Siauliu Bankas, AB. Update to credit analysis. CREDIT OPINION 25 May Update

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1 CREDIT OPINION Siauliu Bankas, AB Update to credit analysis Update Summary Siauliu Bankas, AB's (Siauliu Bankas) Baa3/Prime-3 deposit ratings incorporate a two-notch uplift from the bank's ba2 Baseline Credit Assessment (BCA), resulting from our Advanced Loss Given Failure (LGF) analysis. We view the probability of support from the Government of Lithuania (A3 stable) to Siauliu Bankas as low, resulting in no further uplift for the deposit rating. RATINGS Siauliu Bankas, AB Domicile Siauliai, Lithuania Long Term Debt Not Assigned Long Term Deposit Baa3 Type LT Bank Deposits - Fgn Curr Outlook Positive Please see the ratings section at the end of this report for more information. The ratings and outlook shown reflect information as of the publication date. The bank's ba2 BCA captures the improving operating environment in Lithuania and the increased capitalisation on the back of stronger recurring profitability, with tangible common equity over risk-weighted assets increasing to 15.79% as of year-end 217 from 9.64% in 214. Furthermore, the risks associated with the acquisition of AB Ukio Bankas' (Ukio Bankas) portfolio in 213 have largely been dissipated, and we view the asset risk of the acquired portfolio as largely in line with the rest of the book. This is balanced against the bank's high loan growth and sector concentration in small and medium-sized enterprises (SMEs) and consumer finance in Lithuania. Exhibit 1 Rating Scorecard - Key financial ratios Contacts Siauliu Bankas, AB (BCA: ba2) Jean-Francois Tremblay Associate Managing Director jean-francois.tremblay@moodys.com CLIENT SERVICES Americas Asia Pacific Japan EMEA % 16% 3% 14% Solvency Factors Savina R Joseph Associate Analyst savina.joseph@moodys.com Median ba2-rated banks 18% 25% 12% 1% 2% 8% 15% 6% 1% 4% 2% 7.6% 15.8% 1.5% 3.8% 29.4% Asset Risk: Problem Loans/ Gross Loans Capital: Tangible Common Equity/Risk-Weighted Assets Profitability: Net Income/ Tangible Assets Funding Structure: Market Funds/ Tangible Banking Assets Liquid Resources: Liquid Banking Assets/Tangible Banking Assets % Solvency Factors (LHS) Liquidity Factors Niclas Boheman AVP-Analyst niclas.boheman@moodys.com 5% % Liquidity Factors (RHS) The problem loan and profitability ratios are the weaker of the average of the latest three year-end ratios and the latest reported ratio. The capital ratio is the latest reported figure. The funding structure and liquid asset ratios are the latest year-end figures. Source: Moody's Financial Metrics

2 Credit strengths» The improving operating environment will help the bank reduce costs and sustain profit.» Improved recurring profitability has enhanced internal capital generation capacity, although modestly, because profit remains under pressure from low rates and the non-recurring nature of some gains (for example, loans supported by temporary government programmes and one-off securities transactions).» The bank's stronger capital levels provide capacity above the increasing regulatory and prudential capital requirements.» The bank's sound funding and liquidity position is underpinned by its stable deposit base. Credit challenges» Sector concentration and high loan growth constrain the bank's asset-quality profile, although the problem loan ratio is improving.» Concerns regarding the challenges stemming from the legacy portfolio have been mostly dissipated, with significant recoveries in the portfolio taken over from Ukio Bankas. Outlook The outlook on Siauliu Bankas' long-term deposit rating remains positive, reflecting our expectation that the bank will continue to effectively wind down its stock of problem loans while maintaining solid capitalisation, with a large capacity above the regulatory requirements. We further expect profitability to remain high while acknowledging the fact that certain revenue sources have definitive time limits. Factors that could lead to an upgrade Siauliu Bankas BCA could be upgraded if there is (1) a further decline in the stock of problem loans, with a continued decline in provisioning costs, while the bank (2) maintains its stable recurring earnings, or (3) increases its capital buffers further, or both. Factors that could lead to a downgrade Siauliu Bankas' BCA could be downgraded if there is (1) an acceleration in problem loan formation, both at an absolute level and in relation to the Lithuanian banking system average; (2) a weakening in Siauliu Bankas' internal capital generation and risk-absorption capacity; or (3) a worsening in the operating conditions beyond our current expectations, or all. Any change to the BCA or in the outcome of our LGF analysis would also affect the bank's deposit rating. This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history. 2

3 Key indicators Exhibit 2 Siauliu Bankas, AB (Consolidated Financials) [1] Total Assets (EUR million) Total Assets (USD million) Tangible Common Equity (EUR million) Tangible Common Equity (USD million) Problem Loans / Gross Loans (%) Tangible Common Equity / Risk Weighted Assets (%) Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) Net Interest Margin (%) PPI / Average RWA (%) Net Income / Tangible Assets (%) Cost / Income Ratio (%) Market Funds / Tangible Banking Assets (%) Liquid Banking Assets / Tangible Banking Assets (%) Gross Loans / Due to Customers (%) ,31 2, ,861 1, ,695 1, ,64 1, CAGR/Avg.4 1,545 2, [1] All figures and ratios are adjusted using Moody's standard adjustments. [2] Basel III - fully-loaded or transitional phase-in; IFRS. [3] Basel II; IFRS. [4] May include rounding differences due to scale of reported amounts. [5] Compound Annual Growth Rate (%) based on time period presented for the latest accounting regime. [6] Simple average of periods presented for the latest accounting regime. [7] Simple average of Basel III periods presented. Source: Moody's Financial Metrics Profile Siauliu Bankas, AB (Siauliu Bankas) was established in 1992 in Siauliai, Lithuania, and is publicly traded on Nasdaq Vilnius. The bank had 11 subsidiaries as of the end of March 218, following the recent sale of the indirectly controlled subsidiary Zalgirio Sporto Arena UAB, a real estate management company (previously held for sale). The bank is focused on finance leasing and consumer credits, life insurance, investment management activities, real estate management activities and development of residential areas in Lithuania. The bank is 18% directly owned by the European Bank for Reconstruction & Development (EBRD, Aaa stable). With 2. billion in total assets as of the end of December 217, Siauliu Bankas ranked fourth in terms of loans and deposits among the banks operating in Lithuania. The bank had a market share of 7.3% in terms of assets, 6.9% in terms of deposits and 6.5% in terms of loans as of the end of December 217. It operates in all major cities and financially active regional centres of Lithuania. As of the end of March 218, the bank had 65 regional customer service points across the country and as of year-end 217, it had 89 employees. Detailed credit considerations Large domestic presence gained through the significant acquisition In 213, the bank almost doubled its balance sheet when it acquired at no cost around LTL1.9 billion ($725 million) of assets and LTL2.7 billion ($1,3 million) of liabilities from Ukio Bankas, with a contribution from the state deposit and investment insurance fund covering the balance. This followed the regulatory concerns that led to the suspension and subsequent withdrawal of Ukio Bankas' banking licence. This transaction was very relevant for Siauliu Bankas because the bank gained presence in the domestic market, but the deal also had an impact on the bank's credit profile, given Ukio Bankas' very weak fundamentals. Since then, the bank has been actively working on the restructuring of the acquired portfolio, which was largely finalised by year-end 216. In July 215, Siauliu Bankas acquired 1% of the shares of Bank Finasta AB and the brokerage firm Finasta AB, and gained control over these entities. In settlement for the shares, the bank presented million new shares with a total nominal value of 6.19 million to AB Invalda INVL for subscription. These acquisitions, although modest in size, will allow Siauliu Bankas to gradually improve its market share and to expand the range of services provided within the investment banking-related services. The bank operates in Lithuania, and therefore, its Macro Profile is aligned with the Moderate (+) Macro Profile of Lithuania1, which reflects a flexible and diversified economy benefiting from a resilient and balanced post-crisis recovery and a strong medium-term growth outlook. We expect Siauliu Bankas, like other Lithuanian banks, to continue to benefit from the strong and stable economic 3

4 fundamentals in the country underpinned by robust private consumption, a pickup in investment and a recovery in exports supported by improving external conditions. High stock of problem loans despite the recent improvement in asset-risk trends In the improving operating environment with a pickup in exports, declining unemployment and an accommodative monetary policy, the bank s asset risk has improved markedly. Its asset risk deteriorated following the acquisition of Ukio Bankas, which had a higher credit risk profile. As part of the integration process, Siauliu Bankas has focused on reducing the stock of problem loans through recoveries and write-offs. This improvement is reflected in the decline in the problem loan ratio to 5.5% as of year-end 217 from 7.2% as of year-end 216 (see Exhibit 3). Exhibit 3 Problem loans are decreasing in the benign operating environment, combined with a disciplined review of the stock of loans Problem Loans Gross Loans Problem Loans % Gross Loans (RHS) 1,4 18% 15.3% 16% 1,2 14% 12.4% EUR Millions 1, 12% 1.% 8 1% 7.2% 6 8% 5.5% 4.8% 6% 4 4% 2 2% % March 218 Sources: Siauliu Bankas' financial reports, Moody's Investors Service Siauliu Bankas' gross loans grew 15% annually in 217, in line with our expectation of a high loan growth rate between 1% and 15% for the year. In 217, the loan portfolio grew 15%, following a 15% increase in the retail and business aggregated book and a 3% increase in finance lease receivables, while the loan book grew an additional 2% in the first three months of 218. The bank's problem ratio continued to improve from year-end 217 to reach 4.8% by the end of March 218, while the coverage ratio (loan-loss reserves as a proportion of problem loans) increased to 72.7% as of the end of March 218, following the adoption of IFRS9 at the beginning of 218, from 5.9% as of year-end 217 and 49.6% as of year-end 216. We expect this trend to continue, aided by the continued growth in the denominator, taking into account downside risks that could arise from the bank's legacy portfolio or from its rapid credit growth. We currently assess Siauliu Bankas Asset Risk at b3 owing to the expected continued rapid loan growth and the sector concentration in the SME segment (see Exhibit 4). 4

5 Exhibit 4 Exposures are concentrated in the SME segment, where growth in absolute numbers is most pronounced Maximum exposure to credit risk EUR Millions 8 Year-on-year Growth 16% 136% 7 14% 6 12% 5 1% 4 8% 6% 3 32% 2 19% 6% 3% 4% 18% 15% 6% 1-7% -9% 2% % -1-2% Consumer loans Mortgages Credit cards Other Lage corporates RETAIL SME Public sector BUSINESS Individuals Business Financial Institutions FINANCE LEASE RECEIVABLES Sources: Siauliu Bankas' financial statements, Moody's Investors Service Stronger capital levels comply with new regulatory and prudential capital requirements As of the end of December 217, the bank s tangible common equity-to-risk-weighted assets ratio stood at 15.79%, down slightly from 15.9% as of the end of December 216. The high level of capital buffers is explained by Siauliu Banks improved retained profit, which has significantly enhanced its internal capital generation capacity. Exhibit 5 Capital ratios and minimum capital requirement Common Equity Tier 1 (CET1) ratio TCE % RWA Minimum CET1 ratio 18.% 15.9% 15.1% 16.% 15.8% 13.9% 14.% 12.6% 12.2% 12.% 1.% 9.6% 9.3% 9.% 9.4% 9.4% % 6.% 4.5% 4.% 2.%.% 214 Sources: Siauliu Bankas' financial reports, Moody's Investors Service In terms of regulatory capital ratios, Siauliu Bankas reported a phased-in Common Equity Tier 1 (CET1) capital ratio of 13.87% as of the end of December 217. As of the end of March 218, the ratio of equity to total assets was 9.8% compared with 1.3% as of yearend 217 (9.6% as of year-end 216), following the increase in provisions by 9 million from the adoption of IFRS9. The bank has been reinforcing its capital buffers to comply with the new regulatory and prudential requirements. Following the annual supervisory review and evaluation (SREP), the CET1 ratio requirement was lowered by 1 basis points to 8.9% as of 31 December 216 from 9% as of year-end 215. However, as Siauliu Bankas is designated as an Other Systemically Important Institution, an additional.5% buffer was applied as of 31 December 216, resulting in a total CET1 ratio requirement of 9.4%. An additional.5% countercyclical capital buffer will be required as of 31 December 218. We expect the bank to be compliant, considering the positive trend in profitability and internal capital generation. Furthermore, Siauliu Bankas risk-absorption capacity (measured as problem loans as a percentage of shareholders funds and loan-loss reserves) improved to 23% as of the end of March 218 from 28% as of year-end 217 and 35% as of year-end 216. Our assessment of Siauliu Bankas solvency in relation to its asset-risk profile is reflected in the assigned baa3 Capital score. 5

6 Improving profitability has enhanced internal capital generation capacity; however, certain income sources have definitive time limits Siauliu Bankas has made a significant recovery in earnings in recent years, but we expect the bank's recurring revenue generation capacity to remain strained by the very low interest rate environment and the increasing competition from other banks in the Baltic region. We do not expect new business volumes and lower funding costs owing to the re-pricing of the deposit base to be sufficient to offset a deterioration in profitability. The bank's return on equity (ROE) ratio (Moody's adjusted) was 16.5% as of year-end 217 compared with 2.8% as of year-end 216, and the ratio of net profit over tangible assets (Moody's adjusted) was 1.59% compared with 1.77%. We note that 216 was an exceptional year because it included various extraordinary items. In 217, Siauliu Bankas reported a net profit of 32.1 million compared with 43.7 million in 216. This performance was driven by a 6% increase in net interest income from a year earlier, although driven down by a 54% decrease in non-interest income, owing primarily to a 12.1 million loss from changes in fair value of the bank's subordinated loan. Net fees and commissions increased 16% on the back of higher contribution of fees related to the housing renovation programme and money transfer operations. From the calculation of non-interest income, we exclude the one-off gains relating to Ukio Bankas' loans that were bought below the nominal value, but have been either sold or repaid. The recoveries on the Ukio portfolio and fees related to the renovation programme have definitive time limits ( 3 million in 217 and 13 million in 216), with the bulk of the recoveries from the Ukio transaction already taken in 214 and 215. The remaining difference between the acquisition value and the gross value was 19 million as of year-end 216, 73 million in 215 and 14 million in 214 and the renovation programmes are likely to continue for the next two to four years. The bank is likely to continue to be involved in the renovation programme during that time, but fees will gradually decrease after 22 (in 216, 3% of all fees corresponded to this programme). However, mitigating this time-limited income, the bank is growing its on-balance-sheet lending towards building renovations. At the bottom-line level, the bank's income benefited from a reversal of loss provisions, resulting in an income of 2.5 million (loan-loss provision expenses in 216 were 7.2 million), because the bank has largely finalised the restructuring of the legacy portfolio of Ukio Bankas. In 218, we expect Siauliu Bankas' profitability indicators (as measured by the net income to total assets ratio) to return to more normalised levels, which we expect to be between 1.% and 1.2%. The primary drivers are lower margins owing to the continued low interest rate environment, combined with increased competition in the SME segment. These expectations are supported by the first-quarter 218 results, whereby the bank reported a net income of 9.9 million, 27% lower than the reported net income of 13.4 million in the same period in 217. However, if we adjust for extraordinary loss from changes in the fair value of the subordinated loss of 2.2 million in the first quarter of 218 and of 12.1 million in the same period in 217, resulting from the higher market stock price of the bank, the year-on-year change between the first quarter of 217 and 218 in net income would be 13%. The adjusted net income to total assets ratio for 217 was 1.58% compared with 1.77% for 216. Our Profitability score of ba1 captures the bank's sound profitability metrics, which have followed an improving trajectory over the last few years, balanced against certain volatility in earnings, the low interest rate environment and increasing competition. 6

7 Exhibit 6 Profitability evolution has been strong in recent years Net interest income Pre-provision income Net income 7 6 EUR Millions Sources: Siauliu Bankas' financial reports, Moody's Investors Service Sound liquidity position underpinned by a deposit-based funding model We assess Siauliu Bankas liquidity position based on its funding structure and stock of liquid assets. We assign a Funding score of baa1, adjusted two notches below the Macro-Adjusted score. The adjustment highlights the relatively high weight of corporate deposits over total deposits, which by nature are more volatile than deposits from individuals. Siauliu Bankas' liquidity benefits from its deposit-oriented business model, which represents close to 1% of total funding. As of the end of March 218, the bank reported a loan-to-deposit ratio of 72%, broadly in line with that as of year-end 216, following an increase to 75% as of year-end 217. The increase in 217 reflected the extraordinary increase in the loan book, which was not compensated by a similar increase in deposits. Most of the deposits are from Lithuanian residents. This contrasts with many domestic banks in neighbouring Latvia, where some banks hold high levels of nonresident deposits, which we consider less stable. Most of the bank's securities portfolio comprises debt securities, mainly Lithuanian government bonds. We acknowledge that Siauliu Bankas mainly invests in investment-grade assets. Exhibit 7 Funding and liquidity profiles of Siauliu Bankas constrained by inherently more volatile junior deposits Market Funds % Tangible Banking Assets Liquid Banking Assets % Tangible Banking Assets 4.% 36.6% 34.3% 35.% 34.4% 33.6% 29.4% 3.% 24.7% 25.% 2.% 19.3% 2.7% 14.7% 15.% 1.% 5.% 5.% 3.4% 4.9% 3.8% 3.%.% Sources: Siauliu Bankas' financial reports, Moody's Investors Service Concerns regarding the challenges stemming from the legacy portfolio have been mostly dissipated, with significant improvements in the portfolio taken over from Ukio Bankas The group has absorbed the loan portfolios of Ukio Bankas and largely sold, recovered or written down the bad parts of the portfolio. Siauliu Bankas has methodically reviewed the acquired portfolio to ensure that subpar borrowers have been identified and that the portfolio is aligned with the bank's underwriting standards. We do not expect the rest of Ukio Bankas' portfolio to differ largely from 7

8 the portfolio of Siauliu Bankas. Our view is that the risks relating to the acquisition of Ukio Bankas have decreased, but leave the BCA at the bottom of the range. This is consistent with the positive outlook on the ratings and our expectation that the bank will continue to improve its standalone credit profile. Support and structural considerations Loss Given Failure analysis We apply our advanced LGF analysis to Siauliu Bankas because the bank is subject to the European Union Bank Resolution and Recovery Directive, which we consider to be an operational resolution regime. For this analysis, we assume that equity and losses stand at 3% and 8%, respectively, of tangible banking assets in a failure scenario. We also assume a 25% run-off of junior wholesale deposits and a 5% run-off in preferred deposits and a 26% proportion of junior deposits. These are in line with our standard assumptions. Siauliu Bankas' deposits are likely to face very low loss given failure, owing to the loss absorption provided by the large volume of junior deposits. Siauliu Bankas' deposits are rated two notches above the ba2 Adjusted BCA, owing to a significant buffer of liabilities eligible for bail-in. Counterparty Risk (CR) Assessment CR Assessments are opinions of how counterparty obligations are likely to be treated if a bank fails and are distinct from debt and deposit ratings in that they (1) consider only the risk of default rather than both the likelihood of default and the expected financial loss suffered in the event of default, and (2) apply to counterparty obligations and contractual commitments rather than debt or deposit instruments. The CR Assessment is an opinion of the counterparty risk related to a bank's covered bonds, contractual performance obligations (servicing), derivatives (for example, swaps), letters of credit, guarantees and liquidity facilities. Siauliu Bankas' CR Assessment is positioned at Baa2(cr)/P-2(cr) The CR Assessment, prior to government support, is positioned three notches above the Adjusted BCA of ba2. The main difference with our Advanced LGF approach used to determine instrument ratings is that the CR Assessment captures the probability of default on certain senior obligations, rather than expected loss; therefore, we focus purely on subordination and take no account of the volume of the instrument class. Government support considerations We assign a low probability of government support for deposits, which does not translate into any uplift. Likewise, the CR Assessment does not benefit from government support. Sources of facts and figures cited in this report Unless noted otherwise, we have sourced data relating to systemwide trends and market shares from the Central Bank and the Association of Lithuanian Banks. Bank-specific figures originate from banks' reports and Moody's Banking Financial Metrics. All figures are based on our own chart of account and may be adjusted for analytical purposes. Please refer to the document Financial Statement Adjustments in the Analysis of Financial Institutions published in June 217. About Moody's Bank Scorecard Our scorecard is designed to capture, express and explain in summary form our Rating Committee's judgment. When read in conjunction with our research, a fulsome presentation of our judgment is expressed. As a result, the output of our scorecard may materially differ from that suggested by raw data alone (though it has been calibrated to avoid the frequent need for strong divergence). The scorecard output and the individual scores are discussed in rating committees and may be adjusted up or down to reflect conditions specific to each rated entity. 8

9 Rating methodology and scorecard factors Exhibit 8 Siauliu Bankas, AB Macro Factors Weighted Macro Profile Moderate + Factor Historic Macro Ratio Adjusted Score Credit Trend Assigned Score Key driver #1 Key driver #2 Loan growth Solvency Asset Risk Problem Loans / Gross Loans 7.6% ba3 b3 Sector concentration Capital TCE / RWA 15.8% a3 baa3 Stress capital resilience Profitability Net Income / Tangible Assets 1.5% a3 ba1 Expected trend Combined Solvency Score Liquidity Funding Structure Market Funds / Tangible Banking Assets 3.8% a2 baa1 Deposit quality Liquid Resources Liquid Banking Assets / Tangible Banking Assets 29.4% baa2 baa2 Quality of liquid assets baa2 ba3 Combined Liquidity Score Financial Profile Business Diversification Opacity and Complexity Corporate Behavior Total Qualitative Adjustments Sovereign or Affiliate constraint: Scorecard Calculated BCA range Assigned BCA Affiliate Support notching Adjusted BCA a3 Balance Sheet in-scope (EUR million) 263 1,648 1, ,26 Other liabilities Deposits Preferred deposits Junior Deposits Senior unsecured bank debt Dated subordinated bank debt Equity Total Tangible Banking Assets 9 1% baa1 ba1 A3 baa3-ba2 ba2 ba2 % in-scope 13.% 81.3% 6.2% 21.2% 1.% 1.7% 3.% 1% at-failure (EUR million) 431 1,48 1, ,26 % at-failure 21.3% 73.% 57.2% 15.9% 1.% 1.7% 3.% 1%

10 Debt class Counterparty Risk Assessment Deposits Instrument class Counterparty Risk Assessment Deposits De Jure waterfall De Facto waterfall Notching LGF Assigned Additional Preliminary LGF notching Rating Instrument Sub- Instrument SubDe Jure De Facto Notching Guidance notching Assessment volume + ordination volume + ordination vs. subordination subordination Adjusted BCA 21.5% 21.5% 21.5% 21.5% baa2 (cr) 21.5% 4.7% 21.5% 5.7% baa3 Loss Given Failure notching 3 2 Additional Preliminary Rating Notching Assessment baa2 (cr) baa3 Government Support notching Local Currency Rating Baa2 (cr) Baa3 Foreign Currency Rating -Baa3 Source: Moody's Financial Metrics Ratings Exhibit 9 Category SIAULIU BANKAS, AB Outlook Bank Deposits Baseline Credit Assessment Adjusted Baseline Credit Assessment Counterparty Risk Assessment Moody's Rating Positive Baa3/P-3 ba2 ba2 Baa2(cr)/P-2(cr) Source: Moody's Investors Service Endnotes 1 See Lithuania Macro Profile: Moderate+, published on 23 October

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12 Contacts Niclas Boheman AVP-Analyst 12 CLIENT SERVICES Savina R Joseph Associate Analyst savina.joseph@moodys.com Americas Asia Pacific Japan EMEA