Banks. Norddeutsche Landesbank Girozentrale. 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 Short-Term IDR Viability Rating A F1 Support Rating 1 Support Rating Floor A Guaranteed obligations a bbb AAA a Based on grandfathering provided by owners in the form of Gewährträgerhaftung (guarantor liability) Sovereign Risk Long-Term Foreign-Currency IDR AAA Long-Term Local-Currency IDR AAA Outlooks Long-Term Foreign-Currency IDR Stable Sovereign Long-Term Stable Foreign Currency IDR Sovereign Long-Term Stable Local Currency IDR Financial Data Norddeutsche Landesbank Girozentrale 30 Sep Dec 11 Total assets (USDm) Total assets (EURbn) Total equity (EURbn) Pre-impairment operating 589 1,148 profit (EURm) Operating profit (EURm) Net income (EURm) Net interest margin (%) Operating ROAA (%) Operating ROAE (%) LICs/avg. gross loans (%) NPL ratio (%) Tier 1 capital ratio (%) Total capital ratio (%) Fitch core capital ratio (%) Equity/total assets (%) Related Research Bremer Landesbank Kreditanstalt Oldenburg Girozentrale (March 2013) NORD/LB COVERED FINANCE BANK S.A. (March 2013) Fitch Affirms NORD/LB at 'A'; Outlook Stable (January 2013) Fitch: Conclusion of State-Aid Reviews Positive for Landesbanken (August 2012) Banks Use of Covered Bonds Funding Stable (June 2012) Analysts Krista Davies krista.davies@fitchratings.com Christian van Beek christian.vanbeek@fitchratings.com Key Rating Drivers Support-Driven IDRs: The Long-Term IDR of (NORD/LB) is at its Support Rating Floor of 'A' and is based on the extremely high likelihood of support from the bank s owners, particularly the State of Lower Saxony (AAA/F1+), if required. Capital measures in 2011 and 2012, which led to the State of Lower Saxony increasing its stake in NORD/LB to 59.13% from 41.75%, demonstrate this propensity to support. Business Model Needs Adjustments: NORD/LB is a regional and predominately wholesaleorientated commercial bank, specialised in commercial real estate (CRE), shipping, aircraft, energy and infrastructure financing. Its retail operations are relatively small in terms of revenue and asset contribution. NORD/LB is not obliged to undergo restructuring, unlike those German Landesbanken which required substantial state support in the wake of the financial crisis. The bank is nevertheless reducing the risk concentration of its wholesale-focused business model and recalibrating its asset composition, specifically reducing non-customer-driven assets, as well as cutting costs. In doing so, the bank will comply with European Commission requirements after the capital measures, improve its risk profile and adapt to the new regulatory environment. Adequate Fundamentals: The Viability Rating (VR) reflects NORD/LB s modest profitability, which is subject to volatility due to its derivatives exposure and fair-value accounting, and the bank s increased amount of higher-quality capital. While the bank is highly reliant on wholesale funding, Fitch Ratings considers the investor base well-diversified and the bank's reliance on wholesale funds is mitigated by its access to the German savings bank network. Asset Quality Vulnerable: Fitch expects NORD/LB's asset quality and performance to be vulnerable to any further deterioration of the eurozone sovereign crisis and its negative implications for the German economy and global trade. This is particularly the case given NORD/LB's sizeable shipping and CRE portfolios and its exposure to southern European banks. The bank is also exposed to the highly cyclical aviation industry. These factors could lead to additional impairment charges if Germany faces economic stagnation in Rating Sensitivities Weakening of Support Structure: NORD/LB's Long-Term IDR is at its Support Rating Floor and is therefore sensitive to any change in Fitch's view regarding the ability or propensity of NORD/LB's owners, specifically the state of Lower Saxony, to support the bank. In Fitch s view, a weakening of Lower Saxony s propensity to support NORD/LB is more likely to be driven by changes in a new regulatory and resolution framework, rather than the bank s regional strategic importance decreasing in the eyes of its owners. Shipping Downturn; Risk of Recession: Upgrade potential for NORD/LB s VR is limited, due to the bank s structurally low recurring earnings and concentration risks in volatile asset classes. Fitch expects NORD/LB's honed strategy to improve its risk profile somewhat. Narrow profit margins leave management with limited room to diversify revenue by taking on significant new risk, and a prolonged deterioration in the shipping market could prove negative for the VR, particularly if combined with an unexpected recession in Germany. 4

2 Largely wholesale-driven business model; specialised financing accounts for a significant share Central clearer for more than 50 savings banks in its home region; close links with savings banks Owned by states of Lower-Saxony and Saxony-Anhalt as well as savings banks Profile Wholesale-Focused Business Model Combined with State Ownership AoeR 1 is the state bank for the federal states of Lower Saxony and Saxony-Anhalt and acts as the central bank for the 56 savings banks in Lower Saxony, Saxony-Anhalt and Mecklenburg-Western Pomerania. Its 54.8%-owned subsidiary Bremer Landesbank Kreditanstalt Oldenburg Girozentrale (BremerLB, A/Stable) acts as the central clearer for 13 savings banks in its region. Fitch considers the relationship between the NORD/LB group and its savings banks to be strong. However, Fitch believes that there is currently limited appetite among savings banks in general to increase their investments in Landesbanken that they do not fully control. In this context, the ownership share of savings banks in Lower Saxony and Saxony-Anhalt in NORD/LB were diluted by the capital measures taken in December 2011 and August The group s customer business is dominated by wholesale operations with a focus on specialised financing (particularly CRE, shipping, aircraft, energy and infrastructure financing) as well as corporate banking activities (see Appendix 1 Segment Reporting). Its retail operations are offered through NORD/LB s fully-consolidated subsidiary Braunschweigische Landessparkasse (see Verbund section of Appendix 1 Segment Reporting) and are relatively small in terms of revenue and asset contribution. This partly reflects the bank s role in public-sector banking, in which savings banks are the dominant providers of retail banking services. Figure 1 Shareholder Structure (%) End-Sep 12 State of Lower Saxony State of Saxony-Anhalt 5.57 Lower Saxony Association of Savings Banks and Holding Association of 5.28 the Savings Banks of Saxony-Anhalt Special Purpose 3.66 Holding Association of the Savings Banks of Mecklenburg-Western Pomerania Source: NORD/LB, Fitch No major changes in business model, but focus on reduction of industry concentration risk Customer-driven, regional business expected to grow modestly No further integration with savings bank, or consolidation with other Landesbanken, expected Related Criteria Global Financial Institutions Rating Criteria (August 2012) Assessing and Rating Bank Subordinated and Hybrid Securities (December 2012) Evaluating Corporate Governance (December 2012) NORD/LB is not required to undergo material restructuring, unlike several German Landesbanken that have required substantial state support throughout the financial market crisis. However, the approval by the European Commission (EC) of the capital strengthening measures from 2011 and 2012 required several commitments from the bank, including closing some representative offices, conducting a cost-optimisation programme, waiving dividend payments for the next two years and setting out business targets by geography, volume and customer type. Finally, a 15% reduction of total assets from end-2011 levels is required by Ownership Structure: No Material Changes Expected NORD/LB is a public-law bank. Its current ownership structure (see Figure 1) reflects a slight increase in the holding of the State of Lower Saxony over Q312, when existing silent participations were converted into core capital. Prior to the capital-strengthening measures, which included the conversion of silent participation capital,, the State of Lower Saxony s holding in NORD/LB was 41.75%. NORD/LB s owners act as its guarantors (Gewaehrtraeger), and all have joint and several liability for NORD/LB s grandfathered obligations, on which the rating of these debt issues is based. Under the bank s corporate governance provisions, its owners can change its legal status to that of a joint-stock company (Aktiengesellschaft) without new legislation. Strategy: More Focused, Leaner, but Future Role Unclear In Fitch s view, NORD/LB s role and strategic regional importance are reflected in its entrenched commercial banking business, leading if small retail banking franchise in Lower- Saxony, and low-risk but low-return franchise with its owners, the three states, public-sector entities and the regional savings banks. 1 Anstalt des oeffentlichen Rechts (AoeR); public sector entity 2 Of which 32.8% is held in trust for the state-owned Hannoversche Beteiligungsgesellschaft mit beschraenkter Haftung 2

3 Fitch believes that the business model and strategy of NORD/LB will have to deal with two main challenges: modest profitability levels, and uncertainty regarding the future role of the Landesbanken. These issues are common to the German Landesbanken system as a whole and are outlined in further detail in Appendix 3. Diversified revenues by customer segment Moderate quality and level of riskadjusted profitability Dependence on interest income Bias to non-franchise-driven assetbased financing Volatility due to fair-value effects Increased LICs due to shipping exposure Figure 2 Revenue Split (%) End-Sep 12 Private and 18.2 commercial customers Corporate customers 29.4 & markets Energy and 11.2 infrastructure customers Ship and aircraft 6.6 customers Real estate banking 6.4 customers Other/corporate center %=EUR1.3bn (ex reconciliation and valuation adjustments) Source: NORD/LB Performance Revenues Well Diversified by Customer Group NORD/LB s revenues are characterised by a heavy bias towards interest income, with commission income contributing only a small proportion of revenues, in line with the bank s lending-driven business model. Fitch views this dependency on interest income common to other Landesbanken as a weakness, but one which is unlikely to change materially. In order to broaden its franchise and to expand its product offering especially for larger corporates, NORD/LB would need investments, which are not supported by its current level of profitability. However, Fitch expects NORD/LB s net interest margin to improve further over the medium term, albeit marginally, reflecting the gradual replacement of low-yielding assets with higheryielding assets and competitive refinancing costs. However, it is uncertain whether improving margins can compensate for the notional reduction of NORD/LB s balance sheet and further increase in future funding costs, especially at NORD/LB s subsidiaries in Luxembourg. In addition, NORD/LB s revenue is relatively well diversified by customer and industry group. The bank s exposures encompass regional corporates, businesses and institutional clients, the national and international shipping industry, producers and operators of renewable energy and domestic as well as international CRE investors. This diversification could to some extent help to mitigate losses arising from structural problems in one or two industry players at any given time; the current challenge in this regard is the sharp deterioration of asset quality in ship financing. Impact From Capital Measures 2011/2012 NORD/LB s subsidiary BremerLB has been a reliable source of pre-tax profits for the group in recent years. NORD/LB remains the majority owner of BremerLB although its holding was materially diluted by the conversion in 2012 of the City of Bremen s silent participations at BremerLB into ownership shares. In Fitch s view, this transaction has improved the quality of capital at BremerLB and at the group level but has impaired NORD/LB s future access to dividend income from BremerLB. The transformation of over EUR1bn of silent participation capital into ownership capital at NORD/LB AoeR (on a standalone basis) means that the cost of fixed-coupon payments will fall Figure 3 Profitability Net int. income/ avg. earning assets Cost/income ratio Loans and securities impairment charges/ pre-impairment profits Operating profits/ average total assets Operating profits/ average equity (%) H H H H H NORD/LB BremerLB BayernLB Helaba LBBW DZ Bank Natixis CA CIB BremerLB: Bremer Landesbank Kreditanstalt Oldenburg - Girozentrale (A/F1/bbb ), BayernLB: Bayerische Landesbank (A+/F1+/bb+), Helaba: Landesbank Hessen- Thueringen Girozentrale(A+/F1+/nr), LBBW: Landesbank Baden-Württemberg (A+/F1+/bbb-), DZ Bank: DZ Bank AG Deutsche Zentral-Genossenschaftsbank (A+/F1+/nr), Natixis (A+/Negative/F1+/nr), CA CIB: Credit Agricole Corporate and Investment Bank (A+/Negative/F1+/nr) Source: Fitch, banks annual reports 3

4 away in the future and this will improve the bank s capital-generating capacity. Fitch estimates that the reduction of fixed payments will be sufficient to absorb the costs of the mezzanine asset guarantee provided by the State of Lower Saxony for a portfolio of performing, mainly asset-based financing (see Capital section). Volatile Non-Trading, Trading and Hedging Result NORD/LB s results from the fair-value option, trading and net result of hedge accounting add volatility to NORD/LB s relatively stable revenue sources. In addition, NORD/LB s large securities portfolio creates volatility in the bank s revaluation reserve. This volatility reflects NORD/LB s business model, its large holdings of among others financial securities, and imbalances between USD-denominated assets and funding. However, Fitch views this volatility of financial instruments and performance as mitigated by the fact that NORD/LB has access to term funding through its franchise with savings banks and institutional clients. In addition, an increasing capital cushion, combined with state ownership, should allow NORD/LB to hold these instruments until maturity, or to access USD funding through crosscurrency swaps. Fitch Expects LICs to Rise Shipping industry developments and management commentary lead Fitch to expect NORD/LB s 2012 and 2013 results to be materially dented by the deteriorating portfolio of loans for ship financing. At end-september 2012 loan impairment charges totalled EUR352m (up from EUR111m the same period of the previous year). However, Fitch believes that further provisioning will be likely for the full year 2012, even with the significant Q3 period-on-period increase in loan impairment charges. Large share of exposure to low-risk assets classes, financials and sovereigns, and large amount of senior secured loans Fat-tail risks through industry risks, especially shipping and some legacy in CRE No material risks from ABS portfolio, and aircraft financing Relatively high value at risk Figure 4 Portfolio Breakdown End-Q Energy/infrastructure Private/retail Real estate (EURbn) RWA by area Source: Fitch; NORD/LB Corporates/markets Group mgmt/others Shipping/aviation Loans and advances to customers Risk Management NORD/LB s profitability over the last decade has been broadly low-level but stable, in contrast with the more erratic performance of some of its immediate peers. Fitch believes that this indicates a more realistic self-assessment of managerial and financial resources compared with peers, as well as a more risk-conscious approach in its lending and investment business. Nevertheless, the bank s internal control mechanisms and processes have shown weaknesses that have resulted in substantial losses. Fitch understands that these are being addressed by the bank s management team. In Fitch s view, NORD/LB s major sources of risk include its lending business, of which a substantial share is subject to a high cyclicality (particularly ships and aircraft) and bears some concentration risks, as well as credit spread risk from the bank s sizeable investment securities portfolio. Credit Risk Credit risk is NORD/LB s major type of risk. NORD/LB is working to reduce the overall concentration risks in its portfolios, specifically shipping, investments and CRE, which Fitch considers to be positive. The loan book, which has remained broadly stable since end-2008, is dominated by asset-based financing deals (see Figure 4). In light of this focus, the analysis below covers the risks arising from the main asset-based financing areas. See Appendix 2 for commentary on the bank s other lending activities. Ship Financing: Deteriorated Fast in 2012 but Losses Remain Low NORD/LB s exposure to the shipping industry is sizeable, totalling around EUR19.4bn at end- September The sluggish development of the European economies and substantial overcapacities in the shipping industry have led to a number of rating downgrades in the second quarter of 2012 and Fitch does not expect this situation to stabilise or improve in the near term. Nevertheless, Fitch acknowledges that actual losses have remained small to date. 4

5 However, Fitch is sceptical as to what extent the current LTVs of the ships are stressed and whether they provide a sufficient loan loss buffer for further decreases in the value of ship collateral. Fitch understands that NORD/LB is applying substantial haircuts to the market values in order to assess the LTVs for the loans in its portfolio. However, market values are based on a massively reduced number of actual transactions, in light of market conditions. In particular, this valuation approach does not take into account the effect of fire sales; most ship financing banks, especially in Germany and in Scandinavia, have to date been able to fund these loans, which allows a restructuring without asset sales. In this context, Fitch remains somewhat concerned regarding the high share of deals classified internally at very high risk (often restructured but not reflected in the bank s NPLs), and the volume of ship exposures that are still employed without a long-term charter and have LTVs above 100%. However, financing of ships that are still under construction and lending where NORD/LB is in an equity position have been substantially reduced. In addition, the amount of lost interest income is still quite small, despite a large portion of the portfolio having been restructured. Fitch has conducted simplified stress tests for NORD/LB s shipping portfolio, assuming that loans currently classified as very high risk become doubtful or that 50% of the loans to ships that have no long-term charter and LTVs above 100% become doubtful. The level of stress applied reflects the fact that NORD/LB s ship portfolio is already stressed, so there is not much value in adding further extreme assumptions to the portfolio. The increase in LICs in these insulated stress tests would reduce NORD/LB s current FCC by between 20-40bp in Commercial Real-Estate Financing: Some Legacies NORD/LB s EUR27.5bn CRE portfolio 3 is more likely to be a major source of credit risk than aircraft financing, particularly the international exposure. The internal rating profile of exposures in the UK and US deteriorated in 2009 and 2010, reflecting the pressure on the real-estate markets in these countries. However, the negative rating migration has halted and partially reversed and exposures in the US, UK and Spain were drastically reduced. Domestic CRE lending dominates the bank s portfolio, forming almost 70%, and is less of a concern, in Fitch s view, as the economy is probably not facing a recession in 2013 and markets have remained relatively stable. Non-Performing Loans Likely to Increase Fitch is concerned about the still-elevated level of NORD/LB s non-performing loans (defined as all loans in the lowest three internal rating classes, including impaired loans and loans 90 days past due), although this has fallen over the first nine months of 2012 and stands at about 2.4% of the bank s exposure at default (EaD), or 4.8% of its loan book. NORD/LB s NPL ratio is somewhat higher than those of its closest peers and those of some international peers who did not have the benefit of a robust domestic economy in In Fitch s view, the ratios reflect the deterioration in NORD/LB s shipping portfolio, which is responsible for around half of its NPLs, as well as the stubbornly high level of NPLs in its CRE portfolio. Fitch notes that the internal rating categories (very high risks; EUR5.4bn at end- September 2012) are growing rapidly and have almost reached the level of Any further deterioration of business segments other than shipping could hamper the bank s performance. The coverage of impaired loans (smaller than NPLs) declined for the third consecutive year, from 54% at end-2008 to around 34% in September This reflects the collateralised 3 Note that the amount of the real estate financing is larger than the business segment s assets as it also includes loans to housing associations booked under the segment Corporate Customers & Markets at NORD/LB AoeR 5

6 Q312 Banks Figure 5 Impaired Loan Development 2009-Q312 Impaired loans (LHS) Non-impaired loans (LHS) % impaired loans (RHS) (EURbn) % 2.2% 2.0% Source: Fitch; NORD/LB (%) 5.5% 5.3% % 4 3.3% nature of most of NORD/LB s NPLs and management s view on the collateral value, but exposes the bank to deteriorating collateral values. Also, even when including collateral values, a share of the NPLs remains uncovered. Market Risk: Material Credit Spread Risk Mitigated by Buy-and-Hold Strategy Fitch considers NORD/LB s market risk exposure to be manageable, although credit spread risks inherent to its still-sizeable credit investment portfolio are substantial. The main contributor to credit spread risks is Deutsche Hyp through its large public-sector portfolio. However, this should not result in significant cash losses in light of the bank s buy-and-hold strategy and currently adequate liquidity profile, solid overall asset quality, and decreasing volume of riskier assets (ABS, CDS, peripheral eurozone sovereign risks). NORD/LB s exposure to equity risks and foreign currencies is modest and remained well within allocated limits. NORD/LB s appetite for interest rate risk increased in 2012 but remains comparable with its immediate peers. Market risks at the parent bank and its major subsidiaries are managed separately, but monitored centrally by the parent bank. Operational Risk: Weaknesses Exposed Through Single Events Two single events arising in 2009 and 2008 caused relatively high losses (exceeding EUR100m each) and, revealed weaknesses in NORD/LB s risk controls and processes relating to fraud and internal processes. The bank has since strengthened its internal control systems. Fitch assesses NORD/LB s risk management to be adequate and its risk culture to be conservative, mitigating the risk of similar loss-generating events taking place. Reliance on wholesale funding; retail deposits play minor role Access to savings bank network, a large investor base Core capital substantially improved from low level Generally, Fitch considers external fraud and human error as two of the main causes of operational risk. NORD/LB currently applies the standardised approach for measuring operational risk capital charges, but plans to implement the advanced measurement approach in the long term. Funding and Capital Funding and Liquidity: High Dependence on Wholesale Funds NORD/LB is dependent on wholesale funding, which is typical for a Landesbank, and is in line with its business model. The bank mainly refinances via senior unsecured, secured, and interbank funding and Fitch does not expect any material changes in the bank s funding composition. NORD/LB has access to retail funds through its savings banking subsidiary Braunschweigische Landessparkasse, although the overall contribution from retail funds is minor (EUR4.5bn at end-2011). Customer deposits shown in Fitch s financial figures for NORD/LB (see page 12 onwards) include the bank s registered bonds (EUR5.2bn at end- September 2012). The bank s reliance on wholesale funds is mitigated by its access to the German savings bank network, which represents a stable investor base. In this context, NORD/LB was able to preserve its ties with the savings banks post-2009, unlike some Landesbanken, due to its relatively solid performance throughout the financial market crisis. Due to the savings banks 0% risk-weighting for their exposure to NORD/LB, Fitch does not expect a material drop in the savings banks demand for NORD/LB s debt issues. Secured funding via Pfandbriefe (issued by NORD/LB and Deutsche Hypothekenbank) and lettres de gage publiques (via the Luxembourg subsidiary NORD/LB Covered Finance Bank S.A.) are likely to remain important funding sources for NORD/LB, particularly given the relatively high share of asset-based finance in the bank s portfolio. 6

7 Figure 6 Funding and Capital Ratios Fitch core capital ratio Tier 1 capital ratio Total equity/total assets Loans/ customer deposits Interbank assets/ interbank liabilities (%) H H H H H NORD/LB BremerLB BayernLB Helaba LBBW DZ Bank Natixis CA CIB BremerLB: Bremer Landesbank Kreditanstalt Oldenburg - Girozentrale ( A / F1 / bbb ), BayernLB: Bayerische Landesbank ( A+ / F1+ / bb+ ), Helaba: Landesbank Hessen- Thueringen Girozentrale( A+ / F1+ /nr), LBBW: Landesbank Baden-Württemberg ( A+ /F1+/ bbb- ), DZ Bank: DZ Bank AG Deutsche Zentral-Genossenschaftsbank ( A+ /F1+/nr), Natixis ( A+ /Negative/F1+/nr), CA CIB: Credit Agricole Corporate and Investment Bank ( A+ /Negative/F1+/nr) Source: Fitch, banks annual reports Furthermore, German Pfandbriefe in particular have proven to be a relatively resilient and favourably priced financing instrument. At end-september 2012 the NORD/LB group had outstanding Pfandbriefe totalling EUR44.1bn (of which EUR9bn were mortgage, EUR34.1bn public-sector and EUR0.5bn each for ship and aircraft Pfandbriefe) as well as EUR3.6bn in lettres de gage publiques. Funding through the ECB makes up less than 2% of the NORD/LB s group funding. NORD/LB s planned new debt issuance volume in 2012 was relatively high, at EUR15bn (relatively evenly shared among secured and unsecured), reflecting the bank s reliance on wholesale funds. However, the amount of funding is also driven by the bank s strategy of securing pre-funding for at least a year to allow for the volatile market conditions. NORD/LB s funding still includes a substantial share of grandfathered debt (EUR31bn at end- March 2012), the bulk of which will mature by Fitch understands that maturing debt will based on the bank s current status quo be covered by maturing assets and its current liquidity surplus. In addition, Fitch believes that the bank s strategy of pre-funding around one year in advance will help the management of funding needs in 2014 and 2015 and will strengthen its liquidity management. NORD/LB issues in foreign currencies, predominately USD, CHF, GBP and JPY. USD funding is important because of its relatively large share of USD-denominated assets, estimated at USD25bn. Although the bank uses cross-currency swaps for much of its USD funding, it also has access to USD funding through secured products such as USD-denominated covered bonds. Figure 7 Issued Debt Structure YTD Q312 Total debt issued: EUR61.8bn Mortgage Pfandbriefe 14% Public sector Pfandbriefe 23% Source: NORD/LB Money market 5% Other debt securities 58% NORD/LB s current liquidity profile appears adequate. At end-june 2012 NORD/LB group had around EUR28.1bn of unpledged, ECB-eligible securities available. Fitch expects that NORD/LB will face modest challenges in meeting Basel III s LCR (Liquidity Coverage Ratio) and NSFR (Net-Stable Funding Ratio) before Capital: Amount and Quality Much Improved but Not Strong NORD/LB s capitalisation has improved materially, with Fitch core capital (FCC) moving from being fairly weak to sufficient for the bank s risk profile and Viability Rating. FCC has benefitted from a number of capital measures undertaken by NORD/LB in order to fill the gap calculated by the European Banking Authority 2011 of EUR2.5bn. 4 These measures were mainly the retention of earnings and transformation of silent participations into owner s capital and, to a lesser extent, the reduction of risk-weighted assets. Fitch expects that NORD/LB will improve its capitalisation further if only slightly and initial CRD IV requirements will be fulfilled. 4 In October 2012 NORD/LB announced that it meets the 9% Core Tier 1 ratio, including the sovereign buffer as stated in the EBA December 2011 recommendation 7

8 Appendix 1: Segment Reporting Segment Profitability Helped by Large Central Functions For segment reporting purposes, a relatively large chunk of expenses and low-yielding assets are categorised as Group Management/Others, particularly in comparison to peers; at end- September 2012 around 36% of administrative expenses were reported under this segment. In Fitch s view, this helps the profitability of the core business segments, although it may also limit the assessment of how cost-efficient a segment is. The main contributor to NORD/LB s profitability is the segment Corporate Customers & Markets, which comprises Financial Markets and Institutional Customers, public sector and savings bank activity (Verbundgeschäft) and Corporate Lending. Wholesale businesses and asset-based financing is a typical component of Landesbanken earnings. However, other Landesbanken were somewhat more successful with their retail and business banking activities compared with NORD/LB in Appendix 2: Commentary on Other Credit Risk Areas Figure 8 Critical Sovereign Exposure (EURm) End-Sep 12 Greece 10 Ireland 120 Portugal 150 Spain 387 Italy 1,537 Source: NORD/LB Credit Investment Portfolio/Securities Book (Financial Markets); Sovereigns Exposure and ABS Materially De-Risked NORD/LB s credit investment portfolio, part of which the bank entered as credit surrogate business, remains sizeable. However, Fitch expects the bank s credit surrogate business to decline further; the bank still has an investment stop in place. Overall, the securities portfolio is of relatively good quality; the bulk is composed of financial institutions and public-sector issuers. NORD/LB s asset-backed securities portfolio (EUR3.2bn at end-september 2012 down from EUR8bn at end-2008) is of relatively good quality; around 95% of the portfolio is rated investment grade, despite the massive downgrades in the market. NORD/LB s aggregated sovereign exposure to Greece, Portugal, Ireland, Italy and Spain stood at EUR2.2bn (see Figure 8, down from EUR3.7bn at end-2010), which has been substantially reduced and is concentrated on Italy with EUR1.5bn. In light of the difficult situation of the Spanish banking system, Fitch views NORD/LB s exposure to Spain s banks (EUR1.6bn) as more critical than NORD/LB s amount of sovereign exposure to peripheral eurozone sovereigns, including Spain. NORD/LB s credit derivatives (notional EUR6.5bn, of which EUR1.5bn is in relation to European peripheral sovereign exposure) add material volatility to the bank s profit and loss account. Energy and Infrastructure: No Immediate Risks NORD/LB s fourth-largest industry exposure, after financials, shipping and CRE and before the automotive industry, is energy, including renewables. In line with other Landesbanken, NORD/LB has made this segment a particular focus of its growth strategy for the last four years. After years of virtually no credit losses, the first LICs started to appear in Although three out of the top 20 exposures with loan loss provisions are from this segment, its other risk parameters, like non-performers relative to exposure, are in line with NORD/LB s overall portfolio. Fitch expects no immediate changes in the risk profile of this segment. However, Fitch views some characteristics of this business segment with concern, especially the long maturity of the loans, the high level of government regulation and intervention in the industry, the untested nature of some of the technologies and the ease with which banks can access and grow in this market. Aircraft Financing: No Increase of Risks Expected Aircraft financing (around EUR8bn at end-september 2012) represents another industry 8

9 concentration at NORD/LB. However, Fitch believes that it is currently unlikely that significant pressure will arise from NORD/LB s aircraft financing exposure. This view is supported by aircraft LICs being minimal to date, the performance of this portfolio holding up during various stresses (specifically after the 9/11 terrorist attacks and the 2008 financial crisis), as well as the granularity and relatively risk-averse average LTVs of the portfolio. Other Customer Loans: Fitch Expects Risk Costs to Rise NORD/LB s corporates/markets loan book (EUR33.4bn at end-q312) is relatively diversified by industry and its retail and business lending exposure (EUR8.1bn at end-q312) is less risky, in Fitch s view, considering the granularity of the portfolio and relatively low unemployment rates in Germany. NORD/LB s retail lending is geographically concentrated within Braunschweig and the surrounding region. However, Fitch believes that the peak of the credit cycle was reached in 2012; domestic corporate customers are likely to suffer from the depressed markets in Europe and low growth in Germany in Appendix 3: German Landesbank Structural Considerations The primary issues facing NORD/LB, and German Landesbanken in general, concern modest profitability levels inherent to the tradition German Landesbank business model, and the question of what role the Landesbanken should play in the future. NORD/LB s modest profitability means its management has limited room for manoeuvre in terms of entering into new business areas before the increased risks place a potential burden on capitalisation. At the same time, NORD/LB s ship and CRE lending is inherently cyclical and its project finance business is risky in light of its typically long-term nature. Fitch understands that NORD/LB uses revenues from these more risky activities to support the lower-level but more stable revenues from its role as a traditional Landesbank for the states, savings banks and regional corporate customers. Fitch believes that improving the profitability of domestic customer activities will be a major challenge for NORD/LB, in light of the German corporate and retail banking market being mature and highly competitive, and prospects for loan growth being very limited. In addition, NORD/LB would need to make investments if it were to broaden its product range or customer reach. However, the new regulatory framework will add burdens to all banks earnings, both through the additional administrative burden, as well as higher costs for liquidity buffers or the bank levy. At the same time, NORD/LB s profitability is under pressure because of its large exposure to the shipping industry in particular, which is in a very weak state. Secondly, to the business model and strategy concerns NORD/LB s future position in a potential new landscape of German Landesbanken, which, in Fitch s view, is uncertain. Fitch believes that further concentration among Landesbanken could help to absorb some of the challenges with regard to franchise, quality of earnings and cost efficiency, which are common to all Landesbanken. For example, the size of the combined loan portfolio with German customers of two or more Landesbanken would be comparable to the size of similar loan portfolios of the large private banks. With a broader customer franchise it should be possible to improve efficiency and generate necessary scale for potential cross-selling activities. The German Landesbanken sector is changing only slowly, with changes mainly driven by forces outside the sector. However, shrinking balance sheets and a stronger focus on regional and national business at Bayerische Landesbank, Landesbank Baden-Württemberg and HSH Nordbank may allow for consolidation among the larger Landesbanken, including NORD/LB, in the medium- to long term. 9

10 Alternatively, stronger integration of Landesbanken with their respective savings banks could also lead to more cohesive regional banking groups with more diversified revenues and risks, like for example Landesbank Hessen-Thueringen Girozentrale as part of the S Finanzgruppe Hessen-Thueringen. However, NORD/LB s natural partners for consolidation, its immediate neighbours, have either exited the market (former WestLB), are financially weak (HSH Nordbank) or are fully or majority-owned by savings banks (Landesbank Berlin and Landesbanken Hessen-Thüringen). Accordingly, Fitch believes that it is unlikely that NORD/LB will be part of any further consolidation among Landesbanken in the medium term; similarly unlikely is a material strengthened operational and contractual integration of NORD/LB with its regional savings banks, in Fitch s view. 10

11 Income Statement 30 Sep Dec Dec Dec Months - 3rd Quarter 3rd Quarter As % of Year End As % of Year End As % of Year End As % of USDm EURm Earning EURm Earning EURm Earning EURm Earning Unaudited Unaudited Assets Unqualified Assets Unqualified Assets Unqualified Assets 1. Interest Income on Loans 4, , , , , Other Interest Income 7, , , , , Dividend Income n.a. - n.a. - n.a Gross Interest and Dividend Income 12, , , , , Interest Expense on Customer Deposits 2, , , , , Other Interest Expense 7, , , , , Total Interest Expense 10, , , , , Net Interest Income 1, , , , , Net Gains (Losses) on Trading and Derivatives Net Gains (Losses) on Other Securities (15.5) (12.0) (0.01) (47.0) (0.02) 11. Net Gains (Losses) on Assets at FV through Income Statement (642.6) (497.0) (0.30) (218.0) (0.10) (166.0) (0.07) (108.0) (0.05) 12. Net Insurance Income Net Fees and Commissions Other Operating Income (3.9) (3.0) (0.00) Total Non-Interest Operating Income , Personnel Expenses Other Operating Expenses Total Non-Interest Expenses 1, , , , , Equity-accounted Profit/ Loss - Operating (19.4) (15.0) (0.01) (128.0) (0.06) (200.0) (0.09) 20. Pre-Impairment Operating Profit , , Loan Impairment Charge , Securities and Other Credit Impairment Charges n.a. n.a Operating Profit Equity-accounted Profit/ Loss - Non-operating n.a. n.a. - n.a. - n.a. - n.a Non-recurring Income n.a. n.a n.a. - n.a Non-recurring Expense n.a. - n.a. - n.a Change in Fair Value of Own Debt n.a. n.a. - (130.0) (0.06) (5.0) (0.00) (99.0) (0.04) 28. Other Non-operating Income and Expenses n.a. n.a. - n.a. - n.a. - n.a Pre-tax Profit (92.0) (0.04) 30. Tax expense Profit/Loss from Discontinued Operations n.a. n.a. - n.a. - n.a. - n.a Net Income (141.0) (0.06) 33. Change in Value of AFS Investments (946.0) (0.42) Revaluation of Fixed Assets n.a. n.a. - n.a. - n.a. - n.a Currency Translation Differences n.a. n.a Remaining OCI Gains/(losses) (532.7) (412.0) (0.25) (25.0) (0.01) n.a Fitch Comprehensive Income (84.0) (0.04) Memo: Profit Allocation to Non-controlling Interests Memo: Net Income after Allocation to Non-controlling Interests (152.0) (0.06) 40. Memo: Common Dividends Relating to the Period n.a. n.a. - n.a. - n.a. - n.a Memo: Preferred Dividends Related to the Period n.a. n.a. - n.a. - n.a. - n.a. - Exchange rate USD1 = EUR USD1 = EUR USD1 = EUR USD1 = EUR

12 Balance Sheet 30 Sep Dec Dec Dec Months - 3rd Quarter 3rd Quarter As % of Year End As % of Year End As % of Year End As % of USDm EURm Assets EURm Assets EURm Assets EURm Assets Assets A. Loans 1. Residential Mortgage Loans n.a. n.a. - n.a. - n.a. - n.a Other Mortgage Loans n.a. n.a. - n.a. - n.a. - n.a Other Consumer/ Retail Loans n.a. n.a. - n.a. - n.a. - n.a Corporate & Commercial Loans n.a. n.a. - n.a. - n.a. - n.a Other Loans 148, , , , , Less: Reserves for Impaired Loans/ NPLs 2, , , , , Net Loans 146, , , , , Gross Loans 148, , , , , Memo: Impaired Loans included above 7, , , , , Memo: Loans at Fair Value included above n.a. n.a. - n.a. - n.a. - n.a. - B. Other Earning Assets 1. Loans and Advances to Banks 43, , , , , Reverse Repos and Cash Collateral n.a. n.a. - n.a. - n.a. - n.a Trading Securities and at FV through Income 7, , , , , Derivatives 21, , , , , Available for Sale Securities 62, , , , , Held to Maturity Securities 5, , , , , At-equity Investments in Associates Other Securities n.a. n.a. - n.a. - n.a. - n.a Total Securities 97, , , , , Memo: Government Securities included Above n.a. n.a. - 19, n.a. - n.a Memo: Total Securities Pledged n.a. n.a. - n.a. - n.a. - n.a Investments in Property Insurance Assets n.a. n.a. - n.a. - n.a. - n.a Other Earning Assets Total Earning Assets 288, , , , , C. Non-Earning Assets 1. Cash and Due From Banks , , Memo: Mandatory Reserves included above n.a. n.a. - n.a. - n.a. - n.a Foreclosed Real Estate n.a. n.a. - n.a. - n.a. - n.a Fixed Assets Goodwill Other Intangibles Current Tax Assets Deferred Tax Assets Discontinued Operations n.a. n.a. - n.a. - n.a. - n.a Other Assets , Total Assets 291, , , , , Liabilities and Equity D. Interest-Bearing Liabilities 1. Customer Deposits - Current 31, , , , , Customer Deposits - Savings 1, , , , , Customer Deposits - Term 43, , , , , Total Customer Deposits 76, , , , , Deposits from Banks 77, , , , , Repos and Cash Collateral n.a. n.a. - n.a. - n.a. - n.a Other Deposits and Short-term Borrowings 3, , , , , Total Deposits, Money Market and Short-term Funding 158, , , , , Senior Debt Maturing after 1 Year 80, , , , , Subordinated Borrowing 4, , , , , Other Funding 7, , , , , Total Long Term Funding 92, , , , , Derivatives 22, , , , , Trading Liabilities Total Funding 273, , , , , E. Non-Interest Bearing Liabilities 1. Fair Value Portion of Debt Credit impairment reserves n.a. n.a. - n.a. - n.a. - n.a Reserves for Pensions and Other 5, , , , , Current Tax Liabilities Deferred Tax Liabilities Other Deferred Liabilities n.a. n.a. - n.a. - n.a. - n.a Discontinued Operations n.a. n.a. - n.a. - n.a. - n.a Insurance Liabilities n.a. n.a. - n.a. - n.a. - n.a Other Liabilities , Total Liabilities 279, , , , , F. Hybrid Capital 1. Pref. Shares and Hybrid Capital accounted for as Debt 1, , , , , Pref. Shares and Hybrid Capital accounted for as Equity G. Equity 1. Common Equity 9, , , , , Non-controlling Interest (57.0) (0.03) Securities Revaluation Reserves (209.5) (162.0) (0.07) (546.0) (0.24) Foreign Exchange Revaluation Reserves (3.9) (3.0) (0.00) (3.0) (0.00) (37.0) (0.02) (49.0) (0.02) 5. Fixed Asset Revaluations and Other Accumulated OCI n.a. n.a. - n.a. - n.a. - n.a Total Equity 9, , , , , Total Liabilities and Equity 291, , , , , Memo: Fitch Core Capital 9, , , , , Exchange rate USD1 = EUR USD1 = EUR USD1 = EUR USD1 = EUR

13 Summary Analytics 30 Sep Dec Dec Dec Months - 3rd Quarter 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 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 Operating Profit/ Average Equity Operating Profit/ Average Total Assets Taxes/ Pre-tax Profit (53.26) 10. Pre-Impairment Operating Profit / Risk Weighted Assets Operating Profit / Risk Weighted Assets C. Other Profitability Ratios 1. Net Income/ Average Total Equity (2.80) 2. Net Income/ Average Total Assets (0.06) 3. Fitch Comprehensive Income/ Average Total Equity 6.77 (1.64) Fitch Comprehensive Income/ Average Total Assets 0.20 (0.04) Net Income/ Av. Total Assets plus Av. Managed Securitized Assets n.a. n.a. n.a. n.a. 6. Net Income/ Risk Weighted Assets (0.15) 7. Fitch Comprehensive Income/ Risk Weighted Assets 0.57 (0.10) D. Capitalization 1. Fitch Core Capital/Weighted Risks Tangible Common Equity/ Tangible Assets Tier 1 Regulatory Capital Ratio Total Regulatory Capital Ratio Core Tier 1 Regulatory Capital Ratio n.a. n.a. n.a. n.a. 7. Equity/ Total Assets Cash Dividends Paid & Declared/ Net Income n.a. n.a. n.a. n.a. 9. Cash Dividend Paid & Declared/ Fitch Comprehensive Income n.a. n.a. n.a. n.a. 10. Cash Dividends & Share Repurchase/Net Income n.a. n.a. n.a. n.a. 11. Net Income - Cash Dividends/ Total Equity (2.84) E. Loan Quality 1. Growth of Total Assets (1.07) (0.42) (4.19) (2.35) 2. Growth of Gross Loans (1.24) (0.08) 3. Impaired Loans(NPLs)/ Gross Loans Reserves for Impaired Loans/ Gross loans Reserves for Impaired Loans/ Impaired Loans Impaired Loans less Reserves for Imp Loans/ Equity Loan Impairment Charges/ Average Gross Loans Net Charge-offs/ Average Gross Loans n.a Impaired Loans + Foreclosed Assets/ Gross Loans + Foreclosed Asse F. Funding 1. Loans/ Customer Deposits Interbank Assets/ Interbank Liabilities Customer Deposits/ Total Funding excl Derivatives

14 Reference Data 30 Sep Dec Dec Dec Months - 3rd Quarter 3rd Quarter As % of Year End As % of Year End As % of Year End As % of USDm EURm Assets EURm Assets EURm Assets EURm Assets A. Off-Balance Sheet Items 1. Managed Securitized Assets Reported Off-Balance Sheet n.a. n.a. - n.a. - n.a. - n.a Other off-balance sheet exposure to securitizations n.a. n.a. - n.a. - n.a. - n.a Guarantees 7, , , , , Acceptances and documentary credits reported off-balance sheet n.a. n.a. - n.a. - n.a. - n.a Committed Credit Lines 11, , , , , Other Contingent Liabilities n.a. n.a. - n.a. - n.a. - n.a Total Business Volume 310, , , , , Memo: Total Weighted Risks 103, , , , , Fitch Adjustments to Weighted Risks. n.a. n.a. - n.a. - n.a. - n.a Fitch Adjusted Weighted Risks 103, , , , , B. Average Balance Sheet Average Loans 149, , , , , Average Earning Assets 288, , , , , Average Assets 292, , , , , Average Managed Securitized Assets (OBS) n.a. n.a. - n.a. - n.a. - n.a. - Average Interest-Bearing Liabilities 274, , , , , Average Common equity 9, , , , , Average Equity 8, , , , , Average Customer Deposits 81, , , , , C. Maturities Asset Maturities: Loans & Advances < 3 months n.a. n.a. - n.a. - n.a. - n.a. - Loans & Advances 3-12 Months n.a. n.a. - n.a. - n.a. - n.a. - Loans and Advances 1-5 Years n.a. n.a. - n.a. - n.a. - n.a. - Loans & Advances > 5 years n.a. n.a. - n.a. - n.a. - n.a. - Debt Securities < 3 Months n.a. n.a. - n.a. - n.a. - n.a. - Debt Securities 3-12 Months n.a. n.a. - n.a. - n.a. - n.a. - Debt Securities 1-5 Years n.a. n.a. - n.a. - n.a. - n.a. - Debt Securities > 5 Years n.a. n.a. - n.a. - n.a. - n.a. - Interbank < 3 Months n.a. n.a. - n.a. - n.a. - n.a. - Interbank 3-12 Months n.a. n.a. - n.a. - n.a. - n.a. - Interbank 1-5 Years n.a. n.a. - n.a. - n.a. - n.a. - Interbank > 5 Years n.a. n.a. - n.a. - n.a. - n.a. - Liability Maturities: Retail Deposits < 3 months n.a. n.a. - n.a. - n.a. - n.a. - Retail Deposits 3-12 Months n.a. n.a. - n.a. - n.a. - n.a. - Retail Deposits 1-5 Years n.a. n.a. - n.a. - n.a. - n.a. - Retail Deposits > 5 Years n.a. n.a. - n.a. - n.a. - n.a. - Other Deposits < 3 Months n.a. n.a. - n.a. - n.a. - n.a. - Other Deposits 3-12 Months n.a. n.a. - n.a. - n.a. - n.a. - Other Deposits 1-5 Years n.a. n.a. - n.a. - n.a. - n.a. - Other Deposits > 5 Years n.a. n.a. - n.a. - n.a. - n.a. - Interbank < 3 Months n.a. n.a. - n.a. - n.a. - n.a. - Interbank 3-12 Months n.a. n.a. - n.a. - n.a. - n.a. - Interbank 1-5 Years n.a. n.a. - n.a. - n.a. - n.a. - Interbank > 5 Years n.a. n.a. - n.a. - n.a. - n.a. - Senior Debt Maturing < 3 months n.a. n.a. - n.a. - n.a. - n.a. - Senior Debt Maturing 3-12 Months n.a. n.a. - n.a. - n.a. - n.a. - Senior Debt Maturing 1-5 Years n.a. n.a. - n.a. - n.a. - n.a. - Senior Debt Maturing > 5 Years n.a. n.a. - n.a. - n.a. - n.a. - Total Senior Debt on Balance Sheet n.a. n.a. - n.a. - n.a. - n.a. - Fair Value Portion of Senior Debt n.a. n.a. - n.a. - n.a. - n.a. - Covered Bonds n.a. n.a. - n.a. - n.a. - n.a. - Subordinated Debt Maturing < 3 months n.a. n.a. - n.a. - n.a. - n.a. - Subordinated Debt Maturing 3-12 Months n.a. n.a. - n.a. - n.a. - n.a. - Subordinated Debt Maturing 1-5 Year n.a. n.a. - n.a. - n.a. - n.a. - Subordinated Debt Maturing > 5 Years n.a. n.a. - n.a. - n.a. - n.a. - Total Subordinated Debt on Balance Sheet 4, , , , , Fair Value Portion of Subordinated Debt n.a. n.a. - n.a. - n.a. - n.a. - D. Equity Reconciliation 1. Equity 9, , , , , Add: Pref. Shares and Hybrid Capital accounted for as Equity Add: Other Adjustments n.a. n.a. - n.a. - n.a. - n.a Published Equity 9, , , , , E. Fitch Eligible Capital Reconciliation 1. Total Equity as reported (including non-controlling interests) 9, , , , , Fair value effect incl in own debt/borrowings at fv on the B/S- CC only Non-loss-absorbing non-controlling interests (41.4) (32.0) (0.01) (57.0) (0.03) Goodwill Other intangibles Deferred tax assets deduction Net asset value of insurance subsidiaries First loss tranches of off-balance sheet securitizations Fitch Core Capital 9, , , , , Exchange Rate USD1 = EUR USD1 = EUR USD1 = EUR USD1 = EUR

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