Bank Nederlandse Gemeenten N.V. The Hague, Netherlands

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1 AUGUST 16, 2013 SUB-SOVEREIGN CREDIT ANALYSIS Bank Nederlandse Gemeenten N.V. The Hague, Netherlands Table of Contents: SUMMARY RATING RATIONALE 1 PEER COMPARISON 1 RATING OUTLOOK 2 WHAT COULD CHANGE THE RATING - DOWN 2 ISSUER OVERVIEW 2 KEY RATING CONSIDERATIONS 2 Institutional Framework 2 Financial Position and Performance 3 Capital Adequacy 3 Liquidity 4 Funding 4 Asset Quality 5 Risk Positioning 6 APPLICATION OF JOINT-DEFAULT ANALYSIS 7 RATING HISTORY 8 ANNUAL STATISTICS 9 MOODY S RELATED RESEARCH 13 Analyst Contacts: LONDON Jan Skogberg Associate Analyst jan.skogberg@moodys.com Roshana Arasaratnam Vice President - Senior Analyst roshana.arasaratnam@moodys.com David Rubinoff Managing Director - Sub Sovereigns david.rubinoff@moodys.com Summary Rating Rationale The Aaa long-term and P-1 short-term ratings with negative outlook of Bank Nederlandse Gemeenten N.V. (BNG) reflect the bank s role as the largest lender to the Dutch public sector. The ratings also reflect its:» Well-established business franchise, with a long track record as the leading provider of funding to the Dutch regional and local government (RLG) sector.» Good standing in debt capital markets and a diversified funding strategy combined with established Central Bank access.» Solid financial fundamentals and prudent risk management associated with hedging activities.» Some lending is not zero risk weighted and some investments are non-investment grade, although the bulk of assets is zero risk weighted. Peer Comparison Unlike Nordic lenders, BNG does not have a contractual guarantee from its key stakeholders or a comfort letter from its national government. However, we believe that the Dutch sovereign most likely would provide support in the currently unlikely event of a stress situation, given BNG s importance to the country s public sector. This Credit Analysis provides an in-depth discussion of credit rating(s) for Bank Nederlandse Gemeenten N.V. and should be read in conjunction with Moody s most recent Credit Opinion and rating information available on Moody's website.

2 Rating Outlook The rating outlook is negative, in line with the rating assigned to the Netherlands. What Could Change the Rating - Down BNG s Aaa rating would come under pressure if Netherlands was downgraded. BNG s rating would also come under pressure if its importance to the Dutch public sector was diminished or if its standing in capital markets weakened. Changes in BNG's ownership structure, although unlikely, could also put pressure on its ratings. Issuer Overview Bank Nederlandse Gemeenten N.V. was established in 1914 to give Dutch local governments access to cost-efficient loans. Today BNG is the largest public-sector lender in the Netherlands. The bank also offers limited lending to public-private partnerships. BNG is one of the largest banks in the Netherlands, with total assets of billion in 2012 (2011: billion). Key Rating Considerations Institutional Framework Ownership structure reinforces BNG s role as a sector bank BNG's bylaws restrict its ownership to the Dutch public sector. The central government holds a 50% stake in the bank, with the remaining 50% spread between Dutch municipalities, provinces and a district water board. This ownership structure has been stable since 1925 and is unlikely to be modified given BNG s unchanged mandate. BNG s importance as a provider of cost-effective lending to the Dutch public sector has been emphasised in recent years. Despite increased market volatility, BNG has consistently been able to lend to the Dutch public sector at advantageous rates given its lower funding cost compared to commercial banks. BNG increased its market share during the financial crisis BNG s share of solvency-free lending to local governments, housing associations and healthcare institutions is in excess of 70% of all requested loan quotes in In 2012, long-term lending increased by a modest 1.4% or 1.2 billion. That said, between year-end 2007 and year-end 2012 total gross lending increased by more than 24 billion. BNG is likely to maintain its position as the leading public-sector bank in the Netherlands given its advantageous funding costs. Other activities in its core market For more than 10 years, BNG has invested in public-private partnerships (PPPs), both as a lender and for limited amounts of equity. To help local governments manage revenues associated with recent privatisations, BNG has developed financial-advisory services as well as an asset-management business 2 AUGUST 16, 2013 CREDIT ANALYSIS: BANK NEDERLANDSE GEMEENTEN N.V.

3 with assets under management amounting to 6.4 billion as of December 2012 ( 5.9 billion in 2011). Asset management revenues are not a major contributor to BNG s income. We believe that BNG s asset management function will play a smaller role due to the introduction of treasury banking. Implication is that funds invested with BNG will instead be invested with the Dutch Ministry of Finance. Financial Position and Performance Strong revenues despite volatile markets Like other government-related specialised lenders, BNG must generate sufficient profits to grow capital in line with portfolio expansion, whilst providing efficient, low-cost funding to its clients.» Net income for 2012 rose to 332 million from 256 million in Whilst net interest income increased slightly, value adjustments related to financial instruments are the main contributor to the improved result. Such value adjustments are also common for BNG s peers.» BNG s net interest margin remained adequate at 42 bps, as BNG continued to benefit from lowcost funding and pricing flexibility on its lending rates (see Exhibit 1). 42 bps net interest margin is in line with peers. EXHIBIT 1 Development of BNG s net interest margin: Source: BNG Efficiency Like other specialised lenders, BNG s costs are low relative to total assets. The ratio of costs-to-average assets has remained below 7 bps in the previous five years and stood at 4.5 bps in Costs mainly consist of staff and other administrative expenses. In October 2012, a 32 million bank tax was levied on BNG, which accounted for 50% of its total operating expenses. BNG forecasts that this tax will increase to 33 million in Capital Adequacy BNG s capitalisation is adequate relative to its low-risk assets, of which 90% carry a zero risk weighting. At year-end 2012, its Tier 1 ratio stood at 22% compared to 20% in BNG s Tier 1 ratio is unlikely to change materially given the banks unchanged mandate. BNG has defined its internal Tier 1 floor as 18%. 3 AUGUST 16, 2013 CREDIT ANALYSIS: BANK NEDERLANDSE GEMEENTEN N.V.

4 Equity forms a relatively small percentage (1.9% in 2012) of total assets, which is common among public-sector lenders. BNG intends to increase its leverage ratio to 3% by 2017, through retained profits, as BNG assumes that exemptions will not be granted to it under upcoming European Union (EU) rules concerning capital requirements. In 2011, the bank lowered its dividend payout ratio to 25% from 50%. It is also considering issuing a limited amount of hybrid debt in order to reach the 3% target. At this stage, it is unclear if a 3% leverage ratio will be applicable to BNG under planned EU rules concerning capitalisation. Liquidity Liquidity position remains strong BNG maintains a large liquidity portfolio which mainly consists of highly rated securities. 90% of the portfolio consists of securities in the Aaa to A rating range. The portfolio is well diversified in terms of instrument type and geography. Large investment categories include government bonds, bonds with government guarantee and covered bonds. 8% of the liquidity portfolio consists of instruments in the Baa rating category. These instruments consist mainly of covered bonds and asset/mortgage backed securities. 2% of investments fall into the non-investment-grade category. These securities are predominately government-guaranteed notes and structured securities. Non-investment-grade securities form approximately 11% of BNG s equity. Some investments constitute exposures to Southern European countries such as Spain, Portugal and Italy. In a stress scenario, BNG could repo a large part of its investments with the European Central Bank (ECB). At year-end 2012, BNG held approximately 9.1 billion of collateral with the ECB. BNG could place its zero risk-weighted assets as collateral with the ECB. If required, BNG believes that it could place as much as an additional 40 billion of collateral with the ECB, within a number of weeks. BNG was compliant with the liquidity coverage ratio (LCR) in both 2012 and The minimum requirement is 100% and BNG reported 221% and 150% during the two years, respectively. Funding BNG has a strong standing in capital markets BNG relies on capital markets for its financing. It employs a diversified funding strategy by issuing debt in multiple currencies and markets, to a wide array of investors. This diversified strategy is similar to the one used by its specialised lender peers. 4 AUGUST 16, 2013 CREDIT ANALYSIS: BANK NEDERLANDSE GEMEENTEN N.V.

5 EXHIBIT 2 BNG funding 2012: type of investor Insurance Companies 16% Others 8% Banks 31% BNG funding 2012: geographical distribution Switzerland 6% Middle East/Africa 4% France 4% Other 7% Asia 42% UK/Ireland 11% Central Banks 20% Asset Managers 25% Germany 11% Americas 15% Source: BNG Source: BNG Like other specialised lenders, BNG issues debt securities with early redemption options. These type of securities could suddenly shorten BNG s liability profile. However, these securities form less than 3% of its total long-term funding, which is less than its peers. BNG assumes execution immediately when possible, which we view as prudent. BNG also has a large liquidity portfolio and ample means to refinance maturing debt. Basel III regulations will introduce a net stable funding ratio (NSFR), which compares the amount of available stable funding with required stable funding. BNG already meets the 100% minimum which is anticipated to come into force. Asset Quality Sound credit supported by mainly zero risk-weighted lending The credit ratings of specialised government lenders like BNG rest on the quality of the local government sectors that they serve. We view the Dutch local government sector as stable, wellmanaged and appropriately funded. The bank has never recorded losses associated with a loan to a Dutch local government.» Reliable own-source revenue, but with only modest flexibility. There are no limits on taxation 1 and surpluses may be kept for local government use. Fees for other municipal services, which may be shared between one or more local governments, may be set at cost of services.» Subsidies are well measured to meet costs. Central government funding is well matched to local government requirements. As local tax revenue may be variable due to a given local government s tax base, grants make up the bulk of annual revenues. Grants may take the form of allocations from the Municipal Fund and special grants for particular costs to be supported by national taxation. Additional funds known as Section 12 support are available with local governments with structural finance problems.» Good disclosure and monitoring by next-highest level of government. Dutch local governments have strict requirements to set and maintain budgetary balances as well as accounting standards that support clear budgeting (including multi-year projections), annual reporting and audits. 1 With the exception of real estate taxes, wherein total revenue across all municipalities may not rise more than 3.75% annually. 5 AUGUST 16, 2013 CREDIT ANALYSIS: BANK NEDERLANDSE GEMEENTEN N.V.

6 Municipalities are overseen by the provinces and provinces by the central government. In the case of financial difficulties, Section 12 municipalities are supervised by both the Minister of the Interior and the Minister of Finance, who collectively have the power to transfer assets and obligations in the restructuring or windup of a failing local government.» Well-diversified lending portfolio. 51% of BNG s long-term loan portfolio is related to housing associations. Local governments currently directly account for 33% of lending. Healthcare authorities make up 9% of BNG s lending.» Some lending is subject to solvency requirements. All lending segments contain some lending which is subject to solvency requirements. These loans are mainly to the education, transport and healthcare sectors and the total outstanding amount is 6.5 billion (December 2012). The majority of loans in this category are provided against collateral.» Non-solvency-free lending exhibits concentration. The 20 largest exposures, subject to solvency requirements, account for 42% of all non-solvency-free lending. According to BNG, the bulk of these large exposures have a creditworthiness consistent with an investment-grade rating. EXHIBIT 3 BNG lending by sector: 2012 Other 5.0% Public utilities 2.0% Healthcare Institutions 9.0% Local Government 33.0% Housing Associations 51.0% Source: BNG Risk Positioning Supervisory board has a wealth of experience The supervisory board is well diversified, with members having experience from the finance sector, the national government and local governments. The supervisory board appoints the executive board which currently consists of three experienced members. All key functions in the bank report to the executive board which has the responsibility of controlling all strategic risks. Risks associated with hedging agreements are well managed As is the case for BNG s peers, counterparties are well known international banks. Derivatives are used for hedging purposes, only. Appropriate ISDA/CSA documentation is in place.» Derivative contracts hedge currency and interest-rate risk. BNG s policy requires it to hedge all foreign currency exposure. The bank has a limited interest rate exposure. At the end of 2012, a 200 bps parallel upward shift of the yield curve would translate to a negative 263 million market value movement, equal to approximately 10% of equity. 6 AUGUST 16, 2013 CREDIT ANALYSIS: BANK NEDERLANDSE GEMEENTEN N.V.

7 » Counterparties are limited to highly rated entities. BNG only enters into transactions with externally rated entities. BNG has signed ISDA and CSA agreements with its financial counterparties. Among other terms, daily calculation and transfer of collateral is applied. Application of Joint-Default Analysis As a reflection of the application of Moody s Joint Default Analysis methodology for governmentrelated issuers, BNG s rating is composed of three principal inputs:» a baseline credit assessment of Aaa;» a very high likelihood that the Dutch government (Aaa negative) would act to prevent a default by BNG; and» a very high level of default dependence between the Dutch government and BNG. 7 AUGUST 16, 2013 CREDIT ANALYSIS: BANK NEDERLANDSE GEMEENTEN N.V.

8 Rating History Bank Nederlandse Gemeenten N.V. Date Rating 5 July 1995 Aaa 8 AUGUST 16, 2013 CREDIT ANALYSIS: BANK NEDERLANDSE GEMEENTEN N.V.

9 Annual Statistics Bank Nederlandse Gemeenten N.V. Financial Period Date (31-Dec-12) 12/31/ /31/ /31/ /31/ /31/2012 Summary Balance Sheet (local currency million) Cash & central bank , , ,834.0 Due from banks 8, , , , ,171.0 Securities 7, , , , ,494.0 Gross loans 75, , , , ,725.0 Loan loss reserves (LLR) Insurance assets Fixed assets Other assets 8, , , , ,986.0 Total assets 101, , , , ,228.0 Total assets (USD million) (1) 141, , , , ,726.7 Total assets (EUR million) 101, , , , ,228.0 Demand deposits 6, , , , ,139.0 Savings deposits Due to banks 3, , , , ,223.0 Market funds 79, , , , ,154.0 Insurance liabilities Other liabilities 9, , , , ,927.0 Total liabilities 99, , , , ,443.0 Subordinated debt Shareholders' equity 1, , , , ,752.0 Total capital funds 2, , , , ,785.0 Total liabilities & capital funds 101, , , , ,228.0 Derivatives - notional amount 193, , , , ,835.0 Derivatives - replacement value 5, , , , ,896.0 Contingent liabilities 7, , , , ,659.0 Risk weighted assets (RWA) 10, , , , ,729.0 Memorandum items: PIBS Assets under management (local currency million) 2, , , , ,400.0 Number of employees AUGUST 16, 2013 CREDIT ANALYSIS: BANK NEDERLANDSE GEMEENTEN N.V.

10 Bank Nederlandse Gemeenten N.V. Financial Period Date (31-Dec-12) 12/31/ /31/ /31/ /31/ /31/2012 Summary Income Statement +Interest income 4, , , , , Interest expense 4, , , , ,642.0 Net Interest income Financial transactions Fee & commission income Insurance income (net) +Dividend income and other operating income operating income Personnel expenses Other operating expenses operating funds flow Amortisation/depreciation (Total operating expenses) Preprovision income (PPI) Loan loss provisions (2) Impairment of goodwill, fixed assets and investments +Result of subsidiaries and associates Non-recurring items Pretax income Taxes Net income Minority interests Net income (group share) Growth Rates (%) Gross loans Total assets Customer deposits (demand and savings) Net interest income Fee and commission income Operating expenses Preprovision income Net income AUGUST 16, 2013 CREDIT ANALYSIS: BANK NEDERLANDSE GEMEENTEN N.V.

11 Bank Nederlandse Gemeenten N.V. Financial Period Date (31-Dec-12) 12/31/ /31/ /31/ /31/ /31/2012 Income Statement in % Average Risk Weighted Assets Net interest income Trading income Fee and commission income Insurance income Operating income Operating expenses Preprovision income Loan loss provisions Non-recurring items Net income Liquidity, Funding (including sub debt) & Balance Sheet Composition Avg. liquid assets % avg. total assets Avg. gross loans % avg. total assets Avg. customer deposits % avg. total funding Avg. interbank funds % avg. total funding Avg. market funds (excl. interbank) % avg. total funding Avg. sub debt % avg. total funding Avg. liquid assets % avg. customer deposits Avg. gross loans % avg. customer deposits 1, , , Avg. market funds reliance Avg. RWA % avg. total assets Breakdown of Operating Income in % Net interest income % operating income Trading income % operating income Fee & commission income % operating income Insurance income % operating income Other operating income % operating income AUGUST 16, 2013 CREDIT ANALYSIS: BANK NEDERLANDSE GEMEENTEN N.V.

12 Bank Nederlandse Gemeenten N.V. Financial Period Date (31-Dec-12) 12/31/ /31/ /31/ /31/ /31/2012 Profitability Yield on avg. earning assets (%) Cost of interest bearing liabilities (%) Net interest margin (%) Recurring earning power (Pre-prov. inc. [PPI] % avg. assets) Risk-weighted recurring earning power (PPI % avg. RWA) Post-provision income % avg. assets Post-provision income % avg. risk weighted assets Return on average assets (%) Return on avg. RWA (%) Post-provision income % tier 1 capital Return on equity (period end) (%) Net interest income coverage of loan loss provisions Loan loss provisions % preprovision income Pre-tax income % operating income Internal capital growth (%) Dividend payout ratio (%) Efficiency Cost/income ratio (op. expenses % op. income) Adjusted cost/income ratio (incl. non-operating items) Operating expenses % assets Operating income / employee (local currency thousand) , , , ,000.0 Operating expenses / employee (local currency thousand) PPI / employee (local currency thousand) , , , ,770.6 Asset Quality and Risk Measurement Problem loans % gross loans LLR % problem loans LLR % gross loans Loan loss provisions % gross loans Problem loans % (shareholders' equity + LLR) Replacement value % shareholder's equity Capital Adequacy (Period End) Tier 1 ratio (%) Total capital ratio (%) Shareholders' equity % total assets Equity participations % shareholders' equity [1] USD figure uses historical exchange rate against the EUR. [2] 20 million of the 32 million recorded in 2012 refers to impairment related to indirect share-participation in Connexxion (Dutch Public Transport company) 12 AUGUST 16, 2013 CREDIT ANALYSIS: BANK NEDERLANDSE GEMEENTEN N.V.

13 Moody s Related Research Credit Opinion:» Netherlands, Government of Analyses:» Nederlandse Waterschapsbank N.V., November 2011 (136789)» Netherlands, Government of, December 2012 (147063)» Waarborgfonds Sociale Woningbouw, December 2012 (148274) Banking System Outlook:» Banking System Outlook: Netherlands, December 2012 (148084) Rating Methodology:» Rating Impact of GRI Methodology for Non Depository Financial Institutions in the EMEA Region, June 2005 (93349) To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients. 13 AUGUST 16, 2013 CREDIT ANALYSIS: BANK NEDERLANDSE GEMEENTEN N.V.

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