Swiss Canton of Zurich 'AAA' Ratings Affirmed; Outlook Stable

Research Update: Swiss Canton of Zurich 'AAA' Ratings Affirmed; Outlook Stable Primary Credit Analyst, Sovereigns And International Public Finance: Thomas F Fischinger, Frankfurt (49) 69-33-999-243; thomas.fischinger@spglobal.com Secondary Credit Analyst, Sovereigns And International Public Finance: michael stroschein, Frankfurt +49 69 33 999 251; michael.stroschein@spglobal.com Table Of Contents Overview Rating Action Outlook Rationale Key Statistics Ratings Score Snapshot Key Sovereign Statistics Related Criteria And Research Ratings List WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 24, 2017 1

Research Update: Swiss Canton of Zurich 'AAA' Ratings Affirmed; Outlook Stable Overview We believe the canton will report minor deficits until 2019, driven by moderate expenditure growth. We anticipate that the canton will be able to maintain its low debt burden and benefit from lower refinancing needs. We are affirming our 'AAA' rating on Zurich. The stable outlook reflects our view that the contained deficits will lead to a stabilization of the cantonal debt burden. Rating Action On Nov. 24, 2017, S&P Global Ratings affirmed its 'AAA' long-term issuer credit ratings on the Swiss Canton of Zurich. The outlook is stable. We also affirmed our 'AAA' issue ratings on Zurich's senior unsecured debt. Outlook The stable outlook reflects our expectation that the canton will be able to contain deficits after capital accounts to below 5% of adjusted total revenues over the next two years, leading to a stable debt burden for the canton. We do not believe that the potentially imminent corporate tax reform in Switzerland will have a material financial effect on Zurich. Downside Scenario All other things remaining equal, we could lower the rating if Zurich's management loosens its grip on the financial performance of the canton. In addition, pressure on the ratings would build if the cantonal bank were to call upon the canton for support. However, we currently view this scenario as unlikely. Rationale The ratings on Zurich reflect the extremely predictable and supportive institutional framework for Swiss cantons. Zurich is a major contributor to the Swiss equalization system, and is one of only six of 26 cantons that contributes. The canton benefits from excellent economic fundamentals, with very high GDP per capita and low unemployment rates compared globally. We regard the canton's financial situation as healthy, with low but rising debt and an excellent liquidity situation. We see the potentially sizable contingent liabilities stemming from its guarantee for practically all liabilities of its cantonal bank Zuercher Kantonalbank (ZKB) as the canton's main credit risk; it is currently mitigated by the bank's high stand-alone creditworthiness. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 24, 2017 2

Zurich is the largest cantonal contributor to the Swiss equalization system The institutional framework under which Swiss cantons operate provides equalization transfers to economically weaker cantons. In nominal terms, Zurich is the largest cantonal contributor due to its very favorable economic and financial profile. Following a system evaluation, the federal government, together with the cantons, is aiming to reduce the total distributions payable under the equalization system for donor cantons like Zurich by 2020. For 2018, the canton is obliged to pay Swiss francs (CHF) 465 million (equivalent to 3.1% of operating revenues) to other cantons. The Swiss cantons' institutional framework is mature and extremely predictable, in our view, with major reforms being planned well in advance and widely discussed, notably between the Confederation and the cantons, and among the cantons themselves. The Swiss Confederation is currently preparing a nationwide corporate tax reform, which originally was to have been implemented by 2019. The process has slowed following a negative popular vote in early 2017. In short, the reform provides for the discontinuation of certain tax privileges of foreign holdings, domiciliary, and mixed companies. Zurich receives only a minor portion of such taxes; the canton may therefore predominately be affected by the second-round effects of the reform, that is, when other cantons change their tax codes. Zurich has designed a proposed cantonal implementation plan, which includes tax adjustments. In our view, the canton is adequately prepared to handle the reform's impact. Zurich's prudent financial management already includes the estimated effects of the tax reform in its financial planning from 2020 onward. Zurich has a very strong regional economy, with high wealth levels relative to national and international peers. We estimate Zurich's GDP per capita will reach about CHF98,500 (about $100,000) in 2018. The canton is Switzerland's financial center, and it contributes more than one-fifth of national gross value added. The canton's overall budgetary flexibility should enable it to weather changes in the medium term. We assess it as more flexible than most Swiss peers because a very high share of its revenues is modifiable. Even though tax competition between cantons, as well as public opposition, somewhat limits the canton's ability to raise taxes, the medium-term balancing requirement offsets this effect, and we anticipate that the canton would use its flexibility, if needed. We note the canton's focus on managing its expenditure with respect to investments and operating costs to achieve budgetary consolidation. The canton has provided a legal guarantee for practically all of ZKB's liabilities. The bank's balance sheet size is nearly 11 times the canton's total revenues, which we believe highlights the heavy impact significant problems at the bank would have on the canton's creditworthiness. The bank is qualified as systemically important by the Swiss banking supervisory authority and therefore has to fulfill additional reporting and capital requirements. We currently see a very low likelihood that the canton would be called to support the bank, reflected in our assessment of the bank's SACP at 'aa-'. Consequently, we currently assess the canton's contingent liabilities as moderate. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 24, 2017 3

The canton is on a solid path to budgetary balancing The canton achieved excellent results in 2016, which are unlikely to be seen again in the coming years. The 2016 results benefitted from one-off operating revenues and delays in capital expenditure, which propelled the budgeted deficit after capital accounts into positive territory for the first time in years. The canton has implemented a CHF1.6 billion consolidation package. About 75% of the measures are focused on expenditure, especially on items that the canton believes could grow significantly. The rest of the canton's efforts focus on improved revenue intake. Although some measures are still undecided, we believe that the canton will be able to outperform its current financial planning in 2018-2021 due to its cautious budgeting approach. In our view, the canton is on a solid path to achieving its budgetary balancing requirement. We expect the average operating balance to remain just below 5% of adjusted operating revenues and a small deficit after capital accounts on average over five years in our base-case scenario, up until 2019. In our view, the canton enjoys considerable budgetary flexibility, as it has the right to influence major revenue sources like income, profit, and wealth taxes. Overall, we view the canton's financial management as very strong, due to its approval-based annual budgeting process and very prudent long-term planning. Zurich's strong commitment to balancing accounts is seen in its medium-term balancing requirement, which calls for an automatic consolidation program if, for the rolling eight-year period of four previous and four future years, the accounts do not balance. The cantonal management does not employ derivatives, but two consolidated cantonal hospitals have signed four derivatives for hedging purposes. The supervisory board (Spitalrat) controls these contracts and has the right to sign potential new contracts without requiring prior approval from the cantonal finance department. We believe that the canton would ultimately bear the risk of such transactions. We view the signing of derivatives as an unusual task for a hospital's supervisory board, given that the members' knowhow and responsibilities are firmly in the health care arena. We expect Zurich's tax-supported debt ratio to stabilize at below 40% of operating revenues until 2019, and a slight increase in nominal terms to cover deficits in our base-case scenario. The debt ratio will also depend on the canton's discretionary use of its ample cash reserves. Due to the pension fund's very high coverage ratio, we regard Zurich's unfunded pension liabilities as limited. The canton's cost of debt is very low, with negative interest rates for short-term borrowings and high demand for cantonal debt. As of end-september 2017, the canton has no debt at variable rates or denominated in foreign exchange, which we regard as very low-risk. We view Zurich's liquidity as exceptional. Our assessment takes into account the canton's high cash reserves and strong access to Switzerland's deep and liquid capital market. The canton's net free cash is more than 2x the yearly debt service, benefiting from very low debt falling due over the next 12 months. We note that the canton has reduced the amount of liquid assets because cash holdings are costly for WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 24, 2017 4

the canton due to the current interest rate environment in Switzerland. In our view, the canton has highly predictable cash flows, which form the basis of its liquidity planning. Yearly interest payments are low and stable at about 1% of operating revenues. Zurich plans for a minimum cash position of about CHF500 million, slightly below 4% of operating expenditures. We factor our view of the canton's access to external liquidity as strong into our assessment of its liquidity. This is in line with our favorable view of Switzerland's banking sector (see "Banking Industry Country Risk Assessment: Switzerland," published Nov. 6, 2017, on RatingsDirect). Key Statistics Table 1 Canton of Zurich Key Statistics --Fiscal year end Dec. 31-- (Mil. CHF) 2014 2015 2016 2017bc 2018bc 2019bc Operating revenues 13,626 14,175 14,597 14,725 15,144 15,364 Operating expenditures 13,259 13,674 13,620 13,948 14,571 14,579 Operating balance 367 500 978 778 573 785 Operating balance (% of operating revenues) 2.7 3.5 6.7 5.3 3.8 5.1 Capital revenues 76 27 57 40 41 46 Capital expenditures 966 1,184 729 859 1,004 1,142 Balance after capital accounts (524) (657) 306 (41) (390) (311) Balance after capital accounts (% of total revenues) (3.8) (4.6) 2.1 (0.3) (2.6) (2.0) Debt repaid 1,000 225 500 1,200 207 250 Gross borrowings 1,285 0 50 1,200 590 554 Balance after borrowings 209 (808) 120 (28) 0 0 Modifiable revenues (% of operating revenues) 73.2 71.4 73.6 73.0 71.8 71.9 Capital expenditures (% of total expenditures) 6.8 8.0 5.1 5.8 6.4 7.3 Direct debt (outstanding at year-end) 5,349 5,124 5,274 5,274 5,657 5,961 Direct debt (% of operating revenues) 39.3 36.1 36.1 35.8 37.4 38.8 Tax-supported debt (outstanding at year-end) 5,362 5,136 5,286 5,286 5,669 5,973 Tax-supported debt (% of consolidated operating revenues) 39.4 36.2 36.2 35.9 37.4 38.9 Interest (% of operating revenues) 1.0 1.3 0.7 0.7 0.6 0.5 Local GDP per capita (single units) 96,411 95,678 95,429 96,345 98,571 100,641 National GDP per capita (single units) 78,872 78,507 78,268 78,541 79,638 80,993 The data and ratios above result in part from S&P Global Ratings' own calculations, drawing on national as well as international sources, reflecting S&P Global Ratings' independent view on the timeliness, coverage, accuracy, credibility, and usability of available information. The main sources are the financial statements and budgets, as provided by the issuer. Base case reflects S&P Global Ratings' expectations of the most likely scenario. Ratings Score Snapshot WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 24, 2017 5

Table 2 Canton of Zurich Ratings Score Snapshot Key Rating Factors Institutional Framework Economy Financial Management Budgetary Flexibility Budgetary Performance Liquidity Debt Burden Contingent Liabilities Extremely predictable and supportive Very strong Very strong Strong Average Exceptional Low Moderate *S&P Global Ratings bases its ratings on local and regional governments on the eight main rating factors listed in the table above. Section A of S&P Global Ratings' "Methodology For Rating Non-U.S. Local And Regional Governments," published on June 30, 2014, summarizes how the eight factors are combined to derive the rating. Key Sovereign Statistics Research Update: Switzerland Ratings Affirmed At 'AAA/A-1+'; Outlook Stable November 17, 2017 Related Criteria And Research Related Criteria Criteria - Governments - International Public Finance: Methodology For Rating Non- U.S. Local And Regional Governments - June 30,2014 Criteria - Governments - International Public Finance: Methodology And Assumptions For Analyzing The Liquidity Of Non-U.S. Local And Regional Governments And Related Entities And For Rating Their Commercial Paper Programs - October 15,2009 General Criteria: Use Of CreditWatch And Outlooks - September 14,2009 Related Research Sovereign Risk Indicators - October 13, 2017. An interactive version is also available at http://www.spratings.com/sri. Institutional Framework Assessments For Non-U.S. Local And Regional Governments September 21, 2017 Research Update: Switzerland Ratings Affirmed At 'AAA/A-1+'; Outlook Stable November 17, 2017 Default, Transition, and Recovery: 2016 Annual Non-U.S. Local And Regional Government Default Study And Rating Transitions - May 08, 2017 Refinancing Needs Continue To Dominate German, Swiss, And Austrian Local And Regional Government Borrowing In 2017 - February 23, 2017 Public Finance System Overview: Swiss Cantons November 03, 2016 In accordance with our relevant policies and procedures, the Rating Committee was composed of analysts that are qualified to vote in the committee, with sufficient experience to convey the appropriate level of knowledge and understanding of the WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 24, 2017 6

methodology applicable (see 'Related Criteria And Research'). At the onset of the committee, the chair confirmed that the information provided to the Rating Committee by the primary analyst had been distributed in a timely manner and was sufficient for Committee members to make an informed decision. After the primary analyst gave opening remarks and explained the recommendation, the Committee discussed key rating factors and critical issues in accordance with the relevant criteria. Qualitative and quantitative risk factors were considered and discussed, looking at track-record and forecasts. The committee agreed that all key rating factors were unchanged. The chair ensured every voting member was given the opportunity to articulate his/her opinion. The chair or designee reviewed the draft report to ensure consistency with the Committee decision. The views and the decision of the rating committee are summarized in the above rationale and outlook. The weighting of all rating factors is described in the methodology used in this rating action (see 'Related Criteria and Research'). Ratings List Rating To From Zurich (Canton of) Issuer Credit Rating Foreign and Local Currency AAA/Stable/-- AAA/Stable/-- Senior Unsecured Local Currency AAA AAA Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following S&P Global Ratings numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 24, 2017 7

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