Banks. Berlin Hyp AG. Germany. Full Rating Report. Key Rating Drivers. Rating Sensitivities. Ratings

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1 Germany Full Rating Report Ratings Foreign Currency Long-Term IDR A+ Short-Term IDR F1+ Viability Rating Support Rating 1 bbb- Sovereign Risk Foreign-Currency Long-Term IDR AAA Local-Currency Long-Term IDR AAA Outlooks Foreign-Currency Long-Term IDR Stable Sovereign Foreign-Currency Stable Long-Term IDR Sovereign Local-Currency Long- Stable Term IDR Financial Data 31 Dec Dec 14 Total assets (EURm) 28, ,427.7 Total equity (EURm) 1,38.9 1,18.9 Net interest margin (%) Pre-imp op. profit/ average equity (%) LICs (%) NPL ratio (%) Fitch Core Capital ratio (%) Tier 1 capital ratio (%) Tangible common equity/tangible assets (%) Equity/total assets (%) Key Rating Drivers Institutional Support Driven IDRs: s Issuer Default Ratings (IDRs) and senior debt and Support Ratings are based on institutional support from the German savings banks (Sparkassen-Finanzgruppe (Sparkassen), A+/Stable/F1+/a+), which fully own the bank s parent, Landesbank Berlin Holding AG (LBBH). Equalised With Sparkassen: The IDRs and senior debt ratings are equalised with those of its ultimate owners and reflect Fitch Ratings view that support from the Sparkassen for Berlin Hyp would be forthcoming, if needed. Berlin Hyp is a member of the mutual support scheme of the Landesbanken and is not directly a member of the savings banks mutual support scheme. New Organisational Structure: Berlin Hyp s Viability Rating (VR) benefits from its role as a strategic partner and central provider of commercial real estate (CRE) lending within the savings banks group. The growing proportion of business undertaken on behalf of the savings banks underpins its business model and franchise. However, its business is highly cyclical and Berlin Hyp s relatively small size results in concentration risks. Shift in Foreign Exposure: Berlin Hyp plans to increase its exposure in selected European countries (primarily the UK) for diversification and to mitigate margin erosion in Germany with higher-yielding foreign lending. Although lending standards in its foreign exposure are tighter, we believe it reflects a moderately stronger risk appetite, which has a big influence on its VR. Improved CET1 Ratio: Berlin Hyp s fully loaded common equity Tier 1 (CET1) ratio improved to 13.3% at end-215 following capital increases in 4Q14. This ratio is more in line with peers but the bank s leverage ratio remains weaker at 3.5% at end-215 but is improving. Operating Performance With Challenges: Fitch expects an adequate financial performance in 216 but continues to see pressure in the medium term from persisting low margins and prepayments, as well as increasing competition and limitations to lower funding costs. Sound Asset Quality: Berlin Hyp s non-performing loans (NPLs) declined further in 215 but Fitch believes they have reached a cyclical low. We also consider its cyclical and concentrated asset base, which to some extent constrains its VR. However, Fitch expects concentration risks to decline with the increasing proportion of more granular Sparkassen business. Related Research Berlin Hyp Ratings Navigator (March 216) - Mortgage Pfandbriefe (August 215) Fitch Affirms Berlin Hyp at 'A+'; Outlook Stable (February 216) Global Housing and Mortgage Outlook (January 216) Analysts Roger Schneider roger.schneider@fitchratings.com Sebastian Schrimpf sebastian.schrimpf@fitchratings.com Sparkassen Support Funding: Berlin Hyp s liquidity is adequate. It relies on wholesale funding but this is balanced by good access to the Sparkassen sector s structural excess liquidity and a diversified investor base. Rating Sensitivities Savings Banks Sector Developments: Berlin Hyp s IDRs, Support Rating and senior debt ratings are primarily sensitive to changes in its ownership structure or relationship with the Sparkassen, including its membership of the mutual support scheme. The ratings would also be affected by a change in the Sparkassen s ratings. Potential for VR Upgrade: Berlin Hyp s VR could be upgraded if the bank manages to withstand earnings pressure without a further increase in risk appetite. Upside potential to its VR is limited by its mono-line business model. The VR would come under pressure if a stress in property markets results in a material deterioration of asset quality, or if large single credit losses result in a deterioration of its capitalisation, which Fitch currently does not expect. 29

2 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 4Q9 2Q1 4Q1 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14 4Q14 2Q15 4Q Q1 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14 4Q14 2Q15 4Q15 Banks Figure 1 Strong Investment Inflow Rolling last 12-month CRE investment turnover (Rebased: End-21 = 1) Figure 2 Figure 3 Figure 4 Germany Source: CB Richard Ellis, Fitch Strong Price Growth in Urban Areas Europe Rebased: End-23 = 1 GDPª CPIª Office Apartments Terraced h a Germany; GDP is inflation adjusted Source: VdP, Bundesbank, Destatis, Bulwiengesa Decreasing Margins... Margin trends in key CRE markets a Germany France Ireland Netherlands Spain UK (bps) a 5yr loan based on the max. underwriting ability of a single lender; margin over euribor Source: CB Richard Ellis...Despite Rising LTVs Maximum LTVs a in key CRE markets Germany Ireland Netherlands Spain UK (%) a New 5yr loan based on the maximum underwriting ability of a single lender Source: CB Richard Ellis Related Criteria Global Bank Rating Criteria (March 215) Operating Environment Strong Investment Flows in Europe CRE investments in Europe reached a new high of EUR269bn in 215 (214: EUR212bn, +27% yoy). Foreign buyers accounted for over half of deals in 215. US buyers are the main source of non-european capital but the share of Asian and Middle Eastern buyers is rising. Growth should remain strong in southern Europe in 216, in line with the past 12 months. Overheating Risk Fuels Investors Focus on Non-Core German Assets Germany is Berlin Hyp s largest market. The country s size and economic strength make it one of Europe s most active property investment markets. Domestic CRE investments (adjusted for large acquisitions of CRE companies) remained high in 215 at about EUR53bn, almost half of which came from foreign investors. Attractive asset prices and rental yields are the main demand drivers beside low interest rates. As demand for prime properties in core locations remains high, an overheating of the market is becoming a concern in some large cities residential segments, with the Bundesbank estimating that assets are overvalued by 2%. 1 The resulting compression of prime yields close to pre-crisis levels, limited supply of quality prime assets in core markets and the lack of adequately yielding alternative asset classes drive investor appetite for higher-risk non-prime markets, where yields are stabilising. This creates additional long-term risk as Germany s stagnating population gradually migrates to larger urban areas, which may put pressure on valuations in less attractive non-core locations. Robust Domestic Residential Property Market Valuations and demand for mortgage loans have risen strongly since 21 for the first time in nearly two decades after a long phase of stagnation and underinvestment in residential property since the late 199s. New building permits have risen by 6% since 21 and are now close to their pre-crisis level of almost 39, units a year, which partly mitigates the upward pressure on valuations. Fitch expects property prices to continue to grow at a relatively high rate in the medium term. High net immigration, falling average household size and need for special accommodation for elderly people mitigate lower structural demand due to Germany s low birth rate. Pfandbrief Regulation Limits Erosion of Underwriting Standards New business s loan-to-value (LTV) ratios (based on market values) in Germany were stable at 55%-75% in 215 as strict valuation and eligibility criteria for Pfandbrief cover pools ensure some underwriting discipline. But the persisting low interest rates resulting from the European Central Bank s quantitative easing programme and the euro s recent depreciation is likely to further support demand for German CRE assets. As a result, margin erosion in new domestic lending since 213 suggests that credit risk is increasingly likely to be mispriced. Fitch understands that it is becoming more difficult to originate business with margins above 1bp. Shrinking, Increasingly Domestic Peer Group Mono-line CRE lenders increasingly struggle to operate without the backing of strong universal banks in the re-regulated environment as low profits prevent material improvement of their tight leverage. As a result, most independent domestic lenders remain affected by restructuring, ownership changes or wind-down, while strong ownership has enabled CRE lenders backed by the German savings and cooperative banks to consolidate their domestic franchises despite low earnings. CRE remains one of few asset classes where German banks retain large foreign exposures of about EUR12bn or a third of their CRE assets. However, foreign CRE exposures declined at a double-digit rate in 214, boosted by sales of non-core portfolios. 1 Deutsche Bundesbank: Monthly Report, February

3 Figure 5 New Real Estate Business Inner circle: End-215 Outer circle: End-214 a Figure 6 Figure 7 Berlin West-Germany 2% 42% 15% 24% 2% 59% a International incl. others Source: Berlin Hyp, AR 215 East-Germany International 32% 6% New Real Estate Business Inner circle: End-215 Outer circle: End % Commercial investors Housing societies Builders/developers/other 11% 21% 1% 69% Source: Berlin Hyp, AR % New Real Estate Business Breakdown by type 1% 8% 6% Residential Retail Other 28% Office/business Management Logistics 19% 23% 4% 38% 2% 46% 18% % Source: Berlin Hyp, AR 215 Company Profile CRE Lender Integrated Into the German Sparkassen Organisation Berlin Hyp is a German Pfandbrief issuer and mono-line CRE lender integrated into the German Sparkassen organisation, which is Berlin Hyp s ultimate parent. Within its direct German peer group (including Aareal Bank AG and Deutsche Pfandbriefbank AG) Berlin Hyp is the third-largest institution with total assets of EUR28.5bn at end-215 (EUR3.4bn end-214), which corresponds to about 2.5% of the Sparkassen s total assets. Berlin Hyp s core customers are professional CRE investors, capital investment companies and housing societies and cooperatives and increasingly the Sparkassen themselves. Like for all CRE mono-liners its business is highly cyclical and exposed to material concentration risks. Established Covered Bond Franchise Berlin Hyp is an established issuer of mortgage bonds and has issued public-sector covered bonds (AA+/Stable). New issuance of the latter has ceased following the termination of business with public-sector issuers. The net present value of outstanding issues of mortgage and public-sector covered bonds was EUR12.3bn and EUR3.8bn at end-215, respectively. Entrenched National Franchise With Focus on Standard Property Types Berlin Hyp s headquarters is in Berlin with offices in Duesseldorf, Frankfurt, Hamburg and Munich. A further location in Stuttgart is planned. Traditionally, it has targeted a business mix of a third of its investments in office, a third in residential property and a third in retail and other types. Berlin Hyp has remained conservative in adding non-core property types, such as hotels or logistics, to its portfolio. Its focus is on larger cities in Germany. The bank has a relatively large exposure to the Berlin area (about 17%), which is expected to moderately decline in the coming years. New business in the residential segment in Berlin is now covered by Berliner Sparkasse (BSK) if it fits BSK s size limits. Berlin Hyp s geographic mix focuses on Germany (75%) and its exposure to the former East Germany is fairly small. Selected European Franchise; Lower Risk Profile Berlin Hyp s foreign exposure is concentrated in France, the Netherlands, Poland and the UK. Fitch believes that Berlin Hyp s expertise and direct market coverage in regions other than those mentioned is more limited. The lack of geographical diversification in its CRE portfolio limits its capacity to earn higher margins. The bank s foreign business has a lower risk profile, primarily in terms of LTV, but most foreign markets are more volatile. Traditionally, Berlin Hyp s foreign exposure was between 2% and 25%. Potential Shift in Foreign Markets Berlin Hyp aims to broaden the range of European investments in 216. It is assessing new office investments in London in a countercyclical approach as management expects the local real-estate market to calm down or even reverse. However, such considerations are subject to the UK remaining part of the EU. The main driver of this is to mitigate margin erosion in Germany, which is expected to continue in the coming years, with higher-yielding foreign lending. The increased capital base and the authorisation to issue new shares to finance the expected growth should ensure that sufficient capital is available to cover the additional risks. No New Public-Sector Finance Business Berlin Hyp no longer undertakes new public-sector finance business because of the low margins in this segment. Public-sector assets declined from EUR3.2bn at end-213 to EUR2.7bn end-215 or from 16% of its gross loans to 13%. 3

4 Sparkassen Fully Integrated Into Business Model Fitch believes that the change in Berlin Hyp s business model from being the CRE lending arm of Landesbank Berlin (LBB) to becoming the Sparkassen group s strategic partner and central CRE provider is beneficial to its company profile. Berlin Hyp is now a fully owned subsidiary of LBBH, which itself is owned by the Sparkassen. This restructuring was completed in 215. Figure 8 Stable LTVs LTV < 6% LTV 6-8% LTV 8-1% LTV >1% 1% 8% 6% 4% 2% % Q15 2Q15 3Q15 Source: Berlin Hyp In Fitch s view Berlin Hyp has established a solid and long-term-oriented second layer to its business model as a distinct member of the Sparkassen group, which supports the long-term viability of the business. Berlin Hyp is exposed to strong competition in the industry and practically from all Landesbanken, but the bank should benefit from its specialisation and improved distribution model. Dedicated Service Products for the Sparkassen Berlin Hyp offers dedicated products to the Sparkassen, for example tailor-made debenture notes ( IMMOSchuldscheine ). These instruments allow the Sparkassen to participate in a collateralised loan outside their regions, without violating the regional principle under the Sparkassen law, or other standardised lending products, such as syndicated transactions. Since end-215 Berlin Hyp has been able to offer derivative contracts directly to its clients. This had been done in cooperation with DEKA, the Sparkassen s central asset management company. Berlin Hyp has its own valuation servicing unit for clients. Management and Strategy Experienced Management Team Fitch believes that Berlin Hyp s management quality is good, backed by an experienced threemember board. Additionally a managing director is eligible to participate in board meetings. Its chief executive and the chief operating officer are also members of the management board of LBBH together with two board members of BSK. The chairman of LBBH and Berlin Hyp is the president of DSGV, the head organisation of the German Sparkassen. Effective Execution Including Portfolio Transfer Berlin Hyp has seen a positive and consistent business evolution over the past four years supported by a benign environment. Berlin Hyp executed its strategic deleveraging successfully while maintaining its profitability targets. Most notably, it worked out its NPL book with a low level of NPLs at end-215. Berlin Hyp s corporate change has been actively managed without disruption to its operational or business performance while achieving a rising share of new business. Berlin Hyp had received a net EUR.8bn of assets by end-1q15 based on an agreed plan with BSK to align exposures at both institutions with each institution s revised strategy. This portfolio transfer had no material impact on Berlin Hyp s risk/return profile. Clear Strategic Objectives but Uncertainties from Loan Redemptions Fitch believes that Berlin Hyp is well positioned to meets its domestic business objectives, which should be helped by its cooperation with the Sparkassen. The bank s foreign business is more challenging given its relatively small size, stronger competition in these markets, lower name recognition and potentially less strong access to off-market transactions. The main challenge for Berlin Hyp is to expand its loan portfolio at reasonable terms and address its permanently higher cost base. The low-yield environment has led to significant volumes of early loan redemptions in the industry, which like for its peers is beyond Berlin Hyp s control. This makes it challenging to manage its balance sheet, but Berlin Hyp charges penalty fees that help to mitigate the impact from these early redemptions. 4

5 Credit risk Market price risk Operational risk Residual riskª Total demands Flexibilityᵇ Banks Figure 9 Development of Risk- Covering Assets Flexibility Resource (LHS) Percentage recourse per risk Type (RHS) (EURbn) (%) a Incl. model and liquidity price risk b Risk-covering assets - Total demands Source Berlin Hyp, AR 215 Figure 1 Loan Exposure Breakdown by risk classes No risk classification Risk classes Risk classes 8 12 Risk classes 4 7 Risk classes 1 3 1% 95% 9% 85% 8% Figure 11 Solid Asset Base (%) Growth of gross loans NPLs/gross loans Reserves/NPLs NPLs less reserves/ Fitch Core Capital LICs a /av. gross loans a Loan impairment charges Source: Berlin Hyp, Fitch Figure 12 2% 1% 1% 11% 9% 6% 84% 87% 89% 75% Source: Berlin Hyp, AR 215 Improving Asset Quality 1, Impaired loans (LHS) Reserves for impaired loans (LHS) NPL reserves/impaired loans (RHS) NPLs (excl. reserves)/fcc (RHS) (%) Corporate Governance Neutral to Ratings Berlin Hyp is indirectly supervised by the ECB due to the asset size of LBBH, but its direct supervisor is BaFin, the German regulator. Berlin Hyp complies with the German Corporate Governance Code, although it is not legally obliged to do so. Risk Appetite Moderately Increase in Risk Appetite for Foreign Exposure The CRE business is by definition a volatile and cyclical asset class. However, underwriting standards are reasonably prudent and in line with broad industry practice. Fitch believes that Berlin Hyp has not fundamentally changed its risk profile, reflected in its fairly stable loan-to value (LTV) ratio, which totalled 55% at end-215 (cover pool only) and is in line with other domestic CRE lenders. Underwriting standards are reasonably prudent with property analysis and valuation embedded early in the credit approval process. In Fitch s view the establishment of a Sparkassen Advisory Council, which acts as an independent body to monitor compliance, business evolution and risk management, also suggests that its overall risk profile will remain conservative. Berlin Hyp s planned moderate increase of its foreign exposure shows a moderate increase in risk appetite, in Fitch s view. The bank s strategy is to mitigate margin erosion in its domestic business through higher-yielding international cross-border lending. This development was seen in Berlin Hyp s new business in 215, of which about 24% was originated abroad. The bank s primary target is the UK, which we consider one of the most cyclical markets. Its willingness to take additional risk is reflected in marginal adjustments of underwriting standards. Berlin Hyp is also seeking to raise the share of business with builders and developers, which is more risky in nature. This type of business doubled in 215. Diversification Benefits From Cooperation In 215, total volume of the business jointly undertaken with the Sparkassen amounted to about EUR1bn, of which EUR.7bn was attributable to joint syndication business with the Sparkassen and EUR.3bn was due to their participation in the ImmoSchuldschein. We expect the bank to gradually increase this share in the coming years, potentially up to 2% (215: 1%) of its total business. Fitch believes demand from Sparkassen is likely to grow due to the type of CRE offerings Berlin Hyp can provide outside the areas of individual Sparkassen. This may be particularly appealing to Sparkassen with a constrained loan book. Modest Market Risk The bank s value at risk (VaR) remained fairly stable on a low level and ranged between EUR2m and EUR5m in 215 (99% confidence level, 1-day holding period). At year-end 215, the limit and utilisation totalled EUR55m and EUR31m, respectively. The latter corresponds to about 3% of the bank s Fitch Core Capital (FCC). Berlin Hyp is a non-trading book institution. The bank s main driver of its VaR is interest rate and credit spread risks. The bank effectively hedges its foreign currency exposures and has no open currency positions. A 2bp upward (downward) shift (to a minimum of zero) of the yield curve would have resulted in a NPV change of EUR24m (EUR64m) at end-215, which is manageable and in line with its peers Source: Berlin Hyp, Fitch 5

6 Figure 13 Security Portfolio Country breakdown (215) UK 4% BE/NL/LUX 6% Scandinavia 8% France 14% Figure 14 Eastern Europe 2% Supranational 2% Source: Berlin Hyp, AR 215 Figure 15 Increasing Admin Costs Burden Profitability (%) NII/earning assets Cost-income ratio LIC a /preimpairment operating profit Operating RoA Operating profit/rwa Return on equity a Loan impairment charges Source: Berlin Hyp, Fitch Austria 2% North America 1% Spain 1% Germany 42% Security Portfolio by Issuer Inner circle: End-215 Outer circle: End % Domestic banks/fi Public-law bodies Foreign issuers 58% 14% 28% Source: Berlin Hyp, AR % 28% Financial Profile Asset Quality Collateralisation Mitigates Risk Concentration Similar to other specialised CRE lenders, Berlin Hyp s risk concentration in its CRE and publicsector portfolios is high and constrains its VR. Its 2 largest borrowers account for a multiple of its FCC. This is partly mitigated by granular tenant structures and by collateral. However, Fitch expects that single-name concentration will decline as the Sparkassen business is typically more granular. About 95% of Berlin Hyp s assets are internally classified as investment grade (rating classes 1-7), which is evidence of its sound asset quality. Berlin Hyp s asset quality has continued to improve, benefitting from the positive evolution of the real-estate cycle. Key drivers are also a conservative risk policy for new business in recent years, the moderate risk of exposure in foreign markets and the work-out of its legacy NPL portfolio. Impaired loans have materially declined from EUR2.7bn at end-27 to just EUR447m at end-215. The low NPL ratio of 2.2% at end-215 (end-214: 2.8%) compares favourably with its direct peers. Gradually Increasing Coverage NPL reserve coverage gradually increased from 36% at end-211 to about 49% at end-215. However, Fitch understands that Berlin Hyp s net credit exposure to NPLs (after deducting pledged collaterals and specific loan loss provisions) was in the low single-digit million range at end-215, which is very low compared with its direct peers. Berlin Hyp s aggregate net result of recoveries was positive in recent years, which also indicates a conservative valuation policy. Significant Rise to Builders and Developers in New Business Berlin Hyp s total exposure to development loans, which Fitch considers to be more risky, is higher than its peers. In 215, developers accounted for about 21% of the bank s new business, which will increase its exposure over time. Portfolio Transfer Impact Limited The disentanglement process included a transfer of assets between LBB and Berlin Hyp to align their portfolios with the underlying business strategies. The net increase of EUR.8bn at Berlin Hyp had only a limited impact on the bank s overall credit profile in Fitch s view. Low-Risk Securities Portfolio Following Clean-Up but Some Exposure to HETA Berlin Hyp s securities portfolio had a nominal value of EUR6.5bn at end-215. All ratings were investment grade and there were no structured securities. Germany (42%), France (14%) and supranationals (2%) comprised 76% of the portfolio. There was no exposure to peripheral eurozone countries with the exception of Spanish covered bonds (.8% of the total portfolio), which will mature in the next two years. Exposure to Eastern Europe amounted to about 2% of the total security portfolio at end-215 (Poland, Slovakia, Lithuania) and the bank had no exposure to Russia or Ukraine. Fitch therefore does not expect any material risks arising from this portfolio. However Berlin Hyp has an exposure to Heta Asset Resolution AG (EUR48m nominal plus EUR2m in form of a promissory note; LBB/BSK holds EUR45m and EUR15m in the form of a promissory note), which have been provisioned for in line with regulatory guidance. Fitch considers the quality of Berlin Hyp s public-sector assets to be sound. Its public-sector portfolio, which is going to be run down, and securities portfolio totalled EUR2.7bn and EUR6.5bn, respectively, at end-215. Assets are concentrated in AAA and AA countries. The securities portfolio contains net hidden reserves. It has no structured assets and is not a credit default swap guarantor. The financial institutions counterparties are widely sovereign/stateowned or systemically important banks. 6

7 Figure 16 PnL Development Figure 17 Net interest income Net fees and commissions Other operating income Total non-interest expenses Loan impairment charge Sec. and other credit imp. charges Source: Berlin Hyp (EURm) Slightly Declining Operating Profits Figure 18 Comfortable Capitalisation Operating profit/rwas (LHS) Net interest margin (LHS) Pre-imp. op. profit/av. equity (RHS) CIR (RHS) (%) (%) Source: Berlin Hyp, Fitch (%) FCC/RWA FEC/RWA Tangible equity/ tangible assets Core Tier 1 ratio Internal capital generation a a Due to profit transfer agreement SOURCE: Berlin Hyp, Fitch Earnings and Profitability Satisfactory Performance Berlin Hyp s profitability has remained satisfactory in recent years despite margin pressure. Fitch forecasts challenges for the bank s profitability given the low-interest-rate environment, which has resulted in lower asset spreads, and we see limited room for a further decline in funding costs. Fitch believes that it will be difficult for Berlin Hyp to expand its balance sheet as record new business volume is counterbalanced by substantial early repayments resulting in very limited net new business. Nevertheless, the bank has demonstrated that it can manage operations in this difficult environment. Good Results in 215 Despite Difficult Markets Berlin Hyp s pre-tax profit increased by EUR27m to EUR93m in 215, despite increased administrative costs, additions to the fund for general banking risks and regulatory costs. Net interest income increased by about 2% to EUR223m in 215 and reflects relatively stable margins in its existing business and a further decline in refinancing costs. However, one-off effects, including the receipt of prepayment penalties as well as interest effects associated with the loan portfolio transfers, also contributed to the increase. However, these one-time effects were fully neutralised with compensating measures. Commission income rose by 7% to EUR31m, mainly attributable to higher fees for new-loan commitments. Staff Growth Burdens Performance Investments in infrastructure and growth in staff numbers continue to burden the bank s performance. These higher costs included some one-offs, but Fitch expects higher costs resulting from a 45% increase in staff numbers since 213. This is driven by the integration of employees from LBB and includes increased pension obligations, which rose by 21% to EUR76.5m in 215. Thus, Berlin Hyp s cost-income ratio increased considerably from 4.3% at end-213 to 52.2% at end-215, but this is still an acceptable level when compared with peers. Low Impairment Charges Despite Higher Provisions for Heta The bank s total risk provisioning for 215 EUR rose from EUR8.5m in 214 to EUR18.8m. However, reversals of loan-impairment charges (LICs, -EUR13.1m) to some extent mitigated higher than expected securities and other credit impairment charges (EUR31.9m), which were mainly driven by valuation measures associated with the payment moratorium imposed on Heta by the Austrian Financial Market Authority in 1Q15. The allocation of EUR2m to reserves for general banking risks (34g) and the increase of the bank levy from EUR6.5m to EUR11.4m at end-215 resulted in a lower reported net income. Capitalisation and Leverage Improving Capitalisation Berlin Hyp s capitalisation has improved and its fully loaded CET1 ratio reached 13.3% at end- 215 after capital measures, which is in line with peers. The leverage ratio increased to 3.5% but remained at the lower end of the peers. The improvement of Berlin Hyp s capital ratios was the result of several capital increases since 29 totalling about EUR23m and declining RWAs (215: EUR7.6bn; 29: EUR8.8bn). In 214, Berlin Hyp improved its capitalisation notably through an increase in 34g reserves (fund for general banking risks) of EUR5m and a capital injection by its owner of EUR15m to compensate for the impact of the net asset transfer from BSK. In 215, Berlin Hyp allocated another EUR2m to its 34g reserves to further strengthen its capital base. 7

8 Banks Figure 19 Improving Capitalisation (%) Source: Berlin Hyp Figure 2 Figure 21 Wholesale Funded (%) Loans/customer deposits Interbank assets/interbank liabilities Customer deposits/total funding (excl derivatives) Core Tier 1 ratio Total Reg. capital ratio FCC ratio Leverage ratio Deleveraging Continues Total assets (LHS) RWAs (LHS) (EURbn) FCC/RWAs (RHS) (%) Source: Berlin Hyp, Fitch a Due to profit transfer agreement Source: Berlin Hyp, Fitch Authorised Capital Could Safeguard Growth Berlin Hyp is authorised, pending approval by its supervisory board, to issue new shares up to EUR26m until end May 22 (about EUR5m p.a.) to accommodate growth if necessary. This is due to the fact that Berlin Hyp is unable to build up capital internally through retained earnings under the prevailing profit transfer agreement with LBBH, except for 34g reserves (EUR92.m transferred in 215; 214: EUR68.1m). According to our calculation, the authorised capital increase would enable Berlin Hyp to increase RWAs by about EUR1.8bn to a total of EUR9.5bn by May 22 while keeping capital ratios at the current level. This RWA growth would corresponds to a net new business generation of about EUR5.8bn over the next four years assuming a RWA density of 3%. Low Leverage Ratio, but Improving Berlin Hyp s leverage ratio improved in 215 and reached 3.5% at end-215. The increase was mainly driven by increased capital and the gradually decline in total assets, reflecting the smaller-than-anticipated portfolio transfer volume in 1Q15 and the high amount of prepayments. However, Fitch expects leverage to remain a constraint based on the growth expectations. Availability of Capital Depends on Performance of BSK LBBH has to manage capital for LBB/BSK and for Berlin Hyp, its two operating subsidiaries. We believe that the transformation process to convert LBB s risk profile into a profile that is aligned to Sparkassen including the rebranding of LBB to BSK is well-progressed. LBB has materially reduced its balance sheet and revised its organisational structure, but the process is not due to be completed before end-217. In the meantime, losses at LBB that would require additional capital from LBBH could constrain capital resources available to finance Berlin Hyp s growth. However, a CET1 ration of 17.3% at LBB at end-215 mitigates this risk. Funding and Liquidity Wholesale Funding Profile Berlin Hyp is generally wholesale funded. Its funding benefits from the integration into the Sparkassen organisation, which allows it to benefit from the group s structural excess liquidity arising from its large customer deposit base. A large proportion of Berlin Hyp s senior unsecured debt and covered bonds is acquired by the Sparkassen, which benefit from zero risk-weighting for exposures to Berlin Hyp. Moderate Capital Market Funding Volume Expected Berlin Hyp comfortably met its capital market funding target in 215. During the year, the bank issued mortgage Pfandbriefe with a total amount of EUR1.6bn and senior unsecured instrument of EUR1.5bn. Fitch assumes Berlin Hyp will cover its refinancing requirements of around EUR3bn in 216 mainly through the issuance of covered bonds. Lower Short-Term Funding Volume Berlin Hyp s key components of its short-term funding are secured and unsecured borrowings concluded both bilaterally and through Eurex in the case of repo transactions, despite this being a moderately constraining factor on its amount of unencumbered assets. The bank also participates to a moderate degree in the central bank and other open-market transactions. The bank s reliance on short-term funding has declined in recent years. Comfortable Liquidity Ratios Berlin Hyp s manages its liquidity prudently; it maintains a minimum buffer of over EUR1bn over calculated outflows within a 3-day period. Berlin Hyp s liquidity coverage ratio was a high 441% at end-215, thanks to a high volume of Level 1 securities in its portfolio, which can be placed with the ECB for liquidity purposes. Berlin Hyp s key liquidity indicator, according to German regulations, exceeded the internal limit of 1.15 throughout 215 and comfortably met regulatory requirements. The bank estimated its net stable funding ratio at 143% at end

9 Berlin Hyp s comfortable liquidity position is supported by the available collateral pool for Pfandbriefe. The over-collateralization amounted to 8.2% at end-215, which means that additional bonds can be issued against the existing cover pool. This is comparably low in percentage terms but corresponds to about EUR1.3bn on a discount value basis considering the legally enforced minimum ratio of 2%. MREL Not Expected to Pose Challenges for Berlin Hyp Berlin Hyp has not yet received Minimum Requirement for Eligible Liabilities (MREL) requirements from the regulatory authorities. However, the bank has already calculated a proforma MREL ratio, which totalled 24.9% at end-215. Equity (3.6%), 34g reserves (.4%) and sub-debt (1.6%) comprise 5.6% of its balance sheet while the rest is senior unsecured bonds that mature in more than a year. Support Institutional Support Driven IDRs Berlin Hyp s IDRs, senior debt and support ratings are based on institutional support from the Sparkassen, which fully own Berlin Hyp s parent, LBBH. As LBBH is a non-operative holding without its own assets other than its two subsidiaries, support for Berlin Hyp is likely to come from the Sparkassen. The health of the Sparkassen sector in combination with the size of Berlin Hyp s balance sheet means that the parent s ability to provide support is high. Fitch also believes that there is a strong propensity to provide support for Berlin Hyp as there would likely be a high reputational impact on the group if it does not provide support if needed. No senior bondholder has ever incurred losses in the history of the Sparkassen. Berlin Hyp in our view is a core service and product provider for the Sparkassen. It shares the same brand and the strategic importance to them is underlined by Berlin Hyp s reorganisation. Fitch does not expect a sale of Berlin Hyp due to the high level of operational of integration with the group although a sale would be generally possible due to Berlin Hyp s smaller size. 9

10 Income Statement 31 Dec Dec Dec Dec Dec 211 Year End Year End Year End Year End Year End EURm EURm EURm EURm EURm Unqualified Unqualified Unqualified Unqualified Unqualified 1. Interest Income on Loans Other Interest Income Dividend Income. n.a. n.a. n.a. n.a. 4. Gross Interest and Dividend Income , Interest Expense on Customer Deposits. n.a. n.a. n.a. n.a. 6. Other Interest Expense Total Interest Expense Net Interest Income Net Gains (Losses) on Trading and Derivatives. n.a. n.a. n.a. n.a. 1. Net Gains (Losses) on Other Securities. n.a. n.a. n.a. n.a. 11. Net Gains (Losses) on Assets at FV through Income Statement. n.a. n.a. n.a. n.a. 12. Net Insurance Income. n.a. n.a. n.a. n.a. 13. Net Fees and Commissions Other Operating Income Total Non-Interest Operating Income Personnel Expenses Other Operating Expenses Total Non-Interest Expenses Equity-accounted Profit/ Loss - Operating n.a. n.a. 2. Pre-Impairment Operating Profit Loan Impairment Charge (13.1) 1.4 (4.5) (23.5) Securities and Other Credit Impairment Charges (29.1) Operating Profit Equity-accounted Profit/ Loss - Non-operating. n.a. n.a. n.a. n.a. 25. Non-recurring Income. n.a. n.a. n.a. n.a. 26. Non-recurring Expense n.a. 27. Change in Fair Value of Own Debt. n.a. n.a. n.a. n.a. 28. Other Non-operating Income and Expenses (8.9) (54.7) 5. (6.6) (8.5) 29. Pre-tax Profit Tax expense 1.2 (2.1) Profit/Loss from Discontinued Operations. n.a. n.a. n.a. n.a. 32. Net Income Change in Value of AFS Investments. n.a. n.a. n.a. n.a. 34. Revaluation of Fixed Assets. n.a. n.a. n.a. n.a. 35. Currency Translation Differences. n.a. n.a. n.a. n.a. 36. Remaining OCI Gains/(losses). n.a. n.a. n.a. n.a. 37. Fitch Comprehensive Income Memo: Profit Allocation to Non-controlling Interests. n.a. n.a. n.a. n.a. 39. Memo: Net Income after Allocation to Non-controlling Interests Memo: Common Dividends Relating to the Period Memo: Preferred Dividends Related to the Period..... Exchange rate USD1 = EUR.9185 USD1 = EUR.8237 USD1 = EUR.7251 USD1 = EUR.7579 USD1 = EUR

11 Balance Sheet Assets A. Loans 31 Dec Dec Dec Dec Dec 211 Year End Year End Year End Year End Year End EURm EURm EURm EURm EURm 1. Residential Mortgage Loans. n.a. n.a. n.a. n.a. 2. Other Mortgage Loans 17, , , , , Other Consumer/ Retail Loans. n.a. n.a. n.a. n.a. 4. Corporate & Commercial Loans. n.a. n.a. n.a. n.a. 5. Other Loans 2, , , , , Less: Reserves for Impaired Loans Net Loans 2,61.1 2, , , , Gross Loans 2,827. 2, ,76. 21, , Memo: Impaired Loans included above , Memo: Loans at Fair Value included above. n.a. n.a. n.a. n.a. B. Other Earning Assets 1. Loans and Advances to Banks , , , Reverse Repos and Cash Collateral. n.a. n.a. n.a. n.a. 3. Trading Securities and at FV through Income. n.a. n.a. n.a. n.a. 4. Derivatives. n.a. n.a. n.a. n.a. 5. Available for Sale Securities. n.a. n.a. n.a. n.a. 6. Held to Maturity Securities. n.a. n.a. n.a. n.a. 7. Equity Investments in Associates Other Securities 6,485. 8, , , , Total Securities 6,485. 8, , , , Memo: Government Securities included Above 2, , ,84. 2, , Memo: Total Securities Pledged. n.a. n.a. n.a. n.a. 12. Investments in Property. n.a. n.a. n.a. n.a. 13. Insurance Assets. n.a. n.a. n.a. n.a. 14. Other Earning Assets. n.a. n.a. n.a. n.a. 15. Total Earning Assets 27, , , , ,398.6 C. Non-Earning Assets 1. Cash and Due From Banks Memo: Mandatory Reserves included above. n.a. n.a. n.a. n.a. 3. Foreclosed Real Estate. n.a. n.a. n.a. n.a. 4. Fixed Assets Goodwill. n.a. n.a. n.a. n.a. 6. Other Intangibles Current Tax Assets. n.a. n.a. n.a. n.a. 8. Deferred Tax Assets. n.a. n.a. n.a. n.a. 9. Discontinued Operations. n.a. n.a. n.a. n.a. 1. Other Assets Total Assets 28, , , , ,552.5 Liabilities and Equity D. Interest-Bearing Liabilities 1. Customer Deposits - Current. n.a. n.a. n.a. n.a. 2. Customer Deposits - Savings. n.a. n.a. n.a. n.a. 3. Customer Deposits - Term 2, , ,78.6 2, , Total Customer Deposits 2, , ,78.6 2, , Deposits from Banks 6, , , , , Repos and Cash Collateral. n.a. n.a. n.a. n.a. 7. Commercial Paper and Short-term Borrowings. n.a Total Money Market and Short-term Funding 8, , , , , Senior Unsecured Debt (original maturity > 1 year). n.a. n.a. n.a. n.a. 1. Subordinated Borrowing Covered Bonds n.a. n.a. n.a. n.a. n.a. 12. Other Long-term Funding 17,18. 16, , , , Total LT Funding (original maturity > 1 year) 17, , , , , Derivatives. n.a. n.a. n.a. n.a. 15. Trading Liabilities. n.a. n.a. n.a. n.a. 16. Total Funding 26, , , ,3.4 37,178.6 E. Non-Interest Bearing Liabilities 1. Fair Value Portion of Debt. n.a. n.a. n.a. n.a. 2. Credit impairment reserves. n.a. n.a. n.a. n.a. 3. Reserves for Pensions and Other Current Tax Liabilities Deferred Tax Liabilities. n.a. n.a. n.a. n.a. 6. Other Deferred Liabilities Discontinued Operations. n.a. n.a. n.a. n.a. 8. Insurance Liabilities. n.a. n.a. n.a. n.a. 9. Other Liabilities Total Liabilities 27, , , , ,721.6 F. Hybrid Capital 1. Pref. Shares and Hybrid Capital accounted for as Debt. n.a Pref. Shares and Hybrid Capital accounted for as Equity. n.a. n.a. n.a. n.a. G. Equity 1. Common Equity 1,38.9 1, Non-controlling Interest. n.a. n.a. n.a. n.a. 3. Securities Revaluation Reserves. n.a. n.a. n.a. n.a. 4. Foreign Exchange Revaluation Reserves. n.a. n.a. n.a. n.a. 5. Fixed Asset Revaluations and Other Accumulated OCI. n.a. n.a. n.a. n.a. 6. Total Equity 1,38.9 1, Total Liabilities and Equity 28, , , , , Memo: Fitch Core Capital 1,31.8 1, Memo: Fitch Eligible Capital 1,31.8 1, Exchange rate USD1 = EUR.9185 USD1 = EUR.8237 USD1 = EUR.7251 USD1 = EUR.7579 USD1 = EUR

12 Summary Analytics 31 Dec Dec Dec Dec Dec 211 Year End Year End Year End Year End Year End A. Interest Ratios 1. Interest Income on Loans/ Average Gross Loans Interest Expense on Customer Deposits/ Average Customer Deposits n.a. n.a. n.a. n.a. n.a. 3. Interest Income/ Average Earning Assets Interest Expense/ Average Interest-bearing Liabilities Net Interest Income/ Average Earning Assets Net Int. Inc Less Loan Impairment Charges/ Av. Earning Assets Net Interest Inc Less Preferred Stock Dividend/ Average Earning Assets B. Other Operating Profitability Ratios 1. Non-Interest Income/ Gross Revenues Non-Interest Expense/ Gross Revenues Non-Interest Expense/ Average Assets Pre-impairment Op. Profit/ Average Equity Pre-impairment Op. Profit/ Average Total Assets Loans and securities impairment charges/ Pre-impairment Op. Profit (35.4) Operating Profit/ Average Equity Operating Profit/ Average Total Assets Operating Profit / Risk Weighted Assets C. Other Profitability Ratios 1. Net Income/ Average Total Equity Net Income/ Average Total Assets Fitch Comprehensive Income/ Average Total Equity Fitch Comprehensive Income/ Average Total Assets Taxes/ Pre-tax Profit 1.29 (3.18) Net Income/ Risk Weighted Assets D. Capitalization 1. Fitch Core Capital/ Risk Weighted Assets Fitch Eligible Capital/ Risk Weighted Assets Tangible Common Equity/ Tangible Assets Tier 1 Regulatory Capital Ratio n.a Total Regulatory Capital Ratio Core Tier 1 Regulatory Capital Ratio Equity/ Total Assets Cash Dividends Paid & Declared/ Net Income Internal Capital Generation E. Loan Quality 1. Growth of Total Assets (6.19) (8.81) (2.45) (11.28) (5.29) 2. Growth of Gross Loans (.32) (.87) (3.6) (6.99).3 3. Impaired Loans/ Gross Loans Reserves for Impaired Loans/ Gross Loans Reserves for Impaired Loans/ Impaired Loans Impaired loans less Reserves for Impaired Loans/ Fitch Core Capital Impaired Loans less Reserves for Impaired Loans/ Equity Loan Impairment Charges/ Average Gross Loans (.6).1 (.2) (.1).1 9. Net Charge-offs/ Average Gross Loans Impaired Loans + Foreclosed Assets/ Gross Loans + Foreclosed Assets F. Funding and Liquidity 1. Loans/ Customer Deposits Interbank Assets/ Interbank Liabilities Customer Deposits/ Total Funding (excluding derivatives) Liquidity Coverage Ratio n.a. n.a. n.a. n.a. n.a. 5. Net Stable Funding Ratio n.a. n.a. n.a. n.a. n.a. 12

13 Reference Data 31 Dec Dec Dec Dec Dec 211 Year End Year End Year End Year End Year End EURm EURm EURm EURm EURm A. Off-Balance Sheet Items 1. Managed Securitized Assets Reported Off-Balance Sheet. n.a. n.a. n.a. n.a. 2. Other off-balance sheet exposure to securitizations. n.a. n.a. n.a. n.a. 3. Guarantees Acceptances and documentary credits reported off-balance sheet. n.a. n.a. n.a. n.a. 5. Committed Credit Lines 1, Other Contingent Liabilities. n.a. n.a. n.a. n.a. 7. Total Assets under Management. n.a. n.a. n.a. n.a. B. Average Balance Sheet Average Loans 2, , , , ,177.9 Average Earning Assets 28, , , , ,74.2 Average Assets 29, , , , ,25.4 Average Managed Securitized Assets (OBS). n.a. n.a. n.a. n.a. Average Interest-Bearing Liabilities 27, ,7.7 32, , ,92.1 Average Common equity 1, Average Equity 1, Average Customer Deposits 2, , , ,998. 3,29.4 C. Maturities Asset Maturities: Loans & Advances < 3 months Loans & Advances 3-12 Months 2, Loans and Advances 1-5 Years 4,16. 6,73.7 5, , Loans & Advances > 5 years 13, , , , ,367.8 Debt Securities < 3 Months. n.a. n.a. n.a. n.a. Debt Securities 3-12 Months 1, ,86.2 1,749. 1,61.8 2,685.3 Debt Securities 1-5 Years. n.a. n.a. n.a. n.a. Debt Securities > 5 Years 4, , , , ,54.2 Loans & Advances to Banks < 3 Months , ,19.3 2,32.2 Loans & Advances to Banks 3-12 Months Loans & Advances to Banks 1-5 Years Loans & Advances to Banks > 5 Years. n.a Liability Maturities: Retail Deposits < 3 months. n.a. n.a. n.a. n.a. Retail Deposits 3-12 Months. n.a. n.a. n.a. n.a. Retail Deposits 1-5 Years. n.a. n.a. n.a. n.a. Retail Deposits > 5 Years. n.a. n.a. n.a. n.a. Other Deposits < 3 Months. n.a. n.a. n.a Other Deposits 3-12 Months. n.a. n.a. n.a Other Deposits 1-5 Years. n.a. n.a. n.a. 2,947. Other Deposits > 5 Years. n.a. n.a. n.a. 4,591.9 Deposits from Banks < 3 Months 3, ,531. 8, , ,117.9 Deposits from Banks 3-12 Months , Deposits from Banks 1-5 Years 1, , , Deposits from Banks > 5 Years Senior Debt Maturing < 3 months. n.a. n.a. n.a. n.a. Senior Debt Maturing 3-12 Months 1, ,88.9 3, , ,126.4 Senior Debt Maturing 1-5 Years. n.a. n.a. n.a. n.a. Senior Debt Maturing > 5 Years 11, , ,38.1 9, ,982. Total Senior Debt on Balance Sheet 13, , , , ,18.4 Fair Value Portion of Senior Debt. n.a. n.a. n.a. n.a. Subordinated Debt Maturing < 3 months. n.a. n.a. n.a. n.a. Subordinated Debt Maturing 3-12 Months. n.a. n.a. n.a.. Subordinated Debt Maturing 1-5 Year. n.a. n.a. n.a. n.a. Subordinated Debt Maturing > 5 Years. n.a. n.a. n.a. n.a. Total Subordinated Debt on Balance Sheet Fair Value Portion of Subordinated Debt. n.a. n.a. n.a. n.a. D. Risk Weighted Assets 1. Risk Weighted Assets 7,598. 8,86.5 7,584. 8, , Fitch Adjustments to Risk Weighted Assets. n.a. n.a. n.a. n.a. 3. Fitch Adjusted Risk Weighted Assets 7,598. 8,86.5 7,584. 8, ,19. E. Equity Reconciliation 1. Equity 1,38.9 1, Add: Pref. Shares and Hybrid Capital accounted for as Equity n.a. n.a. n.a. n.a. n.a. 3. Add: Other Adjustments. n.a. n.a. n.a. n.a. 4. Published Equity 1,38.9 1, F. Fitch Eligible Capital Reconciliation 1. Total Equity as reported (including non-controlling interests) 1,38.9 1, Fair value effect incl in own debt/borrowings at fv on the B/S- CC only Non-loss-absorbing non-controlling interests Goodwill Other intangibles Deferred tax assets deduction Net asset value of insurance subsidiaries First loss tranches of off-balance sheet securitizations Fitch Core Capital 1,31.8 1, Eligible weighted Hybrid capital Government held Hybrid Capital Fitch Eligible Capital 1,31.8 1, Exchange Rate USD1 = EUR.9185 USD1 = EUR.8237 USD1 = EUR.7251 USD1 = EUR.7579 USD1 = EUR