Market overview 2 Review of the year 2015 covered bonds 4 Stability Council met for its 12th session 9 Review of the year 2015 SSAs 13 ECB Tracker 17

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1 1/15 2/15 3/15 4/15 5/15 6/15 7/15 8/15 9/15 1/15 11/15 12/15 1/15 2/15 3/15 4/15 5/15 6/15 7/15 8/15 9/15 1/15 11/15 12/15 EURbn EURbn Fixed Income Research Covered Bond & SSA View 216 December 215 5/215 We would like to thank all our readers and wish you and your families a Merry Christmas and a Happy New Year 216! The next Covered Bond & SSA View will be published on: 13 January 216 Your Covered Bond & SSA Team NORD/LB Fixed Income Research Agenda Page Market overview 2 Review of the year 215 covered bonds 4 Stability Council met for its 12th session 9 Review of the year 215 SSAs 13 ECB Tracker 17 Charts & Graphs 21 Publication overview 27 Contacts 28 Find us on Bloomberg: NRDR <GO> Issue volume Covereds Issue volume SSA AT AU BE CA CH CY CZ DE DK ES FI FR GB GR HU IE IT LU NL NO NZ PT SE US Other ES AT NL FR GE SNAT Source: Bloomberg, NORD/LB Fixed Income Research Source: Bloomberg, NORD/LB Fixed Income Research Please see important disclosure on the last pages.

2 Covered Bond & SSA View 16 December 215 Covered Bonds Analyst: Kai Ebeling Primary market Market overview In view of the imminent year-end, a pre-christmas calm descended on the primary market in the last reporting period, meaning that only Italy s Intesa Sanpaolo issued an Obbligazioni Bancarie Garantite worth EUR 1.25bn with a maturity of 1 years. Investors were keenly interested in the paper, which is why the bond was issued with a bid-to-cover ratio of 1.92 at ms +55bp. As a result, the annual volume to date increased to EUR 142.5bn. Issuer Country Banca Timing Popolare ISIN Emilia Maturity Volume Spread Rating EUR Intesa Sanpaolo IT IT y ms +55bp - / Aa2 / bn Source: Bloomberg, NORD/LB Fixed Income Research (Rating: Fitch / Moody s / S&P) Secondary market Moody s publishes its outlook for 216 Trader s comment The trend in spreads on the secondary market has been rather inconsistent since last Wednesday with issuers from Other Europe and Overseas in particular (with the exception of Australian covered bonds) seeing slightly narrower spreads. Spreads narrowed most notably on bonds from the regions mentioned in the mid-maturity range (5Y-7Y), where spreads tightened by ca. one basis point. Spreads on Italian covered bonds widened more with the long end being affected in particular. Here, spreads widened by 2bp (7Y- 1Y) or 3bp (>1Y). Spreads of German Pfandbriefe also widened by ca. one basis point along the entire curve. Last Thursday, Moody s published its outlook for covered bonds for 216, in which the rating agency views the strong and increasing regulatory support for covered bonds (e.g. CRD and LCR) as positive for development. The improving outlook for individual issuers, which have experienced a remarkable improvement in their creditworthiness since the beginning of 214, also contributed to this. According to the report, this improvement plus the new rating methodology for banks led to the proportion of issuers with a negative outlook for the senior unsecured rating falling by 53% within the last twelve months. As a result, the outlook for banks which run a covered bond programme is more positive than it has been since 27. In the regions outside the Eurozone, Moody s expects that other factors will have a positive impact on the credit quality of covered bond issues. This will be economic development in Canada, for example, while the credit rating of the issuer or government will be crucial in Australia, New Zealand, South Korea and Singapore. Sales on the market remain in short supply, which combined with an equal reluctance on the part of market dealers to purchase bonds led to spreads tending to widen. There were occasional purchasers, particularly of non- CBPP3 eligible securities issued by Swedish and British issuers, for example. The year-end as well as the imminent wave of new issues in January is leading most market players to act more cautiously. NORD/LB Fixed Income Research Page 2 of 32

3 Covered Bond & SSA View 16 December 215 SSA Analyst: Fabian Gerlich, CFA Bundesländer agree on joint position on financial equalisation and talk turns once again to Bund-Länder bonds Tap issue from Unédic Trader s comment Market overview Last week, representatives of the German Bundesländer agreed on a joint position on the reform of the federal financial equalisation system which is set to expire in its current form at the end of 219. The proposal to be submitted to the German government is based on a substantial restructuring of the current system. Two of the current levels of financial equalisation (VAT equalisation and financial equalisation between the Länder) are to be merged to facilitate greater transparency. As before, the equalisation should take place on the basis of financial strength. However, the financial strength of municipalities in the Länder will be taken into greater consideration than was previously the case. However, the level of equalisation between the Länder is to be limited in order to ease the burden on Länder that are currently the most significant net payers within the system. While the special supplementary federal grants, which are important items in the budgets of east German Länder in particular, also run out at the end of 219, the Länder are calling for the government to provide a total of EUR 9.7bn a year to be distributed among the Länder. So far the federal government has offered EUR 8.5bn. If rumours are to be believed, the Länder have surprisingly adopted a position that seemingly calls for joint Bund and Länder refinancing. Given that neither we nor the Federal Audit Office can identify any cost advantage offered by the instrument that had been issued once in 213 from an overall taxpayer perspective, this step is a very surprising one. Since the only joint Bund-Länder bond with partial liability on the part of the federal government has impressively demonstrated that it does not offer the hoped-for advantages, this can only mean that the Länder are pushing for refinancing with joint and several liability of the federal government. As this step was previously resoundingly rejected, we doubt that this will change substantially with the talks on the restructuring of the financial equalisation system. The primary market for EUR issues was relatively quiet over the past few days. While the ECB press conference led to a significant increase in volatility and jittery spread movements, there were no new issues of EUR benchmarks in the market. The start of the week saw only a tap issue by Unédic, which increased the size of a six-year bond (UNEDIC 1.5 4/221) by EUR.5bn in total, with the reoffer spread set at OAT +16bp. Market expectations that Länder bonds would be included in the purchasing programme were confirmed at the ECB meeting last Thursday. Spreads tightened in the mid and long-term maturity bands. No bonds are being offered. In contrast, there are offers in the segment up to four years, which is still showing negative yields. The spread level in short-dated maturities has barely changed. The wait for the start of the purchasing programme and approaching end of the year led to only low levels of trading activity in the market. NORD/LB Fixed Income Research Page 3 of 32

4 EURbn Covered Bond & SSA View 16 December 215 Covered Bonds Analyst: Kai Ebeling Primary market matches 211 level Review of the year 215 covered bonds In this, the final issue of our Covered Bond & SSA View in 215, we take the opportunity of providing readers with a review of trends in the primary and secondary markets during the year. Boosted by the ECB s ongoing covered bond purchasing programme, EUR-denominated benchmark issues totalling EUR 142.5bn have been issued since the beginning of this year to date. Similar to the previous year, German issuers accounted for the major share of these issues, a combined 16.8%. In shared second/third place are Spanish and French banks, each group with a share of 13.9% of the primary market volume. Outside the eurozone, at EUR 14.25bn in total, the biggest share of the issuing volume was attributable to Canadian issuers. Banca Popolare Emilia 215 issuing volume by country Issuing trend EUR 142.5bn DE ES FR CA IT GB SE FI NO AU BE IE AT NL DK PT NZ LU Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec ytd Source: market data, NORD/LB Fixed Income Research Source: market data, NORD/LB Fixed Income Research Issuing volume above average in September and July Ongoing decrease in average issue volume The multiannual comparison highlights that the issuing volume of EUR 142.bn recorded in 211 has already been exceeded. This means that a total amount of EUR 31.9bn, or 28.8%, more was issued than in the previous year (EUR 11.6bn). In contrast with previous years, most of the issues were not launched in January, as is usual, but in September instead, with an increase in the volume issued of EUR 23.3bn in September 215. The month had been preceded by volatile market conditions as a result of uncertainty arising at the end of the summer lull about the economic trend in China and the Greek debt drama. Following the agreement between the Greek government and Greece s creditors, a large number of issuers took advantage of the stable market environment to launch a total of 2 issues in the second half of July. The issue volume for July as a whole amounted to EUR 17.8bn in total, whereas the simple average in the previous years ( ) was EUR 4.6bn. With a total of 175 new covered bond issues, the average volume per benchmark issue amounted to EUR 814.3m in 215 and was therefore EUR 37m lower than in the previous year. The issue volume of German Pfandbriefe totalled EUR 558.1m. Canadian issuers opted for deals worth considerably more, with an average issue volume of EUR 1,187.5m. NORD/LB Fixed Income Research Page 4 of 32

5 57% 58% 49% 43% 44% 2% 24% 27% 18% 15% 19% 16% 16% 16% 24% 1% 11% 11% 17% 14% Covered Bond & SSA View 16 December 215 Issuers in Eurozone periphery record highest growth Issuers in the core eurozone countries continue to represent the largest group of issuers, accounting for approx. 44% of the volume placed (214: 43%). The highest percentage growth was recorded by issuers in the eurozone periphery, whose share of the issuing volume rose from 2% in the previous year to now 27%. This growth came at the expense of covered bond issuers from the regions Other Europe and Overseas whose respective percentage shares were down by 3%. However, it should be noted that in terms of absolute figures all segments achieved growth on the previous year. Nevertheless, the two eurozone regions recorded the highest growth rates, driven by CBPP3. While issuers from the eurozone periphery increased the volume issued by 65% compared with the previous year to its current level of EUR 38bn, banks in the core European countries made use of benchmark issues worth EUR 68bn. This represents growth of 42% on 214. Banca Popolare Emilia 215 issuing volume by region in % 215 issues by maturity in % 1% 9% 8% 1% 9% 8% 6% 7% 6% 5% 6% 18% 22% 16% 22% 19% 7% 7% 11% 6% 5% 4% 3% 2% 1% % year Core Eurozone Periphery Eurozone Other Europe Overseas 6% 5% 4% 3% 2% 1% % 27% 38% 31% 42% 47% 37% 38% 38% 28% 18% 7% 2% 4% 5% year 1Y-3Y 3Y-5Y 5Y-7Y 7Y-1Y >1y Source: market data, NORD/LB Fixed Income Research Source: market data, NORD/LB Fixed Income Research Trend towards long maturities remains intact CBPP3 squeezes out traditional covered bond investors With regard to the maturity selected, the trend towards long maturities continued. Approx. two thirds of all benchmark issues placed in total had a time to maturity of more than five years. The sweet spot was the maturity band ranging from 5y to 7y, with the share of this maturity increasing from 31% in the previous year to 42% in the current year. The distribution of the primary market volume by investor group and the country of origin of investors is illustrated on the following page. It is evident that the squeezing out of traditional covered bond investors as a result of the central banks CBPP3, which already started last year, has intensified. The share of central banks and SSAs across all jurisdictions (including outside the eurozone) rose from 17.4% in the previous year to now 31.1%. This growth was essentially at the expense of banks and asset managers, whose shares declined by 6.% and 5.8% respectively. Germany and Austria have remained the most important region for covered bond issuers. At 48.1%, investors in these countries took up almost half of all new issues. For the first time, the Nordic countries were the second most important region this year, albeit with a substantial gap (8.%). NORD/LB Fixed Income Research Page 5 of 32

6 Banks Asset Managers Funds Central Banks/SSA Insurances Pensions Retail/Private Wealt Corporates Hedge Funds Other Germany / Austria UK / Ireland France Nordics Benelux Spain Switzerland Italy Asia/Middle East USA Portugal CEE Others Covered Bond & SSA View 16 December 215 Banca Popolare Emilia 215 issuing volume by investor group 215 issuing volume by investors origin 45% 4% 35% 6% 5% 3% 4% 25% 2% 15% 1% 5% % % 2% 1% % Source: market data, NORD/LB Fixed Income Research Source: market data, NORD/LB Fixed Income Research Negative reoffer spreads recorded for the first time The downward trend in average reoffer spreads continued after an increase in the period from 211 to 212. Compared with the previous year, they lost around 14bp across all jurisdictions, with this year s average reoffer spread standing at 1bp. It fell below the bp limit for the first time in both Germany and France. French issuers launched their issues at ms flat on average and German Pfandbriefe were placed at a reoffer spread as low as ms -1bp. As was also the case in the past, the highest spread was paid by Portuguese issuers at 6bp. However, the average reoffer spread was also down by more than half in Portugal (214: 123bp). Calculated in absolute terms, the average reoffer spreads of Irish issuers decreased the most. Following a reduction of 66bp to a current level of 21bp, they now pay less than a tenth of the average reoffer spread in 212. Average reoffer spread (bp over mid swap) AT AU BE CA CH CZ DE DK ES FI FR GB IE IT LU NL NO NZ PT SE Source: Bloomberg, NORD/LB Fixed Income Research. NORD/LB Fixed Income Research Page 6 of 32

7 Covered Bond & SSA View 16 December 215 Secondary market spreads have generally widened In contrast with the decrease of reoffer spreads in the primary market over the course of the year, spreads in the secondary market increased in most jurisdictions. This affected issuers in the regions Overseas and Other Europe, in particular, where spreads rose in all maturity bands. Australian covered bonds recorded the weakest performance, with spreads in the medium and long maturity bands widening by 15bp and 16bp respectively. 215 performance (in bp; up to and including 14 December 215) 1Y-3Y 3Y-5Y 5Y-7Y 7Y-1Y >1Y AT AU n/a BE n/a CA n/a n/a CH n/a n/a DE DK n/a n/a ES - Multi ES - Single FI n/a FR GB IE n/a n/a IT NL n/a NO n/a NZ n/a n/a n/a PT n/a n/a n/a SE n/a n/a US 17.7 n/a n/a n/a n/a Source: Bloomberg, NORD/LB Fixed Income Research. eurozone outperforms Overseas and Other Europe regions Secondary market spreads have probably touched bottom Compared with the regions Overseas and Other Europe, the trend in spreads in the various eurozone jurisdictions was far more varied. Only Spanish Multi Cédulas and Portuguese covered bonds with a short maturity (1y to 3y) achieved a marked positive performance on the entire curve throughout the year. In the core European countries, Austrian issuers faced widening spreads, especially in the short and medium maturity bands. In the first quarter of the year, investors avoided covered bond issues from Austrian banks in view of the events surrounding HETA Asset Resolution. Some jurisdictions in the core eurozone recorded a relatively steady to slightly positive trend in spreads, particularly in the maturity bands of 3y to 5y, 5y to 7y and 7y to 1y. This primarily applied to French, Dutch and German issuers. However, it should also be noted that more marked spread widening was recorded for German Pfandbriefe, especially in the short maturity bands. Overall, it is evident that issuers in the eurozone outperformed those in the regions Overseas and Other Europe, particularly in the medium and long maturity bands. This was the result of additional demand from the ECB. Nevertheless, it should also be stated that the marked spread tightening recorded in previous years and the positive trend in reoffer spreads do not transfer to the trend in secondary market spreads. Consequently, it seems that a low point was reached over the course of this year. This means that spreads are more likely to widen in 216. NORD/LB Fixed Income Research Page 7 of 32

8 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 EURbn EURm Covered Bond & SSA View 16 December 215 Buying under CBPP3 far more aggressive than previous programmes As indicated above, CBPP3 has a decisive impact on the market. The central banks purchasing approach under the programme has been far more aggressive than with the previous two programmes. This year alone, securities worth EUR 112.2bn have been purchased since the start of the year (up to the review date of 11 December). The total volume purchased under CBPP3 of EUR 141.8bn considerably exceeds the volume of each of the previous two purchasing programmes. Trend in purchasing programmes Banca Popolare Emilia Trend in purchase volume under CBPP ,5 4, ,5 3, 2, , 6 1, , weeks since initiation CBPP1 CBPP2 CBPP3 weekly purchase volume average weekly purchase volume Source: ECB, NORD/LB Fixed Income Research Source: ECB, NORD/LB Fixed Income Research ECB s purchases have increasingly focused on the primary market since September Conclusion With regard to the trend in weekly purchase volumes, it is evident that the ECB achieved its target volume of EUR 2.5bn per week (including ABS) on average. Nonetheless, the central bank currently appears to find it more difficult to achieve this target on a sustained basis, as it is finding significantly fewer sellers in the secondary market than in the first half of this year. The monthly data published on the distribution of purchases in the primary and secondary markets also highlights this aspect. Since September, CBPP3 purchases have focused far more on the primary market than they did in the preceding months (cf. ECB tracker, p. 17). The primary market share rose from an average of 17% (Oct 214 to Aug 215) to a current average level of 55% (Sept to Nov 215). In order to achieve the target volume on a sustained basis, it seems that the central banks are currently forced to rely on a high level of primary market activities. For Q1 216, sufficient supply is likely to be available, since primary market activities in the past tended to be substantial in January. On average, 43% of the annual total issuing volume was issued in the first quarter of each of the past four years. In the course of this year, the covered bond market continued to be dominated by CBPP3. The effects of this included that a record volume (compared with previous years) of EUR 142.5bn was issued. Nevertheless, secondary market spreads seem to have reached a low point in most jurisdictions over the course of the year. This was certainly attributable in part to the ECB s increased purchasing focus on the primary market during the past few months. In the coming year, the ECB s monetary policy is set to remain the decisive influencing factor. NORD/LB Fixed Income Research Page 8 of 32

9 Covered Bond & SSA View 16 December 215 SSAs Analysts: Fabian Gerlich, CFA Norman Rudschuck, CIIA Slight increase in the number of violations Budget woes continue in Bremen and Saarland Stability Council met for its 12th session As scheduled, the 12th session of the Stability Council was on the agenda last week. The meeting of the supervisory body, which examines the budgets of the federal government and Länder, produced no surprises but illustrated the positive trend in Länder budgets within the framework of its published figures. In total, the number of violations identified by the Stability Council in Länder budgets increased minimally from 22 (214) to 23, which was well down on the 29 identified at the first meeting in 211. As soon as a key figure in one of the periods under consideration (current situation = last two financial years and the current financial year; planning = financial planning for the next few years) breaches the permissible limit on several occasions, the body defines this as a violation. The Stability Council again identified budget crises in Bremen and the Saarland. The supervisory body defines a situation in which a period (current situation or planning) for a Land is regarded as conspicuous as a budget crisis. A period is conspicuous as soon as three of the four key figures considered are conspicuous. The Stability Council identified budget crises in Berlin, Bremen, Schleswig-Holstein and the Saarland at its first meeting, which is why these Länder have been following fiscal consolidation programmes since then. To help with the fiscal consolidation, these Länder plus Saxony-Anhalt receive consolidation funds totalling EUR 8m. The consolidation programmes are largely successful: yet again, budget crises were not identified in Berlin and Schleswig-Holstein. Violations identified by the Stability Council Financial balance Credit financing ratio Interest-tax ratio Total debt Current situation Planning Current situation Planning Current situation Planning Current situation Baden-Württemberg No No No No No No No No Bavaria No No No No No No No No Berlin No No No No Yes No Yes Yes Brandenburg No No No No No No No No Bremen Yes Yes Yes Yes Yes Yes Yes Yes Hamburg No No No No No No No No Hesse No No No No No No No No Mecklenburg-Western Pomerania Planning No No No No No No No No Lower Saxony No No No No No No No No North Rhine-Westphalia No No No No No No No No Rhineland-Palatinate No No No No No No No No Saarland Yes Yes Yes Yes Yes Yes Yes Yes Saxony No No No No No No No No Saxony-Anhalt No No No No No No Yes No Schleswig-Holstein No No No No Yes No Yes Yes Thuringia No No No No No No No No For details of the role of the Stability Council, its key figures and definitions please refer to the Issuer Guide German Bundesländer 215. Source: Stability Council, NORD/LB Fixed Income Research NORD/LB Fixed Income Research Page 9 of 32

10 Covered Bond & SSA View 16 December 215 Financial balance in EUR per capita Financial balance in EUR per inhabitant Actual Target Financial planning Limit Violations Limit Violations Baden-Württemberg No No Bayern No No Brandenburg No No Hessen No No Mecklenburg-Vorpommern No No Niedersachsen No No Nordrhein-Westfalen No No Rheinland-Pfalz No No Saarland Yes Yes Sachsen No No Sachsen-Anhalt No No Schleswig-Holstein No No Thüringen No No Bundesländer average Threshold value (non-city states) Berlin No No Bremen Yes Yes Hamburg No No Threshold value (city states) Source: Stability Council, NORD/LB Fixed Income Research Credit financing ratio in % credit financing ratio (%) Actual Target Financial planning Limit Violations Limit Violations Baden-Württemberg 1,9 2,1,3 No -1,7 -,8 -,6 No Bayern -1,7-1,2 -,1 No -1,4-1,3-1,3-1,2 No Brandenburg -2,1-2,3-1, No -1,2-1,5-1,4 No Hessen 5, 2,4 2,3 No 1,6,7-3, -,7 No Mecklenburg-Vorpommern -3,9 -,6 -,7 No -,5 -,6 -,6 -,6 No Niedersachsen 3,8 1,1 2,5 No 2, 1,4,9,5 No Nordrhein-Westfalen 2,6 2,2 1,5 No,6,8, -,4 No Rheinland-Pfalz 1,1,1 2,1 No 1,6 1,,2 -,6 No Saarland 18,5 16,5 15,1 Yes 11,9 15, 8,2 5,2 Yes Sachsen -1,8 1,9-1,7 No -3,9-3,9-2,7-3,4 No Sachsen-Anhalt -,1-1,4 -,6 No -1,1-1,6-1,9 No Schleswig-Holstein -,8 -,4 1,8 No,5 -,1 -,8-1,6 No Thüringen -3, -1,3 -,5 No -,8 -,7 -,3 No Bundesländer average 1, 1,,8 1,1 6,7,2,2 Threshold value (non-city states) 4, 4, 3,8 7,8 7,8 7,8 7,8 Berlin -2,6-1,1-2,2 No -,3 -,3 -,3 -,3 No Bremen 13,7 14,2 12,2 Yes 9,5 8,8 7,4 5,7 Yes Hamburg -4,3 -,3 1,7 No,9, -1,3 No Threshold value (city states) 4, 4, 3,8 7,8 7,8 7,8 7,8 Source: Stability Council, NORD/LB Fixed Income Research NORD/LB Fixed Income Research Page 1 of 32

11 Covered Bond & SSA View 16 December 215 Interest-tax ratio in % Interest-tax ratio (%) Actual Target Financial planning Limit Violations Limit Violations Baden-Württemberg 6, 5,2 5,4 No 5,4 5,5 5,9 No Bayern 2,7 2,4 2,3 No 2,2 1,9 1,7 1,7 No Brandenburg 6,6 5,9 5,3 No 4,7 4,9 4,8 No Hessen 7,7 6,8 7,1 No 6, 6, 6, 6, No Mecklenburg-Vorpommern 7,2 6,4 7, No 5,6 5,2 5,1 5,1 No Niedersachsen 7,9 6,9 7,6 No 7,2 7, 6,8 6,6 No Nordrhein-Westfalen 8,2 7,2 6,5 No 5,8 5,2 5,3 5,2 No Rheinland-Pfalz 9, 8,3 1,2 No 8,2 8,1 8,5 8,5 No Saarland 17,2 16,3 15,8 Yes 14, 13,5 13,4 13, Yes Sachsen 2,6 2,1 1,8 No 1,9 1,9 2, 2,2 No Sachsen-Anhalt 9,6 8,8 8, No 7,2 8, 7,8 No Schleswig-Holstein 11, 9,5 8,7 Yes 8,3 7,,7 8, 7,9 No Thüringen 9,1 8,5 83, No 7,8 7,5 7,2 No Bundesländer average 7,4 6,5 6,7 7,3 7,1 7,2 7,3 Threshold value (non-city states) 1,4 9,1 9,3 1,3 1,3 1,3 1,3 Berlin 11,6 9,9 11,8 Yes 8,3 8,1 8,3 8,5 No Bremen 19,2 16,3 18,3 Yes 16,8 16,4 16,1 15,7 Yes Hamburg 8,1 7, 7,6 No 7,8 7,7 7,5 No Threshold value (city states) 11,1 9,8 1, 11 11, 11, 11, 11, Source: Stability Council, NORD/LB Fixed Income Research Total debt in EUR per capita Level of debt in EUR per inhabitant Actual Target Financial planning Limit Violations Limit Violations Baden-Württemberg No No Bayern No No Brandenburg No No Hessen No No Mecklenburg-Vorpommern No No Niedersachsen No No Nordrhein-Westfalen No No Rheinland-Pfalz No No Saarland Yes Yes Sachsen No No Sachsen-Anhalt Yes No Schleswig-Holstein Yes Yes Thüringen No No Bundesländer average Threshold value (non-city states) Berlin Yes Yes Bremen Yes Yes Hamburg No No Threshold value (city states) Source: Stability Council, NORD/LB Fixed Income Research Fiscal consolidation process in Berlin: consolidation process about to conclude in 216 For those Länder which have to comply with consolidation programmes, the Stability Council also publishes more detailed reports on progress with the consolidation process. In its resolution of 23 May 211, the Stability Council identified a looming budget crisis in Berlin. Since then, the Land has been undergoing a consolidation process. In its current stability report, Berlin presented a key figure analysis and standard projection, which was inconspicuous by and large. The Stability Council determines that Berlin is continuing to comply with its upper limit by a large margin and the Land will successfully conclude its consolidation process in 216. NORD/LB Fixed Income Research Page 11 of 32

12 Covered Bond & SSA View 16 December 215 Consolidation process in Schleswig-Holstein: new debt brings it close to its upper limit Consolidation process in Bremen: asked to prioritise fiscal consolidation Consolidation process in Saarland: remaining on the ball Conclusion Last year, the body asked Schleswig-Holstein not to let the relatively large gap before it hit the upper limit for new borrowing lead to its relaxing its consolidation efforts. This was not without reason: in the current year, against the background of the sharp increase in the number of refugees, the Stability Council draws attention to the marked reduction in the gap before it breaches the permissible figure for new borrowing. However, the consolidation report also shows that Schleswig-Holstein can successfully conclude the consolidation process in 216. While the tone of voice was sharper for the Land Bremen last year, the Stability Council attested to the fact that the city state, which had been asked to intensify its consolidation programme in December 213, had taken additional measures to improve progress on its path to a balanced budget. It also drew attention to the fact that additional measures, which would have an immediate impact, are likely to be necessary over the next few years. Last year, Saarland s plan to reduce the gap between current borrowings and the ceiling for new debt in the forecast period was criticised. This year, the Stability Council attests to the fact that the south-western Bundesland is pursuing its previous consolidation policies. However, additional measures to consolidate the budget are also likely to be needed here over the next few years. In our opinion, the Stability Council s indicators by and large illustrate the yet again fundamentally positive trend in Bundesländer budgets. Although there are a few signs pointing to the fact that this trend is likely to slow (because of the slowdown in economic activity and the refugee crisis, among other factors). However, in our opinion, there has been a further fundamental improvement in the budget situation overall. It remains to be seen how far the target figures for 215 are achieved. We consider positive or negative deviations are still possible here. The cash figures, which will be published in February 216, are therefore only likely to provide a more precise overview of the 215 financial year. We also believe that the extent to which financial planning has to be adjusted, for example because of forthcoming elections and the continuing refugee crisis, is likely to be of interest. However, our assumption is that the trend in Länder finances will remain positive overall. NORD/LB Fixed Income Research Page 12 of 32

13 1/15 2/15 3/15 4/15 5/15 6/15 7/15 8/15 9/15 1/15 11/15 12/15 EURbn EURbn Covered Bond & SSA View 16 December 215 SSAs Review of the year 215 Analysts: Fabian Gerlich, CFA Norman Rudschuck, CIIA In our final publication of the year, we provide a review of the European SSA market in 215 with particular attention to changes in the primary market presence of entities as well as the total return and spread performance. EUR benchmark issuing volumes since 27 EUR benchmark issuing volumes in 215, YTD Other ES AT NL FR GE SNAT Other ES AT NL FR GE SNAT NB: benchmarks are defined as bond issues with a minimum volume of EUR.5bn, Source: Bloomberg, issuers, NORD/LB Fixed Income Research Issuing volume decreases further; foreign currencies steady Importance of supras as EUR benchmark issuers is waning Overall, a further decrease in issuing volumes was a typical feature of 215. The funding requirement of European supranationals, in particular, was significantly lower than in 214 (with a decrease in the issuing volume by a further EUR 15bn approximately). Within Europe, French and German agencies as well as Spanish regions were among the SSA segments which reduced their volume of primary market activities. Only Dutch agencies and Canadian regions increased their benchmark issues. The choice of benchmark funding was interesting. In H1 215, the USD was at the centre of activities following the ongoing recovery of the EUR/USD basis swap spread. However, in H2 215, EUR-denominated issues were significantly more attractive as a result of the spread falling further. With regard to the currency composition, USD benchmarks were at a record level, whereas benchmark funding had remained relatively steady in 214. Yet, for the New Year, we expect the importance of the EUR to increase again in benchmark funding. Within the EUR benchmark market, the share of new issues by European supras decreased once again following a significant increase in the share of this particular segment in previous years. While German SSAs also recorded a slightly lower share, the importance of Dutch issuers remained reasonably constant compared with French issuers. The trend in the structure of EUR benchmark issues was also relatively steady this year. Fixed-income securities continued to prevail, whereas floating rate notes accounted for considerably less than 1% due to the phase of low interest rates. NORD/LB Fixed Income Research Page 13 of 32

14 Change in ASW spread in bp Covered Bond & SSA View 16 December 215 EUR benchmark issues since 29 by coupon type EUR benchmark issues since 29 by maturity band 1% 1% 9% 9% 8% 8% 7% 7% 6% 5% 4% 3% 2% 1% % % 5% 4% 3% 2% 1% % Fixed Floating Other 3y 5y 7y 1y 15y Other NB: benchmarks are defined as bond issues with a minimum volume of EUR.5bn. Source: Bloomberg, issuers, NORD/LB Fixed Income Research Once again, supply in long maturity band is higher With regard to the maturity of benchmarks, SSAs once again tended to select securities with longer maturities in the course of this year, which is now quickly coming to a close. At 2.7%, the 1y maturity once again represented the biggest segment. However, at 13.8% more EUR benchmark issues had a 15y maturity this year than for a number of years. In our database, this segment had not even once come close to the 5% mark since 29. ASW spread trend in 215, YTD SNAT DE - National agencies DE - Regional agencies DE - Länder FR - (RW %) FR - (RW 2%) NL - AT - ES - ES - Regions CA - Regions 1 to 3 3 to 5 5 to 7 7 to 1 1+ Mean NB: calculation based on EUR benchmarks. Allocation to maturity bands as at 5 January 215. Source: Bloomberg, issuers, NORD/LB Fixed Income Research Markedly positive ASW spread performance The trend in spreads for European SSAs was very positive overall. (Marginal) ASW spread widening was only recorded in a few maturity bands. Spanish issuers once again recorded the top performance in terms of ASW spreads. Outside the eurozone periphery, the most significant spread tightening was evident for supranationals. NORD/LB Fixed Income Research Page 14 of 32

15 Current ASW spreads in bp Change in G spread in bp Covered Bond & SSA View 16 December 215 Trend in G-spreads in 215, YTD SNAT DE - National agencies DE - Regional agencies DE - Länder FR - (RW %) FR - (RW 2%) NL - AT - ES - ES - Regions CA - Regions 1 to 3 3 to 5 5 to 7 7 to 1 1+ Mean NB: calculation based on EUR benchmarks. Allocation to maturity bands as at 5 January 215. G-spread calculation based on allocation of bonds to the relevant government bonds with similar maturities. G-spread calculation for supranationals in relation to Bunds. Source: Bloomberg, issuers, NORD/LB Fixed Income Research G-spread widening primarily in Spanish SSAs The picture is different with regard to G-spreads. The spreads of SSA segments reviewed here remained at an almost constant level compared with German and Dutch government bonds as well as supranationals. At the same time, Austrian and French agencies were an exception in this respect and recorded widening G-spreads. The movement was even more significant for Canadian and, especially, Spanish regions. The 25bp widening in the long maturity segment (1+) was attributable to Catalonia s efforts to achieve independence. Outside the periphery, German regional agencies recorded the most significant G-spread tightening in the short maturity band (three to seven years). However, further reduced by the ECB, relatively low liquidity makes it difficult to carry out a more in-depth analysis of this aspect. Current ASW spreads SNAT DE - National agencies DE - Regional agencies DE - Länder FR - (RW %) FR - (RW 2%) NL - AT - ES - ES - Regions CA - Regions 1 to 3 3 to 5 5 to 7 7 to 1 1+ Source: Bloomberg, issuers, NORD/LB Fixed Income Research NORD/LB Fixed Income Research Page 15 of 32

16 Basis points = 1 Current G spreads in bp Covered Bond & SSA View 16 December 215 Current G-spreads SNAT DE - National agencies DE - Regional agencies DE - Länder FR - (RW %) FR - (RW 2%) NL - AT - ES - ES - Regions CA - Regions 1 to 3 3 to 5 5 to 7 7 to 1 1+ G-spread calculation based on allocation of bonds to the relevant government bonds with similar maturities. G-spread calculation for supranationals in relation to Bunds. Source: Bloomberg, issuers, NORD/LB Fixed Income Research ASW spread trend for selected iboxx indices Total return trend for selected iboxx indices Jan 15 Feb 15 Mrz 15 Apr 15 Mai 15 Jun 15 Jul 15 Aug 15 Sep 15 Okt 15 Nov 15 Dez Jan 15 Feb 15 Mrz 15 Apr 15 Mai 15 Jun 15 Jul 15 Aug 15 Sep 15 Okt 15 Nov 15 Dez 15 iboxx Sub-Sovereigns iboxx Supranationals iboxx Other Sub-Sovereigns Non-Financials iboxx iboxx Public Banks iboxx Regions iboxx Sub-Sovereigns iboxx Supranationals iboxx Other Sub-Sovereigns Non-Financials iboxx iboxx Public Banks iboxx Regions Source: Markit, NORD/LB Fixed Income Research Trend in iboxx indices spread tightening and once again positive returns Conclusion In the first half of 215, spread tightening was predominant. This was followed by some significant and erratic fluctuations. The relatively steady ASW spread tightening seen in the previous year then resumed in the second half of 215. Spread volatility of the most important SSA indices was minimal recently, whereas risk premiums fluctuated considerably in the first six months of the year. The sub-indices of the iboxx Sub-Sovereigns which we analyse closed the year with slight ASW spread tightening. With regard to total returns, the trend was promoted by the general direction of interest rates. All indices reflected a relatively constant total return. Overall, the year coming to an end was a successful one for SSAs. Despite a downward trend, the supply was high once again not least because of the ECB s actions. Accordingly, ASW spreads fluctuated considerably in some cases. This was also the case in relation to the relevant government bonds. The general direction of interest rates additionally boosted the return. However, in the New Year, it will represent a major challenge for investors. NORD/LB Fixed Income Research Page 16 of 32

17 Covered Bond & SSA View 16 December 215 Covered Bonds/SSA ECB Tracker Analysts: Kai Ebeling Norman Rudschuck. CIIA CBPP3 volume exceeds EUR 14bn PSPP portfolio continues to rise dynamically and has exceeded EUR 475bn for the first time In this section. we publish weekly updates on the covered bonds. ABS. specific agencies. supranationals and sovereign bonds which the European Central Bank (ECB) is purchasing under the CBPP3. We provide an overview of the development of purchases. As at reference date of 11 December, the ECB reported an amount of EUR bn purchased so far as part of the CBPP3. This represents an increase of EUR 1.896bn against the previous week s value. The pace of purchases has fallen in comparison with the previous week (EUR 2.12bn). Consequently, the pace in the last four weeks in relation to the previous rolling period has improved on account of basis effects, from EUR 7.42bn to EUR 7.684bn. It has therefore continued to fall short of the originally planned target volume of EUR 1.bn per month, with this value only being achieved in one rolling four-week period in the second half of the year. In our opinion, this is not likely to change next year, as a result of which the ECB will maintain a focus on the public sector for its purchases. The ABSPP volume only increased by EUR 98m on the previous week s figure, meaning that EUR bn has so far been purchased under the programme. The pace of purchases in the last four weeks has risen to EUR 624m on account of basis effects, after EUR 582m was recorded in the previous week. The Eurosystem has completed purchases amounting to an overall volume of EUR bn as at 11 December. When compared with the previous week, the portfolio has therefore increased by an impressive EUR 13.6bn. The previous week s value of EUR 16.5bn is therefore still the highest value since the end of March. The purchase rate over the past four weeks is now EUR 56.4bn, so it has again increased in relation to the previous rolling period (EUR 55.3bn) for the eighth consecutive week. In the upcoming reverse auction on Friday, Banque de France will once again be buying three (very) short EFSF bonds, with two maturing in 218 and one in 221. ESM accounts for the fourth paper, for which the maturity is considerably longer, expiring in 225. While the market is gradually recovering from disappointment in the wake of the ECB meeting, we are waiting to discover more details about the planned expansion of the purchase list to include German Bundesländer and the criteria that will apply for purchases. We are not predicting any great deviation on the existing method for government bonds and supranationals. Upcoming Reverse Auctions Bond ISIN Central bank & date EFSF 1 1/4 2/5/18 EUA1GA99 Banque de France (18.12.) EFSF 7/8 4/16/18 EUA1GBB2 Banque de France (18.12.) EFSF 1 3/8 6/7/21 EUA1GBP2 Banque de France (18.12.) ESM 1 9/23/25 EUA1U9894 Banque de France (18.12.) Source: BDF. NORD/LB Fixed Income Research NORD/LB Fixed Income Research Page 17 of 32

18 Covered Bond & SSA View 16 December 215 ECB purchase list of PSPP Issuer Jurisdiction ISINs already purchased EIB SNAT 44 EFSF SNAT 15 ESM SNAT 1 EU SNAT 18 COE SNAT 6 NIB SNAT 1 EURAT SNAT - KFW DE 31 RENTEN DE 1 NRWBK DE 8 LBANK DE 4 CADES FR 15 RESFER FR 1 UNEDIC FR 13 AGFRNC FR 12 OSEOFI FR 8 CDCEPS FR 1 CNA FR 2 ACOSS FR - BNG NL 17 NEDWBK NL 9 NEDFIN NL - OBND AT 3 ASFING AT 4 FINNVE FI 2 TVRFIN FI 1 ICO ES 8 ADIFAL ES 3 CDEP IT 2 FERROV IT 2 ENELIM IT 1 SRGIM IT 4 TRNIM IT 3 IP (REFER / ESTPOR) PT - ENMC PT - SEDABI SI 1 DARSDD SI - Source: ECB. NORD/LB Fixed Income Research NORD/LB Fixed Income Research Page 18 of 32

19 Jul-9 Nov-9 Mar-1 Jul-1 Nov-1 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Covered Bond & SSA View 16 December 215 CBPP3 Overview Weekly purchase volume [EURbn] Primary and secondary market share [EURbn] 3, , 14 3, 14 12, 12 2, , 1 2, 1,5 1,,5, , 6, 4, 2,, Weekly purchases Total volume (rhs) Primary market Secondary market Total volume (rhs) Source: Bloomberg. NORD/LB Fixed Income Research Source: ECB. NORD/LB Fixed Income Research Total volume of covered bond purchase programmes [EURbn] CBPP1 [EUR 2,7bn] CBPP2 [EUR 9,8bn] CBPP3 [EUR 141,8bn] Source: Bloomberg. NORD/LB Fixed Income Research current volume in [ ] NORD/LB Fixed Income Research Page 19 of 32

20 EURbn Covered Bond & SSA View 16 December 215 PSPP overview Weekly purchase volume (EUR bn) Distribution by country at month-end (EUR bn) Weekly purchases Total volume (rhs) Source: Bloomberg. NORD/LB Fixed Income Research Source: ECB. NORD/LB Fixed Income Research Overall distribution of PSPP buying at month-end (EURbn) Country Adjusted distribution key 1 Purchases (EUR m) Expected purchases (EUR m) 2 Difference (EUR m) Average time to maturity in years Market average in years 3 Difference in years DE 26.3% 15,182 14, FR 2.7% 83,5 82,254 1, IT 18.% 72,28 71, SNAT.% 54,71 54, ES 12.9% 51,68 51, NE 5.9% 23,421 23, BE 3.6% 14,45 14, AT 2.9% 11,486 11, PT 2.6% 1,22 1, FI 1.8% 7,352 7, IE 1.7% 6,899 6, SK 1.1% 4,345 4, SI.5% 2,31 2, LU.3% 1,73 1, LV.4% 661 1, LT.6% 1,3 2,397-1, MT.1% CY.2% EE.3% 48 1,118-1, GR.% Total / average 1.% 45, Based on the ECB capital key. adjusted to include supras and the disqualification of Greece. 2 Based on the adjusted distribution key. 3 Weighted average time to maturity of the bonds eligible for purchasing under the PSPP. Source: ECB. NORD/LB Fixed Income Research NORD/LB Fixed Income Research Page 2 of 32

21 AT AU BE CA CH CZ DE DK ES FI FR GB IE IT LU NL NO NZ PT SE US 1/16 2/16 3/16 4/16 5/16 6/16 7/16 8/16 9/16 1/16 11/16 12/16 EURbn EURbn Covered Bond & SSA View 16 December 215 Covered Bonds Charts & Graphs Outstanding volume (Bmk.) Top 1 countries (Bmk.) EUR 197,9bn 15,3% 2,7% 2,8% 3,3% 3,8% 4,% 5,3% 8,3% 11,6% 21,6% 21,2% ES FR DE IT GB NL NO CA SE FI Others Country Vol. ( bn) No. of CBs ØVol. ( bn) Vol. weight. ØMod. Duration ES 236, ,3 2,9 FR 232, ,4 4,1 DE 126,8 184,7 3,3 IT 91,5 87 1,1 3,2 GB 58,4 46 1,3 3,6 NL 44,4 33 1,3 4,5 NO 41,9 39 1,1 2,9 CA 36,8 3 1,2 4,1 SE 31,1 3 1, 3,4 FI 29,4 27 1,1 3,9 Issue volume by year (Bmk.) Maturities next 12 months (Bmk.) AT AU BE CA CH CY CZ DE DK ES FI FR GB GR HU IE IT LU NL NO NZ PT SE US AT AU BE CA CH CY CZ DE DK ES FI FR GB GR HU IE IT LU NL NO NZ PT SE US Avg. mod. duration by country (vol. weighted) Rating distribution (vol. weighted) ,4% 16,2%,7% 5,4% AAA/Aaa AA+/Aa1 AA/Aa ,2% 1,7% 8,4% 1,3% 1,9% 4,6%,6% AA-/Aa3 A+/A1 A/A2 A-/A3 BBB+/Baa1 BBB/Baa2 BBB-/Baa3 1 BB+/Ba1 6,1% BB/Ba2 BB-/Ba3 Source: Bloomberg. NORD/LB Fixed Income Research NORD/LB Fixed Income Research Page 21 of 32

22 ISPIM 1 3/8 12/18/25 HVB.5 12/16/19 CM.1 12/14/18 ACACB 5/8 9/11/23 PMIIM 1 1/2 12/2/25 CMCICB 7/8 4/7/26 BYLAN.35 12/1/22 AEGON 1/4 12/1/2 PBBGR 1/8 11/27/2 SAMBNK 1/4 11/26/2 CCDJ 3/8 11/25/2 MONTE 2 1/8 11/26/25 POHBK 1/4 11/23/2 DB 5/8 11/25/2 SHBASS 3/8 2/24/21 EURbn HVB.5 12/16/19 CM.1 12/14/18 ACACB 5/8 9/11/23 ISPIM 1 3/8 12/18/25 CMCICB 7/8 4/7/26 BYLAN.35 12/1/22 AEGON 1/4 12/1/2 PBBGR 1/8 11/27/2 SAMBNK 1/4 11/26/2 CCDJ 3/8 11/25/2 POHBK 1/4 11/23/2 DB 5/8 11/25/2 SHBASS 3/8 2/24/21 bp PMIIM 1 1/2 12/2/25 MONTE 2 1/8 11/26/25 Covered Bond & SSA View 16 December 215 Covered Bonds Charts & Graphs Spread development (last 15 issues) Reoffer Spread Current ASW Bid-to-Cover (last 15 issues) 3, 2,5 2, 1,5 1,,5, 2,5 2, 1,5 1,,5, Amt. Issued Order Book Bid-to-Cover (rhs) Spread development by country Performance (total return) AU CA DE ES - Multi FI GB IT NO Overall 1-3Y 3-5Y 5-7Y 215 ytd PT US 7-1Y Δ Week Δ Month Δ 3 Months bp % 5% 1% 15% 2% Source: Bloomberg. NORD/LB Fixed Income Research NORD/LB Fixed Income Research Page 22 of 32

23 ASW in bp ASW in bp ASW in bp ASW in bp ASW in bp ASW in bp Covered Bond & SSA View 16 December 215 Covered Bonds Charts & Graphs Germany & Austria years to maturity AT DE - Öpfe DE - Hypfe DE - Others France years to maturity OF OH Structured Nordics Other Core years to maturity DK FI NO SE years to maturity BE CH GB NL Overseas Periphery years to maturity AU CA NZ US years to maturity ES - Single ES - Multi IE IT PT Source: Bloomberg. NORD/LB Fixed Income Research NORD/LB Fixed Income Research Page 23 of 32

24 GE SNAT FR SP NE AS IT PO BE SW 12/15 1/16 2/16 3/16 4/16 5/16 6/16 7/16 8/16 9/16 1/16 11/16 EURbn EURbn Covered Bond & SSA View 16 December 215 SSA Charts & Graphs Outstanding volume (Bmk.) EUR 1458,7bn 35,5% 11,1% 38,5% 5,7% 4,1% 1,7% 5,1% 1,1%,7%,3%,2%,9% GE SNAT FR SP NE AS CA IT PO BE Others Top 1 countries (Bmk.) No. of Vol. weight. Country Vol. ( bn) ØVol. ( bn) bonds ØMod. Duration GE 562, ,2 3,7 SNAT 517, ,5 6,2 FR 161,8 97 1,7 5,5 SP 83,1 64 1,3 3, NE 6, 55 1,1 4,1 AS 24,9 24 1, 6,8 CA 16,6 12 1,4 5,4 IT 1,7 11 1, 8,2 PO 4,8 8,6 4,8 BE 3,1 4,8 2,7 Issue volume by year (Bmk.) Maturities next 12 months (Bmk.) Other ES AT NL FR GE SNAT Other ES AT 1 15 NL 1 FR 5 5 GE SNAT Avg. mod. duration by country (vol. weighted) Rating distribution (vol. weighted) ,4% 25,8% 42,9% 8,%,3% 4,5% 2,8%,8%,6%,1%,9% AAA/Aaa AA+/Aa1 AA/Aa2 AA-/Aa3 A+/A1 A/A2 A-/A3 BBB+/Baa1 BBB/Baa2 BBB-/Baa3 BB+/Ba1 BB/Ba2 BB-/Ba3 B+/B1 B/B2 B-/B3 NR Source: Bloomberg. NORD/LB Fixed Income Research NORD/LB Fixed Income Research Page 24 of 32