Secondary Contact: Sean Cotten, Stockholm (46) ; Related Criteria And Research

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1 Primary Credit Analyst: Pierre-Brice Hellsing, Stockholm +46 (0) ; Secondary Contact: Sean Cotten, Stockholm (46) ; Table Of Contents Major Rating Factors Outlook Rationale Related Criteria And Research SEPTEMBER 27, S&P Global Ratings. All rights reserved. No reprint or dissemination without S&P Global Ratings' permission. See Terms of Use/Disclaimer on the

2 SACP bbb+ + Support +1 + Additional Factors 0 Anchor Business Position bbb+ Moderate -1 ALAC Support +1 Issuer Credit Rating Capital and Earnings Strong +1 Risk Position Adequate 0 Funding Liquidity Average Adequate 0 GRE Support 0 Group Support 0 Sovereign Support 0 A-/Stable/A-2 Major Rating Factors Strengths: Weaknesses: Leading provider of financing to Denmark's agriculture industry. Loss-mitigating guarantee and commission-recovery agreements with owner banks. Robust capitalization and materially increased levels of additional loss-absorbing capital (ALAC) to protect senior creditors in the event of a resolution. Concentration of revenues and credit risk from the narrow business model. High leverage in the farming industry, despite recently improved economic conditions for milk farmers. Outlook: Stable The stable outlook reflects our view that DLR Kredit will preserve its role as provider of agricultural and commercial real estate (CRE) mortgage lending to its owner banks, maintain its strong capital, be successful in building up its ALAC buffers, and not return to a higher reliance on short-term wholesale funding. We see an upgrade as unlikely at this point, considering the concentration of DLR Kredit's revenues stemming from its narrow business model, as well as our expectation of stable capital levels in the coming two years. We could lower the long-term rating if we saw DLR Kredit reversing previous improvements and materially shortening the term structure of its funding. In addition, we could downgrade DLR Kredit if the bank's ALAC issuance stalls, reducing the protection these instruments provide for senior unsecured creditors, which we view as supportive of the current ratings. SEPTEMBER 27,

3 Rationale The 'A-' long-term rating on DLR Kredit reflects our assessment of the Danish banking industry and our expectation that the vast majority DLR Kredit's mortgage portfolio will continue to be covered by efficient loss-mitigation agreements with its owner banks, offsetting the risks arising from its revenue concentration in the Danish agriculture and real estate sectors. The rating also reflects our expectation that the bank will maintain stable capital levels and its access to the well-functioning Danish covered bond market, even as it continues to reshape the maturity profile of its issued securities. Finally, we incorporate one notch of uplift into the long-term rating on DLR Kredit's, reflecting our forecast that the bank's ALAC ratio will sustainably surpass 5.5% by the end of Anchor: 'bbb+' for banks operating only in Denmark Our anchor for a commercial bank operating only in Denmark is 'bbb+', based on an economic risk score of '3' and an industry risk score of '4'. Our assessment of economic risk for Denmark reflects our view that Danish banks benefit from operating in a high-income, open economy with mature political and institutional settings that promote fiscal discipline and growth-stimulating policies. The economy is competitive and diverse and expanding modestly in line with credit growth. Although it has decreased in terms of GDP, household debt remains high and constrains our assessment of economic risk. Problem loans from the previous credit cycle are, in our view, falling, and lending in the agricultural segment is well provisioned. We expect credit losses to fall below 10 basis points (bps) per year through Consequently, we expect Denmark's economy and bank performance to remain stable, supported by a balanced fiscal policy, strong external position, and improving banking sector profitability. We view the regulatory environment in Denmark as being in line with that of other EU countries. We observe an overall improvement in the banking sector's profitability that, in our view, will continue through further cost efficiency measures, decreasing credit losses, and higher mortgage margins. This should enable the sector, including lower-yielding mortgage banks, to report return on equity of at least 9% by 2017, despite a negative central bank deposit rate weighing on deposits margins. We observe that the Danish banking sector is more reliant than peers on functioning wholesale markets. Nevertheless, we note the continued stability and strong track record of the Danish covered bond market and expect continuing measures of individual banks and the regulator to reduce the share of short-term financing. Table 1 DLR Kredit A/S Key Figures (Mil. DKK) 2017* Adjusted assets 155, , , , ,894.2 Customer loans (gross) 141, , , , ,281.1 Adjusted common equity 11, , , , ,960.0 Operating revenues , , , Noninterest expenses SEPTEMBER 27,

4 Table 1 DLR Kredit A/S Key Figures (cont.) (Mil. DKK) 2017* Core earnings *Data as of June 30. DKK--Danish krone. Business position: Agriculture and commercial real estate lender owned by and supporting Denmark's local and regional banks Our assessment of DLR Kredit's business position is based on its comparatively narrow client base and revenues concentrated in lending to the Danish agriculture sector. DLR Kredit's primary market--where it holds a share close to 16%--is first-lien mortgage loans in Denmark, mainly on agriculture properties but also on residential and CRE. The company maintains a market share above 30% in lending to the agricultural sector, where its owner bank and borrower relationships are long term. DLR Kredit's revenue generation is based almost exclusively on charging customers a margin in addition to funding costs, given the pass-through structure of Danish mortgage bonds. The margins increased significantly following the recent crisis, which has resulted in substantial improvement in DLR Kredit's earnings and efficiency metrics. DLR Kredit's business model is concentrated in the agriculture industry, with Danish krone (DKK) 87 billion (about 11.7 billion) or slightly below 63% of its loan portfolio toward this sector at June Having been under stress since 2014, the Danish agriculture industry has recently shown some signs of revival due to pickup in demand from China and other Asian countries and improved productivity. Although the sector's medium-term revenue and liquidity outlook is positive--particularly for the challenged pork and dairy producers--we note that it remains highly leveraged, which could, in the long run, put pressure on DLR Kredit's revenue in this segment. However, a large part of DLR Kredit's overall portfolio--about DKK 27 billion or slightly below 20% of loans--is effectively residential real estate lending to residential rental properties, owners of cooperative housing, and farms that have other stable income. We reflect this as mortgage lending in our calculation of DLR Kredit's risk-adjusted capital (RAC) ratio. The bank funds and manages mortgages distributed by its 64 owner banks and pays commissions in return, while its owner banks provide first-loss guarantees on the referred assets (described in the section "Risk Position"). We consider DLR Kredit's owners' support as critical to our assessment of DLR Kredit's business position. The owners provide first-loss guarantees on referred customers. The owners' support for the company has been illustrated by improvements to DLR Kredit's capital position and simplification of the guarantee structure in recent years. In our view, the owner banks' guarantees and the ability to compensate losses with future commissions and portfolio level guarantees support DLR Kredit's creditworthiness. Jyske Bank, DLR Kredit's largest shareholder with a stake of almost 16%, acquired mortgage company BRFkredit (BRF) in April of Since the acquisition, Jyske's focus on residential mortgage lending has had little impact on Jyske's continued transfer of agricultural and commercial real estate (CRE) loans to DLR Kredit. Furthermore, we think the more capital efficient guarantee structure implemented in January 2015 (described in the section "Risk Position") continues to incentivize owner banks to increase transfers of CRE lending to DLR Kredit. SEPTEMBER 27,

5 Table 2 DLR Kredit A/S Business Position (%) 2017* Total revenues from business line (mil. DKK) , , , Commercial & retail banking/total revenues from business line Return on equity *Data as of June 30. DKK--Danish krone. Capital and earnings: High profitability supports strong capital levels DLR Kredit's RAC ratio at end 2016, calculated using our revised methodology published on July 20, 2017 (see "General: Risk-Adjusted Capital Framework Methodology," published on RatingsDirect), stood at 13.4% as of Dec. 31, 2016, and we expect it to remain stable over the next months. The current RAC ratio is a considerable improvement from 8.2% in 2011, due to owner banks' providing hybrid and share capital as well as DLR Kredit's considerably higher retained earnings in recent years. DLR Kredit's capital adequacy was reinforced in March and April 2017 by a DKK634 million sell-back of treasury shares to its shareholding banks. The repurchase of the share of DLR Kredit owned by Central Bank of Denmark's with retained earnings in September 2016 is a recent illustration that the bank's capital generation has improved considerably. Previous illustrations of this trend include the company's repayment of state-guaranteed hybrid tier 1 issues of DKK4.8 billion between 2012 and 2014 and the repurchase of Finansiell Stabilitet's (The Financial Stability Company) DLR Kredit shares via retained earnings. Although we consider the recent signs of revival in the agriculture sector of Denmark, we still expect pressure on earnings in upcoming years given the impact of the low interest rate. However, the company's strong efficiency--with cost-to-income ratios below 20%--allows over 50% of revenues to be converted into after-tax profits, which we consider outstanding compared with domestic and international peers. We expect this performance, and the risk reduction owing to owner banks' guarantees, will continue to slowly strengthen DLR Kredit's capital buffers through Table 3 DLR Kredit A/S Capital And Earnings (%) 2017* Tier 1 capital ratio S&P Global Ratings' RAC ratio before diversification N.M S&P Global Ratings' RAC ratio after diversification N.M Adjusted common equity/total adjusted capital Net interest income/operating revenues Fee income/operating revenues (25.5) (16.8) (18.2) (14.1) (23.2) Market-sensitive income/operating revenues (6.7) (6.3) (27.5) (15.3) (31.0) Noninterest expenses/operating revenues Preprovision operating income/average assets SEPTEMBER 27,

6 Table 3 DLR Kredit A/S Capital And Earnings (cont.) (%) 2017* Core earnings/average managed assets *Data as of June 30. RAC--Risk-adjusted capital. N.M.--Not meaningful. Table 4 DLR Kredit A/S Risk-Adjusted Capital Framework Data (Mil. DKK) Exposure* Basel III RWA Average Basel III RW (%) S&P Global Ratings RWA Average S&P Global Ratings RW (%) Credit risk Government and central banks 1, Institutions and CCPs 17,986 4, , Corporate 80,450 71, , Retail 37,428 12, , Of which mortgage 37,428 12, , Securitization Other assets 7,390 7, , Total credit risk 144,388 95, , Credit valuation adjustment Total credit valuation adjustment Market risk Equity in the banking book Trading book market risk -- 2, , Total market risk -- 2, , Operational risk Total operational risk -- 2, , Basel III RWA S&P Global Ratings RWA % of S&P Global Ratings RWA Diversification adjustments RWA before diversification 101,250 91, Total Diversification/Concentration Adjustments -- 38, RWA after diversification 101, , Tier 1 capital Tier 1 ratio (%) Total adjusted capital S&P Global Ratings RAC ratio (%) Capital ratio Capital ratio before adjustments 12, , Capital ratio after adjustments 12, , *Exposure at default. Securitization exposure includes the securitization tranches deducted from capital in the regulatory framework. Other assets includes deferred tax assets (DTAs) not deducted from ACE. Adjustments to Tier 1 ratio are additional regulatory requirements (e.g. transitional floor or Pillar 2 add-ons). RWA--Risk-weighted assets. RW--Risk weight. RAC--Risk-adjusted capital. DKK--Danisk krone. Sources: Company data as of Dec. 31, 2016, S&P Global Ratings. SEPTEMBER 27,

7 Risk position: Loss guarantees mitigate credit risk and concentration in the agriculture sector Our assessment of DLR Kredit's risk position reflects the strength of the guarantees provided by its owner banks, including the ability for DLR Kredit to reduce future commissions. In our view, this compensates for the degree of concentration in the agricultural and commercial real estate segments. The company's loss experience during the financial crisis was better than the industry average, based, in part, on its portfolio of first-lien mortgage loans, its right to refuse loan applicants distributed by its owner banks, and first-loss guarantees from the distributing banks. Despite recent improvements in the revenue outlook of the Danish agricultural sector, challenges remain due to sector's overall high debt burden. We believe however, that the low interest rate will likely remain low in the coming two years, helping to support the repayment capacity of most borrowers. The recent increases in agricultural product settlement prices, in particular those of pork and milk, have however contributed to a rapid improvement of DLR Kredit's asset quality. We note, however, a moderating trend for pork, with settlement prices in mid-september 2017 back at their March level of DKK10.30 per kilogram, down from a DKK11.75 peak in the summer of In mid-april 2017, loans in 105-day arrears had returned to their lowest level since 2008, and DKK67 million were released in the first half of Based on these considerations, we forecast effective loan-loss provisions of 7-11 bps annually for DLR Kredit for the next two years, excluding owner bank guarantees. This compares with new loan loss provisions to average customer loans at 8 bps in 2016, 7 bps in 2015, and an average of 9 bps in We note, however, that the reported credit losses overstate the total impact on DLR Kredit's bottom line. A key component of the owner banks' guarantees is the ability for DLR Kredit to recapture losses in excess of the guarantees via reductions in current and future years' commissions. In our view, this reduces the bottom-line impact of credit losses considerably, though some timing differences of the commission recovery could result in temporary reductions in equity during periods of extreme stress. If conditions were to worsen, we would expect that a large portion of the losses would be borne by the owner banks, which generally hold second-lien loans and other financing, in addition to first-lien mortgages transferred to DLR Kredit. All new lending by DLR Kredit after January 2015 is subject to a simplified guarantee structure, covering 34% of total lending at May For loans issued prior to 2015, the historical guarantee structures remain in place. We expect the transition to the new guarantee structure will be largely complete by For loans subject to the new guarantee policy, the recovery of loan provisions on a single-loss provision occurs in the following order. First-loss guarantee by the owner bank on 6% of the outstanding principal of the loan. Loss reductions by reducing commission payments on all loans for the owner bank for up to ten years. Portfolio level guarantee of 6% of the entire portfolio of the owner bank's transferred loans, effectively reducing the 6% guarantee for performing loans. Once these three options are exhausted, DLR Kredit incurs the remaining credit losses. Loans issued prior to 2015 are subject to a joint guarantee for the agricultural loans and a loan-by-loan bilateral guarantee scheme covering all non-agriculture lending. SEPTEMBER 27,

8 The pre-2015 guarantees on the agriculture portfolio (41% of total lending at May 2017) stipulate that: DLR Kredit will incur a minimum first loss of 0.25% of agriculture loans or 1.5x the five-year average of losses. If losses exceed this threshold in any one year, a joint guarantee by the owner banks covers a maximum of 5x DLR Kredit's five-year average losses or 2.5% of the outstanding agriculture loans. The remaining pre-2015 loan portfolio is backed by guarantees covering exposures with loan-to-value ratios of 35%-70% for CRE and 60%-80% for residential rental property and cooperative housing. On May 30, 2017, these guarantees covered 19% of DLR Kredit's loan portfolio, or of DKK27 billion. In addition, for the entire pre-2015 loan portfolio, DLR Kredit has the right to set off commission payments against incurred losses and may do so for 10 years. We recognize that our RAC framework overstates the risk of the loan portfolio because it cannot fully account for the joint guarantee on the agriculture portfolio, nor DLR Kredit's ability to withhold unpaid commissions to distributing banks to cover losses, nor the double-default nature of the guarantee mechanisms. As such, our assessment of DLR Kredit's risk position incorporates that the guarantees offset the sector concentrations in the portfolio. Table 5 DLR Kredit A/S Risk Position (%) 2017* Growth in customer loans (0.1) (0.4) (1.2) Total diversification adjustment / S&P Global Ratings' RWA before diversification N.M Total managed assets/adjusted common equity (x) New loan loss provisions/average customer loans (0.1) Net charge-offs/average customer loans Gross nonperforming assets/customer loans + other real estate owned N/A Loan loss reserves/gross nonperforming assets N/A *Data as of June 30. RWA--Risk-weighted assets. N.M.--Not meaningful. N/A--Not applicable. Funding and liquidity: Reduced reliance on short-term funding and well functioning covered bond market We view DLR Kredit's funding and liquidity as neutral factors for the ratings, reflecting measures taken by the bank and the industry as a whole to reduce the reliance on short-term interest rate fixings, as well as the proven liquidity of the Danish covered bond market over the past several years. Since 2012, DLR Kredit has materially extended the term structure of its funding, primarily in the form of covered bonds, as it prepared for tightened regulations with respect to the share of short-term loan refinancing. Through pricing incentives and a flat yield curve, DLR Kredit has reduced the share of one-year adjustable-rate mortgages (and corresponding one-year covered bonds, thanks to the match principle) to DKK13 billion, or 8% of the portfolio, as of Aug. 31, 2017, from 57% of the portfolio at the end of On Dec. 31, 2016, DLR Kredit's broad liquid assets accounted for 42% of its short-term funding, against 13% in Over the same period, its stable funding ratio improved to 83% from 38%. While these ratios remain weaker than those SEPTEMBER 27,

9 of international peers, we compare them to the bank's local mortgage bank peers and consider the importance of supporting characteristics of the Danish covered bond market. In particular, we note that the balance principle results in a high degree of duration and cash flow matching (in addition to interest rate and currency matching) and that the industry and the regulator have worked to reduce the volume of one-year bond refinancing significantly, resulting in longer and more balanced debt maturity profiles. In our view, this improvement in stability is complemented by the 2014 Danish covered bond legislation that extended bond maturities by 12 months in the event of a failed auction, thus effectively passing refinancing risks to investors and repricing risks onto borrowers. In addition, we note that the Danish covered bond market, a key investment target for Danish pension funds, has, over its long history, continued to perform well in several crisis situations, not least during We expect pension funds' demand for low-risk domestic assets to continue to support stable demand for Danish covered bonds. For all these reasons, we consider DLR Kredit's funding and liquidity as neutral rating factors, despite somewhat lower S&P Global Ratings-adjusted metrics for the bank. We will likely maintain this assessment as long as the institution does not return to a higher reliance on short-term wholesale funding. That said, we believe that the bank will continue to reshape the maturity profile of its issued securities, thanks to the introduction of new funding structures with longer maturities and incentives for borrowers to choose longer-term interest fixing periods. One such product is "RT-Kort," an adjustable-rate mortgage that, at present, extends funding terms to four years while offering customers rates based on the six-month Copenhagen Interbank Tomorrow/Next Average or the Copenhagen Interbank Offered Rate. RT-Kort is a successful product for DLR Kredit, representing 26% of its loan portfolio at year-end 2016, from 14% in In addition, DLR Kredit has raised lending fees on shorter-term mortgages to encourage more customers to switch to longer-term interest rate fixings and, thereby, extended its funding maturity profile. As DLR Kredit continues to reduce its structural mismatch of asset and liability maturities, we expect a very direct boost to our core measures of funding and liquidity. Table 6 DLR Kredit A/S Funding And Liquidity (%) 2017* Long-term funding ratio Stable funding ratio Short-term wholesale funding/funding base Broad liquid assets/short-term wholesale funding (x) Short-term wholesale funding/total wholesale funding Narrow liquid assets/3-month wholesale funding (x) *Data as of June 30. External support: One-notch uplift on additional loss absorbing capacity We include one notch of uplift in the long-term rating on DLR Kredit based on our assessment of its ALAC. In June 2017, DLR Kredit issued its first DKK1 billion (about 134 million) tier 3 instrument (see "DLR Kredit A/S Proposed Senior Resolution Notes Rated 'BBB'," May 19, 2017), followed by a second DKK1 billion issuance in September In addition, DLR Kredit also issued DKK650 million of tier 2, which we include in our calculation of its ALAC. We SEPTEMBER 27,

10 expect the bank to successfully issue additional tier 2 or tier 3 instruments of approximately DKK2 billion in the next two to three years to comply with the Danish government's requirement that mortgage banks issue at least 2% of nominal lending in additional buffers between 2016 and As a result, we estimate that the bank's additional loss-absorption buffers will durably surpass 5.5% of its risk-weighted assets from year-end The threshold we apply to DLR Kredit to give benefit of an additional rating notch for ALAC is 50 bps above our standard threshold of 5% of risk-weighted assets, to reflect concentration of maturities of ALAC instruments in the coming five years. We view Denmark's resolution regime as effective under our ALAC criteria because, among other factors, we believe it contains a well-defined bail-in process under which authorities would permit non-viable systemically important banks to continue critical functions as going concerns following a bail-in of eligible liabilities. Additional rating factors: None No additional factors affect the ratings. Related Criteria And Research Related Criteria Criteria - Financial Institutions - General: Risk-Adjusted Capital Framework Methodology, July 20, 2017 General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017 Criteria - Financial Institutions - Banks: Bank Rating Methodology And Assumptions: Additional Loss-Absorbing Capacity, April 27, 2015 Criteria - Financial Institutions - Banks: Bank Hybrid Capital And Nondeferrable Subordinated Debt Methodology And Assumptions, Jan. 29, 2015 Criteria - Financial Institutions - Banks: Quantitative Metrics For Rating Banks Globally: Methodology And Assumptions, July 17, 2013 Criteria - Financial Institutions - Banks: Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011 Criteria - Financial Institutions - Banks: Banks: Rating Methodology And Assumptions, Nov. 9, 2011 General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009 Related Research The Danish Mortgage Sector Solved The Immediate Problem Of Interest-Only Mortgages, But Remains Vulnerable To Housing Slumps, Sept. 12, 2017 Nordic Banks Continue To Outperform European Peers On Capital Thanks To Steady Retained Earnings And Hybrid Issuance, July 12, 2017 Nordic Banking Regulation Compared, July 10, 2017 Banking Industry Country Risk Assessment: Denmark, Dec. 19, 2016 Nordic Banks' Capital Growth Tapers Off, Aug. 2, 2016 Future of Banking: Nordic Banks Looking Svelte In The Fintech Race, June 14, 2016 Nordic Banks Stay Resilient To Negative Rate Noir, March 24, 2016 The issue ratings listed below in the Ratings Detail are: A+: Junior covered bonds (section 15 senior debt) AAA: Covered bonds SEPTEMBER 27,

11 Anchor Matrix Industry Risk Economic Risk a a a- bbb+ bbb+ bbb a a- a- bbb+ bbb bbb bbb a- a- bbb+ bbb+ bbb bbb- bbb- bb bbb+ bbb+ bbb+ bbb bbb bbb- bb+ bb bb - 5 bbb+ bbb bbb bbb bbb- bbb- bb+ bb bb- b+ 6 bbb bbb bbb- bbb- bbb- bb+ bb bb bb- b+ 7 - bbb- bbb- bb+ bb+ bb bb bb- b+ b bb+ bb bb bb bb- bb- b+ b bb bb- bb- b+ b+ b+ b b+ b+ b+ b b b- Ratings Detail (As Of September 27, 2017) DLR Kredit A/S Counterparty Credit Rating Senior Secured Senior Secured Subordinated Counterparty Credit Ratings History 19-May Jul May Jul-2013 Sovereign Rating Denmark (Kingdom of) A-/Stable/A-2 A+/Stable AAA/Stable BBB A-/Stable/A-2 BBB+/Stable/A-2 BBB+/Watch Neg/A-2 BBB+/Stable/A-2 AAA/Stable/A-1+ *Unless otherwise noted, all ratings in this report are global scale ratings. S&P Global Ratings credit ratings on the global scale are comparable across countries. S&P Global Ratings credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees. Additional Contact: Financial Institutions Ratings Europe; FIG_Europe@spglobal.com SEPTEMBER 27,

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