Credit Opinion: BH Securities, a.s.

Credit Opinion: BH Securities, a.s. Global Credit Research - 19 Jul 2012 Prague, Czech Republic Ratings Category Outlook NSR Issuer Rating -Dom Curr Moody's Rating Stable Baa3.cz Contacts Analyst Phone Oscar Heemskerk/London 44.20.7772.5454 Simone Zampa/Milan 39.02.9148.1100 Yves Lemay/London 44.20.7772.5454 Kateryna Plinksa/London Key Indicators BH Securities, a.s.[1] [2]12-11 [2]12-10 [2]12-09 [2]12-08 [2]12-07 AVERG Total Assets (CZK million) 1892.7 1547.0 1226.8 869.1 1823.0 [3]0.9 Total Assets (EUR million) 74.2 61.7 46.5 32.4 68.6 [3]2.0 Total Assets (USD million) 96.3 82.7 66.7 45.0 100.2 [3]-1.0 Tangible Common Equity (CZK million) 324.4 314.3 319.1 326.8 335.5 [3]-0.8 Tangible Common Equity (EUR million) 12.7 12.5 12.1 12.2 12.6 [3]0.2 Tangible Common Equity (USD million) 16.5 16.8 17.3 16.9 18.4 [3]-2.7 Net Interest Margin (%) 3.2 3.5 3.3 5.0 5.2 [4]4.0 PPI / Avg RWA (%) 5.0 3.8 4.0 4.1 6.1 [5]4.6 Net Income / Avg RWA (%) 3.2 2.9 3.1 2.8 4.6 [5]3.3 (Market Funds - Liquid Assets) / Total Assets (%) -72.8-23.8-19.8-42.9 25.5 [4]-26.8 Core Deposits / Average Gross Loans (%) 7.3 6.0 1.9 3.6 22.9 [4]8.3 Tier 1 Ratio (%) 35.8 38.0 37.4 45.8 24.8 [5]36.4 Tangible Common Equity / RWA (%) 41.4 43.9 42.6 50.6 30.8 [5]41.9 Cost / Income Ratio (%) 69.7 75.3 75.1 73.9 62.7 [4]71.3 [1] All ratios are adjusted using Moody's standard adjustments [2] Basel I; LOCAL GAAP [3] Compound Annual Growth Rate based on LOCAL GAAP reporting periods [4] LOCAL GAAP reporting periods have been used for average calculation [5] Basel I & LOCAL GAAP reporting periods have been used for average calculation Opinion SUMMARY RATING RATIONALE The long-term national scale rating (NSR) of Baa3.cz assigned to BH Securities, a.s reflects the company's modest franchise in a niche market segment (margin trading, brokerage and asset management) and the challenges it faces in these core business areas from significant competition. The issuer outlook is stable. The company's positive rating drivers include its good brand recognition, developing risk management and adequate financial fundamentals.

BH Securities's rating does not include any uplift from its standalone financial strength as a result of support from its parent, PROXY-FINANCE, a.s. (unrated). Rating Drivers - Knowledge of the local stock market and good brand recognition - Regulated by the Czech National Bank as investment firm (non bank) - Absence of a large distribution network or cross-selling synergies compared with its banking competitors - Maintaining profitability in the weakened domestic economic environment in a very competitive Czech market - Counterparty concentration risk - Strengthening of risk management Rating Outlook BH Securities's Baa3.cz rating has a stable outlook. What Could Change the Rating - Up BH Securities's rating could be upgraded if it improved its franchise value without increasing its risk profile and reported solid financial fundamentals. What Could Change the Rating - Down The rating would come under downward pressure if the company reported losses for an extended period, or if its franchise value deteriorates. We would also view negatively if the company's risk appetite were to increase in order to substitute for the shortfall in revenues from dealing with clients. Recent Results and Company Events BH Securities reported CZK4.3million (EUR 174,000) net profit in the first quarter of 2012, a 61% decline compared to the first quarter of 2011. On a year-on-year basis, net interest income (35% of operating income in the first quarter of 2012) and net fees (44% of operating income in the first quarter of 2012) declined by 24% and 29% respectively. This compares to only 8% decline in operating expenses during the same time period. During the first quarter of 2012, the company's total assets declined by 31% to CZK1.3 billion (EUR 52.9 million). Its Tier 1 ratio increased to 39.90% at the end of March 2012 from 35.75% at the end of December 2011, solely due to lower risk weighted assets. The operating environment for Czech financial institutions has weakened, as illustrated by the slowdown in economic output and further downside risks related to softer export demand from European trading partners. Real GDP contracted by 0.7% year-on-year in Q1 2012, and Moody's expects GDP growth of 0% in 2012, compared to 1.7% in 2011, whilst the European Commission forecasts an unemployment rate of 7.2% in 2012. The total trade value of shares on the Prague Stock Exchange fell by 5% in 2011 to CZK 371 billion, and for 2012 H1, the total trade value fell by one-third year-on-year to CZK 134 billion. We expect that the deteriorating operating environment and reducing market activity will weaken BH Securities' performance in 2012. DETAILED RATING CONSIDERATIONS Detailed considerations for BH Securities currently assigned rating are as follows: Franchise Value BH Securities is a securities broker and asset manager operating in the Czech Republic. The company primarily operates on the Prague Stock Exchange, where it ranks among the top ten securities traders in a market dominated by companies backed by financial institutions with a broad portfolio of potential customers. However, its clients also have access to US and other European markets.

Due to the weakening risk appetite of the company's clients, the share of revenues from margin trades has been gradually declining in the last several years in favour of the direct trading on clients' behalf. Margin trading accounts for 13% of operating income in 2011, down from the high 40% in 2008. In order to strengthen its revenue generating ability, BH Securities has developed an online trading platform, which allowed the company to increase trading volumes and penetrate markets outside its current network, focusing on larger cities. In addition, the company has launched Forex trading and is getting ready to switch to a new trading system on Xetra platform, which should unify the trading rules and accessibility of several stock exchanges in the region. Asset management accounted for about 5% of revenues in 2011. This business line had been declining since 2007 when BH securities lost the contract to manage the Ceska Pojistovna pension fund when Generali acquired a stake in the Czech insurance company. However, in 2011 BH Securities managed to increase its assets under management by almost 17 times to CZK10 billion (compared to CZK601 million at year-end 2010), in large part due to a new institutional client. We note that historically the company has been mainly focusing on retail clients, and the dramatic increase identifies a sudden change in focus. During 2011 equity markets in Czech Republic, as well as in the rest of Europe, were hit by the sovereign crisis in Eurozone, with massive sell-outs in late September and early October, followed by weak liquidity and high risk aversion at the end of the year. Despite this challenging operating environment BH Securities reported an increase in 2011 profits. However, we remain concerned about volatility in sentiment that could weigh on the company's future revenues should the current environment persist or deteriorate further. Risk Positioning We view BH Securities' risk management systems and procedures as developing, in line with its size and activities. The risk management department - represented by the risk manager - controls various risks, especially liquidity, stock and FX risk. However, the board of directors has the power to take decisive action. BH Securities uses Value at Risk in a limited manner on its largest exposures; currently stress tests are not used. We note that BH Securities' margin trades have historically been characterised by a relatively high degree of leverage. Given its activity in margin trades, BH Securities is significantly exposed to the Prague Stock Exchange, where it operates as a market maker. BH Securities faces borrower/counterparty concentration risk, as its top ten clients in margin trading represent a large share of the company's borrowings. Furthermore, we believe that there is severe concentration risk in trades, given that the market comprises only 26 listed securities, increasing the risk of market volatility and potential lack of liquidity. We view positively that proprietary trading is limited and employees' remuneration is not directly linked to the profit they make for the company. The company's trading on its own account is limited to a total open position of a maximum CZK50 million (versus equity of CZK338 million). Regulatory Environment All securities traders in the Czech Republic are licensed for their business activities. The Czech National Bank fulfils the role of regulatory authority for BH Securities. The company is periodically inspected, which led to a fine in 2009 regarding its administration function. We note that BH Securities appealed this decision, which is yet to conclude. In 2011, the company had to issue a supplement to its audited financial results, as it had calculated operational risk on 2008-2010 metrics, whereas the regulator prescribed using 2007-09. This reduced the published 2010 capitalisation somewhat to 38.02% from 39.6%. Operating Environment Moody's has lowered its expectations with regards to the economic stability for the Czech Republic, reflecting the weakening operating environment as commented on in "European Banks: How Moody's Analytic Approach Reflects Evolving Challenges", January 2012. Profitability

BH Securities's profitability is vulnerable to market sentiment and price movements, given its relatively minor franchise and as its fee-generating asset management business accounts for only a small share of its revenues. Despite the increasingly challenging environment for equity markets, BH Securities reported a CZK24.1million (EUR938,000) profit in 2011, a 13.7% increase compared to 2010. However, first quarter 2012 results showed a much weaker trend and we are concerned that further deteriorating in operating environment may weaken the company's profitability. On the other hand, somewhat mitigating these risks are introduction of new trading products which should support revenues, as long as market sentiment improves or stabilises. Furthermore, increasing the acquisition of new clients and wider diversification of trading foreign markets could support revenue generation. Capital Adequacy BH Securities's capital adequacy ratio declined to 35.75% at year-end 2011 from 38.02% at year-end-2010, mainly due to growth in risk weighted assets. At the end of 2011, shareholders' equity accounted for 17.9% of the company's assets, down from 22% at year-end 2010 but mostly in line with the historical values. Efficiency Efficiency, as measured by the cost-to-income ratio, improved slightly to 70% in 2011 from 75% a year earlier, but remains challenging given profit deterioration in 2012 year-to-date. Due to cost control initiatives, operating expenses grew by only 2% in 2011, versus 10% increase in operating income over the same time period. We expect the company's expansion of its sales force to increase its cost base. Other Considerations BH Securities is fully controlled by PROXY-FINANCE a.s., a Czech and Slovak financial holding company owned by a group of individuals, in which no one individual owns more than 20% of shares. PROXY-FINANCE is experienced in various segments of the Czech and Slovak financial markets, notably in pension funds, factoring, real estate and media. BH Securities's owner has supported it in the past through a share capital increase. However, in light of the series of sales of PROXY-FINANCE's subsidiaries, PROXY-FINANCE is recognised as a financial investor rather than as a strategic investor, and we have not factored any probability of support from it into BH Securities's rating. We note that the owner has declared its intention to maintain the BH Securities business within its portfolio of investments. 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. ("MIS") AND ITS AFFILIATES 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. CREDIT RATINGS AND MOODY'S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS

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