Credit Opinion: Eksportfinans ASA

Credit Opinion: Eksportfinans ASA Global Credit Research - 04 Dec 2014 Oslo, Norway Ratings Category Outlook Issuer Rating Senior Unsecured Subordinate Commercial Paper Other Short Term Moody's Rating Stable Ba3 Ba3 B1 (hyb) NP (P)NP Contacts Analyst Phone Oscar Heemskerk/London Simon Harris/London 44.20.7772.5454 Julia Dulneva/London Key Indicators EKSPORTFINANS ASA (Consolidated Financials)[1] [2]9-14 [3]12-13 [3]12-12 [3]12-11 [3]12-10 Avg. Total Assets (NOK billion) 91.1 100.8 157.4 213.9 215.6 [4]-19.4 Total Assets (EUR million) 11,223.2 12,056.9 21,453.3 27,613.4 27,654.7 [4]-20.2 Total Assets (USD million) 14,177.7 16,613.7 28,283.8 35,846.3 37,100.0 [4]-21.4 Tangible Common Equity (NOK billion) Tangible Common Equity (EUR million) 5.0 612.0 0.8 90.4-5.3-25.0-728.7-3,231.9 4.5 576.8 [4]1.5 [4]2.5 Tangible Common Equity (USD million) 773.1 124.6-960.7-4,195.5 773.7 Net Interest Margin (%) 0.5 0.6 0.7 0.7 0.6 [4]0.0 [5]0.6 PPI / Average RWA (%) 0.9 4.9 5.0 3.0 3.0 [6]0.9 [6]0.7 35.9 [5]37.8 Net Income / Average RWA (%) (Market Funds - Liquid Assets) / Total Assets (%) 0.7 31.0 4.0 40.2 3.6 41.1 2.1 40.7 2.2 Tier 1 Ratio (%) 24.7 38.0 25.0 16.1 Tangible Common Equity / RWA (%) 19.7 4.6-25.2-84.4 12.7 [6]24.7 14.1 [6]19.7 14.3 [5]21.2 0.6 [5]0.4 Cost / Income Ratio (%) Problem Loans / Gross Loans (%) 43.6 1.1 15.1 0.2 14.2 0.3 18.8 0.0 Source: Moody's [1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel III - transitional phase-in; IFRS [3] Basel II; IFRS [4] Compound Annual Growth Rate based on IFRS reporting periods [5] IFRS reporting periods have been used for average calculation [6] Basel III - transitional phase-in & IFRS reporting periods have been used for average calculation Opinion SUMMARY RATING RATIONALE Moody's assigns Ba3/Not Prime issuer and debt ratings to Eksportfinans ASA. All long-term ratings carry a stable

outlook. The ratings reflect the removal of the government-supported export loan monopoly (on 18 November 2011), which has left Eksportfinans without a viable business model as a credit provider to the Norwegian export industry. As a consequence of this decision, Eksportfinans is now undergoing a run-off process. In our view, the run-off process entails increased operational risks, as well as risks to the company's liquidity, especially regarding (i) the potential for funding shortfalls arising due to asset and liability mismatches, (ii) the possible impact of market fluctuations on the structured funding portfolio or other events prompting a need for additional funding and (iii) the continued legal risk raising the possibility of various kinds of debt repayment triggers being activated. In Moody's assessment, the immediate risk of acceleration of debt repayment diminished following the Tokyo District Court ruling in favour of Eksportfinans in March 2014, in the claim relating to a purported declaration of default in respect of Eksportfinans's Samurai bonds. Mitigating this are (i) the company's sizeable liquidity portfolio, (ii) the good quality of Eksportfinans's loan book, which benefits from guarantees from a governmental institute and/or highly rated banks and (iii) an improving capital buffer as assets and liabilities are running off. We have not factored external support in Eksportfinans's ratings since the company's loss of the governmentsupported export lending business in November 2011. While the company's major shareholders, the Norwegian government (rated Aaa stable), DNB Bank ASA (deposits A1 stable; BFSR C-/BCA baa1 stable), Nordea Bank Norge ASA (Aa3 stable; C-/baa1 stable) and Danske Bank A/S (Baa1 positive; C-/baa2 stable) stated their intention to provide support to Eksportfinans if needed, we note that this has so far not materialised into legal commitments. As of November 2014, Eksportfinans has a new President and CEO- Geir Bergvoll, who was previously Chairman of the Board of Directors of Eksportfinans. Rating Drivers - Limited franchise value due to the run-off status of its operations, but stable ownership from the Norwegian government and large Nordic banks - Continued funding risks such as repayment triggers, market fluctuations of the structured funding portfolio, and asset and liability mismatches - albeit mitigated by sizeable liquidity reserves - Stable loan quality, reflecting government and bank guarantees - Earnings no longer supported by operational expansion and exposed to volatility in its securities books Rating Outlook All long-term ratings carry a stable outlook. On 30 April 2014, Moody's affirmed Eksportfinans's ratings and revised the outlook to stable from negative. The change in outlook of Eksportfinans's ratings to stable reflects Moody's view that the immediate risk of acceleration of debt repayment has diminished, following the Tokyo District Court ruling. As a result, Moody's notes the decreased risk that more of Eksportfinans's liabilities might become due prematurely, thus reducing pressure on Eksportfinans's liquidity. What Could Change the Rating - Up Upward pressure on Eksportfinans's ratings could primarily arise from increased support from its owners. What Could Change the Rating - Down Downward pressure would be exerted on the ratings should the run off process have any negative implications for Eksportfinans's remaining operations, especially regarding its liquidity. Any increased vulnerability to legal risks and triggers that could escalate debt repayment would exert a downward pressure on Eksportfinans's ratings. DETAILED RATING CONSIDERATIONS LIMITED FRANCHISE VALUE BUT STABLE OWNERSHIP We believe the Norwegian government's November 2011 decision to transfer the monopoly of governmentsupported loans from Eksportfinans has left the company without a viable business model and franchise for future operations. Eksportfinans, which is gradually running off its business, has been absent from the lending and funding markets, focusing on managing its existing operations.

Since July 2012, a state-owned company (Eksportkreditt Norge AS) has been established to provide governmentsupported loans and Eksportfinans employees that were not needed at Eksportfinans to run its operations in a responsible manner, mainly within the lending/sales department, have been offered positions in that company. In that respect, we note that it will be important that Eksportfinans manages to retain the key staff competencies needed to manage its complex balance sheet over the run-off period. The main owners of Eksportfinans are three of the largest banking groups in the Nordic area: DNB Bank (40%) and Nordea Bank Norge (23%) and Danske Bank (8%). The Norwegian government holds a 15% direct stake in Eksportfinans and an indirect holding through its 34% stake in DNB. CONTINUED HIGH FUNDING RISKS, ALBEIT MITIGATED BY SIZEABLE LIQUIDITY RESERVES The main risk to Eksportfinans' liquidity position is the legal risk related to the possibility of various kinds of debt repayment triggers being activated. Eksportfinans is not permitted to collect deposits; it has historically relied totally on market funding. Around 30% of outstanding bond debt consists of structured issuances, most of which have triggers that might shorten the maturity of these issuances and could therefore negatively affect liquidity at unexpected times. Eksportfinans has not accessed capital markets since November 2011. Refinancing risks are mitigated by Eksportfinans's cash equivalents of NOK3.7billion and a sizeable liquidity reserve portfolio (NOK28.4 billion at end-september 2014), which mainly comprises bonds from financial institutions and can be used in repo transactions with banks. The liquidity reserve portfolio increased by around 50% since year-end 2013 and comprises around 30% of total assets. In addition, Eksportfinans has an unused committed repo facility from its three-largest owner banks amounting to USD1 billion, after Eksportfinans initiated its reduction from USD 2 billion. This facility has a maturity of 12 months, which can be extended (renewed in June 2014). Moreover, Eksportfinans has a non-committed repo facility with DNB Bank. Eksportfinans also holds an unwinding portfolio of NOK6.8 billion at end-september 2014 (down from NOK7.5 billion at year-end 2013), comprising a significant portion of asset-backed securities, which we view as less liquid. We positively note that securities in this portfolio can be used for repo purposes and that value changes are hedged by a Portfolio Hedge Agreement (PHA) with the main shareholder banks which protects NOK5 billion of the portfolio value. Overall, we continue to regard as essential a credible and timely approach to managing run-off liquidity to ensure an orderly run-off process for Eksportfinans. SOUND CREDIT QUALITY IN ITS LOAN BOOK The asset quality of Eksportfinans' loan book has historically been strong and problem loans represented 1.1% of gross loans at end-september 2014. Moreover, Eksportfinans has a total of NOK91 million exposure towards Icelandic banks that is not considered guaranteed in a satisfactory manner. The company's good loan quality reflects that most of the export lending is guaranteed by the shareholder banks and/or the Norwegian government through the Norwegian Government Guarantee Agency (Garanti-Instituttet for Eksportkreditt or GIEK). However, as a result of its niche business, Eksportfinans loan portfolio exhibits considerable industry and singlename concentration. Shipping-related loans represent the largest industry concentration, accounting for over 40% of the loan portfolio at end-september 2014. In addition, there is significant borrower concentration in the loan book and as of end-september 2014 one loan (Down from 5 loans as of year-end 2012) was above the limit prescribed by CRD's large exposure provision (granted specific exemptions from the provision by the Norwegian regulator, please see further details in the next section below). We view Eksportfinans's strong supported loan quality as a credit-positive as it supports the remaining value of its balance sheet and could potentially provide an alternative source of liquidity if more liquid assets have been exhausted. ONGOING DELEVERAGING EXPECTED TO FURTHER BOOST CAPITAL RATIOS Eksportfinans reported a Tier 1 ratio of 23.9% and total capital ratio of 24.7% as of end-september 2014 (calculated under the CRDIV standardised approach). The introduction of CRD IV regulations decreases the company's capital adequacy, due to changed risk weights on financial institutions, affecting mainly Eksportfinans' bank guaranteed loans and securities, as well as the CVA (Credit Valuation Adjustment) charge on financial derivatives. The good capitalisation level reflects Eksportfinans's management's stated focus on existing operations, which means that the company has been deleveraging in recent years. We expect deleveraging to

continue going forward, unless the company decides to change its capital distribution policy or engage in new capital-expansive ventures. In addition, we positively note that in February 2012 an arrangement was found regarding Eksportfinans's compliance with the CRD's large exposure provision; the Norwegian regulator granted the company extended time (between end-2014 and end-2016, according to the loans' repayment schedules and maturities) to comply with the regulation, conditional upon Eksportfinans not increasing its non-compliant exposures. DECREASING INTEREST-GENERATING ASSETS AND VOLATILITY IN THE SECURITIES BOOK WEIGH ON EARNINGS Interest income has historically been the main source of earnings at Eksportfinans. Net interest income in 2013 was almost 43% lower than in 2012 primarily due to the reduced stock of interest-earning assets and we expect further reduction in this source of income as assets run off. Based on our adjusted financial statements, Eksportfinans's cost-to-income ratio was 15% in 2013, up from 12% in 2012, but down from 19% in 2011; going forward, we expect the cost base will be structurally lower than historical levels due to the reduced scope of operations, in particular the reduced number of employees (53 at year-end 2013). Eksportfinans's reported profits display significant volatility due to the mark-to-market valuation of its own debt, which net of derivatives resulted in an unrealised loss of NOK7.7 billion in 2013 (when the spread on own debt narrowed further), compared with an unrealised loss NOK26 billion in 2012, partially reversing an unrealised gain of NOK41 billion in 2011 when credit spreads widened. Hence, we expect further unrealised losses will affect Eksportfinans's bottom-line as the company will have to reverse NOK8 billion in accumulated unrealised gains. We positively note that earnings volatility related to less liquid securities holdings is mitigated by the PHA. In 2014 earnings deteriorated due to lower margins on investments and an overall decrease in interest generating assets. The annualised return on average assets decreased to 0.2% compared to 0.6% in 2013. As the result, the cost-to-income ratio increased to 44%. NOTE ON DATA Unless noted otherwise, all figures shown in this report are sourced from the bank's latest annual and interim financial reports and our Banking Financial Metrics. These metrics are based on our own chart of account, and are adjusted for analytical purposes. Please refer to the documents entitled "Financial Statement Adjustments in the Analysis of Financial Institutions" published on 19 December 2013. Notching Considerations Moody's rates Eksportfinans's subordinated debt ratings in line with our ratings for such securities issued by other Norwegian financial institutions. Eksportfinans ASA's subordinated debt and subordinated shelf debt are rated B1 (hyb) and (P)B1 respectively, i.e. one notch below the adjusted BCA. The principal methodologies used in the ratings "Government-Related Issuers " published in October 2014. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies. 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 http://www.moodys.com for the most updated credit rating action information and rating history. 2014 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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