DEPFA Bank plc -- Moody's affirms DEPFA's Baa3 unsecured debt ratings; outlook stable

Frankfurt am Main, December 10, 2012 -- Moody's Investors Service has today affirmed the Baa3 long-term debt and deposit ratings of DEPFA BANK plc (DEPFA). At the same time, Moody's downgraded DEPFA's standalone bank financial strength rating (BFSR) to E (equivalent to a standalone credit assessment of caa2) from E+/b2. The short-term bank deposit ratings were affirmed at Prime-3. The outlook on the long-term ratings is stable, whereas the E BFSR does not carry an outlook.

Consequently, Moody's downgraded DEPFA's subordinated debt ratings to Caa3 from B3, reflecting the lowering of the bank's standalone credit strength. The ratings carry a stable outlook.

Furthermore, DEPFA ACS BANK's long-term deposit ratings were affirmed at Baa3/Prime-3 with their stable outlook, while the BFSR was lowered to E/caa2 from E+/b2. DEPFA ACS is the highly integrated issuing entity of DEPFA group for asset-covered securities (ACS) and therefore its ratings remain aligned with those of its sole owner DEPFA BANK plc.

RATINGS RATIONALE

DEPFA'S STANDALONE CREDIT ASSESSMENT LOWERED

Moody's considers that the lower standalone credit assessment of caa2 better reflects (1) the constraints on DEPFA's business model, as the European Commission (EC) requires the bank to roll-off its assets and prohibits DEPFA from underwriting new business under its current ownership; (2) the bank's structurally loss-making core operations, which will come under further pressure when the servicing contract with FMSW (Aaa, negative) expires in September 2013; and (3) the sensitivity of the bank's capital position in the context of its exposure concentrations, in particular sizeable exposures to weaker euro area countries.

Moody's considers DEPFA group's business model to be impaired, as the EC requires the bank to run down its assets in a value-preserving manner and prohibits DEPFA from underwriting new business under its current ownership. The bank will only be allowed to write new business once it is privatised, as required by the EC, by the end of 2014.

Moody's considers DEPFA structurally loss-making, as the bank's profits in 2011 and 2012 were driven by extraordinary effects from the buy-back of certain securities. The rating agency expects further challenges to profitability starting from Q4 2013, when revenues from the expiring servicing contract with FMSW will fall away. The importance of those revenues to cover a large part of DEPFA's cost base, combined with gradually declining earnings from the bank's shrinking asset base, leads Moody's to believe that DEPFA will struggle to adjust its cost base quickly enough and to the extent needed to off-set the projected loss in revenues. The necessary adjustment of DEPFA's cost base will be supported by the transfer of personnel to FMSW.

Moody's considers the bank's capitalisation to be adequate, despite the current solicitation for a buy-back of its hybrid capital. Although the hybrid capital buy-back would improve the bank's already solid regulatory capital ratios, the measures would reduce DEPFA's economic capitalisation or overall loss-absorption capacity, in Moody's view. Based on Moody's findings from stress testing earnings and capital, DEPFA displays some sensitivity to capital pressures that could arise from unexpected credit losses, given the uncertain environment and pressures from the euro area sovereign debt crisis. In this context, Moody's notes that the bank maintains significant long-term exposures to Spain (EUR3.7 billion) and Italy (EUR2.3 billion) and which together represent total exposures of 300% of its Tier 1 capital (EUR2.0 billion), as of September 2012.

DEPFA'S LONG-TERM RATINGS REFLECT OWNERSHIP BY GERMAN GOVERNMENT

Moody's continues to factor a very high probability of support from the German government (Aaa, negative) into DEPFA's Baa3/Prime-3 senior unsecured debt and deposit ratings, which now benefit from a rating uplift of eight notches (from five previously). DEPFA is part of the larger Hypo Real Estate AG Group (HRE; unrated), which the German government nationalised and recapitalised in 2009. With its significant size, DEPFA still accounts for a substantial part of HRE Group's assets and capital as of September 2012. Moody's support assumptions therefore take into account (1) the previous significant financial commitments undertaken by the German government to stabilise HRE; and (2) the expectation of government assistance in case of need, as any adverse developments at Ireland-based DEPFA would have immediate ramifications for HRE. While Moody's says that meeting the privatisation deadline in 2014 is uncertain, the likely consequence of a complete wind-down of the Irish bank is already factored into the current standalone credit assessment of caa2.

WHAT COULD MOVE THE RATINGS UP/DOWN

Any upwards pressure is currently unlikely and will remain so as long as DEPFA remains constrained in its ability to restore a viable banking franchise, as set by the EC's conditions.

Downwards pressure on DEPFA's standalone credit strength could result from eroding capital -- which is presently not expected -- and/or from market shocks, emanating from higher-than-anticipated credit losses and unforeseen contagion effects from the euro area sovereign crisis.

The Baa3 long-term ratings could come under pressure following any indication of declining support from the German government as owner of the HRE Group and therefore DEPFA. A successful privatisation by 2014 -- as required by the EC following the state-aid ruling -- could result in rating changes in either direction, depending on (1) the new owner's financial condition and commitment to DEPFA; and (2) Moody's assumptions on any future systemic support that the bank may receive.

PRINCIPAL METHODOLOGIES

The principal methodology used in these ratings was Moody's Consolidated Global Bank Rating Methodology published in June 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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Mathias Kuelpmann Senior Vice President Financial Institutions Group Moody'sDeutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Carola Schuler MD - Banking Financial Institutions Group JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Releasing Office: Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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