Credit Opinion: Landesbank Berlin AG

Credit Opinion: Landesbank Berlin AG Global Credit Research - 24 Mar 2015 Berlin, Germany Ratings Category Outlook Bank Deposits Bkd Bank Deposits Baseline Credit Assessment Adjusted Baseline Credit Assessment Issuer Rating Senior Unsecured -Dom Curr Subordinate -Dom Curr Other Short Term -Dom Curr Berliner Sparkasse Outlook Bank Deposits Issuer Rating -Dom Curr LBB Finance (Ireland) plc Outlook Bkd Senior Unsecured Bkd Subordinate Bkd Other Short Term Moody's Rating Rating(s) Under Review *A1/P-1 Aa1/P-1 ba1 baa2 **A1 **A1 Baa3 (P)P-1 Rating(s) Under Review *A1/P-1 **A1 Stable Aa1 Aa1 (P)P-1 * Rating(s) within this class was/were placed on review on March 17, 2015 ** Placed under review for possible downgrade on March 17, 2015 Contacts Analyst Phone Andrea Wehmeier/Frankfurt am 49.69.707.30.700 Main Mathias Kuelpmann/Frankfurt am Main Carola Schuler/Frankfurt am Main Torsten-Alexander Thebes/Frankfurt am Main Key Indicators Landesbank Berlin AG (Consolidated Financials)[1] [2]6-14 [2]12-13 [2]12-12 [2]12-11 [2]12-10 Avg. Total Assets (EUR million) 100,734.0101,767.0117,031.0129,679.0129,929.0 [3]-6.2 Total Assets (USD million) 137,920.0140,229.0154,292.7168,342.1174,305.4 [3]-5.7 Tangible Common Equity (EUR million) 1,493.0 1,495.2 1,251.3 1,444.1 1,510.6 [3]-0.3 Tangible Common Equity (USD million) 2,044.1 2,060.3 1,649.7 1,874.7 2,026.5 [3]0.2

Problem Loans / Gross Loans (%) -- 4.4 5.0 6.0 6.0 [4]5.3 Tangible Common Equity / Risk Weighted Assets (%) -- 5.8 4.4 4.3 4.7 [5]4.8 Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) -- 83.2 105.1 118.2 110.9[4]104.4 Net Interest Margin (%) 0.6 0.7 0.7 0.8 0.5 [4]0.7 PPI / Average RWA (%) -- 1.5 1.5 1.0 1.4 [5]1.3 Net Income / Tangible Assets (%) 0.5 0.1 0.2 0.0 0.2 [4]0.2 Cost / Income Ratio (%) 71.3 70.4 66.8 74.0 66.1 [4]69.7 Market Funds / Tangible Banking Assets (%) 33.6 52.9 57.1 60.4 66.8 [4]54.2 Liquid Banking Assets / Tangible Banking Assets (%) 35.4 44.8 41.0 44.4 47.6 [4]42.6 Gross Loans / Total Deposits (%) 45.2 74.1 75.0 68.5 67.2 [4]66.0 Source: Moody's [1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel II; IFRS [3] Compound Annual Growth Rate based on IFRS reporting periods [4] IFRS reporting periods have been used for average calculation [5] Basel II & IFRS reporting periods have been used for average calculation Opinion SUMMARY RATING RATIONALE On 17 March 2015, we placed under review for downgrade Landesbank Berlin AG's (LBB) A1 long-term debt and deposit ratings. The Baa3 rating for senior subordinated debt, the bank's ba1 standalone baseline credit assessment (BCA) and the Prime-1 short-term debt and deposit ratings were not affected by the rating action. We further maintained the bank's Aa1 rating with stable outlook for debt qualifying for `grandfathering'. Our preliminary indication of the expected outcome after the review conclusion is A2 for LBB's debt and deposit ratings. The review was prompted by the expected effects on LBB's various debt and deposit ratings resulting from the implementation of our new methodology for rating banks globally. A positive effect stems from the introduction of our advanced Loss Given Failure (LGF) analysis, which takes into account the severity of loss faced by the different liability classes across the liability structure should the bank enter resolution. However, we expect the pressure (from the European resolution regime adopted in the EU) on our current assumptions for government support to outweigh the positive effect by LGF. LBB's ba1 BCA remains unchanged under the new rating methodology. The BCA is underpinned by the group's relatively strong client franchise; and its comfortable funding profile. At the same time, the standalone BCA is constrained by the bank's modest, yet stable, financial performance. LBB BENEFITS FROM A VERY STRONG- MACRO PROFILE - LARGELY DETERMINED BY GERMAN EXPOSURES The bank's BCA benefits from its Very Strong- Macro Profile, largely determined by the German environment with very high economic, institutional and government financial strength and very low susceptibility to event risk. Operating conditions for the German banking system are, however, constrained by high fragmentation in an oversaturated market, low fee income generation and intensifying competition for domestic business. LBB's Macro Profile also captures exposures to international corporate as well as commercial real-estate (CRE) lending activities in countries with weaker Macro Profiles compared to Germany. Rating Drivers - Profitability pressured by the realignment of activities - Capitalisation remains a rating constraint - Declining concentration risks - Liquidity profile supported by strong access to customer deposits - Senior creditors benefit from LBB's strong position within the mutually supportive Sparkassen-Finanzgruppe (corporate family rating (CFR) Aa2 stable; BCA a2), and a large volume of both outstanding debt and subordinated

instruments in the unlikely event of resolution (LGF analysis) -- Moderate probability of government support, with the deposit ratings benefiting from a one-notch uplift from the BCA Rating Outlook LBB's A1 long-term debt and deposit ratings are on review for downgrade. The review will focus on the analysis of the bank's liability structure, most notably the expected waterfall within its deposit and debt classes in resolution and the respective volume of each debt class and on systemic support. We will use the review for a validation of the results of our LGF analysis, which indicates a very low loss-givenfailure for senior unsecured debt and junior deposits. Absent major changes from the validation, we will position LBB's Preliminary Rating Assessment (PRA) for these liability classes two notches above the Adjusted BCA. Our revised assessment of government support that we factor into LBB's senior debt and deposit ratings will likely result in a reduction to one from the current four notches. LBB is subject to the European resolution regime (Bank Recovery and Resolution Directive, or BRRD), which the German government has implemented with effect from 1 January 2015. What Could Change the Rating - Up As reflected in the review, there is no upward pressure on senior long-term ratings. Upward rating pressure on LBB's ba1 BCA could develop if the bank demonstrates a sustainable improvement in its financial metrics, including capitalisation and profitability. What Could Change the Rating - Down A downgrade of LBB's standalone BCA could be prompted by (1) a halt in the recently improving trend in LBB's capitalisation; and (2) a period of extended earnings pressure during the restructuring period. The aforementioned conditions for a downgrade include restructuring charges affecting the bank's capitalisation or significantly increased leverage following the reorganisation of LBB. Pressure on LBB's A1 long-term ratings could arise from a weaker intrinsic strength. A weakening of cross-sector support mechanisms could also negatively affect the long-term ratings. However, we believe that these developments are unlikely. Our revised assessment of government support that we factor into LBB's senior debt and deposit ratings will likely result in a reduction to one from the current two notches, probably outweighing the positive effects from LGF. Downward pressure could be exerted on the long-term deposit ratings if the cushion for deposits via subordination or the amount outstanding for senior debt declines substantially. DETAILED RATING CONSIDERATIONS PROFITABILITY REMAINS MODEST AND PRESSURED BY THE REALIGNMENT OF ACTIVITIES We expect LBB's earnings to become more stable and predictable following the partial transfer of the capital markets business and continued downsizing and de-risking of its investment portfolio. Nevertheless, the bank's profitability will remain under pressure at least during the next two years driven by (1) charges arising from the realignment that exceed current expectations; (2) potential losses resulting from LBB's higher-risk legacy investments and problem loan book; (3) the ongoing capital strengthening efforts and downsizing of assets, which could pressure income while costs are likely to be reduced over the medium term and (4) the spin-off of its most profitable business segment commercial real estate at its former subsidiary, now sister-company Berlin Hyp AG (Berlin Hyp, Deposits A2 ratings under review for possible downgrade, BCA ba2). While the significant reduction in LBB's balance sheet has reduced the higher risks typically associated with longterm asset lending and capital market activities, overall business volumes and earnings will also be affected. This reduction in business volumes could leave LBB with diminished loss absorption capacity to withstand potential losses arising from its legacy structured credit investments and legacy problem loans, which we expect it to retain after the reorganisation. These challenges have the potential to limit LBB's ability to strengthen capital levels from retained earnings when phasing in the higher capital requirements under the Basel III framework, as reflected in the assigned Profitability score of b1.

We view LBB's profitability as modest, as expressed through its moderate pre-provision income (PPI) -to-rwa ratio of 1.3% in H1 2014 (after 1.6% both in 2013 and in 2012). While we acknowledge LBB's ability to generate stable interest and fee income from its client-driven businesses, its capital-market activities (which will be discontinued) have regularly contributed to earnings volatility in the past. Additionally, special efforts to strengthen the bank's and the banking group's capitalisation have negatively affected the bank's profitability, which was also generally pressured by the low-yield environment. LBB benefits from a well-established regional franchise via the operations of Berliner Sparkasse. The bank is headquartered in Berlin, and services the Berlin area via retail and commercial banking operations, in which Berliner Sparkasse commands leading market positions. In addition, LBB has a sizeable payment services business, and is Germany's largest issuer of fee-charging credit cards. The German Savings Bank Association (Deutscher Sparkassen-und Giroverband or DSGV) - i.e., the umbrella organisation of S-Finanzgruppe - is consolidating the commercial real estate (CRE), capital markets and retail banking activities of LBB as well as its subsidiary Berlin Hyp and DekaBank Deutsche Girozentrale (DekaBank, Deposits A1 ratings under review for possible upgrade; BCA baa2). Under the realignment plan, LBB will be scaled back to its core Berliner Sparkasse and focus on retail banking in Berlin, but will also provide CRE business in the Berlin area and certain services for S-Finanzgruppe. As a consequence, the bank changed its market presence from LBB to Berliner Sparkasse as at 1 January 2014. While the commercial and legal status of LBB remains unaffected, the bank will conduct most of its future business activities under the Berliner Sparkasse brand (with the exception of its treasury management and the national credit card business). LBB's customer-oriented capital market activities, including asset management, were transferred to DekaBank as of January 2014. Berlin Hyp will continue to provide CRE finance focused on Germany, with the opportunity to gain greater visibility in the market. Berlin Hyp wasspun off from LBB as of January 2015; although both will stay under the ownership of Landesbank Berlin Holding AG (LBBH; unrated). CAPITALISATION REMAINS A RATING CONSTRAINT The assigned Capital score of ba1 is based on our expectations of an improving capitalisation metrics after the spin-off of Berlin Hyp as of January 2015, though high leverage still negatively impacts the score. Because of its weak quality, we view the bank's current capitalisation as only satisfactory in view of its low internal capital generation capacity. Our view is supported by the ECB's Comprehensive Assessment, whereby, in the adverse scenario, the CET1 ratio falls to 6.8%, below the 9.1% average for Germany (for LBBH). The reported Tier 1 capital ratio at LBB's non-operating (unrated) ultimate parent company S-Erwerbsgesellschaft Gruppe stood at a satisfactory 12.4% under Basel III as of 30 June 2014 (unaudited). For regulatory purposes, capitalisation requirements are assessed at the level of LBB's ultimate parent company. However, LBB's tangible common equity of 5.8% as a percentage of risk-weighted assets and -- as of 30 June 2014 -- was much lower. In order to address these challenges linked to the phase-in of certain hybrid capital elements, the bank initiated a capital requirements reduction programme in 2012, which cut risk-weighted assets to EUR25.6 billion as of 2013 from EUR34.0 billion as of year-end 2011. DECLINING CONCENTRATION RISKS After the spin-off of Berlin Hyp, LBB's concentration risks haven been reduced especially in the Commercial Real Estate sector, limiting downside risks to capitalisation even under our adverse scenario. The bank's asset quality largely reflects its exposures held within its capital markets portfolio. Although the bank's sizeable financial assets of EUR26 billion (26% of total assets) as at 30 June 2014 have declined from more than EUR54 billion in 2008, in our view these assets still represent a significant driver of income volatility. By year-end 2013, LBB had invested EUR3.3 billion in structured credit products. We believe that LBB has taken appropriate measures to offset any potential negative impact of these instruments. In our view, exposures to sovereign risk from euro-area periphery countries are also manageable. However, the overall level of gross non-performing loans remains high relative to reserves plus equity at 79%, although the volume of loans decreased to EUR1.8 billion as of year-end 2013 (2011: EUR2.9 billion), a factor captured in our assigned Asset Risk score of ba2. Compared with its peers in the German market, the relatively moderate level of new problem loans suggests the continued implementation of LBB's more effective and disciplined underwriting policies in the years preceding the 2008-09 global financial crisis. Our view is supported

by the very limited impact of the Asset Quality Review as part of the ECB's Comprehensive Assessment, where LBB's impact was just 8 basis points (bps), well below the German and EU average. LIQUIDITY PROFILE SUPPORTED BY STRONG ACCESS TO CUSTOMER DEPOSITS We expect LBB's funding profile to improve as a result of (1) limited additional new funding needs in light of balance sheet de-leveraging; and (2) its stronger focus on retail activities and good access to retail-driven funding sources. We consider LBB's liquidity profile to be satisfactory and note that it has improved in recent years, reflected in an average loan-to-deposit ratio of 115.2% as at year-end 2013 (according to Moody's definitions: 2012: 121.2%; 2011: 129.3%) and reflected in the assigned Funding Structure score of ba1. LBB's EUR36 billion customer liabilities accounted for 35% of its total balance sheet as of 30 June 2014. H1 2014 financials that exclude Berlin Hyp's funding position result in a -6.6% market funds ratio and an average loan to deposit ratio of 94%. Our view of LBB's baa1 Liquid Resources score is based on its stable funding access in the savings banks sector and its well diversified funding profile, which includes interbank funds, senior unsecured bonds, promissory note loans as well as a proportion of Pfandbriefe (covered bonds). The bank further benefits from its large depositgathering activities via Berliner Sparkasse, which reported EUR15.3 billion retail and EUR4.8 billion corporate customer deposits as at year-end 2013 (56% of LBB's customer liabilities). Furthermore, as of year-end 2013, guaranteed (`grandfathered') debt, issued under the previous public guarantees available to LBB, amounted to approximately EUR9.4 billion and will largely mature by year-end 2015. We understand that the bank holds assets with a closely matched maturity profile; therefore we do not expect a funding gap to occur at the maturity date of the `grandfathered' bonds. Notching Considerations AFFILIATE SUPPORT LBB benefits from cross-sector support from Sparkassen-Finanzgruppe. Cross-sector support materially reduces the probability of default, as it would be available to stabilise a distressed member bank, and not just compensate for losses in resolution. We continue to consider the readiness of the sector to support its members to be very high. This particularly applies to LBB given its 100% indirect ownership by the sector's savings banks. Cross-sector support continues to provide two notches of rating uplift to LBB's debt, deposit and subordinated instrument ratings. LOSS GIVEN FAILURE LBB is subject to the EU Bank Resolution and Recovery Directive, which we consider to be an Operational Resolution Regime.We therefore apply our LGF analysis, considering the risks faced by the different debt and deposit classes across the liability structure at failure. We assume residual tangible common equity of 3% and losses post-failure of 8% of tangible banking assets, a 25% run-off in "junior" wholesale deposits, a 5% run-off in preferred deposits, and assign a 25% probability to deposits being preferred to senior unsecured debt. These ratios are in line with our standard assumptions. Our LGF analysis indicated a very low loss-given-failure for wholesale deposits, leading us to position the Preliminary Rating Assessment (PRA) two notches above the bank's Adjusted BCA. Our LGF analysis also indicated a very low loss-given-failure for senior unsecured debt, leading us to position their Preliminary Rating Assessment (PRA) also two notches above the bank's Adjusted BCA. We assign a Baa3 local-currency debt rating for senior subordinated debt instruments, which carry a stable outlook. This rating is one notch below LBB's baa2 adjusted BCA which reflects our estimate of support that will likely be made available as `going-concern support'; this principally applies to support from the cross-sector joint liability scheme (Haftungsverbund), which we believe is available for the benefit of all classes of debt. GOVERNMENT SUPPORT The implementation of the BRRD has caused us to reconsider the potential for government support to benefit certain creditors. We now expect a moderate probability of government support for deposits and senior unsecured debt, resulting in a one-notch uplift to the PRA. Our revised systemic support assumptions included in LBB's

ratings reflect the size and high systemic relevance, at the domestic level, of the group of public sector banks. 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. Rating Factors Landesbank Berlin AG Macro Factors Weighted Macro Profile Very Strong - Financial Profile Factor Historic Ratio Macro Adjusted Score Solvency Asset Risk Problem Loans / Gross Loans Credit Trend Assigned Score 5.1% baa2 ba2 Expected trend Capital TCE / RWA - - ba1 Nominal leverage Profitability Net Income / Tangible Assets Combined Solvency Score Liquidity Funding Structure Market Funds / Tangible Banking Assets Liquid Resources Liquid Banking Assets / Tangible Banking Assets Combined Liquidity Score 0.2% b1 b1 - ba2 52.9% b2 ba1 Market funding quality 44.8% aa2 baa1 Encumbrance baa3 baa3 Financial Profile ba1 Qualitative Adjustments Adjustment Business Diversification 0 Opacity and Complexity 0 Corporate Behavior 0 Total Qualitative Adjustments 0 Key driver #1 Key driver #2 Expected trend Sovereign or Affiliate constraint Aaa

Scorecard Calculated BCA range baa3 - ba2 Assigned BCA ba1 Affiliate Support notching 2 Adjusted BCA baa2 Instrument Class Loss Given Failure notching Additional notching Preliminary Rating Assessment Government Support notching Local Currency rating Deposits -- -- -- -- A1 RUR Possible Downgrade Senior unsecured bank debt Dated subordinated bank debt -- -- -- -- A1 RUR Possible Downgrade -1 0 baa3 0 Baa3 Foreign Currency rating A1 RUR Possible Downgrade 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. 2015 Moody s Corporation, Moody s Investors Service, Inc., Moody s Analytics, Inc. and/or their licensors and affiliates (collectively, MOODY S ). All rights reserved. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND ITS RATINGS AFFILIATES ( MIS ) ARE MOODY S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY S ( MOODY S PUBLICATIONS ) MAY INCLUDE MOODY S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY S OPINIONS INCLUDED IN MOODY S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY S ANALYTICS, INC. CREDIT RATINGS AND MOODY S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE. MOODY S CREDIT RATINGS AND MOODY S PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL

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