DZ BANK RESEARCH 2/15 FINANCIAL INSTITUTIONS EBS BUILDING SOCIETY 11 NOV 2009

Transcription

1 1/15 FINANCIAL INSTITUTIONS A Research Publication by DZ BANK AG EBS Building Society BONDS Legal form: Mutual Society The EBS Building Society 2) is one of two remaining building societies in Ireland. A building society is a company which is owned by its customers (borrowers and investors), and there are consequently no institutional investors. Half-year loss In the first half of 2009 the Irish EBS Building Society reported a pre-tax loss of EUR 9m (1H08: profit of EUR 27m). The main negative factor was significantly higher risk provisions of EUR 44m (EUR 5m). NAMA EBS expects loans to property developers with a volume of EUR 500m and associated mostly performing loans of another EUR 500m to be transferred to the Irish Bad Bank NAMA. EBS predicts that the discount on the book value of the loans could amount to 25% to 30%, significantly denting earnings. By its own admission, EBS is therefore reliant on subsequent state recapitalisation of at least EUR 300m, made possible via a change to the Building Society Act. Credit Focus 11 Nov 2009 SENIOR UNSECURED RATINGS Moody s: A2 neg. Standard & Poor s: n/a Fitch: BBB neg. CRESTA-SCORE: A- COVERED BOND RATINGS Moody s: Standard & Poor s: Fitch: Aaa n/a AA Covered-Bond-Programme EBS currently has two ACS with a total volume of EUR 2.35bn outstanding used for repo transactions with the Irish central bank. On the reporting date, 31 September 2009, the cover assets for the EBS covered bonds consisted of 37,838 mortgage loans secured with Irish properties for property ownership with a total volume of around EUR 3.4bn.

2 DZ BANK RESEARCH 2/15 COMPANY PROFILE The EBS Building Society is one of two remaining building societies in Ireland. A building society is a company which is owned by its customers (borrowers and investors), and there are consequently no institutional investors. This has the advantage that profits do not have to be paid out in the form of dividends, but can be fully retained or respectively passed on to customers in the form of favourable terms for financial products and services. However, on the other hand, opportunities to strengthen the capital base with capital measures are also therefore limited. Legal form: Mutual Society In addition to mortgage loans, EBS also provides savings products, investment funds, credit cards and life and buildings insurance. Lending to property developers was halted in April In the first half of 2009, EBS increased its market share of new residential mortgage loans to 18.5% and of new retail deposits to 16.2%. Business focus on residential mortgages INTERIM RESULTS 2009 In the first half of 2009 the Irish EBS Building Society reported a pre-tax loss of EUR 9m (1H08: profit of EUR 27m). The main negative factor was significantly higher risk provisions of EUR 44m (EUR 5m). Much higher costs for refinancing via deposits and the capital market and commission for state guarantees also dented interest income. The net interest margin declined correspondingly by 11 to 66 basis points. Thanks to an extraordinary profit of EUR 5m from the repurchase of its own bonds at discounts of between 3% and 34% to the nominal value, but also as a result of a reduction in operating expenditure (-8.3%), operating profit before risk provisions improved from EUR 32.0m to 35.1m. Pre-tax loss of EUR 9m in first half of 2009 SELECTED P&L DATA (EURm) 1H2008 1H2009 Net interest income % Net provision income % Other operating income % Partial operating income % Operating expenses % Operating profit before LLP % Loan loss provisions % Net income % Source: EBS Building Society As expected, credit quality has deteriorated further. EBS reports 3.9% of the loans in its retail loan book (EUR 14.8bn) as non-performing, but the Credit Risk Committee is charged with ensuring that an appropriate level of credit risk insurance is being maintained on higher loan to value lending. The situation is much more dramatic in relation to commercial credits and loans to property developers (EUR 2.2bn). Here EBS reports 20.1% of loans as non-performing! However, a large proportion of these loans should meet the criteria for transfer to the Irish Bad Bank NAMA (see below). Further deterioration of credit quality Around 90% of the credit portfolio is secured by residential properties. Cover from risk provisions here is around 30 basis points. The remaining 10% of loans are

3 DZ BANK RESEARCH 3/15 secured with commercial properties and land. We calculate the cover here to be around 9.14%. LOAN BOOK AND LOAN PROVISIONS (EUR m) Credit volume Provisions Cover ratio Residential Property 15, % Commercial 1, % Development Finance % 17, % Source: EBS Building Society Refinancing is mainly via deposits from retail (EUR 5.8bn) and corporate customers (EUR 4.5bn) (total 49% of refinancing). EBS also has bonds, CDs, promissory notes, CPs and securitisations with a total of EUR 4.5bn outstanding (around 22% of refinancing). Of these, EUR 1.3bn fall due within the next 12 months and another EUR 1.7bn in the subsequent 12 months. In addition there are also interbank liabilities of EUR 5.9bn (around 29% of refinancing), likely to consist mainly of funding via the ECB. Half of refinancing via deposits The Core Tier 1 and Tier 1 ratios were low at the end of June at 5.3% and 7.7% respectively. Recapitalisation is planned via the Irish government in conjunction with the transfer of loans to NAMA (see below) and should help improve the capital ratios. Capital adequacy weak SELECTED BALANCE SHEET DATA (EURm) 1H2008 1H2009 Total assets 21,374 22,167 4% Loans to banks 1,288 1,392 8% Loans to customers 16,901 17,036 1% Securities 2,741 3,151 15% Due to banks 6,104 5,931-3% Due to customers 10,126 10,345 2% Debt in issue 3,683 4,481 22% Tier 1 capital* % Total capital 1,027 1,058 3% Source: EBS Building Society; *approximated based on RWA and capital ratios One positive feature is that EBS expects the credit cycle to have bottomed out last year with an annual loss of EUR 38m, and that the second half of 2009 will be better. In the second quarter of 2009 EBS also reported an increase in mortgage applications (+45% compared to 1Q09), a positive sign for the Irish property market. In terms of margins, EBS expects these to reach an unsustainably low level for banks and building societies with an inevitable increase in future years. EBS: credit cycle has bottomed out

4 DZ BANK RESEARCH 4/15 FUNDAMENTALE SCORE Based on the half-year results the fundamental score is in the range of BBB. Fundamental score: In the range of BBB (%) 1H2008 1H2009 Size 6 Total assets (EURm) 21,374 22,167 Profitability 4 Net interest margin Recurring earnings power RoE RoA Efficiency 9 Cost/ income ratio Cost/ total assets Asset quality 8 LLP/ operating profit before LLP LLP/ Loans and securities Capital 7 Equity ratio Tier 1 ratio Total capital ratio Total score 6,5 Source: DZ BANK NAMA So far the following details have been announced for the Irish Bad Bank NAMA:! Total loans with a book value of EUR 77bn will be transferred. Lenihan Estimated discount: 30% estimates that an average discount of 30% will be applied, and that these loans will be valued at EUR 54bn the long-term economic value. According to Lenihan, the current market value is around EUR 47bn.! Starting with the largest loan exposures, most loans will be transferred to NAMA by the middle of next year.! The banks will bear 5% of the risks. We interpret this as meaning that the banks will receive state-guaranteed senior bonds with a countervalue of 95% of the loans transferred and subordinated bonds with a value of 5%.! As a result of the transfer of the loans, some banks will require new equity capital. The banks and building societies will preferably raise this from private lenders making use of all opportunities. The Irish government is, however, prepared to provide sufficient equity capital, should the banks efforts be unsuccessful. However, this is dependent on the banks presenting a restructuring plan in line with the criteria laid down by the EU Commission. Irish government available for recapitalisation

5 DZ BANK RESEARCH 5/15! Should NAMA make a loss (at the end of the scheduled maturity of ten years), this will be transferred to the banks via a special tax. The NAMA legislation was approved at the parliamentary committee level last week and is to be approved by parliament at the beginning of November. EBS expects loans to property developers with a volume of EUR 500m and associated performing loans of another EUR 500m to be transferred to the Irish Bad Bank NAMA. EBS predicts that the discount on the book value of the loans could amount to 25% to 30%, significantly denting earnings. By its own admission, EBS is therefore reliant on subsequent state recapitalisation of at least EUR 300m, made possible via a change to the Building Society Act. A recapitalisation of EUR 300m would match the discount on loans to be transferred to NAMA (30% on loans of EUR 1bn). Since EBS has already built provisions of around EUR 160m for these loans and the size of risk-weighted assets will be reduced after the loan transfer, the capital ratios should improve. EBS plans to transfer loans of EUR 1bn State recapitalisation of at least EUR 300m NEW STATE GUARANTEE FOR IRISH BANKS In addition to the opportunity to transfer loans to property developers, the Irish government plans to give the banks a helping hand with a new state guarantee for bank liabilities (Credit Institutions (Eligible Liabilities Guarantee) Scheme 2009, ELG Scheme). The draft proposals are as follows: New guarantee will only apply to newly issued liabilities! The guarantee under the ELG Scheme will be unconditional and irrevocable and will guarantee timely servicing.! Those eligible for participation in the ELG Scheme are system-relevant solvent banks, already identified by the Finance Minister as entitled to participate in the old guarantee system (Credit Institutions (Financial Support) Scheme 2008, CIFS Scheme).! The following will be covered: a) All deposits, b) Primary unsecured certificates of deposit, c) Primary unsecured Commercial Paper and d) Other primary unsecured bonds.! The existing state guarantee for deposits will also therefore remain in place under the ELG Scheme. Banks affected can apply for a gradual reduction in the guarantee, enabling them to also accept deposits without the protection of the state guarantee.! All bank liabilities covered under the old guarantee, will remain covered even after the new guarantee has come into effect until the end of the old guarantee period (29 September 2010). "Old" guarantee to remain in place until September 2010! From the commencement of the ELG Scheme, newly established bank liabilities will only be covered via the ELG Scheme.

6 DZ BANK RESEARCH 6/15! Tier 2 bonds and ACS issued after the ELG Scheme has come into effect are not covered either by the old or the new guarantee system. In contrast, any Tier 2 bonds and ACS already guaranteed under the CIFS Scheme, will still be guaranteed.! Liabilities covered by the new guarantee system (ELG Scheme) may report maturities of a maximum of five years. The issuing period for liabilities will extend from the date when the ELG Scheme comes into effect up to 29 September 2010 provided the EU Commission grants its approval. However, a guarantee will only be issued on application.! The recommendations of the ECB for the market-conform pricing of state guarantees will apply to liabilities covered by the ELG Scheme. Overall, the proposed regulations therefore largely correspond to those already in existence in other European countries. However, there is one major difference: while the issuing window in the rest of Europe is restricted to at the latest (in the USA an extension to is being considered as an emergency programme for certain banks, although a heavy fine of at least 3% p.a. would then be payable), Irish banks will be permitted to issue state-guaranteed bonds up to September However, this is probably due to the fact that Irish banks have had to wait for such a guarantee for long-term liabilities since the beginning of the year, and therefore have pent-up demand for the guarantee of medium-term capital market fundings. Regulations correspond to those in other countries, only the issuing period differs BANKING CONSOLIDATION IN IRELAND In recent months, there have been increasing rumours about a possible merger of EBS Building Society (A2 neg./--/ BBB *-), Irish Nationwide Building Society (Baa3 *- /--/BBB-) and the banking subsidiary of Irish Life & Permanent (A2 neg./ BBB+ stab./--). This could lead to the emergence of a third strong banking group in addition to the two market leaders Allied Irish Bank and Bank of Ireland. We regard such efforts at streamlining loan books via NAMA and appropriate recapitalisation as sensible, and this could have a stabilising effect on the rating trends of these banks. Merger of three banking groups? FITCH-RATING In response to the announcement of the details of the Irish Bad Bank NAMA, Fitch had reduced the rating for the primary unsecured liabilities of the EBS Building Society by one notch to BBB. A further downgrade is also on the cards. The rating of EBS Tier 1 bonds has been downgraded to B*-. Fitch has also revised down the financial strength rating from C/D to E. True, Fitch is taking account of the positive consequences for the medium and long-term trend at the banks, since the banks are being relieved of a burden and can concentrate on the more resilient traditional credit business. In the agency s view, the banks will return to profit earlier, provide the domestic economy with more credit and improve their liquidity. The restructuring should also help to rehabilitate the money and capital markets. On the other hand, an average discount of 30% will be applied to the loans which are to be transferred. The resulting losses will exert pressure on the ratings of some Irish banks.

7 DZ BANK RESEARCH 7/15 According to Fitch, capitalisation at EBS was already in short supply before the announcement of the NAMA discount. Following the transfer of the loans to NAMA, EBS will be reliant on external support. Fitch has therefore cut its issuer rating to BBB- and the rating for primary unsecured liabilities to BBB. The latter is under review for a further downgrade. The reason why bonds have so far carried a rating one notch higher than the issuer rating for EBS and the further review is that, in the case of insolvency, the deposits of members of the building society will be serviced subordinate to normal bond creditors. However, Fitch sees a danger that the consolidation in the Irish banking sector might alter the status of EBS as a building society and that the structural superiority of the senior bonds might disappear. The expected external support and the resulting greater likelihood of a loss being shared has also prompted Fitch to cut the rating for the Tier 1 bonds of EBS from BB+ to B. OUR ASSESSMENT Forecasts relating to the trend in the Irish economy and the Irish property market make it clear that Irish banks are facing further substantial loan defaults, not only this year, but also in The creation of the Irish Bad Bank NAMA is an important and necessary step in this respect, to at least liberate the banks from the exposures most at risk of default. The proposed discount of 30% on the book value of the loans at the time of transfer is relatively high and could lead to further losses at the Irish banks. However, this will be immediately balanced out by recapitalisation measures, where as in the case of EBS these are effected as required via the Irish government. Paradoxically, a potentially even higher discount is to be welcomed, since this would enable a large proportion of the expected credit defaults and provisions to be immediately worked off /brought forward and the negative consequences for equity capital to be directly balanced out. NAMA is an important step towards stabilising the banks Irrespective of the relief provided via NAMA, uncertainty remains concerning the timing and extent of a recovery in the economy and the property market and the effects on the profitability and credit quality of EBS. Refinancing via deposits has also become much more expensive because of tough competition and will equally put pressure on profits as the costs of the recapitalisation. While the remuneration of these special shares may be lower than that of Preferred Shares issued by commercial banks to governments (9% to 12%), it will still be a drag on profits. We maintain our CRESTA-SCORE of A- for senior unsecured bonds, which takes account of the high probability of state support extending beyond the forthcoming recapitalisation. At the same time we would like to point out that downward risks are currently dominant. Besides the negative factors weighing on EBS fundamentals the possibly upcoming concentration process within the Irish banking sector as well as the political sentiment with regard to further support measures should also be monitored closely. CRESTA-SCORE: A-

8 DZ BANK RESEARCH 8/15 COVER ASSETS EBS currently has two ACS with a total volume of EUR 2.35bn outstanding used for repo transactions with the Irish central bank. On the reporting date, 31 September 2009, the cover assets for the EBS covered bonds consisted of 37,838 mortgage loans secured with Irish properties for property ownership with a total volume of around EUR 3.4bn. While the Irish legislation on the issuing of ACS requires only a cash minimum surplus cover of 3%, EBS has obviously voluntarily committed itself to retaining surplus cover of at least 21%. With a cash value surplus cover of 34%, both requirements are currently clearly being met. Below we list the most important key data for the cover pool: Surplus cover requirements clearly met at 34% DATA FOR COVER ASSETS Volume of the pool (EUR) 3,425, Covered bond volume outstanding (EUR) 2,350, Surplus cover (cash) 33.61% Surplus cover (nominal) 46.94% Average loan size (EUR) 90,541 Number of loans 37,838 Average weighted maturity (months) 58 Average weighted residual maturity (months) 251 Average weighted currrent loan-to-value (indexed) (%) Average weighted original loan-to-value (%) Proportion of loans with a variable interest rate (%) Average weighted interest rate 2.99% Source: EBS Building Society The cover pool consists solely of private mortgage loans issued within Ireland. From a geographical perspective, the main focus (70.62%) is very clearly on the province of Leinster including the capital city Dublin in terms of the volume of property loans contained in the cover assets; followed by the province of Munster in the south of Ireland with 18.79% and the provinces of Connacht and Ulster in the west and north of the island respectively (10.59%). Main focus on Greater Dublin GEOGRAPHIC BREAKDOWN OF THE COVER POOL Connacht/ Ulster; 10,59% M unster; 18,79% Dublin ; 41,13% Rest Leinster; 29,49% Source: EBS Building Society

9 DZ BANK RESEARCH 9/15 TREND IN AVERAGE LOAN-TO-VALUE PROPORTION OF NON-PERFORMING LOANS IN COVER POOL 65% 64% loans > 3 months arrears; 1,18% 63% 62% 61% 60% 59% 58% LTV (indexed) 57% 56% 01/ 09 02/ 09 03/ 09 04/ 09 05/ 09 06/ 09 07/ 09 08/ 09 09/ 09 performing loans; 98,82% Source: EBS Building Society Source: EBS Building Society The average indexed loan-to-value of the mortgage loans contained in the cover pool currently amounts to 63.61% and is therefore around 4.5% above the level at the beginning of the year (58.98%). The increase reflects the decline in property prices in Ireland. The average house price in Ireland has therefore continued to fall this year, having already declined by an average of 9.4% in Overall, a further price decline of around 10% has to be expected in full-year 2009, and the trend is likely to persist initially next year with property prices down again by an average of 5%. The trend in property prices has resulted in 13.1% of the loans in the cover pool already currently exceeding the market value of the properties (loans >100% indexed LTV). This is a level which, based on the continuing decline in property prices, will increase further and will have to be kept under review. The proportion of non-performing loans or respectively loans showing payment arrears of longer than three months was however still moderate at around 1.18% on the reporting date and thus well below the level for EBS s total retail portfolio (3.9% per ). In addition, insurance is in place on higher loan to value lending. Indexed LTVs continuing to grow Ratings At the end of September Fitch downgraded the outstanding covered bonds (Mortgage Covered Securities) of the EBS Building Society by two notches from AAA to AA. This move had been preceded by the one-notch downgrade of the longterm rating of the EBS Building Society to BBB in response to the announcement of the details of the Irish Bad Bank NAMA. EBS covered bonds lost the best rating from Fitch in September The downgrade of the EBS covered bond rating was directly connected with the weaker issuer rating. Based on a strict interpretation of Fitch s rating method, given a long-term rating of BBB and a discontinuity factor of 13.2% applied to the covered bond programme, the covered bond rating is A+. However, based on EBS s voluntary commitment to maintain minimum surplus cover of 21% at all times, Fitch awards a rating two notches higher of AA. Downgrade connected with new weaker issuer rating In contrast, Moody s last confirmed the Aaa rating for the ACS of EBS on 30 June The rating agency awards the covered bond programme a Timely Payment Indicator (TPI) of probable-high. Based on a strict interpretation of the Moody s Moody s still values ACS at Aaa

10 DZ BANK RESEARCH 10/15 rating methodology, the covered bond rating would only therefore be at risk if the issuer rating were downgraded by two notches to Baa1. In April Moody s attached a negative outlook to the issuer rating (A2). The Irish ACS market SWAP SPREADS OUTSTANDING ACS Swapspreads in bp BoI WestLB Maturity Source: DZ BANK The Irish ACS market currently consists of fifteen publicly placed ACS in the Jumbo format with a total volume of just under EUR 30bn. In terms of the outstanding volume, the lion s share of EUR 17.5bn relates to the outstanding bonds of DEPFA ACS, 100% of which belong to the now fully nationalised Hypo-Real-Estate-Holding AG. In addition to West LB, which has only one ACS outstanding, so far only the AIB Mortgage Bank and the Bank of Ireland are still active with three publicly placed ACS respectively. The outstanding ACS of the two Irish banks are currently still benefiting from the state guarantee announced by the Irish government last autumn. However, this is restricted to two years and runs out on 29 September next year. Although, in our view, the Irish ACS legislation provides a high level of creditor protection, fundamental market sentiment even against the background of the continuing price decline and the economic downturn in Ireland - is only cautiously optimistic. However, in September, the Bank of Ireland successfully placed a fiveyear ACS at midswaps basis points. The first public issue since the outbreak of the financial crisis has now narrowed by around 30 basis points and is still one of the cheapest covered bonds in the eurozone. DEPFA ACS have dominated Irish ACS market so far

11 DZ BANK RESEARCH 11/15 Overview of the important characteristics of the ACS legislation The ACS issued on the basis of the Irish Asset Covered Securities Act are securities secured by mortgage loans or respectively local authority loans entered in the pledge register. Irish ACS The refinancing of mortgages or government loans by issuing Irish ACS may only be undertaken by issuers with the status of a designated bank. Permission to do so is granted by the Irish central bank. The extent and type of the business activities permitted, both the main areas of activity and also ancillary business, are positively defined within the legislation; i.e. only activities mentioned in the legislation are permitted. Special bank principle The cover assets for mortgage ACS, commercial mortgage ACS and public sector ACS must be entered in separate pledge registers. Pledge register By issuing mortgages and commercial mortgage ACS and public sector ACS, unlimited refinancing may be carried out with mortgage loans and public sector loans from the EMR zone, and to a limited extent also from Canada, Japan, the USA, Australia, New Zealand and Switzerland. Limited circulation Ordinary cover For private mortgages or public sector loans, the obligatory surplus cover is 3% and for commercial mortgage loans 10%. The amounts are calculated in cash for all three ACS classes. The ACS issuers are also contractually committed to retaining nominal surplus cover of 5%. Surplus cover requirements In the case of the insolvency of the issuer, the cover assets do not form part of the insolvency assets. They are to be used solely to meet the claims of the ACS creditors. The ACS creditors enjoy a prior claim in the case of the insolvency of the issuer. Status of cover assets The law lays down the fundamental regulations regarding congruent maturities, interest and exchange rates in relation to ACS bonds for the cover pool, as specified in the guidelines issued by the Irish financial regulatory authority. For example, in order to test the sensitivity of the cover pool in relation to interest changes, stress scenarios must be calculated every week based on a cash calculation. The swap curve is used as a basis for calculating the cash values of the cover assets and the covered bonds in circulation. In the stress scenarios the respective cash values will then be calculated initially on the basis of a swap curve adjusted upwards and downwards by 100 basis points. The calculation is then carried out again with a swap curve rotated on the basis of an established formula. The losses resulting from changes in interest rates simulated in this way may not exceed 10% of the share capital and reserves in any of the cases examined. Risk regulations The Irish central bank monitors adherence to the general banking regulations contained within the Irish ACS legislation. A monitor ensures that the interests of ACS creditors are taken into account and that the legal requirements for the cover pool are met. Supervision

12 DZ BANK RESEARCH 12/15 IMPRINT Published by: DZ BANK AG Deutsche Zentral-Genossenschaftsbank, Platz der Republik, Frankfurt am Main Board of Directors: Wolfgang Kirsch (Chief Executive Officer), Lars Hille, Wolfgang Köhler, Hans-Theo Macke, Albrecht Merz, Thomas Ullrich, Frank Westhoff Responsible: Klaus Holschuh, Head of Research and Economics Responsible: Dr: Jan Holthusen, Head of Fixed Income Research, Tel.: +49 (0) , DZ BANK AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main 2009 This document may be reproduced only with the permission of DZ BANK AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main TIME CONDITIONS OF ENVISAGED UPDATES BOND ANALYSES ("CORPORATE BONDS AND EUROBONDS OF EMERGING MARKETS") DZ BANK maintains lists of certain issuers which issue bonds and for which recommendations are published ("Masterliste for Corporates and for Emerging Markets"). The main criteria for including or deleting an issuer are the fungibility and good market liquidity of bonds of this issuer. The inclusion or deletion of issuers in the master list at any time is subject to the sole discretion of DZ BANK. A comment or summary (list of recommendations) is prepared at least quarterly for the companies and countries in the Masterliste. In order to comply with the regulations of the Securities Trading Act, it is possible that the publication of financial analyses may be restricted at any time without any prior announcement for individual issuers in the Masterliste. RESPONSIBLE SUPERVISORY AUTHORITY Bundesanstalt für Finanzdienstleistungsaufsicht, Lurgiallee 12, Frankfurt am Main, Germany RESPONSIBLE COMPANY DZ BANK AG Deutsche Zentral-Genossenschaftsbank, Platz der Republik, Frankfurt am Main, Germany RESEARCH ANALYST COMPENSATION Research analysts are not compensated for specific investment banking transactions. The author(s) of this report receive(s) compensation that is based on (among other factors) the overall profitability of DZ BANK, which includes earnings from the firm s investment banking and other businesses. DZ BANK generally prohibits its analysts, persons reporting to analysts, and members of their households from maintaining a financial interest in the securities or futures of any companies that the analysts cover. CERTIFICATION Each DZ BANK research analyst who is involved in the preparation of this research report certifies that: a) the views expressed in the research report accurately reflect such research analyst s personal views about the subject securities and issuers; and b) that no part of his or her compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in the research report. THE NUMERICAL ANNOTATIONS IN THE TEXT REFER TO THE NUMBERING OF THE NOTES BELOW (1-9) DZ BANK and/or its respective affiliate(s) 1) beneficially owns 1% or more of any class of common equity securities of the subject company, 2) has managed or co-managed a public offering of securities of the subject company within the past 12 months, 3) beneficially makes a market in, or undertakes the designated sponsor responsibilities of, the subject company. As such, the market maker may have an inventory position, either "long" or "short", in the relevant security and may be on the opposite side of orders executed on the relevant exchange, 4) beneficially has received during the past 12 months compensation for investment banking services from the company, its parent, or its wholly owned or majority-owned subsidiary, 5) holds a trading position, as that term is defined by German law, in shares of the company whose securities are subject of the research, 6) entered into an agreement concerning the preparation of financial analysis with issuers of financial instruments, if these or financial instruments issued by them are the subject of the financial analysis, 7) beneficially expects to receive or intends to seek compensation for investment banking services in the next 3 months from the company, its parent, or its wholly owned or majority-owned subsidiary. 8) The author, or an individual who assisted in the preparation, of the report or a member of their respective households serves as an officer, director or advisory board member of the subject company. 9) The author, or an individual who assisted in the preparation, of the report or a member of their respective households has a direct ownership position in securities issued by the subject company or derivatives thereof. Further information and compulsory data regarding financial analyses can be found under DISCLAIMER 1.a) This report has been prepared by DZ BANK AG Deutsche Zentral- Genossenschaftsbank AG, Frankfurt am Main, Germany ( DZ BANK ) and has been approved by DZ BANK for distribution in Germany and other such locations as noted below. The authoring analysts are employed by DZ BANK. b) Our recommendations do not constitute any investment advice and consequently, they may not be fully (or not at all) suitable to individual investors, depending on their investment objectives, targeted holding period or the individual financial situation. The recommendations and opinions contained in this report constitute the best judgment of DZ BANK at the date and time or preparation of this document and are subject to change without notice as a result of future events or results. This report is for distribution in all countries only in accordance with the applicable law and rules and persons into whose possession this report comes should inform themselves about and observe such law and rules. This report constitutes an independent appraisal of the relevant issuer or security by DZ BANK; all evaluations, opinions or explanations contained herein are those of the author of the report and do not necessarily correspond with those of the issuer or third parties. c) This report is being furnished to you solely for your information and may not be reproduced, redistributed or published in whole or in part, to any other person. d) DZ BANK has obtained the information on which this report is based from sources believed to be reliable, but has not verified all of such information. Consequently, DZ BANK, DZ Financial Markets LLC and/or their respective affiliates do not make or provide any representations or warranties regarding the preciseness, completeness or accuracy of the information or the opinions contained in this report. Further, DZ BANK assumes no liability for damages incurred as a result of distributing and/or using this report and/or which are connected to the utilization of this document. Any decision to effect an investment in securities should be founded on independent investment analysis and processes as well as other reports including, but not limited to, information memoranda, sales prospectuses or offering circulars rather than on the basis of this report. Whilst DZ BANK may provide hyperlinks to web sites of entities mentioned in this report, the inclusion of a link does not imply that DZ BANK endorses, recommends or approves any material on the linked page or accessible from it. DZ BANK accepts no responsibility whatsoever for any such material, nor for any consequences of its use. e) This report is not to be construed as and does not constitute a public offer or an invitation to any person to buy or sell any security or other financial instrument. The information in this report does not constitute investment advice. In preparing this report, DZ BANK has not and does not act in the capacity of investment adviser to, or asset manager for, any person.

13 DZ BANK RESEARCH 13/15 f) DZ BANK may have investment banking and other business relationships with the company or companies that are the subject of this report. DZ BANK s research analysts also provide important input into the investment banking and other business selection processes. Investors should assume that DZ BANK, DZ Financial Markets LLC and/or their respective affiliates are seeking or will seek investment banking or other business from the company or companies that are the subject of this report and that the research analysts who were involved in preparing this material may participate in the solicitation of such business to the extent permitted by applicable law. DZ BANK, DZ Financial Markets LLC and/or one of its affiliates as well as their employees may have positions in the securities or effect transactions in the securities. g) Research analysts are not compensated for specific investment banking transactions. The author(s) of this report receive(s) compensation that is based on (among other factors) the overall profitability of DZ BANK, which includes earnings from the firm s investment banking and other businesses. DZ BANK generally prohibits its analysts, persons reporting to analysts, and members of their households from maintaining a financial interest in the securities or futures of any companies that the analysts cover. 2. Specific information for the United States States of America and Canada: This research report is being provided by DZ BANK to U.S. investors in accordance with Rule 15a-6 under the Securities and Exchange Act of It is only being distributed to, and is only intended to be read by, major institutional investors as that term is defined by Rule 15a-6. Any order for the purchase or sale of securities covered by this report must be placed with DZ BANK's U.S. registered broker-dealer affiliate, DZ Financial Markets LLC. You may reach DZ Financial Markets LLC at 609 Fifth Avenue, New York, NY 10017, This research has been prepared outside the United States by analysts who may not have been subject to rules regarding the preparation of reports and the independence of research analysts like those in effect in the United States. The opinions, estimates and projections contained in this report are those of DZ BANK as of the date of this report and are subject to change without notice. The information contained in this report has been compiled by DZ BANK from sources believed to be reliable but no representation or warranty, express or implied, is made by DZ BANK or its affiliated companies or any other person as to the report s accuracy, completeness or correctness. Within the scope of application of the federal laws of the United States or the laws of the individual US states, the above exclusion of representations and warranties takes precedence over the exclusion of liability clause in Section 1, paragraph 4 above. The securities/adrs discussed in this report are either listed on a US exchange, traded in the US over-the-counter, or traded only on a foreign exchange. Those securities that are not registered in the US may not be offered or sold, directly or indirectly, within the US or to US persons (within the meaning of Regulation S and under the Securities Act of 1933 (the Securities Act ) except pursuant to an exemption under the Securities Act. This report does not constitute an offer with respect to the purchase or sale of any security within the meaning of Section 5 of the Securities Act and neither this report nor anything contained herein shall form the basis of, or be relied upon in connection with, any contract or commitment whatsoever. In Canada it may only be distributed to persons who are resident in Canada to whom trades of the securities described herein may be made exempt from the prospectus requirements of applicable provincial or territorial securities laws. 3.a) Specific information for the United Kingdom: DZ BANK is regulated by the German Financial Services Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) for the conduct of business. However, to the extent that this report is being distributed in the UK, this report may be distributed only to and is directed only at Eligible Counterparties and Professional Clients within the meaning of the FSA Rules (such persons being referred to as "relevant persons"). This report must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this report relates is available only to relevant persons and will be engaged in only with relevant persons. b) DZ BANK, DZ Financial Markets LLC and/or their respective affiliates expressly exclude all conditions, warranties, representations and terms (whether implied by statute, common law or otherwise) of any kind whether regarding the preciseness, completeness or accuracy of the information or the opinions contained in this report, or otherwise. Further, DZ BANK assumes no liability for direct or indirect damages or loss of any kind, whether arising in or for breach of contract, tort (including negligence), breach of statutory duty, indemnity or otherwise, incurred as a result of distributing and/or using this report. Nothing in this Disclaimer is intended to exclude or limit or shall have the effect of, excluding or limiting, any liability for (i) fraud, (ii) death or personal injury caused by negligence, (iii) breach of terms regarding title implied by s.12 Sale of Goods Act 1979 and/or s.2 Supply of Goods and Services Act 1982, or (iv) any liability to the extent the same may not be excluded or limited as a matter of law. Within the scope of application of the laws of England, this Section 3 b) takes precedence over the exclusion of liability provisions in Section 1d) above. 4. Specific information for Italy: This report must only be distributed in Italy to persons as defined in Article 2(1) (e) of Directive 2003/71/EC ( Qualified Investors ). No other persons other than Qualified Investors should read, act, or rely on any information contained in this report. Any activity to which this report relates will only be engaged in with Qualified Investors. 5. Specific information for Singapore: This report is distributed by DZ BANK International Singapore Ltd. ( DZIS ) and DZ BANK Singapore Branch. Recipients of this report are to contact DZIS (Telephone No.: (65) ) and DZ BANK Singapore Branch (Telephone No.: (65) ) in Singapore in respect of any matters arising from, or in connection with, this report. If the recipient of this research report is not an accredited investor, expert investor or institutional investor (as defined under Section 4A of The Securities and Futures Act), DZIS and DZ BANK Singapore Branch accept legal responsibility for the contents of the report without any disclaimer limiting or otherwise curtailing such legal responsibility. The views and opinions in this report are our own as of the date hereof and are subject to change. This report is strictly confidential and is being supplied to you strictly on the basis that it will remain confidential. No part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of DZIS and DZ BANK Singapore Branch. 6. DZ BANK Research Recommendation Definitions (Ratings System): (Except as otherwise noted, expected performance within the 12 month period from the date of the rating): Buy: greater than 5% increase in share price Hold: price changes between +5% and -5% Sell: more than 5% decrease in share price 7.a) Note: - Any price targets shown for companies discussed in this report may not be achieved due to multiple risk factors, including, without limitation, market volatility, sector volatility, corporate actions, the state of the economy, the failure to achieve earnings and/or revenue projections, the unavailability of complete and accurate information and/or a subsequent occurrence that affects the underlying assumptions made by DZ BANK or by other sources relied upon in the report. b) DZ BANK may also have published other research about the company during the period covered that did not contain a price target but that discussed valuation matters. The price targets shown should be considered in the context of all prior published research as well as developments relating to the company, its industry and financial markets. c) DZ BANK is not obliged to up-date the research report. Investors must keep themselves informed about on the current course of business and any changes in the current course of business of the issuer. d) By using this report or by relying on it in any manner whatsoever you agree to be bound by the foregoing limitations. Additional information on the contents of this report is available on request. e) If any term of this Disclaimer is found to be illegal, invalid or unenforceable under any applicable law, such term shall, insofar as it is severable from the remaining terms, be deemed omitted from this Disclaimer and shall in no way affect the legality, validity or enforceability of the remaining terms. DZ BANK RESEARCH ALL COVERED COMPANIES Buy 69.5%, Hold 3.2%, Sell 27.3% PERCENTAGE OF COMPANIES WITHIN EACH CATEGORY FOR WHICH DZ BANK, DZ FINANCIAL MARKETS LCC AND/OR RESPECTIVE AFFILIATES HAVE PROVIDED INVESTMENT BANKING SERVICES WITHIN THE PREVIOUS 12 MONTHS Buy 13.0%, Hold 50.0%, Sell 10.6%

14 DZ BANK RESEARCH 14/15 FIXED INCOME RESEARCH: RATING CHANGES WITHIN THE LAST 12 MONTHS AAREAL BANK AG AAREAL BANK AG ACHMEA HYPOTHEEKBANK NV AHOLD NV (KONINKLIJKE-) Marketperformer ALLIED IRISH BANKS PLC Marketperformer ALLIED IRISH BANKS PLC ARCELOR MITTAL S.A Underperformer BANCO BILBAO VIZCAYA ARGENTARIA SA BANCO BILBAO VIZCAYA ARGENTARIA SA Underperformer BANCO BILBAO VIZCAYA ARGENTARIA SA BANCO ESPIRITO SANTO BANCO POPULAR ESPANOL BANCO POPULAR ESPANOL BANCO SANTANDER SA BANK OF AMERICA CORP BANK OF AMERICA CORP BAYERISCHE LANDESBANK Underperformer BAYERISCHE LANDESBANK BAYERISCHE MOTOREN WERKE AG Marketperformer BAYERISCHE MOTOREN WERKE AG Outperformer BERLIN-HANNOVER HYPBK AG BERTELSMANN AG Marketperformer BERTELSMANN AG Underperformer BRITISH AMERICAN TOBACCO PLC Underperformer BRITISH AMERICAN TOBACCO PLC Marketperformer CAISSE CENTRALE DESJARDINS DU QUEBEC CAISSE CENTRALE DESJARDINS DU QUEBEC Outperformer CAISSE CENTRALE DU CREDIT IMMOBILIER DE FRANCE Underperformer CAISSE CENTRALE DU CREDIT IMMOBILIER DE FRANCE Marketperformer CAIXA ECONOMICA MONTEPIO GERAL CAIXA ECONOMICA MONTEPIO GERAL CARREFOUR SA Underperformer COMMERZBANK AG Marketperformer CONTINENTAL AG Underperformer CONTINENTAL AG Marketperformer CONTINENTAL AG Underperformer CREDIT AGRICOLE SA Underperformer CREDIT AGRICOLE SA Marketperformer CREDIT MUTUEL ARKEA Underperformer CREDIT MUTUEL ARKEA CREDIT SUISSE GROUP AG CREDIT SUISSE GROUP AG Outperformer CREDIT SUISSE GROUP AG Marketperformer CZECH REPUBLIC Marketperformer DEUTSCHE BAHN AG Marketperformer DEUTSCHE HYPOTHEKENBANK Underperformer DEUTSCHE HYPOTHEKENBANK DEUTSCHE LUFTHANSA AG Underperformer DEUTSCHE TELEKOM AG Marketperformer DEUTSCHE TELEKOM AG Outperformer DNB NORBANK ASA Outperformer DNB NORBANK ASA Marketperformer DNB NORBANK ASA Outperformer DUESSELDORFER HYPOBANK E.ON AG Marketperformer EBS BUILDING SOCIETY Underperformer ELECTRICITE DE FRANCE (E.D.F.) Marketperformer ELECTRICITE DE FRANCE (E.D.F.) Outperformer ELECTRICITE DE FRANCE (E.D.F.) Marketperformer ELECTRICITE DE FRANCE (E.D.F.) Marketperformer ENBW Underperformer ENDESA S.A Marketperformer ENDESA S.A Underperformer ENDESA S.A Marketperformer ENEL S.p.A Outperformer ENEL S.p.A Marketperformer ENEL S.p.A Underperformer ENEL S.p.A Marketperformer ERSTE GROUP BANK AG Outperformer ERSTE GROUP BANK AG ERSTE GROUP BANK AG EUROHYPO AG EUROHYPO AG EUROHYPO AG EWE AG EWE AG FEDERAL REP OF GERMANY FRENCH REPUBLIC FRENCH REPUBLIC GDF SUEZ S.A. GOLDMAN SACHS GROUP INC HELLENIC REPUBLIC HELLENIC REPUBLIC HELLENIC REPUBLIC HENKEL KGAA HSH NORDBANK AG HYPO REAL ESTATE HLDG AG HYPO REAL ESTATE HLDG AG IBERDROLA S.A. IBERDROLA S.A. IKB DEUTSCHE INDUSTRIEBANK AG IKB DEUTSCHE INDUSTRIEBANK AG IMPERIAL TOBACCO GROUP PLC INTESA SANPAOLO SPA JPMORGAN CHASE & CO JPMORGAN CHASE & CO KINGDOM OF BELGIUM KINGDOM OF BELGIUM KINGDOM OF BELGIUM KINGDOM OF THE NETHERLANDS KINGDOM OF THE NETHERLANDS KONINKLIJKE (ROYAL) KPN NV KONINKLIJKE (ROYAL) KPN NV LAFARGE LAFARGE LANDESBANK BADEN-WUERTTEMBERG LEASEPLAN CORPORATION NV LINDE AG (The Linde Group) LLOYDS TSB GROUP PLC LLOYDS TSB GROUP PLC LVMH S.A. MEDIOBANCA SPA MEDIOBANCA SPA MEDIOBANCA SPA MERCK KGAA MORGAN STANLEY MORGAN STANLEY MORGAN STANLEY NIBC BANK NV OTP BANK PLC OTP BANK PLC POHJOLA BANK PLC POHJOLA BANK PLC POHJOLA BANK PLC POHJOLA BANK PLC POHJOLA BANK PLC PORSCHE AG PORSCHE AG PORSCHE AG PORSCHE AG PORTUGAL TELECOM PORTUGUESE REPUBLIC PORTUGUESE REPUBLIC RAIFF ZENTRALBK OEST AG RAIFF ZENTRALBK OEST AG REPSOL YPF SA REPSOL YPF SA REPUBLIC OF AUSTRIA REPUBLIC OF AUSTRIA REPUBLIC OF BULGARIA Underperformer Marketperformer Underperformer Marketperformer Outperformer Marketperformer Outperformer Marketperformer Outperformer Underperformer Marketperformer Underperformer Marketperformer Marketperformer Marketperformer Underperformer Marketperformer Underperformer Marketperformer Outperformer Marketperformer Marketperformer Outperformer Marketperformer Outperformer Underperformer Marketperformer Outperformer Underperformer Underperformer Underperformer Underperformer Underperformer Underperformer Marketperformer Marketperformer Underperformer Underperformer Outperformer Outperformer Marketperformer Underperformer Marketperformer Marketperformer Outperformer Marketperformer Marketperformer Marketperformer Underperformer Outperformer Underperformer Underperformer REPUBLIC OF COLOMBIA REPUBLIC OF CROATIA REPUBLIC OF CROATIA REPUBLIC OF FINLAND REPUBLIC OF HUNGARY REPUBLIC OF IRELAND REPUBLIC OF IRELAND REPUBLIC OF IRELAND REPUBLIC OF SLOVENIA REPUBLIC OF SOUTH AFRICA REPUBLIC OF SOUTH AFRICA REPUBLIC OF TURKEY ROCHE HOLDING AG RWE AG RWE AG SANOFI-AVENTIS S.A. SEB AB SNS BANK NEDERLAND SNS BANK NEDERLAND SUEDZUCKER AG TELECOM ITALIA S.P.A. TELECOM ITALIA S.P.A. TELECOM ITALIA S.P.A. TELEKOM AUSTRIA AG TELEKOM AUSTRIA AG TELEKOM AUSTRIA AG TELIASONERA AB TELIASONERA AB THYSSENKRUPP AG TUI AG UBS AG UBS AG UNICREDITO ITALIANO SPA UNICREDITO ITALIANO SPA UNITED MEXICAN STATES UNITED MEXICAN STATES VATTENFALL AB VATTENFALL AB VOLKSWAGEN AG Marketperformer Underperformer Marketperformer Marketperformer Outperformer Outperformer Underperformer Marketperformer Marketperformer Marketperformer Underperformer Underperformer Marketperformer Marketperformer Outperformer Outperformer Underperformer Outperformer Outperformer Outperformer Marketperformer Underperformer Underperformer Marketperformer Outperformer Marketperformer Outperformer Underperformer Underperformer Marketperformer Underperformer Marketperformer Underperformer Underperformer Outperformer Marketperformer Outperformer Outperformer

15 DZ BANK RESEARCH 15/15 RESPONSIBLE Jörg Birkmeyer Head of Credit Research Financials +49 (0) AUTHORS Andre Jan Hovora,CEFA, CIIA Analyst Covered Bonds (0) andre.hovora@dzbank.de Oliver Piquardt,CFA Analyst Financial Institutions (0) oliver.piquardt@dzbank.de CONTACTS Capital Markets International Clients Head of Capital Markets International Clients + 49 (0) Frank Scheidig Sales Europe Head of Sales Europe + 49 (0) Marc Brugman Head of Sales Western Europe + 49 (0) Marco Kubatzki Head of Sales Southern Europe + 49 (0) Paola Schmauss-Cortés Head of Sales Nordic Countries + 49 (0) Lars Carlsen Head of Sales Central Banks + 49 (0) Pavel Jansta Sales Emerging Markets Head of Sales Emerging Markets + 49 (0) Tilo Sperling Head of Sales Middle East / North Africa and Turkey + 49 (0) Marc Schoucair Head of Sales Central Eastern Europe + 49 (0) Christoph Ott Sales Asia Head of Sales Asia Mahmood Jumabhoy Head of Sales North and South Asia Aik Kiong Yeo Capital Markets Germany / Austria Head Capital Markets Germany / Austria + 49 (0) H.-Theo Brockmann Sales Institutional Clients Head of Sales Institutional Clients + 49 (0) NN Head of Sales Institutional Clients Germany + 49 (0) Thorsten Göttel Head of Sales Structured Products + 49 (0) Jörn Schneider Head of Sales Institutional Banks and Austria + 49 (0) Norbert Schäfer Sales Corporates Head of Sales Corporates + 49 (0) Roland Weiß Head of Sales Key Account Clients + 49 (0) Hans-J. Gretscher Head of Sales Meta and SME North + 49 (0) Klaus Langer Head of Sales International and Public Clients + 49 (0) Christian Sauer Head of Sales Derivatives + 49 (0) Tobias Strumpel Head of Sales Meta and SME South + 49 (0) Evelyne Thiessen Origination Head of Origination + 49 (0) Arnold Fohler Head of Origination Financials Germany + 49 (0) Jörg Müller Head of Origination International Financials and Corporat+ 49 (0) Kai-Henning Poerschke CG701e