The J.P. Morgan Covered Bond Handbook 2011 Taking the Strain

EuropeCredit Research 12 September 2011 The J.P. Morgan Covered Bond Handbook 2011 Taking the strain

European ABS & CB Research AC  We write this year’s Handbook from something of a position of strength Gareth Davies, CFA (44-20) 7325-7283 for the industry. Over the course of the past twelve months we have seen [email protected] product expansion across many metrics: from the number of AC jurisdictions providing a stable regulatory framework for covered bond Flavio Marco Rusconi (44-20) 7777-4461 issuance; to the number of originators relying on covered bonds as part [email protected]

of their funding mix; and of course to the number of investors, both J.P. Morgan Securities Ltd. credit- and rates-focused who now engage with the asset class.

 This is an even greater achievement when considering the broad market themes that have characterised the past twelve months. With the continuing peripheral European sovereign crisis elevating concerns about the health of the region’s banks, and further exacerbated by what is proving to be a relatively weak economic recovery (at best), the appetite for adding bank debt (even when secured) has been tested severely. Covereds as an asset class appear to have passed this test.

 That being said however, we remain aware of potential roadbumps in the medium-term outlook. We identify the developing regulatory regime as the primary protagonist – we believe the regulatory backdrop is potentially becoming skewed in favour of covered bonds to such a degree, that it is damaging the diversity of alternate bank funding opportunities, and by derivation, potentially harming the ability of today’s covered product to grow at a more measured and sustainable pace. We would welcome a more balanced environment where covereds play a role in bank funding, but not the role.

 As usual, we split the Handbook into two discrete sections, first providing an overview of market and product themes, followed by the larger, second segment which provides a jurisdiction-by-jurisdiction, issuer-by-issuer overview of those institutions that have accessed the international capital markets.

 Hard copies of this publication are available by contacting the analysts.

See page 302 for analyst certification and important disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

www.morganmarkets.com Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Foreword

Credit where credit is due What a difference a year makes! At the time of publication of our last Handbook in September 2010, we wrote something of a ‘love letter’ to credit investors; suggesting they increase their engagement with an asset class that had historically been outside their traditional investment criteria. The onslaught of the European sovereign crisis augmented our investment rationale, with pricing pushing a number of covered sub- segments to levels where value could also be identified from a credit perspective. In last year’s publication, we welcomed the opportunity that both regulatory support and pricing linked more closely to alternative bank funding instruments in a number of jurisdictions had brought to the market.

The last year has demonstrated We therefore write this year’s Handbook from something of a position of strength for the increasing appeal of covered the industry. Over the course of the past twelve months we have seen product bonds on a global basis… expansion across many metrics: from the number of jurisdictions providing a stable regulatory framework for covered bond issuance; to the number of originators relying on covered bonds as part of their funding mix; and of course to the number of investors, both credit- and rates-focused who now engage with the asset class.

…despite substantial headwinds This is an even greater achievement when considering the broad market themes that have characterised the past twelve months. With the continuing peripheral European sovereign crisis elevating concerns about the health of the region’s banks, and further exacerbated by what is proving to be a relatively weak economic recovery (at best), the appetite for adding bank debt (even when secured) has been tested severely. Covereds as an asset class appear to have passed this test.

Can one have too much of a That being said however, we remain aware of potential roadbumps in the medium- good thing? Yes… term outlook (as credit analysts the glass is always half empty). While analysts responsible for other products may envy the relative health of the covered bond markets, our caution stems from what we see as the potential for over-reliance on the asset class.

Lots of eggs. Lots of baskets. In this, we identify the developing regulatory regime as the primary protagonist–we Please! believe the regulatory backdrop is potentially becoming skewed in favour of covered bonds to such a degree, that it is damaging the diversity of alternate bank funding opportunities, and by derivation, potentially harming the ability of today’s covered product to grow at a more measured and sustainable pace. Looking ahead to the next twelve months, we would welcome a more balanced environment where covereds play a role in bank funding, but not the role.

Document structure As usual, we split the Handbook into two discrete sections, first providing an overview of market and product themes, followed by the larger, second segment which provides a jurisdiction-by-jurisdiction, issuer-by-issuer overview of those institutions that have accessed the international capital markets.

We hope this Handbook proves useful for investors over the course of the next twelve months, and of course welcome any feedback on its form and content.

2 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Table of Contents Foreword...... 2 Primary Market Outlook...... 9 The last twelve months–‘the boy done good'...... 9 The next twelve months–Magic 8 ball time...... 14 Secondary Market Outlook ...... 15 The last twelve months–Vow to thee, my country ...... 15 The next twelve months–More of the same...... 17 Our covered bond recommendations...... 18 Product overview...... 20 Covered Bonds: a “bluffer’s guide” ...... 20 What exactly is a covered bond?...... 21 Covered bonds vs. RMBS...... 23 Rating Agencies ...... 25 DBRS ...... 25 Fitch Ratings...... 25 Moody’s ...... 28 Standard & Poor’s...... 29 Austrian Covered Bonds ...... 36 Legislative snapshot...... 36 Austrian covered bond & macro backdrop ...... 37 BAWAG PSK...... 38 Erste Bank Group...... 39 HYPO NOE Gruppe...... 40 Kommunalkredit Austria AG...... 41 UniCredit Bank Austria...... 42 Canadian Covered Bonds...... 44 Legislative snapshot...... 44 Canadian covered bond & macro backdrop...... 45 Bank of Montreal ...... 46 Caisse Centrale Desjardins du Quebec...... 48 CIBC ...... 50 National Bank of Canada...... 52 Royal Bank of Canada...... 53 Scotiabank ...... 55 Toronto Dominion Bank...... 57 Danish Covered Bonds ...... 60 Legislative snapshot...... 60 Danish covered bond & macro backdrop...... 61 BRF Kredit AS...... 62 Danske Bank AS...... 63 DLR Kredit AS...... 65

3 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Nordea Kredit AS...... 66 Nykredit Realkredit AS (‘Nykredit’)...... 67 Realkredit Danmark AS (‘Realkredit’)...... 68 Dutch Covered Bonds...... 70 Legislative snapshot...... 70 Dutch covered bond & macro backdrop...... 71 ABN Amro Bank NV (‘ABN’)...... 72 Achmea Hypotheekenbank NV ('Achmea’)...... 73 ING Bank NV (‘ING’) ...... 74 NIBC Bank NV (‘NIBC’)...... 75 SNS Bank NV (‘SNS’)...... 77 Finnish Covered Bonds ...... 80 Legislative snapshot...... 80 Finnish covered bond & macro backdrop...... 81 Aktia Real Estate Mortgage Bank plc ...... 82 Nordea Bank Finland Oyj...... 83 OP Mortgage Bank (‘OP’)...... 84 Sampo Housing Loan Bank...... 85 French Covered Bonds ...... 88 Legislative snapshot...... 88 French covered bond & macro backdrop...... 92 AXA Bank Europe SCF ...... 93 Banques Populaires SCF ...... 94 BNP Paribas Home Loan SFH...... 95 BNP Paribas Public Sector SCF...... 96 BPCE SFH...... 97 Caisse de Refinancement de l’Habitat...... 98 CIF Euromortgage SCF...... 99 Compagnie de Financement Foncier SCF ...... 100 Crédit Agricole Home Loans SFH ...... 101 Crédit Mutuel Arkéa Home Loans SFH ...... 102 Crédit Mutuel-CIC Home Loans SFH...... 103 Dexia Municipal Agency SCF ...... 104 General Electric SCF...... 105 Groupe Caisse d’Épargne Covered Bonds...... 106 HSBC France Covered Bonds...... 107 Société Générale SCF...... 108 Société Générale SFH ...... 109 German Covered Bonds ...... 112 Legislative snapshot...... 112 German covered bond & macro backdrop ...... 113 Aareal Bank AG...... 114 Bayerische Landesbank (BayernLB)...... 116 Berlin-Hannoversche Hypothekenbank...... 118 Bremer Landesbank ...... 119

4 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Corealcredit Bank AG...... 121 DekaBank Deutsche Girozentrale ...... 122 Deutsche Apotheker und Aertzebank...... 123 Deutsche Bank...... 124 Deutsche Genossenshafts-Hypothekenbank (DG Hyp)...... 125 Deutsche Hypo Hannover (Deutsche Hypothekenbank) ...... 126 Deutsche Postbank ...... 127 Deutsche Schiffsbank...... 128 Dexia Kommunalbank Deutschland...... 129 Duesseldorfer Hypothekenbank...... 130 Eurohypo ...... 131 HSH Nordbank ...... 133 ING DiBa ...... 135 Landesbank Baden Württemberg (LBBW)...... 136 Landesbank Berlin ...... 137 Landesbank Hessen-Thueringen ...... 139 Landesbank Saar ...... 140 Muenchener Hypothekenbank ...... 141 Norddeutsche Landesbank...... 142 pbb (Deutsche Pfandbriefbank)...... 144 SEB AG...... 146 Unicredit Bank AG (HypoVereinsbank) ...... 147 Westdeutsche Immobilienbank...... 148 WestLB ...... 149 WL Bank ...... 150 Greek Covered Bonds...... 152 Legislative snapshot...... 152 Greek macro backdrop ...... 153 National Bank of Greece ...... 154 Hungarian Covered Bonds ...... 156 Legislative snapshot...... 156 Hungarian covered bond & macro backdrop ...... 157 FHB Bank...... 158 OTP Bank...... 159 Irish Covered Bonds ...... 162 Legislative snapshot...... 162 Irish covered bond & macro backdrop ...... 163 AIB Mortgage Bank (‘AIBMB’)...... 164 Bank of Ireland Mortgage Bank (‘BoIMB’) ...... 165 Depfa ACS Bank (‘DACS’) ...... 166 EBS Mortgage Finance (‘EBS’)...... 167 Italian Covered Bonds...... 170 Legislative snapshot...... 170 Italian covered bond & macro backdrop...... 171

5 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Banca Carige (‘Carige’) ...... 172 Banca Monte dei Paschi di Siena (‘BMPS’)...... 173 Banca Popolare di Milano (‘BPM’) ...... 174 Banco Popolare (‘Popolare’)...... 175 Credito Emiliano (‘Credem’)...... 176 Intesa Sanpaolo (‘Intesa’)...... 177 UBI Banca (‘UBI’)...... 179 Unicredit Group (‘Unicredit’)...... 180 Korean Covered Bonds...... 182 Legislative snapshot...... 182 Korean covered bond & macro backdrop ...... 183 Kookmin Bank...... 184 Korea Housing Finance Corporation...... 185 Luxembourgish Covered Bonds ...... 188 Legislative snapshot...... 188 Luxembourgish covered bond backdrop...... 189 Dexia LdG Banque...... 190 Erste Europaeische Pfandbrief und Kommunalbank (EEPK)...... 191 Eurohypo Luxembourg SA...... 192 Nord/LB Covered Finance Bank SA...... 194 New Zealand Covered Bonds ...... 196 Legislative snapshot...... 196 New Zealand covered bond & macro backdrop...... 197 Bank of New Zealand...... 198 Westpac New Zealand...... 199 Norwegian Covered Bonds...... 202 Legislative snapshot...... 202 Norwegian covered bond & macro backdrop ...... 203 DnB NOR Boligkreditt ASA (‘DNB’) ...... 204 Nordea Eiendomskreditt...... 205 SpareBank 1 Boligkreditt ASA...... 206 Sparebanken Vest Boligkreditt AS...... 207 Terra Boligkreditt AS...... 208 Portuguese Covered Bonds ...... 210 Legislative snapshot...... 210 Portuguese covered bond & macro backdrop ...... 211 Banco Comercial Portugues (‘Millennium bcp’) ...... 212 Banco Espirito Santo (‘BES’)...... 213 Banco Portugues de Investimento (‘BPI’) ...... 214 Caixa Economica Montepio Geral (‘Montepio’)...... 215 Caixa Geral de Depositos (‘CGD’) ...... 216 Santander Totta (‘Totta’)...... 217 Spanish Covered Bonds ...... 220 Legislative snapshot...... 220

6 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Spanish covered bond & macro backdrop ...... 222 Standalone programmes: ...... 223 Banco Bilbao Vizcaya Argentina (‘BBVA’) ...... 223 Banco CAM...... 225 Banco Espanol de Credito (‘Banesto’) ...... 227 Banco Pastor...... 228 Banco Popular Espanol...... 230 Banco Sabadell ...... 232 Banco Santander ...... 234 Bankia ...... 236 Bankinter ...... 238 Bilbao Bizkaia Kutxa (‘BBK’) ...... 240 Caixa d’Estalvis de Catalunya, Tarragona i Manresa (‘CatalunyaCaixa’)...... 242 CaixaBank ...... 244 Caja de Ahorros y Monte de Piedad de Guipúzcoa y San Sebastián (‘Kutxa’)...... 246 Caja Vital Kutxa ...... 247 Cajamar Caja Rural...... 248 Ibercaja...... 250 Santander Consumer Finance ...... 251 Unicaja ...... 252 Multi-Cedulas ...... 253 Programmes...... 253 Swedish Covered Bonds ...... 260 Legislative snapshot...... 260 Swedish covered bond & macro backdrop ...... 261 Landshypotek AB ...... 262 Länsförsäkringar Hypotek AB...... 263 Nordea Hypotek AB...... 264 Skandinaviska Enskilda Banken AB...... 265 Stadshypotek Mortgage AB...... 266 Swedbank Mortgage AB ...... 267 Swedish Covered Bond Corporation ...... 268 Swiss Covered Bonds...... 270 Legislative snapshot...... 270 Swiss covered bond backdrop...... 271 Credit Suisse Group AG...... 272 UBS AG ...... 273 UK Covered Bonds...... 276 Legislative snapshot...... 276 UK covered bond & macro backdrop...... 277 Barclays Bank PLC (‘Barclays’)...... 278 Bradford & Bingley PLC (‘Bradbi’) ...... 280 Coventry Building Society (‘Coventry’) ...... 281 HSBC Bank PLC (‘HSBC’) ...... 282 Leeds Building Society (‘Leeds’)...... 283

7 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Lloyds Banking Group PLC (‘Lloyds’)...... 284 Nationwide Building Society (‘Nationwide’) ...... 285 Northern Rock Asset Management (‘NRAM’)...... 287 Royal Bank of Scotland PLC (‘RBS’)...... 289 Santander UK plc (‘Santander’)...... 291 Yorkshire Building Society (‘Yorkshire’) ...... 293 US Covered Bonds...... 296 Legislative snapshot...... 296 US covered bond & macro backdrop ...... 297 Bank of America...... 298 J.P. Morgan Chase ...... 299

8 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Primary Market Outlook

The past twelve months–‘the boy done good' Recent issuance trends Covered bond issuance We have recorded benchmark covered bond issuance of €255bn to the 1st September continues to expand its role in (see Figure 1). This compares to full-year issuance of €276bn in 2010, or an increase funding the world's banks of 31% over the comparable eight-month period last year. Even when considering that 2011 has seen a number of months with minimal levels of issuance owing to broad macro market dislocation (see Figure 2), it remains impressive that the amount issued in the ‘functioning’ 5 months has still exceeded 2010 levels.

Figure 1: Covered Bonds issuance, €mm 350,000 Cov. Bonds (Not retained) 300,000

250,000

200,000

150,000

100,000

50,000

0 2007 2008 2009 2010 2011 YTD Source: Dealogic, J.P. Morgan Covered Bonds Research. Benchmark issuance only

Even when adjusting for newer issuance jurisdictions (in particular Canada where issuance volumes have picked up dramatically), we see 2011 levels comparing favourably to those of 2010. Looking further back to issuance volumes in 2007 as a representative ‘steady state’ year (i.e. pre credit crisis), total issuance amounts were approximately €200bn, showing significant progression in market size since 2007 (potentially by FY2011, +€100bn or +50% over four years).

Figure 2: Monthly Covered Bonds issuance, €mm Figure 3: Covered bonds outstanding, top 5 jurisdictions, €mm 60,000 2,700,000 Germany Spain Denmark France Sweden Other 50,000 2,400,000 2,100,000 40,000 1,800,000 30,000 1,500,000 20,000 1,200,000 900,000 10,000 600,000 0 1 1 1 1 0 0 0 1 1 1 1 1 300,000 1 1 1 1 1 1 1 1 1 1 1 1 ------l r t r y v c b g p n n u a c p a o e e u e a u 0 J A O J J F M A S N D M 2003 2004 2005 2006 2007 2008 2009 2010 Source: Dealogic, J.P. Morgan Covered Bonds Research. Benchmark issuance only Source: ECBC. All issuance

Issuance–digging a little deeper Breaking the aggregate issuance figures down into 'tiers' of countries, we take as a starting point the classifications proposed in 2010’s Handbook, with the caveat of a few ‘jurisdictional switches’ (we redesignate the ‘Peripheral’ category which previously contained only smaller issuance markets in 2010, as now including markets affected by the European sovereign crisis. We switch the smaller countries into the ‘Outer Core’ grouping). Our amended classifications are set as follows:

9 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

‘Inner core’ jurisdictions Three jurisdictions jump to the fore when considering the longest-standing and most established covered bond markets: Denmark, France and Germany. Most covered bonds issued out of these jurisdictions offer a greater degree of liquidity and are supported by a strong domestic investor base.

These bonds tend to price the tightest in the new issue market. Individual issuer credit risk is often perceived to be of less importance in these markets owing to the systemic importance of the product to the respective jurisdiction.

‘Outer core’ jurisdictions This classification includes all other Western European jurisdictions along with jurisdictions recently joining or about to join the covered bond community, including Canada, Korea, New Zealand and the US.

Peripheral jurisdictions We aggregate exposures to those markets most affected by the European sovereign crisis: Greece, Ireland, Italy, Portugal and Spain.

Figure 4: Issuance volumes by country tier, €mm 200,000 Inner core Outer core Periphery

150,000

100,000

50,000

0 2008 2009 2010 2011 YTD Source: J.P. Morgan Covered Bonds Research. Benchmark issuance only

‘Traditional’ issuance Turning first to the ‘Inner core’ we see that issuance over time has been consistently jurisdictions have become less increasing out of France, with Danish issuers mostly active on the domestic, non- prolific issuers benchmark DKK market (see Figure 5). Significantly, the issuance of public-sector backed pfandbrief has fallen over time–exacerbating a trend that started pre-2007 and driving the German contribution to annual issuance down to just €45bn in 2010 vs €102bn in 2008.

10 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Figure 5: Inner core jurisdictions issuance (all distributed), €mm Figure 6: Outer core jurisdictions issuance, €mm 120,000 Denmark France Germany 300,000 Canada Netherlands Norway Sweden UK Other 100,000 250,000

80,000 200,000 150,000 60,000 100,000 40,000 50,000 20,000 0 0 Retained Distributed Retained Distributed Retained Distributed Retained Distributed 2008 2009 2010 2011 YTD 2008 2008 2009 2009 2010 2010 2011 YTD 2011 YTD Source: J.P. Morgan Covered Bonds Research. Benchmark issuance only Source: J.P. Morgan Covered Bonds Research. Benchmark issuance only

'Outer core’ takes a bigger role, Considering next ‘Outer core' issuance volumes, we can see quite dramatic increases with dislocation in other bank in paper placed with investors over the past few years. Even when stripping out new funding markets supporting issuance jurisdictions such as Canada, we can see an increased penetration in markets appetite for the CB product such as the UK, the Netherlands and especially Sweden. While dislocation from the alternate secured funding markets (i.e. securitisation) can be attributed to supporting covered bond issuance in some countries, in the UK and the Netherlands the argument appears weaker because of the relative health of the respective securitisation markets. Rather we suspect that dislocation in other, unsecured bank funding markets is more directly a driver for the elevated covered bond issuance volumes out of these two jurisdictions.

Figure 7: Peripheral jurisdictions issuance, €mm 60,000 Greece Ireland Italy Portugal Spain 50,000

40,000

30,000

20,000

10,000

0 Retained Distributed Retained Distributed Retained Distributed Retained Distributed 2008 2008 2009 2009 2010 2010 2011 YTD 2011 YTD Source: J.P. Morgan Covered Bonds Research. Benchmark issuance only

Bifurcated experiences for Finally, we turn to ‘Peripheral’ issuance, seeing some €52bn issued YTD in total, peripheral countries: Spain and although only Italy and Spain were able to sell bonds on the public market for a Italy can issue, the rest issue to distributed total of €45bn (FY2010: €87bn including retained bonds, €51bn Frankfurt distributed to investors). Issuers from these two jurisdictions tapped the market quite aggressively in the first five months of the year, with even small, local lenders taking advantage of tightening spreads, but issuance almost entirely dried up as sovereign concerns took over once again during the summer. Unicredit, however, was amongst the first issuers to ‘re-open’ the covered bond market in recent weeks, although at a hefty premium to previous spread levels. Issuance by Greece, Ireland and Portugal has been overwhelmingly retained by the originators for (potential) use as central bank repo facilities.

11 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Pricing patterns: it’s all in the brand Inner core jurisdictions look to Launch spreads and origination patterns give a clear indication of the ability of have market access even in issuers from each jurisdictional tier to access the market. Issuers from the ‘Inner periods of volatility core’ jurisdictions appear able to tap the market at virtually any time, regardless of periods of broad market volatility (Figure 8). Furthermore, as shown for France, within-jurisdiction tiering seems to be primarily driven by bond maturity, rather than by the issuer itself (more akin to a ‘rates perspective’).

‘Outer core’ jurisdictions offer a more diverse mix. Certain jurisdictions, such as the Nordics, display a pattern closer to that of ‘Inner core’ ones, while others, such as the UK, do not seem to be able to brave the markets on their own and often come to the market in clusters. Furthermore, in the UK, launch spreads seem to be primarily driven by issuer name, rather than by maturity: some of the smaller building societies have to offer wider spreads than those paid by the larger banks, regardless of maturity (a ‘credit’ perspective). Interestingly, Santander UK also appears to price wider than other more ‘domestic' names.

Figure 8: French launch spreads vs MS, bp Figure 9: UK launch spreads vs MS, bp 100 200 <3yrs 3-5yrs 5-7yrs 7-10yrs >10yrs 80 150

60 100 40 50 20 <3yrs 3-5yrs 5-7yrs 7-10yrs >10yrs 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 1 1 1 0 0 1 1 1 1 1 1 1 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 1 0 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 ------1 1 ------1 1 1 1 1 ------1 1 1 1 1 1 1 - - 1 1 1 1 1 1 1 1 1 1 1 1 1 l l t t ------r r r r ------v v c c c n n y y n n n b b p p g g p l l t t r r r r c c u u y y v v c c c a a p p n n n n n p p b b g g p o o e e e a a a a u u u e e e e u u e u u c c a a p p J J a a o o e e e a a u u u e e e e u u e O O J J A A J J J J J F F M M S S N N D D D A A S M M O O A A J J J J J F F M M S S N N D D D A A S M M Source: J.P. Morgan Covered Bonds Research. Benchmark issuance only Source: J.P. Morgan Covered Bonds Research. Benchmark issuance only

The most ‘credit-linked’ The ‘open-closed’ pattern seen in the UK is even more in evidence in the peripheral jurisdictions appear to have countries, where issuers are particularly sensitive to the tone of the broader market. more occasional market access Both Spanish and Italian issuers have taken advantage of the window of opportunity offered by the relative calm on the sovereign front earlier in the year and issuers of all sizes and shapes came to the market. There is also very little differentiation in terms of maturity, but there is a significant gap between spreads offered by large, more established financial institutions and smaller, regional lenders. In Spain in particular, issuers such as BBVA or Santander are able to pay much tighter spreads on longer maturity bonds than those paid by the savings banks (Figure 11) as an example.

Figure 10: Italian launch spreads vs MS, bp Figure 11: Spanish launch spreads vs MS, bp 250 350 300 200 250 150 200

100 150 100 50 <3yrs 3-5yrs 5-7yrs 7-10yrs >10yrs 50 <3yrs 3-5yrs 5-7yrs 7-10yrs >10yrs 0 0 1 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 0 0 1 1 1 1 0 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 ------l l l l t t t t r r r r r r r r y y y y y v v c c c v v v c c n n n n n n n n n p p b b g g p p b b g g u u u u c c c c a a a a p p p p a a a a a o o e e e o o o e e a a u u u a a u u e e e e u u e e e e u u J J J J O O A A O O A A J J J J J J J J J F F M M F F M M S S N N D D D A A S S N N N D D A A M M M M M Source: J.P. Morgan Covered Bonds Research. Benchmark issuance only Source: J.P. Morgan Covered Bonds Research. Benchmark issuance only

12 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

How does this compare to the performance of other bank funding instruments? Covered bonds do well both As we have noted above, covered bond issuance volumes have shown significant absolutely and relatively progression over the past four years. In Figure 12 below we set out the issuance volumes of two equally important bank funding instruments to see whether the absolute success of covered bonds is also observable in relative terms. Figure 12: ABS, Senior Unsecured, Covered Bonds issuance, €mm 350,000 ABS (Not retained) Snr unsec. Cov. Bonds (Not retained) 300,000

250,000

200,000

150,000

100,000

50,000

0 2007 2008 2009 2010 2011 YTD Source: J.P. Morgan Covered Bonds Research. Benchmark issuance only

Uncertainty as to the risk profile Readers can clearly see that while covered bond issuance has gone from strength to of senior unsecured debt has strength over the period in question, the two largest alternative bank funding sources translated into additional supply have recorded significant declines in issuance. Turning to each separately, we have of covered bonds seen senior unsecured issuance volumes decline from €264bn in 2007, to €159bn in 2010 (and €127bn YTD 2011). Undoubtedly some of this decline can be attributed to an investor aversion to specific issuers or jurisdictions, but equally important in our view has been the uncertainty created by proposed regulatory initiatives surrounding the senior unsecured product itself. We note that the proposed adoption of explicit bail-in language for senior unsecured bonds from 2013 has undermined investor confidence in the risk profile of the instrument. While this uncertainty persists, investors will naturally demand additional compensation for the perceived additional risk, making economically feasible senior unsecured issuance out of the reach of most (European) issuers. Securitisation markets remain Turning to the securitisation market, we see a dramatic change in issuance volumes open for Northern European following the onset of the credit crunch, with €325bn of bonds placed with investors issuers, but regulatory initiatives in the first eight months of 2007, compared to €51bn over the same period in 2011. have also altered the incentives in these markets Furthermore, there has been a significant divergence in the fortunes of individual issuing jurisdictions, with the UK and the Netherlands (and to a lesser extent, Italy) able to access the distributed RMBS markets at regular intervals, while other countries have been frozen out of the market owing to the basis between current asset spreads and required liability costs. Furthermore, as we noted in last year’s Handbook, the regulatory environment for both securitisation issuance and investment has been tightened since 2007 from a myriad of sources (CRD III, IV, BIS Liquidity Regime, Solvency II etc). Much as for senior unsecured debt, this has undoubtedly skewed the landscape in favour of covered bonds. Regulatory backdrop could put As we noted in our introduction, we remain aware of potential roadbumps in the too much pressure on the asset medium-term outlook for the asset class (as credit analysts the glass is always half class empty), seeing the developing regulatory regime as skewing the incentives in favour of covered bonds to such a degree, that it is damaging the diversity of alternate bank funding opportunities, and by derivation, potentially harming the ability of today’s covered product to grow at a more measured and sustainable pace.

13 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

The next twelve months–Magic 8 ball time We are either brave or foolish to try and predict the next twelve months, recognising the close link between sentiment for covered bonds and that for financial and government risk more broadly. Letting the reader decide which is the more appropriate interpretation, we set out our thoughts on the next 12 months below:

Who is going to be doing what? ‘Inner core’ and colder ‘Outer From the issuer perspective, we expect the ‘Inner core’ jurisdictions to be relatively core’ countries to have almost unaffected by the vagaries of peripheral crisis (barring a significant event). Danish, uninterrupted access to covered German and French issuers are likely to be able to continue accessing the markets bond funding relatively uninterrupted, albeit with potentially wider access points in particular for French issuers, where sentiment appears less resilient to continued sovereign crisis uncertainty.

For 'Outer core' countries, we see a number of subsets in expected ability to access the markets. For the Scandinavian issuers, we would expect them to be able to access both the Euro and Dollar markets (largely US, but also AUD) broadly uninterrupted Wetter ‘Outer core’ countries to over the course of the next twelve months (assuming the same caveat as above). For rely more on CB as a the UK and Netherlands, we continue to expect to see a greater reliance on the replacement for senior covered product – less as an alternative to RMBS, which still remains a functioning unsecured bonds, with market in both jurisdictions, but more likely as an alternative to senior unsecured Commonwealth countries relying more on investors closer issuance. For non-European issuers, including Canadian, New Zealand and (shortly) to home Australian institutions, we expect to see ever increasing issuance predominantly targeted at the domestic or quasi-domestic markets.

No market access for those at For peripheral countries, we need to split the group into two: those already in the the centre of the peripheral epicentre of the sovereign storm (Greece, Ireland and Portugal) and those one or two storm, occasional access for steps removed (Italy and Spain). Somewhat perversely, the outlook for issuance from those one or two steps away Greece, Ireland and Portugal is easier to communicate, with our hypothesis that we will see no distributed issuance from any of the three jurisdictions for the foreseeable future. For Italy and Spain, we can adopt the same approach, seeing 'national champions' as able to fund over the majority of the year, alongside smaller players being able to fund only in times of market stability.

More investors expected From the investor perspective, we expect to see a continuation of recent trends with respect to investor engagement. If we bifurcate the investor base into traditional 'rates' and newer 'credit' investors, we would expect the rates subset to show a larger appetite in terms of notionals from broadly the same number of accounts, driven largely by regulatory incentives (particularly Solvency II). In comparison, for credit investors we would expect both the breadth, in terms of number of accounts, and depth, in terms of the willingness of these accounts to invest in the covered asset class, to continue to expand over the course of the next twelve months.

In aggregate, with forecast total benchmark issuance of approximately €300bn for FY2011, it would not seem outlandish to expect between €325-350bn in FY2012 given continued dislocation in alternative bank funding sources and an expanding international footprint for the product.

14 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Secondary Market Outlook

The last twelve months–Vow to thee, my country Although wider, not as wide as After stabilising in the second half of 2010 and actually seeing some tightening in the other instruments opening months of 2011 as sovereign concerns initially subsided, covered bond spreads succumbed to broader financial market deterioration as the peripheral saga continued to play out in front of the market’s eyes. Despite the absolute widening evident in many jurisdictions, covered bonds as an asset class have significantly outperformed the broader ‘financials’ sector (Figure 13), although some of the more liquid RMBS asset classes, such as UK prime RMBS, have proved to be even more resilient in price terms.

Figure 13: Cross-asset class spreads comparison, bp Figure 14: Selected Covered Bond spreads, bp iTraxx Europe Senior Fin. 5yrs JPM Maggie CB 3 - 5 Yr 300 350 France CB 3 - 5 Years Germany CB 3 - 5 Years UK RMBS AAA Euro FL 5 Yr 250 300 UK CB 3 - 5 Years Spain CB 3 - 5 Yr 200 250

150 200 150 100 100 50 50 0 0 0 0 0 0 0 1 1 0 0 0 0 1 1 1 1 0 0 0 1 1 1 0 1 0 0 0 0 0 1 1 0 0 0 1 1 1 1 1 1 1 1 1 1 0 0 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 ------1 1 ------1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 l t l - - r r r r ------v c ------n n n n b y b y g p g p l l t r r u c u r r y y a p a p v c n n n n o e b g p b g p a u a u e a e a u e u e u u c J J a p a p a a o e a u a u e e J A J O J A J u e u e F M F M A S N D A S J J M M A O A J J J J F M F M A S N D A S M M Source: J.P. Morgan Covered Bonds Research Source: J.P. Morgan Covered Bonds Research

Tiered price performance for Understandably, not all covered bonds were affected in the same way by the those jurisdictions with feet sovereign headwinds: while French, German and UK spreads proved relatively ‘closest to the fire’ resilient and widened only modestly during the latest bout of volatility, Spanish prices have been a lot more sensitive to the mood swings of the wider market. Figure 14 shows how these have spiked initially in May-June 2010, during the first Greek crisis, then again in December 2010-January 2011, on the back of the Irish crisis and finally resumed rising in June 2011, when sovereign concerns spread to Spain itself along with Italy.

The different relationship between covered bond spread performance and trends in broader market sentiment in the various jurisdictions is perhaps more clear in the charts below. We compare sovereign CDS, used as a measure of stress on a specific jurisdiction, with senior unsecured and covered bond spreads from selected issuers in those countries.

Pfandbrief appear more In Germany (Figure 15), covered bonds are clearly the most resilient of all asset defensive than even the classes considered, even more so than sovereign CDS, which has gapped wider over sovereign the summer months.

15 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Figure 15: German CDS, Senior unsecured and Covered bond Figure 16: UK CDS, Senior unsecured and Covered bond spreads, bp spreads, bp 400 BoS CB 2016 Lloyds Snr. Unsec. 2016 UK 5yrs CDS 160 Deutsche Bank CB 2016 Deutsche Bank Snr. Unsec. 2017 350 140 Germany 5yrs CDS 300 120 250 100 200 80 150 60 100 40 50 20 0 … …

0 - - 0 0 0 0 1 1 0 0 0 0 0 1 1 1 0 0 1 1 y y 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 - - a a ------l l r r t r r v c b b -20 n n g p n n g u u M M a a p c p o e e e a u u e a u u 0 1 0 0 0 0 0 0 0 0 0 1 1 1 1 1 0 0 1 1 J J A A O 1 1 J J J J 1 1 1 1 1 1 1 1 1 1 1 F M A S N D F M A 1 1 1 1 1 1 1 ------l l r r r t r y y b g p v c b g n n n n u u a a p c p a a e u e o e e u a u a u J J A A O J J J J F M F M A S A N D M M Source: Bloomberg Source: Bloomberg

Similarly, in the UK, covered bond spreads have remained broadly stable (Figure 16), whereas senior unsecured prices have significantly widened whilst even the sovereign CDS has come under pressure, although by a lesser degree than elsewhere in Europe.

Close relationship between In Italy and Spain, on the other hand, there is a much closer link between the various government, bank and covered asset classes, with CDS, senior unsecured and covered spreads moving more or less debt in peripheral markets in unison. Interestingly, in Italy and even more so in Spain, the traditionally tight differential between senior unsecured and covered bonds seems to have widened significantly over the recent months, perhaps suggesting that investors have started better appreciating the extra layer of security offered by the cover pool.

Figure 17: Italian CDS, Senior unsecured and Covered bond spreads, Figure 18: Spanish CDS, Senior unsecured and Covered bond bp spreads, bp 500 Intesa CB 2017 Intes Sen. Unsec. 2017 Italy 5yrs CDS 500 BBVA CB 2016 BBVA Sen. Unsec. 2015 Spain 5yrs CDS

400 400

300 300

200 200 100 100 0 0 1 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 0 0 1 1 0 … … 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 - - 0 0 ------0 0 0 0 0 0 0 1 1 1 1 1 1 - - - - 0 0 1 1 l l y y r r r t r 1 1 y y b g p v c b g p 1 1 1 1 1 1 1 1 1 1 1 1 1 n n n n 1 1 1 1 u u a - - a a a ------p c p ------a a e u e o e e u e l l a u a u r t r r r J J v c b b n n g p n n g p A A O u u J J J J M M F M A S F M A S a a p c p N D o e M M e e u e u e a u a u J J A A O J J J J F M A S N D F M A S Source: Bloomberg Source: Bloomberg

And another thing… The close links between sovereign, issuer and the covered bond spread are also reflected in the ratings of the three instruments (see later Rating Agency section for an explicit explanation of the relationships), which in turn often have a second order consequence on the pricing of the covered instrument (as in, the lower the rating, the lower the price). While Figure 19 sets out the average covered bond rating by jurisdiction according to data from S&P, Figure 20 shows the direct impact that the rating of the sovereign (and in turn on the domestic banks) can have on the ratings of outstanding covered bond programmes.

16 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Figure 19: Average covered bond and issuer rating by country Figure 20: Average unused notches and maximum number of notches uplift, # Average covered bond rating Average of uplift (notches) used 19 8 AAA Average issuer credit rating Average of unused notches AA+18 Maximum number of notches uplift (for low ALMM classification) AA17 6 AA16- A+15 A 14 4 A-13 BBB+12 BBB11 2 BBB10- BB+ 9 0 A A E K S X E D R A N N N R R I A A L T S K E E X D R A R P N A E U U R R N R N O E U O I W F I I T L L U U P R F N S U R A E E O C D G P O I N S W F I L N S F C D P N G S

Source: Standard & Poor’s Source: Standard & Poor’s

Most visibly, we see that those countries most affected by the sovereign crisis (Portugal and Ireland in this particular universe) also have the least ‘headroom’ between any future potential issuer/sovereign downgrades and a direct, second-order impact on the rating of covered bonds in the jurisdiction.

The next twelve months–More of the same Who is going to be doing what? In thinking about likely secondary spread trajectories over the coming months, we adopt the same caveat we used when thinking about issuance volumes–i.e. barring any significant event in the sovereign space. Assuming this, we actually expect the current price tiering relationships to remain broadly intact.

By that we mean we would expect to see ‘Inner core’ jurisdictions along with Scandinavian paper to remain broadly unchallenged, offering investors liquidity, but also a less generous pick-up to sovereigns. We would envisage that investors into these asset classes would therefore remain predominantly made up of the more traditional investor base, along with those 'credit like' accounts who are perhaps either new to the asset class and deploying a strategy of slowly building their experience in the sector, or those seeking refuge from the sovereign crisis. If there are any areas of potential technical weakness in this category, we could expect to see French spreads underperform relative to other jurisdictions in this grouping.

For jurisdictions in the ‘middle of the pack’ in spread terms, we would expect increased supply (see earlier section) to be broadly offset by increased client engagement as alternative instruments undershoot in terms of issuance volumes. The UK would be a prime example of this in our opinion, where both ‘traditional’ and ‘new’ investors participate alongside one another. Similarly, Tier One Spanish and Italian names are likely to find the same pockets of interest from both sides of the aisle.

For paper from the distressed jurisdictions of Greece, Ireland and Portugal we would expect to see faster money continue to focus their attention. While we undoubtedly see opportunities to add risk in these segments, the potential for further downgrades (to below investment grade) is likely to mitigate the interest of more 'permanent' covered bond investors, potentially leaving these instruments as longer term investments for anyone who adds positions as opposed to ‘trading assets’.

17 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Our covered bond recommendations

Table 1: Selected Covered Bond recommendations by jurisdiction Sector Outlook Commentary Investment recommendations Germany Technical Fundamentals ‘Rates’ perspective ‘Credit’ perspective   The core jurisdiction in the European CB market. Overwhelmingly a “rates buyer” market, and owing to the relatively tight levels of Neutral Underweight pfandbrief will offer little interest to a credit investor unless liquidity (or the perception of liquidity) is the over-arching driver of investment). Significant redemptions of bonds (particularly public sector backed outstandings) combined with a loyal investor base will likely support pfandbrief levels, despite our view that investors are not being compensated appropriately for the credit risk assumed in the underlying pools. France   The ‘second’ internationally active market in Europe, with a combination of both ‘legislative’ and ‘structured’ (although now also Underweight Underweight legislative) products available to investors (OF or OH). While supply has been elevated during the past twelve months, spreads have been relatively resilient. Generically we prefer OH to OF based on our preference for mortgage assets over public sector exposures, compounded by the typical premium which OH bonds tend to come at in relation to OFs. Furthermore, we would expect OH bonds to perform better than OF bonds over the next few months, owing to some accounts approaching line limits on the more frequent OF names. Scandinavia   Solidly performing covered markets, with few 'credit' concerns with respect to sovereign or issuer strength. Has benefitted in Overweight Neutral spread terms both from the addition of northern European demand to the domestic investor base, along with the tapping of overseas dollar markets (US, Australia). Could see some mild spread tightening in EUR as paper diverted to further afield investors. Positions in these markets offer both liquidity and remain relatively removed from the European sovereign crisis. Netherlands   The last predominantly “rates” market. With the current pick-up of senior unsecured paper relative to Dutch covered bonds, we do Neutral Neutral not expect any significant pricing revisions over the next few months. As ‘hybrid' secured researchers, we see more value in adding securitisation exposure in the Netherlands however. UK   We remain overweight UK covered bonds, appreciating the strength of the guarantor structure (as for Netherlands and Italy). Overweight Overweight Furthermore, owing to the nascent start of a domestic, GBP covered bond market, we also recognise the potential for performance in the existing largely EUR-denominated UK covered bonds, as both future supply is directed into the GBP market and continental investors appreciate the pick-up to some of the tighter, northern European markets. For the more ‘adventurous’ investors, we also see particular appeal in covered bonds of now state-supported institutions (Bradbi and NRAM) which benefit from HM Treasury guarantees (Bradbi to runoff, NRAM revocable with 3 months notice). Italy   While we very much appreciate the SPV structure deployed in OBGs, like the underlying mortgage collateral and the financial Underweight Underweight health of most Italian households, and see the predominantly domestically funded Italian banks as unlikely to ‘over issue’ OBGs, we switch our overweight recommendation to an underweight based on the seemingly significant potential for political backflips with respect to adopting credible austerity measures to stem sovereign contagion. On a HTM perspective, we would remain overweight based on technicals, but on a MTM basis, we see the political backdrop as too volatile to justify further investment.

18 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Sector Outlook Commentary Investment recommendations Spain Tier 1/Tier 2 Tier 1/Tier 2   Solid cross-over market where both credit and rates buyers can be seen in significant volumes. Despite the ongoing stresses in Overweight/Neutral Overweight/Neutral the peripheral sovereign crisis and the reorganisation of the caja system, sentiment remains somewhat levelheaded (particularly for Tier One institutions). While we remain aware of the potential for a further bout of sovereign-inspired weakness over the coming months, and the more central hypothesis that bond ratings will continue to be challenged over the course of 2011, we also view cedulas as one of the most defensive types of covered bond, owing to its unique claim on ‘all mortgage assets’ of the issuing institution (i.e. substantially subordinating the rights of all other senior investors). Portugal   Higher yielding cousin to the Spanish market, we remain overweight Portuguese covered bonds based on fundamentals: driven Underweight Overweight by our view on the underlying mortgage borrowers and the relative health of the Portuguese banking system itself. Sovereign inspired weakness could challenge the shorter term success of our overweight recommendation however, but at yields close to/in the double digits, we expect investors with a medium-term investment horizon to benefit any positions. Currently a play for 'faster money'/high yield type accounts, the shorter term ability to exit any positions will remain constrained (more traditional covered bond investors have been burned once). Potential for slippage into non-investment grade ratings territory. Ireland Domestic/Depfa Domestic/Depfa   Covered bonds’ distressed segment, predominantly considered a 'faster money'/high yield play. Despite the obvious concerns Underweight/Overweight Overweight/Overweight around the health of the Irish banking system in general, and its housing market in particular, we remain overweight Irish ACS. This view is largely driven by the level of political and regulatory support that has been evident for the asset class; and reinforced confirmation that burden sharing will be concentrated in subordinated bonds. Away from domestic issuers, Depfa ACS can also offer investors comfortable with public sector exposure an interesting play from an institution currently 100% owned by the German government. Source: J. P. Morgan Covered Bond Research

19 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Product overview

Covered Bonds: a “bluffer’s guide” We set out below a cheat-sheet for readers new to the asset class, providing a synopsis of the main characteristics of the product and an overview of the major markets.

Table 2: Covered bond cheat-sheet

What is a covered bond? Covered bonds are secured, senior, bullet instruments of an issuer (typically a bank), that provide investors with recourse to both the issuing institution and the underlying, revolving collateral pool. How do CBs differ from RMBS? The main differences between RMBS and covered bonds can be summarised as: a) amortisation: RMBS generally have a pass-through structure based on the repayment of collateral, while CBs generally have a hard or soft bullet profile; b) credit enhancement: covered bonds have much simpler structures than ABS and rely on over-collateralisation as a form of credit enhancement. This can vary according to the usage of the programme by the issuer but a minimum OC has to be maintained; this is monitored through asset and interest coverage tests typically monitored by third parties, which ensure that the asset pool and its proceeds are enough to match the issuer's CB liabilities. In RMBS, credit enhancement is given by subordination and structural features and, except for certain structures, it generally increases as the deal de-levers; c) unlike securitisation, where investors benefit from recourse to the collateral pool only, CB investors benefit from dual recourse to both the issuer and the cover pool. What types of CB structures exist? There are three broad CB structures: a) CB can be issued off the balance sheet of the originator, with the collateral pool remaining with the originator, albeit ringfenced for covered bond investors (for example in Austria and Germany); b) a financial institution establishes a limited function subsidiary, which in turn issues covered bonds (for example France’s OF, Norway); c) in countries without specific CB legislation, CB are typically unsecured obligations of the issuer, with funds raised from the issuance of CB lent to a guarantor (typically a limited liability SPV), which uses the loan to acquire collateral from the originator. This entity then acts as guarantor to the unsecured bonds, agreeing to repay bondholders on insolvency of the issuer (for example UK, Canada, Netherlands, Italy). What type of collateral is accepted? CB legislation (or transactions docs when no CB legislation exists) typically defines the list of collateral eligible to be included in the cover pool. The main types of assets used as primary collateral are public sector exposures, residential and commercial mortgages and shipping loans. In some cases, a max LTV is specified. The EC’s CRD also allows senior MBS (both residential and commercial) issued by securitisation entities, where at least 90% of the underlying mortgages comply with the above rules for unsecured mortgage exposures. The MBS must be rated Credit Quality Step 1, and can only form 10% of the collateral pool (self-originated MBS receive a waiver from the 10% cap). Substitute assets up to a given threshold (typically 10-15%) can also be included in cover pools. What type of risk are investors exposed to? Investors are generally exposed to issuer's risk until its default, after which they are exposed to the credit risk of the cover pool. If there are CBs outstanding after the cover pool has been extinguished, CB investors will have a residual claim to the bankruptcy estate of the issuer which will rank pari passu with that of senior unsecured bondholders Do cover bonds accelerate upon the issuer’s default? No, CBs do not necessarily accelerate on insolvency of the issuing institution. Only the failure of the programme to make payments as and when due results in the acceleration of the obligations. Which jurisdictions are the largest issuers? The largest issuer, by outstanding amount, is Germany, followed by Spain, Denmark, France and Sweden. As CBs gain popularity with regulators, issuers and investors, more jurisdictions are starting to push for dedicated covered bond legislation (for example Canada and the US).

Source: J.P. Morgan Covered Bond Research

20 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

As in last year’s Handbook, we once again set out below to define the core characteristics of the covered bond product, despite recognising that by making some generic statements, we ignore some of the multiple nuances that issuance from hundreds of issuers and tens of jurisdictions necessarily implies. We update this segment to reflect changes to legislative frameworks and the rating methodologies of the main agencies.

For more detail on individual jurisdictions, please see the respective country sections towards the back of this publication.

What exactly is a covered bond? In a sentence… Secured debt with dual recourse Covered bonds are secured, senior, bullet instruments of an issuer (typically a bank), to both the issuer and the that provide investors with recourse to both the issuing institution and the underlying, collateral pool… revolving collateral pool.

Structural Form Covered bonds are typically thought of as bonds issued from the balance sheet of an originating bank, with the revolving collateral pool remaining with the originator, albeit ringfenced for covered bond investors in case of institutional insolvency. This model is deployed in a number of significant issuing jurisdictions (for example, Austria, Finland, Germany, Greece, Hungary, Portugal Spain and Sweden); however, there are also two other forms of covered bond structures common in a number of jurisdictions.

Three broad structural forms The most simplistic alternate structure can be accurately described by its name: used in covered bond issuance ‘Specialist Banking Principle’, whereby a ‘full service’ financial institution establishes a limited function subsidiary, which in turn issues the covered bonds, backed by assets transferred from the originator. This form is typical in Ireland, and France (for Obligations Fonciere), Luxembourg and Norway.

The third variation on issuance form tends to have been adopted by the Anglo-Saxon jurisdictions (Canada, New Zealand, UK and US) along with Italy, the Netherlands and Switzerland. This structure was typically adopted by countries that did not benefit from specific covered bond legislation, but rather adopted securitisation techniques to create a covered bond investment (Figure 21).

Figure 21: Example UK covered bond structure

Bank ABC Loans & related ABC CB LLP Swaps Seller security LLP Provider(s)

Consideration

Repayment of Interco loan Interco loan

Bank ABC Trustee Issuer

CB Proceeds

CB Investors

Source: J.P. Morgan Covered Bond Research

21 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Under this approach, covered bonds are actually unsecured obligations of the issuer. Funds raised from the issuance of covered bonds are then on-lent to a guarantor entity (typically a limited liability SPV), which uses the loan to acquire collateral from the originator. This entity then acts as guarantor to the unsecured bonds, agreeing to repay bondholders on insolvency of the issuer.

Market participants often refer to 'legislative' and 'structured' covered bond markets, distinguishing between the first two forms described above and the latter (although these terms can be something of a misnomer since many 'structured' markets now also have legislation).

Recourse & seniority Covered bond investors benefit from dual recourse, whereby they have recourse to both the collateral pool backing the specific programme as well as to the estate of the originator on its default. Securitisation investors on the other hand have recourse only to the collateral pool.

Covered bonds remain the obligation of the issuing institution prior to its default, similar to any unsecured obligation and irrespective of the collateral performance in the cover pool (non-payment of a covered bond constitutes a default of the institution). Only after issuer default does Only after an institution’s default does the primary source of programme payments the primary source of investor cashflows become the cover switch to the cover pool itself. Subsequently, should the pool prove insufficient to pool repay all outstanding obligations under the programme, covered bond investors will have further recourse to the bankruptcy estate of the issuer. These residual claims would rank pari passu with those of other senior (unsecured) bondholders.

Collateral Covered bond legislation typically defines the list of collateral eligible to be included in a cover pool. The main types of assets used as primary collateral (substitute assets are also eligible in cover pools up to a pre-defined threshold, typically 10-15%) are Most common form of collateral public sector exposures, residential and commercial mortgages and shipping loans. used remains mortgages, As the product expands its geographic reach beyond its traditional home in Europe, followed by public sector assets the list of eligible (primary) assets looks set to expand. Legislative proposals currently winding their way through the US Congress look set to expand the definition of eligible assets to include student loans, credit cards, auto loans and leases and SME loans. Kookmin Bank of Korea has also issued a covered bond backed by both mortgage and credit card collateral (although this has now been replaced with cash holdings).

In the EU, the primary source of guidance is provided in the Capital Requirement Directive1 (CRD), which sets out the following:

 Exposures to public sector entities (central governments, central banks, PSEs, regional governments and local authorities in the EU)  Exposures to public sector entities (central governments, central banks and MDBs qualifying as Credit Quality Step 1, PSE, regional governments and local authorities not in the EU falling into Credit Quality Step 2 cannot exceed 20%)  Exposures to institutions in Credit Quality Step 1, not to exceed 15%

1 http://register.consilium.europa.eu/pdf/en/10/st11/st11527.en10.pdf

22 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

 Residential (80% LTV limit) and commercial mortgage loans (60% LTV limit, or 70% if an issuer provides a minimum of 10% over-collateralisation)  Senior MBS (both residential and commercial) issued by securitisation entities, where at least 90% of the underlying mortgages comply with the above rules for unsecured mortgage exposures. The MBS must be rated Credit Quality Step 1, and can only form 10% of the collateral pool. For the 10% limit to be waived, the MBS must be self-originated and the originator must retain the first loss piece  Loans secured by ships (60% LTV limit) Derivatives are also permitted in certain jurisdictions to hedge specific risks, including interest and foreign exchange exposures. Credit risk of the cover pool remains with the issuer until Cover pools backing covered bonds are dynamic in nature, with investors essentially default, upon which it transfers assuming the credit risk of the cover pool only upon issuer default. to the investor Insolvency Covered bonds do not necessarily accelerate on insolvency of the issuing institution. Only on the failure of the programme to make payments as and when due results in the acceleration of the obligations.

Covered bonds vs. RMBS Mortgage-backed covered bonds and RMBS have more than a passing similarity to each other (especially when considering the market-reopening UK master trust RMBS bonds which contained an originator put at maturity). However, there are also some notable structural differences between the two products. We set out to highlight the most prominent below.

Definitions The ECBC2 sets out a definition of a covered bond as follows:

‘Covered bonds are debt instruments secured by a cover pool of mortgage loans (property as collateral) or public-sector debt to which investors have a preferential claim in the event of default.’

More fully, the BIS sets out a definition of securitisation in its ‘International Convergence of Capital Markets and Capital Standards’3 document:

‘A traditional securitisation is a structure where the cash flow from an underlying Covered bonds do not meet the international definition of pool of exposures is used to service at least two different stratified risk positions or securitisation tranches reflecting different degrees of credit risk. Payments to the investors depend upon the performance of the specified underlying exposures, as opposed to being derived from an obligation of the entity originating those exposures.’

As we can see from the above BIS definition, covered bonds fail to meet this test on a number of fronts. First, as we have already noted, cashflows from the underlying pool are not necessarily used to service the covered bonds, but rather the general resources of the issuing institution are utilised. Second, with the exception of Danish junior

2 http://ecbc.hypo.org/Objects/9/Files/ECBC%20Fact%20Book%202010.pdf 3 http://www.bis.org/publ/bcbs128.pdf?noframes=1

23 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

covered bonds, there are no stratified risk positions or tranches reflecting different credit risk profiles in covered bonds. Finally, payments to investors do not depend on the performance of the underlying exposures while the issuing entity remains solvent. The credit risk of the cover pool is not transferred until issuer insolvency.

Amortisation Repayment profiles differ European securitisation bonds typically amortise over time through the repayment of between the two secured the underlying exposures (notable exceptions to this are UK credit card and UK and products Dutch mortgage master trusts which offer investors soft-bullet bonds). Distributed covered bonds typically utilise a hard or soft-bullet redemption profile (there are some pass-through covered bonds, but these have typically been retained by originators for use as central bank repo collateral).

Credit enhancement & Investor protections Over-collateralisation and Covered bonds are less structurally engineered than even the simplest type of pass- programme tests are the main through securitisation vehicles (even setting aside the complexities of ABS master types of credit enhancement for CB investors trusts). To this end, covered bonds do away with much of the credit enhancements offered to securitisation investors (subordinated tranches, reserve funds, excess spread etc). Rather, covered bond investors’ main form of credit enhancement stems from programme over-collateralisation, (which is naturally dynamic based on issuer actions, including collateral additions and the programme issuance/redemptions profile). Unlike in securitisations, where credit enhancement tends to increase over time as the structure delevers (barring collateral credit issues and the specific case of master trusts), over-collateralisation in covered bond programmes can increase or decrease as the programme is utilised by the issuer.

Further investor protection is provided to CB investors by tests adopted in local legislation or programme terms. For example, structured covered bond programmes (i.e. Canada, Netherlands, UK etc) typically require that the assets of the guarantor entity are subject to an Asset Coverage Test (ACT) on a regular basis. The test is designed to ensure a minimum level of over-collateralisation in the cover pool to protect investors from market and liquidity risks. The guarantor must therefore ensure that on each calculation date, the ‘Adjusted Aggregate Loan Amount’ (i.e. the aggregate loan amount haircut by predefined criteria) is at least equal to the outstanding amount of the programme’s CB. The ACT is conducted by the Cash Manager, with annual third party asset monitor reviews. Failure to remedy a breached ACT by the next calculation date usually results in an Issuer Event of Default.

Similarly, programmes from these jurisdictions also typically include an Amortisation Test (AT) which is designed to ensure that the cover pool exceeds the outstanding notional of CB at all times. The adoption of an AT serves to minimise time subordination within the structure for outstanding noteholders. Following service of a Notice to Pay on the guarantor, it must ensure that on each calculation date following an Issuer Event of Default, the Amortisation Test Aggregate Loan Amount will at least equal the aggregate outstanding amount of the CB.

Other tests offering protection to bondholders include ‘Pre-maturity Tests’ (which are designed to ensure the borrower can provide sufficient liquidity in case of downgrade (i.e. pre-defined period prior to scheduled bond redemption, if a borrower's short-term rating is below a prescribed threshold, the borrower must fund a cash collateral account to ensure redemption)); and ‘Interest Coverage Tests’ to ensure interest from the cover pool after hedges always exceeds interest payments due on the covered bonds over a given period.

24 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Rating Agencies

All agencies use the unsecured We set out below an overview of the ratings approaches adopted by the four agencies rating of the issuer as a rating‘s with respect to covered bonds. All four agencies link the rating of covered bonds to floor for its covered bonds the rating of the issuing bank, providing further scope for uplift from the issuer rating based on both collateral and cover pool cashflow characteristics. We have updated the following overviews to reflect amendments from Fitch, proposed amendments from S&P, as well as adding DBRS' rating methodology.

DBRS The following is a synopsis of the methodology used by DBRS to rate covered bonds. For a complete overview of the Agency’s approach, please see ‘Rating European Covered Bonds’, published 29th August 2011.

DBRS sees covered bonds as being akin to senior secured bank debt, therefore deploying a 'linked approach' to its ratings methodology. The ratings process is built around three steps: the rating of the issuer, an assessment of the legal & structuring framework and an assessment of the cover pool. In more detail:

 Step 1 utilises the issuer's rating, seeing it as the primary source of the timely payment and ultimate repayment of a programme’s outstanding covered bonds.  Step 2 focuses on the Legal and Structuring Framework ('LSF') under which the respective covered bond programme operates. This assessment is the most significant of the three individual Steps, and once completed, determines the maximum achievable rating for a specific programme. Assigning a LSF grade requires a review of the respective legislation and the legal environment in the relevant country. Where legislation does not exist, the analysis is conducted at the individual programme term level instead. The LSF can be categorised in four assessments: Very Strong, Strong, Adequate, and Modest  Step 3 focuses on an assessment of the cover pool, following similar collateral analysis methodologies to those deployed in securitisation analysis. It is undertaken by incorporating the cover pool analysis along with reviews of hedging contracts, expected cash flows from the pool and the payment profile of the programme, as well as cashflow stress analysis. Fitch Ratings The following is a synopsis of the methodology used by Fitch Ratings to rate covered bonds. For a complete overview of the Agency’s approach, please see Fitch Rating’s ‘Covered Bond Rating Criteria', published 11th August 2011.

Fitch Ratings uses a three-stage process in arriving at the ratings it gives to covered bonds. First, it combines the Issuer Default Rating (IDR) with the programme’s Discontinuity Factor (D-Factor) to calculate a maximum rating on a probability of default (PD) basis. Second, it tests the programme’s overcollateralisation, and finally calculates a recovery uplift.

The D-Factor is designed to capture the level of expected difficulty in transitioning from the issuer to the cover pool, after issuer default. The D-Factor is itself derived from five separate attributes, each given a contributory weighting: Asset Segregation

25 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

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(45%), Liquidity Gaps (35%), Alternative Management (15%), Oversight (5%) and Privileged Derivatives (flat adjustment). Effectively, the IDR sets the floor rating for the covered bond, with the D-Factor setting the cap rating. The higher the D-Factor %, the lower the level of rating uplift that can be achieved from the IDR.

 Asset Segregation looks at the effective segregation of the cover pool from other creditors, the remoteness of over-collateralisation from creditor claims and also considers clawback, co-mingling and set-off risk.  Liquidity Gaps analysis is two-fold, making a macro assessment of market liquidity and timing for potential portfolio sales, while also considering liquidity gaps at the programme level with the effectiveness of asset-liability mechanisms (i.e. pass-through structures, extendable bond maturities, liquidity guidelines, marching of assets/substitute assets).  Alternative Management looks to the process governing the appointment of a substitute manager, along with the time taken to affect such a process. Furthermore, the Agency considers the availability of suitable replacements in a given market, along with the potential for conflicts of interest.  Oversight considers the importance of covered bonds to a particular market, and the regulatory involvement in monitoring and supervising covered bonds.  Privileged Derivatives considers how vulnerable programmes with privileged hedging agreements are to the default of the issuer. Table 3: Maximum achievable rating based on PD (Stage 1) D-factor IDR 100% 70% 60% 50% 40% 30% 20% 14% 10% 5% 0% AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AA+ AA+ AA+ AAA AAA AAA AAA AAA AAA AAA AAA AAA AA AA AA+ AA+ AA+ AA+ AAA AAA AAA AAA AAA AAA AA- AA- AA AA AA+ AA+ AA+ AAA AAA AAA AAA AAA A+ A+ AA- AA- AA- AA AA AA+ AA+ AAA AAA AAA A A A+ AA- AA- AA AA AA+ AA+ AAA AAA AAA A- A- A A+ A+ AA- AA- AA AA+ AA+ AAA AAA BBB+ BBB+ A- A A+ A+ AA- AA AA+ AA+ AAA AAA BBB BBB BBB+ BBB+ A- A A+ AA- AA AA AA+ AAA BBB- BBB- BBB BBB BBB BBB BBB+ A A+ AA- AA AAA BB+ BB+ BBB- BBB- BBB- BBB BBB BBB+ A- A AA- AAA BB BB BB+ BB+ BBB- BBB- BBB BBB BBB+ A- AA- AAA BB- BB- BB BB BB+ BB+ BBB- BBB BBB BBB+ A AAA B+ B+ BB- BB BB BB+ BB+ BBB- BBB BBB A- AAA B B B+ BB- BB- BB BB+ BBB- BBB- BBB BBB+ AAA B- B- B B+ BB- BB- BB BB+ BBB- BBB- BBB+ AAA CCC/+ CCC/+ B- B B+ BB- BB- BB BB+ BBB- BBB AAA Source: Fitch Ratings Stage 2 involves assessing the highest level of stress that the over-collateralisation in the cover pool can withstand while still maintaining timely interest and principal payments in a wind-down scenario. The pool is assessed under economic downturn conditions, and compares the stressed cashflows from the cover pool to the payments required to be made on the covered bonds themselves. Over-collateralisation is key to the rating since it is the only form of credit-enhancement available to covered bond investors.

26 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

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Fitch gives credit for over-collateralisation in the following order: contractual commitments, if legally binding and enforceable; non-contractual public statements and covenants; and issuer’s internal guidelines. For issuers without any of the above:

 For institutions rated at least F2, the lowest level of over-collateralisation during the last twelve months  For institutions rated F3 or below, the minimum level of over-collateralisation required by legislation To achieve this analysis, the Agency runs scenario analysis from the highest achievable rating under Stage 1, down to the IDR. If over-collateralisation is insufficient to avoid a payment default on the covered bonds in the first scenario at the cap rating, the test is re-run again at each rating down to the IDR. The first rating where over-collateralisation is sufficient to support the payments required under the programme, is the rating under Stage 2.

Stage 3 is to recognise the positive impact of higher recoveries from the underlying collateral in the cover pool. Recoveries are calculated by comparing the NPV of cashflows from the cover pool against the NPV of privileged liabilities (the covered bonds themselves along with privileged swaps).

Table 4: Maximum uplift from Step 1 due to recovery considerations Recovery range (in %) Investment grade Non-IG Outstanding 91-100 +2 +3 Superior 71-90 +1 +2 Good 51-70 +1 +1 Average 31-50 - - Below average 11-30 -1 -1 Poor 0-10 -1/-2 -2/-3 Source: Fitch Ratings

Criteria for CB secured on commercial real estate loans Fitch believes that the risks inherent in pools, whether wholly or partially backed by commercial real estate exposures, are significant enough to warrant specific analysis when rating programmes. These analysis steps form part of its overall covered bond rating process defined above.

Definitions Fitch defines loans as commercial real estate exposures if they are secured on property types which include office, retail or industrial, alongside exposures to multifamily housing units and more specialised property types such as hotels. Multi- property (>4 units) buy-to-let loans are also considered under this approach.

Approach Fitch requires loan level data analysis to be conducted to most accurately capture the risk of commercial property portfolios. Should loan level data be unavailable, the Agency will apply the most conservative assumptions when modeling. Calculations are then conducted on the default likelihood and recovery rate of each exposure, and rolled up into a total commercial property default and recovery rating.

27 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Moody’s The following is a synopsis of the methodology used by Moody’s to rate covered bonds. For a complete overview of the Agency’s approach, please see ‘Moody’s Rating Approach to Covered Bonds’, published 4th March 2010.

Moody’s employs a joint default methodology, capturing both the credit strength of the issuing bank along with that of the cover pool. The rating of the issuing bank is the starting point of the Agency’s analysis, with the final rating of the covered bond programme determined by the quality of the collateral pool, the strength of the legal framework under which the programme is issued, and any other pertinent contractual commitments. Similar to its approach to other asset classes, the Agency uses an Expected Loss approach, combining the issuer PD based on the senior unsecured rating and the expected LGD to CB investors in the event of such a default.

Moody’s uses a four-stage process for determining its covered bond ratings, looking first at the rating of the issuer, followed by consideration around the credit quality of the cover pool, modeling refinancing risks and finally computing market risks.

Similar to the approach of the other agencies, analysis starts at the rating of the issuer. Step 2 results in the analysis of the pool on either a loan-by-loan or stratified basis. A collateral score is given to act as a guide to the strength of the cover pool, considering the amount of collateral that can be refinanced at different rating levels and the amount of collateral written off on issuer default. The higher the collateral score, the higher the risk-free credit enhancement required by the programme (i.e. a lower collateral score implies higher collateral quality). Collateral scores can be reduced based on the (lower) correlation between the cover pool and the issuer itself.

Step 3 involves the modeling of refinancing risks, owing to the fact that natural amortisation of the pool is likely to be insufficient to meet the repayment profile of the programme. Moody’s looks to the securitisation market to calculate the discount that should be applied to the cover pool when calculating a stress refinancing margin. Finally, under Step 4, the agency looks to calculate market risks post-default of the issuer.

Moody’s also utilises a metric called the Timely Payment Indicator (or TPI), which is used in conjunction with the issuer’s rating to calculate the final covered bond programme rating. The TPI is designed to capture an assessment of the timeliness of payment of interest and principal following issuer default. TPI drivers are split over five categories, as follows:

 Legislation/contract considerations  Hedging considerations  Asset type considerations  Nature of liabilities considerations  Other considerations

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Table 5: Maximum achievable rating based onTPI TPI Sponsor rating Very improbable Improbable Probable Probable-High High Very High A1 Aaa Aaa Aaa Aaa Aaa Aaa A2 Aa1 Aa1 Aaa Aaa Aaa Aaa A3 Aa2 Aa2 Aaa Aaa Aaa Aaa Baa1 Aa3 Aa3 Aa1 Aa1 Aaa Aaa Baa2 A1 A1 Aa2 Aa2 Aa1 Aaa Baa3 A3 A2 A1 Aa3 Aa2 Aa1 Ba1 Baa3 Baa2 Baa1 A3 A2 A1 Ba2 Baa3 Baa2 Baa1 A3 A2 A1 Ba3 Baa3 Baa2 Baa1 A3 A2 A1 B1 Ba3 Ba2 Ba1 Baa3 Baa2 Baa1 B2 Ba3 Ba2 Ba1 Baa3 Baa2 Baa1 B3 Ba3 Ba2 Ba1 Baa3 Baa2 Baa1 Source: Moody’s Standard & Poor’s The following is a synopsis of the methodology used by Standard & Poor’s to rate covered bonds. For a complete overview of the Agency’s approach, please see Table 6: Scaling factors ‘Revised Methodology And Assumptions For Assessing Asset-Liability Mismatch Timing of Scaling Risk In Covered Bonds’, published 16th December 2009. mismatch factor 0-1yr 100% Figure 22: S&P covered bond ratings approach 1-2y 95% 2-3y 90% Asset Risk Cashflow Legal Risk Operational & Counterparty 3-4y 85% Risk Administrative Risk 4-5y 80% Risk 5-6y 75% 6-7y 70% Zero Low 7-8y 65% 1 ALMM Classification 8-9y 60% Moderate High 9-10y 55% Category 1 >10y 50% 2 Programme Categorisation Category 2

Source: Standard & Poor’s M Category 3

Category 1 2 3 a x .

Zero Unrestricted Maximum Potential #

Low 7 6 5 n 3 CB rating o t Moderate 6 5 4 c h e

High 5 4 3 s

Cashflow & Market Value 4 Determine target credit enhancement to Analysis achieve maximum potential ratings uplift

Compare target credit enhancement with 5 CB Rating available credit enhancement

Source: Standard and Poor’s

S&P’s ratings methodology uses a five-stage process to calculate a programme’s ultimate rating. First the Agency looks to calculate a programme’s maximum ALMM (asset liability mismatch) along with its timing, then under Stage 2 segregates programmes based on their issuance jurisdiction. The ALMM classification is determined as the maximum cumulative net ALMM as a percentage of outstanding liabilities. To calculate the ALMM, S&P stresses the periodic cashflows from the collateral pool and compares these to the stressed outflows of the programme. The net difference (‘net stressed periodic cashflow’) is then scaled based on its timing. The ALMM percentage is then calculated as the maximum cumulative scaled ALMM amount, divided by the outstanding balance of programme liabilities. Based

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on the calculated percentage, the programme will sit in one of four available classification buckets.

Table 7: ALMM classifications and potential maximum uplift ALMM Classification ALMM Percentage Max. Potential Uplift Zero N/A Unrestricted Low <15% 5-7 notches Moderate 15-30% 4-6 notches High >30% 3-5 notches Source: Standard & Poor’s

Rated covered bonds will therefore benefit from a minimum three notch uplift over the issuer’s own rating, and a maximum seven notch upgrade. For programmes without ALMM risk, such as pass-through bonds, a covered bond’s rating is unconstrained by the issuer’s rating.

Step 2 allocates programmes into one of three categories based primarily on their jurisdiction of issuance.

Table 8: Programme categorisation Category 1 Category 2 Category 3 Range of funding options Can raise funds from both Can raise funds either Access to funding is asset sales and borrowing. through asset sales or restricted so sale of No restrictions on when or borrowing. No assets is forced how funds can be raised restrictions on when or how funds can be raised Strength of funding Long, well-established Limited history for the Newly established CB sources history for the CB market. CB market. Not as market. Systematic Systematic importance is systematic as Category importance is low. high. Broad range of banks 1. Broad range of banks Uncertain investor able to lend, and adequate able to lend, and demand among a broad investor demand among a adequate investor range of investors for broad range of investors for demand among a broad the assets backing the the assets backing the range of investors for programme programme the assets backing the programme Jurisdictions Denmark; France (OFs); Canada; Finland; France Greece; US Germany; Spain, Sweden (structured CB); Ireland; Italy; Luxembourg; Netherlands; Norway; Portugal; UK Maximum potential 5 to 7 4 to 6 3 to 5 ratings uplift Range of funding options Can raise funds from both Can raise funds either Access to funding is asset sales and borrowing. through asset sales or restricted so sale of No restrictions on when or borrowing. No assets is forced how funds can be raised restrictions on when or how funds can be raised

Source: Standard & Poor’s

Step 3 sees the combination of ALMM Classification (Stage 1) and Programme Categorisation (Stage 2), giving the maximum potential covered bond rating.

30 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

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Table 9: Maximum potential ratings uplift from the issuer’s ICR ALMM Classification Category 1 Category 2 Category 3 Zero Unrestricted Unrestricted Unrestricted Low 7 6 5 Moderate 6 5 4 High 5 4 3 Source: Standard & Poor’s

Table 10: Maximum potential rating Issuer Rtg Category 1 Category 2 Category 3 AAA AAA AAA AAA AA+ AAA AAA AAA AA AAA AAA AAA AA- AAA AAA AAA A+ AAA AAA AA+ A AAA AA+ AA A- AA+ AA AA- BBB+ AA AA- A+ BBB AA- A+ A BBB- A+ A A- BB+ A A- BBB+ BBB- A- BBB+ BBB BB+ BBB+ BBB BBB- Source: Standard & Poor’s

Step 4 involves the modeling of revised collateral pool market values based on stressed asset spreads. These are used to calculate the expected proceeds to the programme if it borrowed or sold assets, allowing the Agency to calculate the required level of over-collateralisation required to support the maximum rating uplift. Asset market values are calculated using spread shocks, whereby the NPV of projected asset cashflows is based on stressed discount margins (taken from securitisation market pricing).

If the programme’s over-collateralisation reaches or exceeds the target level required under Step 4, the programme will be awarded the maximum potential rating. Should the actual level of over-collateralisation fall below this, however, the Agency will assign a commensurately lower rating.

S&P also assigns outlooks for CB ratings (Stable/Developing; Positive; and Negative).

Counterparty criteria S&P is currently continuing to review the feedback on its proposed update of its covered bond counterparty and supporting obligations methodology and assumptions as at 15th August 2011.

The proposals relate specifically to the treatment of derivative obligations in covered bonds. The treatment of direct support and other support obligations remain the same as for those implemented in January for other structured finance obligations. Owing to the existence of multiple counterparties in covered bond programmes and the dual recourse nature of the product (i.e. the role of the originator/issuer), the proposed criteria link the rating of covered bonds to both the Issuer ICR and those of the derivative counterparties.

31 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

In summary, on the assumption that derivative obligations contain a replacement mechanism, and the derivative counterparties in the programme are third parties, then the proposed criteria will take into consideration three factors:

 The number of derivative counterparties  The weighted-average rating of the derivative counterparties; and  The ICR of the issuer Simplistically, the lowest rating assigned to a covered bond would be the higher of the issuer’s ICR plus one notch; or the lowest rated derivative counterparty’s ICR plus one notch.

Table 11: Adjustments to the maximum covered bond rating

Step 1 Step 2 Step 3

Number of Weighted-Avg CB Issuer Derivative Rating of Derivative Rating Counterparties Counterparties

AAA to A A- to BBB-

>10 derivative Bucket 1 counterparties No adjustment No adjustment AAA to AA-

And No adjustment Minus 1 notch A+ to A <30% Single Counterparty Minus 1 notch Minus 2 notches A- to BBB- Concentration

Bucket 2 No adjustment Minus 1 notch AAA to AA-

Minus 1 notch Minus 2 notches A+ to A

Minus 2 notches Minus 3 notches A- to BBB-

Source: Standard and Poor’s

32 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected] s e l i f o r P

r e u s s I

33 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

34 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected] s d n o B

d e r e v o C

n a i r t s u A

35 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Austrian Covered Bonds

Legislative snapshot We set out in Table 12 a snapshot of key covered bond attributes in Austria.

Table 12: Austrian Covered Bond legislative overview Attribute Commentary Framework Legislative Framework Three different frameworks for covered bond issuance: Mortgage Banking Law of 1899 (Hypothekenbankgesetz); Law on Secured Bank Bonds (Gesetz betrffend fundierte Bankschuldverschreibungen (FBS) 1905) and Mortgage Bond Act (Pfandbriefgesetz as amended 2005). Types of covered bonds The current framework gives the option to issue two types of covered bonds: Pfandbriefe are issued under the Mortgage Banking and Mortgage Bond Acts that apply to commercial and public sector banks; Fundierte Bankschuldverschreibungen (FBS) are issued under the Law of Secured Bank Bonds, which applies to all other issuers. There are mortgage-backed bonds and public sector-backed bonds. Structure of Issuer Direct issuance? Yes, the bonds are issued directly off the balance sheet of the issuer. Comments (if any) The issuer does not necessarily have to be the originator under the Pfandbriefe framework and assets originated outside the issuer can be included. ABS and MBS are not allowed as collateral. Bankruptcy remoteness Issuers are required to record assets backing the bonds in the cover register. Dual claim Yes, pari passu with unsecured creditors. Bond format Generally fixed rate (although there are small size floating rate issues) bullets. Supervision Financial Market Authority and Ministry of Finance, along with both a primary and secondary (back-up) trustee. For FBS, the collateral pool is monitored by a government commissioner. Cover pool Eligible assets Mortgage The property must be located in Austria, EEA or Switzerland. Residential, commercial and agricultural loans allowed under Pfandbriefe. The preferential claim of the cover bonds must be recognised by the local laws; if not, there is a 10% limit on collateral from that jurisdiction. LTV caps For FBS it s according to the statutes, although in practice this is 60%. For Pfandbriefe it is 60% LTV soft cap. Public Sector Exposures to public sector entities located in Austria, other EEA or Switzerland with maximum risk weighting of 20%. FBS may also include bonds with “Mundelgelder” (“safe bond”) status. Non-performing collateral Not given credit towards OC calculations. Substitution Assets Cash, credit institution debt, assets available for use at the ECB, public sector debt from acceptable jurisdictions (see above) are available for use as substitution assets, up to a cap of 15%. Hedging Derivatives are only allowed for hedging of market, interest and FX risk. Valuation Individual market values. The issuer monitors the property value and regular audits are undertaken. The valuation of the property cannot exceed its resale value and valuation guidelines need to be approved by the regulator. Other comments (if any) Requirements ALM matching Asset coverage Natural matching and stress testing. Pfanbriefe use nominal cover, while FBS uses nominal cover as a min but can be replaced by NPV cover. Minimum 2% OC has to be maintained. Interest coverage Interest income from the assets must at least cover interest paid on the bonds. Other (if any) Consequence of breach Regulatory or rule-based actions. Monitoring Periodic reporting required. The cover pool monitor performs audits on the pool, verifies any breach of coverage test and has reporting duties to the supervisory authority. Other Compliance with EU Both types of bonds are UCITS and CRD compliant. legislation Source: National legislation, J.P. Morgan Covered Bond Research

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Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Austrian covered bond & macro backdrop

Figure 23: CB issuance, €mm Figure 24: CB outstanding, €mm 14,000 30,000

12,000 Mortgage Public Sector 25,000 Mortgage Public Sector 10,000 20,000 8,000 15,000 6,000 10,000 4,000 2,000 5,000 0 0 2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 2007 2008 2009 2010 Source: ECBC. Latest data available displayed Source: ECBC. Latest data available displayed Figure 25: Austrian real GDP growth, y-on-y, % Figure 26: Austrian unemployment level, %

6 Real GDP growth 6 4 5 2 4 0 3 -2 2 -4 Unemployment -6 1 -8 0 0 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 1 1 ------r r r r r r r r r r r r r r r r r r r r r r r r a a a a a a a a a a a a a a a a a a a a a a a a M M M M M M M M M M M M M M M M M M M M M M M M

Source: Bloomberg Source: Bloomberg

Figure 27: Austrian CPI and base rate, % Figure 28: Austrian consumer confidence, balance of survey

5 Inflation Base rate 20 Cons. Confidence 4 15 3 10 5 2 0 1 -5 -10 0 -15 -1 -20

1 2 3 4 5 6 7 8 9 0 1 -25 0 0 0 0 0 0 0 0 0 1 1 ------0 1 2 3 4 5 6 7 8 9 0 1 r r r r r r r r r r r 0 0 0 0 0 0 0 0 0 0 1 1 a a a a a a a a a a a ------r r r r r r r r r r r r M M M M M M M M M M M a a a a a a a a a a a a M M M M M M M M M M M M

Source: Bloomberg Source: Bloomberg

Figure 29: Austrian outstanding mortgage stock (€mm) and annual Figure 30: Austrian average mortgage rate, % change, % (RHS) 7 Avg mortgage rate 90,000 Outstanding mortgage stock Annual change in mtge stock (RHS) 30% 6 80,000 25% 5 70,000 4 60,000 20% 50,000 3 15% 40,000 2 30,000 10% 1 20,000 5% 10,000 0 3 4 5 6 7 8 9 0 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 1 1 ------0 0% l l l l l l l l n n n n n n n n n u u u u u u u u a a a a a a a a a 2 3 3 4 4 5 5 6 6 7 7 8 8 9 9 0 0 1 J J J J J J J J J J J J J J J J J 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 1 1 ------c n c n c n c n c n c n c n c n c n e e e e e e e e e u u u u u u u u u J J J J J J J J J D D D D D D D D D Source: ECB Source: ECB

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BAWAG PSK Table 14: Key balance sheet figures, €mm (BBG: BAWAG) FY 2008 FY 2009 FY 2010 Loans 20,697 21,066 22,288 Snapshot Total Assets 41,578 41,225 38,556 Bank für Arbeit und Wirtshaft (BAWAG) PSK is one of Deposits 22,585 22,674 21,733 Short-term borrowings 3,268 6,811 6,290 the largest banking groups in Austria and is mostly Other short-term focused on retail finance and deposit-taking. borrowings 3,312 3,017 3,169 Long-term borrowings 10,957 6,371 4,900 BAWAG and PSK were founded as separate entities; in Equity 1,326 2,292 2,424 2000 BAWAG acquired PSK, creating the third largest Source: Bloomberg banking group in Austria at the time and the most Table 15: Select financial metrics extensive centrally managed distribution network in the country. FY 2008 FY 2009 FY 2010 ROA -1.3 0.4 0.3 ROE -37.9 10.8 6.9 In 2004, the Austrian Trade Union acquired the ROC -5.6 1.1 0.9 remaining non-Austrian-owned 46% stake in the bank C:I 318.9 56.6 63.6 from Bayern LB but it was forced to sell in October Source: Bloomberg 2005, following the collapse of Refco, a broker that was used to hide significant losses in derivatives transactions. Cover pool overview The bank subsequently received a support package in We set out below some of the key cover pool order to avoid defaulting. In 2007, the bank was sold to characteristics: Cerberus and a consortium of lenders and insurers. Table 16: Covered bond characteristics In 2009, in exchange for an increase in capital and a As at April 2011 guarantee for certain assets by the Republic of Austria, Ratings S/M/F the bank agreed to provide lending to SMEs and Covered Bond rating -/Aa1/- Issuer rating -/Baa2/- households for a total of €1.7bn over three years. Cover pool Financial performance Cover pool size (€) 3,408,000,000 Bonds outstanding (€bn) 2,527,000,000 We set out below some of the key financial performance Nominal OC (%) 28.0 metrics: Mandatory OC (%) 15.5

Currency split (%) Table 13: Key profit & loss figures, €mm EUR 91.0 FY 2008 FY 2009 FY 2010 CHF 9.0 Net interest income 653 564 650 Provisions for loan Debtor distribution (in %) losses 281 237 200 Municipalities 70.0 NII less provisions 371 328 450 Republic of Austria 25.0 Federal States 5.0 Comm.& fee income 144 155 159 Other operating Ratings split (%) income 14 30 -4 AAA 54.5 Non-interest expense 684 608 618 AA 32.5 Operating profit -751 230 154 A 9.4 BBB and below 3.6 PBT -804 222 149 Source: Investor report Taxes -89 57 13 Net profit (loss) -548 165 137 Source: Bloomberg

38 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Erste Bank Group Table 19: Select financial metrics (BBG: ERSTBK) FY 2008 FY 2009 FY 2010 NIM 2.7 2.8 2.9 Snapshot ROA 0.4 0.4 0.5 The Erste Bank Group operates across eight markets in ROE 10.4 8.7 7.7 ROC 1.3 1.3 1.6 Central and Eastern Europe, with over 17 million C:I 66.9 56.3 55.5 customers, of which 95% are EU residents. Through the Core capital 7.2 10.8 11.8 acquisition of 10 local banks between 1997 and 2007 it Source: Bloomberg has significantly increased its presence in 8 Central and Eastern European jurisdictions. Cover pool overview We set out below some of the key cover pool The group is primarily a savings bank and uses deposits characteristics: to finance the majority of its lending activities: the bank relies on deposits for 60% of its funding needs and has a Table 20: Covered bond characteristics loan-to-deposits ratio of 111%. Public-sector Mortgage As at June 2011 As at June 2011 Erste issues both mortgage and public-sector-backed Ratings S/M/F S/M/F Pfandbriefe. Covered Bond rating -/Aaa/- -/Aaa/- Issuer rating A/A1/A A/A1/A

Financial performance Cover pool Cover pool size (€) 3,518,185,014 7,124,153,368 We set out below some of the key financial performance Outstanding CB (€) 2,826,602,922 5,358,027,905 metrics: Nominal OC (%) 24.5 33.0 Number of loans 6,442 38,067 Table 17: Key profit & loss figures, €mm Avg loan size (€) 2,013,748 226,471 FY 2008 FY 2009 FY 2010 WA original LTV (in %) 50.1 Net interest income 4,892 5,208 5,391 Remaining tenor (yrs) 14.2 17.1 Provisions for loan WA seasoning (yrs) 4.5 6.0 losses 1,071 2,057 2,031 Fixed rate assets (in %) 21.3 10.8 NII less provisions 3,820 3,152 3,360 Geographical split (in %) Comm.& fee income 2,426 2,320 2,488 Austria – Vienna 20.0 32.0 Other operating Austria – Lower Austria 20.0 18.0 income 217 185 140 Austria – Styria 16.0 16.0 Non-interest expense 4,885 4,856 4,949 Austria – Other 37.2 27.2 Operating profit (loss) 1,123 1,288 1,494 Germany 2.0 6.7 Other Europe 0.0 0.1 PBT 576 1,261 1,515 Taxes 177 285 329 Property type (in %) Net profit (loss) 860 903 1,015 Private housing 36.0 Source: Bloomberg Subsidised tenant 22.0 associations Commercial housing 16.0 Table 18: Key balance sheet figures, €mm Commercial properties 26.0 FY 2008 FY 2009 FY 2010 Borrower type (in %) Commercial Loans 70,000 70,296 70,526 Municipalities 36.0 Consumer Loans 49,753 51,702 54,364 Provinces 22.0 Other Loans 6,432 7,136 7,839 Guaranteed by Provinces 17.0 Total Assets 201,441 201,710 205,938 G.teed by Municipalities 14.0 Deposits 109,305 112,042 117,016 Short-term borrowings 38,971 27,683 22,304 Source: Investor report Other ST borrowings 7,940 9,488 12,631 Long-term borrowings 26,185 34,372 30,709 Equity 11,095 16,123 17,129 Source: Bloomberg

39 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

HYPO NOE Gruppe Table 22: Key balance sheet figures, €mm (BBG: NDOLB) FY 2009 FY 2010 Real Estate Loans 1,154 1,217 Snapshot Commercial Loans 2,113 1,565 The HYPO NOE Gruppe is one of Austria’s largest state Consumer Loans 5,314 6,096 Other Loans 1,154 1,217 banks and the bank’s sole owner is the State of Lower Total Assets 11,645 12,004 Austria, rated Aaa by Moody’s. The group focuses Deposits 2,461 2,327 mostly on providing public sector and real estate finance Short-term borrowings 3,065 2,624 in Lower Austria but is increasingly active in the rest of Long-term borrowings 6,011 5,945 Equity 404 382 Austria and abroad, particularly in Germany and CEE Source: Annual report 2010 countries. Table 23: Select financial metrics The HYPONOE group operates along three business FY 2009 FY 2010 lines: HYPO NOE Landesbank is a universal bank with ROE 5.4 1.8 private and corporate clients in Lower Austria and C:I 57.3 76.4 Vienna. HYPO NOE Real Consult and HYPO NOE Core capital 11.1 11.5 Leasing are regional market leaders in the real estate and Source: Annual report 2010 public finance sectors. Cover pool overview Currently 50% of the funding needs of the bank are We set out below some of the key cover pool satisfied on the debt capital markets, with another 41% characteristics: coming from customers and credit institutions deposits. Going forward HYPO NOE expects to rely more Table 24: Covered bond characteristics significantly on public sector covered bonds for the As at April 2011 funding of its lending activities. Ratings S/M/F Covered Bond rating -/Aaa/- Issuer rating A/-/- Financial performance We set out below some of the key financial performance Cover pool Cover pool size (€) 2,976,864,895 metrics: Bonds outstanding (€bn) 1,922,646,234 Nominal OC (%) 51.8 Table 21: Key profit & loss figures, €mm Geographical split (in %) FY 2009 FY 2010 Austria 94.8 Net interest income 139 135 Hungary 5.2 Provisions for loan losses 34 18 Debtor distribution (in %) NII less provisions 105 117 Guaranteed by Federal States 60.9 Federal States 17.7 Comm.& fee income 10 10 Municipalities 11.6 Other operating Guaranteed by Municipalities 4.5 income 4 -48 Other 5.3 Non-interest expense 77 82 Source: Investor report PBT 25 8 Taxes 5 1 Net profit (loss) 20 7 Source: Annual report 2010

40 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Kommunalkredit Austria AG Table 26: Key balance sheet figures, €mm (BBG: KA) FY 2009 FY 2010 Consumer Loans 2,661 2,698 Snapshot Total Assets 18,283 16,271 The bank was established in 1958 to provide low- Deposits 1,029 1,580 interest, long-term funding to Austrian local authorities. Equity 421 419 This remains its principal line of business to this day, as Source: Annual report 2010 it focuses on local authorities, municipalities, Table 27: Select financial metrics governments and public institutions. The bank provides a range of services including municipal and infrastructure FY 2009 FY 2010 C:I 47.9 project finance, including project consulting, budget Core capital 14.3 15.7 management and asset management consulting, together Source: Annual report 2010 with other financing services. The domestic market remains the main focus of the bank, but its operations Cover pool overview extend to Germany, Switzerland and the newest EU We set out below some of the key cover pool Member States. characteristics:

The core segments of business are energy and Table 28: Covered bond characteristics environment, social infrastructure and transport. Since As at 1993 the bank has been in charge of managing the December 2010 environmental support schemes of the Republic of Ratings S/M/F Austria as well as the Environmental and Water Covered Bond rating -/Aa1/- Management Fund. Issuer rating -/Baa1/A Cover pool The bank was nationalised in 2009, with the Austrian Cover Pool (€bn) 9.3 Government now owning 99.78% of the bank, and the Bonds outstanding (€bn) 7.2 OC (in %) 29.0 remaining 0.22% owned by the Association of Austrian Municipalities. Public-sector-backed covered bonds Geographical split (in %) make up 29% of its current funding. Austria 67.8 Switzerland 11.0 Germany 7.6 Financial performance Italy 5.2 We set out below some of the key financial performance Others 8.4 metrics: Rating split (in %) Aaa 20.5 Table 25: Key profit & loss figures, €mm Aa 69.5 A 9.9 FY 2009 FY 2010 Source: Investor report Net interest income 4.8 47 Provisions for loan losses 0.7 4 NII less provisions 4.1 43

Comm.& fee income 3.4 14 Other operating income 1.1 15 Non-interest expense 4.8 44

PBT 3.2 32 Taxes 0.3 7 Net profit (loss) 2.9 25 Source: Annual report 2010

41 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

UniCredit Bank Austria Table 30: Key balance sheet figures, €mm (BBG: BACA) FY 2008 FY 2009 FY 2010 Loans 131,973 123,602 130,093 Snapshot Total Assets 222,461 194,459 193,049 Bank Austria has been part of the UniCredit Group since Deposits 101,179 97,041 100,284 Short-term borrowings 35,511 33,362 33,130 2005 and is one of the leading banks in the Central and Other short-term Eastern Europe region, but maintains a strong presence in borrowings 38,701 12,374 6,172 the domestic market as well. Long-term borrowings 34,597 30,789 29,206 Equity 14,237 14,388 17,476 The bank offers its services through an extensive network Source: Bloomberg of around 300 branches in Austria. Bank Austria is also Table 31: Select financial metrics the leader in catering to the corporate world: 89%/41%/35% of all large/medium/small Austrian FY 2008 FY 2009 FY 2010 NIM 3.4 4.3 10.1 corporates and businesses are amongst its customers, as ROA 0.5 0.6 0.4 at the end of June 2011. ROE 8.1 8.3 5.0 ROC 1.4 1.4 1.0 Bank Austria acts as a sub-holding company of the C:I 56.2 77.6 83.1 UniCredit Group and is responsible for overseeing the Source: Bloomberg Group's banking activities in the CEE region. In this Cover pool overview position, the bank also has access to the growing Central and Eastern European markets, where the Group has We set out below some of the key cover pool close to 4,000 branches in 19 countries, often as one of characteristics: the leading banking institutions in each jurisdiction. Table 32: Covered bond characteristics Unicredit Bank Austria issues public-sector-backed As at June covered bonds. 2011 Ratings S/M/F Covered Bond rating -/Aaa/- Financial performance Issuer rating A/A1/-

We set out below some of the key financial performance Cover pool metrics: Cover pool size (€) 5,771,000,000 Number of loans 3,921 Table 29: Key profit & loss figures, €mm Nominal OC (%) 26.0 Avg loan size (€) 1,441,870 FY 2008 FY 2009 FY 2010 Net interest income 6,261 4,734 4,543 Remaining tenor (yrs) 8.3 Provisions for loan WA seasoning (yrs) 4.4 losses 1,012 0 0 Fixed rate assets (in %) 33.3 NII less provisions 5,249 4,734 4,543 Bullet Loans (in %) 55.0

Other operating Geographical split of guarantors (in %) income 364 3,049 3,125 Vienna 20.8 Non-interest expense 4,744 4,254 4,857 Republic of Austria 16.3 Operating profit 2,198 1,226 987 Lower Austria 14.2 Other 48.7 PBT 1,505 1,334 1,146 Taxes 222 182 348 Debtor distribution (in %) Net profit (loss) 1,144 1,152 798 Municipalities 22.7 Source: Bloomberg Guaranteed by Federal States 25.9 Guaranteed by Municipalities 8.1 Federal States 25.0 Guaranteed by the State 12.4 Other 5.9 Source: Investor report

42 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected] s d n o B

d e r e v o C

n a i d a n a C

43 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Canadian Covered Bonds

Legislative snapshot We set out in Table 33 a snapshot of key covered bond attributes in Canada.

Table 33: Canadian Covered Bond legislative overview Attribute Commentary Framework Legislative Framework There is currently no covered bond framework in Canada and as a result covered bonds are based on contractual agreements within general law. The government has however expressed the intention of introducing a special covered bond law and to this purpose published a consultation paper in May 2011. The consultation period ended in June 2011. Types of covered bonds So far only mortgage and mortgage+MBS backed bonds. Eligible collateral includes public sector loans, mortgages, MBS. Structure of Issuer Direct issuance? Yes and no. The current construct is similar to that used in the Netherlands and in the UK, whereby a securitisation technique is used to recreate a traditional covered bond structure using common and contract law. The assets are purchased by a bankruptcy-remote vehicle, the Guarantor, via an intercompany loan granted by the issuer; the Guarantor then provides a guarantee on the issuer's covered bonds. Comments (if any) In the May 2011 consultation paper, the government expressed the intention of keeping the SPV framework in order to better guarantee asset segregation, rather than switching to a register-based framework. Bankruptcy remoteness The assets are sold via a legal true sale to the Guarantor and therefore segregated from the issuer. Legal title to the assets remains with the issuer until the breach of a trigger. Dual claim Yes Bond format Typically fixed. Bonds can be extended by up to 12mths if the issuer fails to repay in full on original maturity. Supervision Office of the Superintendent of Financial Institutions (OSFI). Cover pool Eligible assets Mortgage Existing covered bond programmes are secured on residential mortgages, MBS and home equity lines of credit (TD Bank programme only). Mortgages can be guaranteed (generally by the CMHC). LTV caps For the calculation of the LTV-adjusted balance, only the first 80%/90% of non-guaranteed/guaranteed loans is taken into account. Public Sector No public sector CB for the moment. Non-performing collateral 0% weight in calculation of LTV-adjusted balance. Substitution Assets Not allowed to exceed 10%. Exposure to institutions that qualify for 10% risk weight; exposure to 20% risk weight institutions limited to 10% of pool. Hedging Derivatives are allowed to hedge interest and exchange rate risk. Valuation Individual asset market value, estimated during underwriting process. When conducting the Asset Coverage Test (ACT) a different multiplier is used depending on whether each loan is performing or not. Other comments (if any) The new legislation is looking to restrict mortgage collateral to Canadian properties only. The consultation paper also proposes to have a uniform valuation system. Requirements ALM matching Asset coverage The issuer is required to stress the cover pool when carrying out an ACT in order to ensure the cover pool is enough to cover all covered bonds claims. OC depends on the contractual agreement, but the current issuers generally have a maximum OC of 10%. The consultation paper is looking to impose 10% OC as a maximum. In Canada, creditors of the insolvent issuer can claim back the extra assets over the ACT limit. The consultation paper is looking to incorporate this in the legal framework. Interest coverage n/a Other (if any) There is also a reserve fund that needs to be funded by the Guarantor upon downgrade of the issuer below a specified threshold. If hard bullets are issued, these have to be cash collateralised 6 months before maturity. Consequence of breach If breach of ACT there is an issuer EoD. If a pre-maturity test in case of a hard bullet is breached, then Issuer EoD. Monitoring Independent monitor will check ACT. Consultation paper looking to introduce role of registrar. Other Compliance with EU Neither UCITS nor CRD compliant. legislation Source: National legislation, J.P. Morgan Covered Bond Research

44 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Canadian covered bond & macro backdrop

Figure 31: Mortgage CB Issuance, €mm Figure 32: Mortgage CB outstanding, €mm 14,000 20,000 12,000 Mortgage Mortgage 10,000 15,000 8,000 10,000 6,000

4,000 5,000 2,000 0 0 2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 2007 2008 2009 2010

Source: ECBC. Latest data available displayed Source: ECBC. Latest data available displayed

Figure 33: Canada real GDP growth, y-on-y, % Figure 34: Canada unemployment level and mortgage arrears (RHS),

8 Real GDP growth % 6 10 Unemployment Mortgage arrears (RHS) 0.50 4 9 0.45 2 8 0.40 0 7 0.35 -2 6 0.30 -4 5 0.25 -6 4 0.20 -8 3 0.15 -10 2 0.10

0 1 2 3 4 5 6 7 8 9 0 1 1 0.05 0 0 0 0 0 0 0 0 0 0 1 1 ------r r r r r r r r r r r r 0 0.00 a a a a a a a a a a a a 0 1 2 3 4 5 6 7 8 9 0 1 M M M M M M M M M M M M 0 0 0 0 0 0 0 0 0 0 1 1 ------n n n n n n n n n n n n a a a a a a a a a a a a J J J J J J J J J J J J Source: Bloomberg Source: Bloomberg, Canadian Banker Association

Figure 35: Canada CPI and base rate, % Figure 36: Canada consumer confidence index, #

7 Inflation Base rate Cons. Confidence 6 120 5 100 4 3 80 2 60 1 0 40 -1 20 -2

0 1 2 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 0 0 1 1 ------2 3 4 5 6 7 8 9 0 1 r r r r r r r r r r r r 0 0 0 0 0 0 0 0 1 1 a a a a a a a a a a a a ------n n n n n n n n n n M M M M M M M M M M M M a a a a a a a a a a J J J J J J J J J J

Source: Bloomberg Source: Bloomberg

Figure 37: Canada house price growth, % Figure 38: Canada housing permits issued and housing starts index (RHS), #

14 House price growth 8,000 Housing permits Housing starts index (RHS) 350 12 7,000 300 10 6,000 8 250 5,000 6 200 4 4,000 150 2 3,000 0 2,000 100 -2 -4 1,000 50 -6 0 0 0 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 1 1 ------n n n n n n n n n n n n n n n n n n n n n n n n a a a a a a a a a a a a a a a a a a a a a a a a J J J J J J J J J J J J J J J J J J J J J J J J

Source: Bloomberg Source: Bloomberg

45 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Bank of Montreal Financial performance (BBG: BMO) We set out below some of the key financial performance Snapshot metrics: BMO Financial Group is a highly diversified financial Table 34: Key profit & loss figures, CADmm services organisation, catering to more than 11 million personal, commercial, corporate and institutional FY 2008 FY 2009 FY 2010 Net interest income 5,072 5,570 6,235 customers in North America and internationally. BMO Provisions for loan provides a broad range of retail banking, wealth losses 1,330 1,603 1,049 management and investment banking products and NII less provisions 3,742 3,967 5,186 solutions along three business divisions. Comm.& fee income 4,375 4,607 4,683 Other operating Personal & Commercial Banking offers a broad range of income 447 465 545 Non-interest expense 6,902 7,311 7,590 retail banking products as well as financial advisory and Operating profit 1,973 2,150 3,571 capital markets services in Canada; in the USA, the bank operates as Harris Bank and M&I Bank, which will PBT 1,981 2,080 3,571 become a single brand in 2012. Taxes -71 217 687 Net profit (loss) 1,978 1,787 2,810 Source: Bloomberg The Private Client Group, BMO’s group of wealth management businesses, serves a full range of client Table 35: Key balance sheet figures, CADmm segments, from mainstream to ultra-high net worth, as FY 2008 FY 2009 FY 2010 well as select institutional markets, with a broad offering Commercial Loans 84,151 68,169 68,338 of wealth management products and solutions. PCG Consumer Loans 95,200 93,922 103,182 operates in both Canada and the United States, as well as Loans 177,604 160,189 169,642 Total Assets 416,050 388,458 411,640 in China and the United Kingdom. Deposits 257,670 236,156 249,251 Short-term borrowings 51,284 58,376 63,548 BMO Capital Markets provides a wide array of products Other short-term and services to corporate, institutional and government borrowings 23,429 23,578 24,415 Long-term borrowings 5,715 5,386 4,576 clients: equity and debt underwriting, corporate lending Equity 17,904 20,197 21,880 and project financing, mergers and acquisitions advisory Source: Bloomberg services, merchant banking, securitisation, treasury and market risk management, foreign exchange, derivatives, Table 36: Select financial metrics debt and equity research and institutional sales and FY 2008 FY 2009 FY 2010 trading. NIM 1.7 1.8 2.1 ROA 0.5 0.4 0.7 ROE 12.6 9.9 14.5 ROC 2.7 2.3 3.3 C:I 66.4 65.0 60.4 Core Capital 9.8 12.2 13.5 Source: Bloomberg

46 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Cover pool overview We set out below some of the key cover pool characteristics:

Table 37: Covered bond characteristics As at July 2011 Ratings S/M/F Covered Bond rating AAA/Aaa/AAA Issuer rating A+/Aa2/AA-

Cover pool Cover pool size (CAD) 7,263,524,927 Outstanding liabilities (in CAD) 5,065,970,000 Asset percentage (in %) 95.0

Number of loans 42,829 Average loan (in CAD) 169,594 WA seasoning (mths) 20 WA LTV (in %) 66.0 Highest regional exposure (in %) Ontario - 40.1 Fixed rate mortgages (in %) 62.2 Owner occupied properties (in %) 85.2

Bureau Score breakdown (in %) <500 or Unavailable 0.5 500-599 1.7 600-699 19.2 700-799 66.1 >=800 12.5

Current LTV breakdown (in %) <=50 17.3 50.01-55 5.5 55.01-60 7.4 60.01-65 8.2 65.01-70 8.5 70.01-75 12.8 75.01-80 31.9 >80 8.5 Source: Investor report

47 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Caisse Centrale Desjardins du Quebec Financial performance (BBG: CCDJ) We set out below some of the key financial performance Snapshot metrics: Caisse Centrale Desjardins is a cooperative owned by the Table 38: Key profit & loss figures, CADmm Fédération des caisses Desjardins du Québec. It offers financing, banking and international services to FY 2008 FY 2009 FY 2010 Net interest income 180 245 236 institutional organisations (governments, municipalities, Provisions for loan school districts, etc.), large and medium-sized businesses losses 21 13 -33 and various Desjardins Group entities. NII less provisions 160 232 269 Comm.& fee income 26 24 27 Caisse Centrale Desjardins acts as treasurer for the Other operating Desjardins Group and as its financial agent on Canadian income 3 6 2 Non-interest expense 77 101 88 and international markets. Operating profit -9 200 226

As treasurer, Caisse Centrale Desjardins develops and PBT -45 164 187 implements liquidities and asset liability management Taxes -8 37 45 Net profit (loss) -37 127 142 strategies for the Group. Caisse Centrale is also Source: Bloomberg responsible for meeting the liquidity needs of the Group, as well as increasing and diversifying its sources of funds Table 39: Key balance sheet figures, CADmm on national and international markets. FY 2008 FY 2009 FY 2010 Loans 14,781 13,080 15,946 As the financial agent for Desjardins Group, Caisse Total Assets 25,335 22,597 26,900 Centrale Desjardins represents the caisses within the Deposits 16,310 14,836 18,754 Short-term borrowings 943 1,154 1,565 Canadian Payments Association. On behalf of the Group, Other short-term Caisse Centrale guarantees and assumes the clearing for borrowings 3,163 2,554 2,930 banking instruments with the Bank of Canada, and for Equity 1,262 1,328 1,647 securities negotiated in Canada with the Canadian Source: Bloomberg Depository for Securities. Table 40: Select financial metrics FY 2008 FY 2009 FY 2010 NIM 1.0 1.3 1.1 ROA -0.2 0.5 0.6 ROE -3.2 9.8 9.6 ROC 5.0 C:I 29.9 29.2 Core Capital 15.4 17.6 Source: Bloomberg

48 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Cover pool overview We set out below some of the key cover pool characteristics:

Table 41: Covered bond characteristics As at July 2011 Ratings S/M/F Covered Bond rating -/Aaa/AAA Issuer rating AA-/Aa1/AA-

Cover pool Cover pool size (CAD) 1,210,672,719 Outstanding liabilities (in CAD) 987,200,000 Asset percentage (in %) 93.5

Number of loans 7,486 Average loan (in CAD) 161,725 WA seasoning (mths) 18 WA remaining term (mths) 36 WA original LTV (in %) 92.1 WA current LTV (in %) 88.1 Fixed rate mortgages (in %) 59.7

Original LTV breakdown (in %) <20 0.1 20-50 0.3 50-60 0.4 60-65 0.6 65-70 0.6 70-75 1.7 75-80 3.1 80-85 6.0 85-90 12.0 90-95 27.6 95-100 47.6 >100 0.0

Current LTV breakdown (in %) <20 0.1 20-50 0.7 50-60 0.9 60-65 1.0 65-70 1.7 70-75 3.6 75-80 5.7 80-85 11.3 85-90 25.3 90-95 27.2 95-100 22.5 >100 0.0 Source: Investor report

49 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

CIBC Table 43: Key balance sheet figures, CADmm (BBG: CM) FY 2008 FY 2009 FY 2010 Commercial Loans 39,273 37,343 38,582 Snapshot Consumer Loans 133,648 131,829 140,030 Canadian Imperial Bank of Commerce (CIBC) operates Loans 171,475 167,212 176,892 Total Assets 353,930 335,944 352,040 in two core areas of business: retail banking (CIBC Deposits 232,952 223,117 246,671 Retail Markets) and wholesale banking (CIBC World Short-term borrowings 44,947 43,369 37,893 Markets), both in the Canadian domestic market and Other short-term abroad, catering to almost 11mm customers. borrowings 22,015 22,090 20,256 Long-term borrowings 7,258 5,757 4,773 Equity 14,016 14,449 15,958 The Retail Markets division comprises CIBC's personal Source: Bloomberg banking, business banking and wealth management businesses and operates in Canada and the Caribbean. Table 44: Select financial metrics The segment also offers investment management services FY 2008 FY 2009 FY 2010 globally to retail and institutional clients in Hong Kong, NIM 1.8 1.9 2.1 Singapore and the Caribbean. ROA -0.6 0.3 0.7 ROE -19.5 9.1 19.2 ROC -3.2 1.8 4.1 CIBC World Markets is the wholesale banking arm of C:I 184.5 66.8 57.9 CIBC. Wholesale Banking provides a wide range of Core Capital 10.5 12.1 13.9 credit, capital markets, investment banking, merchant Source: Bloomberg banking, and research products and services to government, institutional, corporate and retail clients in Canada and in key markets around the world through its two business segments – corporate and investment banking and capital markets.

Financial performance We set out below some of the key financial performance metrics:

Table 42: Key profit & loss figures, CADmm FY 2008 FY 2009 FY 2010 Net interest income 5,207 5,394 6,204 Provisions for loan losses 773 1,649 1,046 NII less provisions 4,434 3,745 5,158

Comm.& fee income 4,219 3,950 4,142 Other operating income 961 377 676 Non-interest expense 7,201 6,660 7,027 Operating profit -4,260 1,619 4,012

PBT -3,741 1,619 4,012 Taxes -1,699 424 1,533 Net profit (loss) -2,060 1,174 2,452 Source: Bloomberg

50 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Cover pool overview We set out below some of the key cover pool characteristics:

Table 45: Covered bond characteristics As at July 2011 Ratings S/M/F Covered Bond rating AAA/Aaa/AAA Issuer rating A+/Aa2/AA-

Cover pool Cover pool size (CAD) 14,041,818,110 Outstanding liabilities (in CAD) 9,654,325,000 Asset percentage (in %) 92.9

Number of loans 78,579 Average loan (in CAD) 164,413 WA seasoning (mths) 24 WA remaining term (mths) 35 WA current LTV (in %) 59.4 Highest regional exposure (in %) Ontario - 45.7 Fixed rate mortgages (in %) - Owner occupied properties (in %) 92.6

Bureau Score breakdown (in %) Unavailable 4.0 <500 0.0 500-599 0.9 600-699 19.3 700-799 65.3 >=800 10.5

LTV breakdown (in %) <=40 18.7 40.01-45 6.2 45.01-50 6.9 50.01-55 8.3 55.01-60 9.7 60.01-65 9.8 65.01-70 7.4 70.01-75 8.4 75.01-80 9.7 >80 15.0 Source: Investor report

51 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

National Bank of Canada Table 48: Select financial metrics (BBG: NACN) FY 2008 FY 2009 FY 2010 NIM 1.8 1.8 1.6 Snapshot ROA 0.6 0.6 0.7 National Bank of Canada (NBC) Group is the sixth ROE 16.6 15.7 16.9 ROC 2.2 2.7 2.9 largest Canadian bank and the leading bank in Quebec. C:I 72.3 64.4 65.3 NBC provides financial services to individual customers, Core Capital 9.4 10.7 14.0 SMEs and large corporations in Canada and offers Source: Bloomberg specialised services in a number of international markets. NBC offers products including corporate and investment Cover pool overview banking, securities brokerage, insurance and wealth We set out below some of the key cover pool management and mutual funds and retirement plan characteristics: management. Table 49: Covered bond characteristics Half of its revenues (and 45% of its net income) come As at July 2011 from the personal and commercial banking division, 31% Ratings S/M/F (42% of net income) from its financial markets segment Covered Bond rating -/Aaa/AAA and the remaining 18% (13% of net income) from its Issuer rating A/Aa2/A+ wealth management business. Cover pool Cover pool size (CAD) 1,559,302,830 Financial performance Outstanding liabilities (in CAD) 994,100,000 Asset percentage (in %) 93.5 We set out below some of the key financial performance metrics: Number of loans 13,493 Average loan (in CAD) 115,564 WA remaining term (mths) 34 Table 46: Key profit & loss figures, CADmm WA current LTV (in %) 74.7 FY 2008 FY 2009 FY 2010 Highest regional exposure (in %) Quebec - 79.1 Net interest income 1,852 1,966 1,912 Fixed rate mortgages (in %) 52.8 Provisions for loan Owner occupied properties (in %) 95.5 losses 144 305 144 NII less provisions 1,708 1,661 1,768 Bureau Score breakdown (in %) Unavailable 7.1 Comm.& fee income 1,585 1,753 1,817 <500 0.3 Other operating 500-599 3.9 income 496 387 405 600-699 21.9 Non-interest expense 2,629 2,662 2,794 700-799 57.4 Operating profit 864 1,164 1,340 >=800 9.4

PBT 798 1,164 1,373 Current LTV breakdown (in %) Taxes 167 252 271 <=40 7.1 Net profit (loss) 776 854 1,034 40.01-45 2.5 45.01-50 3.4 Source: Bloomberg 50.01-55 3.9 55.01-60 4.8 Table 47: Key balance sheet figures, CADmm 60.01-65 5.3 65.01-70 5.2 FY 2008 FY 2009 FY 2010 70.01-75 7.0 Commercial Loans 21,149 20,003 21,469 75.01-80 9.4 Consumer Loans 31,061 33,274 36,355 >80 51.6 Loans 51,741 52,637 57,188 Source: Investor report Total Assets 129,332 132,138 145,301 Deposits 76,022 75,170 81,785 Short-term borrowings 22,980 25,957 30,805 Other short-term borrowings 4,274 5,733 5,946 Long-term borrowings 2,255 2,017 2,033 Equity 7,538 7,674 8,407 Source: Bloomberg

52 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Royal Bank of Canada Financial performance (BBG: RY) We set out below some of the key financial performance Snapshot metrics: RBC is Canada’s largest bank by both assets and market Table 50: Key profit & loss figures, CADmm capitalisation, and is one of North America’s leading financial services companies. FY 2008 FY 2009 FY 2010 Net interest income 9,048 11,541 10,977 Provisions for loan The bank, through its subsidiaries, offers a broad range losses 1,595 3,413 1,861 of financial products and services, including personal and NII less provisions 7,453 8,128 9,116 commercial banking, wealth management, insurance, Comm.& fee income 8,463 9,307 9,181 corporate and investment banking and transaction Other operating processing services. It operates mostly in Canada and the income 2,507 891 1,217 Non-interest expense 12,351 14,558 14,393 USA, but is also present in 51 other countries, catering Operating profit 6,005 6,526 7,084 for a total of nearly 18mm customers through its 5 business segments. PBT 6,005 5,526 6,968 Taxes 1,369 1,568 1,646 Net profit (loss) 4,555 3,858 5,223 Canadian Banking provides personal and business Source: Bloomberg financial services in Canada. International Banking comprises banking businesses in the U.S. and Caribbean, Table 51: Key balance sheet figures, CADmm and global custody and investor services. Wealth FY 2008 FY 2009 FY 2010 Management businesses serve affluent and high net Real Estate Loans 122,991 122,130 128,832 worth clients around the world and provide asset Commercial Loans 96,300 78,927 73,375 management and estate and trust services directly to Consumer Loans 195,455 205,224 221,828 Loans 289,540 280,963 292,206 clients and through internal partners and third-party Total Assets 723,859 654,989 726,206 distributors. Deposits 438,575 398,304 433,033 Short-term borrowings 59,560 76,509 88,179 The Capital Markets business provide corporate, Other short-term borrowings 46,974 40,031 36,719 government, and institutional advice, capital, and access Long-term borrowings 9,531 7,856 7,408 to the world’s financial markets and innovative products. Equity 33,129 38,977 41,207 Source: Bloomberg Finally, the Insurance segment provides Canadian customers insurance solutions including life, health, Table 52: Select financial metrics travel, home, auto, and creditor insurance. FY 2008 FY 2009 FY 2010 NIM 1.9 2.3 2.1 ROA 0.7 0.5 0.7 ROE 17.6 12.0 15.0 ROC 4.3 3.5 4.1 C:I 60.7 58.6 60.4 Core Capital 9.0 13.0 13.0 Source: Bloomberg

53 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Cover pool overview We set out below some of the key cover pool characteristics:

Table 53: Covered bond characteristics As at July 2011 Ratings S/M/F Covered Bond rating AAA/Aaa/AAA Issuer rating AA-/Aa1/AA

Cover pool Cover pool size (CAD) 12,824,298,714 Outstanding liabilities (in CAD) 7,806,003,000 Asset percentage (in %) 91.8

Number of loans 110,377 Average loan (in CAD) 116,186 WA seasoning (mths) 37 WA authorised LTV (in %) 67.6 WA drawn LTV (in %) 60.5 Highest regional exposure (in %) Ontario - 39.7 Fixed rate mortgages (in %) 62.0 Owner occupied properties (in %) 91.4

Bureau Score breakdown (in %) Unavailable 0.9 <500 1.1 500-599 3.0 600-699 14.3 700-799 54.0 >=800 26.8

Authorised LTV breakdown (in %) <=40 6.8 40.01-45 2.4 45.01-50 3.1 50.01-55 4.0 55.01-60 6.4 60.01-65 10.5 65.01-70 9.4 70.01-75 24.1 75.01-80 33.4

Drawn LTV breakdown (in %) <=40 12.8 40.01-45 4.5 45.01-50 5.5 50.01-55 7.0 55.01-60 9.8 60.01-65 13.2 65.01-70 13.3 70.01-75 15.9 75.01-80 18.2 Source: Investor report

54 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Scotiabank Financial performance (BBG: BNS) We set out below some of the key financial performance Snapshot metrics: Scotiabank is one of Canada’s largest banks, offering a Table 54: Key profit & loss figures, CADmm wide range of products across 50 countries around the world to 18.6mm customers. The Group has four core FY 2008 FY 2009 FY 2010 Net interest income 7,574 8,328 8,621 business lines: Canadian Banking, International Banking, Provisions for loan Scotia Capital (wholesale banking arm of the Group) and losses 630 1,744 1,239 Global Wealth Management. NII less provisions 6,944 6,584 7,382 Comm.& fee income 3,631 4,323 4,188 The Canadian banking operations provide banking and Other operating investing services to just under 7.6mm customers; the income 857 788 988 Non-interest expense 7,296 7,919 8,182 core lines of business are retail and small business Operating profit 3,950 4,794 6,084 lending, wealth management and commercial banking services to medium and large businesses. PBT 3,950 4,794 6,084 Taxes 691 1,133 1,745 Net profit (loss) 3,140 3,547 4,239 The international operations offer retail and commercial Source: Bloomberg banking services across the Caribbean, Central and Latin America and Asia. Table 55: Key balance sheet figures, CADmm FY 2008 FY 2009 FY 2010 Scotia Capital, the wholesale banking arm of the Commercial Loans 125,503 106,520 103,981 Scotiabank, offers a wide variety of products to Consumer Loans 165,803 162,652 183,030 corporate, government and institutional investor clients. Loans 288,680 266,302 284,224 Total Assets 507,625 496,516 526,657 Scotia Capital is a full-service lender and investment Deposits 346,580 350,419 361,650 dealer in Canada and Mexico, and operates in other parts Short-term borrowings 48,206 51,256 61,805 of Latin America and the US, in addition to providing Other short-term select products and services to niche markets in Europe borrowings 11,969 9,583 7,616 Long-term borrowings 4,852 6,444 6,439 and Asia. Equity 22,144 25,326 28,210 Source: Bloomberg The latest addition to the Group, Global Wealth Management, provides a full range of products and Table 56: Select financial metrics services to affluent and high net-worth clients in Canada FY 2008 FY 2009 FY 2010 and international locations; it also offers insurance NIM 2.0 1.9 1.9 products to retail customers in Canada and international ROA 0.7 0.7 0.8 locations such as Mexico, Chile, Peru, El Salvador and ROE 16.9 16.9 18.1 ROC 4.6 4.6 4.8 the Caribbean. C:I 59.4 54.8 52.8 Core Capital 9.3 10.7 11.8 Source: Bloomberg

55 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Cover pool overview We set out below some of the key cover pool characteristics:

Table 57: Covered bond characteristics As at July 2011 Ratings S/M/F Covered Bond rating -/Aaa/AAA Issuer rating AA-/Aa1/AA-

Cover pool Cover pool size (CAD) 8,957,319,054 Outstanding liabilities (in CAD) 6,158,000,000 Asset percentage (in %) 95.0

Number of loans 57,938 Average loan (in CAD) 154,602 Seasoning (mths) 28 WA remaining term (mths) 31 WA current LTV (in %) 81.7 Highest regional exposure (in %) Ontario - 56.5 Fixed rate mortgages (in %) 78.3 Owner occupied properties (in %) 100.0

Bureau Score breakdown (in %) <500 1.8 500-599 4.7 600-699 18.0 700-799 57.1 >=800 18.5

LTV breakdown (in %) <=50 17.6 50.01-55 5.2 55.01-60 5.9 60.01-65 6.9 65.01-70 7.3 70.01-75 7.4 75.01-80 6.1 >80 43.6 Source: Investor report

56 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Toronto Dominion Bank Table 59: Key balance sheet figures, CADmm (BBG: TD) FY 2008 FY 2009 FY 2010 Commercial Loans 71,160 87,322 91,072 Snapshot Consumer Loans 150,000 168,174 181,257 TD Bank Financial Group offers a full range of financial Loans 219,624 253,128 270,020 Total Assets 563,214 557,219 619,545 products and services ranging from personal and Deposits 375,694 391,034 429,971 commercial banking and wealth management to Short-term borrowings 37,172 34,113 49,121 insurance and wholesale banking. The group caters to Other short-term over 19 million customers worldwide. borrowings 28,761 29,813 37,642 Long-term borrowings 13,330 13,278 12,506 Equity 33,784 40,829 44,377 The Group is structured along four key business lines: Source: Bloomberg Canadian Personal & Business Banking including TD Canada Trust, TD Commercial Banking, TD Financing Table 60: Select financial metrics Services and TD Insurance; Wealth Management FY 2008 FY 2009 FY 2010 including TD Waterhouse, TD Wealth Management, TD NIM 2.2 2.5 2.4 Asset Management and TD Ameritrade; Whole Banking ROA 0.8 0.5 0.8 ROE 14.9 9.1 12.0 and US Personal & Commercial Banking. ROC 4.9 3.7 4.9 C:I 64.4 66.2 62.2 The bank operates mostly in its core markets of Canada Core Capital 9.8 11.3 12.2 and the USA and as of April 2011 it had CDN $630 Source: Bloomberg billion in assets. TD also ranks among the world’s leading online financial services firms, with approximately 7 million online customers.

Financial performance We set out below some of the key financial performance metrics:

Table 58: Key profit & loss figures, CADmm FY 2008 FY 2009 FY 2010 Net interest income 8,532 11,326 11,543 Provisions for loan losses 1,063 2,480 1,625 NII less provisions 7,469 8,846 9,918

Comm.& fee income 4,901 5,683 6171 Other operating income 1,836 603 1,292 Non-interest expense 9,454 11,825 12,163 Operating profit 4,152 3,555 5,777

PBT 4,413 3,472 6,023 Taxes 537 241 1,273 Net profit (loss) 3,833 3,120 4,644 Source: Bloomberg

57 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Cover pool overview We set out below some of the key cover pool characteristics:

Table 61: Covered bond characteristics As at July 2011 Ratings S/M/F Covered Bond rating -/Aaa/- Issuer rating -/Aaa/-

Cover pool Cover pool size (CAD) 8,242,366,078 Outstanding liabilities (in CAD) 2,079,000,000 Asset percentage (in %) 95.0

Number of loans 70,755 Average loan (in CAD) 116,492 WA seasoning (mths) 63 WA authorised LTV (in %) 68.0 WA drawn LTV (in %) 54.8 Highest regional exposure (in %) Ontario - 55.1 Fixed rate mortgages (in %) 17.2 Owner occupied properties (in %) 100.0

Bureau Score breakdown (in %) Unavailable 0.2 <500 0.1 500-599 0.9 600-699 11.8 700-799 68.7 >=800 18.4

Authorised LTV breakdown (in %) <=40 6.3 40.01-45 2.3 45.01-50 6.0 50.01-55 2.9 55.01-60 4.6 60.01-65 10.0 65.01-70 6.8 70.01-75 31.3 75.01-80 29.9

Drawn LTV breakdown (in %) <=40 24.5 40.01-45 5.7 45.01-50 6.9 50.01-55 6.7 55.01-60 7.5 60.01-65 9.5 65.01-70 9.2 70.01-75 13.8 75.01-80 12.8 >80 3.4 Source: Investor report

58 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected] s d n o B

d e r e v o C

h s i n a D

59 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Danish Covered Bonds

Legislative snapshot We set out in Table 62 a snapshot of key covered bond attributes in the Denmark.

Table 62: Danish Covered Bond legislative overview Attribute Commentary Framework Legislative Framework Danish Mortgage Credit Loans & Mortgage Credit Bonds etc Act. Executive Order No. 718 of 21 June 2007 on the Issue of Bonds, the Balance Principle and Risk Management; Bill No. 577 of 6 June 2007 amending the Financial Business Act 454 of 10 June 2003 Types of covered bonds Two current types and one legacy type of 'standard' covered bond. Current types are primarily differentiated by the type of issuer, and the type of substitution assets allowed in the cover pool. Specialist mortgage credit institutions are the only type of issuer of SDROs (Saerligt Daekkede RealkreditObligationer or covered mortgage bonds), while licensed credit institutions, specialist mortgage credit institutions and shipping finance institutions (Danmarks Skibskredit) can issue SDOs (Saeligt Deakkede Obligationer or covered bonds). Legacy issues are ROs (RealkreditObligationer), and do not meet the covered bond definitions under the CRD (grandfathered risk-weights for pre-2008 issuance). Furthermore, Danish covered bond issuers can issue 'junior' covered bonds to obtain capital for supplementary security to ensure compliance with LTV limits Structure of Issuer Direct issuance? Yes Comments (if any) Both specialised mortgage credit institutions (who have restrictions on the scope of their banking activities) and also licensed credit institutions (essentially commercial banks). Separate ‘capital centres’ or cover pools maintained for different types of issues or assets Bankruptcy remoteness Segregated assets in cover register. No automatic acceleration in case of bankruptcy. Derivatives counterparties rank pari passu with bondholders Dual claim Yes. Furthermore, Mortgage bank (i.e. SDRO) investors also have a preferential claim against the assets of other Capital Centres ahead of other creditors Bond format Typically, fixed rate and hard bullet, although there are exceptions (for example, Danske has a mix of hard and soft bullet bonds) Supervision Danish FSA Cover pool Eligible assets Mortgage Mortgages assets from EEA and OECD, Switzerland, USA, Canada, Japan, New Zealand and Australia. LTV caps Maximum LTV of 80% for residential (with repayment restrictions, otherwise 75%), 70% for agricultural and 60% for commercial properties and holiday homes (or 70% with additional collateral posted) Public Sector Public sector based in EEA and OECD, Switzerland, USA, Canada, Japan, New Zealand and Australia. For public sector assets, there is a cap of 20% of the pool for 20% risk-weighted exposures Non-performing collateral Used to minimise interest rate, currency, credit or other risks Substitution Assets Substitute collateral can constitute a maximum of 15% of the pool. Derivatives are also allowed into the pool Hedging Elimination of interest rate and currency risk through hedging Valuation Individual market value, with annual revaluations for commercial premises and every three years for residential properties. In case of LTV limit breaches through falling property values, an issuer is required to infuse supplementary assts into the cover pool on a loan by loan basis, thus maintaining the required minimum requirement for cover at all times Other comments (if any) Requirements ALM matching Asset coverage NPV of cover pool has to be above liabilities’ value at all times; cashflows from pool and derivatives should be enough to cover payments on liabilities. Issuers have to adhere to one of the general and the specific balance principle (imposes limits on interest rate and currency risk, while also imposing matched funding requirements) Interest coverage See above Other (if any) No minimum requirement for over-collateralisation for commercial banks (SDO issuers) but specialist mortgage banks have to maintain 8% of RWA (SDRO issuers). Danish covered bond issuers can issue 'junior' covered bonds to obtain capital for supplementary security to ensure compliance with LTV limits Consequence of breach Programme freeze. Potential for removal of the SDO designation. Other regulatory actions by the FSA Monitoring Danish FSA Other Compliance with EU UCITS and CRD compliant. ROs are not compliant legislation Source: National legislation, J.P. Morgan Covered Bond Research

60 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Danish covered bond & macro backdrop

Figure 39: CB issuance, €mm Figure 40: CB outstanding, €mm 160,000 400,000 Mortgage Ships 140,000 350,000 Mortgage Ships 120,000 300,000 100,000 250,000 80,000 200,000 60,000 150,000 40,000 100,000 20,000 50,000 0 0 2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 2007 2008 2009 2010 Source: ECBC. Latest data available displayed Source: ECBC. Latest data available displayed

Figure 41: Danish real GDP growth, y-on-y, % Figure 42: Danish unemployment level, %

6 Real GDP growth 7 Unemployment 4 6 2 5 0 4 -2 3 -4 2 -6 1 -8 0 0 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 1 1 ------r r r r r r r r r r r r r r r r r r r r r r r r a a a a a a a a a a a a a a a a a a a a a a a a M M M M M M M M M M M M M M M M M M M M M M M M

Source: Bloomberg Source: Bloomberg

Figure 43: Danish CPI and base rate, % Figure 44: Danish consumer confidence, balance of survey

5 15 Cons. Confidence 5 Inflation Base rate 4 10 4 5 3 3 0 2 2 -5 1 -10 1 0 -15 0 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 1 1 ------r r r r r r r r r r r r r r r r r r r r r r r r a a a a a a a a a a a a a a a a a a a a a a a a M M M M M M M M M M M M M M M M M M M M M M M M

Source: Bloomberg Source: Bloomberg

Figure 45: Danish house price growth, y-on-y, % Figure 46: Danish housing starts, #

30% 40,000 OECD HP nominal growth Housing starts (sum of prev. 12 mths) 25% 35,000 20% 30,000 15% 10% 25,000 5% 20,000 0% 15,000 -5% -10% 10,000 -15% 5,000 -20% 0 1 2 3 4 5 6 7 8 9 0 0 1 2 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 1 1 ------r r r r r r r r r r n n n n n n n n n n n n a a a a a a a a a a a a a a a a a a a a a a M M M M M M M M M M J J J J J J J J J J J J

Source: Bloomberg Source: Bloomberg

61 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

BRF Kredit AS Table 65: Select financial metrics (BBG: BRF) FY 2008 FY 2009 FY 2010 NIM 0.71 0.73 0.73 Snapshot ROA -0.22 -0.26 0.01 BRF Kredit (‘BRF’) is a specialist mortgage lender, ROE -4.67 -6.17 0.10 ROC -0.23 -0.27 n/a accounting for approximately 10% of the Danish C:I 92.91 42.63 n/a mortgage market. BRFKredit offers mortgage loans Core capital 12.30 13.30 13.70 secured against owner-occupied homes (44%), Source: Bloomberg commercial properties (16%) and for private rental (20%) and cooperative housing (16%). All properties are Cover pool overview located in Denmark. BRF Kredit is owned by an We set out below some of the key cover pool independent business foundation, BRFfonden. characteristics:

The lender finances its lending activity using covered Table 66: Covered bond characteristics bonds and mortgage bonds, depending on the type of As at 31 March 2011 collateral requiring funding. BRF adheres to the general S/M/F balance principle, with bonds being full recourse Covered Bond rating: Capital Centre E (SDO) -/Aa2/- obligations on BRF Kredit. Mortgage bonds are Covered Bond rating: Capital Centre B (RO) -/Aa3/- Covered Bond rating: General Capital Centre (RO) -/Aa3/- supported by a cover pool of assets, either from a specific Issuer rating -/Baa3/- capital centre or by the remaining assets of BRF Kredit (General Capital Centre). Total Cover Pool Balance (DKK bn) 207 WA Loan Balance (DKK) 1,610,444 No. of Loans: 128,536 Financial performance WA LTV (in %): We set out below some of the key financial performance ARM (in %): 59 metrics: Fixed rate mortgages (in %) 22 Capped mortgages (in %): 10 Table 63: Key profit & loss figures, DKKmm Private housing (in %): 47 Copenhagen concentration (in %): 48 FY 2008 FY 2009 FY 2010 Net interest income 1,554 1,747 1,644 Source: Investor Report Provisions for loan losses 647 2,125 471 NII less provisions 907 -378 1,173 Table 67: Collateral pool LTV breakdown Commissions & fee Current LTV ranges As at 31 March 2011 income 192 266 167 0-<=40% 19 Other operating >40%-<=60% 22 income 34 8 9 >60%-<=80% 29 Non-interest expense 1,063 1,098 857 >80%-<=100% 20 Operating profit (loss) -576 -852 17 >100% 10 PBT -575 -858 21 Taxes -75 -237 7 Net profit (loss) -500 -621 14 Source: Investor report. All loans

Source: Bloomberg

Table 64: Key balance sheet figures, DKKmm FY 2008 FY 2009 FY 2010 Loans 213,909 221,025 212,976 Total Assets 233,838 246,829 231,430 Deposits 3,286 3,937 5,448 Short-term borrowings 28,075 25,075 11,401 Long-term borrowings 186,983 202,557 198,383 Equity 10,389 9,730 9,742 Source: Bloomberg

62 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Danske Bank AS Table 69: Key balance sheet figures, DKKmm (BBG: DANBNK) FY 2008 FY 2009 FY 2010 Loans 2,019,294 1,815,615 1,848,446 Snapshot Total Assets 3,543,974 3,098,477 3,213,886 Danske Bank Group (‘Danske’) is the largest financial Deposits 874,690 859,580 861,053 Short-term borrowings 562,726 311,169 317,988 group in Denmark and one of the largest in the Nordic Other ST borrowings 930 1,197 858 region. The Group focuses on retail banking, with a Long-term borrowings 1,064,000 1,111,658 1,083,041 product range which includes banking, mortgage lending, Equity 98,247 100,659 104,742 insurance, leasing, real-estate brokerage and asset Source: Bloomberg management. Table 70: Select financial metrics Domestically, the group is the market leader with a FY 2008 FY 2009 FY 2010 market share of approximately 25%, serving both retail NIM 1.26 1.57 1.27 ROA 0.03 0.05 0.12 and corporate customers. In Sweden and Norway, the ROE 1.00 1.74 3.57 Group has mid-single-digit market shares (6% and 5% ROC 0.06 0.11 0.24 respectively) through its acquisitions of Ostgota Enskilda C:I 67.84 49.80 58.40 Bank & Provinsbankerne and Fokus Bank respectively, Core capital 9.20 14.10 14.80 while also owning Finland's third largest bank (Sampo Source: Bloomberg Bank. 12% market share). Danske is also currently Cover pool overview present in Ireland, Luxembourg, Germany, Poland and the Baltics. Danske also owns Realkredit Danmark (see We set out below some of the key cover pool separate issuer profile), the group’s mortgage finance characteristics: arm. Table 71: Pool I: Covered bond characteristics Danske issues covered bonds backed by three separate As at 31 March 2011 cover pools: Pool I (International) comprises 49% S/M/F Covered Bond rating AAA/Aaa/AAA Swedish and 51% Norwegian mortgages, while Pool D Issuer rating A/A2/A+ (Domestic) is made up of 100% Danish loans. Pool C (combined) includes both commercial and residential Total Cover Pool Balance (DKK bn) 95.8 Avg Loan Balance (DKK) 823,873 loans from Sweden. No. of Loans: 116,280 WA LTV (in %): 59.0 Financial performance OC at cut-off (in %): 20.8 Substitution collateral (DKK bn) 6.6 We set out below some of the key financial performance Seasoning (in months): 36.0 metrics: Remaining term (in months): 440 Housing cooperatives (in %): 23.8 Country concentration (in %): Nor 51 Swe 49 Table 68: Key profit & loss figures, DKKmm

FY 2008 FY 2009 FY 2010 Source: Investor Report Net interest income 39,546 47,542 35,983 Provisions for loan Table 72: Pool I: Collateral pool LTV breakdown losses 12,088 25,677 13,817 NII less provisions 27,458 21,865 22,166 Current LTV ranges As at 31 March 2011 Commissions & fee 0-<=40% 20.9 income 11,046 10,464 11,803 >40%-<=50% 13.6 Other operating >50%-<=60% 15.2 income 7,386 -8,851 -3,121 >60%-<=70% 17.0 Non-interest expense 33,184 33,117 31,125 >70%-<=80% 18.6 Operating profit (loss) 2,012 4,462 5,707 >80% 14.8 PBT 2,229 4,755 6,450 Source: Investor report Taxes 1,193 3,042 2,786 Net profit (loss) 1,011 1,727 3,661

Source: Bloomberg

63 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Table 73: Pool D: Covered bond characteristics As at 31 March 2011 S/M/F Covered Bond rating AAA/Aaa/AAA Issuer rating A/A2/A+

Total Cover Pool Balance (DKK bn) 32.8 Avg Loan Balance (DKK) 602,612 No. of Loans: 54,492 WA LTV (in %): 60.0 OC at cut-off (in %): 18.9 Substitution collateral 1.0 Seasoning (in months): 48.0 Remaining term (in months): 309 Copenhagen concentration (in %): 36.3

Source: Investor Report

Table 74: Pool D: Collateral pool LTV breakdown Current LTV ranges As at 31 March 2011 0-<=40% 18.6 >40%-<=50% 13.8 >50%-<=60% 16.5 >60%-<=70% 17.6 >70%-<=80% 17.9 >80% 15.5 Source: Investor report

Table 75: Pool C: Covered bond characteristics As at 31 March 2011 S/M/F Covered Bond rating AAA/Aaa/AAA Issuer rating A/A2/A+

Total Cover Pool Balance (DKK bn) 10.0 Avg Loan Balance (DKK) 2,539,556 No. of Loans: 3,924 WA LTV (in %): 49.0 OC at cut-off (in %): 29.1 Substitution collateral - Seasoning (in months): 46.0 Remaining term (in months): 261 Housing cooperatives (in %): 29.5

Source: Investor Report

Table 76: Pool C: Collateral pool LTV breakdown Current LTV ranges As at 31 March 2011 0-<=40% 37.8 >40%-<=50% 12.6 >50%-<=60% 16.8 >60%-<=70% 13.6 >70%-<=80% 10.5 >80% 8.8 Source: Investor report

64 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

DLR Kredit AS Table 79: Select financial metrics (BBG: LANDBR) FY 2008 FY 2009 FY 2010 NIM 7.93 13.36 n/a Snapshot ROA 0.33 0.23 0.17 Dansk Landbrugs Realkreditfond (‘DLR’) was founded ROE 8.90 5.50 3.70 ROC 0.34 0.23 n/a in 1960 to target farmers' needs for long-term capital. C:I 21.25 45.53 46.95 DLR was allowed to grant mortgages with LTVs ranging Core capital 6.60 11.60 12.00 between 45-70% but gave up this exclusive right in 1999, Source: Bloomberg before being transferred to the Mortgage Credit Act in 2000. In 2001, it acquired its current form as a company Cover pool overview limited by shares. It is owned by close to one hundred We set out below some of the key cover pool Danish regional and local banks that are also users of its characteristics: services. Shares in DLR are redistributed every third year to reflect the various banks’ usage of the mortgage Table 80: Covered bond characteristics lender. As at 31 March 2011 S/M/F The loan portfolio is heavily skewed towards agricultural Covered Bond rating (SDO, Capital Centre B) -/Aa1/- and commercial properties, with fixed rate loans and Covered Bond rating (RO, General Capital Centre) -/Aa1/- Issuer rating -/Baa1/- short-interest period loans accounting for 19% and 81% of the total portfolio respectively. ARM loans are by far Total Cover Pool Balance (DKK bn) 106.3 the dominant loan type, with a 66% share of the loan Office and business property loans (in %): 19.0 Multifamily (in %): 14.0 book. Interest-only loans make up 54% of the pool, but Residential loans (in %): 59.0 are mostly concentrated in the private rental and Fixed rate loans (in %): 21.8 cooperative housing sections of the loan portfolio. Interest only loans (in %): 57.9

Financial performance Source: Moody’s We set out below some of the key financial performance metrics:

Table 77: Key profit & loss figures, DKKmm FY 2008 FY 2009 FY 2010 Net interest income 963 1,047 857 Provisions for loan losses -14 159 106 NII less provisions 977 889 750 Commissions & fee income 66 76 79 Other operating income 17 18 23 Non-interest expense 180 203 192 Operating profit (loss) 611 450 336 PBT 611 450 336 Taxes 153 113 85 Net profit (loss) 458 337 251

Source: Bloomberg

Table 78: Key balance sheet figures, DKKmm FY 2008 FY 2009 FY 2010 Total Assets 137,581 149,330 144,533 Deposits 0 0 2,376 Short-term borrowings 1,500 5,000 1,000 Long-term borrowings 130,428 137,789 128,427 Equity 5,609 6,534 7,112 Source: Bloomberg

65 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Nordea Kredit AS Table 83: Select financial metrics (BBG: NBHSS) FY 2008 FY 2009 FY 2010 NIM 1.48 1.42 1.25 Snapshot ROA 0.62 0.47 0.49 Nordea Kredit (‘Nordea’) grants mortgage lending ROE 15.35 11.55 11.36 ROC 1.56 1.16 1.22 secured by residential, commercial, agricultural and C:I 53.05 49.99 51.96 industrial properties in Denmark. The Nordea Group is a Core capital 7.40 10.20 9.80 well established financial group catering to the Nordic Source: Bloomberg and Baltic states, where it is consistently one of the largest by market share, with a small but growing Cover pool overview presence in new European markets. No geographical We set out below some of the key cover pool market accounts for more than a quarter of income, out characteristics: of a customer base of around 10mm households and corporates. Table 84: Covered bond characteristics As at 31 March 2011 Nordea Kredit operates two covered bond Capital S/M/F Centres: mortgage bonds (ROs) are issued out of Capital Covered Bond rating AAA/Aaa/- Centre I and constitute 31% of the loan pool. Covered Issuer rating (Nordea Bank Danmark) AA-/Aa3/AA- bonds (SDROs) compliant with UCITS and CRD Total Cover Pool Balance (DKK bn) 318.6 requirements are issued out of Capital Centre II and new Capital Centre 1 (in %): 31.3 issues are almost exclusively out of this CC. Capital Centre 2 (in %): 68.7 WA LTV (in %): 65.0 Fixed rate mortgages (in %) 40.9 Financial performance ARM mortgages (in %): 47.7 We set out below some of the key financial performance Interest only mortgages (in %): 56.6 metrics: Source: Investor Report Table 81: Key profit & loss figures, DKKmm FY 2008 FY 2009 FY 2010 Net interest income 37,973 39,323 38,419 Provisions for loan losses 3,474 11,065 6,546 NII less provisions 34,499 28,258 31,873 Commissions & fee income 18,879 18,377 22,006 Other operating income 1,282 782 864 Non-interest expense 37,176 39,367 41,815 Operating profit (loss) 25,149 22,539 26,608 PBT 25,321 22,897 27,100 Taxes 5,398 5,637 7,268 Net profit (loss) 19,915 17,230 19,787

Source: Bloomberg

Table 82: Key balance sheet figures, DKKmm FY 2008 FY 2009 FY 2010 Loans 1,973,200 2,101,000 2,341,700 Total Assets 3,529,000 3,776,300 4,329,300 Deposits 1,106,100 1,142,700 1,314,700 Short-term borrowings 386,578 388,313 303,628 Other ST borrowings 3,409 4,204 3,742 Long-term borrowings 872,413 1,024,600 1,187,600 Equity 132,524 166,813 182,627 Source: Bloomberg

66 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Nykredit Realkredit AS (‘Nykredit’) Table 87: Select financial metrics (BBG: NYKRE) FY 2008 FY 2009 FY 2010 NIM 0.72 0.95 0.91 Snapshot ROE -1.33 0.25 7.63 Nykredit is the second largest lender and the largest C:I 93.54 47.56 51.08 mortgage provider in Denmark, with a share of 42% of Core capital 13.50 n/a 18.50 the mortgage lending market and 5% of the commercial Source: Bloomberg banking market. The group also offers insurance, pension Cover pool overview and estate agency services and products. Nykredit Realkredit is wholly owned by Nykredit Holding AS We set out below some of the key cover pool (majority owned by the Nykredit Foundation (88.61%)). characteristics: In 2003 Nykredit acquired Totalkredit, which currently Table 88: Pool D (RO): Covered bond characteristics operates as a wholly owned subsidiary. Since 2006 the two have been jointly funded, with Totalkredit covered As at 31 March 2011 bonds originally issued out of Capital Centre D. Since S/M/F Covered Bond rating AAA/Aaa/- 2007, these are issued out of Capital Centre E with the Issuer rating A+/A2/- pre-existing series being grandfathered in accordance with the CRD. Nykredit is the largest issuer of Danish Total Cover Pool Balance (DKK bn) 309.3 Avg Loan Balance: 1,381,640 mortgage bonds, and one of the largest private bond No. of Loans: 223,881 issuers in Europe. WA LTV (in %): 53.8 Fixed rate loans (in %): 36.1 Interest only (in %): 50.8 Financial performance Source: Investor Report We set out below some of the key financial performance metrics: Table 89: Pool D (RO): Collateral pool LTV breakdown Current LTV ranges As at 31 March 2011 Table 85: Key profit & loss figures, DKKmm 0-<=40% 19.0 FY 2008 FY 2009 FY 2010 >40%-<=60% 33.0 Net interest income 7,974 11,294 11,261 >60%-<=70% 18.0 Provisions for loan >70%-<=80% 15.0 losses 1,443 7,919 2,382 >80%-<=90% 8.0 NII less provisions 6,531 3,375 8,879 >90% 7.0 Commissions & fee Source: Investor report income 1,374 2,026 2,149 Other operating Table 90: Pool E (SDO): Covered bond characteristics income 1,634 1,686 209 Non-interest expense 7,622 8,977 7,629 As at 31 March 2011 Operating profit (loss) -1,004 305 3,397 S/M/F PBT -881 179 3,433 Covered Bond rating AAA/Aaa/- Taxes -186 50 873 Issuer rating A+/A2/- Net profit (loss) -695 129 4,071 Total Cover Pool Balance (DKK bn) 583.2 Source: Bloomberg Avg Loan Balance: 1,443,157 No. of Loans: 404,141 Table 86: Key balance sheet figures, DKKmm WA LTV (in %): 62.9 Fixed rate loans (in %): 14.3 FY 2008 FY 2009 FY 2010 Interest only (in %): 63.3 Loans 994,185 1,055,003 1,103,540 Source: Investor Report Total Assets 1,218,127 1,247,263 1,311,142 Deposits 61,177 64,483 55,369 Table 91: Pool E (SDO): Collateral pool LTV breakdown Short-term borrowings 162,549 119,313 95,879 Other ST borrowings 72 1,008 160 Current LTV ranges As at 31 March 2011 Long-term borrowings 865,725 949,524 1,018,506 0-<=40% 10.0 Equity 50,377 51,241 55,420 >40%-<=60% 20.0 Source: Bloomberg >60%-<=70% 18.0 >70%-<=80% 34.0 >80%-<=90% 13.0 >90% 5.0 Source: Investor report

67 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Realkredit Danmark AS (‘Realkredit’) Cover pool overview (BBG: RDKRE) We set out below some of the key cover pool Snapshot characteristics: Realkredit Danmark (‘RD’) specialises in mortgage Table 95: Covered bond characteristics lending secured by residential, commercial, agricultural and industrial properties. RD dates back to 1851 but it As at 31 March 2011 S/M/F became a wholly owned subsidiary of the Danske Bank Covered Bond rating AAA/-/- Group in 2001. Issuer rating (Danske Bank) A/A2/A+

Total Cover Pool Balance (DKK bn) 526.0 RD’s main market is Denmark, where it is the second WA LTV (in %): 66 largest specialist mortgage lender, but also offers loans Seasoning (mths) 35 secured by properties in the UK, Sweden, Faroe Islands Remaining term (mths) 311 Residential loans (in %): 61 and Greenland. Commercial loans (in %): 26 Multifamily loans (in %): 13 Financial performance Fixed rate loans (in %): 12.5 We set out below some of the key financial performance Source: Investor Report metrics:

Table 92: Key profit & loss figures, DKKmm FY 2008 FY 2009 FY 2010 Net interest income 4,832 5,732 4,941 Provisions for loan losses 417 1,265 n/a NII less provisions 4,415 4,467 4,941 Commissions & fee income 454 516 -501 Other operating income 11 7 168 Non-interest expense 824 1,012 1,873 Operating profit (loss) 3,805 3,333 2,289 PBT 3,805 3,333 2,294 Taxes 952 841 573 Net profit (loss) 2,853 2,492 1,721

Source: Bloomberg

Table 93: Key balance sheet figures, DKKmm FY 2008 FY 2009 FY 2010 Loans 670,320 692,040 705,342 Total Assets 710,871 746,170 757,621 Deposits 0 0 n/a Short-term borrowings 8,111 26,855 27,408 Other ST borrowings 0 131 n/a Long-term borrowings 0 2,037 2,061 Equity 38,528 41,020 42,883 Source: Bloomberg

Table 94: Select financial metrics FY 2008 FY 2009 FY 2010 NIM 0.72 0.83 0.69 ROA 0.40 0.33 0.23 ROE 7.60 6.50 4.10 ROC 6.05 4.28 2.42 C:I 19.50 17.20 45.00 Core capital 56.50 44.20 38.80 Source: Bloomberg

68 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected] s d n o B

d e r e v o C

h c t u D

69 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Dutch Covered Bonds

Legislative snapshot We set out in Table 96 a snapshot of key covered bond attributes in the Netherlands.

Table 96: Dutch Covered Bond legislative overview Attribute Commentary Framework Legislative Framework Decree of 3 June 2008 amending the Financial Services Act and Decree on Conduct of Business Supervision of Financial Undertakings Types of covered bonds The contractual terms are defined by the Dutch law and allow four types of bonds: general law based CB (those structured through contract law, prior to the adoption of CB legislation), covered bonds, CRD and UCITS compliant registered CB and non-CRD-compliant registered CB (both issued under the framework) Structure of Issuer Direct issuance? Yes and No. Unsecured bonds are directly issued by the institution, but guaranteed by a third party vehicle (Covered Bond Company or CBC) Comments (if any) Dutch CB are issued by credit institutions, where the CB are direct, unsecured, unsubordinated and unconditional obligations of the Issuer. Under the typical structure, the Issuer lends the sums received from bond issuance to a guarantor, with the guarantor using the funds to purchase collateral from the originator. The guarantor agrees to guarantee the Issuer’s obligations to covered bond investors, collateralising the guarantee with the purchased loans and securities acquired from the Issuer. Bankruptcy remoteness Similar to the UK, in case of insolvency of the originator, the issuer exercises the financial guarantee over the pledged assets; if the issuer is insolvent, assets are formerly transferred to the CBC. No acceleration on issuer default, only on breach of the Asset Percentage Test Dual claim Yes Bond format Typically, fixed rate, hard bullet. However, an ability to extend maturities by up to 12 months following issuer insolvency Supervision Netherlands Authority for Financial Markets (AFM) and Dutch Central Bank (DNB) Cover pool Eligible assets Mortgage Owing to the (initial) non-statutory nature of the Dutch covered bond framework, originators typically define their own eligibility criteria. Assets must be governed by the laws of an EU member state, the US, Canada, Japan, Korea, Hong Kong, Singapore, Australia, NZ or Switzerland. Max size typically set at €1.5mm and for non-NHG loans max 125% LTFV. Both NHG and non-NHG loans accepted. LTV caps "Soft" (loans above the maximum can be included in the cover pool, with 'credit' given for only the eligible portion of the asset under the Asset Coverage Test). Dutch legislation determines an 80% eligible maximum LTV. Loan with LTFV between 125% and 130% must not exceed 5% of total. Public Sector N/a as of today Non-performing collateral Can remain in the cover pool, with declining recognition of 90d+ collateral contribution in calculating the programme tests Substitution Assets Substitution assets consisting of highly liquid, non-mortgage assets are also eligible for inclusion, up to certain, pre-defined programme limits. Substitute collateral typically must not exceed 10%, with eligibility criteria self-imposed by the issuers. Hedging Used to minimise interest rate, currency, credit or other risks Valuation Individual market values, indexed Other comments (if any) All existing programmes are backed by Dutch residential mortgages, with the exception of NIBC's programme which also includes German residential mortgages. Requirements ALM matching Asset coverage Requirements prescribed by the issuers in each programme. No minimum over-collateralisation set. Nominal value of assets has to be greater than principal amount of o/s bonds. Pre-maturity tests are designed to ensure the borrower can provide sufficient liquidity in case of downgrade (i.e. pre-defined period prior to scheduled bond redemption, if a borrower's short-term rating is below a prescribed threshold, the borrower must fund a cash collateral account to ensure redemption). Amortisation tests are designed to ensure the issuer has the capacity to meet its obligations following a borrower EOD. Asset Coverage tests are designed to ensure that pool collateral is sufficient to meet future interest and principal cashflows on the outstanding covered bonds Interest coverage Yes. All programmes require the establishment of a reserve fund sized at between 1-3 months of interest payments and operating costs to ensure continued payment if the issuer's rating falls below pre- determined levels Consequence of breach Programme freeze (no issuance nor asset removal), alternative administration, other regulatory actions Monitoring Cover pool monitor Other Compliance with EU legislation UCITS and CRD compliant for registered covered bonds (see above) Source: National legislation, J.P. Morgan Covered Bond Research

70 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Dutch covered bond & macro backdrop

Figure 47: CB issuance, €mm Figure 48: CB outstanding, €mm 16,000 50,000 14,000 Mortgage 40,000 Mortgage 12,000

10,000 30,000 8,000 6,000 20,000 4,000 10,000 2,000 0 0 2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 2007 2008 2009 2010

Source: ECBC. Latest data available displayed Source: ECBC. Latest data available displayed

Figure 49: Dutch real GDP growth, y-on-y, % Figure 50: Dutch unemployment level, %

6 Real GDP growth 8 Unemployment 4 7 6 2 5 0 4 -2 3 2 -4 1 -6 0 0 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 1 1 ------r r r r r r r r r r r r n n n n n n n n n n n n a a a a a a a a a a a a a a a a a a a a a a a a J J J J J J J J J J J J M M M M M M M M M M M M

Source: Bloomberg Source: Bloomberg

Figure 51: Dutch CPI and base rate, % Figure 52: Dutch consumer confidence, balance of survey

5.0 Inflation Base rate 40 Cons. Confidence 4.5 30 4.0 20 3.5 10 3.0 0 2.5 -10 2.0 1.5 -20 1.0 -30 0.5 -40 0.0 -50 0 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 1 1 ------r r r r r r r r r r r r r r r r r r r r r r r r a a a a a a a a a a a a a a a a a a a a a a a a M M M M M M M M M M M M M M M M M M M M M M M M

Source: Bloomberg Source: Bloomberg

Figure 53: Dutch house price growth, % Figure 54: Dutch outstanding mortgages (€mm) and annual growth of mortgage stock, %

25% House price growth 250,000 Annual owner occ.dwelling transactions 20% 200,000 15% 10% 150,000 5% 100,000 0% 50,000 -5% -10% 0 0 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 0 0 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 1 ------n n n n n n n n n n n n c c c c c c c c c c c a a a a a a a a a a a a e e e e e e e e e e e J J J J J J J J J J J J D D D D D D D D D D D

Source: Bloomberg Source: ECB

71 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

ABN Amro Bank NV (‘ABN’) Cover pool overview (BBG: ABNANV) We set out below some of the key cover pool Snapshot characteristics: ABN Amro Bank NV (‘ABN’) is a full service financial Table 99: Covered bond characteristics institution offering retail, private and commercial banking clients a broad range of financial products, from As at 30 June 2011 Ratings its base in the Netherlands. On 1st July 2010, the legal Covered bond rating AAA/Aaa/AAA merger between ABN Amro Bank NV and Fortis Bank Issuer rating A/Aa3/A+ (Nederland) NV was completed, creating a combined Cover pool Jun-11 entity called ABN Amro Bank NV. This institution is Mortgage balance (€bn) 31.0 wholly owned by the Dutch government, and will Bonds outstanding (€bn) 21.8 eventually be returned to the private sector. Asset percentage 80.7 Credit support (%) 104.0

The ABN covered bond programme is backed by Dutch # mortgages 170,161 residential mortgages, and is registered with the Dutch Avg loan balance 98,151 central bank. WA Current LTV (%) 75.0 WA Current LTFV (%) 88.2

Financial performance WA Indexed LTV (%) 72.2 WA Indexed LTFV (%) 85.0 We set out below some of the key financial performance metrics: WA seasoning (mths) 69.4

Table 97: Key profit & loss figures, €mm Top regional concentrations Zuid-Holland 21.9 FY 2008 FY 2009 FY 2010 Noord-Holland 20.3 Net interest income 4,512 4,268 4,905 Noord-Brabant 15.5 Provisions for loan losses 0 0 0 Source: Investor Report NII less provisions 4,512 4,268 4,905

Comm.& fee income 1,383 2,400 2,550 Other operating income 273 806 -508 Non-interest expense 3,845 6,016 7,013 Operating profit (loss) 2,694 1,800 568

PBT 1,918 215 -269 Taxes 158 -59 145 Net profit (loss) 4,819 272 -417 Source: Annual Report

Table 98: Key balance sheet figures, €mm FY 2008 FY 2009 FY 2010 Total Assets 183,539 386,524 379,599 Short-term borrowings 730 26,951 19,982 Other ST borrowings 125,272 254,484 240,170 Equity 7,044 8,955 12,112 Source: Annual Report

72 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Achmea Hypotheekenbank NV Cover pool overview ('Achmea’) We set out below some of the key cover pool characteristics: (BBG: ACHMEA) Snapshot Table 102: Covered bond characteristics Achmea Hypotheekbank NV was formed in 1995 and As at 31 March 2011 provides mortgage loans to private individuals in the Ratings S/M/F Netherlands under the Centraal Beheer Achmea, FBTO, Covered bond rating -/Aa2/AAA Avéro Achmea and Woonfonds Hypotheken brands. Issuer rating -/Aaa/A- Achmea mortgage bank is wholly owned by Achmea Cover pool Mar-11 Holding, which in turn is a wholly owned subsidiary of Mortgage balance (€bn) 4.1 the insurance group Eureko BV. Bonds outstanding (€bn) 2.9 Asset percentage 71.4

While part of the lending is financed with deposits, # mortgages 47,783 Achmea is active on the wholesale markets: in addition Avg loan balance 85,189 to the €10bn covered bond programme started in 2007, WA Current LTV (%) 92.1 the bank has had an established RMBS platform since WA seasoning (mths) 79.0 2000 and a €10bn EMTN programme launched in 1996. Top regional concentrations Zuid-Holland 18.2 The Achmea covered bond programme is backed by Noord-Holland 16.1 Dutch residential mortgages, and is not currently Noord-Brabant 15.8 registered with the Dutch central bank. Source: Investor Report Financial performance We set out below some of the key financial performance metrics:

Table 100: Key profit & loss figures, €mm FY 2008 FY 2009 FY 2010 Net interest income 99 126 99 Provisions for loan losses n/a n/a n/a NII less provisions 99 126 99 Commissions & fee income n/a 11 n/a Other operating income n/a n/a n/a Non-interest expense 55 55 Operating profit (loss) 38 67 38 PBT 38 67 38 Taxes 10 16 10 Net profit (loss) 29 50 29

Source: Annual Report

Table 101: Key balance sheet figures, €mm FY 2008 FY 2009 FY 2010 Total Assets 14,725 14,387 14,725 Deposits 15,672 15,999 15,672 Short-term borrowings 2,335 250 2,335 Other ST borrowings 670 791 670 Long-term borrowings n/a n/a n/a Equity 11,406 239 11,406 Source: Annual Report

73 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

ING Bank NV (‘ING’) Table 105: Select financial metrics (BBG: INTNED) FY 2008 FY 2009 HY 2010 NIM 0.9 1.2 1.6 Snapshot ROA 0.1 0.1 0.5 ING Bank NV is the Dutch subsidiary of the ING Group, ROE 3.2 2.6 13.9 ROC 0.2 0.2 1.7 a global financial institution based in the Netherlands. C:I 82.4 69.0 56.9 ING offers a wide range of financial products, including Core capital 9.3 10.2 12.3 banking, insurance, investments and retirement services. Source: Bloomberg

At the end of 2009, ING announced that it will proceed Cover pool overview with a gradual separation of its banking and insurance We set out below some of the key cover pool businesses, to be completed by the end of 2013, in order characteristics: to provide more efficient and agile operations. Table 106: Covered bond characteristics The ING covered bond programme is backed by Dutch As at 31 July 2011 residential mortgages, and is registered with the Dutch S/M/F central bank. Covered Bond rating AAA/Aaa/AAA Issuer rating A+/Aa3/A+

Financial performance Cover pool size (€) 33,827,518,280 We set out below some of the key financial performance Number of loans parts 365,681.0 metrics: Avg loan parts (€) 92,506 WA original LTMV (in %) 70.41 Table 103: Key profit & loss figures, €mm Remaining tenor (yrs) 22.74 WA seasoning (yrs) 6.92 FY 2008 FY 2009 FY 2010 Net interest income 8,900 11,020 14,034 Interest only (in %) 67.17 Provisions for loan WA avg Debt to Income 4.22 losses 1,280 2,973 1,751 WA avg Payment to Income (in %) 20 NII less provisions 7,620 8,047 12,283 Highest regional concentration (in %) Zuid-Holland 21 3,994 3,553 3,556 Comm.& fee income 492 456 346 Other operating income 11,309 10,571 11,047 Source: Investor Report Non-interest expense 897 1,384 5,922 Operating profit (loss) 533 500 5,523 Table 107: Collateral pool LTV breakdown -170 -43 948 PBT 772 684 4,495 Current LTV ranges As at 31 July Taxes 8,900 11,020 14,034 2011 Net profit (loss) 1,280 2,973 1,751 0-<=40% 15.7 >40%-<=50% 8.7 Source: Annual Report >50%-<=60% 10.7 >60%-<=70% 11.5 Table 104: Key balance sheet figures, €mm >70%-<=80% 11.8 >80%-<=100% 41.6 FY 2008 FY 2009 FY 2010 Loans 598,328 551,774 587,448 Source: Investor Report Total Assets 1,034,689 882,119 933,073 Deposits 537,683 477,602 519,304 Short-term borrowings 205,272 148,909 145,214 Other ST borrowings 183,632 130,264 131,229 Long-term borrowings 66,931 77,350 86,432 Equity 24,121 31,217 35,069 Source: Annual Report

74 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

NIBC Bank NV (‘NIBC’) Table 110: Select financial metrics (BBG: NIBCAP) FY 2008 FY 2009 HY 2010 NIM 1.3 0.6 n/a Snapshot ROA 0.3 0.2 n/a NIBC offers merchant banking and specialised finance in ROE 5.9 2.7 5.0 ROC 0.4 0.2 n/a sectors such as shipping, oil & gas services, C:I 54.7 53.9 50.0 infrastructure & renewables and real estate. Merchant Core capital 16.6 n/a 14.5 Banking provides end-clients with investment banking Source: Bloomberg products in the Benelux and Germany, while Specialised Finance focuses on asset and project financing, along Cover pool overview with the Group's retail activities including residential We set out below some of the key cover pool mortgages and retail savings. The bank was founded in characteristics: 1945, and subsequently two Dutch pension funds, ABP and PGGM, acquired 85% of NIB, creating the NIB Table 111: Covered bond characteristics–Dutch assets Capital brand, while 15% was owned by the Dutch As at 30 June 2011 Government. In 2005, a consortium of financial S/M/F institutions, led by J.C. Flowers & Co. purchased all Covered Bond rating /A1/AAA equity interests in the bank, which changed its name to Issuer rating BBB/Baa3/BBB Cover pool size (€) 935,548,876 NIBC. The NIBC covered bond programme is backed by % of pool 80.5 both Dutch and German resi mortgages, and is registered with the Dutch central bank. WA Current LTFV (in %) 90.3 WA Indexed LTFV (in %) 79.9 Seasoning (mths) 75.6 Financial performance Number of loans 5,206 We set out below some of the key financial performance Avg principal balance (borrower) 176,481 Avg principal balance (loan part) 84,221 metrics: Interest only (in %) 63.2 Highest regional concentration (in %) Zuid-Holland 21 Table 108: Key profit & loss figures, €mm Original LTFV distribution (in %) FY 2008 FY 2009 FY 2010 <=50% 17.1 Net interest income 257 64 132 >50%-<=60% 7.1 NII less provisions 257 64 132 >60%-<=70% 7.3 Comm. & fee income 43 32 26 >70%-<=80% 11.6 Non-interest expense 200 187 221 >80%-<=90% 11.4 Operating profit (loss) 164 165 163 >90%-<=100% 9.3 PBT 94 41 88 >100% 36.0 Taxes 1 -2 8 Source: Investor Report Net profit (loss) 92 43 76 Source: Annual Report

Table 109: Key balance sheet figures, €mm FY 2008 FY 2009 FY 2010 Loans 8,807 8,933 7,005 Total Assets 28,937 29,189 28,009 Deposits 2,293 4,332 4,781 Short-term borrowings 5,546 2,601 1,354 Other ST borrowings 3,481 3,213 3,382 Long-term borrowings 15,078 16,605 n/a Equity 1,638 1,696 1,803 Source: Annual Report

75 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Table 112: Covered bond characteristics–German assets As at 30 June 2011 S/M/F Covered Bond rating /A1/AAA Issuer rating BBB/Baa3/BBB

Cover pool size (€) 226,618,386 Share of total pool (in %) 19.5 WA Current LTFV (in %) 63.8 WA Indexed LTFV (in %) 63.8 Seasoning (mths) 103.2 Number of loans 2,232 Avg principal balance (borrower) 101,532 Avg principal balance (loan part) 45,837 Annuity (in %) 93.8 Highest regional concentration (in %) NRW 29.2

Original LTFV distribution (in %) <=50% 18.3 >50%-<=60% 23.0 >60%-<=70% 28.3 >70%-<=60% 19.7 >80%-<=90% 7.1 >90%-<=100% 1.6 >100% 2.0 Source: Investor Report

76 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

SNS Bank NV (‘SNS’) Table 115: Select financial metrics (BBG: SNSSNS) FY 2008 FY 2009 HY 2010 NIM n/a Snapshot ROA -0.5 SNS Bank NV is the mortgage lender of the SNS Reaal ROE 6.7 -4.6 -20.2 ROC -1.1 Group, whose product range spans mortgage and C:I 62.8 56.6 57.9 property finance, savings and investment products and Core capital 10.5 10.7 n/a insurance and pensions. SNS Reaal reached its current Source: Bloomberg form in 1997, after the merger of SNS Groep, which focused mainly on retail banking, and Reaal Groep, Cover pool overview whose main business line was insurance. We set out below some of the key cover pool characteristics: In addition to the covered bond programme, SNS has at its disposal a €25bn MTN platform and is also the Table 116: Covered bond characteristics originator behind one of the longest standing RMBS As at 30 June 2011 platforms in the Dutch market, HERMES. S/M/F Covered Bond rating -/Aa1/AAA The SNS covered bond programme is backed by Dutch Issuer rating -/Baa1/BBB+ residential mortgages, and is registered with the Dutch Cover pool size (€) 6,450,149,852 central bank. Number of loans 37,625 Avg loan (€) 169,855

Financial performance WA original LTMV (in %) 76.0 We set out below some of the key financial performance WA indexed LTMV (in %) 74.0 metrics: Remaining tenor (yrs) 24.5 WA seasoning (mths) 59.6

Table 113: Key profit & loss figures, €mm Interest only (in %) 82.4 Savings mtges (in %) 10.5 FY 2008 FY 2009 FY 2010 National mortgage guarantee (in %) 15.0 Net interest income 773 672 918 Highest regional concentration (in %) Limburg 17.2 Provisions for loan losses 0 NII less provisions 773 672 918 Source: Investor Report Commissions & fee income 152 136 138 Table 117: Collateral pool LTV breakdown Other operating income 2 1 4 Non-interest expense 773 1,197 622 Current LTV ranges As at 30 June Operating profit (loss) 418 2011 PBT 183 -99 -532 0-<=40% 4.4 Taxes 36 -1 -101 >40%-<=50% 4.3 Net profit (loss) 147 -98 -431 >50%-<=60% 7.4 >60%-<=70% 12.0 >70%-<=80% 18.7 Source: Annual Report >80%-<=90% 6.6 >90%-<=100% 9.1 Table 114: Key balance sheet figures, €mm >100% 37.6 FY 2008 FY 2009 FY 2010 Source: Investor Report Loans 68,577 70,194 65,013 Total Assets 76,695 80,289 78,918 Deposits 21,859 24,435 37,880 Short-term borrowings 16,675 16,954 5,118 Other ST borrowings 323 Long-term borrowings 30,282 30,739 29,523 Equity 2,404 2,434 1,836 Source: Annual Report

77 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

78 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected] s d n o B

d e r e v o C

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79 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Finnish Covered Bonds

Legislative snapshot We set out in Table 62 a snapshot of key covered bond attributes in the Finland.

Table 118: Finnish Covered Bond legislative overview Attribute Commentary Framework Legislative Framework Act on Mortgage Credit Banks (1240/1999), as subsequently amended Types of covered bonds Two. Direct balance sheet issuance from a Deposit Bank or via a specialist banking subsidiary (Mortgage Credit Bank or MCB) Structure of Issuer Direct issuance? Yes Comments (if any) Bankruptcy remoteness Segregation of assets in a special cover register, with a preferential claim on registered collateral. Bankruptcy of the Deposit Bank or MCB does not automatically result in acceleration of the covered bonds (first step is to find a new sponsor for the programme), except where breach of the asset eligibility criteria has occurred. Here, the cover pool can be sold on instruction of the FSA-appointed attorney directing the bankruptcy administrator, with all existing bondholders due and payable (pari passu). Dual claim Yes Bond format Typically, fixed rate. Mix of hard and soft bullet bonds. Nordea and Aktia issue hard bullet bonds, while Op and Sampo have the ability to extend maturities by up to 12 months at the discretion of the issuer Supervision Finnish FSA Cover pool Eligible assets Mortgage Residential and commercial mortgages, along with shares in housing companies, with commercial mortgages capped at 10% of the cover pool. Both residential and commercial properties must be situated in Finland or other members of the EEA LTV caps Up to 70% LTV for residential exposures and 60% LTV for commercial mortgage exposures. CB investors only benefit from the eligible cover pool element of the mortgage (max 70% LTV for residential mortgages, 60% for commercial) Public Sector Loans to public authorities can also be included in the cover pool at book value Non-performing collateral NPLs greater than 90d must be removed from the cover pool calculations Substitution Assets Substitute assets (limited to a maximum of 20% of the cover pool) can include government or other public sector exposures, credit institutions and cash Hedging Elimination of interest rate and currency risk through hedging Valuation Individual market values for underlying collateral Other comments (if any) Requirements ALM matching Asset coverage Matching by nominal value, currency and duration (average term to maturity of CB is shorter than average term to maturity of collateral assets). Minimum required over-collateralisation defined as 2% of the Net Present Value by law and issuer/programme specific levels. Interest coverage Interest received in a given 12 month period must be greater than interest due on the liabilities Other (if any) Consequence of breach Cancelling the license or other regulatory action Monitoring Monitored on a monthly basis by the FSA Other Compliance with EU UCITS and CRD compliant. legislation Source: National legislation, J.P. Morgan Covered Bond Research

80 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Finnish covered bond & macro backdrop

Figure 55: CB issuance, €m Figure 56: CB outstanding, €mm 6,000 12,000

5,000 Mortgage 10,000 Mortgage 4,000 8,000

3,000 6,000

2,000 4,000

1,000 2,000

0 0 2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 2007 2008 2009 2010 Source: ECBC. Latest data available displayed Source: ECBC. Latest data available displayed

Figure 57: Finnish real GDP growth, y-on-y, % Figure 58: Finnish unemployment level, %

8 Real GDP growth 12 Unemployment 6 4 10 2 8 0 -2 6 -4 -6 4 -8 2 -10 -12 0 0 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 1 1 ------r r r r r r r r r r r r r r r r r r r r r r r r a a a a a a a a a a a a a a a a a a a a a a a a M M M M M M M M M M M M M M M M M M M M M M M M

Source: Bloomberg Source: Bloomberg

Figure 59: Finnish CPI and base rate, % Figure 60: Finnish consumer confidence, balance of survey

6 Inflation Base rate 25 Cons. Confidence 5 20 4 15 3 10 2 5 1 0 0 -1 -5 -2 -10 0 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 1 1 ------r r r r r r r r r r r r r r r r r r r r r r r r a a a a a a a a a a a a a a a a a a a a a a a a M M M M M M M M M M M M M M M M M M M M M M M M

Source: Bloomberg Source: Bloomberg

Figure 61: Finnish house price growth, y-on-y, % Figure 62: Finnish construction & production index, #

14% OECD HP nominal growth 160 OECD Construction production index 12% 140 10% 8% 120 6% 100 4% 2% 80 0% 60 -2% 40 -4% -6% 20 -8% 0 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 1 1 ------r r r r r r r r r r r r r r r r r r r r r r r a a a a a a a a a a a a a a a a a a a a a a a M M M M M M M M M M M M M M M M M M M M M M M

Source: Bloomberg Source: Bloomberg

81 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Aktia Real Estate Mortgage Bank plc Table 120: Key balance sheet figures, €mm (BBG: AKTIA) FY 2008 FY 2009 FY 2010 Loans 5,426 6,061 6,592 Snapshot Total Assets 9,540 10,556 11,249 Aktia Real Estate Mortgage Bank plc (Aktia MB) is a Deposits 3,098 3,029 3,397 Short-term borrowings 1,917 1,724 960 Finnish credit institution, specialising in mortgage loans. Other ST borrowings 3 19 158 The bank grants loans to both individuals and housing Long-term borrowings 2,366 3,000 3,638 corporations, and is regulated by the Finnish Mortgage Equity 317 466 497 Bank Act. The institution is owned by Aktia Bank plc Source: Bloomberg (49.9% of equity, 70% voting rights), 31 savings banks (37.9%, 20%) and 36 local co-operative banks (12.2%, Table 121: Select financial metrics 10%). Aktia Group is the fourth largest banking group in FY 2008 FY 2009 FY 2010 Finland, acting as the central financial institution for NIM 1.28 1.67 1.50 ROA 0.06 0.34 0.51 independent savings and cooperative banks. ROE 1.68 9.45 12.52 ROC 0.14 0.69 1.13 Aktia Real Estate Mortgage Bank plc mortgages are C:I 99.70 66.30 63.90 distributed through the branch networks of the co- Core capital 9.30 9.50 10.10 operating banks. Eligible cover pool collateral is Source: Bloomberg restricted to first-lien Finnish residential mortgages. Cover pool overview Furthermore, the originator has committed to a mandatory over-collateralisation level of 8.5%. The bank We set out below some of the key cover pool funds its activities predominantly by issuing covered characteristics: bonds, with short-term funding coming from a credit Table 122: Covered bond characteristics facility from Aktia Bank. As at 30 June 2011 Financial performance S/M/F Covered bond rating -/Aa1/- We set out below some of the key financial performance Issuer rating (Aktia Bank plc) -/A1/- metrics: €mm Mortgages 3,532 Table 119: Key profit & loss figures, €mm Substitute collateral 163 FY 2008 FY 2009 FY 2010 Collateral pool 3,694 Net interest income 129 102 153 LTV <60% 2,541 Provisions for loan LTV 60-70% 132 losses 0 1 32 LTV 70-85% G'teed by Republic of Finland 93 NII less provisions 128 102 121 WA LTV (%) 56.1 Comm.& fee income 57 51 61 Average loan size (€) 78,500 Other operating WA Margin (bp) 78.2 income 37 -30 33 Non-interest expense 171 120 169 Operating profit (loss) 54 0 47 Source: Investor Report

PBT 66 7 47 Taxes 13 1 13 Net profit (loss) 52 5 34 Source: Bloomberg

82 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Nordea Bank Finland Oyj Cover pool overview (BBG: NBHSS) We set out below some of the key cover pool Snapshot characteristics: Nordea Bank Finland (‘Nordea’) is a 100% owned Table 126: Covered bond characteristics subsidiary of Nordea Bank AB, part of the larger Nordea Group, a well established financial group catering to the As at 31 March 2011 S/M/F Nordic and Baltic states, where it is consistently one of Covered bond rating -/Aaa/- the largest by market share, with a small but growing Issuer rating (Nordea Finland) -/Aa2/- presence in new European markets. No geographical Cover pool size (€mm) 9,205 market accounts for more than a quarter of income, out Nominal OC (%) 191.0 of a customer base of around 10mm households and # of loans 157,431 corporates. # of borrowers 128,083 WA loan size (€) 62,271

Financial performance WA Current LTV (%) 51.6 We set out below some of the key financial performance WA Indexed LTV (%) 56.4 metrics: WA seasoning (mths) 44.0 Rental properties (%) 48.7 Table 123: Key profit & loss figures, €mm Second homes (%) 2.4 FY 2008 FY 2009 FY 2010 Commercial loans (%)] 1.1 Net interest income 180 240 290 Public sector collateral (%) 1.5 Provisions for loan losses 28 129 104 Source: Investor Report NII less provisions 152 111 186 Table 127: Collateral pool LTV breakdown Comm.& fee income 132 178 191 Other operating Current LTV ranges As at 31 March 2011 income 410 452 439 0-<=40% 71.8 Non-interest expense 494 548 543 >40%-<=60% 21.3 Operating profit (loss) 119 265 308 >60%-<=70% 7.0 >70%-<=80% - PBT 119 265 308 >80%-<=90% - Taxes 31 71 79 >90% - Net profit (loss) 88 194 229 Source: Investor report Source: Bloomberg

Table 124: Key balance sheet figures, €mm FY 2008 FY 2009 FY 2010 Loans 12,279 11,323 12,433 Total Assets 32,448 35,510 36,184 Deposits 3,508 4,133 4,231 Short-term borrowings 3,643 4,984 4,960 Other ST borrowings 2,012 434 455 Long-term borrowings 17,747 18,595 17,940 Equity 1,640 2,267 2,377 Source: Bloomberg

Table 125: Select financial metrics FY 2008 FY 2009 FY 2010 NIM 0.83 0.98 1.10 ROA 0.30 0.57 0.64 ROE 5.02 9.93 9.86 ROC 0.42 0.79 0.90 C:I 76.21 56.56 55.60 Core capital 12.00 11.80 12.50 Source: Bloomberg

83 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

OP Mortgage Bank (‘OP’) Table 130: Select financial metrics (BBG: POHBK) FY 2010 NIM Snapshot ROA 0.30 OP Mortgage Bank plc (‘OP’) is the mortgage bank of ROE 7.70 ROC the OP-Pohjola Group, the largest financial services C:I 43.00 group in Finland. The Group includes OP Mortgage Core capital 13.60 Bank, over 200 member co-operative banks, their central Source: Bloomberg co-operative, Pohjola Bank as the central bank of the Group and companies belonging to its member credit Cover pool overview institutions. The member co-operative banks are We set out below some of the key cover pool independent, local deposit-taking institutions engaged in characteristics: retail banking. OP Mortgage Bank is regulated under the Finnish Mortgage Bank Act, and grants secured housing Table 131: Pool A: Covered bond characteristics loans. As at 31 March 2011 S/M/F OP Mortgage Bank’s purpose is to grant mortgage loans Covered bond rating AAA/Aaa/- through its member co-operative banks. The Bank Issuer rating (Pohjola Bank plc) AA-/Aa2/AA- obtains funding through the issuance of mortgage-backed €mm covered bonds, which are direct, unconditional and Mortgages n/a unsubordinated obligations of OP Mortgage Bank. Substitute collateral n/a Collateral pool 4,600 Covered bonds in issue 3,250 Financial performance We set out below some of the key financial performance LTV <60% 4,500 LTV >60% (JPM estimate) 100 metrics: WA LTV (%) 46.0 Table 128: Key profit & loss figures, €mm Average loan size (€) 48,000 FY 2010 Source: Investor Report. J.P. Morgan estimates Net interest income 961 Provisions for loan losses 2 Table 132: Pool B: Covered bond characteristics NII less provisions 959 As at 31 March 2011 S/M/F Comm.& fee income 606 Covered bond rating AAA/Aaa/- Other operating Issuer rating (Pohjola Bank plc) AA-/Aa2/AA- income 49 Non-interest expense 1,010 €mm Operating profit (loss) 1,291 Mortgages n/a Substitute collateral n/a PBT 1,066 Collateral pool 1,800 Taxes 268 Covered bonds in issue 1,000 Net profit (loss) 798 Source: Bloomberg LTV <60% 1,760 LTV >60% (JPM estimate) 40 Table 129: Key balance sheet figures, €mm WA LTV (%) 56.0 FY 2010 Average loan size (€) 66,000 Total Assets 285,409 Deposits 55,552 Source: Investor Report. J.P. Morgan estimates Short-term borrowings 60,493 Other ST borrowings Long-term borrowings 21,975 Equity 10,858 Source: Bloomberg

84 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Sampo Housing Loan Bank Table 135: Sampo Bank plc: Select financial metrics (BBG: DANBNK) FY 2008 FY 2009 FY 2010 NIM n/a n/a n/a Snapshot ROA 2.90 2.68 3.91 Sampo Housing Loan Bank plc (SHLB) is a wholly ROE 10.92 10.47 13.38 ROC 9.44 9.08 11.68 owned subsidiary of Sampo Bank plc and is constituted C:I n/a n/a n/a with the sole purpose of funding mortgages through the Core capital n/a n/a n/a issuance of covered bonds. Sampo Bank plc is the third Source: Bloomberg largest bank in Finland and through its Finnish parent, Sampo Group, is in turn a part of the larger Danske Bank Cover pool overview Bank, one of the Nordic region’s largest banking groups. We set out below some of the key cover pool characteristics: Similar to other covered bond issuers in the country, SHLB is regulated by Finland's Mortgage Bank Act. The Table 136: Covered bond characteristics bank purchases mortgages from its parent company, and As at 31 December 2010 issues covered bonds under a €5bn EMTN programme. S/M/F All other functions such as mortgage servicing are Covered bond rating -/Aaa/- performed by Sampo Bank plc. To date, Sampo Housing Issuer rating (Sampo Bank plc) A/A1/- Loan Bank has issued two transactions from its shelf, €mm with €2bn of bonds currently outstanding. Mortgages 2,068 Substitute collateral 96 Collateral pool 2,164 Financial performance We set out below some of the key financial performance LTV <60% 2,018 metrics: LTV > 60% 35 WA LTV (%) 36.2 Table 133: Sampo Bank plc: Key profit & loss figures, €mm Average loan size (€) 48,000 FY 2008 FY 2009 FY 2010 Net interest income Source: Investor Report Provisions for loan losses NII less provisions

Comm.& fee income Other operating income 23 20 26 Non-interest expense n/a n/a n/a Operating profit (loss) 934 912 929

PBT 870 825 1,321 Taxes 195 184 217 Net profit (loss) 675 641 1,104 Source: Bloomberg

Table 134: Sampo Bank plc: Key balance sheet figures, €mm FY 2008 FY 2009 FY 2010 Total Assets 21,205 26,635 29,851 Deposits n/a n/a n/a Short-term borrowings 0 0 0 Other ST borrowings n/a n/a n/a Long-term borrowings 1,269 2,098 2,187 Equity 4,631 7,613 8,886 Source: Bloomberg

85 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

86 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected] s d n o B

d e r e v o C

h c n e r F

87 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

French Covered Bonds

Legislative snapshot We set out in Table 137 a snapshot of key covered bond attributes in France.

Table 137: French Covered Bond legislative overview: OF Attribute Commentary Framework Legislative Framework Art. 515-13 and seq. of the French Monetary and Financial Code; Act. No 99-532 of 25 June 1999; Decree No 99-655 of 29 July 1999; Decree No 99-710 of 3 Aug 1999; regulation No 99-10 of the banking and finance regulation committee on SCF; Art. 16 of Act No 69-1263 of 31 December 1969 Types of covered bonds One. Structure of Issuer Direct issuance? No. Bonds are issued by a specialised credit institution (Societe de Credit Foncier, SCF) with authorisation from the Credit Institution and Investment Companies Committee (CECEI). SCF are limited by law in their range of business activities. Comments (if any) Bankruptcy remoteness Established by law by guaranteeing that the bankruptcy of a company holding shares of the SCF does not extend to the SCF. Also, upon default, no creditors can be paid until the privileged creditors are repaid in full. There is no acceleration upon judicial liquidation of an SCF. Dual claim Yes, all assets of the SCF secure the OFs and other privileged creditors and no creditor can be paid until the privileged ones are repaid in full. Bond format Fixed rate. Hard bullet, but docs generally have flexibility to introduce soft bullets. Supervision French Banking Commission. Cover pool Eligible assets Mortgage Residential or commercial mortgages, although only marginal exposure to commercial loans in current pools. Assets securing the loans have to be based in the EEA or a State qualifying for Step 1 credit quality assessment by a rating agency recognised by the French banking commission. RMBS bonds rated at least AAA can also be included in the pool, as long as they are at least 90% backed by eligible collateral. LTV caps Soft LTV limit of 60%, 80% for loans used to finance the purchase or construction of a property and 100% for loans with a personal or FGAS guarantee; guaranteed loans must not exceed 35% of SCF assets. Public Sector Debt issued or guaranteed by a public entity located in the EEA, Switzerland, Canada, USA, Japan, Australia and New Zealand or any State that qualifies for a Step 1 credit assessment by a rating agency. Non-performing collateral Loans in arrears by more than 90 days are removed from the pool. Substitution Assets Cash equivalent assets. Issuer or guarantor has to be rated at least AA-. Substitution collateral cannot exceed 15% of the cover pool. Hedging Derivatives used only used to minimise interest rate, currency or other risks. Valuation Prescribed standards. Commercial properties must be valued each year if value >€450k and loan balance >€360k or every 3yrs if loan balance <€360k. Other comments (if any) Requirements ALM matching Asset coverage Asset cover nominal ratio must be at least 1 at all times and must be published at least twice a year. If rating of the mortgage guarantor or RMBS bond is at least AA-, 100% weight is given to the asset; if rating between A- and A+, 50% weight; below A- 0% weight. Substitute collateral is given 95% weight, repossessed properties 50% weight and other eligible assets 100% weight. Post Group EoD, an Amortisation Test is carried out. Interest coverage The Pre-maturity Test checks that there is enough liquidity in case of a downgrade; a breach constitutes a Group EoD but not an issuer EoD. Other (if any) Minimum OC of 2% Consequence of breach A breach of the Asset Cover test is not an issuer EoD but a Group EoD and no more issuance is allowed. Non-compliance with the Amortisation Test is an EoD. Monitoring A specific controller must be appointed by the SCF with approval of the French Banking Commission. The controller will check asset and interest coverage, A/L mismatches and the eligibility of the assets. Must file an annual report to the Commission. Other Compliance with EU UCITS- and CRD-compliant legislation Source: National legislation, J.P. Morgan Covered Bond Research

88 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Table 138: French Covered Bond legislative overview: OH Attribute Commentary Framework Legislative Framework Art 515-34 and seq. of the French Monetary and Financial Code, art 74 of law 2010-1249 Types of covered bonds One Structure of Issuer Direct issuance? No. The bonds are issued out of a specialised credit institution (SFH) with a limited purpose. Comments (if any) The framework was set up in 2010 to allow law-base covered bonds to become UCIT-compliant through their inclusion in a legal framework. The exclusive legal purpose of the SFH is to grant or finance loans and hold securities under specific conditions set out in the French Monetary and Financial Code. Bankruptcy remoteness Art. 515-27 of the French Monetary and Financial Code precludes the extension of any safeguard procedure, judicial reorganisation or liquidation of the SFH's parent to the SFH. There is no acceleration of the bonds upon insolvency of the issuer. Dual claim Yes, but only a residual claim if the cover pool is not enough to redeem the bonds. Bond format Typically fixed rate, soft bullet with generally a 12 mths extension allowed. Supervision Autorite de Controle Prudentiel (ACP), French Banking Commission Cover pool Eligible assets Mortgage Residential loans secured on a property located in the EEA or a state rated at least AA-. These can also be in the form of RMBS as long as at least 90% of the underlying pool satisfies the criteria, the securitisation vehicle is governed by French, EEA, US, Swiss, Canadian, Japanese, Australian or New Zealand law and the bonds are rated AAA. No limitations on guaranteed home loans. LTV caps Soft limit of 80%, with generally hard limit of 100%. Public Sector n/a Non-performing collateral No loans in arrears can be added to the pool, but no explicit requirement to substitute them after they have been added to the pool. Loans in arrears by more than 3 months are not given full credit in the calculation of the Asset Coverage Test. Substitution Assets Up to 15% of collateral. Can consist of debt guaranteed or issued by institutions rated at least AA-; debt due within 100 days or guaranteed by a member of the EEA rated at least A-; debt issued or guaranteed by public sector entities referred to in the French Monetary and Financial Code. Hedging Only used to minimise interest rate, currency or other risks. Valuation Individual market values. Carried out on an annual basis by the Specific Controller. Other comments (if any) Requirement to disclose details of the cover pool on a quarterly basis. Requirements ALM matching Asset coverage Minimum nominal OC of 2% has to be maintained, although Asset Percentage in prospectus is often above min requirement. If breached, there is no event of default, but the license of the issuer as SCH can be withdrawn. Prior to parent default, an Asset Cover test has to be carried out and assets must be less than liabilities at all times. If less than 1, then no further issuance is allowed and there is a Borrower EoD but not an Issuer EoD. There is also a Pre-maturity Test that checks that the originator can provide enough liquidity in case of a downgrade; a breach constitutes a Borrower EoD. Finally, there is a Liquidity test with a similar purpose, but a breach does not lead to an EoD. Interest coverage The issuer has to make sure that liquidity needs for the next 180 days are covered with substitute assets, liquidity lines granted by eligible counterparties or central banks. Other (if any) Post default of the parent, an Amortisation test is carried out; if the Amortisation ratio is less than 1, then an Issuer event of default takes place and the bonds accelerate. Consequence of breach See above. Monitoring There are an asset monitor and a specific controller that acts as an independent trustee and by law reports to the ACP. Other Compliance with EU UCITS compliant but not CRD compliant legislation Source: National legislation, J.P. Morgan Covered Bond Research

89 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Table 139: French Covered Bond legislative overview: CRH Attribute Commentary Framework Legislative Framework Art. 13 of Law 85-695; sections 313-42 to 313-49 and sections 313-20 to 313-25 of the French Monetary and Financial Code; Art. 36 of Law 2006-872. Types of covered bonds One. Structure of Issuer Direct issuance? The bonds are issued by CRH, a specialist financial institution whose only business purpose is to fund French banks' loans to individuals. Comments (if any) CRH was set up in 1985 as a government-guaranteed central agency; now it is a private company owned by French banks. Bankruptcy remoteness Achieved by special legal framework superseding general insolvency laws. Dual claim Yes, but residual claim only. At CRH level, if one of the shareholder banks defaults and the loan portfolio transferred to CRH is insufficient, then CRH becomes an unsecured creditor of the bank. Bond format Fixed rate, bullet. Supervision French Banking Authority Cover pool Eligible assets Mortgage Only first ranking or guaranteed French home loans to individuals (in theory loans from other jurisdictions of the EEA are eligible but only French loans are currently in the pool). LTV caps Max LTV is 60%, 80% for loans used to finance the purchase or construction of a property, 90% if the amount of the loan portfolio is 25% above the outstanding bonds, 100% for loans guaranteed by the FGAS. Public Sector n/a Non-performing collateral n/a Substitution Assets No replacement assets are allowed. RMBS and other types of residential assets (such as loan portfolios) are not permitted. Hedging No derivatives. Exact matching of assets and liabilities by law. Valuation Valued annually using a lending value, which cannot exceed the market value. The valuation has to be conservative, based on lasting, long-term characteristics of the property and normal market and local conditions. Other comments (if any) Requirements ALM matching Asset coverage Cover pool has to be 125% of liabilities. Interest coverage n/a Other (if any) Consequence of breach Monitoring The French Banking Authority and an independent monitor who audits the cover pool and checks coverage tests. Other Compliance with EU UCITS- and CRD-compliant legislation Source: National legislation, J.P. Morgan Covered Bond Research

90 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Table 140: French Covered Bond legislative overview: General law based covered bonds Attribute Commentary Framework Legislative Framework French Monetary and Financial Code Types of covered bonds One Structure of Issuer Direct issuance? No, bonds are issued by a licensed financial institution whose sole purpose is to provide financing to the parent bank. Comments (if any) Unlike other structured covered bond frameworks in Europe (such as the UK, Dutch or Italian ones), the covered bonds are issued by the SPV. Bankruptcy remoteness The French Monetary and Financial Code guarantees the bankruptcy remoteness of the Issuer in case of insolvency of the parent. There is no acceleration upon default of the parent bank. Dual claim In case of default of the parent, covered bonds holders have recourse to the cover pool and a residual claim against the parent. Bond format Typically fixed rate, soft bullet, Bonds can have an extended maturity date, generally a year after the original maturity date. Supervision ACP, Autorite de Controle Prudentiel Cover pool French Banking Commission Eligible assets Mortgage French residential mortgages, no limits on guaranteed loans. LTV caps Soft limit of 80% LTV for residential mortgages, with hard 100% LTV limit. Public Sector n/a Non-performing collateral No arrears at inclusion, but no specific requirement to substitute non performing loans. These are not accounted for in the calculation of the Asset Coverage Test. Substitution Assets Short term (<1yr left) debt securities or long term debt securities where the issuer is rated at least AA-; government and public entities' securities with a remaining maturity of less than 1yr that are rated AAA; Euro or other currency, liquid RMBS with mat.<1yr rated at least AA-. Hedging Derivatives used to hedge interest rate and currency risk. Valuation Individual market values. If the market value of the property, only 80% of the increase is used for the indexation; if the value has fallen, the full price change is used to calculate indexed values. Other comments (if any) Requirements ALM matching Asset coverage Minimum Asset percentage of 92.5% has to be maintained. Prior to parent default, an Asset Cover test has to be carried out and assets must be less than liabilities at all times. If the ratio is less than 1, then no further issuance is allowed and there is a Borrower EoD but not an Issuer EoD. Interest coverage There is also a Pre-maturity Test that checks that the originator can provide enough liquidity in case of a downgrade; a breach constitutes a Borrower EoD. Other (if any) Post Borrower default, an Amortisation test is carried out to ensure that the collateral is enough to pay future liabilities. If the test fails, the representative, at its discretion or mandated by the majority of bondholder, can ask for the acceleration of the bonds. Consequence of breach Monitoring An independent Asset Monitor is appointed. Other Compliance with EU Non UCIT- or CRD-compliant legislation Source: National legislation, J.P. Morgan Covered Bond Research

91 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

French covered bond & macro backdrop

Figure 63: CB issuance, €mm Figure 64: CB outstanding, €mm 100,000 350,000

Mortgage Public Sector Mixed Assets 300,000 Mortgage Public Sector Mixed Assets 80,000 250,000 60,000 200,000

40,000 150,000 100,000 20,000 50,000 0 0 2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 2007 2008 2009 2010 Source: ECBC. Latest data available displayed Source: ECBC. Latest data available displayed

Figure 65: French real GDP growth, y-on-y, % Figure 66: French unemployment level, %

5 Real GDP growth 12 4 3 10 2 8 1 0 6 -1 4 -2 Unemployment -3 2 -4 -5 0 0 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 1 1 ------r r r r r r r r r r r r r r r r r r r r r r r r a a a a a a a a a a a a a a a a a a a a a a a a M M M M M M M M M M M M M M M M M M M M M M M M

Source: Bloomberg Source: Bloomberg

Figure 67: French CPI and base rate, % Figure 68: French consumer confidence, balance of survey

6 Inflation Base rate 10 Cons. Confidence 5 0 4 -10 3 -20 2 -30 1 0 -40 -1 -50 0 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 0 0 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 1 ------r r r r r r r r r r r r r r r r r r r r r r r a a a a a a a a a a a a a a a a a a a a a a a M M M M M M M M M M M M M M M M M M M M M M M

Source: Bloomberg Source: Bloomberg

Figure 69: French house price growth, y-on-y, % Figure 70: French dwelling sales, #

20 House price growth 40000 Dwelling sales 15 35000 10 30000 25000 5 20000 0 15000 -5 10000 -10 5000 -15 0 0 1 2 3 4 5 6 7 8 9 0 1 6 7 8 9 0 1 6 6 7 7 8 8 9 9 0 0 0 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 0 0 1 1 1 1 ------r r r r r r r r r r r r l l l l l r r r r r r v v v v v a a a a a a a a a a a a u u u u u a a a a a a o o o o o J J J J J M M M M M M M M M M M M M M M M M M N N N N N

Source: Bloomberg Source: Bloomberg

92 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

AXA Bank Europe SCF Cover pool overview (BBG: AXASA) We set out below some of the key cover pool Snapshot characteristics: As part of a diversification strategy that began in 2007 to Table 143: Covered bond characteristics complement its insurance products, AXA launched AXA Bank in Switzerland in 2009, quickly followed by AXA As at June 2011 Ratings S/M/F banks in Belgium, the Czech Republic, France, Germany, Covered bond rating AAA/-/AAA Hungary and Slovakia. Issuer rating A+/-/-

Cover pool All European banking activities are coordinated by AXA Cover pool size (€) 1,727,618,673 Bank Europe, formerly known as AXA Bank Belgium. Number of loans 27,733 AXA Bank Europe has a market share of 8% of the Avg loan (€) 79,931 Belgian mortgage lending market. WA initial LTV (in %) 74.1 WA current LTV (in %) 49.2 AXA Bank Europe SCF was set up using the OF Remaining tenor (mths) 187 structure offered by the French legislative framework. WA seasoning (mths) 72 WA DTI (in %) 37.4 The assets of the SCF are AAA-rated RMBS bonds Source: Investor Report backed by a portfolio of prime Belgian residential loans originated and serviced by AXA Bank Europe. Table 144: Collateral pool LTV breakdown Current LTV ranges As at June 2011 Financial performance 0-<=40% 37.6 We set out below some of the key financial performance >40%-<=50% 15.2 metrics: >50%-<=60% 14.0 >60%-<=70% 12.5 >70%-<=80% 10.5 Table 141: Key profit & loss figures AXA Bank Europe, €mm >80%-<=90% 6.3 >90%-<=100% 3.8 FY 2009 FY 2010 Net interest income 224 235 Source: Investor Report 8 5 Comm.& fee income 216 229 Other operating income Non-interest expense 36 40 Operating profit (loss) 30 40 271 301 PBT 8 53 Taxes Net profit (loss) -14 -14 Source: Annual report 2010

Table 142: Key balance sheet figures AXA Bank Europe, €mm FY 2009 FY 2010 Loans 20,345 22,355 Total Assets 26,296 31,377 Deposits 16,865 16,111 Short-term borrowings 972 1,830 Equity 854 851 Source: Annual report 2010

93 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Banques Populaires SCF Table 147: Select financial metrics (BBG: BPCOV) FY 2009 FY 2010 C:I 69 60 Snapshot Core capital 9.1 10.1 Together with Caisse d'Épargne, Banques Populaires is Source: Annual report 2010 one of the two brands of the Groupe BPCE. The two cooperative groups merged in July 2009 to create the Cover pool overview second largest French banking group, combining two We set out below some of the key cover pool cooperative banking networks consisting of the twenty characteristics: Banque Populaire banks and seventeen Caisses d'Épargne. Alongside the central BPCE institution, the Table 148: Covered bond characteristics group also operates a number of subsidiary businesses, As at June 2011 including the majority owned Natixis, which focuses on Ratings S/M/F corporate and investment banking activities, as well as Covered bond rating AAA/Aaa/- Crédit Foncier de France (see separate issuer overview). Issuer rating A+/Aa3/A+ Cover pool June-11 The group provides banking, financial and real estate Cover pool size (€) 11,939,996,724 services to all types of customers, with Caisse d’Épargne Number of loans 203,612 Avg loan (€) 58,641 more focused on the retail sector, while Banques Populaires specialises in services to SMEs, professionals WA current LTV (in %) 68.0 and high net worth individuals. WA current indexed LTV (in %) 64.0 Remaining tenor (mths) 172 WA seasoning (mths) 43 Unlike Groupe Caisse d'Épargne, BPCOV utilises obligation foncieres for part of its funding requirements. Owner occupied property (in %) 89.4 Buy-to-let (in %) 8.0 Employed (in %) 54.7 Financial performance Self employed (in %) 13.2 We set out below some of the key financial performance Source: Investor Report metrics: Table 149: Collateral pool LTV breakdown Table 145: Key profit & loss figures Groupe BPCE, €mm Current LTV ranges As at June 2011 FY 2009 FY 2010 0-<=40% 13.9 >40%-<=50% 9.1 Net interest income 12,752 12,182 >50%-<=60% 10.9 >60%-<=70% 13.3 Comm.& fee income 8,705 9,052 >70%-<=80% 16.2 Other operating >80%-<=90% 19.2 income 11,804 11,770 >90%-<=100% 17.5 Non-interest expense 16,359 16,057 Operating profit (loss) 723 5,648 Source: Investor Report

PBT -368 5,749 Taxes -293 1,716 Net profit (loss) -75 4,033 Source: Annual report 2010

Table 146: Key balance sheet figures Groupe BPCE, €mm FY 2009 FY 2010 Loans 309,855 342,994 Total Assets 1,028,802 1,048,442 Deposits 14,941 12,993 Short-term borrowings 77,057 83,944 Long-term borrowings 124,755 136,313 Equity 47,794 51,365 Source: Annual report 2010

94 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

BNP Paribas Home Loan SFH Table 151: Key balance sheet figures, €mm (BBG: BNPPCB) FY 2008 FY 2009 FY 2010 Loans 494,401 678,766 684,686 Snapshot Total Assets 2,075,551 2,057,698 1,998,158 The BNP Paribas Group was created ten years ago Deposits 413,955 604,903 580,913 Short-term borrowings 1,286,572 1,021,434 980,082 through the merger of Banque Nationale de Paris and Other ST borrowings 87,405 77,187 68,974 Paribas. Since then it has continued its expansion by Long-term borrowings 131,295 153,347 148,549 acquiring BNL, the sixth largest Italian bank, and 75% of Equity 58,968 80,344 85,630 Fortis Bank in Belgium and 66% of BGL in Source: Bloomberg Luxembourg. Table 152: Select financial metrics The group focuses on retail banking, corporate and FY 2008 FY 2009 FY 2010 investment banking and investment solutions, providing NIM 0.8 1.1 1.3 ROA 0.2 0.3 0.4 services to 13mm customers in its core markets of ROE 6.7 10.6 12.2 Belgium, France, Italy and Luxembourg and a further ROC 0.3 0.5 0.7 5mm in its secondary markets: the Mediterranean basin, C:I 73.1 59.3 61.4 Eastern Europe and the USA. Alongside the retail Core capital 7.8 10.1 11.4 banking operations, the group also provides specialised Source: Bloomberg financial services, including consumer credit and Cover pool overview mortgages (BNP Paribas Personal Finance), leasing (BNP Paribas Leasing Solutions) and corporate vehicle We set out below some of the key cover pool management (Arval). Significant business lines also exist characteristics: in Corporate & Investment Banking (BNP Paribas CIB) Table 153: Covered bond characteristics and Investment Solutions (Private Banking, Asset Management, Securities Services and Insurance amongst As at July 2011 others). Ratings S/M/F Covered bond rating AAA/Aaa/AAA Issuer rating AA/Aa2/AA- The bank switched from structured covered bonds to OH covered bonds in 2011 for part of its funding needs. Cover pool Cover pool size (€) 34,200,106,112 Number of loans 345,931 Financial performance Avg loan (€) 98,864 We set out below some of the key financial performance WA current LTV (in %) 68.2 metrics: WA current indexed LTV (in %) 62.0 Remaining tenor (mths) 186.9 Table 150: Key profit & loss figures, €mm WA seasoning (mths) 48.7 FY 2008 FY 2009 FY 2010 Owner occupied property (in %) 81.7 Net interest income 13,498 21,021 24,060 Buy-to-let (in %) 13.4 Provisions for loan Employed borrower (in %) 63.5 losses 3,783 7,818 4,201 Self-employed borrower (in %) 13.9 NII less provisions 9,715 13,203 19,859 Unemployed borrower (in %) 5.3 Source: Investor Report Comm.& fee income 10,713 12,276 13,857 Other operating income 4,862 5,182 5,773 Table 154: Collateral pool LTV breakdown Non-interest expense 25,223 28,700 32,489 Current LTV ranges As at July 2011 Operating profit (loss) 3,705 8,569 12,830 0-<=40% 14.8 >40%-<=50% 8.2 PBT 3,924 9,000 13,020 >50%-<=60% 10.0 Taxes 472 2,526 3,856 >60%-<=70% 11.9 Net profit (loss) 3,021 5,832 7,843 >70%-<=80% 15.5 Source: Bloomberg >80%-<=90% 20.4 >90%-<=100% 19.3 Source: Investor Report

95 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

BNP Paribas Public Sector SCF Cover pool overview (BBG: BNPSCF) We set out below some of the key cover pool Snapshot characteristics: See earlier profile. Table 158: Covered bond characteristics

Unlike BNP Paribas Home Loans CB, BNP Paribas As at June 2011 Ratings S/M/F public sector SCF utilises obligation foncieres for part Covered bond rating AAA/Aaa/AAA of its funding requirements. Issuer rating AA/Aa2/AA-

Cover pool size (€mm) 4,096 Financial performance We set out below some of the key financial performance Country of guarantor (in %) metrics: France 23 USA 28 Germany 35 Table 155: Key profit & loss figures, €mm UK 14

FY 2008 FY 2009 FY 2010 Country of borrowers (in %) Net interest income 13,498 21,021 24,060 Australia 14 Provisions for loan China 11 losses 3,783 7,818 4,201 Chile 11 NII less provisions 9,715 13,203 19,859 Ireland 11 Turkey 9 Comm.& fee income 10,713 12,276 13,857 Others 44 Other operating income 4,862 5,182 5,773 Borrowers by sector (in %) Non-interest expense 25,223 28,700 32,489 Aviation 76 Operating profit (loss) 3,705 8,569 12,830 Transport 8 Energy 14 PBT 3,924 9,000 13,020 Other 2 Taxes 472 2,526 3,856 Net profit (loss) 3,021 5,832 7,843 Currency split (in %) Source: Bloomberg USD 61 EUR 25 Table 156: Key balance sheet figures, €mm AUD 14 FY 2008 FY 2009 FY 2010 Asset types (in %) Loans 494,401 678,766 684,686 AAA sovereign backed loans 100 Total Assets 2,075,551 2,057,698 1,998,158 Other 0 Deposits 413,955 604,903 580,913 Source: Investor Report Short-term borrowings 1,286,572 1,021,434 980,082 Other ST borrowings 87,405 77,187 68,974 Long-term borrowings 131,295 153,347 148,549 Equity 58,968 80,344 85,630 Source: Bloomberg

Table 157: Select financial metrics FY 2008 FY 2009 FY 2010 NIM 0.8 1.1 1.3 ROA 0.2 0.3 0.4 ROE 6.7 10.6 12.2 ROC 0.3 0.5 0.7 C:I 73.1 59.3 61.4 Core capital 7.8 10.1 11.4 Source: Bloomberg

96 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

BPCE SFH Cover pool overview (BBG: BPCECB) We set out below some of the key cover pool Snapshot characteristics: BPCE SFH was created in 2011 in order to allow Groupe Table 162: Covered bond characteristics BPCE (see separate Banques Populaires overview above) to tap the newly crated OH market. As at June 2011 Ratings S/M/F Covered bond rating AAA/Aaa/- Financial performance Issuer rating A+/Aa3/A+

We set out below some of the key financial performance Cover pool metrics: Cover pool size (€) 6,631,472,043 Number of loans 120,592 Table 159: Key profit & loss figures Groupe BPCE, €mm Avg loan (€) 54,991 FY 2009 FY 2010 WA current LTV (in %) 69.4 Net interest income 12,752 12,182 WA current LTV (in %) 64.1 Remaining tenor (mths) 184 Comm.& fee income 8,705 9,052 WA seasoning (mths) 53 Other operating income 11,804 11,770 Fixed rate loans (in %) 90.8 Non-interest expense 16,359 16,057 Owner occupied (in %) 88.5 Operating profit (loss) 723 5,648 BTL (in %) 9.3 Self-employed (in %) 14.7 PBT -368 5,749 Source: Investor Report Taxes -293 1,716 Net profit (loss) -75 4,033 Table 163: Collateral pool LTV breakdown Source: Annual report 2010 Current LTV ranges As at June 2011 Table 160: Key balance sheet figures Groupe BPCE, €mm 0-<=40% 12.6 >40%-<=50% 7.9 FY 2009 FY 2010 >50%-<=60% 10.2 Loans 309,855 342,994 >60%-<=70% 12.6 Total Assets 1,028,802 1,048,442 >70%-<=80% 15.9 Deposits 14,941 12,993 >80%-<=90% 21.1 Short-term borrowings 77,057 83,944 >90%-<=100% 19.7 Long-term borrowings 124,755 136,313 Source: Investor Report Equity 47,794 51,365 Source: Annual report 2010

Table 161: Select financial metrics FY 2009 FY 2010 C:I 69 60 Core capital 9.1 10.1 Source: Annual report 2010

97 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Caisse de Refinancement de l’Habitat Financial performance (BBG: CRH) We set out below some of the key financial performance Snapshot metrics: Caisse de Refinancement de l'Habitat (CRH) is a credit Table 164: Key profit & loss figures, €mm institution whose ownership is split amongst a number of French banks: Crédit Agricole-Crédit Lyonnaise 40%, FY 2008 FY 2009 FY 2010 Net interest income 8.0 2.8 2.3 Crédit Mutuel CIC 33%, Société Générale 13%, BNP Paribas 9%, and BPCE 5% (percentages also reflective of Non-interest expense 1.9 1.8 2.2 the breakdown of CRH’s loans). Operating profit (loss) 9.1 0.9 0.2 PBT 9.1 0.9 0.2 CRH was created with the sole purpose of funding Taxes 2.0 0.3 0.1 French mortgages granted by its shareholder credit Net profit (loss) 3.8 0.6 0.1 institutions. It does this by issuing mortgage bonds as per Source: Annual report 2010 its own special legal framework, regulated by law 85-695 of July 1985. CRH bonds were initially backed by a Table 165: Key balance sheet figures, €mm guarantee from the French government, but this was FY 2008 FY 2009 FY 2010 withdrawn in 1988. From 2006 they have received a Loans 216 145 246 Total Assets 38,525 40,626 42,486 capital risk-weighting of 10%. Other ST borrowings 3,261 6,244 5,091 Long-term borrowings 34,279 32,044 36,284 The underlying mortgage loans remain on the Equity 180 208 208 shareholder banks’ balance sheets, with promissory notes Source: Annual report 2010 issued to CRH. CRH-issued bonds then mimic the same features (rate, maturities etc) of these promissory notes. Cover pool overview By law, CRH must have a minimum over- We set out below some of the key cover pool collateralisation rate of 25%. In fact, as of December characteristics: 2010, CRH mortgage bonds amount to just over €41bn, compared to a cover pool of €60bn, for an over- Table 166: Covered bond characteristics collateralisation level of 44%. No substitution assets are As at December 2010 allowed in the collateral pool, while internal rules Ratings S/M/F Covered bond rating -/Aaa/AAA stipulate that no holdings of securitised positions are Issuer rating n.a. allowed. Cover Pool Funds are received by CRH from the shareholder banks Cover pool size (€bn) 59.5 Bonds outstanding (€bn) 41.3 five business days in advance of payment on its own OC (%) 44.0 bonds. If one of the borrowing banks defaults, CRH Cover pool size excl. non-compliant loans (€bn) 53.7 acquires full ownership of the pledged collateral and is OC excl. non-compliant loans (%) 30.0 allowed to sell the portfolio and use the proceeds to buy Source: Investor Report and cancel the corresponding bonds. Furthermore, CRH could ask its other shareholders to provide a back-up line of up to 5% of the outstanding loans.

The bank utilises CRH bonds for its funding needs.

98 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

CIF Euromortgage SCF Financial performance (BBG: CIFEUR) We set out below some of the key financial performance Snapshot metrics: Crédit Immobilier de France (CIF) is the only Table 167: Key profit & loss figures, €mm independent financial institution in France that is solely dedicated to mortgage lending to individuals. CIF’s 12 FY 2009 FY 2010 Net interest income 10.1 10.4 subsidiaries serve specific geographic markets through 300 branches and 6,000 independent advisors. The sole Operating profit (loss) 4.9 shareholders of CIF are the SACICAPs, whose purpose PBT 4.8 8.4 is to provide lending to low income individuals. The Taxes 1.6 2.9 SACICAPs undertake a vast programme of building and Net profit (loss) 3.2 5.5 selling housing to promote home ownership and devote Source: Annual report 2010 at least one third of their distributable earnings to government-designated social programmes. Table 168: Key balance sheet figures, €mm FY 2009 FY 2010 CIF Euromortgage is the SCF of the Crédit Immobilier Total Assets 24,617 25,813 de France (CIF). The funding activity of CIF Long-term borrowings 330 732 Equity 111 113 Euromortgage is organised around CIF's two Source: Annual report 2010 securitisation vehicles, CIS Assets (created in 2001 as a multi-series FCC or SPV) and BPI Master Mortgage Cover pool overview (created in 2003 with the sole purpose of purchasing We set out below some of the key cover pool home loans originated by Banque Patrimoine et characteristics: Immobilier). CIF Euromortgage’s primary purpose is to purchase all the AAA/Aaa senior notes issued by these Table 169: Covered bond characteristics two SPVs, and to use them as collateral for its cover pool. As at June 2011 Ratings S/M/F Covered bond rating -/Aaa/AAA After an initial build-up period, CIF Euromortgage has Issuer rating n/a reached an equilibrium, with annual finding needs of between €3bn and €5bn. CIF Europmortgage plans to Cover Pool Cover pool size (€) 24,690,000,000 launch regular public issues at least twice a year. In 2010 CIF issued €2.8bn of covered bonds through a mix of Asset type (in %) public and private placements; in 2011 YTD, €2.0bn CIF Assets 65.8 Replacement portfolio 12.3 have been issued so far, all publicly sold. CIF also CIF Mortgage promissory notes 8.9 regularly comes to the market through taps of previous BPI Master mortgage 8.1 issues and registered covered bonds (German debt AAA-rated European RMBS 4.9 securities). Source: Investor Report

The bank utilises obligation foncieres for part of its funding needs.

99 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Compagnie de Financement Foncier Financial performance SCF We set out below some of the key financial performance metrics: (BBG: CFF) Snapshot Table 170: Key profit & loss figures, €mm Crédit Foncier de France (CFF) is a credit institution FY 2008 FY 2009 FY 2010 licensed by the French Credit Institutions and Investment Net interest income 174 358 279 Firms Committee as a finance company and a SCF. The company is a wholly owned subsidiary of Crédit Foncier Comm.& fee income 38 41 45 Other operating (A/Aa3/A+) and an affiliate of BPCE (A+/Aa3/A+) and income 2 3 2 its only business purpose is to finance the residential and Non-interest expense 120 115 99 public sector lending activities of these two companies. Operating profit (loss) 85 258 214

PBT 84 258 217 CFF was initially founded in 1852, with the task to Taxes 22 83 74 originate mortgage loans and local authority loans and to Net profit (loss) 62 175 143 issue bonds to finance these loans. Compagnie de Source: Annual report 2010 Financement Foncier (CFF) gained its current status as a SCF in 1999, when old secured loans as well as eligible Table 171: Key balance sheet figures, €mm assets and liabilities were transferred to CFF to make it FY 2008 FY 2009 FY 2010 compliant with the new law on SCF (Act of 25 June Consumer Loans 36,311 37,184 39,709 Other Loans 9,806 12,745 16,493 1999). Total Loans 46,117 49,929 56,202 Total Assets 95,943 98,245 103,827 In April 2010 CFF launched its inaugural issue (followed Deposits 33 5 15 by a second one in September) under the RegS/144A Short-term borrowings 188 242 244 Long-term borrowings 79,960 81,957 88,128 framework targeting the US market, which had been Equity 1,385 1,560 1,612 quasi-inactive since 2007. Furthermore, it set up the Source: Annual report 2010 USMTS programme to issue OF in USD. Cover pool overview CFF sold €12.1bn and €12.7bn of covered bonds in 2009 We set out below some of the key cover pool and 2010 in a number of currencies, including EUR, characteristics: USD, NOK, HKD and CHF. Year-to-date 2011 issuance has reached €6.4bn and CFF was able to issue through Table 172: Covered bond characteristics the months of June, July and August, despite difficult As at December 2010 market conditions. Ratings S/M/F Covered bond rating AAA/Aaa/AAA The bank utilises obligation foncieres for part of its Issuer rating A/Aa3/A+ funding needs. Cover Pool Cover pool size (€bn) 103.8

Asset type (in %) Mortgage loans, of which: 33.6 Mortgage loans and related items 20.0 European RMBS 13.6 Public sector exposures, of which: 52.0 Mortgage loans guaranteed by the public sector 9.7 French public sector loans 18.1 International public sector loans 24.2 Other assets, of which: 14.4 Replacement securities 11.4 Other assets 3.0

Coverage ratio as per SCF law 10.8 Source: Investor Report

100 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Crédit Agricole Home Loans SFH Table 174: Key balance sheet figures CA S.A., €mm (BBG: ACACB) FY 2008 FY 2009 FY 2010 Consumer Loans 349,037 344,515 364,725 Snapshot Loans 349,037 362,348 383,246 The Credit Agricole Group offers retail banking and Total Assets 1,653,220 1,557,342 1,593,529 Deposits 421,411 464,080 501,360 corporate and investment baking products and specialised Short-term borrowings 171,749 341,064 353,872 financial services. The group operates globally through Other ST borrowings 588,921 99,631 67,971 70 countries and catering to 54mm customers worldwide, Long-term borrowings 222,083 378,779 353,875 although its core markets are France, Italy and Greece. Equity 47,336 51,964 52,149 Source: Bloomberg Within the group, Credit Agricole S.A. ensures the Table 175: Select financial metrics cohesion and smooth running of the network and acts as a representative for the Group in dealing with the FY 2008 FY 2009 FY 2010 NIM 0.9 1.0 1.1 banking authorities. It also acts as a central bank, ROA 0.1 0.1 0.1 ensuring financial unity. Its activities are organised into ROE 2.7 2.8 3.0 three, broad business lines. Retail banking in France and ROC 0.3 0.2 0.2 C:I 81.3 68.7 69.0 abroad; Specialised Business lines including asset Core capital 8.6 9.5 10.6 management, insurance, private banking and consumer Source: Bloomberg finance, leasing and factoring; and Corporate and Investment banking. Cover pool overview We set out below some of the key cover pool The second pillar of the Group is its 39 regional banks, in characteristics: which CA S.A. owns a 25% stake. These offer a broad range of financial products to individuals, SMEs, farmers Table 176: Covered bond characteristics and local authorities. Finally, the third arm of the Group is the Fédération Nationale du Crédit Agricole, the body As at June 2011 Ratings S/M/F through which the regional banks discuss policies and Covered bond rating AAA/Aaa/AAA represent themselves. Issuer rating A+/Aa1/AA-

Cover Pool The bank switched from structured CB to OH for part of Cover pool size (€) 29,728,482,533 its funding needs. Number of loans 855,908 Avg loan (€) 34,733

Financial performance WA current LTV (in %) 61.4 We set out below some of the key financial performance WA current indexed LTV (in %) 54.5 metrics: Remaining tenor (mths) 155 WA seasoning (mths) 80

Table 173: Key profit & loss figures CA S.A., €mm Owner occupied property (in %) 83.0 Buy-to-let (in %) 13.9 FY 2008 FY 2009 FY 2010 Employed borrower (in %) 66.3 Net interest income 12,113 14,290 14,894 Self-employed borrower (in %) 18.3 Provisions for loan losses 2,806 4,526 3,205 Source: Investor Report NII less provisions 9,307 9,764 11,689 Table 177: Collateral pool LTV breakdown Comm.& fee income 9,309 9,798 10,775 Other operating Current LTV ranges As at June 2011 income 8,075 -6,179 -5,108 0-<=40% 18.1 Non-interest expense 17,905 17,367 19,638 >40%-<=50% 11.4 Operating profit (loss) 184 1,093 2,980 >50%-<=60% 14.7 >60%-<=70% 17.3 PBT 1,200 1,657 2,629 >70%-<=80% 16.7 Taxes -66 211 877 >80%-<=90% 12.4 Net profit (loss) 1,024 1,125 1,263 >90%-<=100% 9.4 Source: Bloomberg Source: Investor Report

101 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Crédit Mutuel Arkéa Home Loans SFH Table 179: Key balance sheet figures, €mm (BBG: CMACB) FY 2008 FY 2009 FY 2010 Loans 29,356 30,863 35,902 Snapshot Total Assets 69,059 72,362 78,747 Crédit Mutuel Arkéa is a cooperative credit union formed Deposits 20,131 21,168 23,657 Short-term borrowings 4,080 5,700 5,556 by the federations of Crédit Mutuel du Bretagne, Crédit Other ST borrowings 1,287 1,493 1,536 Mutuel du Sud-Ouest, Crédit Mutuel du Massif Central Equity 2,818 3,507 3,777 and around 20 other specialised lenders, for a total of Source: Annual report 2010 around 600 local saving banks and branches, serving 3.1mm customers, mostly in the Brittany (24% market Table 180: Select financial metrics share of deposit-taking and 27% market share in retail FY 2008 FY 2009 FY 2010 loans), South West (7% market share for both deposits ROE 1.1 5.9 8.4 and retail loans) and Massive Central (2% market share Core capital 12.5 11.3 for both deposits and retail lending) regions. Source: Annual report 2010

CM Arkea’s loan book is 54% residential loans, 11% Cover pool overview consumer loans and 20% SME/corporate loans. In order We set out below some of the key cover pool to expand and further diversify its activities and characteristics: geographical exposure, CM Arkea has set up subsidiaries and developed partnerships with a national reach and Table 181: Covered bond characteristics offering internet deposit-taking services, consumer As at June 2011 lending outside of the core regions and insurance and Ratings S/M/F asset management services. Covered bond rating AAA/-/- Issuer rating A+/-/-

The bank has recently moved from structured covered Cover pool bonds to an SFH programme with a maximum size of Cover pool size (€) 4,686,365,979 Number of loans 92,815 €10bn for part of its funding needs. This reduced Avg loan (€) 68,117 refinancing risk for the issuer and increased credit quality for investors. WA current LTV (in %) 69.0 WA current indexed LTV (in %) 65.0 Remaining tenor (mths) 166 Financial performance WA seasoning (mths) 46 We set out below some of the key financial performance Owner occupied property (in %) 85.0 metrics: Buy-to-let (in %) 11.7 Employed borrower (in %) 67.2 Table 178: Key profit & loss figures, €mm Self-employed borrower (in %) 14.1 Unemployed borrower (in %) 1.5 FY 2008 FY 2009 FY 2010 Source: Investor Report Net interest income 473 610 660

Comm.& fee income 474 429 466 Table 182: Collateral pool LTV breakdown Other operating Current LTV ranges As at June 2011 income 3,588 5,350 4,438 0-<=40% 18.7 Non-interest expense 4,307 971 1,089 >40%-<=50% 9.0 Operating profit (loss) 44 200 347 >50%-<=60% 10.8 >60%-<=70% 12.3 PBT 78 208 341 >70%-<=80% 14.4 Taxes 27 46 48 >80%-<=90% 17.8 Net profit (loss) 31 161 293 >90%-<=100% 16.9 Source: Annual report 2010 Source: Investor Report

102 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Crédit Mutuel-CIC Home Loans SFH Table 184: Key balance sheet figures, €mm (BBG: CMCICB) FY 2008 FY 2009 FY 2010 Real Estate Loans 155,205 159,402 171,483 Snapshot Loans 295,837 304,511 323,065 CM10-CIC is a group of 10 regional Crédit Mutuel (CM) Total Assets 581,709 579,038 591,309 Deposits 196,507 218,431 237,402 regional banks. It is the 5th largest bank by equity and Short-term borrowings 56,349 40,065 28,509 the 3rd largest retail banking franchise in France. At the Other ST borrowings 27,354 16,738 16,619 end of 2009, it had market share of 12% and 17% for Long-term borrowings 191,258 173,301 168,805 deposits and loans respectively, according to Fitch Equity 25,036 30,619 33,388 Ratings. CM10-CIC is part of the wider network of 18 Source: Bloomberg CM regional banks, accounting for around 80% of CM’s Table 185: Select financial metrics assets. FY 2008 FY 2009 FY 2010 NIM 0.8 1.4 1.5 Banque Fédérative du Crédit Mutuel (BFCM) manages ROA 0.1 0.3 0.5 the general interest of the specialised branches of the ROE 1.7 6.7 9.4 group, is involved in the financing of large-scale projects ROC 0.2 0.7 1.3 C:I 78.4 63.7 64.8 and is active in the financial markets. Core capital 9.8 11.8 Source: Bloomberg CMCIC Home Loans SFH is registered as a limited liability company and is licensed to act as a credit Cover pool overview institution with limited purpose. Its sole activity is to We set out below some of the key cover pool finance residential mortgages for CMCEE-CIC group. characteristics:

The bank utilises an SFH structure issuing OH for part of Table 186: Covered bond characteristics its funding needs. As at July 2011 Ratings S/M/F Financial performance Covered bond rating AAA/Aaa/AAA We set out below some of the key financial performance Issuer rating A+/Aa3/AA- metrics: Cover pool Cover pool size (€) 28,636,976,000 Table 183: Key profit & loss figures, €mm Number of loans 337,825 Avg loan (€) 84,769 FY 2008 FY 2009 FY 2010 Net interest income 3,970 7,392 8,183 WA current LTV (in %) 70.0 Provisions for loan WA current indexed LTV (in %) 63.0 losses 1,459 2,089 991 Remaining tenor (mths) 192 NII less provisions 2,511 5,303 7,192 WA seasoning (mths) 53

Comm.& fee income 3,734 4,411 4,683 Fixed rate (in %) 98.3 Other operating Owner occupied property (in %) 80.1 income 1,966 2,253 2,711 Buy-to-let (in %) 16.4 Non-interest expense 7,742 9,718 10,635 Loans with guarantor (in %) 35.4 Operating profit (loss) 362 2,835 4,187 First liens (in %) 64.6

PBT 409 2,742 4,171 Source: Investor Report Taxes -33 860 1,145 Net profit (loss) 440 1,831 2,916 Table 187: Collateral pool LTV breakdown Source: Bloomberg Current LTV ranges As at July 2011 0-<=40% 16.9 >40%-<=50% 10.3 >50%-<=60% 13.0 >60%-<=70% 15.5 >70%-<=80% 17.8 >80%-<=90% 18.9 >90%-<=100% 0.1 Source: Investor Report

103 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Dexia Municipal Agency SCF Financial performance (BBG: DEXMA) We set out below some of the key financial performance Snapshot metrics: Dexia Municipal Agency (DexMA) is the SCF of the Table 188: Key profit & loss figures, €mm Dexia Group, whose sole activity is to finance local governments in the EEA area, the USA, Canada and FY 2009 FY 2010 Net interest income 282 256 Japan (although France remains its main market) and issue covered bonds. It is a wholly owned subsidiary of Non-interest expense 92 96 Dexia Crédit Local, the French public finance arm of the Operating profit (loss) 207 163 Dexia group. PBT 207 163 Taxes 73 54 The Dexia group is active in public and project finance, Net profit (loss) 134 109 personal finance, investment management, insurance and Source: Bloomberg treasury and financial market. Table 189: Key balance sheet figures, €mm In the public sector financing market, the group is a FY 2009 FY 2010 leader in Europe and its main markets are Belgium Loans 78,870 85,196 Total Assets 85,830 94,230 (market share of 80%), France (market share of 42%) and Long-term borrowings 65,933 66,819 Italy (market share of 20%). Dexia also offers a full Equity 990 1,069 range of retail services to customers in Belgium, Source: Bloomberg Luxembourg and Turkey, where it is amongst the top 6 privately owned banks. Cover pool overview We set out below some of the key cover pool Dexia Group is also amongst the largest in Europe in the characteristics: field of asset management, with €86.4bn of assets under management as at December 2010. Dexia also manages Table 190: Covered bond characteristics further funds through its joint-venture with Royal Bank As at March 2011 of Canada. Ratings S/M/F Covered bond rating AAA/Aaa/AAA The bank utilises obligation foncieres for part of its Issuer rating A/A3/A+ funding needs. Through this platform it issued €5.7bn in Cover pool 2009, €9.0bn in 2010 and €5.6bn in 2011 YTD. Bonds Cover pool size (€) 78,106,500,000 are denominated in EUR, CHF, NOK and USD. Country split (in %) France 64.9 Belgium 9.7 Italy 9.7 Switzerland 5.2 Spain 4.1 Luxembourg 2.4 Other 4.0

Collateral type (in %) Loans to local governments 70.4 Bonds 29.6 Source: Investor Report

104 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

General Electric SCF (BBG: GESCF) Snapshot GE Money Bank France is part of GE Capital, in turn part of the General Electric Group. GE Capital provides a wide range of products - from consumer lending to financial products for businesses throughout the world.

GE Capital entered the French market through its acquisition of Crédit de l'Est and Banque Sovac in 1995. GE Money Bank, formerly known with the name GE Capital Bank, offers a wide range of consumer lending products, such as personal loans, credit cards, car loans and mortgage facilities. The company also provides leasing and real estate financing.

The bank utilises obligation foncieres for part of its funding needs.

Cover pool overview We set out below some of the key cover pool characteristics:

Table 191: Covered bond characteristics As at June 2011 Ratings S/M/F Covered bond rating AAA/Aaa/-

Cover pool Cover pool size (€) 2,610,402,732 Number of loans 31,054 Avg loan (€) 84,060

WA current LTV (in %) 67.9 WA current indexed LTV (in %) 58.9 Remaining tenor (mths) 179 WA seasoning (mths) 63

Owner occupied property (in %) 48.0 Buy-to-let (in %) 20.1 Employed (in %) 82.3 Self employed (in %) 13.5 Source: Investor Report

Table 192: Collateral pool LTV breakdown Current LTV ranges As at June 2011 0-<=40% 14.5 >40%-<=50% 9.2 >50%-<=60% 10.9 >60%-<=70% 12.8 >70%-<=80% 17.8 >80%-<=90% 14.2 >90%-<=100% 17.6 Source: Investor Report

105 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Groupe Caisse d’Épargne Covered Cover pool overview Bonds We set out below some of the key cover pool characteristics: (BBG: CDEE) Snapshot Table 196: Covered bond characteristics Together with Caisse d'Épargne, Banques Populaires is As at July 2011 one of the two brands of the Groupe BPCE (see separate Ratings S/M/F Banques Populaires overview above). Unlike BPCE SFH Covered bond rating AAA/Aaa/- and Banques Populaires SCF, Groupe Caisse d’Épargne Issuer rating A+/Aa3/A+ still uses structured covered bonds. Cover pool Cover pool size (€) 15,919,449,032 Financial performance Number of loans 272,115 Avg loan (€) 58,503 We set out below some of the key financial performance metrics: WA current LTV (in %) 68.7 WA current indexed LTV (in %) 67.5 Table 193: Key profit & loss figures Groupe BPCE, €mm Remaining tenor (mths) 191 WA seasoning (mths) 46 FY 2009 FY 2010 Net interest income 12,752 12,182 Fixed rate (in %) 96.5 Owner occupied property (in %) 90.4 Comm.& fee income 8,705 9,052 Buy-to-let (in %) 7.2 Other operating Employed (in %) 81.7 income 11,804 11,770 Self employed (in %) 0.2 Non-interest expense 16,359 16,057 Source: Investor Report Operating profit (loss) 723 5,648 Table 197: Collateral pool LTV breakdown PBT -368 5,749 Taxes -293 1,716 Current LTV ranges As at July 2011 Net profit (loss) -75 4,033 0-<=40% 13.4 Source: Annual report 2010 >40%-<=50% 8.5 >50%-<=60% 10.4 Table 194: Key balance sheet figures Groupe BPCE, €mm >60%-<=70% 12.6 >70%-<=80% 15.9 FY 2009 FY 2010 >80%-<=90% 19.8 Loans 309,855 342,994 >90%-<=100% 19.5 Total Assets 1,028,802 1,048,442 Source: Investor Report Deposits 14,941 12,993 Short-term borrowings 77,057 83,944 Long-term borrowings 124,755 136,313 Equity 47,794 51,365 Source: Annual report 2010

Table 195: Select financial metrics FY 2009 FY 2010 C:I 69 60 Core capital 9.1 10.1 Source: Annual report 2010

106 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

HSBC France Covered Bonds Table 199: Key balance sheet figures HSBC Group, €mm (BBG: HSBC3) FY 2008 FY 2009 FY 2010 Loans 668,579 625,379 717,018 Snapshot Total Assets 1,811,400 1,649,900 1,836,500 HSBC France (HBFR) is part of the HSBC Group, one of Deposits 799,346 808,760 918,543 Short-term borrowings 169,984 145,462 143,317 the largest banking groups globally and headquartered in Other ST borrowings 248,661 468,791 350,227 the UK. HSBC France was created by the combination of Long-term borrowings 73,125 65,441 73,181 five banks (CCF, UBP, Banque de Picardie, Banque de Equity 71,833 94,663 115,902 Baecque Beau and the Paris branches of Banque Hervet), Source: Bloomberg which were rebranded in 2005 under the HSBC logo. It was initially established as Banque Suisse et Francaise in Table 200: Select financial metrics 1894, later known as CCF until it was absorbed by FY 2008 FY 2009 FY 2010 HSBC in 2000. NIM 2.2 2.2 2.0 ROA 0.2 0.2 0.5 ROE 5.1 5.1 9.5 HSBC France operates through 380 branches offering ROC 1.3 1.5 3.2 global banking and markets, asset management, C:I 53.1 47.5 55.0 insurance and private banking services. HSBC France Core capital 8.3 10.8 12.1 caters mainly to wealthier clients and also focuses on Source: Bloomberg corporate and investment banking, after reducing its Cover pool overview exposure to the retail banking sector through the sale of seven regional banks to Groupe BPCE in 2009. We set out below some of the key cover pool characteristics: The bank utilises structured covered bonds for part of Table 201: Covered bond characteristics its funding needs, although looks set to launch OH bonds imminently. As at June 2011 Ratings S/M/F Covered bond rating AAA/Aaa/- Financial performance Issuer rating AA/Aa3/AA We set out below some of the key financial performance Cover pool metrics: Cover pool size (€) 3,761,763,792 Number of loans 30,765 Table 198: Key profit & loss figures HSBC Group, €mm Avg loan (€) 122,274

FY 2008 FY 2009 FY 2010 WA current LTV (in %) 68.9 Net interest income 29,272 29,379 29,876 WA current indexed LTV (in %) 58.9 Provisions for loan Remaining tenor (mths) 167 losses 17,041 19,047 10,604 WA seasoning (mths) 51 NII less provisions 12,231 10,332 19,272 Owner occupied property (in %) 72.6 Comm.& fee income 16,923 15,390 15,950 Buy-to-let (in %) 18.9 Other operating Employed (in %) 66.6 income 2,010 2,535 1,466 Self employed (in %) 20.6 Non-interest expense 29,573 27,421 31,309 Operating profit (loss) 6,209 8,302 12,673 Source: Investor Report

PBT 6,360 5,090 14,379 Table 202: Collateral pool LTV breakdown Taxes 1,920 277 3,660 Net profit (loss) 3,914 4,195 9,939 Current LTV ranges As at June 2011 0-<=40% 25.1 Source: Bloomberg >40%-<=50% 12.3 >50%-<=60% 13.2 >60%-<=70% 13.8 >70%-<=80% 13.7 >80%-<=90% 11.6 >90%-<=100% 10.3 Source: Investor Report

107 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Société Générale SCF Table 204: Key balance sheet figures Societe Generale, €mm (BBG: SOCSCF) FY 2008 FY 2009 FY 2010 Loans 383,125 373,399 401,013 Snapshot Total Assets 1,130,003 1,023,701 1,132,072 Société Générale SCF is the SCF set up by Société Deposits 282,514 300,054 337,447 Short-term borrowings 582,835 454,701 499,547 Générale, one of the largest French financial institutions. Other ST borrowings 57,817 48,800 55,003 The objective of SG SCF is to provide funding for SG’s Long-term borrowings 85,663 86,740 92,913 public-sector loan book. The cover pool consists entirely Equity 40,887 46,838 50,975 of loans to French public entities and the bonds issued Source: Bloomberg are in OF form. Table 205: Select financial metrics SG’s product offer ranges from corporate and investment FY 2008 FY 2009 FY 2010 banking to retail banking, insurance, private finance and NIM 0.8 1.2 1.2 ROA 0.2 0.1 0.4 investment management services. ROE 7.0 2.1 10.4 ROC 0.4 0.2 0.7 On the French retail banking market the bank operates C:I 59.0 47.9 64.7 through three distribution networks: Société Générale, Core capital 8.8 10.7 10.6 Crédit du Nord and Boursorama Banque, an online bank. Source: Bloomberg Through these networks, the bank offers services to Cover pool overview almost 11mm customers. SocGen also offers international retail banking services in 37 countries, We set out below some of the key cover pool serving another 12mm customers. characteristics:

Table 206: Covered bond characteristics Société Générale is also actively present in the private baking sector, with €84.1bn of assets under management As at March 2011 across 19 countries as at the end of June 2011. Ratings S/M/F Covered bond rating AAA/Aaa/AAA Furthermore, the group has 25% stake in the asset Issuer rating A+/Aa2/A+ manager Amundi. Cover pool Cover pool size (€) 10,751,812,383 Corporate and Investment Banking is the third pillar of Number of loans 1,314 the group, with offices in 33 countries. France (in %) 94.8

Borrower type within France (in %) Financial performance Regions 12.0 We set out below some of the key financial performance Departments 30.4 metrics: Districts 13.8 Districts groups 12.2 Public health complex 18.0 Table 203: Key profit & loss figures Societe Generale, €mm Syndicates 7.8 Other 5.9 FY 2008 FY 2009 FY 2010 Fixed rate loans (in %) 61.2 Net interest income 8,414 11,964 12,288 Provisions for loan Source: Investor Report losses 4,903 10,860 3,604 NII less provisions 3,511 1,104 8,684

Comm.& fee income 10,505 10,445 10,038 Other operating income 1,267 1,007 1,271 Non-interest expense 16,370 13,387 19,654 Operating profit (loss) 4,316 827 5,724

PBT 4,008 800 5,844 Taxes 1,235 -308 1,542 Net profit (loss) 2,010 678 3,917 Source: Bloomberg

108 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Société Générale SFH Cover pool overview (BBG: SOCSFH) We set out below some of the key cover pool Snapshot characteristics: Table 210: Covered bond characteristics Société Générale SFH is the SFH set up by Société Générale, to take advantage of the new legislative As at June 2011 Ratings S/M/F framework. Unlike the OF bonds of SOCSCF (see profile Covered bond rating AAA/Aaa/AAA above) OH bonds are collateralised by residential Issuer rating A+/Aa2/A+ mortgages. Cover pool Cover pool size (€) 24,738,832,559 Financial performance Number of loans 352,688 We set out below some of the key financial performance Avg loan (€) 70,144 metrics: WA current LTV (in %) 58.5 Remaining tenor (mths) 166 Table 207: Key profit & loss figures Societe Generale, €mm WA seasoning (mths) 49

FY 2008 FY 2009 FY 2010 Fixed rate loans (in %) 90.2 Net interest income 8,414 11,964 12,288 Owner occupied property (in %) 74.2 Provisions for loan Buy-to-let (in %) 25.6 losses 4,903 10,860 3,604 Source: Investor Report NII less provisions 3,511 1,104 8,684

Comm.& fee income 10,505 10,445 10,038 Table 211: Collateral pool LTV breakdown Other operating Current LTV ranges As at June 2011 income 1,267 1,007 1,271 Non-interest expense 16,370 13,387 19,654 0-<=40% 27.1 Operating profit (loss) 4,316 827 5,724 >40%-<=50% 12.3 >50%-<=60% 12.5 PBT 4,008 800 5,844 >60%-<=70% 11.5 Taxes 1,235 -308 1,542 >70%-<=80% 11.3 Net profit (loss) 2,010 678 3,917 >80%-<=90% 11.5 >90%-<=100% 13.9 Source: Bloomberg Source: Investor Report Table 208: Key balance sheet figures Societe Generale, €mm FY 2008 FY 2009 FY 2010 Loans 383,125 373,399 401,013 Total Assets 1,130,003 1,023,701 1,132,072 Deposits 282,514 300,054 337,447 Short-term borrowings 582,835 454,701 499,547 Other ST borrowings 57,817 48,800 55,003 Long-term borrowings 85,663 86,740 92,913 Equity 40,887 46,838 50,975 Source: Bloomberg

Table 209: Select financial metrics FY 2008 FY 2009 FY 2010 NIM 0.8 1.2 1.2 ROA 0.2 0.1 0.4 ROE 7.0 2.1 10.4 ROC 0.4 0.2 0.7 C:I 59.0 47.9 64.7 Core capital 8.8 10.7 10.6 Source: Bloomberg

109 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

110 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected] s d n o B

d e r e v o C

n a m r e G

111 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

German Covered Bonds

Legislative snapshot We set out in Table 212 a snapshot of key covered bond attributes in Germany.

Table 212: German Covered Bond legislative overview Attribute Commentary Framework Legislative Framework German Pfandbrief Act (Pfandbriefgesetz of 2005) and Regulations to the Pfandbrief Act (amended in 2009 and 2010); Net Present Value Regulation (Barwertverordnung); Regulation on the Determination of the Mortgage Lending Value (Beleihungswertermittlungsverordnung); Cover Register Statutory Order (Deckungsregisterverordnung); Funding Register Statutory Order (Refinanzierungsregisterverordnung); §§ 22a – German Banking Act (Kreditwesengesetz). Types of covered bonds Four. Mortgage, Public sector, Ship and Aircraft covered bonds. Structure of Issuer Direct issuance? Yes. Comments (if any) Since 2005, pfandbrief issuers no longer need to be specialised banks. Bonds are therefore issued directly off the balance sheet of the lender, although a special pfandbrief licence is required. Bankruptcy remoteness Issuers are required to have a register to record the cover assets. Insolvency of the originating institution does not accelerate payments under the covered bonds. On insolvency, a special cover pool administrator (Sachwalter) carries out the administration of the cover assets. Dual claim Yes, pari passu with unsecured creditors. Bond format Fixed rate, hard bullets. Supervision Federal Financial Supervisory Authority; German Banking Supervisory Authority (BaFin). A cover pool monitor also supervises the cover pool. Cover pool Eligible assets Mortgage Residential or commercial. Land or mortgages on properties under construction are limited at 10% of collateral value and the asset can only be located in EEA, Switzerland, USA, Canada and Japan. The total volume of the loans in states for which the preferential right of the Pfandbrief on the cover assets is not ensured may not exceed 10%. LTV caps 60% LTV for residential, commercial and agricultural loans. The LTV of the loans can be higher, but only the first 60% is considered. Public Sector Loans granted to or guaranteed by public authorities with a RSA risk weight less than 20% and from EU, EEA, Japan, Canada, USA, Switzerland and other European OECD members. The total volume of the loans in states for which the preferential right of the Pfandbrief on the cover assets is not ensured may not exceed 10%. Ship/Aircraft 60% LTV limit for both. The total volume of the loans in states for which the preferential right of the Pfandbrief on the cover assets is not ensured may not exceed 20%. Substitution Assets Up to 10% of the cover pool can be made up of money claims against the ECB, EU central banks or other suitable institutions. For mortgage covered bonds, another 10% can be made up of assets eligible for public sector Pfandbriefe. Hedging Derivatives are allowed for mitigation of market risk. Valuation Individual market values, with monitoring requirements for commercial property exposures each year, and every three years for residential properties. Other comments (if any) Derivatives are also eligible cover assets, up to a maximum of 12% of the pool on an NPV basis. Requirements ALM matching Asset coverage Eligible assets must be 102% of liabilities at all times on an NPV basis. Derivatives can be used to help meet cashflow requirements. Interest coverage The Pfandbrief issuer is obliged to cover the maximum liquidity gap within the next 180 days. Other (if any) Consequence of breach Regulatory or rule-based actions Monitoring In addition to the regulators, an independent pool monitor performs regular audits, reports to the supervision authorities, veifies coverage ratios and checks that assets are recorded correctly in the cover register. Other Compliance with EU Both UCITS and CRD compliant. legislation Source: National legislation, J.P. Morgan Covered Bond Research

112 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

German covered bond & macro backdrop

Figure 71: CB issuance, €mm Figure 72: CB outstanding, €mm 250,000 1,200,000 Mortgage Public Sector Ships Mortgage Public Sector Ships 1,000,000 200,000 800,000 150,000 600,000 100,000 400,000

50,000 200,000

0 0 2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 2007 2008 2009 2010 Source: ECBC. Latest data available displayed Source: ECBC. Latest data available displayed

Figure 73: German real GDP growth, y-on-y, % Figure 74: German unemployment level, %

6 Real GDP growth 14 4 12 2 10 0 8 -2 6 -4 4 Unemployment -6 2 -8 0 0 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 1 1 ------r r r r r r r r r r r r r r r r r r r r r r r r a a a a a a a a a a a a a a a a a a a a a a a a M M M M M M M M M M M M M M M M M M M M M M M M

Source: Bloomberg Source: Bloomberg

Figure 75: German CPI and base rate, % Figure 76: German consumer confidence, balance of survey

6 Inflation Base rate 120 Cons. Confidence 5 4 100 3 80 2 60 1 40 0 20 -1

0 1 2 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 0 0 1 1 ------0 1 2 3 4 5 6 7 8 9 0 1 r r r r r r r r r r r r 0 0 0 0 0 0 0 0 0 0 1 1 a a a a a a a a a a a a ------r r r r r r r r r r r r M M M M M M M M M M M M a a a a a a a a a a a a M M M M M M M M M M M M

Source: Bloomberg Source: Bloomberg

Figure 77: German nominal house price growth, % Figure 78: German residential construction orders index, #

3.5% Nominal house price growth Residential construction orders index 3.0% 180 2.5% 160 2.0% 140 1.5% 120 1.0% 100 0.5% 80 0.0% -0.5% 60 -1.0% 40 -1.5% 20 -2.0% 0 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 1 1 ------r r r r r r r r r r r n n n n n n n n n n n n a a a a a a a a a a a a a a a a a a a a a a a M M M M M M M M M M M J J J J J J J J J J J J

Source: OECD Source: Bloomberg

113 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Aareal Bank AG Table 214: Key balance sheet figures, €mm (BBG: AARB) FY 2008 FY 2009 FY 2010 Loans 24,530 23,176 24,329 Snapshot Total Assets 41,023 39,569 41,217 The Aareal Bank Group is a specialist in property finance Deposits 20,665 21,361 22,846 Short-term borrowings 8,934 5,083 5,168 and related services. It provides financing, advisory and Long-term borrowings 7,681 9,131 8,887 other services to real estate clients and also offers public Equity 1,452 2,077 1,985 sector finance to both domestic and international clients. Source: Bloomberg

The business model is made up of two segments: Table 215: Select financial metrics Structured property financing includes the institution’s FY 2008 FY 2009 FY 2010 property financing activities as well as advisory and NIM 1.3 1.2 1.3 consulting services to clients in realising real estate ROA 0.1 0.1 0.2 ROE 3.6 3.9 5.7 projects. The Consulting/services unit of the group ROC 0.4 0.4 0.6 provides a range of services to clients in the institutional C:I 69.1 63.0 63.8 housing industry in Germany, including IT systems, Core capital 8.0 11.0 10.5 payment transactions systems and real estate portfolio Source: Bloomberg management. Cover pool overview Aareal Bank operates in 25 countries in Europe, North We set out below some of the key cover pool America and Asia, although its core market remains characteristics: Germany, in particular in the public sector financing business: exposures to German public entities account for Table 216: Public-sector covered bond characteristics almost three quarters of its public sector cover pool and As at June for 17% of its mortgage cover pool. 2011 Ratings S/M/F Covered Bond rating -/-/AAA Aareal Bank is an established issuer of both public sector Issuer rating -/-/A- and mortgage Pfandbriefe, which account for the majority of its long-term funding Cover pool Cover pool size (€) 3,359,100,000 Overcollateralisation (€) 330,700,000 Financial performance We set out below some of the key financial performance Borrower type (in %) German Federal States 59.0 metrics: EU countries 24.0 German Landesbanken 8.0 Table 213: Key profit & loss figures, €mm German Federal Government 6.0 Other 3.0 FY 2008 FY 2009 FY 2010 Net interest income 500 460 509 Risk weighting split (in %) Prov. for loan losses 80 150 105 Solvency 0 95.0 NII less provisions 420 310 404 Solvency 20 5.0 Source: Investor report Commission & fee inc. 211 188 187 Other operating inc. 74 30 38 Non-interest expense 471 460 477 Operating profit 103 88 129

PBT 110 87 134 Taxes 45 20 40 Net profit (loss) 47 49 76 Source: Bloomberg

114 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Table 217: Mortgage covered bond characteristics As at June 2011 Ratings S/M/F Covered Bond rating -/-/AAA Issuer rating -/-/A-

Cover pool Cover pool size (€) 10,501,900,000 Over-collateralisation (€) 1,805,200,000

Geographical split (in %) Western Europe ex. Germany 30.0 Southern Europe 19.0 Germany 17.0 Northern Europe 14.0 North America 11.0 Eastern Europe 8.0 Asia 1.0

Property type (in %) Office 37.0 Retail 24.0 Hotel 13.0 Logistic 12.0 Residential 12.0 Other 2.0 Source: Investor report

115 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Bayerische Landesbank (BayernLB) Table 219: Key balance sheet figures, €mm (BBG: BYLAN) FY 2008 FY 2009 FY 2010 Loans 199,128 156,142 152,435 Snapshot Total Assets 421,666 338,818 316,354 BayernLB is a leading commercial bank for large and Deposits 91,307 92,197 91,734 Short-term borrowings 142,480 91,484 87,195 middle-market corporate customers in Germany and Long-term borrowings 129,300 101,685 83,171 Europe whilst also catering for retail customers. It works Equity 11,265 14,061 13,911 closely with the Sparkassen-Finanzgruppe in Bavaria, Source: Bloomberg other Bavarian savings banks and the Bavarian State. In particular, BayernLB's products are sold via other saving Table 220: Select financial metrics banks, which act as customers, owners and sales partners. FY 2008 FY 2009 FY 2010 The bank aims at increasing its partnership with the NIM 0.7 0.7 0.6 savings banks in the future in order to target the ROA -1.2 -0.7 0.2 ROE -52.1 -23.4 4.3 Mittelstand sector. ROC -2.0 -1.3 0.3 C:I -322.3 70.7 50.4 Long-term commercial financing to residential property Core capital 8.0 12.5 11.0 developers and construction companies both on the Source: Bloomberg domestic and international markets are its core activities. The bank also offers real estate investment and M&A Cover pool overview advisory. We set out below some of the key cover pool characteristics: The other area of focus for the bank is the Mittelstand sector. The bank offers banking and advisory services Table 221: Public-sector covered bond characteristics and financing solutions to middle-market companies As at June looking to export their products abroad and is a leader in 2011 the subsidised credit business - particularly in the areas Ratings S/M/F Covered Bond rating -/Aaa/AAA of sustainable energy production and energy efficiency, Issuer rating -/A1/A+ sustainable mobility and water management. Cover pool Cover pool size (€) 46,105,000,000 Finally, BayernLB also offers retail banking services Overcollateralisation (in %) 45.5 through its Deutsche Kreditbank (DKB) subsidiary. In addition to internet banking, DKB focuses also on Geographical split (in %) Germany 90.5 growing markets such as environmental technology, Switzerland 4.3 healthcare and education & research. Other 5.2

Borrowers type (in %) Financial performance Other public assets 40.0 We set out below some of the key financial performance States 32.0 metrics: Municipalities 20.0 Sovereign 3.0 Additional cover 5.0 Table 218: Key profit & loss figures, €mm Source: Investor report FY 2008 FY 2009 FY 2010 Net interest income 2,670 2,562 1,942 Prov. for loan losses 1,656 3,277 696 NII less provisions 1,014 -715 1,246

Commission & fee inc. 1,114 1,040 811 Other operating inc. 141 461 1 Non-interest expense 3,151 2,731 2,062 Operating profit -5,089 -2,395 798

PBT -5,167 -2,765 884 Taxes 191 328 294 Net profit (loss) -5,084 -2,619 590 Source: Bloomberg

116 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Table 222: Mortgage covered bond characteristics As at June 2011 Ratings S/M/F Covered Bond rating -/Aaa/AAA Issuer rating -/A1/A+

Cover pool Cover pool size (€) 11,560,000,000 Overcollateralisation (in %) 53.5

Geographical split (in %) Germany 66.7 UK 11.1 France 6.1 Italy 4.8 USA 4.1 Other 7.2

Property type (in %) Office 38.0 Retail 25.0 Residential 24.0 Mixed Commercial 7.0 Other 6.0 Source: Investor report

117 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Berlin-Hannoversche Hypothekenbank Cover pool overview (BBG: BHH) We set out below some of the key cover pool Snapshot characteristics: Berlin Hyp is a real estate financing bank and one of the Table 226: Public-sector covered bond characteristics leading mortgage-lending institutions in Germany. In conjunction with its parent company, the Landesbank As at June 2011 Berlin, it offers a wide range of financial services and Ratings S/M/F products. These span from the financing of large projects Covered Bond rating -/Aaa/AAA and portfolios to individual residential, commercial and Issuer rating -/-/AA- mixed use projects. Cover pool Cover pool size (€) 8,249,000,000 The bank was founded in 1868 and assumed several Overcollateralisation (€) 1,046,000,000 forms and names before eventually becoming Berlin Hyp Geographical split (in %) in 1993, fully owned by the State of Berling; it Germany 90.3 subsequently merged with Braunschweig-Hannoversche Austria 3.7 Hypothekenbank in 1996. Other 6.0 Borrowers type (in %) Financial performance Federal States 62.0 Public law banks & enterprises 19.0 We set out below some of the key financial performance Foreign debtors 10.0 metrics: Central Government 1.0 Other 8.0 Table 223: Key profit & loss figures, €mm Source: Investor report FY 2008 FY 2009 FY 2010 Net interest income 214 214 215 Table 227: Mortgage covered bond characteristics Prov. for loan losses 93 0 0 As at June NII less provisions 121 214 215 2011 Ratings S/M/F Commission & fee inc. 17 14 24 Covered Bond rating -/Aa1/AA+ Other operating inc. 5 7 21 Issuer rating -/-/AA- Non-interest expense 85 156 168 Operating profit 57 78 92 Cover pool Cover pool size (€) 13,253,700,000 PBT 57 78 5 Overcollateralisation (€) 1,573,600,000 Taxes 13 19 1 Net profit (loss) 45 59 2 Geographical split (in %) Source: Bloomberg Germany 81.0 France 5.9 Table 224: Key balance sheet figures, €mm UK 4.4 Other 8.7 FY 2008 FY 2009 FY 2010 Total Assets 41,487 41,291 40,738 Property type (in %) Short-term borrowings 9,230 11,191 12,805 Office 28.9 Long-term borrowings 27,770 21,090 18,420 Residential 23.3 Equity 720 789 831 Retail 14.3 Source: Bloomberg Mixed Commercial 29.5 Other 3.9 Table 225: Select financial metrics Source: Investor report FY 2008 FY 2009 FY 2010 ROA 0.1 0.1 0.0 ROE 6.1 7.8 0.2 ROC 0.1 0.2 0.0 C:I 35.1 66.6 64.7 Source: Bloomberg

118 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Bremer Landesbank Table 230: Select financial metrics (BBG: BREMLB) FY 2008 FY 2009 FY 2010 ROA 0.1 0.1 0.1 Snapshot ROE 2.7 4.3 3.7 Bremer Landesbank is the leading regional and ROC 0.1 0.2 0.2 commercial bank in the North West of Germany and also C:I 73.1 69.8 46.9 assumes the role of Landesbank, a central bank for the Source: Bloomberg savings banks. Its two shareholders are the Norddeutsche Cover pool overview Landesbank with a 92.5% stake, while the State of Bremen owns the remaining 7.5%. We set out below some of the key cover pool characteristics: The north western region of Germany is the recognised Table 231: Public-sector covered bond characteristics business area of the bank. The bank provides financial solutions and products to its regional and national As at June customers along four different business lines: Corporate 2011 Ratings S/M/F customers, Private customers, Financial markets and Covered Bond rating -/Aaa/AAA Special finance. In addition to these business segments, Issuer rating -/Aa2/A the bank fulfills its role as Landesbank by supporting the Cover pool empowerment of the regional economic area. Cover pool size (€) 4,023,600,000 Over-collateralisation (€) 586,000,000 The bank has three types of pfandbrief in circulation, Over-collateralisation (in %) 17 with public-sector, mortgage and shipping bonds Borrowers type (in %) available. Local Authorities 43.9 Regional Authorities 13.6 State - Financial performance Other 42.6 We set out below some of the key financial performance Source: Investor report metrics: Table 232: Mortgage covered bond characteristics Table 228: Key profit & loss figures, €mm As at June FY 2008 FY 2009 FY 2010 2011 Net interest income 254 312 341 Ratings S/M/F Prov. for loan losses 22 0 0 Covered Bond rating -/Aaa/AAA NII less provisions 232 312 341 Issuer rating -/Aa2/A

Commission & fee inc. 74 53 55 Cover pool Other operating inc. 9 51 44 Cover pool size (€) 1,035,800,000 Non-interest expense 160 292 211 Over-collateralisation (€) 258,400,000 Operating profit 28 123 229 Over-collateralisation (in %) 33.2

PBT 35 86 92 Property type (in %) Taxes 5 38 40 Office 4.5 Net profit (loss) 29 48 48 Residential 54.0 Source: Bloomberg Retail 2.4 Mixed Commercial 29.3 Extra collateral 9.8 Table 229: Key balance sheet figures, €mm Source: Investor report FY 2008 FY 2009 FY 2010 Loans 20,106 20,743 21,812 Total Assets 34,308 33,569 34,228 Deposits 9,949 10,202 10,096 Short-term borrowings 7,377 10,489 11,574 Other ST borrowings 362 608 1,035 Long-term borrowings 15,683 9,322 8,985 Equity 936 1,277 1,299 Source: Bloomberg

119 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Table 233: Ship covered bond characteristics As at June 2011 Ratings S/M/F Covered Bond rating n/a Issuer rating -/Aa2/A

Cover pool Cover pool size (€) 687,500,000 Over-collateralisation (€) 322,400,000 Over-collateralisation (in %) 88.3

Geographical split (in %) Germany 73.1 Marshall Islands 5.3 Greece 3.0 Cyprus 2.7 Malta 2.5 Netherlands 2.3 Other 11.1 Source: Investor report

120 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Corealcredit Bank AG Table 236: Select financial metrics (BBG: COREAL) FY 2008 FY 2009 FY 2010 NIM 0.2 0.6 0.6 Snapshot ROA 0.1 0.0 0.0 Coreralcredit is a specialist bank for commercial property ROE 1.8 0.4 0.4 ROC 0.1 0.0 0.0 finance and commercial lending, as well as related C:I 100.8 74.3 73.9 advisory services. The bank offers real estate solutions Core capital 12.1 13.5 15.3 for both German and international clients, although its Source: Bloomberg main market remains the domestic one, as evidenced by the 60% exposure to Germany in its public sector cover Cover pool overview pool. We set out below some of the key cover pool characteristics: As well as the tried and tested method of refinancing via Mortgage Pfandbriefe, Corealcredit also makes use of Table 237: Public-sector covered bond characteristics securitisation and syndication. Business with the public As at June sector has been discontinued and as such the cover pool 2011 will be run off according to the maturity of the bonds. Ratings S/M/F Covered Bond rating -/-/AAA Issuer rating -/-/BBB- Financial performance We set out below some of the key financial performance Cover pool Cover pool size (€) 1,552,600,000 metrics: Overcollateralisation (€) 101,300,000

Table 234: Key profit & loss figures, €mm Geographical split (in %) Germany 60.0 FY 2008 FY 2009 FY 2010 Austria 17.1 Net interest income 37 72 66 Hungary 5.2 Prov. for loan losses 15 24 14 Spain 4.5 NII less provisions 22 48 52 Italy 3.9 Greece 3.2 Commission & fee inc. 12 7 8 Other 6.2 Other operating inc. 22 11 7 Non-interest expense 69 64 61 Source: Investor report Operating profit -16 -3 6 Table 238: Mortgage covered bond characteristics PBT -12 -2 9 Taxes -25 -5 -2 As at June Net profit (loss) 13 3 3 2011 Ratings S/M/F Source: Bloomberg Covered Bond rating -/-/AA- Issuer rating -/-/BBB- Table 235: Key balance sheet figures, €mm Cover pool FY 2008 FY 2009 FY 2010 Cover pool size (€) 3,309,100,000 Loans 6,901 5,632 4,968 Overcollateralisation (€) 590,400,000 Total Assets 15,767 11,375 9,834 Deposits 3,559 2,773 2,689 Property type (in %) Short-term borrowings 2,732 2,094 2,070 Residential 39.0 Long-term borrowings 7,548 5,604 4,168 Office 26.3 Equity 696 696 694 Mixed Commercial 18.7 Source: Bloomberg Retail 15.3 Industrial 0.7 Source: Investor report

121 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

DekaBank Deutsche Girozentrale Table 241: Select financial metrics (BBG: DEKA) FY 2008 FY 2009 FY 2010 NIM 0.3 0.3 0.3 Snapshot ROA -0.1 0.3 0.5 DekaBank is the German Savings Bank Finance Group's ROE -2.5 11.6 17.0 ROC -0.2 0.6 1.1 (Sparkassen Finanzgruppe) central asset manager. The C:I 77.0 48.9 51.1 German Savings Banks and Giro Association and a group Core capital 10.5 12.7 12.9 of savings banks each own 50% of DekaBank. Source: Bloomberg

With managed fund assets of about € 180 billion, more Cover pool overview than five million customer deposits and group locations We set out below some of the key cover pool in Luxembourg and Switzerland, the DekaBank Group is characteristics: one of the largest asset managers in Germany, with the savings banks and Landesbanken as exclusive sales Table 242: Public-sector covered bond characteristics partners for its products. As at June 2011 The three main lines of business are: Asset management Ratings S/M/F – this offers products based on property investments and Covered Bond rating AAA/Aaa/- Issuer rating A/Aa2/- property finance for private and institutional investors and is the largest provider of open-ended property funds Cover pool in Germany; Property finance - this division provides Cover pool size (€) 19,619,551,433 Over-collateralisation (€) 2,045,626,170 tailored financial solutions for professional property investors worldwide; the Corporate& Markets business Geographical split (in %) acts as a partner to institutional investors through lending Germany 90.7 Mixed America 3.2 and trading and sales. Great Britain 2.3 Other 3.8 Financial performance Borrower type (in %) We set out below some of the key financial performance Regional authorities 12.1 metrics: Local authorities 3.4 State 2.5 Table 239: Key profit & loss figures, €mm Other 82.0 Source: Investor report FY 2008 FY 2009 FY 2010 Net interest income 390 453 347 Prov. for loan losses 292 352 -52 Table 243: Mortgage covered bond characteristics NII less provisions 98 100 399 As at June 2011 Commission & fee inc. 2,706 2,280 2,443 Ratings S/M/F Non-interest expense 2,559 2,135 2,245 Covered Bond rating AAA/Aaa/- Operating profit -49 520 877 Issuer rating A/Aa2/-

PBT -65 498 849 Cover pool Taxes 51 150 202 Cover pool size (€) 177,856,258 Net profit (loss) -81 386 648 Over-collateralisation (€) 132,856,258 Source: Bloomberg Geographical split (in %) Table 240: Key balance sheet figures, €mm Germany 75.7 France 24.3 FY 2008 FY 2009 FY 2010 Loans 29,575 23,489 26,943 Property type (in %) Total Assets 138,609 133,283 130,222 Office 43.7 Deposits 33,745 23,773 21,370 Retail 20.6 Short-term borrowings 21,787 14,906 18,435 Mixed commercial 8.3 Other ST borrowings 42,224 55,704 49,607 Other collateral 27.4 Long-term borrowings 37,614 35,400 36,702 Source: Investor report Equity 3,240 3,500 4,108 Source: Bloomberg

122 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Deutsche Apotheker und Aertzebank Table 246: Select financial metrics (BBG: DAA) FY 2008 FY 2009 FY 2010 NIM 1.5 1.6 1.8 Snapshot ROA 0.2 -0.7 0.1 Deutsche Apotheker und Aertzebank (‘apoBank’) was ROE 3.2 -15.6 3.2 ROC 0.3 -1.2 0.2 founded in 1902 as a cooperative bank for the academic C:I 71.9 161.0 68.4 medical professions. As a focused specialist and niche Core capital 12.8 6.2 7.6 player, the bank has a strong market position in the Source: Bloomberg German healthcare sector; with over 100,000 members, more than 330,000 customers and a balance sheet total of Cover pool overview around €40 billion, apoBank is the largest primary We set out below some of the key cover pool cooperative bank in Germany. characteristics: apoBank provides a comprehensive range of financial Table 247: Mortgage covered bond characteristics services and is the market leader within its customer As at June segment in the areas of lending and payment services. 2011

Financial performance Ratings S/M/F Covered Bond rating AAA/-/- We set out below some of the key financial performance Issuer rating A+/A2/A+ metrics: Cover pool Cover pool size (€) 2,864,870,000 Table 244: Key profit & loss figures, €mm Overcollateralisation (in %) 66.0 FY 2008 FY 2009 FY 2010 Net interest income 559 609 674 Property type (in %) Prov. for loan losses 125 114 160 Residential 73.4 Multifamily 17.5 NII less provisions 434 494 514 Mixed commercial 3.5 Commission & fee inc. 206 192 201 Other collateral 5.7 Other operating inc. 12 16 15 Source: Investor report Non-interest expense 482 516 558 Operating profit 37 -279 64

PBT 68 -269 30 Taxes 9 14 -23 Net profit (loss) 60 -283 53 Source: Bloomberg

Table 245: Key balance sheet figures, €mm FY 2008 FY 2009 FY 2010 Loans 24,554 25,600 26,277 Total Assets 41,221 41,231 38,819 Deposits 15,801 16,984 18,191 Short-term borrowings 11,535 11,190 9,473 Other ST borrowings 492 678 470 Long-term borrowings 11,136 10,503 8,720 Equity 2,010 1,621 1,679 Source: Bloomberg

123 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Deutsche Bank Table 249: Key balance sheet figures, €mm (BBG: DB) FY 2008 FY 2009 FY 2010 Real estate loans 52,453 58,673 132,235 Snapshot Commercial loans 94,857 88,785 141,416 Deutsche Bank is a global investment bank operating in Consumer loans 83,376 85,675 167,350 Other loans 92,986 86,988 102,259 72 countries along two main business lines: Corporate & Total Assets 2,202,423 1,500,664 1,905,630 Investment Banking (CIB) and Private Clients & Asset Deposits 395,553 344,220 533,984 Management (PCAM). Other ST borrowings 39,115 42,897 64,990 Short-term borrowings 1,337,537 725,722 859,022 Long-term borrowings 143,585 142,359 181,910 The CIB segment focuses on the origination, sales and Equity 31,914 37,969 50,392 trading of capital markets products including debt, Source: Bloomberg equity, and other securities, together with corporate advisory, corporate lending and transaction banking. The Table 250: Select financial metrics bank has significantly strengthened its investment FY 2008 FY 2009 FY 2010 banking franchise in 2009 and 2010, after having NIM 0.6 0.7 1.0 weathered the financial crisis of 2008 relatively better ROA -0.2 0.3 0.1 ROE -11.3 14.8 5.4 than some of its competitors. ROC -1.1 1.7 0.8 C:I 130.1 73.1 75.8 The PCAM division offers investment management Core capital 10.1 12.6 12.3 solutions to both private and institutional clients, together Source: Bloomberg with traditional banking activities for private individuals Cover pool overview and small and medium-sized businesses. Deutsche Bank We set out below some of the key cover pool has a strong retail base in Europe, with Germany as its characteristics: core market, where it holds a market-leading position. The bank has further reinforced its domestic market Table 251: Mortgage covered bond characteristics position with the acquisition of a stake in Postbank (52% As at June as at March 2010, with the potential of increasing it to 2011 near full ownership by 2012). The bank also operates Ratings S/M/F close to 2,900 retail branches across Italy, Spain, Covered Bond rating AAA/Aaa/AAA Issuer rating A+/Aa3/AA- Belgium, Portugal, Poland, India and China, of which 1,100 are Postbank branches. Cover pool Cover pool size (€) 2,838,500,000 Financial performance Overcollateralisation (in %) 41.9 We set out below some of the key financial performance Fixed rate loans (in %) 88.7 metrics: €-denominated loans (in %) 91.3 Property type (in %) Table 248: Key profit & loss figures, €mm Residential 5.4 Multifamily 28.9 FY 2008 FY 2009 FY 2010 Office 28.7 Net interest income 12,453 12,459 15,583 Retail 17.7 Prov. for loan losses 1,076 2,630 1,274 Industrial 4.8 NII less provisions 11,377 9,829 14,309 Other 14.6

Commission & fee inc. 12,449 11,377 13,652 Geographical split (in %) Other operating inc. 820 131 165 Germany 89.4 Non-interest expense 20,522 23,095 25,691 UK 7.8 Operating profit -5,202 4,948 5,990 France 1.3 Switzerland 1.2 PBT -5,741 5,202 3,975 Other 0.4 Taxes -1,845 244 1,645 Net profit (loss) -3,835 4,973 2,310 Source: Investor report Source: Bloomberg

124 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Deutsche Genossenshafts- Cover pool overview Hypothekenbank (DG Hyp) We set out below some of the key cover pool characteristics: (BBG: DGHYP) Snapshot Table 255: Public-sector covered bond characteristics DG Hyp was founded in 1921 and is the largest mortgage As at June bank in the cooperative financial system. Its expertise 2011 lies in commercial real estate finance, with business Ratings S/M/F originated via three channels: cooperative banking via Covered Bond rating AAA/-/- 1,100 partner banks, directly with domestic investors and Issuer rating A/-/A+ developers and through participation in syndicates on Cover pool international markets. Cover pool size (€) 26,717,380,000 Over-collateralisation (in %) 11.4

The bank is affiliated to DZ Bank Group and, outside its Geographical split (in %) German core market, it is represented in the USA, the Germany 63.4 UK, France and Poland. Spain 14.6 Italy 6.2 Austria 3.7 Pfandbriefe constitute the main funding channel for the Portugal 2.4 lending operations of DG Hyp, which issues both public Other 9.7 sector and mortgage Pfandbriefe. Borrower type (in %) Central Government 8.8 Financial performance Regional authorities 33.4 Local authorities 33.2 We set out below some of the key financial performance Other 24.6 metrics: Source: Investor report

Table 252: Key profit & loss figures, €mm Table 256: Mortgage covered bond characteristics FY 2008 FY 2009 FY 2010 As at June Net interest income 163 164 203 2011 Prov. for loan losses 62 125 75 Ratings S/M/F NII less provisions 102 39 128 Covered Bond rating AAA/-/- Issuer rating A/-/A+ Commission & fee inc. 28 30 36 Other operating inc. 9 14 15 Cover pool Non-interest expense 157 142 109 Cover pool size (€) 15,721,510,000 Operating profit -129 -261 -92 Over-collateralisation (in %) 14.3

PBT 0 -127 23 Property type (in %) Taxes 0 -2 0 Residential 50.4 Net profit (loss) 0 0 0 Office 24.3 Source: Bloomberg, Annual report 2010 Retail 12.5 Industrial 0.7 Table 253: Key balance sheet figures, €mm Other 12.1 FY 2008 FY 2009 FY 2010 Geographical split (in %) Loans 39,090 37,043 35,807 Germany 83.2 Total Assets 76,016 68,075 64,443 UK 4.6 Deposits 17,000 16,016 15,324 France 4.3 Equity 1,847 1,653 1,407 USA 3.1 Other 4.9 Source: Bloomberg, Annual report 2010 Source: Investor report Table 254: Select financial metrics FY 2008 FY 2009 FY 2010 Core capital 7.3 6.9 7.6 Source: Bloomberg, Annual report 2010

125 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Deutsche Hypo Hannover (Deutsche Table 259: Select financial metrics Hypothekenbank) FY 2008 FY 2009 FY 2010 NIM 0.3 0.3 0.5 (BBG: DHY) ROA -0.3 -0.1 0.1 Snapshot ROE -22.8 -6.3 3.9 ROC -0.4 -0.1 0.1 Deutsche Hypo Hannover is a mortgage bank and as such C:I -56.1 64.8 40.8 it focuses on all aspects of financing and consultancy Core capital 7.9 6.8 7.7 associated with real estate. In particular, the bank Source: Bloomberg specialises in large-scale commercial financing with professional real estate customers and the construction of Cover pool overview residential buildings for investment purposes in We set out below the key cover pool characteristics: Germany, Europe and the USA. Table 260: Public-sector covered bond characteristics The bank also offers public-sector lending and capital As at June market transactions with German and foreign clients in 2011 Ratings S/M/F western Europe, Japan, Canada and the USA. It has been Covered Bond rating -/Aaa/- part of Nord/LB since 2008, allowing it to achieve an Issuer rating -/A1/- even stronger position in the field of commercial real Cover pool estate financing. Cover pool size (€) 15,545,500,000 Overcollateralisation (€) 689,100,000 Financial performance Borrower type (in %) We set out below some of the key financial performance German Central Government 1.2 metrics: German Federal States 28.3 Municipalities, non-profit organizations 6.5 Table 257: Key profit & loss figures, €mm Foreign loans 45.7 Public sector banks 12.9 FY 2008 FY 2009 FY 2010 Public sector companies 2.4 Net interest income 105 118 173 Substitute collateral 2.9 Prov. for loan losses 31 70 79 NII less provisions 74 48 94 Ratings split (in %) AAA 27.1 Commission & fee inc. 6 17 16 AA 58.2 Other operating inc. 19 3 2 A 14.0 Non-interest expense 48 67 82 BBB 0.8 Operating profit -156 -34 37 Source: Investor report

PBT -156 -34 36 Taxes -59 -1 5 Table 261: Mortgage covered bond characteristics Net profit (loss) -97 -32 31 As at June Source: Bloomberg 2011 Ratings S/M/F Table 258: Key balance sheet figures, €mm Covered Bond rating -/Aaa/- FY 2008 FY 2009 FY 2010 Cover pool Loans 16,049 16,621 18,409 Cover pool size (€) 8,236,900,000 Total Assets 37,116 34,050 35,998 Over-collateralisation (€) 961,800,000 Deposits 10,307 10,121 10,041 Short-term borrowings 6,278 5,683 8,296 Geographical split (in %) Long-term borrowings 18,844 17,354 16,397 Germany 61.7 Equity 373 655 931 USA 11.0 Great Britain 9.8 Source: Bloomberg Netherlands 9.7 Other Europe 7.8

Property type (in %) Residential 23.5 Office 30.8 Retail 30.5 Other 15.2 Source: Investor report

126 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Deutsche Postbank Table 263: Key balance sheet figures, €mm (BBG: DPB) FY 2008 FY 2009 FY 2010 Real estate loans 54,319 56,561 55,762 Snapshot Loans 103,995 109,402 110,019 Deutsche Postbank Group is one of Germany’s major Total Assets 231,219 226,609 214,684 Deposits 117,472 131,988 136,476 financial services providers, catering to over 14 million Short-term borrowings 61,856 37,031 16,479 customers. Its focus is on retail business with private Other ST borrowings 21,687 26,414 30,315 customers; it is also active in the corporate banking Long-term borrowings 23,012 24,516 24,377 sector, while its transaction banking division performs Equity 4,952 5,251 5,627 back office services for other financial services Source: Bloomberg providers. Table 264: Select financial metrics Postbank offers its retail customers traditional banking FY 2008 FY 2009 FY 2010 NIM 1.2 1.1 1.3 products ranging from deposit banking and lending to ROA -0.4 0.0 0.1 bonds, investment funds, insurance policies and home ROE -17.4 1.5 2.5 savings contracts. In 2006 Postbank acquired the 850 ROC -1.0 0.1 0.2 C:I 123.1 91.7 78.2 largest branches from Deutsche Post AG and created a Core capital 7.2 7.6 8.1 mobile sales team of more than 4,000 consultants Source: Bloomberg through the acquisition of BHW. It sells its products through a networked multi-channel platform via the Cover pool overview Internet, by telephone, in branches. We set out below some of the key cover pool characteristics:

Postbank also offers solutions for payment transactions, Table 265: Public-sector covered bond characteristics commercial real estate finance and traditional corporate As at June 2011 finance to SMEs, in addition to leasing, factoring and Ratings S/M/F extensive investment management services. Covered Bond rating AAA/Aaa/AAA Issuer rating A/A1/A+

Postbank has one of the most advanced banking Cover pool transaction platforms in Europe. In 2004, Postbank Cover pool size (€) 2,677,200,000 opened its new Transaction Banking business segment, Over-collateralisation (in %) 37.4 offering itself as a service provider to other financial Geographical split (in %) services companies. Germany 66.4 Netherlands 7.5 In December 2007, Postbank received its Pfandbrief Belgium 7.5 France 7.5 license and issued its first mortgage Pfandbrief in 2008, Austria 7.5 followed by a public sector one in 2009. Italy 3.7

Borrower type (in %) Financial performance Central Government 33.6 We set out below some of the key financial performance Regional authorities 16.6 metrics: Other 49.8 Source: Investor report Table 262: Key profit & loss figures, €mm Table 266: Mortgage covered bond characteristics FY 2008 FY 2009 FY 2010 As at June 2011 Net interest income 2,456 2,401 2,748 Prov. for loan losses 498 678 561 Ratings S/M/F NII less provisions 1,958 1,723 2,187 Covered Bond rating AAA/Aaa/AAA Commission & fee inc. 1,683 1,614 1,586 Issuer rating A/A1/A+ Other operating inc. 218 187 175 Non-interest expense 3,324 3,280 3,374 Cover pool Operating profit -1,075 -407 306 Cover pool size (€) 8,038,400,000 PBT -1,064 -398 315 Over-collateralisation (in %) 19.7 Taxes -179 -475 176 Net profit (loss) -886 76 138 Property type (in %): Residential 100.0 Geographical split (in %): Germany 100.0 Source: Bloomberg

127 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Source: Investor report Table 269: Select financial metrics Deutsche Schiffsbank FY 2008 FY 2009 FY 2010 (BBG: DSB) ROE 4.1 0.6 C:I 19.4 16.1 Snapshot Core capital 9.2 9.5 Deutsche Schiffsbank is one of the leading ship finance Source: Annual report 2010 banks in the world, with joint headquarters in Bremen and Hamburg. Through its long history - the bank was Cover pool overview founded in 1918 - it has acquired significant expertise in We set out below some of the key cover pool the sector and currently has an extensive global client characteristics: base. The shareholders are Commerzbank and Bayerische Hypo- und Vereinsbank, which indirectly Table 270: Public-sector covered bond characteristics hold 92% and 8% respectively. As at June 2011 The bank offers maritime and public finance services in Ratings S/M/F all the main currencies for both new builds and second- Covered Bond rating n/a Issuer rating -/A3/- hand tonnage. Deutsche Schiffsbank also offers related services, such as construction finance and preliminary Cover pool equity finance. Cover pool size (€) 1,558,500,000 Overcollateralisation (€) 127,600,000

Most of the lending takes the form of long-term ship Geographical split (in %) mortgage loans and Pfandbriefe are used to fund these Germany 80.4 activities. The ship loans are mostly granted in US Italy 5.5 Austria 5.5 dollars. Poland 2.6 Other 6.1 Financial performance Borrower type (in %) We set out below some of the key financial performance Central Government 11.6 metrics: Regional authorities 46.0 Other 42.4 Table 267: Key profit & loss figures, €mm Source: Investor report

FY 2008 FY 2009 FY 2010 Table 271: Ship covered bond characteristics Net interest income 150 175 As at June Commission & fee inc. 11 16 2011 Other operating inc. 5 12 Ratings S/M/F Non-interest expense 31 29 Covered Bond rating n/a Operating profit 23 6 Issuer rating -/A3/-

PBT 22 6 Cover pool Taxes 22 0 Cover pool size (€) 5,392,700,000 Net profit (loss) 0.3 0 Overcollateralisation (€) 1,447,100,000 Source: Annual report 2010 Geographical split (in %) Germany 41.3 Table 268: Key balance sheet figures, €mm Greece 9.1 FY 2008 FY 2009 FY 2010 Marshall Islands 9.0 Loans 12,467 12,113 Malta 6.5 Total Assets 16,311 15,742 Cyprus 5.4 Short-term borrowings 3,927 3,123 Liberia 5.3 Equity 7,445 8,040 Hong Kong 4.5 Bahamas 4.2 Source: Annual report 2010 Other 14.8 Source: Investor report

128 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Dexia Kommunalbank Deutschland Table 274: Select financial metrics (BBG: DEXGRP) FY 2008 FY 2009 FY 2010 C:I 43.4 46.4 Snapshot Core capital 12.3 22.8 Dexia Kommunalbank Deutschland, a 100% subsidiary Source: Annual report 2010 of the Dexia Group, focuses predominantly on the public finance line of business, both in Germany and abroad. It Cover pool overview provides a wide range of products and services in the We set out below some of the key cover pool management of PPP/PFI and project finance as well as characteristics: export finance, particularly to the infrastructure/transportation, energy and Table 275: Public-sector covered bond characteristics telecommunications sectors. As at June 2011 The German operations form part of Dexia Credit Local Ratings S/M/F and Dexia Kommunalbank’s special role within the Covered Bond rating AAA/-/- Issuer rating (Dexia KB) A/A3/A+ Dexia Group is the funding of the group's public finance activities. Eligible assets are generally transferred from Cover pool the various entities within the Dexia Group into Dexia Cover pool size (€) 37,601,740,000 Over-collateralisation (€) 3,474,110,000 Kommunalbank and funded via the issuance of AAA- rated Pfandbriefe (S&P). Geographical split (in %) Germany 66.6 Italy 8.9 While maintaining predominantly German assets in its Austria 5.4 cover pool (currently 66.6%), the bank's objective is to Spain 4.5 increase its international base of cover assets. Belgium 5.2 Other 9.4

Financial performance Borrowers type (in %) We set out below some of the key financial performance Regional Authorities 47.6 Local Authorities 22.9 metrics: Central Government 8.4 Other 21.1 Table 272: Key profit & loss figures, €mm Source: Investor report FY 2008 FY 2009 FY 2010 Net interest income 45 42 NII less provisions 45 42

Commission & fee inc. 2 2 Other operating inc. 0 2 Non-interest expense 22 19

PBT 1 1 Taxes 0 0 Net profit (loss) 1 1 Source: Annual report 2010

Table 273: Key balance sheet figures, €mm FY 2008 FY 2009 FY 2010 Loans 20,855 20,893 Total Assets 47,291 48,695 Deposits 7,828 7,289 Short-term borrowings 309 2,686 Long-term borrowings 19,895 19,673 Equity 344 532 Source: Annual report 2010

129 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Duesseldorfer Hypothekenbank Cover pool overview (BBG: DUSHYP) We set out below some of the key cover pool Snapshot characteristics: DHB’s main line of business is public-sector lending, Table 279: Public-sector covered bond characteristics although property finance has gradually become the second pillar of the institution’s business model, As at June 2011 accounting for almost 10% of the aggregate lending Ratings S/M/F volume and roughly 20% of the bank’s operating income. Covered Bond rating -/-/AAA Loans to central, regional and local authorities and to Issuer rating -/-/BBB- public-sector banks dominate the portfolio. The bank has Cover pool no retail business at all. Cover pool size (€) 7,033,000,000 Over-collateralisation (€) 882,000,000

The bank’s operations are for the most part funded Ratings split (in %) through public-sector Pfandbriefe, with mortgage AAA 32.4 Pfandbriefe and unsecured bonds playing a much smaller AA 27.2 role. DHB remains predominantly owned (94%) by the A 26.8 BBB 2.2 Bundesverband deutscher Einlagensicherungsfonds Below BBB and NR 11.5 (Association of German Bank Deposit Protection Funds). Geographical split (in %) Germany 51.7 Financial performance Austria 15.8 We set out below some of the key financial performance Spain 10.2 Italy 9.1 metrics: Czech Republic 2.4 Other 10.9 Table 276: Key profit & loss figures, €mm Borrower type (in %) FY 2008 FY 2009 FY 2010 Central Government 15.1 Net interest income 29 55 6 Regional authorities 35.8 Prov. for loan losses 88 9 21 Local authorities 4.9 NII less provisions -59 46 -15 Other 44.2 Source: Investor report Commission & fee inc. 3 2 2 Other operating inc. 0 6 8 Non-interest expense 32 49 29 Table 280: Mortgage covered bond characteristics Operating profit -215 2 -21 As at June 2011 PBT -215 2 -20 Taxes 0 0 0 Ratings S/M/F Net profit (loss) -215 2 -20 Covered Bond rating n/a Issuer rating -/-/BBB- Source: Annual report 2010 Cover pool Table 277: Key balance sheet figures, €mm Cover pool size (€) 853,000,000 Over-collateralisation (€) 203,000,000 FY 2008 FY 2009 FY 2010 Loans 4,501 3,635 3,206 Property type (in %) Total Assets 24,466 24,170 20,642 Residential 15.0 Deposits 7,589 7,358 237 Office 63.0 Short-term borrowings 8,352 8,384 9,098 Retail 16.0 Long-term borrowings 8,056 8,094 4,440 Other 6.0 Equity 307 251 251 Source: Annual report 2010 Geographical split (in %) Germany 59.0 Table 278: Select financial metrics USA 10.3 Netherlands 2.5 FY 2008 FY 2009 FY 2010 UK 2.1 ROE 0.5 -2.8 Switzerland 1.2 C:I 75.1 -276.0 France 0.8 Core capital 7.0 17.0 Other 9.1 Source: Annual report 2010 Source: Investor report

130 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Eurohypo Table 283: Select financial metrics (BBG: EURHYP) FY 2008 FY 2009 FY 2010 NIM 0.5 0.5 0.6 Snapshot ROA -0.5 -0.3 -0.4 Eurohypo AG is a leading international specialist bank ROE -25.8 -22.6 -23.0 ROC -0.6 -0.4 -0.5 for real estate and public finance. The bank currently C:I 35.0 38.6 forms part of the Commerzbank Group, but is expected Source: Bloomberg to be spun out of the institution by 2014 as a condition for approval of State Aid. Cover pool overview We set out below some of the key cover pool The core real estate division of the company comprises characteristics: portfolio and development loans for commercial and residential projects. While the residential lending activity Table 284: Public-sector covered bond characteristics is mostly restricted to the domestic German market, on As at June the commercial lending front, the bank is active in 2011 several EU jurisdictions, Russia, Turkey, the UK and the Ratings S/M/F USA. Eurohypo targets professional real estate investors Covered Bond rating AAA/Aaa/AAA and developers with a particular need for frequent Issuer rating A-/A3/A- financing and in need of complex financial solutions. Cover pool Cover pool size (€) 41,666,000,000 The public finance division offers conventional public Over-collateralisation (€) 2,713,000,000 sector lending, financing and consulting to PPP projects Geographical split (in %) and Pfandbrief refinancing and cover pool management. Germany 67.2 Its core domestic market makes up two thirds of the Austria 5.4 USA 3.4 cover pool. Switzerland 2.8 Italy 2.7 Financial performance Spain 2.4 Other 16.2 We set out below some of the key financial performance metrics: Borrower type (in %) Central Government 14.2 Table 281: Key profit & loss figures, €mm Regional authorities 67.8 Local authorities 9.4 FY 2008 FY 2009 FY 2010 Other 8.6 Net interest income 1,146 1,288 1,338 Source: Investor report Prov. for loan losses 858 1,174 1,407 NII less provisions 288 114 -69

Commission & fee inc. 297 180 213 Other operating inc. 58 5 -34 Non-interest expense 581 465 433 Operating profit -1,401 -369 -764

PBT -1,409 -515 -785 Taxes -169 387 72 Net profit (loss) -1,240 -902 -857 Source: Bloomberg

Table 282: Key balance sheet figures, €mm FY 2008 FY 2009 FY 2010 Loans 150,263 129,695 116,299 Total Assets 291,600 256,061 229,010 Deposits 36,867 34,630 32,287 Short-term borrowings 100,546 188,469 164,938 Long-term borrowings 122,657 4,279 4,234 Equity 4,022 3,952 3,515 Source: Bloomberg

131 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Table 285: Mortgage covered bond characteristics As at June 2011 Ratings S/M/F Covered Bond rating AAA/Aaa/AAA Issuer rating A-/A3/A-

Cover pool Cover pool size (€) 51,332,000,000 Over-collateralisation (€) 9,664,000,000

Property type (in %) Residential 39.1 Office 25.6 Retail 22.3 Industrial 5.2 Other 7.9

Geographical split (in %) Germany 68.1 UK 7.5 Spain 5.5 France 4.1 Portugal 3.4 Italy 2.4 Other 9.1 Source: Investor report

132 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

HSH Nordbank Table 288: Select financial metrics (BBG: HSHN) FY 2008 FY 2009 FY 2010 NIM 1.0 1.1 0.9 Snapshot ROA -1.4 -0.4 -0.0 HSH Nordbank is one of the major providers of real ROE -90.0 -23.0 -0.1 ROC -2.1 -0.6 0.1 estate finance in Germany, but also offers private C:I 903.5 25.7 64.2 banking services to high net-worth clients and financing Core capital 5.1 9.5 15.4 to the regionally dominant industries of shipping, Source: Bloomberg transportation and energy. The institution is the result of the 2003 merger between Hamburgische Landesbank and Cover pool overview Landesbank Schleswig-Holstein (LB Kiel). Ownership is We set out below some of the key cover pool currently (at least until 2013) centred around the City characteristics: State of Hamburg and the State of Schleswig-Holstein, which own a combined 85.5% of the institution. Table 289: Public-sector covered bond characteristics As at June Internationally, its focus is on transportation and real 2011 estate finance and it is a major player in the sectors of Ratings S/M/F infrastructure, aviation, renewable energy and shipping, Covered Bond rating -/Aaa/- Issuer rating -/A3/A- where it is the largest lender in the world. Cover pool In private banking, the bank focuses on wealthy private Cover pool size (€) 7,374,500,000 Over-collateralisation (in %) 21.1 clients and foundations. The savings banks division offers integrated solutions for business conducted by Geographical split (in %) savings banks as well as debt and liquidity management Germany 76.6 Austria 8.3 for public-sector clients. Other 15.1

Financial performance Borrower type (in %) Central Government 17.2 We set out below some of the key financial performance Regional authorities 62.6 metrics: Local authorities 8.4 Other 11.8 Table 286: Key profit & loss figures, €mm Source: Investor report FY 2008 FY 2009 FY 2010 Net interest income 2,051 2,121 1,502 Table 290: Ship covered bond characteristics Prov. for loan losses 1,888 2,794 129 As at June NII less provisions 163 -673 1,373 2011 Ratings S/M/F Commission & fee inc. 398 303 302 Covered Bond rating -/A2/- Other operating inc. -44 -22 -139 Issuer rating -/A3/A- Non-interest expense 1,149 870 874 Operating profit -2,796 -548 311 Cover pool Cover pool size (€) 3,432,700,000 PBT -2,617 -1,325 17 Over-collateralisation (in %) 38.7 Taxes 227 -423 -31 Net profit (loss) -2,809 -734 -3 Geographical split (in %) Source: Bloomberg Germany 72.2 Liberia 6.6 Table 287: Key balance sheet figures, €mm Marshall Islands 5.9 Other 15.3 FY 2008 FY 2009 FY 2010 Source: Investor report Loans 115,269 105,839 98,235 Total Assets 208,370 174,484 150,930 Deposits 52,469 49,803 50,446 Short-term borrowings 61,498 100,596 79,645 Other ST borrowings 24,440 22,533 16,464 Equity 2,005 4,442 5,094 Source: Bloomberg

133 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Table 291: Mortgage covered bond characteristics As at June 2011 Ratings S/M/F Covered Bond rating -/Aaa/- Issuer rating -/A3/A-

Cover pool Cover pool size (€) 5,989,100,000 Over-collateralisation (in %) 23.6

Property type (in %) Residential 24.0 Office 46.1 Retail 12.5 Other 17.4

Geographical split (in %) Germany 59.0 France 14.7 Netherlands 14.1 Other 12.3 Source: Investor report

134 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

ING DiBa Cover pool overview We set out below some of the key cover pool (BBG: INGDIB) characteristics: Snapshot ING DiBa, fully owned by the Dutch ING Groep, is the Table 295: Mortgage covered bond characteristics biggest direct bank in Germany, with over 7mm As at June customers. The core businesses are savings accounts, 2011 Ratings S/M/F mortgages, securities, consumer loans and current Covered Bond rating -/Aaa/- accounts for private clients. Issuer rating -/Aa3/-

The bank issued its first mortgage Pfandbrief in June Cover pool Cover pool size (€) 837,440,000 2011. Over-collateralisation (€) 337,440,000

Financial performance Property type (in %) Single family 70.5 We set out below some of the key financial performance Multifamily 5.6 metrics: Flats 23.9 Source: Investor report Table 292: Key profit & loss figures, €mm FY 2008 FY 2009 FY 2010 Operating profit -657 -566

PBT 280 494 Taxes 78 149 Net profit (loss) 202 345 Source: Bloomberg

Table 293: Key balance sheet figures, €mm FY 2008 FY 2009 FY 2010 Total Assets 87,753 96,333 Short-term borrowings 4,459 5,670 Equity 4,499 4,831 Source: Bloomberg

Table 294: Select financial metrics FY 2008 FY 2009 FY 2010 ROE 7.4 ROC 15.0 Source: Bloomberg

135 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Landesbank Baden Württemberg Table 298: Select financial metrics (LBBW) FY 2008 FY 2009 FY 2010 NIM 0.5 0.7 0.6 ROA -0.5 -0.3 -0.1 (BBG: LBBW) ROE -25.5 -17.9 -3.4 Snapshot ROC -0.7 -0.5 -0.2 C:I 336.4 66.2 75.1 LBBW is a regionally-linked universal bank and together Core capital 6.9 9.8 11.4 with its regional retail banks (Baden-Württembergische Source: Bloomberg Bank, Rheinland-Pfalz Bank, and Sachsen Bank), it offers a wide spectrum of financial products throughout Cover pool overview Germany. BW-Bank acts as a savings bank for LBBW in We set out below some of the key cover pool the area of Stuttgart, the state capital of Baden- characteristics: Württemberg. Table 299: Public-sector covered bond characteristics The bank was formed in 1999 after the merger of the As at June three regional banks and is now one of Germany’s largest 2011 banks: LBBW is the largest bank in the southwest of Ratings S/M/F Germany, ranking among the five largest German banks Covered Bond rating -/Aaa/AAA and among the 50 largest credit institutions worldwide. Issuer rating -/Aa2/A+ The largest three shareholders remain the local savings Cover pool banks (40.5%) along with the State of Baden- Cover pool size (€) 58,811,000,000 Württemberg (19.6%) and the City of Stuttgart (18.9%). Over-collateralisation (€) 13,166,000,000 Geographical split (in %) Through its international network, LBBW is able to offer Germany 96.0 banking services to local corporate clients willing to Other 4.0 access the global markets. Borrower type (in %) Central Government 4.6 Financial performance Regional authorities 18.0 Local authorities 10.8 We set out below some of the key financial performance Other 66.6 metrics: Source: Investor report

Table 296: Key profit & loss figures, €mm Table 300: Mortgage covered bond characteristics FY 2008 FY 2009 FY 2010 As at June Net interest income 2,294 2,778 2,163 2011 Prov. for loan losses 883 1,527 471 Ratings S/M/F NII less provisions 1,411 1,251 1,692 Covered Bond rating -/Aaa/- Issuer rating -/Aa2/A+ Commission & fee inc. 730 964 828 Other operating inc. 717 386 127 Cover pool Non-interest expense 2,576 2,900 1,963 Cover pool size (€) 10,004,000,000 Operating profit -2,566 -203 113 Over-collateralisation (€) 5,320,000,000

PBT -2,662 -1,214 -318 Property type (in %) Taxes -550 268 30 Residential 53.4 Net profit (loss) -2,088 -1,483 -348 Office 12.8 Source: Bloomberg Retail 8.6 Industrial 0.9 Table 297: Key balance sheet figures, €mm Other Commercial 24.4 FY 2008 FY 2009 FY 2010 Geographical split (in %) Loans 147,329 145,729 128,592 Germany 96.7 Total Assets 447,738 411,694 374,413 USA 1.6 Deposits 103,232 105,212 87,931 Other 1.7 Short-term borrowings 130,215 109,352 79,328 Source: Investor report Long-term borrowings 159,598 141,280 102,637 Equity 6,060 10,506 9,960 Source: Bloomberg

136 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Landesbank Berlin Table 302: Key balance sheet figures, €mm (BBG: LBBER) FY 2008 FY 2009 FY 2010 Real estate loans 16,908 17,629 18,486 Snapshot Loans 46,217 47,476 45,410 Landesbank Berlin Girozentrale was founded as a bank Total Assets 145,388 143,835 131,477 Deposits 32,720 35,129 36,092 subject to public law on 1 October 1990. At the same Short-term borrowings 52,381 49,873 39,014 time, the city's savings banks that had been separated into Other ST borrowings 31,760 33,408 32,865 east and west were transferred to Landesbank Berlin and Long-term borrowings 26,532 22,698 20,769 since then have formed the joint Berliner Sparkasse. As Equity 1,962 2,712 2,722 at 1 January 2006, Landesbank was transformed into a Source: Bloomberg stock corporation in accordance with the Berlin Savings Table 303: Select financial metrics Bank Act of summer 2005. At the same time, the State of Berlin made Landesbank Berlin AG the parent company FY 2008 FY 2009 FY 2010 NIM 0.9 0.6 0.5 of the public-law Berliner Sparkasse. Berliner Sparkasse ROA 0.0 0.2 0.2 is now operated as a branch of Landesbank Berlin AG. ROE 1.5 11.5 10.1 ROC 0.1 0.3 0.4 C:I 85.3 62.3 67.7 LBBER operates along four business segments. Retail Core capital 11.0 8.5 15.2 banking leverages off the extensive sales network of Source: Bloomberg Berliner Sparkasse to offer traditional banking products, investment and pension products and more complex asset Cover pool overview management services. In Regional Corporate banking We set out below some of the key cover pool LBBER has a leading position as a partner to SMEs and characteristics: corporates in its regional catchment area. The Real Estate Financing division caters mainly to institutional and Table 304: Public-sector covered bond characteristics professional real estate investors in Germany and selected European jurisdictions. Finally, the Capital As at June 2011 Markets business provides market access to institutional Ratings S/M/F and private investors. Covered Bond rating -/Aaa/AAA Issuer rating -/A1/AA-

Financial performance Cover pool We set out below some of the key financial performance Cover pool size (€) 4,368,621,227 metrics: Over-collateralisation (€) 2,667,172,709 Geographical split (in %) Table 301: Key profit & loss figures, €mm Germany 98.2

FY 2008 FY 2009 FY 2010 Borrower type (in %) Net interest income 1,248 861 714 Central Government 7.4 Prov. for loan losses 63 185 105 Regional authorities 51.9 NII less provisions 1,185 676 609 Local authorities 2.5 Other 38.2 Commission & fee inc. 439 395 421 Other operating inc. 222 91 160 Source: Investor report Non-interest expense 1,077 1,118 1,150 Operating profit 99 410 374

PBT 9 339 317 Taxes -35 67 52 Net profit (loss) 32 257 267 Source: Bloomberg

137 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Table 305: Mortgage covered bond characteristics As at June 2011 Ratings S/M/F Covered Bond rating -/Aaa/- Issuer rating S/M/F -/A1/AA-

Cover pool Cover pool size (€) 3,269,554,082 Over-collateralisation (€) 495,002,358

Geographical split (in %) Germany 89.8 France 9.8 Poland 0.4

Property type (in %) Residential 39.4 Office 32.5 Retail 12.4 Industrial 7.3 Other 8.4 Source: Investor report

138 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Landesbank Hessen-Thueringen Table 308: Select financial metrics (BBG: HESLAN) FY 2008 FY 2009 FY 2010 NIM 0.6 0.6 0.6 Snapshot ROA -0.0 0.2 0.2 The Helaba Group is one of Germany’s leading ROE -0.9 6.8 5.9 ROC -0.1 0.4 0.4 Landesbanken, with a strong domestic and international C:I 100.6 56.4 61.3 foothold. The bank is owned by the savings banks (85%) Core capital 8.3 8.8 9.6 and the states of Hesse (10%) and Thuringia (5%). Source: Bloomberg

The bank is focused on three areas: the Multinational Cover pool overview Corporate Business division offers financial services to We set out below some of the key cover pool corporations, banks and institutional investors. The characteristics: Private Customers & SME Business unit provides the Sparkassen in Hesse and Thueringen with financial Table 309: Public-sector covered bond characteristics products and services; through the Frankfurter Sparkasse, As at June Helaba is region’s market leader in retail banking. 2011 Finally, its Public Development & Infrastructure business Ratings S/M/F finances development programmes in the states of Hesse Covered Bond rating AAA/Aaa/AAA Issuer rating A/Aa2/A+ and Thueringen. Cover pool Pfandbriefe play an important funding role for both the Cover pool size (€) 20,911,500,000 Over-collateralisation (€) 6,040,900,000 retail and public sector lending business. Borrower type (in %) Financial performance Central Government 3.6 Regional authorities 18.0 We set out below some of the key financial performance Local authorities 39.1 metrics: Other 39.2

Table 306: Key profit & loss figures, €mm Geographical split (in %) Germany 92.6 FY 2008 FY 2009 FY 2010 Spain 6.6 Net interest income 1,047 1,029 1,017 Other 0.8 Prov. for loan losses 66 487 285 Source: Investor report NII less provisions 981 542 732 Table 310: Mortgage covered bond characteristics Commission & fee inc. 339 349 404 Other operating inc. 373 234 357 As at June Non-interest expense 1,197 1,171 1,223 2011 Operating profit -72 323 388 Ratings S/M/F Covered Bond rating -/-/AAA PBT -54 343 398 Issuer rating A/Aa2/A+ Taxes -11 80 100 Net profit (loss) -45 324 299 Cover pool Source: Bloomberg Cover pool size (€) 8,823,600,000 Over-collateralisation (€) 2,806,500,000 Table 307: Key balance sheet figures, €mm Geographical split (in %) FY 2008 FY 2009 FY 2010 Germany 95.2 Loans 89,917 86,280 86,445 Netherlands 1.7 Total Assets 184,572 169,901 166,244 Other 3.1 Deposits 41,884 41,891 40,896 Short-term borrowings 33,965 33,214 Property type (in %) Long-term borrowings 45,130 43,030 76,556 Residential 20.7 Equity 4,675 4,898 5,203 Office 47.6 Retail 25.3 Source: Bloomberg Industrial 2.1 Other 4.3 Source: Investor report

139 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Landesbank Saar Table 313: Select financial metrics (BBG: SAARLB) FY 2008 FY 2009 FY 2010 NIM 0.6 0.6 0.6 Snapshot ROA -0.4 0.0 0.1 Landesbank Saar (SaarLB) is the largest financial ROE -23.1 3.0 5.3 ROC -0.5 0.1 0.2 institution in the Saarland region and has positioned itself C:I 149.4 43.4 58.2 as the leading Franco-German SME bank. The Bank’s Core capital 8.4 11.7 10.0 core markets are the German state of Saarland and the Source: Bloomberg neighbouring regions of France, particularly the country’s northeast. Cover pool overview We set out below some of the key cover pool SaarLB’s activities are geared toward small and medium- characteristics: sized enterprises, high net worth individuals and customers seeking commercial real estate financing. Table 314: Public-sector covered bond characteristics SaarLB also provides financing for mainly regional As at June public-sector budgets and for renewable energy projects. 2011 As the central bank to the Saarland savings banks, Ratings S/M/F SaarLB conducts syndicate business with the regional Covered Bond rating n/a Issuer rating -/A1/A savings banks. It is also a regional centre of competence in corporate finance, securities transactions and Cover pool international commercial business. Cover pool size (€) 2,479,000,000 Over-collateralisation (in %) 66.5

Owners include BayernLB (49.9%), Saarland (35.2%) Borrower type (in %) and the Sparkassenverband Saar (14.9%). Regional authorities 15.7 Local authorities 16.4 Other 67.8 Financial performance Source: Investor report We set out below some of the key financial performance metrics: Table 315: Mortgage covered bond characteristics As at June Table 311: Key profit & loss figures, €mm 2011 FY 2008 FY 2009 FY 2010 Ratings S/M/F Covered Bond rating n/a Net interest income 116 121 109 Issuer rating -/A1/A Prov. for loan losses 47 73 22 NII less provisions 70 49 87 Cover pool Cover pool size (€) 360,000,000 Commission & fee inc. 43 25 29 Over-collateralisation (in %) 59.3 Non-interest expense 104 88 91 Operating profit -71 17 29 Geographical split (in %) Germany 46.9 PBT -89 14 31 France 53.1 Taxes -9 4 10 Net profit (loss) -80 10 22 Property type (in %) Source: Bloomberg Residential 9.7 Office 38.6 Table 312: Key balance sheet figures, €mm Retail 26.4 Industrial 0.8 FY 2008 FY 2009 FY 2010 Other 24.4 Real estate loans 2,787 2,934 2,986 Source: Investor report Loans 7,360 6,995 7,392 Total Assets 20,608 18,668 19,049 Deposits 4,684 4,806 5,136 Short-term borrowings 6,787 4,989 5,276 Other ST borrowings 475 522 468 Long-term borrowings 8,290 7,874 7,579 Equity 290 371 449 Source: Bloomberg

140 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Muenchener Hypothekenbank Table 318: Select financial metrics (BBG: MUNHYP) FY 2008 FY 2009 FY 2010 C:I 62.5 64 Snapshot Core capital 6.5 6.4 Münchener Hypothekenbank is active in the public sector Source: Bloomberg lending business as well as in mortgage lending. As an independent mortgage bank – no other large bank holds a Cover pool overview majority share in MünchenerHyp – the bank’s owners We set out below some of the key cover pool primarily consist of cooperative banks, cooperative characteristics: central banks and individual members/shareholders, often customers of the bank itself.The bank operates along two Table 319: Public-sector covered bond characteristics main business lines: the Private customer unit conducts As at June its business through the Volksbanken, the 2011 Raiffeisenbanken and the regional offices of the bank. Ratings S/M/F Covered Bond rating -/Aaa/- Issuer rating -/A1/- The Commercial lending division is centrally managed from the Munich office and has offices in other main Cover pool German cities; internationally, it operates through a Cover pool size (€) 10,149,365,000 Overcollateralisation (€) 1,349,287,000 network of partners based in London, Madrid, New York, Paris and Vienna. Geographical split (in %) Germany 80.5 Austria 4.5 Financial performance Belgium 2.3 We set out below some of the key financial performance Switzerland 2.1 metrics: Other 10.6 Borrower type (in %) Table 316: Key profit & loss figures, €mm Central Government 10.4 Regional authorities 51.8 FY 2008 FY 2009 FY 2010 Local authorities 13.2 Net interest income 117 124 Other 24.6 Prov. for loan losses 24 18 NII less provisions 92 107 Source: Investor report

Commission & fee inc. 9 10 Table 320: Mortgage covered bond characteristics Other operating inc. 3 2 Non-interest expense 100 100 As at June Operating profit 13 17 2011 Ratings S/M/F PBT 13 17 Covered Bond rating -/Aaa/- Taxes 2 5 Issuer rating -/A1/- Net profit (loss) 11 11 Cover pool Source: Bloomberg Cover pool size (€) 17,440,875,000 Overcollateralisation (€) 1,927,940,000 Table 317: Key balance sheet figures, €mm Geographical split (in %) FY 2008 FY 2009 FY 2010 Germany 72.8 Loans 22,678 24,493 Switzerland 13.8 Total Assets 35,733 35,196 USA 9.4 Deposits 9,282 9,341 Other 4.0 Short-term borrowings 25,377 24,753 Other ST borrowings 99 99 Property type (in %) Long-term borrowings 178 187 Residential 76.2 Equity 772 789 Office 14.8 Source: Bloomberg Retail 4.7 Industrial 0.4 Other 3.9 Source: Investor report

141 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Norddeutsche Landesbank Table 323: Select financial metrics (BBG: NDB) FY 2008 FY 2009 FY 2010 NIM 0.7 0.6 0.7 Snapshot ROA 0.1 -0.1 0.1 NORD/LB is the leading universal bank in North ROE 2.6 -2.7 3.8 ROC 0.1 -0.1 0.1 Germany, where it is the Landesbank for the federal C:I 85.9 60.7 65.1 states Lower Saxony and Saxony Anhalt. It also acts as Core capital 8.1 8.7 9.2 the central bank for 62 savings banks in Lower Saxony, Source: Bloomberg Saxony-Anhalt and Mecklenburg-Western Pomerania. Cover pool overview We set out below some of the key cover pool As a commercial bank, NordLB offers financial services characteristics: to private, corporate and institutional clients. The bank is also involved in ship and aircraft financing and in Table 324: Public-sector covered bond characteristics international infrastructure, energy and real estate As at June projects. 2011 Ratings S/M/F As a central bank for the local savings bank, NordLB Covered Bond rating -/Aaa/AAA provides a variety of services to the local savings banks Issuer rating -/Aa2/A but also to individual ones beyond the three home states. Cover pool Cover pool size (€) 25,745,000,000 As part of its development business, the bank also offers Overcollateralisation (in %) 22.6 consulting services to individual state governments. Geographical split (in %) Germany 96.3 Financial performance Italy 1.2 Other 2.5 We set out below some of the key financial performance metrics: Borrower type (in %) Central Government 4.0 Table 321: Key profit & loss figures, €mm Regional authorities 24.0 Local authorities 18.7 FY 2008 FY 2009 FY 2010 Other 53.3 Net interest income 1,500 1,366 1,650 Source: Investor report Prov. for loan losses 266 1,042 657 NII less provisions 1,234 324 993 Table 325: Mortgage covered bond characteristics Commission & fee inc. 284 277 351 As at June Other operating inc. 909 936 883 2011 Non-interest expense 1,815 1,878 2,046 Ratings S/M/F Operating profit 16 108 364 Covered Bond rating -/Aaa/- Issuer rating -/Aa2/A PBT 22 -92 236 Taxes -129 49 0 Cover pool Net profit (loss) 150 -152 218 Cover pool size (€) 2,269,000,000 Source: Bloomberg Overcollateralisation (in %) 189.0

Table 322: Key balance sheet figures, €mm Geographical split (in %) Germany 87.0 FY 2008 FY 2009 FY 2010 Luxembourg 5.3 Loans 110,968 110,294 111,587 Netherlands 1.8 Total Assets 244,265 238,688 228,586 Other 5.9 Deposits 61,998 61,306 60,742 Short-term borrowings 69,862 62,152 60,962 Property type (in %) Long-term borrowings 99,664 101,257 94,221 Residential 46.3 Equity 5,631 5,842 5,890 Office 26.2 Other 27.5 Source: Bloomberg Source: Investor report

142 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Table 326: Ship covered bond characteristics As at June 2011 Ratings S/M/F Covered Bond rating n/a Issuer rating A-/Aa2/A

Cover pool Cover pool size (€) 601,000,000 Over-collateralisation (in %) 446.4

Geographical split (in %) Germany 77.4 Cyprus 22.6 Source: Investor report

143 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected] pbb (Deutsche Pfandbriefbank) Table 328: Key balance sheet figures, €mm (BBG: HYPORE) FY 2008 FY 2009 FY 2010 Loans 219,771 194,446 206,944 Snapshot Total Assets 419,654 359,676 328,119 pbb Deutsche Pfandbriefbank is part of the HRE group, Deposits 15,936 13,259 43,216 Short-term borrowings 198,881 185,090 114,476 which is 100% owned by the German government Long-term borrowings 150,759 112,895 99,449 through the SoFFin, with the expectation that it will be Equity - 1,508 3,566 6,616 returned to the private sector by the middle of the decade. Source: Bloomberg The bank is present in about a dozen national and international locations and was created in mid-2009 by Table 329: Select financial metrics the merger of Hypo Real Estate Bank AG and DEPFA FY 2008 FY 2009 FY 2010 Deutsche Pfandbriefbank AG. NIM 0.4 0.4 0.3 ROA -1.3 -0.6 -0.3 ROE -17.9 In October 2010, HRE underwent a significant balance ROC -1.6 -0.7 -0.3 sheet restructuring by transferring around €173bn C:I -117.6 124.6 298.6 (nominal value) of assets to FMW Wertmanagement; Core capital 6.2 9.4 34.7 furthermore, €124bn of SoFFin-guaranteed bonds issued Source: Bloomberg by HRE have also been transferred to the FMS Wertmanagement. Cover pool overview We set out below some of the key cover pool Going forward, HRE aims to be a specialist bank for real characteristics: estate and public finance; it will also concentrate its activities in regional terms, focusing on Germany and Table 330: Public-sector covered bond characteristics Europe. Depending on the particular area of activity, it As at June will also be active in other international markets. The 2011 focus will always be on the eligibility of business for Ratings S/M/F Covered Bond rating AA+/Aaa/AAA Pfandbrief funding. Issuer rating BBB/A3/A-

Financial performance Cover pool Cover pool size (€) 41,993,800,000 We set out below some of the key financial performance Over-collateralisation (€) 4,071,200,000 metrics: Geographical split (in %) Germany 44.3 Table 327: Key profit & loss figures, €mm Austria 15.4 FY 2008 FY 2009 FY 2010 Italy 10.1 Net interest income 1,633 1,396 840 France 8.5 Prov. for loan losses 1,656 2,091 445 Spain 5.7 NII less provisions -23 -695 395 Portugal 3.5 Other 12.5 Commission & fee inc. 200 137 95 Other operating inc. 120 14 100 Borrower type (in %) Non-interest expense 811 1,397 1,056 Central Government 32.4 Operating profit -2,846 -2,213 -872 Regional authorities 40.7 Local authorities 4.0 PBT -5,375 -2,221 -859 Other 23.0 Taxes 86 15 51 Source: Investor report Net profit (loss) -5,461 -2,236 -910 Source: Bloomberg

144 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Table 331: Mortgage covered bond characteristics As at June 2011 Ratings S/M/F Covered Bond rating AA+/Aa1/AA+ Issuer rating BBB/A3/A-

Cover pool Cover pool size (€) 20,961,600,000 Over-collateralisation (€) 6,163,200,000

Property type (in %) Residential 24.0 Office 38.4 Retail 24.1 Industrial 2.4 Mixed commercial 9.0 Other 2.1

Geographical split (in %) Germany 57.3 UK 10.1 France 6.9 US 5.3 Other 20.4 Source: Investor report

145 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

SEB AG Cover pool overview (BBG: SEBAG) We set out below some of the key cover pool Snapshot characteristics: SEB AG became the German subsidiary of the Swedish Table 335: Public-sector covered bond characteristics bank SEB in 2000. The core businesses are banking and financial and insurance services for companies, As at June 2011 institutions and real estate clients, as well as for retail Ratings S/M/F customers. Covered Bond rating -/Aa1/- Issuer rating A-/Baa1/-

In 2005 it was the first German commercial bank to be Cover pool granted license to issue Pfandbriefe by BaFin. In 2010 Cover pool size (€) 5,903,200,000 Santander, the Spanish banking group, acquired the retail Over-collateralisation (€) 640,500,000 network from SEB, which counted 174 branches and Geographical split (in %) catered to around 1mm customers. The existing covered Germany 91.4 bonds however remained an obligation of SEB AG, Austria 4.4 which will retain its merchant banking and wealth Other 4.2 management operations. Borrower type (in %) Central Government 0.7 Financial performance Regional authorities 40.7 Local authorities 1.7 We set out below some of the key financial performance Other 57.0 metrics: Source: Investor report

Table 332: Key profit & loss figures, €mm Table 336: Mortgage covered bond characteristics FY 2008 FY 2009 FY 2010 As at June Net interest income 388 360 252 2011 NII less provisions 388 360 237 Ratings S/M/F Covered Bond rating -/Aa1/- Commission & fee inc. 311 257 133 Issuer rating A-/Baa1/- Other operating inc. 26 9 8 Non-interest expense 502 504 252 Cover pool Operating profit 211 89 71 Cover pool size (€) 4,550,000,000 Over-collateralisation (€) 1,039,900,000 PBT 171 -16 62 Taxes 64 -1 23 Geographical split (in %) Net profit (loss) 108 -89 -80 Germany 85.9 Source: Annual report 2010 Sweden 6.2 Other 7.9

Table 333: Key balance sheet figures, €mm Property type (in %) FY 2008 FY 2009 FY 2010 Residential 43.8 Office 25.7 Consumer loans 29,306 26,393 17,514 Retail 25.7 Loans 29,306 26,393 17,514 Other 4.8 Total Assets 60,137 52,743 49,090 Deposits 26,236 22,057 16,707 Source: Investor report Short-term borrowings 16,153 16,837 16,396 Other ST borrowings 682 929 617 Long-term borrowings 14,623 10,536 7,281 Equity 2,444 2,385 2,199 Source: Annual report 2010

Table 334: Select financial metrics FY 2008 FY 2009 FY 2010 C:I 66.0 82.6 107.0 Core capital 8.6 Source: Annual report 2010

146 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Unicredit Bank AG (HypoVereinsbank) Cover pool overview We set out below some of the key cover pool (BBG: HVB) characteristics: Snapshot HypoVereinsbank (HVB) is a member of UniCredit Table 340: Public-sector covered bond characteristics Group, which occupies the leading position in the As at June economic area comprising Italy, Germany, Austria, and 2011 Ratings S/M/F central and eastern Europe, with over 10,000 branches in Covered Bond rating AAA/Aaa/AAA 22 countries. Issuer rating A/A1/A+

HVB operates predominantly in Germany, where it offers Cover pool Cover pool size (€) 9,197,000,000 retail and corporate banking services, as well as real Over-collateralisation (€) 1,673,600,000 estate financing, private banking and corporate and investment banking services. Geographical split (in %) Germany 97.5 Austria 2.2 Financial performance Other 0.4

We set out below some of the key financial performance Borrower type (in %) metrics: Central Government 2.4 Regional authorities 31.3 Table 337: Key profit & loss figures, €mm Local authorities 48.0 Other 18.3 FY 2008 FY 2009 FY 2010 Source: Investor report Net interest income 4,261 4,521 4,248 Prov. for loan losses 760 1,601 632 NII less provisions 3,501 2,920 3,616 Table 341: Mortgage covered bond characteristics As at June Commission & fee inc. 2,535 2,160 1,312 2011 Other operating inc. 147 399 239 Ratings S/M/F Non-interest expense 4,577 4,693 3,433 Covered Bond rating -/Aa1/AAA Operating profit -561 1,580 2,361 Issuer rating A/A1/A+

PBT -595 1,266 1,882 Cover pool Taxes 54 382 154 Cover pool size (€) 31,489,700,000 Net profit (loss) -671 819 1,703 Over-collateralisation (€) 5,519,000,000 Source: Bloomberg Property type (in %) Table 338: Key balance sheet figures, €mm Residential 71.0 Office 12.6 FY 2008 FY 2009 FY 2010 Retail 10.1 Real estate loans 62,723 56,012 50,062 Industrial 1.9 Loans 175,518 145,919 139,351 Other 4.4 Total Assets 458,602 363,420 371,909 Deposits 114,962 96,490 108,494 Geographical split (in %) Short-term borrowings 83,867 50,704 51,887 Germany 100.0 Other ST borrowings 171,716 130,127 136,683 Source: Investor report Long-term borrowings 63,639 61,286 100,563 Equity 23,024 23,638 23,670 Source: Bloomberg

Table 339: Select financial metrics FY 2008 FY 2009 FY 2010 ROA -0.2 0.2 0.5 ROE -3.0 3.6 7.4 ROC -0.4 0.6 1.3 C:I 94.6 53.9 53.4 Core capital 13.2 17.8 16.6 Source: Bloomberg

147 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Westdeutsche Immobilienbank Table 344: Select financial metrics (BBG: WESTIB) FY 2008 FY 2009 FY 2010 ROE 10.9 9.0 10.2 Snapshot C:I 35.1 37.7 34.7 Westdeutsche Immobilien Bank AG (‘WestImmo’) is a Core capital 8.4 8.2 8.0 100% subsidiary of WestLB AG and the centre of Source: Annual report 2010 competence for all domestic, foreign real estate property financings and activities for the group. It is a domestic Cover pool overview leader in real estate financing and also maintains a strong We set out below some of the key cover pool presence in other European markets as well as in North characteristics: America and in Asia. Table 345: Public-sector covered bond characteristics Customers include institutional investors, global As at June developers, property companies, real estate corporates 2011 and medium-sized enterprises. The bank finances a wide Ratings S/M/F Covered Bond rating AAA/- /- range of properties, including office, commercial and Issuer rating BBB+/-/- residential properties, shopping centres, hotels and industrial or public buildings. Cover pool Cover pool size (€) 1,899,600,000 Over-collateralisation (€) 564,000,000 In addition to financing property, at both individual project or at a portfolio level, the bank also offers Geographical split (in %) Germany 97.4 customers a range of additional products such as real estate joint ventures, syndications and interest and Borrower type (in %) exchange derivatives. Central Government 2.6 Regional authorities 19.7 Local authorities 53.3 Financial performance Other 24.3 We set out below some of the key financial performance Source: Investor report metrics: Table 346: Mortgage covered bond characteristics Table 342: Key profit & loss figures, €mm As at June 2011 FY 2008 FY 2009 FY 2010 Ratings S/M/F Net interest income 179 218 239 Covered Bond rating AAA/- /- Prov. for loan losses 27 66 68 Issuer rating BBB+/-/- NII less provisions 152 132 171 Cover pool Commission & fee inc. 31 40 33 Cover pool size (€) 10,365,900,000 Other operating inc. 2 4 8 Over-collateralisation (€) 1,744,600,000 Non-interest expense 86 95 90 Operating profit 122 77 99 Geographical split (in %) Germany 53.0 PBT 121 85 99 USA 10.8 Taxes 13 3 4 UK 10.6 Net profit (loss) 97 83 95 Other 25.6 Source: Annual report 2010 Property type (in %) Table 343: Key balance sheet figures, €mm Residential 32.3 Office 37.3 FY 2008 FY 2009 FY 2010 Retail 15.2 Loans 14,716 16,732 20,080 Other 15.2 Total Assets 26,171 26,889 25,888 Source: Investor report Deposits 5,756 6,864 6,954 Short-term borrowings 6,826 6,360 5,320 Long-term borrowings 8,870 8,190 8,196 Equity 861 906 855 Source: Annual report 2010

148 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

WestLB Table 348: Key balance sheet figures, €mm (BBG: WESTLB) FY 2008 FY 2009 FY 2010 Real estate loans 7,433 10,808 Snapshot Commercial loans 108,691 93,078 75,713 WestLB AG is a commercial bank with roots in North Consumer loans 3,542 3,819 6,433 Total Assets 288,122 242,311 191,523 Rhine-Westphalia, Germany´s largest federal state. It is Deposits 29,722 27,643 23,756 one of Germany´s leading financial services providers Short-term borrowings 35,619 36,213 17,873 and the central institution for the savings banks in North Other ST borrowings 73,604 53,697 51,331 Rhine-Westphalia and Brandenburg. Long-term borrowings 103,898 84,644 64,673 Equity 3,821 3,733 4,107 Source: Bloomberg WestLB works in close partnership with the savings banks, offering a wide range of products and services but Table 349: Select financial metrics focusing on lending, structured finance, capital market, FY 2008 FY 2009 FY 2010 asset management, transaction services and real estate NIM 0.5 0.9 0.8 finance. ROA 0.0 -0.2 -0.1 ROE 0.4 -14.1 -6.1 ROC 0.0 -0.4 -0.2 WestLB is owned by the two savings banks associations C:I 67.5 63.3 82.9 of North Rhine-Westphalia (over 25% stake each), the Core capital 6.4 8.2 11.4 State of North Rhine-Westphalia (18%) and Source: Bloomberg NRW.BANK (31%), which in turn is owned by the State of NRW (99%) and two regional associations. In 2008, Cover pool overview WestLB’s owners (NRW Bank, local savings bank We set out below some of the key cover pool association and the States) approved a risk shield for the characteristics: Bank. The European authorities have approved this state aid, on condition that the institution must reduce its Table 350: Public-sector covered bond characteristics balance sheet and its RWA by 50% respectively. As at June 2011 Financial performance Ratings S/M/F Covered Bond rating -/Aaa/- We set out below some of the key financial performance Issuer rating -/A3/A- metrics: Cover pool Table 347: Key profit & loss figures, €mm Cover pool size (€) 10,078,789,000 Over-collateralisation (€) 856,775,000 FY 2008 FY 2009 FY 2010 Net interest income 1,260 1,919 1,464 Geographical split (in %) Prov. for loan losses 479 796 242 Germany 80.3 NII less provisions 781 1,123 1,222 Switzerland 5.4 Austria 3.9 Commission & fee inc. 530 512 514 Spain 3.6 Other operating inc. 402 184 775 Other 6.8 Non-interest expense 1,530 1,663 1,833 Operating profit 167 24 105 Borrower type (in %) Central Government 4.4 PBT 26 -503 -133 Regional authorities 44.1 Taxes 8 28 107 Local authorities 39.6 Net profit (loss) 18 -531 -240 Other 11.8 Source: Bloomberg Ratings split (in %) AAA 39.8 AA 55.5 A 4.3 Below BBB and NR 0.4 Source: Investor report

149 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

WL Bank Cover pool overview (BBG: WLBANK) We set out below some of the key cover pool Snapshot characteristics: WL Bank AG is a Pfandbriefbank in the Volksbanken Table 354: Public-sector covered bond characteristics Raiffeisenbanken cooperative financial services group. WL BANK is the largest subsidiary of WGZ Bank, the As at June 2011 cooperative central bank of the Volksbanken and Ratings S/M/F Raiffeisenbanken (the commercial and agricultural credit Covered Bond rating AAA/-/- cooperatives) in the Rhineland and in Westphalia. Issuer rating A+/-/A+ Cover pool As a Pfandbrief bank, WL Bank focuses on public-sector Cover pool size (€) 23,751,800,000 and real estate lending, both for commercial and Over-collateralisation (€) 2,293,700,000 residential use. Borrower type (in %) Central Government 10.5 Financial performance Regional authorities 43.7 Local authorities 30.9 We set out below some of the key financial performance Other 14.8 metrics: Geographical split (in %) Table 351: Key profit & loss figures, €mm Germany 82.8 Spain 4.2 FY 2008 FY 2009 FY 2010 Austria 4.0 Net interest income 112 106 124 Other 9.0 Prov. for loan losses 34 0 0 Source: Investor report NII less provisions 79 106 124 Table 355: Mortgage covered bond characteristics Commission & fee inc. 1 1 1 Other operating inc. 3 3 4 As at June Non-interest expense 52 59 104 2011 Operating profit 30 51 25 Ratings S/M/F Covered Bond rating AAA/-/- PBT 30 51 25 Issuer rating A+/-/A+ Taxes 10 25 13 Net profit (loss) 20 26 11 Cover pool Source: Bloomberg Cover pool size (€) 10,267,800,000 Over-collateralisation (€) 1,266,000,000 Table 352: Key balance sheet figures, €mm Property type (in %) FY 2008 FY 2009 FY 2010 Residential 85.6 Consumer loans 11,787 13,678 15,082 Office 5.6 Loans 20,656 23,785 26,303 Retail 6.0 Total Assets 40,576 43,380 43,931 Other 2.8 Deposits 12,888 14,344 14,553 Source: Investor report Short-term borrowings 6,000 8,615 9,922 Other ST borrowings 125 166 142 Long-term borrowings 21,214 19,873 18,917 Equity 335 356 361 Source: Bloomberg

Table 353: Select financial metrics FY 2008 FY 2009 FY 2010 NIM 0.3 0.3 0.3 ROA 0.0 0.1 0.0 ROE 6.0 7.5 3.1 ROC 0.1 0.1 0.0 C:I 36.5 44.1 76.1 Source: Bloomberg

150 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected] s d n o B

d e r e v o C

k e e r G

151 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Greek Covered Bonds

Legislative snapshot We set out in Table 356 a snapshot of key covered bond attributes in Greece.

Table 356: Greek Covered Bond legislative overview Attribute Commentary Framework Legislative Framework Article 91 Law 3601/2007 and Act 2598/2.11.2007 of the Bank of Greece Types of covered bonds Only one benchmark distributed bond (ETEGA 3.875 Jul 2016) Structure of Issuer Direct issuance? Bonds can be issued either directly off the balance sheet of the lender (‘direct issuance’) or via an SPE (‘indirect issuance’ can be undertaken in two forms, with either the credit institution guaranteeing bonds issued by the SPE, or vice versa) Comments (if any) ETEGA bonds are issued directly from NBG's balance sheet Bankruptcy remoteness Covered bond holders protected by preferential claim by law, with no automatic acceleration on issuer insolvency. Post issuer insolvency, breach of the Asset Percentage test (liabilities < 95% assets) results in acceleration of the programme Dual claim Yes. Should the cover pool be insufficient to satisfy CB bondholders, a claim pari passu to other unsecured bondholders within the insolvency estate exists. Bond format Fixed rate, soft bullet, with the ability to extend the maturity by up to 12 months at the discretion of the issuer Supervision Bank of Greece Cover pool Eligible assets Mortgage Eligible mortgage collateral includes domestic residential mortgages, domestic commercial mortgages and ship loans LTV caps A combination of "Soft" and "Hard". Maximum LTVs for domestic residential mortgages are 80%, for domestic commercial mortgages of 60%; and ship loans of 60% LTV. Whereas residential and commercial loans can be included in the cover pool above the LTV thresholds (with subsequent scaling), ship loans can only be included if they are under the LTV threshold. Public Sector Pools can also include exposures to public sector entities or credit institutions from the EEA, CH, US, Canada, Australia, New Zealand, OECD as well as multi-national development banks Non-performing collateral NPLs greater than 90d must be removed from the cover pool Substitution Assets Substitute collateral can also be included in the pool to meet over- collateralisation requirements Hedging Natural matching preferred but derivatives allowed to hedge risk Valuation Individual market values. The value of mortgaged property must also be checked by an independent valuer on a periodic basis (3 years for residential, annually for commercial) Other comments (if any) Requirements ALM matching Asset coverage Prior to insolvency, the issuer must comply with the nominal value test which is set at Assets > 95% of Liabilities, or an asset percentage determined by the rating agencies Interest coverage Yes. Interest income must exceed interest expense over a 12 month period Other (if any) NPV test including a parallel 200bp yield curve shift. Consequence of breach Programme freeze (no issuance nor asset removal). Other regulatory actions by the CBI Monitoring An independent Cover Pool Monitor supervises compliance with the legislative and regulatory provisions Other Compliance with EU legislation UCITS and CRD compliant Source: National legislation, J.P. Morgan Covered Bond Research

152 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Greek macro backdrop

Figure 79: CB Issuance, €mm Figure 80: CB outstanding, €mm 20,000 25,000

Mortgage 20,000 Mortgage 15,000 15,000 10,000 10,000

5,000 5,000

0 0 2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 2007 2008 2009 2010

Source: ECBC, latest data available Source: ECBC, latest data available

Figure 81: Greek real GDP growth, y-on-y, % Figure 82: Greek unemployment level, %

8 Real GDP growth 18 Unemployment 6 16 4 14 2 12 0 10 -2 8 -4 6 -6 4 -8 2 -10 0 0 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 1 1 ------r r r r r r r r r r r r r r r r r r r r r r r r a a a a a a a a a a a a a a a a a a a a a a a a M M M M M M M M M M M M M M M M M M M M M M M M

Source: Bloomberg Source: Bloomberg

Figure 83: Greek CPI and base rate, % Figure 84: Greek consumer confidence, balance of survey

6 Inflation Base rate 0 5 -10 4 -20 -30 3 -40 2 -50 1 -60 -70 Cons. Confidence 0

0 1 2 3 4 5 6 7 8 9 0 1 -80 0 0 0 0 0 0 0 0 0 0 1 1 ------0 1 2 3 4 5 6 7 8 9 0 1 r r r r r r r r r r r r 0 0 0 0 0 0 0 0 0 0 1 1 a a a a a a a a a a a a ------r r r r r r r r r r r r M M M M M M M M M M M M a a a a a a a a a a a a M M M M M M M M M M M M

Source: Bloomberg Source: Bloomberg

Figure 85: Greek house price growth, % Figure 86: Greek newly built properties, #

25% House price growth (Urban areas) House price growth (Athens) 6,000 Newly built properties 20% 5,000 15% 4,000 10% 3,000 5% 0% 2,000 -5% 1,000 -10% 0 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 0 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 1 ------r r r r r r r r r r r n n n n n n n n n n n a a a a a a a a a a a u u u u u u u u u u u M M M M M M M M M M M J J J J J J J J J J J

Source: Bank of Greece Source: Bloomberg

153 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

National Bank of Greece Table 359: Select financial metrics (BBG: ETEGA) FY 2007 FY 2008 FY 2009 FY 2010 NIM 4.6 4.3 4.1 3.9 Snapshot ROA 1.8 1.5 0.8 0.3 NBG Group is the oldest commercial bank and largest ROE 18.9 18.7 10.2 3.7 ROC 8.0 6.4 3.1 1.1 financial services group in Greece, with a 25% market C:I 51.4 49.4 49.8 55.0 share in retail banking and 26% share in deposits from its Core capital 9.2 10.0 11.3 13.1 network of 570 branches. As well as its core domestic Source: Bloomberg market, the institution also focuses on providing banking services in southeastern Europe and the eastern Cover pool overview Mediterranean. We set out below some of the key cover pool characteristics: The Group provides a wide range of financial products to private and corporate clients, including investment Table 360: Covered bond characteristics banking, brokerage, insurance, asset management and As at 30 June leasing & factoring. It is also present in 12 other 2011 countries through 9 banks and a network of 65 other Covered Bond rating S/M/F -/Ba3/BB- companies. NBG has a presence in the following Issuer rating S/M/F CCC/B3/B- Cover pool size (€) 3,279,608,304 countries through acquisitions: Bulgaria, FYROM, Number of loans 45,504 Romania, Turkey and Serbia. Avg loan (€) 72,073

WA original LTV (in %) 65.0 Financial performance WA indexed LTV (in %) 59.3 We set out below some of the key financial performance Remaining tenor (yrs) 20.6 metrics: WA seasoning (yrs) 4.8 Fixed (in %) 33.9 Table 357: Key profit & loss figures, €mm Second homes (in %) 4.4 Self employed (in %) 32.7 FY 2007 FY 2008 FY 2009 FY 2010 Net interest income 3,289 3,591 3,940 4,148 Source: Investor Report Provisions for loan losses 330 520 1,295 1,450 Table 361: Collateral pool LTV breakdown NII less provisions 2,959 3,071 2,645 2,698 Current LTV ranges As at 30 June Comm.& fee income 859 841 742 710 2011 Other operating income 256 147 22 20 0-<=40% 14.9 Non-interest expense 2,430 2,491 2,585 2,653 >40%-<=50% 10.6 Operating profit (loss) 1,886 1,966 1,252 636 >50%-<=60% 10.9 >60%-<=70% 13.6 PBT 1,903 1,937 1,252 638 >70%-<=80% 24.7 Taxes 259 352 289 197 >80% 25.4 Net profit (loss) 1,625 1,546 923 406 Source: Investor Report Source: Bloomberg Table 362: Collateral pool indexed LTV breakdown Table 358: Key balance sheet figures, €mm Current LTV ranges As at 30 June FY 2007 FY 2008 FY 2009 FY 2010 2011 Loans 54,693 73,076 74,753 77,262 0-<=40% 23.6 Total Assets 90,386 101,839 113,394 120,745 >40%-<=50% 11.8 Deposits 60,530 67,657 71,194 68,010 >50%-<=60% 12.5 Short-term borrowings 10,374 14,840 21,643 29,899 >60%-<=70% 14.1 Other ST borrowings 6,403 6,475 7,187 7,122 >70%-<=80% 15.0 Long-term borrowings 4,013 3,737 3,085 4,432 >80% 22.9 Equity 8,542 8,267 9,828 10,905 Source: Investor Report Source: Bloomberg

154 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected] s d n o B

d e r e v o C

n a i r a g n u H

155 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Hungarian Covered Bonds

Legislative snapshot We set out in Table 363 a snapshot of key covered bond attributes in Hungary.

Table 363: Hungarian Covered Bond legislative overview Attribute Commentary Framework Legislative Framework Act XXX 1997 on mortgage banks and mortgage bonds (Mortgage Bank Act) outlines the special framework applicable to covered bonds issuers. Act CXII 1996 also contains rules on the establishment, operation, supervision and liquidation of mortgage banks. Decree 40/2005 contains rules regarding the calculation of the value of the cover assets and the methodology for stress tests to be applied. Types of covered bonds Only one, mortgage covered bonds. Structure of Issuer Direct issuance? Yes. Comments (if any) Only mortgage banks are allowed to issue covered bonds, with the collateral being kept on their balance sheet. Bankruptcy remoteness Assets backing the bonds are recorded on a register. Dual claim Yes Bond format Fixed rate, bullet. Supervision Hungarian Financial Supervisory Authority. Cover pool Eligible assets Mortgage Mortgages secured by properties located in the EEA. LTV caps Max LTV for residential/commercial/agricultural mortgages max is 70/60/60% respectively. Currently pools only contain residential mortgages. Public Sector n/a Non-performing collateral Issuer has to repurchase loans in arrears by more than 90 days. Substitution Assets Substitute collateral must not exceed 20% of the cover assets and must consist of liquid assets as specified in the Mortgage Bank Act. Hedging Derivatives are allowed to hedge interest and exchange rate risk. Valuation Individual market values. Decree 25/1997 and Decree 54/1997 request the application of the principle of carefulness in valuing the property. Other comments (if any) Requirements ALM matching Asset coverage Assets must be greater than liabilities at all times. Interest coverage Interest received must exceed that due on the bonds at any time. Other (if any) Consequence of breach Alternative administration. Monitoring Trustee/cover pool monitor. Other Compliance with EU legislation UCITS and CRD compliant. Source: National legislation, J.P. Morgan Covered Bond Research

156 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Hungarian covered bond & macro backdrop

Figure 87: Mortgage CB Issuance, €mm Figure 88: Mortgage CB outstanding, €mm 3,500 8,000 3,000 7,000 Mortgage Mortgage 2,500 6,000 5,000 2,000 4,000 1,500 3,000 1,000 2,000 500 1,000 0 0 2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 2007 2008 2009 2010

Source: ECBC. Latest data available displayed Source: ECBC. Latest data available displayed

Figure 89: Hungary real GDP growth, y-on-y, % Figure 90: Hungary unemployment level, %

8 Real GDP growth 14 Unemployment 6 12 4 2 10 0 8 -2 6 -4 4 -6 -8 2 -10 0 0 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 1 1 ------r r r r r r r r r r r r r r r r r r r r r r r r a a a a a a a a a a a a a a a a a a a a a a a a M M M M M M M M M M M M M M M M M M M M M M M M

Source: Bloomberg Source: Bloomberg

Figure 91: Hungary CPI and base rate, % Figure 92: Hungary consumer confidence index, #

14 Inflation Base rate 0 12 -10 Cons. Confidence 10 -20 8 -30 6 -40 4 -50 2 -60 -70 0

Source: Bloomberg Source: Bloomberg

Figure 93: Hungary house price growth, % Figure 94: Hungary building permits, sum of previous 12mths, #

30% House price growth 30,000 Building permits (of previous 12mths) 25% 25,000 20% 15% 20,000 10% 15,000 5% 0% 10,000 -5% 5,000 -10% -15% 0 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 1 1 ------r r r r r r r r r r r r r r r r r r r r r r r a a a a a a a a a a a a a a a a a a a a a a a M M M M M M M M M M M M M M M M M M M M M M M

Source: FHB Bank Source: Hungarian Central Statistical Office

157 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

FHB Bank Table 366: Select financial metrics (BBG: FHBHU) FY 2008 FY 2009 FY 2010 NIM 2.7 2.8 3.4 Snapshot ROA 1.0 0.9 1.3 FHB Land Credit and Mortgage Bank was established in ROE 18.5 11.2 16.5 ROC 1.1 0.9 1.5 1997 by four banks and the Government with the aim of C:I 55.8 41.1 60.2 providing long-term financing, creating opportunities for Source: Bloomberg long-term investment and promoting the development of the real estate market. Cover pool overview We set out below some of the key cover pool The government substantially reduced its stake in 2003 characteristics: and in 2004 the bank’s shares started trading on the Budapest Stock Exchange. The group has since been Table 367: Covered bond characteristics adding more specialised financial products, such as life annuity, consulting, real estate agency and valuation As at March 2011 Ratings S/M/F services to its range of traditional banking services. Covered Bond rating -/Baa3/- Issuer rating -/Ba1/- In September 2010, FHB bought Allianz Bank from Cover pool Allianz Hungary, increasing the range of banking and Cover pool size (HUF) 491,138,915,107 insurance products available to FHB's customer base. In Outstanding liabilities (HUF) 384,003,167,000 2011 Allianz Bank eventually merged into FHB Bank. Current OC (in %) 27.9 Committed OC (in %) 13.00

Financial performance Residential mortgages (in %) 98.0 We set out below some of the key financial performance Commercial mortgages (in %) 2.0 metrics: Residential pool Number of loans 125,807 Table 364: Key profit & loss figures, HUFmm Average loan (HUF) 3,903,908 WA seasoning (mths) 60 FY 2008 FY 2009 FY 2010 WA remaining term (mths) 168 Net interest income 17,152 19,532 27,253 WA current LTV (in %) 49.9 Provisions for loan Floating rate loans (in %) 57.6 losses 805 3,951 5,127 Highest regional exposure (in %) Budapest - 25.3 NII less provisions 16,347 15,580 22,126 Loans in arrears >2mths (in %) 1.9

Comm.& fee income 2,467 1,414 2,168 LTV breakdown (in %) Other operating <=40 31.0 income 1,975 798 10,272 40-50 14.0 Non-interest expense 14,157 10,830 21,809 50-60 16.0 Operating profit 10,057 6,963 8,918 60-70 37.0 >70 2.0 PBT 10,057 8,251 8,918 Source: Moody’s Taxes 3,375 1,681 -2,279 Net profit (loss) 6,683 6,544 11,198 Source: Bloomberg

Table 365: Key balance sheet figures, HUFmm FY 2008 FY 2009 FY 2010 Loans 613,747 636,750 647,354 Total Assets 689,512 824,978 873,520 Deposits Short-term borrowings 14,233 35,608 22,650 Other short-term borrowings 32,875 n/a 59,691 Long-term borrowings 602,217 641,534 609,929 Equity 40,187 76,501 59,062 Source: Bloomberg

158 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

OTP Bank Table 369: Key balance sheet figures, HUFmm (BBG: OTPHB) FY 2008 FY 2009 FY 2010 Commercial Loans 2,535,027 2,466,413 2,598,277 Snapshot Consumer Loans 4,256,443 4,152,251 4,486,875 The OTP Group comprises several subsidiaries offering a Other Loans 257,911 288,430 417,179 Loans 6,778,701 6,412,716 6,741,059 wide range of financial products. OTP Bank offers more Total Assets 9,367,724 9,755,132 9,780,946 traditional banking services, while specialised services Deposits 5,258,167 5,688,887 5,821,489 such as car leasing, investment funds and insurance Short-term borrowings 1,048,526 1,199,725 1,098,507 (using strategic collaboration with French insurance Other short-term borrowings 187,532 260,011 385,744 company, Groupama, which owns an 8% stake in the Long-term borrowings 1,811,688 1,412,674 1,166,277 group) are offered by other group's subsidiaries. Equity 1,048,971 1,191,606 1,308,929 Source: Bloomberg OTPBank was established in 1949 as a state-owned institution. It first became a public company in 1990 but Table 370: Select financial metrics remained government-owned until 1995, when its FY 2008 FY 2009 FY 2010 privatisation began. NIM 5.5 6.7 6.6 ROA 2.7 1.6 1.2 ROE 24.9 13.6 9.5 After becoming private, OTP started expanding its ROC 6.9 3.9 3.2 operations by entering neighbouring markets in the C:I 35.6 27.7 30.5 Central and Eastern Europe region through a number of Core Capital 11.3 13.8 14.0 acquisitions and has become a key player in the region. Source: Bloomberg Outside of its domestic market, it has operations in Bulgaria, Croatia, Romania, Serbia, Slovakia, Ukraine, Cover pool overview Montenegro and Russia. We set out below some of the key cover pool characteristics: Financial performance Table 371: Covered bond characteristics We set out below some of the key financial performance metrics: As at March 2011 Ratings S/M/F Covered Bond rating BBB-/Baa3/- Table 368: Key profit & loss figures, HUFmm Issuer rating -/Baa1/- FY 2008 FY 2009 FY 2010 Cover pool Net interest income 439,743 590,674 617,376 Cover pool size (HUF) 1,426,375,124,748 Provisions for loan Outstanding liabilities (HUF) 1,246,124,684,536 losses 111,449 249,278 273,024 Current OC (in %) 14.5 NII less provisions 328,294 341,396 344,352 Number of loans 302,079 Comm.& fee income 181,765 170,335 177,252 Average loan (HUF) 4,716,002 Non-interest expense 346,196 238,080 279,105 WA seasoning (mths) 55 Operating profit 429,541 273,732 280,600 WA remaining term (mths) 183 WA current LTV (in %) 62.7 PBT 274,367 170,482 140,183 Floating rate loans (in %) 67.0 Taxes 33,299 20,276 22,057 Highest regional exposure (in %) Budapest - 24.8 Net profit (loss) 240,472 151,045 117,930 Loans in arrears >2mths (in %) 3.6 Source: Bloomberg LTV breakdown (in %) <=40 22.1 40-50 15.1 50-60 13.8 60-70 12.2 70-80 11.0 >80 25.8 Source: Moody’s

159 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

160 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected] s d n o B

d e r e v o C

h s i r I

161 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Irish Covered Bonds

Legislative snapshot We set out in Table 372 a snapshot of key covered bond attributes in Ireland.

Table 372: Irish Covered Bond legislative overview Attribute Commentary Framework Legislative Framework Asset Covered Securities (ACS) Act 2001 (as amended), along with regulations from the Central Bank of Ireland Types of covered bonds Three. Mortgage ACS; Commercial Mortgage ACS and Public Sector ACS Structure of Issuer Direct issuance? No Comments (if any) ACS are issued by Designated Credit Institutions (DCIs), special purpose subsidiaries with restricted business activities of the main Irish lenders. They are authorised by the Central Bank of Ireland. Typically called a Mortgage or ACS Bank Bankruptcy remoteness The claim and cashflows of an ACS are unaffected by the actual or potential insolvency of the DCI or its parent. In either case, the securities and hedges continue, and do not accelerate. First defense is for the NTMA to find a new sponsor following issuer insolvency Dual claim Yes. Should the cover pool be insufficient to satisfy ACS bondholders, a claim pari passu to other unsecured bondholders within the ACS Bank exists. Should the resources of the ACS Bank be insufficient, we believe the unlimited liability legal status of the ACS subsidiary will allow the upstreaming of claims to the ultimate parent bank Bond format Typically, fixed rate, soft bullet, with the ability to extend maturities by up to 12 months at the discretion of the issuer Supervision IFSRA, and CBI Cover pool Eligible assets Mortgage Mortgage assets are restricted to EEA jurisdictions, plus Australia, New Zealand, Switzerland, Canada, Japan and the US. Securitised mortgage assets are also eligible for inclusion if rated at least AA-, and constitute a maximum of 20% of the pool. Commercial mortgages can constitute a maximum of 10% of the pool LTV caps "Soft" (loans above the maximum can be included in the cover pool, with 'credit' given for only the eligible portion of the asset). The maximum LTV for residential mortgages is 75%, and for commercial mortgages 60%. The cover pool also benefits from the portion of the loan which is above the maximum threshold (i.e. loans do not need to be removed if they breach the maximum threshold) Public Sector Public sector assets are limited to the same jurisdictions as for mortgage assets above, along with debt from highly-rated multilateral development banks and international organisations Non-performing collateral NPLs greater than 90d must be removed from the cover pool Substitution Assets Substitution assets can also be kept in the cover pool (capped at 15%). Substitution assets include deposits with eligible financial institutions and tier 1 assets (as defined by the ECB for repo purposes) Hedging Used to minimise interest rate, currency, credit or other risks. Entered on the asset register and rank pari passu with ACS holders. Do not accelerate on issuer insolvency Valuation Prudent market valuation taken on entry into the cover pool for residential assets, and then annually thereafter. Where house prices are declining according to the Permanent/TSB index, the indexed valuation should be used. If prices increase, 85% of the upward revision should be used. For commercial exposures, the latest market value should be reviewed by an independent valuer, with mandatory reviews for large (>7%) declines in approved indices Other comments (if any) DCIs can also keep assets on their balance sheets which are not registered in the cover pool. DCIs can issue more than one type of ACS (mortgage-backed, public sector backed etc). Within the DCI, segregation of assets is based on pool-type and must be recorded in separate registers. Requirements ALM matching Asset coverage Mandatory 103% over-collateralisation for residential and public sector mortgage assets. For commercial assets, minimum over-collateralisation of 10% is required. Public commitment by both major institutions to maintain at 105% for mortgage assets now binding Interest coverage Yes. Interest income must exceed interest expense over a 12 month period. NPV of changes on the balance sheet of an ACS issuer from a 100bp shift/twist in the yield curve must not exceed 10% of the Issuer's own funds Other (if any) Duration of the cover assets must not be less than that of issued securities. For public-sector backed bonds, the duration of the assets can be no greater than 3 years longer than the outstanding bonds Consequence of breach Programme freeze (no issuance nor asset removal). Other regulatory actions by the CBI Monitoring An independent Cover Asset Monitor supervises compliance with the ACS Act’s provisions Other Compliance with EU legislation UCITS and CRD compliant Source: National legislation, J.P. Morgan Covered Bond Research

162 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Irish covered bond & macro backdrop

Figure 95: Irish CB issuance, €mm Figure 96: Irish CB outstanding, €mm 25,000 100,000

Mortgage Public Sector Mortgage Public Sector 20,000 80,000

15,000 60,000

10,000 40,000

5,000 20,000

0 0 2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 2007 2008 2009 2010 Source: ECBC. Latest data available displayed Source: ECBC. Latest data available displayed

Figure 97: Irish real GDP growth, y-on-y, % Figure 98: Irish unemployment level, %

15 Real GDP growth 16 14 Unemployment 10 12 10 5 8 0 6 4 -5 2 -10 0 0 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 0 1 1 ------0 0 0 0 0 0 0 0 0 0 1 1 r r r r r r r r r r r r ------r r r r r r r r r r r r a a a a a a a a a a a a a a a a a a a a a a a a M M M M M M M M M M M M M M M M M M M M M M M M

Source: Bloomberg Source: Source: Bloomberg

Figure 99: Irish CPI and base rate, % Figure 100: Irish consumer confidence, balance of survey

8 Inflation Base rate 140 Cons. Confidence 6 4 120 2 100 0 80 -2 60 -4 40 -6 20 -8

Source: Bloomberg Source: Bloomberg

Figure 101: Irish house price growth, % Figure 102: Irish residential planning permissions, #

25 House price growth 8,000 Planning permissions 20 7,000 15 6,000 10 5 5,000 0 4,000 -5 3,000 -10 2,000 -15 -20 1,000 -25 0 0 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 1 1 ------r r r r r r r r r r r r r r r r r r r r r r r r a a a a a a a a a a a a a a a a a a a a a a a a M M M M M M M M M M M M M M M M M M M M M M M M

Source: CSO Source: CSO

163 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

AIB Mortgage Bank (‘AIBMB’) Table 374: Key balance sheet figures, €mm (BBG: AIB) FY 2010 Total Assets 36,983 Snapshot Deposits 27,333 AIB Mortgage Bank (‘AIBMB’) is a DCI under the Irish Short-term borrowings Other ST borrowings ACS legislation, and a wholly owned subsidiary of Long-term borrowings Allied Irish Banks Plc (‘AIB'). AIBMB’s principal Equity 423 purpose is to issue ACS backed by mortgage loans on Source: Annual Report residential property. These loans may be made directly by the bank itself (AIB transferred its Irish branch- Cover pool overview originated residential mortgage business to AIBMB in We set out below some of the key cover pool 2006), sourced from other subsidiaries of AIB Group or characteristics: third parties. Table 375: Covered bond characteristics Most of the bank’s activities are outsourced to AIB under As at 30 June 2011 an outsourcing and agency agreement, with AIB Ratings originating residential mortgage loans through its branch Covered bond rating A/Baa3/A network, servicing the mortgage loans, providing Parent rating BB/Ba2/BBB Fitch D:factor 70.0% treasury services and a range of other support services. Moody's TPI Very Improbable The bank's activities are financed through the issuance of MCS, a mortgage-backed promissory note facility with Cover pool Mortgage balance (€bn) 20.5 the central bank and Irish FSA, and the balance by AIB Bonds outstanding (€bn) 13.3 plc. OC ACS (%) 26.3 OC nominal (%) 54.9

AIB acquired EBS Building Society (now called EBS # mortgages 132,052 Limited) in July 2011, and remains majority owned by Avg loan balance 155,411 the Irish government. WA Unindexed LTV (%) 67.9 WA Indexed LTV (%) 91.8 Indexed LTV>80% 58.0 Financial performance Indexed LTV>90% 49.0 We set out below some of the key financial performance Indexed LTV>100% 38.0 metrics: Asset seasoning 54.3

Table 373: Key profit & loss figures, €mm Owner occupied 74.0 Second homes 1.0 FY 2010 BTL 25.0 Net interest income 215 Dublin 36.0 Provisions for loan Other 64.0 losses 344 NII less provisions -129 Source: Investor Report Comm.& fee income Other operating income 0 Non-interest expense 144 Operating profit (loss) 72

PBT -316 Taxes -37 Net profit (loss) 277 Source: Annual Report

164 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Bank of Ireland Mortgage Bank Table 377: Key balance sheet figures, €mm (‘BoIMB’) FY 2008 FY 2009 FY 2010 Loans 19,346 20,505 20,830 (BBG: BKIR) Total Assets 27,475 36,161 36,276 Snapshot Deposits 0 0 Short-term borrowings 19,383 21,663 22,704 Bank of Ireland Mortgage Bank (‘BoIMB’) was Other ST borrowings 26 19 118 established in 2004 as a DCI under the Irish ACS Long-term borrowings 7,224 13,683 12,725 legislation, and is a wholly-owned subsidiary of the Equity 763 794 718 Governor & Company of the Bank of Ireland (‘BoI’). In Source: Annual Report June 2004, BoI transferred its Irish residential mortgage Table 378: Select financial metrics business and substantially all of its Irish residential mortgage loans to BoIMB, whose main activities are the FY 2009 FY 2010 NIM 1.7 0.6 issuance of residential MCS. Portfolios of mortgages can ROA 0.1 - 0.0 be directly originated, acquired from other parts of the ROE 4.0 - 7.6 BoI group or third parties. ROC 0.1 C:I 13.8 13.3 Core capital As for AIB, most of the bank’s activities are outsourced Source: Annual Report to BoI under an outsourcing and agency agreement, with BoI originating residential mortgage loans through its Cover pool overview branch network, servicing the mortgage loans, providing We set out below some of the key cover pool treasury services and a range of other support services. characteristics: The bank's activities are financed through the issuance of MCS, a mortgage-backed promissory note facility with Table 379: Covered bond characteristics the central bank and Irish FSA, and the balance by BoI plc. As at 30 June 2011 Ratings Covered bond rating -/Baa3/- Bank of Ireland remains in the private sector. Parent rating BB+/Ba2/BBB Fitch D:factor n/a Financial performance Moody's TPI Very Improbable We set out below some of the key financial performance Cover pool metrics: Mortgage balance (€bn) 15,751,754,017

# mortgages 110,976 Table 376: Key profit & loss figures, €mm Avg loan balance 141,938 FY 2008 FY 2009 FY 2010 WA Current LTV 64.5 Net interest income 188 195 199 WA Indexed LTV 88.9 Provisions for loan Indexed LTV>80% 61.7 losses 0 0 153 Indexed LTV>90% 52.0 NII less provisions 188 195 46 Indexed LTV>100% 40.0

Comm.& fee income 0 0 0 Asset seasoning 61.5 Other operating income 0 0 20 Non-interest expense 104 114 14 Fixed rate loans (%) 19.8 Operating profit (loss) 84 81 63 Interest only loans (%) 16.0 Investment properties (%) 22.8 PBT 87 35 -63 Taxes 11 4 -8 Dublin 31.6 Net profit (loss) 76 31 -55 Other 68.4 Source: Annual Report Source: Investor Report

165 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Depfa ACS Bank (‘DACS’) Cover pool overview (BBG: DEPFA) We set out below some of the key cover pool Snapshot characteristics: Depfa ACS Bank (‘DACS’) is a subsidiary of Depfa Table 382: Covered bond characteristics Bank plc, which in turn is a subsidiary of Deutsche Pfandbriefbank AG (formed by the merger of Hypo Real As at 30 June 2011 Ratings Estate Bank AG and Depfa Deutsche Pfandbriefbank Covered bond rating AA/Aa3/AAA AG). DACS’ current business model focuses on the Issuer rating BBB/Baa3/BBB+ financing of public sector assets with ACS. It is the Fitch D:factor 9.5% Moody's TPI Probable-High largest ACS issuer, with close to €30bn of bonds outstanding currently (as at June 2011). The cover pool Collateral pool backing the remaining bonds was significantly Pool (€bn) 32.4 restructured in October 2010, as part of the broader HRE Bonds (€bn) 29.6 transfer of assets to FMS-Wertmanagement (FMS-WM). Borrower classification PSE 67.5 Post the merger, the combined Deutsche Pfandbriefbank Local Govt 16.8 Sovereign 11.8 is repositioning itself to be a bank specialising in Other 3.9 European real estate and public sector finance, funded predominantly by the issuance of pfandbrief. Based on Ratings AAA 40.1 this, we expect DACS to continue in its solvent run-off AA 37.5 for a number of years. A 21.9 BBB 0.5

Financial performance Largest jurisdictions We set out below some of the key financial performance Germany 28.4 metrics: USA 18.0 Spain 11.6 Italy 6.1 Table 380: Key profit & loss figures, €mm France 5.6

FY 2010 Non-EEA 22.9 Net interest income 252 Provisions for loan losses 2 Source: Investor Report NII less provisions 250

Comm.& fee income -310 Other operating income -422 Non-interest expense 198 Operating profit (loss) -680

PBT -680 Taxes Net profit (loss) Source: Annual Report

Table 381: Key balance sheet figures, €mm FY 2010 Loans 99,000 Total Assets 144,000 Deposits Short-term borrowings 66,000 Other ST borrowings Long-term borrowings Equity 4,000 Source: Annual Report

166 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

EBS Mortgage Finance (‘EBS’) (BBG: EBSBLD) Snapshot EBS Mortgage Finance (‘EBS MF’) was established in November 2008 as a DCI under the Irish ACS legislation, and a wholly owned subsidiary of the EBS Building Society. EBS MF’s main purpose is to issue MCS backed by mortgage loans on residential property under a €6bn ACS programme.

EBS was one of Ireland’s two building societies (the 6th largest credit institution in Ireland), with close to one hundred outlets across the Irish Republic. EBS traditionally focused its lending business on public sector workers in Ireland. It accounts for approximately 8% of the retail savings market.

AIB acquired EBS Building Society (now called EBS Limited) in July 2011. The newly combined entity remains majority owned by the Irish government.

Financial performance We set out below some of the key financial performance metrics for EBS:

Table 383: Covered bond characteristics As at 30 June 2011 Ratings Covered bond rating -/Baa3/A- Issuer rating n/a Fitch D:factor 70.0% Moody's TPI Improbable

Cover pool Mortgage balance 3,943,112,141 Bonds outstanding 2,350,000,000 OC ACS (%) 43.3 OC nominal (%) 70.2

# mortgages 41,846 Avg loan balance 94,229 WA Original LTV 67.6 WA Indexed LTV 81.0 Indexed LTV>80% 54.2 Indexed LTV>90% 45.2 Indexed LTV>100% 36.3

Asset seasoning 70.0 Fixed rate 17.0

Dublin 39.0 Other 61.0

Source: Investor Report

167 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

168 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected] s d n o B

d e r e v o C

n a i l a t I

169 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Italian Covered Bonds

Legislative snapshot We set out in Table 384 a snapshot of key covered bond attributes in Italy.

Table 384: Italian Covered Bond legislative overview Attribute Commentary Framework Legislative Framework Law 80 of May 2005, amending Art 7 & 7-bis of Law 130/1999. Also Ministry of Economy and Finance regulation 310, Dec 2006 and Bank of Italy regulation May 2007 and March 2010 Types of covered bonds One. Obbligazioni Bancarie Garantite (OBG). OBG programmes can be backed by residential and commercial loans, RMBS bonds and loans to public sector entities Structure of Issuer Direct issuance? No, bonds are issued via an SPV Comments (if any) Italian OBG are direct, unconditional, unsecured and unsubordinated of the issuer. Under the Italian framework, the bank lends funds to an SPE that will in turn use them to purchase assets from the issuer. The SPE will also guarantee the payments to the bonds in case of default of the issuer, using the assets as collateral Bankruptcy remoteness Bankruptcy remoteness is achieved by law through the transfer to the SPE Dual claim Yes Bond format Fixed rate. The bonds can be extended (generally for a period of 12mths but this varies by issuer) if: a) an issuer event of default occurred AND b) the OBG guarantor does not have sufficient funds to redeem the bond at its initial maturity Supervision Banca d'Italia Cover pool Eligible assets Mortgage No specific requirements by law, except that the mortgaged properties have to be located in the EEA and Switzerland LTV caps Residential mortgages with LTV<80% and commercial mortgages with LTV<60% Public Sector Can be both loans to public sector entities or bonds issued or guaranteed by such institutions. Requirements include: location in EEA or Switzerland with max risk weight of 20% (RSA); or outside EEA or Switzerland and with 0-20% risk weight (RSA) Non-performing collateral At least 95% of underlying assets represented by eligible mortgage receivables. Risk weighting not greater than 20% under standardised approach. If ABS makes up more than 10% of the cover pool, than the mortgages backing ABS must be originated by the issuing bank and the issuer must retain the first loss piece Substitution Assets Highly liquid assets up to 15% of the cover pool Hedging Derivatives allowed to hedge risk Valuation Individual market values; the valuation approach needs to approved by the Bank of Italy and is independently audited Other comments (if any) Intesa uses own-originated RMBS as collateral Requirements ALM matching Asset coverage Prior to insolvency, the issuer must make sure that the nominal value of the CB is less than that of the cover pool. Also, the NPV of the bonds and all related transaction costs, must be less than the NPV of the assets. OC is based on each issuer contractual agreement, no legal requirement. Post issuer default, an amortisation test is also carried out to check that the assets, adjusted by their current status (e.g. arrears or defaults) are enough to cover the liabilities Interest coverage Yes. Interest income must exceed interest expense Other (if any) Issuer can only issue if they have consolidated regulatory capital of at least €500m, a total capital ratio of at least 9% and Tier 1 ratio greater than 6%. If their total capital ratio (TCR) is >11% and Tier 1>7%, then they can issue liabilities up to 100% of eligible assets; if TCR>10& and Tier 1>6.5%, then they can issue up to 60%; if TCR>9% and Tier 1>6%, then they can issue up to 25% of eligible assets Consequence of breach If a breach of any pre-default tests occurs and is not cured, the OBG guarantee activates and the cashflows from the assets are used to pay the bonds. If the Amortisation Test fails, all bonds become due and payable Monitoring An independent Cover Pool Monitor supervises compliance Other Compliance with EU legislation UCITS and CRD compliant Source: National legislation, J.P. Morgan Covered Bond Research

170 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Italian covered bond & macro backdrop

Figure 103: CB issuance, €mm Figure 104: CB outstanding, €mm 16,000 40,000

14,000 Mortgage Public Sector 35,000 Mortgage Public Sector 12,000 30,000 10,000 25,000 8,000 20,000 6,000 15,000 4,000 10,000 2,000 5,000 0 0 2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 2007 2008 2009 2010 Source: ECBC. Latest data available displayed Source: ECBC. Latest data available displayed

Figure 105: Italian real GDP growth, y-on-y, % Figure 106: Italian unemployment level, %

6 Real GDP growth 12 Unemployment 4 10 2 8 0 6 -2 -4 4 -6 2 -8 0 0 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 1 1 ------r r r r r r r r r r r r r r r r r r r r r r r r a a a a a a a a a a a a a a a a a a a a a a a a M M M M M M M M M M M M M M M M M M M M M M M M

Source: Bloomberg Source: Bloomberg

Figure 107: Italian CPI and base rate, % Figure 108: Italian consumer confidence, balance of survey

5 Inflation Base rate 5 Cons. Confidence 5 0 4 -5 4 3 -10 3 -15 2 -20 2 -25 1 1 -30 0 -35 0 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 1 1 ------r r r r r r r r r r r r r r r r r r r r r r r r a a a a a a a a a a a a a a a a a a a a a a a a M M M M M M M M M M M M M M M M M M M M M M M M

Source: Bloomberg Source: Bloomberg

Figure 109: Italian house price growth, % Figure 110: Italian outstanding mortgages (€mm) and annual growth of mortgage stock, %

25% House price growth 400,000 Outstanding mortgages Growth in o/s mortgages 25% 20% 350,000 20% 15% 300,000 250,000 15% 10% 200,000 10% 5% 150,000 5% 0% 100,000 -5% 50,000 0% -10% 0 -5% 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 1 1 ------r r r r r r r r r r r c c c c c c c c c n n n n n n n n n a a a a a a a a a a a e e e e e e e e e u u u u u u u u u M M M M M M M M M M M J J J J J J J J J D D D D D D D D D

Source: Bloomberg Source: ECB

171 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Banca Carige (‘Carige’) Table 387: Select financial metrics (BBG: BANCAR) FY 2007 FY 2008 FY 2009 FY 2010 NIM 2.9 3.2 n/a n/a Snapshot ROA 0.8 0.7 0.6 0.5 The Banca Carige Group is one of the six largest ROE 7.4 6.5 5.6 4.7 ROC 1.7 1.5 1.3 1.0 financial services groups in Italy, with over 1,000 C:I 74.6 62.1 61.8 65.8 branches and agencies throughout the country. The group Core capital 7.8 7.9 7.9 6.7 includes the parent, Banca Carige, four other banks Source: Bloomberg (Cassa di Risparmio di Savona, Cassa di Risparmio di Carrara, Banca del Monte di Lucca, and Banca Cesare Cover pool overview Ponti), an asset management company (Carige Asset We set out below some of the key cover pool Management Sgr) and two insurance companies (Carige characteristics: Assicurazioni and Carige Vita Nuova which specialise in non-life and life insurance respectively). The group is Table 388: Covered bond characteristics also the majority shareholder of Creditis Servizi As at 30 April Finanziari SpA, a company specialised in consumer 2011 credit. S/M/F Covered Bond rating AAA/Aaa/AAA Issuer rating A-/A2/A- Ownership is split between a foundation (43%), France’s Groupe BPCE (15%), Generali (1.5%) and a free float of Cover pool size (€) 3,292,403,155 40%. Number of loans 35,780 Avg loan (€) 92,018

Carige’s covered bonds are backed by Italian mortgages. WA LTV (in %) 50.1 Remaining tenor (mths) 213.6 Financial performance WA seasoning (mths) 42.7 We set out below some of the key financial performance Residential properties (in %) 96.1 metrics: Commercial properties (in %) 3.9 Source: Investor Report Table 385: Key profit & loss figures, €mm Table 389: Collateral pool LTV breakdown FY 2007 FY 2008 FY 2009 FY 2010 Net interest income 683 826 740 714 Current LTV ranges As at 30 April Provisions for loan 2011 losses 75 77 100 114 0-<=40% 32.0 NII less provisions 608 749 641 600 >40%-<=50% 15.0 >50%-<=60% 16.0 Comm.& fee income 289 292 315 16 >60%-<=70% 16.8 Other operating income 773 39 23 16 >70%-<=80% 19.4 Non-interest expense 1,337 703 742 746 >80% 0.8 Operating profit (loss) 368 329 337 256 Source: Investor Report

PBT 370 309 313 262 Taxes 157 96 104 98 Net profit (loss) 205 206 205 177 Source: Bloomberg

Table 386: Key balance sheet figures, €mm FY 2007 FY 2008 FY 2009 FY 2010 Loans 17,017 20,916 22,786 21,854 Total Assets 27,464 31,986 36,299 40,010 Deposits 11,031 11,713 14,954 14,357 Short-term borrowings 1,780 2,107 1,963 4,961 Other ST borrowings 1,415 1,728 1,528 1,540 Long-term borrowings 7,281 9,579 10,020 9,660 Equity 2,862 3,576 3,853 3,737 Source: Bloomberg

172 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Banca Monte dei Paschi di Siena Table 392: Select financial metrics (‘BMPS’) FY 2007 FY 2008 FY 2009 FY 2010 NIM 2.4 2.5 2.0 1.7 (BBG: MONTE) ROA 0.9 0.5 0.1 0.4 Snapshot ROE 17.5 7.9 1.4 5.7 ROC 2.0 1.0 0.2 0.8 Banca Monte dei Paschi di Siena, founded in 1472, is C:I 64.5 77.3 75.7 70.7 considered to be the oldest bank in the world. Through a Core capital 8.9 9.3 7.5 13.0 number of acquisitions, the MPS Group is now the third Source: Bloomberg largest financial services group in Italy. The group offers a wide range of products, including retail banking and Cover pool overview financial advisory, corporate and investment banking We set out below some of the key cover pool (with a particular focus on SMEs), wealth management, characteristics: pension fund and life insurance services. Table 393: Covered bond characteristics Through a national network of over 3,000 branches, the As at 31 May group caters to the needs of over 6 million customers; 2011 outside of the domestic market, the Group has branches S/M/F Covered Bond rating /Aaa/AAA in the main international financial centres and aims at Issuer rating A-/A2/A- expanding its presence in emerging markets, in particular in the Mediterranean basin, in central and eastern Europe Cover pool size (€) 12,594,657,406 Number of loans 121,620 and in Asia. Avg loan (€) 103,557

BMPS’ covered bonds are backed by Italian mortgages. WA Current LTV (in %) 61.1 Remaining tenor (mths) 243.5 WA seasoning (mths) 27.4 Financial performance We set out below some of the key financial performance Top three regions (%) Veneto 16.4 metrics: Toscana 14.8 Lazio 14.3 Table 390: Key profit & loss figures, €mm Floating rate (in %) 89.2 FY 2007 FY 2008 FY 2009 FY 2010 Fixed rate (in %) 10.8 Net interest income 3,485 4,371 3,997 3,819 Provisions for loan Source: Investor Report losses 614 1,002 1,453 1,126 NII less provisions 2,871 3,369 2,544 2,693 Table 394: Collateral pool LTV breakdown Comm.& fee income 1,711 1,664 1,935 2,170 Current LTV ranges As at 31 May Other operating income 175 334 212 203 2011 Non-interest expense 3,426 4,445 4,462 4,186 Operating profit (loss) 1,161 243 -95 509 0-<=40% 22.1 >40%-<=50% 12.3 PBT 1,270 -92 43 1,327 >50%-<=60% 14.1 Taxes 552 -930 31 342 >60%-<=70% 17.0 Net profit (loss) 1,438 923 220 985 >70%-<=80% 40.3 Source: Bloomberg Source: Investor Report Table 391: Key balance sheet figures, €mm FY 2007 FY 2008 FY 2009 FY 2010 Loans 104,913 145,085 146,976 154,450 Total Assets 162,076 213,796 224,815 244,279 Deposits 56,963 75,935 77,240 79,028 Short-term borrowings 26,837 40,921 44,457 53,804 Other ST borrowings 24,480 26,965 27,425 38,108 Long-term borrowings 39,809 47,158 42,559 35,247 Equity 8,939 15,103 17,456 17,426 Source: Bloomberg

173 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Banca Popolare di Milano (‘BPM’) Cover pool overview (BBG: PMIIM) We set out below some of the key cover pool Snapshot characteristics: BPM was founded as a cooperative bank in Milan. The Table 398: Covered bond characteristics group now offers a range of financial products across Italy. It is the eighth largest banking group and the fourth As at 30 June 2011 S/M/F largest Popolare bank, with a leading position in the Covered Bond rating AAA/Aaa/AAA north of the country. It operates close to 800 branches Issuer rating A-/A1/A- across Lombardy, Piedmont, Apulia and Latium. Cover pool size (€) 3,951,326,775 Number of loans 39,557 BPM’ covered bonds are backed by Italian mortgages. Avg loan (€) 99,889

WA LTV (in %) 52.15 Financial performance Remaining tenor (mths) 226.9 We set out below some of the key financial performance WA seasoning (mths) 36.16 metrics: Top three regions (%) Lombardia 73.5 Lazio 12.5 Table 395: Key profit & loss figures, €mm Emilia Romagna 4.3 FY 2007 FY 2008 FY 2009 FY 2010 Source: Investor Report Net interest income 1,216 1,246 1,052 872 Provisions for loan Table 399: Collateral pool LTV breakdown losses 127 205 337 238 NII less provisions 1,089 1,041 715 633 Current LTV ranges As at 30 June 2011 0-<=40% 27.8 Comm.& fee income 658 591 767 685 >40%-<=50% 15.1 Other operating income 116 111 89 -128 >50%-<=60% 16.1 Non-interest expense 1,237 1,243 1,452 1,328 >60%-<=70% 18.4 Operating profit (loss) 555 256 218 -114 >70%-<=80% 22.2 >80%-<=100% 0.4 PBT 546 213 217 -31 Source: Investor Report Taxes 220 130 114 78 Net profit (loss) 315 75 104 106 Source: Bloomberg

Table 396: Key balance sheet figures, €mm FY 2007 FY 2008 FY 2009 FY 2010 Loans 28,665 32,899 32,629 35,385 Total Assets 43,627 45,039 44,281 54,053 Deposits 21,414 20,218 21,804 23,173 Short-term borrowings 7,137 6,010 3,384 7,824 Other ST borrowings 2,707 2,623 2,160 2,448 Long-term borrowings 8,065 12,009 12,012 12,070 Equity 3,598 3,389 4,022 3,984 Source: Bloomberg

Table 397: Select financial metrics FY 2007 FY 2008 FY 2009 FY 2010 NIM 3.1 3.0 2.5 1.9 ROA 0.8 0.2 0.2 0.2 ROE 9.2 2.2 2.9 2.7 ROC 1.8 0.4 0.5 0.5 C:I 63.0 71.7 70.6 90.9 Core capital 7.2 7.7 8.6 7.8 Source: Bloomberg

174 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Banco Popolare (‘Popolare’) Table 402: Select financial metrics (BBG: BPIM) FY 2007 FY 2008 FY 2009 FY 2010 NIM n/a 2.4 2.2 1.8 Snapshot ROA 0.5 -0.3 0.2 0.2 The group was created in 2007 from the merger of Banco ROE 5.5 -3.3 2.5 2.7 ROC 1.0 -0.4 0.3 0.4 Popolare di Verona e Novara and the Banca Popolare C:I 69.0 77.1 71.0 76.4 Italiana. It is the largest cooperative bank and also fourth Core capital 5.2 6.4 7.7 7.2 largest Italian banking group by assets, focused on Source: Bloomberg northern and central Italy, with a traditionally strong presence in the regions of Lombardy, Piedmont, Liguria, Cover pool overview Tuscany and Emilia Romagna. We set out below some of the key cover pool characteristics: The group focuses its businesses on retail banking, while also offering business banking for small and medium- Table 403: Covered bond characteristics sized corporates. It operates approximately 2,200 As at 30 June branches throughout Italy. Subsidiaries also include 2011 Banca Aletti (private & investment banking), Aletti S/M/F Gestielle (asset management), Popolare Vita (life Covered Bond rating -/Aaa/AAA Issuer rating A-/A2/BBB+ assurance), Avipop Assicurazioni (non-life Cover pool size (€) 9,027,689,441 bancassurance) and Banca Italease (leasing). Number of loans 87,363 Avg loan (€) 103,335

Popolare’s covered bonds are backed by Italian Est. WA LTV (in %) 51.9 mortgages. Remaining tenor (yrs) 19.0 WA seasoning (yrs) 4.7

Financial performance Floating rate (in %) 69.1 We set out below some of the key financial performance Fixed rate (in %) 30.9 metrics: Source: Investor Report Table 400: Key profit & loss figures, €mm Table 404: Collateral pool LTV breakdown FY 2007 FY 2008 FY 2009 FY 2010 Net interest income 1,815 2,703 2,492 2,179 Current LTV ranges As at 30 June Provisions for loan 2011 losses 312 1,140 815 782 0-<=40% 27.9 NII less provisions 1,503 1,563 1,677 1,397 >40%-<=50% 14.9 >50%-<=60% 16.2 Comm.& fee income 1,157 1,411 1,344 1,420 >60%-<=70% 20.2 Other operating income 499 656 572 493 >70%-<=80% 20.9 Non-interest expense 2,613 3,319 2,884 3,223 Operating profit (loss) 797 -197 308 168 Source: Investor Report

PBT 1,077 -557 497 218 Taxes 480 -140 229 -100 Net profit (loss) 617 -333 267 308 Source: Bloomberg

Table 401: Key balance sheet figures, €mm FY 2007 FY 2008 FY 2009 FY 2010 Loans 84,551 79,846 93,334 92,698 Total Assets 128,393 121,327 135,709 135,156 Deposits 48,419 42,980 46,083 41,625 Short-term borrowings 25,059 25,884 35,184 36,007 Other ST borrowings 8,549 7,579 6,868 7,018 Long-term borrowings 30,152 24,253 25,228 23,435 Equity 11,075 10,188 12,112 11,940 Source: Bloomberg

175 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Credito Emiliano (‘Credem’) Table 407: Select financial metrics (BBG: CRDEM) FY 2007 FY 2008 FY 2009 FY 2010 NIM 3.3 4.0 2.4 1.9 Snapshot ROA 1.0 0.6 0.3 0.3 Credito Emiliano was founded in 1910 and has strong ROE 17.1 9.5 4.9 4.3 ROC 2.0 1.1 0.7 0.6 ties to the Emilia Romagna region. Through acquisitions C:I 64.3 74.0 71.7 76.1 in both the banking and broader financial services Core capital 8.1 9.6 11.1 11.3 sectors, the CREDEM group now counts over 600 Source: Bloomberg banking and financial advisor branches in 16 Italian regions. Cover pool overview We set out below some of the key cover pool The Group offers banking services to individuals and characteristics: SMEs, financial advisory and private banking services. The bank has two subsidiaries in Switzerland (Banca Table 408: Covered bond characteristics Euromobiliare SA) and in Luxembourg (Credem As at 30 June International SA). Over three quarters of the Group’s 2011 shares are in the hands of CREDEM Holding, whose S/M/F main shareholders include the Max Mara fashion group Covered Bond rating /Aaa/AAA Issuer rating A/-A2/A (14%) and Pictet (5%). Cover pool size (€) 2,055,351,786 Credem’s covered bonds are backed by Italian Number of loans 25,449 Avg loan (€) 80,764 mortgages. WA Current LTV (in %) 43.8 Financial performance Remaining tenor (mths) 170.0 WA seasoning (mths) 52.0 We set out below some of the key financial performance metrics: Top three regions (%) Emilia Romagna 26.8 Table 405: Key profit & loss figures, €mm Lombardia 15.6 Sicilia 11.1 FY 2007 FY 2008 FY 2009 FY 2010 Net interest income 798 1,057 632 505 Floating rate (in %) 78.5 Provisions for loan Fixed rate (in %) 21.5 losses 53 59 108 62 NII less provisions 745 998 524 443 Source: Investor Report

Comm.& fee income 470 379 426 476 Table 409: Collateral pool LTV breakdown Other operating income 57 36 45 16 Non-interest expense 775 760 779 823 Current LTV ranges As at 30 June Operating profit (loss) 327 179 165 166 2011 0-<=40% 43.4 PBT 327 181 163 168 >40%-<=50% 19.6 Taxes 78 25 74 90 >50%-<=60% 15.3 Net profit (loss) 249 156 89 78 >60%-<=70% 12.7 Source: Bloomberg >70%-<=80% 9.1

Table 406: Key balance sheet figures, €mm Source: Investor Report FY 2007 FY 2008 FY 2009 FY 2010 Loans 13,414 17,618 17,536 18,884 Total Assets 26,233 30,136 26,439 29,998 Deposits 10,505 11,452 12,534 11,821 Short-term borrowings 5,580 4,202 3,883 9,157 Other ST borrowings 2,386 2,709 1,562 1,518 Long-term borrowings 5,181 6,808 5,000 3,995 Equity 1,543 1,753 1,850 1,804 Source: Bloomberg

176 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Intesa Sanpaolo (‘Intesa’) Table 412: Select financial metrics (BBG: ISPIM) FY 2007 FY 2008 FY 2009 FY 2010 NIM 2.1 2.4 2.0 1.9 Snapshot ROA 1.3 0.4 0.4 0.4 Intesa Sanpaolo is a banking group resulting from the ROE 13.5 5.1 5.5 5.1 ROC 2.5 0.9 0.9 0.9 merger between Banca Intesa and Sanpaolo IMI. It is one C:I 66.3 76.7 63.7 65.4 of the leaders in the Italian market as well as having a Core capital 6.5 7.1 8.4 9.4 strong international presence focused on Central-Eastern Source: Bloomberg Europe and the Mediterranean basin. Cover pool overview The Group brings together two major Italian banks and is We set out below some of the key cover pool a leader in its domestic market across all business areas characteristics: in which it operates (retail, corporate and wealth management). Outside of Italy, it operates over 1,800 Table 413: Mortgage (RMBS) covered bond characteristics branches providing retail and commercial banking As at 31 July services across thirteen countries. Corporate clients are 2011 further supported across thirty-one countries, including S/M/F the US, Russia, China and India. Covered Bond rating -/Aaa/- Issuer rating A+/Aa3/AA-

Intesa Sanpaolo issues both a public-sector backed OBG, Cover pool size (€) 5,175,360,562 and a mortgage-backed OBG (using RMBS to transfer Number of loans 70,745 Avg loan (€) 73,155 mortgage risk between group entities). WA Current LTV (in %) 43.7 Financial performance Remaining tenor (mths) 194.5 WA seasoning (mths) 73.5 We set out below some of the key financial performance metrics: Floating rate (in %) 50.6 Fixed rate (in %) 49.4 Table 410: Key profit & loss figures, €mm Top three regions (%) FY 2007 FY 2008 FY 2009 FY 2010 Lombardia 45.1 Net interest income 10,947 13,053 11,716 11,111 Lazio 11.1 Provisions for loan Puglia 7.4 losses 1,043 2,433 3,448 2,818 NII less provisions 9,904 10,620 8,268 8,293 LTV Breakdown 0-<=40% 39.9 Comm.& fee income 7,304 6,543 6,141 6494 >40%-<=50% 21.0 Other operating income -254 843 -153 -39 >50%-<=60% 20.8 Non-interest expense 12,627 14,224 12,315 12,203 >60%-<=70% 14.1 Operating profit (loss) 4,677 1,525 2,889 2,936 >70%-<=80% 4.2

PBT 4,860 839 3,455 3,237 Source: Investor Report Taxes 1,539 -656 686 1,155 Net profit (loss) 7,250 2,553 2,805 2,705 Source: Bloomberg

Table 411: Key balance sheet figures, €mm FY 2007 FY 2008 FY 2009 FY 2010 Loans 335,273 387,012 363,447 360,693 Total Assets 572,959 636,133 624,844 658,757 Deposits 178,758 202,558 197,632 198,359 Short-term borrowings 94,958 76,864 69,256 79,004 Other ST borrowings 65,286 80,257 71,297 76,254 Long-term borrowings 139,891 188,280 185,243 179,983 Equity 52,349 50,054 53,771 54,600 Source: Bloomberg

177 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Table 414: Public Sector covered bond characteristics As at 31 July 2011 S/M/F Covered Bond rating -/Aaa/- Issuer rating A+/Aa3/AA-

Cover pool size (€) 9,811,680,791 Number of loans 1,140 Avg loan (€) 8,606,738

Remaining tenor (mths) 182 WA seasoning (mths) 70

Fixed rate (%) 64.4 Floating rate (%) 35.6

AAA to AA- (%) 46.8 A+ to A- (%) 20.2 BBB+ to BBB- (%) 0.0 Not Rated (%) 33.0

Sovereign (%) 21 Municipality (%) 47 Region (%) 27 Other (%) 5

Sovereign %) North (%) 42.6 Central (%) 16.2 South (%) 16.4 Spain (%) 2.2 France (%) 2.0 Germany (%) 0.5 Belgium (%) 0.3

Source: Investor Report

178 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

UBI Banca (‘UBI’) Table 417: Select financial metrics (BBG: UBIIM) FY 2007 FY 2008 FY 2009 FY 2010 NIM n/a 2.8 2.3 1.9 Snapshot ROA 0.8 0.1 0.2 0.1 UBI Banca is a cooperative group that was created in ROE 8.2 0.6 2.4 1.5 ROC 1.7 0.2 0.5 0.3 2007 from the merger of Banche Popolari Unite and C:I 65.0 77.7 68.5 73.9 Banca Lombarda e Piemontese. While the core markets Core capital 6.9 7.7 8.0 7.5 are the northern regions of Lombardy and Piedmont, the Source: Bloomberg group also has a significant presence in central and southern Italy. Cover pool overview We set out below some of the key cover pool The bank focuses mostly on retail banking, which characteristics: accounts for 97% of its customer base and 69% of its revenues, although it also has a strong presence in the Table 418: Covered bond characteristics SME market (24% of its revenues). UBI Banca is the As at 30 June parent company of the group, and performs centralised 2011 functions, while supporting the nine network banks along S/M/F with a wide range of product companies which specialise Covered Bond rating -/Aaa/AAA Issuer rating A/A1/A in corporate banking, consumer credit, asset management, factoring & leasing and life & non-life Cover pool size (€) 8,590,439,273 bancassurance. Number of loans 122,098 Avg loan (€) 70,357

UBI Banca’s covered bonds are backed by Italian WA Current LTV (in %) 45.3 mortgages. Remaining tenor (mths) 191.8 WA seasoning (mths) 59.8

Financial performance Top three regions (%) We set out below some of the key financial performance Lombardia 60.3 Lazio 8.4 metrics: Piemonte 6.6

Table 415: Key profit & loss figures, €mm Floating rate (in %) 76.9 Fixed rate (in %) 23.1 FY 2007 FY 2008 FY 2009 FY 2010 Net interest income 2,655 3,068 2,506 2,171 Source: Investor Report Provisions for loan losses 328 559 865 707 NII less provisions 2,327 2,508 1,641 1,464 Table 419: Collateral pool LTV breakdown Current LTV ranges As at 30 June Comm.& fee income 1,423 1,388 1,329 1,378 2011 Other operating income 250 224 255 239 0-<=40% 41.8 Non-interest expense 2,958 3,090 2,920 2,840 >40%-<=50% 15.8 Operating profit (loss) 1,153 271 383 226 >50%-<=60% 14.6 >60%-<=70% 13.7 PBT 1,191 356 519 334 >70%-<=80% 14.1 Taxes 461 193 237 232 Net profit (loss) 938 69 270 172 Source: Investor Report Source: Bloomberg

Table 416: Key balance sheet figures, €mm FY 2007 FY 2008 FY 2009 FY 2010 Loans 91,814 96,365 97,715 101,491 Total Assets 121,492 121,956 122,313 130,559 Deposits 47,807 54,151 47,722 47,654 Short-term borrowings 8,205 3,981 5,324 5,384 Other ST borrowings 5,406 6,209 5,427 5,224 Long-term borrowings 40,818 43,441 44,349 48,094 Equity 12,898 12,264 12,350 11,942 Source: Bloomberg

179 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Unicredit Group (‘Unicredit’) Table 422: Select financial metrics (BBG: UCGIM) FY 2007 FY 2008 FY 2009 FY 2010 NIM 1.5 2.0 1.9 1.9 Snapshot ROA 0.6 0.4 0.2 0.1 The UniCredit Group has its origins in Italy, which, ROE 12.3 7.1 3.0 2.1 ROC 1.6 1.1 0.5 0.4 together with Austria and Germany (through the C:I 64.4 65.8 60.5 66.8 acquisition of HvB), remains one of its key markets. Core capital 6.6 6.7 8.6 9.5 Over the years the group has grown into one of the main Source: Bloomberg European financial services groups, with a strong presence in Central and Eastern Europe. The group has a Cover pool overview presence in 22 countries, with over 9,000 branches We set out below some of the key cover pool worldwide. characteristics:

The Group offers a wide variety of financial products, Table 423: Covered bond characteristics ranging from retail to corporate and investment banking, As at 30 April organised along a number of divisions: Families & SME 2011 (F&SME), Private Banking (PB); Central & Eastern S/M/F Europe (CEE), and Corporate & Investment Banking. Covered Bond rating AAA/Aaa/AAA Issuer rating A/Aa3/A (CIB). Cover pool size (€) 13,171,755,547 Unicredit’s covered bonds are backed by Italian Number of loans 123,034 Avg loan (€) 107,058 mortgages. WA Current LTV (in %) 61.2 Financial performance Remaining tenor (mths) 258.7 WA seasoning (mths) 36.5 We set out below some of the key financial performance metrics: Top three regions (%) Lombardia 22.0 Table 420: Key profit & loss figures, €mm Lazio 15.0 Piemonte 11.6 FY 2007 FY 2008 FY 2009 FY 2010 Net interest income 13,114 19,710 17,732 16,475 Floating rate (in %) 47.7 Provisions for loan Fixed rate (in %) 38.0 losses 2,141 3,582 8,152 6,708 Other (in %) 14.3 NII less provisions 10,973 16,128 9,580 9,766 Source: Investor Report Comm.& fee income 11,354 11,125 9,424 10,210 Other operating income 916 1,021 848 975 Table 424: Collateral pool LTV breakdown Non-interest expense 18,208 19,904 18,654 19,524 Operating profit (loss) 6,879 5,712 2,885 2,106 Current LTV ranges As at 30 April 2011 PBT 7,300 4,995 2,923 2,175 0-<=40% 14.2 Taxes 2,589 465 888 530 >40%-<=50% 8.9 Net profit (loss) 5,901 4,012 1,702 1,323 >50%-<=60% 11.1 Source: Bloomberg >60%-<=70% 21.4 >70%-<=80% 44.3 Table 421: Key balance sheet figures, €mm Source: Investor Report FY 2007 FY 2008 FY 2009 FY 2010 Loans 552,933 598,923 549,037 546,089 Total Assets 1,021,835 1,045,612 928,760 929,488 Deposits 421,133 424,489 424,811 373,960 Short-term borrowings 162,568 179,336 108,413 113,003 Other ST borrowings 145,795 201,187 146,822 150,268 Long-term borrowings 206,816 164,032 151,114 168,792 Equity 62,434 58,240 62,892 67,703 Source: Bloomberg

180 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected] s d n o B

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181 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Korean Covered Bonds

Legislative snapshot A brief description of the two covered bond structures so far has been included in the respective issuer’s profile page.

182 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Korean covered bond & macro backdrop

Figure 111: Mortgage CB Issuance, €mm Figure 112: Mortgage CB outstanding, €mm 1,000 2,000

800 Mortgage Mortgage 1,500 600 1,000 400

500 200

0 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: J.P. Morgan Covered Bond Research Source: J.P. Morgan Covered Bond Research

Figure 113: Korean real GDP growth, y-on-y, % Figure 114: Korean unemployment level, %

14 Real GDP growth 6 Unemployment 12 10 5 8 4 6 4 3 2 0 2 -2 1 -4 -6 0 0 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 1 1 ------r r r r r r r r r r r r r r r r r r r r r r r r a a a a a a a a a a a a a a a a a a a a a a a a M M M M M M M M M M M M M M M M M M M M M M M M

Source: Bloomberg Source: Bloomberg

Figure 115: Korean CPI and base rate, % Figure 116: Korean business survey index, #

6 Inflation Base rate 160 Business survey index 5 140 4 120 100 3 80 2 60 1 40 20 0

Source: Bloomberg Source: Bloomberg

Figure 117: Korean house price growth, % Figure 118: Korean loans to households (KRWtn) and annual change (RHS), %

20% House price growth 800 Credit to HH (stock) Credit to HH (growth) RHS 40% 700 35% 15% 600 30% 10% 500 25% 400 20% 5% 300 15% 200 10% 0% 100 5% -5% 0 0% 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 1 1 ------r r r r r r r r r r r r r r r r r r r r r r r a a a a a a a a a a a a a a a a a a a a a a a M M M M M M M M M M M M M M M M M M M M M M M

Source: OECD Source: Bloomberg

183 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Kookmin Bank Table 426: Key balance sheet figures, KRWmm

(BBG: CITNAT) FY 2008 FY 2009 FY 2010 Snapshot Loans 198,205,056 194,154,608 194,797,999 Kookmin Bank is the largest bank in South Korea by Total Assets 262,093,168 256,519,760 254,861,755 Deposits 158,867,920 170,385,872 182,518,858 assets and market capitalisation. It has a strong domestic Short-term borrowings 19,095,720 13,843,061 11,408,783 presence (18.5% share of the deposits markets) and also a Other short-term small, but growing international presence in Asia. The borrowings 21,152,812 13,134,672 10,694,467 Long-term borrowings 42,610,592 37,985,060 28,751,037 core business remains lending to individuals and SMEs: Equity 17,314,094 19,342,558 19,360,739 these constitute 57% and 36% of its domestic currency Source: Bloomberg loan book while residential mortgages account for 44% of the lending to households. Table 427: Select financial metrics FY 2008 FY 2009 FY 2010 As there is no specific covered bond legislation in Korea, NIM 3.3 2.7 2.2 the issuer adopted a securitisation-like structure, whereby ROA 0.6 0.2 0.0 the issuer will make a loan to a guarantor, which will in ROE 9.1 3.5 0.1 ROC 2.1 0.8 0.0 turn purchase the assets from the issuer via a trust and C:I 56.2 60.1 72.5 guarantee the bonds in case of default. The bonds are Core Capital 10.9 direct, unconditional, senior obligations of Kookmin and Source: Bloomberg the bondholders have full dual recourse to the pool and the bank. The bonds are hard bullets, with no extension Cover pool overview allowed in the prospectus. The asset percentage (AP) is We set out below some of the key cover pool set at 85% for mortgages; an amortisation test will be characteristics: also carried out if there is a non-cured breach of the ACT. Table 428: Covered bond characteristics

The collateral pool initially included mortgages and Ratings S/M/F credit card receivables. In December 2010, however, Covered Bond rating AA/Aa1/- Kookmin decided to spin-off its credit card business into Issuer rating A/A1/- a new subsidiary of the group. With the consent of the Cover pool noteholders, Kookmin repurchased the credit card Cover pool size (KRW) 1,413,314,337,848 receivables from the pool; the bonds are therefore Outstanding liabilities (in KRW equivalent) 1,248,500,000,000 currently backed by the mortgage assets and cash. Number of loans 15,348 Average loan balance (in KRW) 92,084,593 Financial performance WA seasoning (mths) 51 WA remaining term (mths) 275 We set out below some of the key financial performance WA LTV (in %) 45.2 metrics: >90days arrears (in %) 0.2 Source: Investor report Table 425: Key profit & loss figures, KRWmm FY 2008 FY 2009 FY 2010 Net interest income 7,298,904 6,288,439 5,241,222 Provisions for loan losses 1,776,830 2,207,853 2,567,473 NII less provisions 5,522,074 4,080,586 2,673,749

Comm.& fee income 1,412,415 1,324,506 1,046,735 Other operating income 138,701 115,527 154,419 Non-interest expense 5,259,183 5,088,616 4,870,546 Operating profit 1,811,443 703,027 -787,931

PBT 2,158,289 660,471 -975,830 Taxes 647,505 24,668 -311,148 Net profit (loss) 1,510,784 635,803 11,200 Source: Bloomberg

184 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Korea Housing Finance Corporation Table 430: Key balance sheet figures, KRWmm (BBG: KHFC) FY 2008 FY 2009 FY 2010 Loans 2,795,500 Snapshot Total Assets 3,443,840 KHFC is a quasi-government financial institution Short-term borrowings 260,000 Other short-term established with the aim of supplying long-term housing borrowings 185,000 finance. KHFC also provides mortgage guarantees to Long-term borrowings 2,039,782 prospective homebuyers and reverse mortgage products. Equity 884,917 Source: Annual report 2010 The company is a regular issuer of MBS and student loan ABS and has only issued its first covered bond (called Cover pool overview mortgage-backed bonds, MBB) in July 2010, as We set out below some of the key cover pool permitted by Art. 31 of the KHFC Act. In 2010 it characteristics: announced that it was planning to issue $2bn of covered bonds annually starting in 2011: so far $500mm of fixed Table 431: Covered bond characteristics rate bonds and $200mm of floating rate notes have been As at June 2011 issued in 2011. Ratings S/M/F Covered Bond rating -/Aa3/- Issuer rating A/A1/- The bonds are direct, unconditional senior, obligations of the bank and bondholders have full dual recourse to the Cover pool pool and the KHFC. The underlying collateral is Cover pool size (KRW) 839,804,918,469 Outstanding liabilities (in KRW equivalent using 607,500,000,000 purchased from participating banks (SC First Bank issuance date FX rate) Korea, Shinhan Bank, Woori Bank, Kookmin Bank, Korea Exchange Bank, Industrial Bank of Korea and Number of loans 8,359 Average loan balance (in KRW) 100,467,151 Hana Bank, although in this case only SC First Bank, WA seasoning (mths) 26 Shinhan and Woori participated) and is subject to an WA LTV (in %) 47.3 ACT (eligible assets at least equal to liabilities) and a WA indexed LTV (in %) 45.6 portfolio yield test (interest received has to be greater Floating rate loans (in %) 58.0 than liabilities and expenses). While there is no Owner occupied (in %) 100.0 acceleration of the bonds in case of an issuer event of Interest only (in %) 38.6 default, the bonds will accelerate if there is a covered Current LTV breakdown (in %) bond event of default i.e. failure to pay interest and/or 0-40 27.0 principal as due. 40-50 20.7 50-60 52.3

Financial performance Indexed LTV breakdown (in %) We set out below some of the key financial performance 0-40 32.0 metrics: 40-50 21.9 50-60 32.1 60-70 13.1 Table 429: Key profit & loss figures, KRWmm 70-80 0.8 >80 0.1 FY 2008 FY 2009 FY 2010 Net interest income 51,805 Source: Moody’s Provisions for loan losses 11,722 NII less provisions 40,083

Comm.& fee income 65,507 Other operating income 159,877 Non-interest expense 295,470 Operating profit 18,668

PBT 23,245 Taxes -12,501 Net profit (loss) 35,746 Source: Annual report 2010

185 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

186 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected] s d n o B

d e r e v o C

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187 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Luxembourgish Covered Bonds

Legislative snapshot We set out in Table 432a snapshot of key covered bond attributes in Luxembourg.

Table 432: Luxembourgish Covered Bond legislative overview Attribute Commentary Framework Legislative Framework Article 12-1 to 12-9 of the Law of April 5, 1993 on the Financial Sector and June 22, 2000 amendment to Law of November 21, 1997 on banks issuing mortgage bonds. The Luxembourg Supervisory Authority (Commission de Surveillance du Secteur Financier, or CSSF) also released circular 01/42 on the rule for the appraisal of real estate and circular 03/95 on the maintenance of the cover register. Further amended in 2008. Types of covered bonds Three types of collateral: public sector, mortgage and movable assets (ships, aircraft, railway). Structure of Issuer Direct issuance? Bonds are issued by a specialised credit institution. Comments (if any) Covered bonds are issued by a specialised credit institution with a license from the financial services regulator. Bankruptcy remoteness The issuer is required to keep a register of the cover pool, with one section for each type of collateral (and one section each for the three types of movable assets). If the issuer is declared bankrupt the assets in the cover pool are separated from other assets and do not become part of the estate. Dual claim Yes. If the assets in the cover pool are not enough to repay the bonds when due, any outstanding claim ranks pari passu with the senior unsecured creditors of the issuer. Bond format Fixed or floating rate, hard bullets. Supervision CSSF (Luxembourgish FSA). Cover pool Eligible assets Mortgage Domestic, other EEA, other OECD residential and commercial loans. Senior MBS is also permitted as long as at least 90% the underlying collateral satisfies the cover pool criteria. LTV caps 80% for residential loans and 60% for commercial loans. Both are hard caps. Public Sector Exposures to public sector entities in OECD jurisdictions or to multilateral development banks. Movable assets Ship loans, aircraft loans, other movable asset loans. Assets have to be registered in an OECD country. LTV limit is 60% for all types of assets. Substitution Assets Substitution assets can make up to 20% of the pool and can be cash, loans, or bonds satisfying the conditions. Hedging Derivatives can be used to reduce interest rate, currency and other market risks. Valuation Individual market values. Other comments (if any) Requirements ALM matching Asset coverage 2% OC has to be maintained at all times on a nominal and NPV basis. Interest coverage Natural matching and stress testing are used. Other (if any) Consequence of breach Regulatory or rule-based actions Monitoring Supervisory Authority, rating agencies and the appointed trustee/cover pool monitor. Other Compliance with EU UCITS but not CRD compliant. Issuers can make their LdG CRD compliant by limiting their cover pool legislation exposures to within the CRD limits. Source: National legislation, J.P. Morgan Covered Bond Research

188 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Luxembourgish covered bond backdrop

Figure 119: CB Issuance, €mm Figure 120: CB outstanding, €mm 12,000 40,000 Mortgage Public Sector 35,000 10,000 Mortgage Public Sector 30,000 8,000 25,000 6,000 20,000 15,000 4,000 10,000 2,000 5,000 0 0 2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 2007 2008 2009 2010 Source: ECBC, latest data available Source: ECBC, latest data available

189 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Dexia LdG Banque Table 434: Key balance sheet figures, € (BBG: DEXGRP) FY 2008 FY 2009 FY 2010 Loans 1,755,944,715 1,561,162,211 1,343,356,827 Snapshot TotalAssets 5,114,606,302 5,132,240,797 5,581,832,159 Dexia LdG Banque was founded in 2007, when it was Equity 128,282,484 162,344,188 193,807,467 granted a license to operate as an LdG issuer. It is a fully Source: Annual Report 2010 owned subsidiary of Dexia Banque Internationale à Luxembourg SA, part of the Dexia Group. Table 435: Select financial metrics FY 2008 FY 2009 FY 2010 The Group offers two broad types of services: in C:I 7.8 6.8 4.8 Core capital 25.4 24.3 22.1 Belgium, Luxembourg and Turkey it provides retail and Source: Annual Report 2010 commercial banking services; in its core markets of France and Belgium it is one of the leaders in public and Cover pool overview wholesale banking, providing banking and other financial We set out below some of the key cover pool services to local public finance operators. The group is characteristics: also present in Germany, where it has a platform granting access to the Pfandbriefe market, in Italy and in the Table 436: Covered bond characteristics Iberian peninsula. As at July 2011 Ratings S/M/F The first LdG was issued out of the €25bn EMTN Covered Bond rating AAA/-/- programme in September 2007. The cover pool consists Issuer rating (Dexia Banque) A/A3/A+ entirely of public sector assets that are eligible according to the Article 12-1 of the Financial Services Act of April Cover Pool Eligible Loans (€) 3,342,000,000 5, 1993. Eligible countries are those included in the EEA Eligible Debt Securities (€) 2,007,000,000 and the OECD. Interest and foreign exchange risk are Substitution Assets (€) 245,000,000 regulated by strict rules and are fully hedged in order to Country split (in %) reduce the risk of an asset-liability mismatch to the France 34.7 minimum. Luxembourg 13.1 USA 9.8 Spain 9.0 Financial performance Germany 7.5 We set out below some of the key financial performance Belgium 7.2 metrics: Sweden 4.3 Greece 3.7 Italy 3.0 Table 433: Key profit & loss figures, € Poland 2.2 Austria 1.8 FY 2008 FY 2009 FY 2010 Japan 1.5 Net interest income 19,199,623 23,608,834 20,602,112 Ireland 0.9 Provisions for loan Finland 0.8 losses 135,950 135,905 -33,042 Canada 0.3 NII less provisions 19,063,673 23,472,929 20,635,154 Korea 0.2 Other operating Source: Investor report income 21,000 -36,763 -69,162 Non-interest expense 106,353 134,293 391,685 Operating profit (loss) 20,895,980 22,552,186 39,484,729

PBT 20,760,030 22,688,091 39,451,687 Taxes 1,072,285 1,690,378 2,642,809 Net profit (loss) 19,687,745 20,997,713 36,808,878 Source: Annual Report 2010

190 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Erste Europaeische Pfandbrief und Table 438: Key balance sheet figures, € Kommunalbank (EEPK) FY 2008 FY 2009 FY 2010 Loans 2,844,501,741 1,817,250,364 1,801,560,961 (BBG: EEPK) Total Assets 7,724,015,387 6,299,805,316 6,244,314,231 Snapshot Deposits 159,044,860 234,856,293 501,208,948 Short-term EEPK, part of the Commerzbank Group since 2002, borrowings 392,314,942 426,000,000 480,142,196 focuses mostly on lending to public bodies such as Other ST borrowings 375,000,000 16,533,876 51,000,000 governments, regional assemblies, local authorities and Equity 66,935,480 281,350,509 281,932,570 public corporations throughout the OECD zone. EEPK Source: Annual Report 2010 benefits from a group letter of comfort from Table 439: Select financial metrics Commerzbank AG. It is one of Commerbank's two public-sector covered bond issuing subsidiaries in FY 2008 FY 2009 FY 2010 Luxembourg (the other being Eurohypo Luxembourg). Core capital 36.3 35.2 Source: Annual Report 2010 The bank was established in 1999, when it received the Cover pool overview license as a central mortgage bond institution. The first public covered bond issue was in 2000, but the current We set out below some of the key cover pool multi-currency €7.5bn ETMN programme was characteristics: established in 2003. In 2006, the bank issued its first Table 440: Covered bond characteristics Luxembourgish mortgage covered bond. As at July 2011 Just under half of the cover pool is located in the USA Ratings S/M/F Covered Bond rating AA+/-/- and Canada, while just over 50% of the cover pool has an Issuer rating (Commerzbank AG) A/A2/A+ external rating of at least AA/Aa3. FX and interest rate risk are hedged using derivatives. Cover Pool Cover pool size (€) 5,049,500,000

In April 2009, S&P lowered the rating of EEPK’s LdG to Country split (in %) AA+ from AAA due to changes in its covered bond USA 33.3 Canada 13.1 rating methodology. Luxembourg 8.0 Switzerland 6.7 Financial performance Italy 6.6 Germany 6.3 We set out below some of the key financial performance Hungary 3.9 metrics: UK 2.8 Korea 2.8 Table 437: Key profit & loss figures, € Other 19.7 FY 2008 FY 2009 FY 2010 Rating split (in %) Net interest income 13,123,532 2,670,771 27,013,846 AAA 12.3 AA (incl. AA+ and AA-) 40.1 Other operating A (incl. A+ and A-) 27.6 income 758,077 8,390,079 561,481 BBB (incl. BBB+ and BBB-) 8.5 Non-interest expense 7,954,395 9,768,101 17,843,448 NR 11.5 Source: Investor report PBT 10,085,550 85,283,746 1,847,427 Taxes 407,003 301,225 1,265,366 Net profit (loss) -10,492,553 -41,218,658 582,061 Source: Annual Report 2010

191 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Eurohypo Luxembourg SA Cover pool overview (BBG: EURHYP) We set out below some of the key cover pool Snapshot characteristics: Eurohypo Europaische Hypothekenbank (Eurohypo Table 443: Covered bond characteristics Luxembourg SA) focuses on public lending to EU, EEA and OECD countries and is Luxembourg’s largest As at June 2011 mortgage bank. Unlike its parent, which operates mainly Ratings S/M/F with sovereigns and sub-sovereigns in the EEA, Covered Bond rating AAA/-/AAA Switzerland, Canada and Japan, Eurohypo Luxembourg Issuer rating A-/-/A- is active on a more international scale, offering public Cover Pool sector finance to sovereigns and sub-sovereigns in a Cover pool size (€) 13,154,000,000 wider range of OECD countries. Public debtor debt (in %) 51.0 LdG debt (in %) 43.3 Over-collateralisation (in %) 5.8 Eurohypo Luxembourg was founded in 1989 and initially conducted general banking until it received its special Country split (in %) purpose banking license in 1999. It has a market share of USA 18.0 GBR 15.7 more than 50% in terms of volume of LdG in circulation. Germany 16.6 The assets in the cover pool are largely investment grade Canada 11.7 and mostly independent from any monoline rating. Switzerland 10.4 Spain 6.3 Eurohypo Luxembourg and its parent are today part of Italy 5.4 the Commerzbank Group, and are timetabled to be Other 15.8 divested by 2014 as part of the EU conditions for Europe 64.4 approval of state aid from the German taxpayer. North America 29.7 Asia 2.4 Financial performance Supra 3.5 We set out below some of the key financial performance Split by guarantee (in %) metrics: Not wrapped 90.1 MBIA 3.6 XL 0.3 Table 441: Key profit & loss figures, € AMBAC 0.5 FY 2008 FY 2009 FY 2010 FGIC 2.7 Net interest income 70,028,000 39,721,000 FSA 2.8 Provisions for loan losses 2,495,000 -1,613,000 S&P Rating split (in %) NII less provisions 67,533,000 41,334,000 AAA 24.9 AA (incl. AA+ and AA-) 15.6 Other operating A (incl. A+ and A-) 18.2 income -877,000 -1,566,000 BBB (incl. BBB+ and BBB-) 1.0 Non-interest expense 7,203,000 7,083,000 Below BBB or NR/Internal rating only 40.3 Operating profit (loss) 72,996,000 26,178,000 Fitch Rating split (in %) PBT 60,184,000 -37,753,000 AAA 18.5 Taxes -14,493,000 14,959,000 AA (incl. AA+ and AA-) 17.3 Net profit (loss) 45,691,000 -22,794,000 A (incl. A+ and A-) 8.0 BBB (incl. BBB+ and BBB-) 0.8 Source: Annual Report 2010 Below BBB or NR/Internal rating only 55.4 Source: Investor report Table 442: Key balance sheet figures, € FY 2008 FY 2009 FY 2010 Commercial Loans 2,329,648,000 3,420,363,000 Consumer Loans 4,216,946,000 4,373,569,000 Loans 6,546,594,000 7,793,932,000 Total Assets 24,902,863,000 25,798,686,000 Deposits 490,517,000 476,699,000 LT borrowings 7,504,934,000 9,450,687,000 Equity 159,393,000 92,955,000 Source: Annual Report 2010

192 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Hypo Pfandbrief Bank International SA Table 445: Key balance sheet figures, € FY 2008 FY 2009 FY 2010 (BBG: PBINTL) Loans 810,570,779 964,479,076 Total Assets 8,054,395,760 4,639,961,258 Snapshot Deposits 166,054,019 369,140,000 HPBI is part of the Hypo Real Estate Group, which Short-term borrowings 1,582,796,661 1,602,096,661 focuses on real estate and public finance. It is a Long-term borrowings 1,370,097,000 1,597,097,000 Equity 123,787,628 126,100,000 subsidiary of Depfa Bank plc, the Irish subsidiary of Source: Annual Report 2010 HRE AG. HRE AG is currently owned 100% by the German state, through SoFFin, the Financial Market Table 446: Select financial metrics Stabilisation Agency. FY 2008 FY 2009 FY 2010 Core capital 15.7 39.7 In October 2010, HRE underwent a significant balance Source: Annual Report 2010 sheet restructuring by transferring around €173bn (nominal value) of assets to FMW Wertmanagement; Cover pool overview furthermore, €124bn of SoFFin-guaranteed bonds issued We set out below some of the key cover pool by HRE have also been transferred to the FMS characteristics: Wertmanagement. Table 447: Covered bond characteristics HPBI is a pure Pfandbrief bank, licensed as a Banque d´Emission de Lettre de Gage by the Luxembourgish As at June 2011 regulators. As for other issuers from this jurisdiction, Ratings S/M/F HPBI is active in the international public sector lending Covered Bond rating AA/-/- business. The cover pool is skewed towards Europe, Issuer rating (Hypo Public Finance Bank) BBB/Baa3/BBB+ which accounts for just over 75% of the cover assets, Cover pool with the single largest country exposure being to Austria Public sector cover pool size (€) 3,205,000,000 (19%). The vast majority (97%) of the underlying Over-collateralisation (€) 405,000,000 collateral is investment grade and over-collateralisation is Nominal OC (%) 14.5 14.5%. Country split (in %) Austria 19.2 Financial performance Germany 15.5 USA 15.3 We set out below some of the key financial performance Switzerland 11.6 metrics: Spain 9.1 Ireland 7.2 Canada 6.8 Table 444: Key profit & loss figures, € Other 15.3 FY 2008 FY 2009 FY 2010 Central Europe 46.3 Net interest income 18,602,066 11,006,344 North America 22.1 Western Europe 13.0 Other operating Southern Europe 10.7 income 778,072 1,487,630 Eastern Europe 4.2 Non-interest expense 3,980,392 7,904,722 Asia 2.3 Northern Europe 1.5 PBT 2,815,569 2,593,374 Taxes 349,783 328,374 Rating split (in %) Net profit (loss) 2,465,786 2,265,000 AAA 46.5 Source: Annual Report 2010 AA (incl. AA+ and AA-) 30.5 A (incl. A+ and A-) 13.1 BBB (incl. BBB+ and BBB-) 6.8 NR 3.1 Source: Investor report

193 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Nord/LB Covered Finance Bank SA Table 449: Key balance sheet figures, € (BBG: NDB) FY 2008 FY 2009 FY 2010 Loans 2,001,600,000 1,932,400,000 Snapshot Total Assets 5,930,600,000 6,408,500,000 Nord/LB CFB SA is a wholly owned subsidiary of Short-term borrowings 1,960,800,000 2,550,900,000 Other ST borrowings 367,900,000 433,000,000 Nord/LB Luxembourg SA and part of the Nord/LB Equity 64,300,000 67,000,000 Group. It is also in receipt of a direct letter of support Source: Annual Report 2010 from the parent company. The only objective of Nord/LB CFB is to conduct business as a covered bond bank: as Table 450: Select financial metrics such, the bank takes on part of the public finance FY 2008 FY 2009 FY 2010 business generated by Nord/LB Girozentrale and ROE 11.9 10.7 provides funding primarily via the issuance of covered C:I 24.6 28.1 bonds. Nord/LB CFB is the only institution within the Core capital 7.4 8.6 Landesbank framework to provide such a funding Source: Annual Report 2010 platform to its savings bank. Cover pool overview The bank actively lends to public sector entities in the We set out below some of the key cover pool OECD area, but Germany remains its core market and characteristics: accounts for 30% of the exposures currently in the cover pool; the cover pool is also skewed towards the USA, Table 451: Covered bond characteristics which contributes a quarter of its assets, although for the As at June moment the bank is not planning to increase its exposure 2011 to this jurisdiction, except for 100% government- Ratings S/M/F Covered Bond rating AAA/-/AAA guaranteed exposures. The bank’s portfolio does not Issuer rating A-/-/A include any exposures to Iceland, Turkey, Mexico, Greece and the Baltic States and will not invest in them Cover Pool Cover pool size (€) 4,297,900,000 in the future. The bank will also add no further weight to its exposures to most Eastern European countries and Country split (in %) Ireland. Germany 30.2 USA 24.8 Canada 5.0 The pool is mostly investment grade (87%) and evenly Spain 4.5 distributed between the top three investment grade Netherlands 4.4 ratings (AAA to A). Other 31.0 Rating split (in %) Financial performance AAA 27.6 AA (incl. AA+ and AA-) 25.5 We set out below some of the key financial performance A (incl. A+ and A-) 33.9 metrics: BBB (incl. BBB+ and BBB-) 12.9 Source: Investor report Table 448: Key profit & loss figures, € FY 2008 FY 2009 FY 2010 Net interest income 8,725,000 8,589,000 Provisions for loan losses 289,000 1,013,000 NII less provisions 8,436,000 7,576,000

Comm.& fee income 1,175,000 740,000 Other operating income -2,323,000 -2,296,000 Non-interest expense 2,675,000 2,853,000

PBT 7,955,000 6,714,000 Taxes 1,591,000 482,000 Net profit (loss) 6,364,000 7,197,000 Source: Annual Report 2010

194 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

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195 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

New Zealand Covered Bonds

Legislative snapshot There is no special covered bond legislation in New Zealand. Therefore, since only two banks have issued covered bonds so far, we provide a brief overview of the structure of each programme in the issuer profiles section below.

In October and November 2010 the Reserve Bank of New Zealand opened a consultation period in order to evaluate the potential introduction of a legislative framework and a uniform covered bond structure. The first result of the consultation was the imposition in March 2011 of a 10% limit on the issuance of covered bonds by locally-incorporated banks.

196 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

New Zealand covered bond & macro backdrop

Figure 121: CB Issuance, €mm Figure 122: CN Outstanding, €mm 1,400 1,400 1,200 1,200 Mortgage Mortgage 1,000 1,000 800 800 600 600 400 400 200 200 0 0 2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 2007 2008 2009 2010

Source: ECBC, latest data available Source: ECBC, latest data available

Figure 123: New Zealand real GDP growth, y-on-y, % Figure 124: New Zealand unemployment level, %

8 Real GDP growth 8 Unemployment 6 7 6 4 5 2 4 0 3 2 -2 1 -4 0 0 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 1 1 ------r r r r r r r r r r r r r r r r r r r r r r r r a a a a a a a a a a a a a a a a a a a a a a a a M M M M M M M M M M M M M M M M M M M M M M M M

Source: Bloomberg Source: Bloomberg

Figure 125: New Zealand CPI and base rate, % Figure 126: New Zealand consumer confidence index, #

9 Inflation Base rate Cons. Confidence 8 140 7 120 6 100 5 80 4 3 60 2 40 1 20 0

Source: Bloomberg Source: Bloomberg

Figure 127: New Zealand house price growth, % Figure 128: New Zealand dwelling sales, #

30% House price growth 12,000 Dwelling sales 25% 10,000 20% 15% 8,000 10% 6,000 5% 0% 4,000 -5% 2,000 -10% -15% 0 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 1 1 ------r r r r r r r r r r r n n n n n n n n n n n n a a a a a a a a a a a a a a a a a a a a a a a M M M M M M M M M M M J J J J J J J J J J J J

Source: OECD Source: Bloomberg

197 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Bank of New Zealand Table 453: Key balance sheet figures, NZDmm (BBG: BZLNZ) FY 2008 FY 2009 FY 2010 Loans 51,975 55,142 54,986 Snapshot Total Assets 64,209 69,862 69,647 BNZ is a wholly owned subsidiary of National Australia Deposits 25,920 27,233 28,663 Short-term borrowings 1,212 3,901 1,606 Bank. The bank offers a range of financial products to Other short-term individuals, small businesses and farmers and large borrowings 4,656 8,304 6,421 corporations in New Zealand. Long-term borrowings 1,264 1,280 1,278 Equity 3,933 3,745 4,002 BNZ issued the first ever covered bond out of New Source: Bloomberg Zealand in 2010; since there is no special covered bond Table 454: Select financial metrics law, the deal is governed by New Zealand and English contract and common law. BNZ will sell the mortgages FY 2008 FY 2009 FY 2010 ROA -0.3 0.9 to a guarantor, which will purchase these using the ROE -5.6 15.0 proceeds of the covered bonds issuance and will then Source: Bloomberg guarantee the bonds. The bondholder will have dual recourse to the issuer and the cover pool. This structure Cover pool overview resembles that used in Canada, the Netherlands and the We set out below some of the key cover pool UK. characteristics:

The bonds will benefit from a defined cover pool with Table 455: Covered bond characteristics LTV restrictions, overcollateralisation and asset coverage As at March and amortisation tests (only the first 80% LTV will be 2011 taken into account for inclusion in the cover pool and Ratings S/M/F liabilities may not exceed 97% of the asset value at any Covered Bond rating -/Aaa/AAA time). Issuer rating AA/Aa3/AA Cover Pool Financial performance Cover pool size (NZD) 2,623,000,000 Outstanding liabilities (in NZD) 2,189,000,000 We set out below some of the key financial performance Nominal overcollateralisation (in %) 19.9 metrics: Nominal asset percentage (in %) 83.4 Supporting asset percentage (in %) 86.6 Table 452: Key profit & loss figures, NZDmm Number of loans 19,718 FY 2008 FY 2009 FY 2010 Average loan size (in NZD) 133,045 Net interest income 1,328 1,351 1,281 WA residual maturity (yrs) 23 Provisions for loan WA seasoning (mths) 39 losses 0 0 187 WA LTV (in %) 47.4 NII less provisions 1,328 1,351 1,094 Highest geographic exposure (in %) Auckland - 35.4 Interest only loans (in %) 6.1 Other operating income 440 397 379 Current LTV breakdown (in %) Non-interest expense 786 777 818 <40 39.0 Operating profit 1,197 875 824 40-50 15.7 50-60 15.0 PBT 1,126 685 637 60-70 16.4 Taxes 341 866 35 70-80 13.9 Net profit (loss) 785 -181 602 >80 0.1 Source: Bloomberg Source: Fitch Ratings

198 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Westpac New Zealand Table 458: Select financial metrics (Westpac Group) (BBG: WSTP) FY 2008 FY 2009 FY 2010 NIM 2.0 2.6 2.2 Snapshot ROA 0.9 0.7 1.1 Westpac New Zealand is part of the Westpac Banking ROE 23.1 13.2 17.4 ROC 2.8 2.0 3.1 Corporation, the Australian financial services group. In C:I 47.7 42.7 43.6 New Zealand the bank offers a range of financial Core Capital 7.8 8.1 9.1 products to individuals, farmers and SMEs and corporate Source: Bloomberg and institutional clients. Cover pool overview As for BNZ, Westpac New Zealand covered bonds use a We set out below some of the key cover pool securitisation-like structure. The bonds are direct, characteristics: unconditional and senior obligations of Westpac New Zealand and the bondholders have full dual recourse to Table 459: Covered bond characteristics the cover pool and the issuer. Westpac needs to maintain As at July 2011 an asset percentage of 90%, which translates into a Ratings S/M/F committed OC of 11%. Only the first 75% LTV will be Covered Bond rating -/Aaa/AAA considered for the asset coverage test. Issuer rating AA/Aa3/AA Cover Pool Financial performance Cover pool size (NZD) 2,750,000,000 Outstanding liabilities (in NZD) 1,774,408,732 We set out below some of the key financial performance Asset percenatge (%) 84.5 metrics: Asset coverage ratio (%) 131.8

Table 456: Key profit & loss figures (Westpac Group), AUDmm Number of loans 22,359 Average loan size (in NZD) 117,184 FY 2008 FY 2009 FY 2010 WA residual maturity (mths) 276 Net interest income 7,237 11,667 11,867 WA seasoning (mths) 33 Provisions for loan WA Current LTV Limit (%) 57.2 losses 931 3,238 1,456 WA Current LTV (%) 55.7 NII less provisions 6,306 8,429 10,411 Interest only (%) 12.4 Comm.& fee income 2,060 2,637 2,433 Fixed rate loans (%) 67.6 Other operating Largest concentration (%) Auckland - 22.1 income 1,034 1,254 1,699 Non-interest expense 5,313 7,053 7,360 LTV limit breakdown (in %) Operating profit 4,904 6,222 8,048 0-50 47.7 50-55 5.8 PBT 5,219 6,096 8,038 55-60 6.4 Taxes 1,287 2,579 1,626 60-65 7.0 Net profit (loss) 3,859 3,446 6,346 65-70 7.9 Source: Bloomberg 70-75 9.4 75-80 15.5 >80 0.3 Table 457: Key balance sheet figures (Westpac Group), AUDmm FY 2008 FY 2009 FY 2010 Current LTV breakdown (in %) 0-50 50.5 Loans 313,545 463,459 477,655 50-55 6.1 Total Assets 439,676 589,587 618,277 55-60 6.0 Deposits 233,730 329,456 337,385 60-65 7.1 Short-term borrowings 83,402 70,394 66,745 65-70 7.8 Other short-term 70-75 9.6 borrowings 19,541 27,252 30,853 75-80 13.0 Long-term borrowings 54,264 92,180 106,971 Equity 19,471 36,571 40,118 Source: Fitch Ratings Source: Bloomberg

199 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

200 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected] s d n o B

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201 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Norwegian Covered Bonds

Legislative snapshot We set out in Table 460 a snapshot of key covered bond attributes in the Norway.

Table 460: Norwegian Covered Bond legislative overview Attribute Commentary Framework Legislative Framework Act on Financing Activity and Financial Institutions (No. 40 of 10 June 1988), as amended in 2007 (No. 11 of 6 March 2007), along with accompanying regulations Types of covered bonds One Structure of Issuer Direct issuance? No Comments (if any) Norwegian covered bonds are issued by specialised mortgage credit institutions ('Boligkreditt'), special purpose subsidiaries of the main lenders with restricted business activities. They have a license from the Norwegian FSA (specialist banking principle) Bankruptcy remoteness Segregation of assets in a special cover register, with a preferential claim on register collateral. Insolvency of the issuer does not necessarily result in acceleration of the outstanding liabilities. If however the Cover Pool fails to meet the requirements of the Act, the holders of CB benefit from a priority claim over the proceeds of a sale of the assets in the cover pool. In this case, the CB investors retain the benefit of any shortfall claim against the issuing institution which ranks pari passu with other senior, unsecured claims Dual claim Yes. To the special purpose subsidiary only Bond format Typically, fixed rate, with a mix of hard and soft bullets bonds, with the ability to extend maturities by up to 12 months at the discretion of the issuer Supervision Kredittilsynet (Norwegian FSA) Cover pool Eligible assets Mortgage Loans can be originated by the issuer, by the parent bank or from another bank. Residential mortgages, commercial mortgages issued in the EEA or OECD can be included in the cover pools LTV caps "Hard" (loans above the maximum can not be included in the cover pool). Residential (up to 75% LTV) and commercial (up to 60% LTV) mortgages for inclusion in the cover pool Public Sector Public sector assets must be granted to or guaranteed by a public body in either the EEA or OECD Non-performing collateral NPLs greater than 90d must be removed from the cover pool calculations Substitution Assets Up to 20% of cover pool can be substitute assets (30% can be temporarily allowed) Hedging Used to minimise interest rate, currency, credit or other risks Valuation Individual market values. Should LTVs rise above the maximum thresholds set out above through falling property valuations, the portion of the mortgage loan under these maximum levels may be included in the cover pool calculations, while bondholders continue to benefit from the collateral amount above these thresholds Other comments (if any) All assets must be recorded in a cover pool register Requirements ALM matching Asset coverage The nominal value of the cover pool must at all times exceed the aggregate value of claims under the covered bonds. NPV of cover pool should always remain above that of the liabilities; cashflows from pool and derivatives should be enough to cover payments on liabilities and derivatives; FX risk should be hedged and the issuer must set limits for cashflow mismatches using a parallel +/- 100bp shift in the curve. Over- collateralisation requirements are not defined by legislation (voluntary over-collateralisation is protected to the benefit of CB investors) Interest coverage The CB issuer must ensure that the payment flows from the cover pool enable the mortgage credit institution to honour its payment obligations towards holders of covered bonds and counterparties to derivative contracts Other (if any) No mandatory OC, but voluntary OC is considered bankruptcy remote Consequence of breach Tests must be complied with Monitoring Kredittilsynet (Norwegian FSA) appoints an independent party to check that the value of the cover pool exceeds that of the claims and that the register is in accordance with the laws and regulations. Other Compliance with EU UCITS and CRD compliant. legislation Source: National legislation, J.P. Morgan Covered Bond Research

202 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Norwegian covered bond & macro backdrop

Figure 129: CB issuance, €mm Figure 130: CB outstanding, €mm 35,000 80,000

30,000 Mortgage Public Sector 70,000 Mortgage Public Sector 25,000 60,000 50,000 20,000 40,000 15,000 30,000 10,000 20,000 5,000 10,000 0 0 2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 2007 2008 2009 2010 Source: ECBC. Latest data available displayed Source: ECBC. Latest data available displayed

Figure 131: Norwegian real GDP growth, y-on-y, % Figure 132: Norwegian unemployment level, %

5 5 Real GDP growth Unemployment 4 4 3 4 2 3 3 1 2 0 2 -1 1 -2 1 -3 0 0 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 1 1 ------r r r r r r r r r r r r r r r r r r r r r r r r a a a a a a a a a a a a a a a a a a a a a a a a M M M M M M M M M M M M M M M M M M M M M M M M

Source: Bloomberg Source: Bloomberg

Figure 133: Norwegian CPI and base rate, % Figure 134: Norwegian consumer confidence, balance of survey

8 35 Inflation Base rate Consumer confidence 7 30 6 25 5 20 4 15 10 3 5 2 0 1 -5 0 -10 -1 -15 0 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 1 1 ------r r r r r r r r r r r r r r r r r r r r r r r r a a a a a a a a a a a a a a a a a a a a a a a a M M M M M M M M M M M M M M M M M M M M M M M M

Source: Bloomberg Source: Bloomberg

Figure 135: Norwegian house price growth, y-on-y, % Figure 136: Norwegian building permits, #

20% 120 OECD HP nominal growth OECD Building permits index 15% 100 10% 80 5% 60 0% 40 -5% 20 -10% 0 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 1 1 ------r r r r r r r r r r r r r r r r r r r r r r r a a a a a a a a a a a a a a a a a a a a a a a M M M M M M M M M M M M M M M M M M M M M M M

Source: Bloomberg Source: Bloomberg

203 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

DnB NOR Boligkreditt ASA (‘DNB’) Table 463: Select financial metrics (BBG: DNBNOR) FY 2008 FY 2009 FY 2010 NIM n/a n/a n/a Snapshot ROA n/a 0.3 0.5 DnB NOR Boligkreditt (‘DNB’) is the covered bond ROE n/a 9.6 16.1 ROC n/a 0.3 0.5 issuer set up by DnB NOR Bank ASA, Norway’s leading C:I 23.6 41.6 32.9 financial services group. DnB NOR has a 30% market Core capital 6.3 8.0 7.4 share of the retail lending market and accounts for 35% Source: Bloomberg of corporate lending in Norway. It is 34% owned by the Norwegian Government. Cover pool overview We set out below some of the key cover pool The covered bond programme, set up in June 2007, is characteristics: rated AAA by all three agencies and totals around €40bn. The pool is entirely backed by Norwegian residential Table 464: Covered bond characteristics mortgages, originated within DnB NOR Bank’s As at 31 May 2011 distribution network. Covered Bond rating S/M/F AAA/Aaa/AAA Parent rating S/M/F (DnB Nor Bank) A+/Aa3/A+ Financial performance Total Cover Pool Balance: (NOK000) 421,705,396 We set out below some of the key financial performance Substitution assets: 0 metrics: Over-collateralisation 35.1 WA Loan Balance: (NOK) 1,039,346 Table 461: Key profit & loss figures, NOKmm No. of Loans: 405,741 FY 2008 FY 2009 FY 2010 WA Seasoning (in months): 52 Net interest income 958 2,962 2,320 WA Remaining term (in months): 266 Provisions for loan WA Indexed LTV (in %): 55.4 Interest only mortgages (in %): 39.9 losses n/a n/a n/a NII less provisions 958 2,962 2,320 Fixed rate mortgages (in %) 5.6

Comm.& fee income 28 46 46 Source: Investor Report Other operating income n/a n/a 7 Table 465: Collateral pool LTV breakdown Non-interest expense 443 869 1,336 Operating profit (loss) 1,429 1,214 2,724 Current LTV ranges As at 31 May 2011 0-<=40% 20.6 PBT 1,429 1,217 2,724 >40%-<=50% 11.9 Taxes 398 343 763 >50%-<=60% 17.5 Net profit (loss) 1,031 873 1,961 >60%-<=70% 28.3 Source: Bloomberg >70%-<=75% 15.8 >75% 5.9 Table 462: Key balance sheet figures, NOKmm Source: Investor report FY 2008 FY 2009 FY 2010 Loans 198,482 337,111 397,640 Total Assets 226,347 350,943 410,528 Deposits n/a n/a n/a Short-term borrowings 0 0 94,307 Other ST borrowings n/a2,015 9,106 n/a n/a Long-term borrowings 217,270 336,402 292,495 Equity 6,527 11,650 12,748 Source: Bloomberg

204 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Nordea Eiendomskreditt Table 468: Nordea Group: Select financial metrics (BBG: NBHSS) FY 2008 FY 2009 FY 2010 NIM 1.48 1.42 1.25 Snapshot ROA 0.62 0.47 0.49 Nordea Eiendomskreditt (‘NE’) is a 100% owned ROE 15.35 11.55 11.36 ROC 1.56 1.16 1.22 subsidiary of Nordea Bank Norge ASA, part of the larger C:I 53.05 49.99 51.96 Nordea Group, a well established financial group Core capital 7.40 10.20 9.80 catering to the Nordic and Baltic states, where it is Source: Bloomberg consistently one of the largest by market share, with a small but growing presence in new European markets. Cover pool overview No geographical market accounts for more than a quarter We set out below some of the key cover pool of income, out of a customer base of around 10mm characteristics: households and corporates. Table 469: Covered bond characteristics The purpose of the issuer is to acquire and provide As at 31 March 2011 residential mortgage loans and finance its activities Covered Bond rating S/M/F -/Aaa/AAA mainly through covered bond issuance. Loans in NE are Issuer rating S/M/F (Nordea Bank Norge) AA-/Aa2/AA- originated by Nordea Bank Norge, and subsequently Total Cover Pool Balance: (NOK mm) 77,960 transferred to NE. Substitute collateral (NOK mm) 45.4 OC level (%) Financial performance WA Loan Balance: (NOK) 1,150,000 We set out below some of the key financial performance No. of Loans: 69,969 metrics: No. of Borrowers 65,758 WA Seasoning (in months): 30 WA Current LTV (%) 57.6 Table 466: Nordea Group: Key profit & loss figures, £mm WA Indexed LTV (%) 54.2 FY 2008 FY 2009 FY 2010 Net interest income 41,982 46,156 41,308 Source: Investor Report Provisions for loan losses 3,841 12,988 7,038 Table 470: Collateral pool LTV breakdown NII less provisions 38,141 33,169 34,270 Current LTV ranges As at 31 March 2011 Comm.& fee income 20,872 21,570 23,661 0-<=40% 74.3 Other operating >40%-<=50% 11.3 income 1,418 918 929 >50%-<=60% 8.2 Non-interest expense 41,100 46,209 44,960 >60%-<=70% 4.9 Operating profit (loss) 27,804 26,456 28,609 >70%-<=75% 1.3 >75% 0.0 PBT 27,994 26,876 29,138 Source: Investor report Taxes 5,968 6,616 7,815 Net profit (loss) 22,018 20,225 21,275 Source: Bloomberg

Table 467: Nordea Group: Key balance sheet figures, £mm FY 2008 FY 2009 FY 2010 Loans 2,574,800 2,343,000 2,449,400 Total Assets 4,604,900 4,211,300 4,528,100 Deposits 1,443,300 1,274,300 1,375,200 Short-term borrowings 504,435 433,047 317,588 Other ST borrowings 4,449 4,688 3,914 Long-term borrowings 1,138,400 1,142,600 1,242,200 Equity 172,927 186,030 191,024 Source: Bloomberg

205 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

SpareBank 1 Boligkreditt ASA Table 472: Key balance sheet figures, NOKmm (BBG: SPABOL) FY 2008 FY 2009 FY 2010 Loans 42,494 80,154 94,742 Snapshot Total Assets 53,326 84,233 105,079 SpareBank 1 Boligkreditt (‘SpareBank’) is a mortgage Deposits 0 0 n/a Short-term borrowings 5,905 1,992 390 company licensed by the Norwegian FSA. It is a separate Other ST borrowings 0 0 n/a legal entity established in accordance with the Long-term borrowings 500 3,475 97,791 Norwegian covered bonds legislation in order to acquire Equity 1,678 3,683 4,805 mortgages from banks in the SpareBank 1 Alliance and Source: Bloomberg finance further lending via the issuance of covered bonds. The Alliance is a combination of 17 Norwegian Table 473: Select financial metrics local and regional savings banks and two commercial FY 2008 FY 2009 FY 2010 banks owned by these banks. It is the second largest NIM n/a 0.17 n/a ROA 0.00 0.00 0.08 Norwegian retail mortgage lender, with a market share of ROE 3.76 3.14 1.79 20% of retail loans and 16.1% of corporate lending. The ROC 0.78 0.98 0.14 assets backing SpareBank 1's covered bond programme C:I 32.19 14.20 18.68 are 100% Norwegian residential mortgages. Core capital n/a n/a n/a Source: Bloomberg SpareBank 1 Gruppen AS is owned by Sparebanken Cover pool overview Hedmark (9%), SpareBank 1 Nord-Norge (16%), SpareBank 1 SMN (20%), SpareBank 1 SR-Bank (29%), We set out below some of the key cover pool and the cooperating savings banks a further 18%. characteristics: Together, they constitute the country’s second largest Table 474: Covered bond characteristics lender. As at 31 March 2011 Financial performance Covered Bond rating S/M/F -/Aaa/AAA Issuer rating S/M/F -/A1/A- We set out below some of the key financial performance metrics: Total Cover Pool Balance: (NOK000) 82,160,601 Substitute collateral (NOK000) 12,372,175

Table 471: Key profit & loss figures, NOKmm WA Loan Balance: (NOK) FY 2008 FY 2009 FY 2010 No. of Loans: 75,905 WA Seasoning (in months): 1,082,414 Net interest income 104 108 137 WA Original LTV (in %): 57.0 Provisions for loan WA Current LTV (in %): 50.1 losses 0 0 n/a WA Interest Rate (in %): 3.72 NII less provisions 104 108 137 n/a n/a n/a Comm.& fee income n/a n/a n/a Source: Investor Report Other operating income -35 29 -7 Table 475: Collateral pool LTV breakdown Non-interest expense 22 19 24 Operating profit (loss) 47 117 105 Current LTV ranges As at 31 March 2011 3 0 n/a 0-<=40% 30.1 PBT 44 117 105 >40%-<=50% 14.3 Taxes 12 33 30 >50%-<=60% 18.1 Net profit (loss) 32 84 76 >60%-<=70% 18.6 Source: Bloomberg >70%-<=75% 18.8 >75% 0.0 Source: Investor report

206 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Sparebanken Vest Boligkreditt AS Table 478: Select financial metrics (BBG: SVEG) FY 2008 FY 2009 FY 2010 NIM 1.65 1.59 1.59 Snapshot ROA 0.24 0.38 0.60 Sparebanken Vest Boligkreditt is a mortgage company ROE 4.74 7.82 11.30 ROC 0.47 0.70 1.15 licensed by the Norwegian FSA, established in 2008. It is C:I 63.46 60.35 55.81 a separate legal entity established in accordance with the Core capital 7.73 10.54 10.80 Norwegian covered bonds legislation in order to acquire Source: Bloomberg. Sparebanken Vest data mortgages from Sparebanken Vest and finance further lending via the issuance of covered bonds. Sparebanken Cover pool overview Vest is the third largest savings bank with a significant We set out below some of the key cover pool focus in western Norway. It is focused on the retail characteristics: market (approximately 70% of its loan book), alongside the SME sector. It operates 63 branches, serving close to Table 479: Covered bond characteristics 230,000 customers. As at 30 April 2011 Covered Bond rating S/M/F -/Aaa/AAA The cover pool of Sparebanken is backed in its entirety Issuer rating S/M/F -/A2/A- by Norwegian residential mortgages, transferred from Total Cover Pool Balance: (NOK000) 27,500,000 Sparebanken Vest. Substitute collateral (NOK000) 1,006,905 OC level (%) 22.0 Financial performance WA Loan Balance: (NOK) 943,000 We set out below some of the key financial performance No. of Loans: 27,595 metrics: WA Seasoning (in months): 32.4 WA Remaining term (%) 271.4 WA Indexed LTV (%) 52.5 Table 476: Key profit & loss figures, NOKmm

FY 2008 FY 2009 FY 2010 Source: Investor Report Net interest income 1,329 1,465 1,585 Provisions for loan Table 480: Collateral pool LTV breakdown losses n/a n/a n/a NII less provisions 1,329 1,465 1,585 Current LTV ranges As at 30 April 2011 0-<=40% 28.0 Comm.& fee income 393 0.04 382 >40%-<=50% 17.5 Other operating >50%-<=60% 18.0 income 151 0.42 168 >60%-<=70% 19.0 Non-interest expense 1,144 1,255 1,309 >70%-<=75% 9.5 Operating profit (loss) 615 770 969 >75% 6.0 204 270 169 Source: Investor report PBT 411 500 800 Taxes 204 137 189 Net profit (loss) 206 362 611 Source: Bloomberg. Sparebanken Vest data

Table 477: Key balance sheet figures, NOKmm FY 2008 FY 2009 FY 2010 Loans 76,235 82,302 88,001 Total Assets 94,893 97,661 105,275 Deposits 40,521 44,881 48,719 Short-term borrowings 12,140 14,583 10,529 Other ST borrowings 1,353 865 770 Long-term borrowings 35,686 31,794 38,559 Equity 4,372 4,885 5,929 Source: Bloomberg. Sparebanken Vest data

207 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Terra Boligkreditt AS Cover pool overview (BBG: TERBOL) We set out below some of the key cover pool Snapshot characteristics: Terra Boligkreditt (‘Terra’) is a specialised credit Table 483: Covered bond characteristics institution, fully owned by Terra Gruppen AS. Terra Gruppen itself is owned by 78 local Terra banks (98% As at 30 June 2011 Covered Bond rating S/M/F -/Aa2/- ownership) and was constituted in order to provide its Issuer rating S/M/F n/a shareholder banks access to areas that are too small to make entering their market cost effective. The company Total Cover Pool Balance (€mm): 4,003 WA Loan Balance (€): 170,801 therefore negotiates on behalf of all the banks to arrange No. of Loans: 23,435 banking solutions that deliver strategic benefits and WA Current LTV (in %): 46.3 economies of scale. The shareholder banks are WA Indexed LYV (in %): 42.2 Cooperative housing (in %): 13.0 committed to using the solutions negotiated for the group Substitute assets (in %): 7.0 in the most important areas. Fixed rate mortgages (in %) 7.2

Terra banks rank as the fourth largest lender to the retail Source: Investor Report sector, with a market share of 11%, while the focus on the corporate market is limited. Terra operates Table 484: Collateral pool LTV breakdown approximately 190 branches across the country. Current LTV ranges As at 30 June 2011 0-<=40% 26.0 >40%-<=50% 13.0 Financial performance >50%-<=60% 61.0 We set out below some of the key financial performance >60%-<=70% 26.0 metrics: >70%-<=75% 0.0 >75% 0.0 Source: Investor report Table 481: Key profit & loss figures, NOKmm FY 2008 FY 2009 FY 2010 Net interest income 72 139 176 Provisions for loan losses n/a n/a n/a NII less provisions n/a n/a n/a n/a n/a n/a Comm.& fee income 37 63 109 Other operating income 0 0 0 Non-interest expense 27 35 35 Operating profit (loss) n/a n/a n/a n/a n/a n/a PBT 9 48 36 Taxes 2 13 10 Net profit (loss) 6 35 26 Source: Bloomberg

Table 482: Select financial metrics FY 2008 FY 2009 FY 2010 NIM n/a n/a n/a ROA n/a n/a n/a ROE 1.30 5.40 3.39 ROC 0.05 0.16 0.08 C:I 37.08 25.57 20.14 Core capital 16.63 11.25 12.39 Source: Bloomberg

208 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected] s d n o B

d e r e v o C

e s e u g u t r o P

209 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Portuguese Covered Bonds

Legislative snapshot We set out in Table 485 a snapshot of key covered bond attributes in Portugal.

Table 485: Portuguese Covered Bond legislative overview Attribute Commentary Framework Legislative Framework Decree 59/2006 and Decree 298/1992, Notices 5-8/2006, Reg instrument 13/2006 Types of covered bonds Two. Mortgage CB (Obrigacoes Hipotecarias) and Public Sector CB (Obrigacoes Sobre o Sector Publico): Structure of Issuer Direct issuance? Yes and No. The originator can either issue CB directly from the institution’s balance sheet or can transfer the assets to a specialised credit institution (Mortgage Credit Institution or MCI) who then issues the bonds Comments (if any) Portuguese programmes to date have used the direct issuance model Bankruptcy remoteness No acceleration on issuer insolvency, although a two-thirds majority of bondholders can vote to accelerate the programme following issuer dissolution Dual claim Yes. Should the cover pool be insufficient to satisfy CB bondholders, a claim pari passu to other unsecured bondholders within the insolvency estate exists Bond format Typically, fixed rate, soft bullet, with the ability to extend maturities by up to 12 months at the discretion of the issuer. Maturities must be greater than 2 years and less than 50 years Supervision Bank of Portugal and CMVM Cover pool Eligible assets Mortgage European Union first-lien mortgages (or second-lien where the first-lien is also included). Insured or guaranteed loans can also be included LTV caps "Hard" (loans above the maximum can not be included in/must be removed from the cover pool). Both residential (max LTV 80%) and commercial (max LTV 60%) within the EU; the property has to be valued every three years for residential properties (or annually for exposures >€500k) and annually for commercial ones Public Sector Loans granted and debt issued or guaranteed by governments or local authorities within the EU Non-performing collateral NPLs greater than 90d must be removed from the cover pool Substitution Assets Substitute collateral is limited to a maximum of 20% of the cover pool, and can include cash deposits with the Bank of Portugal or other credit institutions rated at least A-, government bonds or other eligible bonds (including ECB Tier 1 assets) Hedging Used to minimise interest rate, currency, credit or other risks. Entered on the asset register and rank pari passu with CB holders. Must be sourced from an EU or OECD bank rated at least A-. Do not accelerate on issuer insolvency Valuation Individual market values. Independent revaluations must occur at least every three years for loans that exceed 5% of an institution's own funds, €500k for residential property or €1mm for commercial property. The value of mortgaged property must also be checked by the institution on a periodic basis (3 years for residential, annually for commercial). Cover pools are monitored by a designated independent supervisor. Other comments (if any) Bondholders also benefit from the protection of a bondholder representative charged with implementing the deliberations of the bondholder meetings that may have established early redemption of the programme, represent bondholders in any legal action etc. Credit facilities can also be used to finance redemption or interest payments on outstanding CB Requirements ALM matching Asset coverage Nominal cover required, with minimum 5.26% OC for mortgage bonds, none required for public sector bonds. Interest coverage Yes. Interest paid on the mortgage bonds can never exceed interest received from the cover pool Other (if any) The average maturity of outstanding bonds can not exceed the average life of the mortgage claims. NPV of assets must exceed NPV of CB. Must also be met for a 200bp parallel shift in the yield curve Consequence of breach Failure to meet the above requirements requires the issuing institution to either add mortgage or substitution collateral, or to repurchase outstanding bonds from the secondary market. Other regulatory actions by the BdP Monitoring Independent auditor must verify compliance with all legal and regulatory requirements as well as auditing collateral. Annual reports to the BdP Other Compliance with EU UCITS and CRD compliant legislation Source: National legislation, J.P. Morgan Covered Bond Research

210 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Portuguese covered bond & macro backdrop

Figure 137: Portuguese CB issuance, €mm Figure 138: Portuguese CB outstanding, €mm 14,000 35,000

12,000 Mortgage Public Sector 30,000 Mortgage Public Sector 10,000 25,000 8,000 20,000 6,000 15,000 4,000 10,000 2,000 5,000 0 0 2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 2007 2008 2009 2010 Source: ECBC. Latest data available displayed Source: ECBC. Latest data available displayed

Figure 139: Portuguese real GDP growth, y-on-y, % Figure 140: Portuguese unemployment level, %

5 Real GDP growth 14 Unemployment 4 12 3 2 10 1 8 0 -1 6 -2 4 -3 -4 2 -5 0 0 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 1 1 ------r r r r r r r r r r r r r r r r r r r r r r r r a a a a a a a a a a a a a a a a a a a a a a a a M M M M M M M M M M M M M M M M M M M M M M M M

Source: Source: Bloomberg Source: Bloomberg

Figure 141: Portuguese CPI and base rate, % Figure 142: Portuguese consumer confidence, balance of survey

6 Inflation Base rate 5 0 4 -10 Cons. Confidence 3 2 -20 1 -30 0 -1 -40 -2 -50 -3

0 1 2 3 4 5 6 7 8 9 0 1 -60 0 0 0 0 0 0 0 0 0 0 1 1 ------0 1 2 3 4 5 6 7 8 9 0 1 r r r r r r r r r r r r 0 0 0 0 0 0 0 0 0 0 1 1 a a a a a a a a a a a a ------r r r r r r r r r r r r M M M M M M M M M M M M a a a a a a a a a a a a M M M M M M M M M M M M

Source: Bloomberg Source: Bloomberg

Figure 143: Portuguese house price growth, % Figure 144: Portuguese outstanding mortgages (€mm) and annual 6% House price growth growth of mortgage stock, % 4% 140,000 Outstanding mortgages Growth in o/s mortgages 18% 2% 120,000 16% 14% 0% 100,000 12% -2% 80,000 10% 8% -4% 60,000 6% 40,000 -6% 4% 20,000 2% -8% 6 7 8 9 0 1 6 7 8 9 0 5 6 7 8 9 0 0 0% 0 0 0 0 0 0 0 0 1 1 1 0 0 0 0 0 1 ------2 3 4 5 6 7 8 9 0 3 4 5 6 7 8 9 0 1 n n n n n n y y y y y p p p p p p 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 1 1 a a a a a a a a a a a ------e e e e e e J J J J J J c c c c c c c c c n n n n n n n n n S S S S S S M M M M M e e e e e e e e e u u u u u u u u u J J J J J J J J J D D D D D D D D D Source: INE Source: ECB

211 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Banco Comercial Portugues Table 488: Select financial metrics (‘Millennium bcp’) FY 2007 FY 2008 FY 2009 FY 2010 NIM 2.0 2.1 1.5 1.7 (BBG: BCPPL) ROA 0.6 0.2 0.2 0.2 Snapshot ROE 13.8 3.6 4.2 3.5 ROC 1.4 0.6 0.6 0.8 Banco Comercial Portugues was founded in 1985 and in C:I 64.0 64.5 65.5 56.7 2004 was rebranded as Millennium bcp to unite under Core capital 5.5 7.1 9.3 9.2 one name the different brands that made up the group’s Source: Bloomberg retail banking operations. Cover pool overview Within Portugal, group activities include the universal We set out below some of the key cover pool bank (Millenium bcp), mutual fund management characteristics: company (Millenium bcp gestao de activos), mortgages (BII), insurance (Millennium bcp Ageas) and private Table 489: Covered bond characteristics property fund management (Interfundos). After securing As at 31 March 2011 a strong presence in the domestic market, BCP has also Covered Bond rating S/M/F -/Baa3/BBB+ expanded into overseas markets, such as Poland, Greece, Issuer rating S/M/F BBB-/Ba1/BBB- Turkey, Angola, Mozambique and the USA. In the Current OC (%) 25.7 Iberian market, Millennium bcp and Banco Sabadell established an agreement according to which Millennium Cover pool size (€) 9,116,355,643 Number of loans 179,813 bcp supports Banco Sabadell's Customers in Portugal and Avg loan (€) 50,699 Banco Sabadell supports Millennium bcp's customers in Spain. Fixed rate mortgages (%) 7.9 WA seasoning (mths) 62.6 Second homes (%) 4.5 Financial performance Loans in arrears (%) 1.0 We set out below some of the key financial performance Top Regional concentration (%) Lisbon 28% metrics: WA LTV (in %) 47.1 Source: Investor Report Table 486: Key profit & loss figures, €mm FY 2007 FY 2008 FY 2009 FY 2010 Table 490: Covered pool LTV breakdown Net interest income 1,565 1,758 1,337 1,553 Current LTV ranges As at 31 March 2011 Provisions for loan 260 545 560 713 losses 0-<=40% 36.3 NII less provisions 1,305 1,213 777 839 >40%-<=50% 15.4 >50%-<=60% 16.3 Comm.& fee income 926 897 866 34 >60%-<=70% 17.2 Other operating income 111 75 57 34 >70%-<=80% 14.8 Non-interest expense 2,010 1,828 1,674 1,720 Source: Investor Report Operating profit (loss) 724 376 252 511

PBT 688 342 296 358 Taxes 70 84 46 -3 Net profit (loss) 563 201 225 302 Source: Bloomberg

Table 487: Key balance sheet figures, €mm FY 2007 FY 2008 FY 2009 FY 2010 Loans 65,650 75,165 75,191 73,905 Total Assets 88,166 94,424 95,550 100,010 Deposits 39,247 44,694 46,066 45,515 Short-term borrowings 9,432 9,339 10,306 20,077 Other ST borrowings 2,862 9,209 7,940 5,573 Long-term borrowings 29,724 23,114 22,185 20,177 Equity 4,899 6,248 7,221 7,247 Source: Bloomberg

212 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Banco Espirito Santo (‘BES’) Table 493: Select financial metrics (BBG: BESPL) FY 2007 FY 2008 FY 2009 FY 2010 NIM 1.7 1.8 1.8 1.8 Snapshot ROA 1.0 0.6 0.7 0.6 Banco Espirito Santo (‘BES’) is Portugal’s largest listed ROE 13.8 9.4 10.5 8.2 ROC 1.6 1.0 1.1 1.3 bank and the second largest financial institution by net C:I 49.6 53.9 50.2 53.1 assets, with an average market share of 20.3% in the Core capital 7.5 6.6 8.3 8.8 domestic market with 2.1mm clients. The institution has Source: Bloomberg a free float of 40.5%, with the majority of share capital held by the core shareholders of EFSG (40%) and Credit Cover pool overview Agricole (c11%). We set out below some of the key cover pool characteristics: As well as a full range of retail and commercial banking services offered in Portugal, BES also specialises in Table 494: Covered bond characteristics Private Banking, Corporate Banking and Investment As at 31 March 2011 Banking. BES also operates in overseas markets, Covered Bond rating S/M/F -/Baa3/- focusing on those with cultural and economic ties to Issuer rating S/M/F BBB-/Ba1/- Portugal (Angola, Brazil, Spain and the Maghreb). Cover pool size (€) 4,950,329,942 Number of loans 92,355 Avg loan (€) 53,601 Financial performance We set out below some of the key financial performance Current OC (%) 19.0 metrics: Fixed rate mortgages (%) 3.1 WA seasoning (mths) 64.3 Table 491: Key profit & loss figures, €mm Second homes (%) 9.3 BTL (%) 1.3 FY 2007 FY 2008 FY 2009 FY 2010 Loans in arrears (%) 0.0 Net interest income 1,004 1,178 1,290 1,357 Provisions for loan Top Regional concentration (%) Lisbon City 28% losses 213 274 540 352 NII less provisions 791 904 750 1,005 Source: Investor Report Comm.& fee income 716 709 786 887 Other operating income 27 0 96 0 Table 495: Covered pool LTV breakdown Non-interest expense 1,081 1,144 1,243 1,362 Current LTV ranges As at 31 March 2011 Operating profit (loss) 778 611 586 750 0-<=40% 15.8 >40%-<=50% 12.1 PBT 788 511 685 701 >50%-<=60% 18.0 Taxes 153 83 110 44 >60%-<=70% 24.2 Net profit (loss) 607 402 522 511 >70%-<=80% 29.9 Source: Bloomberg Source: Investor Report

Table 492: Key balance sheet figures, €mm FY 2007 FY 2008 FY 2009 FY 2010 Loans 42,170 47,049 48,979 50,829 Total Assets 68,355 75,187 82,297 83,655 Deposits 22,348 24,566 24,661 30,383 Short-term borrowings 8,984 12,492 10,713 14,345 Other ST borrowings 1,848 2,744 1,970 2,348 Long-term borrowings 26,408 27,426 35,740 26,402 Equity 5,414 4,653 6,939 7,476 Source: Bloomberg

213 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Banco Portugues de Investimento Table 498: Select financial metrics (‘BPI’) FY 2007 FY 2008 FY 2009 FY 2010 NIM 1.8 1.7 1.4 1.4 (BBG: BPIPL) ROA 0.9 0.4 0.4 0.4 Snapshot ROE 23.0 9.6 10.5 11.2 ROC 3.1 1.4 1.7 1.6 The BPI group, headed by Banco BPI, is a financial C:I 52.1 58.5 58.9 65.5 services group offering services to both retail and Core capital 6.2 8.8 8.6 9.1 corporate customers. It is the fourth largest private Source: Bloomberg financial group with a market share of approximately 11% in deposits and loans and more than seventeen Cover pool overview percent in asset management. We set out below some of the key cover pool characteristics: The group's commercial bank (Banco BPI) serves 1.6mm individuals, companies and institutions with close to 700 Table 499: Mortgage covered bond characteristics branches. BPI also provides investment banking services As at 31 March 2011 on the Iberian peninsula and asset management. The Covered Bond rating S/M/F A+/A3/A- group is also active in Angola, where it has a 20% market Issuer rating S/M/F BBB-/Baa3/BBB- Cover pool size (€) 4,472,700,195 share in deposits via its controlling stake in Banco de Number of loans 82,891 Fomento. In addition to Angola, BPI also owns a 30% Avg loan (€) 52,876 stake in Mozambique’s BCI. Current OC (%) 26.9

Financial performance Fixed rate mortgages (%) 0.0 We set out below some of the key financial performance Second homes (%) 2.4 BTL (%) 0.8 metrics: Loans in arrears (%) 0.0

Table 496: Key profit & loss figures, €mm Top Regional concentration (%) Lisbon 29%

FY 2007 FY 2008 FY 2009 FY 2010 WA original LTV (in %) 65.6 Net interest income 630 649 589 630 WA current LTV (in %) 55.6 Provisions for loan WA seasoning (mths) 64.3 losses 112 144 166 121 NII less provisions 518 505 423 509 0-<=40% 18.8 >40%-<=50% 14.8 Comm.& fee income 348 315 322 338 >50%-<=60% 18.8 Other operating income 94 258 103 101 >60%-<=70% 23.9 Non-interest expense 647 722 744 786 >70%-<=80% 23.6 Operating profit (loss) 450 340 323 269 Source: Investor Report PBT 481 229 319 285 Taxes 109 51 45 -6 Table 500: Public Sector covered bond characteristics Net profit (loss) 355 150 175 185 Current LTV ranges As at 31 March 2011 Source: Bloomberg Covered Bond rating S/M/F BBB/A3/- Issuer rating S/M/F BBB/A3/BBB- Table 497: Key balance sheet figures, €mm Cover pool size (€) 499,404,612 Number of loans 959 FY 2007 FY 2008 FY 2009 FY 2010 Avg loan (€) 516,352 Loans 27,231 29,275 29,956 30,055 Total Assets 40,546 43,025 47,449 45,660 Top 10 borrowers (in %) 52.0 Deposits 19,906 23,611 22,488 23,106 Top 50 borrowers (in %) 84.9 Short-term borrowings 3,759 2,036 7,488 5,979 WA seasoning (mths) 31.2 Other ST borrowings 1,217 2,954 2,637 2,467 WA remaining term (mths) 95.0 Long-term borrowings 6,273 7,185 9,736 8,423 Equity 1,905 1,961 2,303 1,964 Source: Investor Report Source: Bloomberg

214 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Caixa Economica Montepio Geral Table 503: Select financial metrics (‘Montepio’) FY 2008 FY 2009 FY 2010 NIM 1.9 1.5 (BBG: MONTPI) ROA 0.3 0.3 Snapshot ROE 4.9 5.2 ROC 0.6 0.7 Founded as a mutual bank, Montepio offers financial C:I 62.4 55.1 58.5 products ranging from savings and retail banking to Core capital 7.9 9.5 9.0 investment management, insurance and leasing. It is the Source: Bloomberg oldest financial institution in Portugal, and the country’s sixth largest banking institution. It is one of the largest Cover pool overview providers of housing and construction mortgage finance We set out below some of the key cover pool in Portugal. characteristics:

Montepio is fully owned by Montepio Geral Assiciaco Table 504: Covered bond characteristics Mutualista (MCAM), a private mutual association, a not- As at 30 June 2011 for-profit with the aim of promoting social protection and Covered Bond rating S/M/F -/Baa3/BBB health benefits. Issuer rating S/M/F -/Ba2/BB Cover pool size (€) 2,238,258,384 Number of loans 38,410 Financial performance Avg loan (€) 58,273 We set out below some of the key financial performance Current OC (%) 36.9 metrics: Fixed rate mortgages (%) 0.0 Table 501: Key profit & loss figures, €mm Loans in arrears (%) 0.2

FY 2008 FY 2009 FY 2010 WA LTV (in %) 54.6 Net interest income 335 322 271 WA Seasoning (mths) 84.2 Provisions for loan WA remaining term (mths) 296.3 losses 0 0 0 Subsidised loans (in %) 24.1 NII less provisions 335 321 272 Constant amortization loans (in %) 90.4

Comm.& fee income 85 89 89 Source: Investor Report Other operating income 19 20 17 Non-interest expense 269 261 263 Operating profit (loss) 154 201 176

PBT 34 44 51 Taxes 0 0 0 Net profit (loss) 34 44 51 Source: Bloomberg

Table 502: Key balance sheet figures, €mm FY 2008 FY 2009 FY 2010 Loans 15,010 14,682 14,554 Total Assets 16,852 17,245 18,249 Deposits 8,330 9,181 10,008 Short-term borrowings 1,597 1,140 2,442 Other ST borrowings 39 42 55 Long-term borrowings 5,448 5,296 4,217 Equity 824 986 995 Source: Bloomberg

215 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Caixa Geral de Depositos (‘CGD’) Table 507: Select financial metrics (BBG: CXGD) FY 2007 FY 2008 FY 2009 FY 2010 NIM 2.2 2.2 1.5 1.4 Snapshot ROA 0.9 0.4 0.2 0.2 Caixa Geral de Depositos was founded in 1876 as a ROE 18.7 10.0 5.5 4.1 ROC 3.0 1.4 0.8 0.7 savings bank and is a public limited company, whose C:I 74.4 80.8 76.7 72.5 only shareholder is the Portuguese government. The Core capital 6.7 7.0 8.5 8.9 Bank is the leading universal bank in the Republic Source: Bloomberg (significant market shares in customer deposits and mortgage lending), and the dominant financial group. Cover pool overview The Group has 5mm customers domestically, or We set out below some of the key cover pool approximately half the population, with a branch network characteristics: of over 800 branches. Table 508: Mortgage covered bond characteristics The institution is structured along a number of business As at 30 June 2011 lines including commercial banking, investment banking Covered Bond rating S/M/F -/Baa3/A- & venture capital, asset management, specialised credit Issuer rating S/M/F BBB-/Ba1/BBB- (including Leasing & Factoring and consumer credit); Cover pool size (€) 11,238,126,029 Number of loans 261,569 insurance (both life and non-life) and health care. The Avg loan (€) 42,964 bank also operates outside of Portugal, with the main Current OC (%) 32.8 foreign markets being Brazil and Mexico. WA current LTV (in %) 52.5 WA seasoning (mths) 84.7 Financial performance WA remaining term (yrs) 23.4 We set out below some of the key financial performance LTV breakdown (in %) metrics: 0-<=40% 23.9 >40%-<=50% 16.0 Table 505: Key profit & loss figures, €mm >50%-<=60% 17.8 >60%-<=70% 20.1 FY 2007 FY 2008 FY 2009 FY 2010 >70%-<=80% 22.2 Net interest income 2,032 2,201 1,641 1,613 Provisions for loan Regional breakdown (in%) losses 249 448 676 51 Lisbon 27.8 NII less provisions 1,783 1,754 965 1,562 Porto 13.9 Setubal 10.3 Comm.& fee income 491 533 592 649 Braga 6.2 Other operating income 2,642 2,751 2,244 1,881 Faro 4.9 Non-interest expense 3,928 4,653 3,622 3,135 Source: Investor Report Operating profit (loss) 1,072 631 379 1,081

PBT 1,075 662 374 364 Table 509: Public Sector covered bond characteristics Taxes 178 157 70 65 Current LTV ranges As at 30 June 2011 Net profit (loss) 856 459 279 251 Covered Bond rating S/M/F -/Baa3/BBB Source: Bloomberg Issuer rating S/M/F BBB-/Ba1/BBB- Cover pool size (€) 1,256,051,004 Table 506: Key balance sheet figures, €mm Number of loans 2,589 Avg loan (€) 485,149 FY 2007 FY 2008 FY 2009 FY 2010 Current OC (%) 32.6 Loans 66,844 75,311 77,222 81,907 Total Assets 103,554 111,060 120,985 125,862 Top 5 regional exposures (in%) Deposits 54,039 60,128 64,256 67,680 Lisbon 15.4 Short-term borrowings 8,841 6,952 6,479 14,604 Porto 13.6 Other ST borrowings 2,474 2,784 2,232 1,936 Setubal 8.1 Long-term borrowings 19,675 23,694 29,252 22,839 Santarem 7.4 Equity 5,541 5,484 7,157 7,840 Aveiro 6.7 Source: Bloomberg Source: Investor Report

216 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Santander Totta (‘Totta’) Cover pool overview (BBG: SANTAN) We set out below some of the key cover pool Snapshot characteristics: Banco Santander Totta is part of the Santander Group Table 512: Covered bond characteristics and offers financial services in Portugal and a number of other countries. The bank operates over 700 branches As at 30 June 2011 Covered Bond rating S/M/F A+/Aa3/AA domestically, and is the third largest privately owned Issuer rating S/M/F BBB-/Baa1/AA bank by assets. It has a market share of between 9 and Cover pool size (€) 6,353,882,916 10% in loans and deposits. Aside from retail banking, the Number of loans 110,842 Avg loan (€) 49,021 institution also provides commercial banking, corporate banking, global banking and markets and asset Current OC (%) 33.8 management services to its Portuguese account base. WA current LTV (in %) 56.0 WA seasoning (mths) 62.4 The Santander Group is one of the largest financial WA remaining term (yrs) 311.1 groups in the world: the fourth by profits and the eighth by market capitalisation. The group has a strong LTV breakdown (in %) 0-<=40% 18.1 international presence, with 91 million customers across >40%-<=50% 14.2 9 core markets in Europe and the Americas. While retail >50%-<=60% 19.4 banking accounts for the largest share of its profits, the >60%-<=70% 25.5 >70%-<=80% 22.3 group offers a wide range of products, including corporate and investment banking and asset management. Fixed rate mortgages (%) 1.4 Second homes (%) 6.4 Loans in arrears (%) 0.1 Financial performance We set out below some of the key financial performance Regional breakdown (in%) metrics: Lisbon 39.4 Porto 28.5 Coimbra 13.5 Table 510: Key profit & loss figures, €mm Algarve 7.7 North 4.3 FY 2009 FY 2010 Net interest income 762 674 Provisions for loan Source: Moody’s losses NII less provisions

Comm.& fee income 364 406 Other operating income Non-interest expense 521 521 Operating profit (loss)

PBT 567 482 Taxes 87 106 Net profit (loss) 473 394 Source: Annual Report

Table 511: Key balance sheet figures, €mm FY 2009 FY 2010 Loans Total Assets 45,681 47,366 Deposits Short-term borrowings Other ST borrowings Long-term borrowings Equity 2,731 2,633 Source: Annual Report

217 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

218 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected] s d n o B

d e r e v o C

h s i n a p S

219 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Spanish Covered Bonds

Legislative snapshot We set out in Table 513 a snapshot of key covered bond attributes in Spain.

Table 513: Spanish Covered Bond legislative overview: Standalone programmes Attribute Commentary Framework Legislative Framework Special law-based covered bonds. Mortgage Market Law 41/2007, Law 2/1981, Royal Decree 716/2009, Law 22/2003 Types of covered bonds Two. Mortgage Covered Bonds (Cedulas Hipotecarias or CH) and Public Sector Covered Bonds (Cedulas Territoriales or CT) Structure of Issuer Direct issuance? Yes. Issuers are either specialist or universal credit institutions; the collateral is kept on the balance sheet of the issuer and not transferred to a separate legal entity Comments (if any) Bankruptcy remoteness All assets are recorded on the cover register. No acceleration occurs in case of insolvency of the issuer Dual claim Yes. Covered bond holders’ preferential claim protected by law Bond format Typically, fixed rate, hard bullet Supervision Bank of Spain, Ministry of Economy and Commerce, CNMV (Spanish Securities Commission) Cover pool Eligible assets Mortgage EU mortgages. Bondholder claims are guaranteed by the entire mortgage book of the issuer (both residential and commercial mortgage assets, as well as both eligible and ineligible mortgages) of the lender (excluding any collateral pledged in other transactions such as bonos hipotecarios) LTV caps "Hard" (loans above the maximum are not included in the cover pool as 'eligible' collateral). Residential mortgages (max 80% LTV) and commercial mortgages (max 60% LTV); if there are additional guarantees, LTVs can be raised to 95% and 80% respectively. No loans or part of loans are allowed if LTVs are above limits (they instead form part of the 'ineligible' mortgage book which still stand to the benefit of CH investors) Public Sector Public sector exposures to EEA countries back public sector covered bonds in the form of loans or credits to central governments, local authorities or public companies linked to such institutions Non-performing collateral Remain as part of the 'ineligible' mortgage book Substitution Assets CH can be backed up to a limit of 5% of issued capital by substitution assets, including EU government bonds, other cedulas, mortgage bonds, MBS, eligible bank debt and other low risk, high quality assets Hedging Used to minimise interest rate or currency risks. Entered on the asset register and rank pari passu with CB holders. Must be sourced from an EU or OECD bank rated at least A+/A1. Do not accelerate on issuer insolvency Valuation Properties are valued by the lender or by a valuation company at origination. If the value of the property falls by over 20% (and exists for at least 12 months), the lender has the right to ask the extension of the loan to other assets to cover the required the 80% LTV limit; if the borrower does not take any action within two months, the lender can assume that it has decided to repay the loan in full. No indexation of mortgage collateral post-inclusion in the pool occurs Other comments (if any) Requirements ALM matching Asset coverage Minimum OC of 25% for eligible mortgages and 43% for public sector exposures is legally required. If minimum OC breached, there is a grace period of 10 days for mortgage collateral and 3 months for public sector collateral Interest coverage Not applicable Other (if any) Minimum asset-liability NPV of 102%. The average maturity of outstanding bonds can not exceed the average life of the mortgage claims Consequence of breach Failure to meet the above requirements requires the issuing institution to either grant new mortgages and add to the pool; add substitution collateral, to repurchase outstanding bonds from the secondary market; or to deposit cash or public funds at the BdE. Other regulatory actions by the BdE Monitoring No specific cover pool monitor as collateral pool is backed by the entire mortgage book. Oversight provided through institutional audit process Other Compliance with EU legislation UCITS and CRD compliant Source: National legislation, J.P. Morgan Covered Bond Research

220 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Table 514: Spanish Covered Bond legislative overview: Multi-Cedulas programmes f Attribute Commentary Framework Legislative Framework Mortgage Market Law 41/2007, Royal Decree 716/2009, Law 22/2003 Types of covered bonds One. Multi-Cedulas (MC) are backed by a collection of individually issued CHs and CTs as described above Structure of Issuer Direct issuance? Yes. From an SPV Comments (if any) The FTA (Fondo Titulización de Activos, or SPV) is managed by an SGFT (Sociedad Gestora de Fondo de Titulización), which is registered with CNMV (Spanish Securities Commission) Bankruptcy remoteness Yes. Underlying CH or CT bonds are aggregated in an FTA, or bankruptcy remote vehicle, from which a multi-issuer backed covered bond is issued Dual claim At the underlying CH or CT level. No cross-collateralisation of individual constituent CH or CT in the MC Bond format Typically, fixed rate, soft bullet. Extendible maturity to allow the liquidation of the collateral pool backing the indiviudal CH or CTs backing the MC. Typically extendible to the longest CH or CT maturity in the pool, plus a work-out period (between three and twenty years) Supervision Bank of Spain, Ministry of Economy and Commerce, CNMV Cover pool Eligible assets Mortgage The collateral backing the multi-cedula are the individually structured covered bonds, which in turn are backed by the mortgage or public-sector portfolios of the respective contributing institutions. The collateral used in MC are individual issues of cedulas with a dual claim to the issuer and the specific underlying assets LTV caps At the underlying level Public Sector At the underlying level Non-performing collateral At the underlying level Substitution Assets At the underlying level Hedging Derivatives permitted. The SGFT uses OC, reserve funds, excess spread and liquidity facilities (similar to features used in a traditional securitisation) to match payments of the underlying pooled cedulas with those of the MC Valuation At the underlying level Other comments (if any) Requirements ALM matching Asset coverage Payment terms of the MC typically mirror those of the underlying CH or CT, ensuring no funding mismatch. Interest coverage Liquidity lines or reserve funds provide only structural support in terms of covering the payment of timely interest or expenses upon CH or CT default. The liquidity facilities are available to scheduled maturity, with MC become akin to pass-throughs if an underlying CH or CT is not redeemed on its expected maturity Other (if any) Failure to pay interest on the MC can occur because the issuer of an underlying CH or CT has defaulted and the liquidity provider has either defaulted itself, or the facility has been depleted. Failure to pay principal on the MC can occur because the CH or CT issuer has defaulted and it has not proved possible to liquidate sufficient collateral in the underlying pool by the legal final maturity of the MC (either due to asset insufficiency or timing). Consequence of breach n/a Monitoring Trustee Other Compliance with EU legislation Non UCITS and Non CRD compliant Source: National legislation, J.P. Morgan Covered Bond Research

221 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Spanish covered bond & macro backdrop

Figure 145: Mortgage CB Issuance, €mm Figure 146: Mortgage CB outstanding, €mm 80,000 400,000 Mortgage CB Public Sector CB Mortgage CB Public Sector CB 70,000 350,000 60,000 300,000 50,000 250,000 40,000 200,000 30,000 150,000 20,000 100,000 10,000 50,000 0 0 2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 2007 2008 2009 2010 Source: ECBC. Latest data available displayed Source: ECBC. Latest data available displayed

Figure 147: Spanish real GDP growth, y-on-y, % Figure 148: Spanish unemployment level, %

8 Real GDP growth 25 Unemployment 6 20 4 2 15 0 10 -2 5 -4 -6 0 0 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 1 1 ------r r r r r r r r r r r r r r r r r r r r r r r r a a a a a a a a a a a a a a a a a a a a a a a a M M M M M M M M M M M M M M M M M M M M M M M M

Source: Bloomberg Source: Bloomberg

Figure 149: Spanish CPI and base rate, % Figure 150: Spanish consumer confidence, balance of survey

6 Inflation Base rate Cons. Confidence 5 10 4 0 3 -10 2 1 -20 0 -30 -1 -40 -2 0 1 2 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 0 1 1

------50 r r r r r r r r r r r r 0 1 2 3 4 5 6 7 8 9 0 1 a a a a a a a a a a a a 0 0 0 0 0 0 0 0 0 0 1 1 ------M M M M M M M M M M M M r r r r r r r r r r r r a a a a a a a a a a a a M M M M M M M M M M M M Source: Bloomberg Source: Bloomberg

Figure 151: Spanish house price growth, % Figure 152: Spanish mortgage approvals, # 20% 140,000 House price growth Mortgage approvals 15% 120,000 100,000 10% 80,000 5% 60,000 0% 40,000 -5% 20,000 0 3 4 5 6 7 8 9 0 1 -10% 3 4 5 6 7 8 9 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 1 1 2 3 4 5 6 7 8 9 0 1 ------r r r r r r r r r 0 0 0 0 0 0 0 0 0 1 1 p p p p p p p p ------a a a a a a a a a r r r r r r r r r r r e e e e e e e e a a a a a a a a a a a M M M M M M M M M S S S S S S S S M M M M M M M M M M M

Source: Bloomberg Source: Bloomberg

222 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Standalone programmes: Financial performance Banco Bilbao Vizcaya Argentina We set out below some of the key financial performance metrics: (‘BBVA’) (BBG: BBVASM) Table 515: Key profit & loss figures, €mm Snapshot FY 2008 FY 2009 FY 2010 Banco Bilbao Vizcaya Argentaria (‘BBVA’) is the Net interest income 12,133 14,325 13,849 Provisions for loan second largest Spanish financial institution with a strong losses 2,797 5,199 4,718 international presence. The Group counts 35 million NII less provisions 9,336 9,126 9,131 individual and corporate customers in over 32 countries Comm.& fee income 5,539 5,305 5,382 and offers a wide range of financial services and Other operating products. income 3,559 3,400 3,543 Non-interest expense 13,991 12,845 13,542 In Spain and Portugal, BBVA focuses on commercial Operating profit 6,002 6,530 6,408 and retail banking, consumer finance and insurance, as PBT 6,926 5,736 6,422 well as business development for SMEs and other Taxes 1,541 1,141 1,427 companies and institutions. Net profit (loss) 5,020 4,210 4,606 Source: Bloomberg The other main business line is Wholesale Banking & Table 516: Key balance sheet figures, €mm Asset Management. This division offers asset management, investment banking and global markets and FY 2008 FY 2009 FY 2010 Real Estate Loans 145,522 148,874 150,782 product management throughout Europe, the Americas Commercial Loans 107,686 51,021 90,408 and Asia. BBVA targets Mexico and the Latin American Consumer Loans 127,890 126,488 135,868 markets in particular, where it offers pension, insurance Other Loans 105,745 112,864 120,934 and private banking products and services. Total Assets 542,650 535,065 552,738 Deposits 239,007 242,582 275,789 Short-term borrowings 74,225 75,936 74,776 BBVA issued cédulas hipotecarias and territoriales. Other short-term So far in 2011, it has issued €5.5bn in mortgage covered borrowings 46,252 36,044 38,819 Long-term borrowings 121,144 117,817 102,600 bonds and €2.1bn in public sector covered bonds. Equity 26,705 30,763 37,475 Source: Bloomberg

Table 517: Select financial metrics FY 2008 FY 2009 FY 2010 NIM 2.5 2.9 2.8 ROA 1.0 0.8 0.8 ROE 19.0 15.3 14.1 ROC 2.2 1.9 2.2 C:I 59.6 50.5 53.3 Core Capital 7.9 9.4 10.5 Source: Bloomberg

223 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Cover pool overview We set out below some of the key cover pool characteristics:

Table 518: Mortgage Covered bond characteristics As at March 2011 Ratings S/M/F Covered Bond rating -/Aaa/- Issuer rating AA/Aa2/AA-

Cover pool Cover pool size (€) 78,992,233,000 Outstanding liabilities (in €) 27,153,284,000 Current OC (in %) 112.6 Required OC for current rating (in %) 13.0

Residential properties (in %) 69.5 Commercial properties (in %) 30.5

Residential pool overview WA seasoning (mths) 55 WA remaining term (mths) 274 WA current LTV (in %) 59.3 <80% LTV 84.1 Second homes (in %) 10.1 Highest regional exposure (in %) Catalonia - 18.9

Commercial pool overview WA seasoning (mths) 42.3 WA remaining term (mths) 172.9 WA current LTV (in %) 51.6 <80% LTV (in %) 93.9 Largest 10 borrowers (in %) 3.5 Highest regional exposure (in %) Andalusia - 19.6

Property type Real estate developers 73.4 Source: Moody’s

Table 519: Public sector Covered bond characteristics As at March 2011 Ratings S/M/F Covered Bond rating -/Aaa/- Issuer rating AA/Aa2/AA-

Cover pool Cover pool size (€) 26,184,006,922 Outstanding liabilities (in €) 10,279,414,000

Number of borrowers 3,328 Average exposure (in €) 7,867,791 Exposure to 10 largest borrowers (in %) 30.7 Highest regional exposure (in %) Catalonia - 21.5

Borrower type Direct claim against region/municipality 72.2 Claim with guarantee of region/municipality 27.8 Source: Moody’s

224 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Banco CAM Table 522: Select financial metrics (BBG: CAJAME) FY 2008 FY 2009 FY 2010 NIM 1.8 2.1 1.3 Snapshot ROA 0.5 0.4 0.3 Banco CAM was created as part of the reorganisation of ROE 12.3 9.4 9.9 ROC 1.5 1.0 0.9 the cajas system in Spain. Initially, CAM was originally C:I 63.4 n/a 64.4 to merge with Cajastur, Caja Santander y Cantabria and Core Capital 8.5 n/a n/a Caja Extremadura to form the new Banco Base, but the Source: Bloomberg merger failed. Subsequently, the government injected capital but required the caja to restructure as a Cover pool overview commercial bank, as part of a set of conditions for We set out below some of the key cover pool receiving public funds. characteristics:

Before becoming Banco CAM, CAM was the fourth- Table 523: Mortgage covered bond characteristics largest savings bank in Spain by assets and was itself the As at March product of the merger, over the years, of over 30 smaller 2011 cajas from the Valencia and Alicante provinces, which Ratings S/M/F remain its core markets. Its core business remains Covered Bond rating -/Baa1/- Issuer rating -/Ba1/BB+ offering banking services to individuals and SMEs. CAM’s role will be to manage social welfare projects Cover pool financed through dividends paid by Banco CAM and act Cover pool size (€) 32,961,970,736 Outstanding liabilities (in €) 10,466,600,000 as holding company. Estimated eligible collateral (in €) 21,107,992,220 Current OC (in %) 214.9 Financial performance Residential properties (in %) 41.2 We set out below some of the key financial performance Commercial properties (in %) 58.8 metrics: Residential pool overview Table 520: Key profit & loss figures, €mm Pool balance (in €) 13,593,540,437 Average loan (in €) 81,289 FY 2008 FY 2009 FY 2010 WA current LTV (in %) 61.7 Net interest income 1,292 1,456 909 Highest regional exposure (in %) Valencia - 44.1 Provisions for loan losses 982 71 134 LTV breakdown NII less provisions 311 1,385 774 0-40% LTV 21.1 41-50% LTV 11.1 Comm.& fee income 231 232 199 51-60% LTV 14.0 Other operating 61-70% LTV 15.2 income 742 178 90 71-80% LTV 16.9 Non-interest expense 1,415 756 787 >80% LTV 21.7 Operating profit -185 1,226 284 Commercial pool overview PBT 387 274 201 Pool balance (in €) 19,368,430,299 Taxes -45 -2 -43 Average loan (in €) 157,324 Net profit (loss) 390 277 244 WA seasoning (mths) 36 WA current LTV (in %) 59.9 Source: Bloomberg Highest regional exposure (in %) Valencia - 40.4

Table 521: Key balance sheet figures, €mm LTV breakdown 0-40% LTV 23.8 FY 2008 FY 2009 FY 2010 41-50% LTV 12.3 Real Estate Loans 42,288 39,150 36,171 51-60% LTV 13.5 Loans 58,495 52,429 50,850 61-70% LTV 16.5 Total Assets 75,473 71,442 70,667 71-80% LTV 17.3 Deposits 41,397 44,440 43,299 >80% LTV 16.6 Short-term borrowings 13,147 9,814 12,326 Other short-term Source: Moody’s borrowings 578 417 390 Long-term borrowings 13,352 12,369 10,674 Equity 3,576 2,907 2,012 Source: Bloomberg

225 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Table 524: Public sector Covered bond characteristics As at 31 Mar 2010 Ratings S/M/F Covered Bond rating -/A3/-

Cover pool Cover pool size (€) 1,111,736,153 Outstanding liabilities (in €) 400,000,000 Current OC (in %) 177.9

Average exposure (in €) 739,186 Exposure to 10 largest borrowers (in %) 40.6 Highest regional exposure (in %) Valencia - 64.9

Borrower type Direct claim against region/municipality/federal state 88.6 Other 11.4 Source: Moody’s

226 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Banco Espanol de Credito (‘Banesto’) Table 527: Select financial metrics (BBG: BANEST) FY 2008 FY 2009 FY 2010 NIM 1.6 1.6 1.6 Snapshot ROA 0.7 0.5 0.4 Banco Espanol de Credito (‘Banesto’) was founded in ROE 16.0 10.6 8.5 ROC 1.2 0.9 0.7 Madrid in 1902 with French capital but is currently 97% C:I 45.7 48.8 40.8 owned by the Santander Group. Core Capital 7.7 8.7 n/a Source: Bloomberg Banesto’s main activity in Spain is commercial banking, particularly retail banking to individuals and SMEs. It Cover pool overview also offers private and personal banking products to We set out below some of the key cover pool wealthy individuals. The bank also offers wholesale characteristics: banking services, including corporate banking, treasury, capital markets, stock market brokerage and international Table 528: Covered bond characteristics business. As at June 2011 Banesto issues cédulas hipotecarias. So far this year it Ratings S/M/F has issued €1.5bn of mortgage covered bonds, paying up Covered Bond rating -/Aaa/AA Issuer rating AA/A2/AA to MS+190bp for a 4 years maturity bond. Cover pool Financial performance Cover pool size (€) 30,929,134,841 Outstanding liabilities (in €) 17,889,360,000 We set out below some of the key financial performance Estimated eligible collateral (in €) 24,156,002,808 metrics: Current OC (in %) 72.9 Required OC for current rating (in %) 28.0

Table 525: Key profit & loss figures, €mm Residential properties (in %) 78.8 FY 2008 FY 2009 FY 2010 Commercial properties (in %) 21.2 Net interest income 1,774 1,841 1,766 Provisions for loan Residential pool overview losses 300 452 811 Pool balance (in €) 23,668,377,045 NII less provisions 1,475 1,389 955 Number of loans 222,152 Average loan (in €) 106,541 Comm.& fee income 706 662 667 Estimated WA current LTV (in %) 57.4 Other operating Highest regional exposure (in %) Andalusia - 22.5 income 162 129 281 Second homes (in %) 1.6 Non-interest expense 1,356 1,462 1,220 Operating profit 1,137 954 784 LTV breakdown 0-40% LTV 20.5 PBT 1,081 779 608 41-50% LTV 11.7 Taxes 306 221 151 51-60% LTV 14.7 Net profit (loss) 780 560 460 61-70% LTV 20.8 71-80% LTV 17.8 Source: Bloomberg >80% LTV 14.5

Table 526: Key balance sheet figures, €mm Commercial pool overview Pool balance (in €) 6,353,022,309 FY 2008 FY 2009 FY 2010 Number of loans 8,754 Real Estate Loans 37,615 37,716 38,163 Average loan (in €) 725,728 Loans 72,899 72,220 70,789 WA remaining term (mths) 123 Total Assets 120,479 126,221 120,620 Estimated WA current LTV (in %) 56.0 Deposits 41,919 40,961 47,071 Largest 10 borrowers (in %) 18.2 Short-term borrowings 12,407 14,028 7,551 Highest regional exposure (in %) Madrid - 33.6 Other short-term borrowings 7,751 9,215 8,293 LTV breakdown Long-term borrowings 30,552 32,258 31,719 0-40% LTV 25.3 Equity 5,154 5,473 5,477 41-50% LTV 10.5 Source: Bloomberg 51-60% LTV 15.7 61-70% LTV 15.3 71-80% LTV 14.3 >80% LTV 18.8 Source: Moody’s

227 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Banco Pastor Financial performance (BBG: PASSM) We set out below some of the key financial performance Snapshot metrics: Banco Pastor is the seventh largest banking group in Table 529: Key profit & loss figures, €mm Spain and the leader in Galicia, where it has a market share of loans and deposits of over 10% in 2010. Despite FY 2008 FY 2009 FY 2010 Net interest income 526 540 473 its strong ties with the domestic region, 62% of its Provisions for loan branches are located outside of Galicia. losses 229 588 283 NII less provisions 297 -49 190

The bank focuses on deposit-taking and lending to Comm.& fee income 187 178 161 individuals and SMEs but also offers investment Other operating management and pension funds products. It operates a income 70 69 65 Non-interest expense 448 433 445 network of over 600 branches throughout Spain and has a Operating profit 264 113 95 small international presence, with 10 branches in Europe and the Americas. PBT 199 125 13 Taxes 57 26 -12 Net profit (loss) 164 101 62 The largest shareholder is the Fundacion Pedro Burrie de Source: Bloomberg la Maza (a private foundation devoted to promoting the development of Galicia), which holds approximately Table 530: Key balance sheet figures, €mm 42% of the institution’s share capital. The other largest FY 2008 FY 2009 FY 2010 single shareholders are Nocaixagalicia (5.4%), Ponte Real Estate Loans 11,746 13,447 13,939 Gadea group (5.1%) and Casagrande Cartagena (3.9%), Loans 20,788 20,385 21,652 while 24% and 19% are in the hands of retail and Total Assets 27,121 32,325 31,135 Deposits 13,247 13,659 15,025 institutional investors respectively. Short-term borrowings 3,186 7,303 6,699 Other short-term Banco Pastor issues cédulas hipotecarias. borrowings 1,459 1,078 637 Long-term borrowings 7,197 8,317 7,002 Equity 1,507 1,610 1,606 Source: Bloomberg

Table 531: Select financial metrics FY 2008 FY 2009 FY 2010 NIM 2.1 1.9 1.6 ROA 0.6 0.3 0.2 ROE 11.0 6.9 4.3 ROC 1.4 0.7 0.4 C:I 46.2 36.7 52.1 Core Capital 7.5 10.6 10.6 Source: Bloomberg

228 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Cover pool overview We set out below some of the key cover pool characteristics:

Table 532: Covered bond characteristics As at March 2011 Ratings S/M/F Covered Bond rating -/Baa1/- Issuer rating -/Ba1/-

Cover pool Cover pool size (€) 13,179,568,062 Outstanding liabilities (in €) 6,233,100,000 Estimated eligible collateral (in €) 8,751,272,400 Current OC (in %) 111.4 Required OC for current rating (in %) 11.0

Residential properties (in %) 50.4 Commercial properties (in %) 49.6

Residential pool overview Pool balance (in €) 6,439,470,641 Number of loans 54,467 Average loan (in €) 118,227 WA seasoning (mths) 35 WA remaining term (mths) 320 WA current LTV (in %) 58.6 Highest regional exposure (in %) Catalonia - 23.0

LTV breakdown 0-40% LTV 21.9 41-50% LTV 10.7 51-60% LTV 14.0 61-70% LTV 18.9 71-80% LTV 31.2 >80% LTV 3.3

Commercial pool overview Pool balance (in €) 6,344,920,825 Number of loans 7,576 Average loan (in €) 837,503 WA seasoning (mths) 27.6 WA remaining term (mths) 155.9 WA current LTV (in %) 47.2 Largest 10 loans (in %) 7.8 Largest 10 borrowers (in %) 17.9 Highest regional exposure (in %) Galicia - 27.6

LTV breakdown 0-40% LTV 44.8 41-50% LTV 12.1 51-60% LTV 12.9 61-70% LTV 12.8 71-80% LTV 10.4 >80% LTV 7.0 Source: Moody’s

229 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Banco Popular Espanol Table 534: Key balance sheet figures, €mm (BBG: POPSM) FY 2008 FY 2009 FY 2010 Real Estate Loans 48,420 47,782 48,896 Snapshot Loans 89,780 94,956 96,032 Banco Popular Espanol is currently the third largest Total Assets 110,376 129,290 130,140 Deposits 44,973 52,908 59,324 commercial financial group in Spain, although much Short-term borrowings 14,264 23,900 12,650 smaller than the two institutions in front of it, Santander Other short-term and BBVA, and set to be overtaken by Bankia once the borrowings 2,396 2,107 2,138 integration of the underlying lenders is finalised. The Long-term borrowings 31,740 32,991 25,402 Equity 8,346 8,448 8,252 group focuses exclusively on the domestic retail and Source: Bloomberg commercial banking businesses, with a network of over 2,300 branches and a market share of around 5% (and Table 535: Select financial metrics around 10% in a number of SME-related lines of FY 2008 FY 2009 FY 2010 business). NIM 2.5 2.5 2.0 ROA 1.0 0.6 0.5 In 2010, Banco Popular entered into a JV with Credit ROE 16.2 11.0 7.7 ROC 1.8 1.2 0.9 Mutuel to create a new bank in Spain, to which the group C:I 37.7 33.6 42.3 will contribute €2bn of loans and €1.7bn of AUM. In Core Capital 8.1 9.1 9.6 2011, BPE joined forces with Allianz, combining its Source: Bloomberg asset management operations with the insurer's pensions and insurance businesses.

Banco Popular issues cédulas hipotecarias.

Financial performance We set out below some of the key financial performance metrics:

Table 533: Key profit & loss figures, €mm FY 2008 FY 2009 FY 2010 Net interest income 2,559 2,830 2,462 Provisions for loan losses 905 1,520 1,106 NII less provisions 1,654 1,310 1,356

Comm.& fee income 1,016 885 867.915 Other operating income 132 60 319 Non-interest expense 1,539 1,485 1,698 Operating profit 1,391 1,176 1,044

PBT 1,461 1,073 833 Taxes 390 293 228 Net profit (loss) 1,052 766 590 Source: Bloomberg

230 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Cover pool overview We set out below some of the key cover pool characteristics:

Table 536: Covered bond characteristics As at June 2011 Ratings S/M/F Covered Bond rating AAA/Aaa/AA+ Issuer rating A-/A2/A-

Cover pool Cover pool size (€) 35,617,095,287 Outstanding liabilities (in €) 18,752,800,000 Eligible collateral (in €) 24,603,673,600 Current OC (in %) 89.9

Residential properties (in %) 39.0 Commercial properties (in %) 61.0

Residential pool overview Pool balance (in €) 13,687,771,111 Number of loans 143,831 Average loan (in €) 95,103 WA seasoning (mths) 44 WA remaining term (mths) 259 WA current LTV (in %) 57.7 Holiday homes 16.9 Highest regional exposure (in %) Andalusia - 31.9

LTV breakdown 0-40% LTV 22.0 41-50% LTV 11.7 51-60% LTV 14.7 61-70% LTV 18.6 71-80% LTV 18.4 >80% LTV 14.7

Commercial pool overview Pool balance (in €) 21,367,592,178 Number of loans 45,393 Average loan (in €) 470,724 WA seasoning (mths) 29 WA remaining term (mths) 140 WA current LTV (in %) 50.3 Largest 10 loans (in %) 5.8 Largest 10 borrowers (in %) 7.3 Highest regional exposure (in %) Andalusia - 23.0

LTV breakdown 0-40% LTV 33.8 41-50% LTV 12.8 51-60% LTV 14.1 61-70% LTV 15.1 71-80% LTV 8.7 >80% LTV 15.5

Property type Retail 23.6 Land 22.0 Real estate developments 21.7 Office 18.5 Industrial 12.3 Other 2.0 Source: Moody’s

231 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Banco Sabadell Table 538: Key balance sheet figures, €mm (BBG: SABSM) FY 2008 FY 2009 FY 2010 Real Estate Loans 35,677 36,280 40,016 Snapshot Loans 63,006 63,233 73,981 Banco Sabadell is Spain’s sixth largest banking group, Total Assets 80,378 82,823 97,099 Deposits 36,442 37,407 48,843 and offers a wide range of financial products throughout Short-term borrowings 8,722 9,577 10,334 the country via different brands and names. The group Other short-term also operates in Africa, Asia and the Americas via a borrowings 1,513 2,701 2,743 number of branches, representative offices and Long-term borrowings 24,118 24,852 21,894 Equity 4,448 5,297 5,689 subsidiaries or part-owned companies. Source: Bloomberg

Banco Sabadell is structured along five business lines: Table 539: Select financial metrics Commercial Banking; Corporate Banking & Global FY 2008 FY 2009 FY 2010 Operations; Markets & Private Banking, BS America and NIM 2.0 2.1 1.8 Bancassurance. The group's largest business line is ROA 0.9 0.6 0.4 Commercial Banking, which provides a range of ROE 14.9 10.8 7.0 ROC 1.7 1.3 0.9 financial products and services for large and medium- C:I 52.7 49.6 54.2 sized companies, SMEs, other small businesses, Core Capital 7.3 9.1 9.4 individuals and administrations. Source: Bloomberg

The Corporate Banking & Global Operations department deals with the bank’s largest customers, who require unique features and complexity; it offers Structured Finance, Treasury and Capital Markets and Corporate Finance services.

Banco Sabadell issues cédulas hipotecarias

Financial performance We set out below some of the key financial performance metrics:

Table 537: Key profit & loss figures, €mm FY 2008 FY 2009 FY 2010 Net interest income 1,460 1,615 1,475 Provisions for loan losses 571 226 396 NII less provisions 889 1,390 1,079

Comm.& fee income 610 562 571 Other operating income 87 64 72 Non-interest expense 1,224 1,286 1,316 Operating profit 480 1,028 670

PBT 260 571 464 Taxes 12 45 81 Net profit (loss) 674 522 380 Source: Bloomberg

232 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Cover pool overview We set out below some of the key cover pool characteristics:

Table 540: Covered bond characteristics As at March 2011 Ratings S/M/F Covered Bond rating -/Aaa/- Issuer rating A/A3/A-

Cover pool Cover pool size (€) 22,152,304,607 Outstanding liabilities (in €) 12,938,700,000 Estimated eligible collateral (in €) 18,114,180,000 Current OC (in %) 71.2 Required OC for current rating (in %) 59.0

Residential properties (in %) 45.0 Commercial properties (in %) 55.0

Residential pool overview Number of loans 95,622 Average loan (in €) 104,162 WA seasoning (mths) 49 WA current LTV (in %) 55.8 Highest regional exposure (in %) Catalonia - 39.4 Second homes (in %) 15.6

LTV breakdown 0-40% LTV 23.7 41-50% LTV 13.2 51-60% LTV 16.4 61-70% LTV 19.5 71-80% LTV 17.6 >80% LTV 9.6

Commercial pool overview Number of loans 27,228 Average loan (in €) 447,778 WA seasoning (mths) 34 WA current LTV (in %) 50.4 Largest 10 loans (in %) 5.1 Largest 10 borrowers (in %) 10.9 Highest regional exposure (in %) Catalonia - 41.4

Property type Real estate developments 26.9 Land 26.5 Industrial 9.4 Retail 8.2 Office 5.4 Hotel 5.4 Other 18.2

LTV breakdown 0-40% LTV 31.3 41-50% LTV 16.9 51-60% LTV 19.3 61-70% LTV 18.0 71-80% LTV 9.4 >80% LTV 5.1 Source: Moody’s

233 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Banco Santander Table 542: Key balance sheet figures, €mm (BBG: SANTAN) FY 2008 FY 2009 FY 2010 Real Estate Loans 351,609 411,778 430 Snapshot Commercial Loans 178,364 186,693 207,371 The Santander Group is the fourth largest bank in the Consumer Loans 347,201 379,297 395,622 Other Loans 113,789 134,433 140,858 world by profits and the eighth by market capitalisation. Total Assets 1,049,632 1,110,529 1,212,017 Deposits 378,749 468,283 575,360 The group has a strong international presence, with 91 Short-term borrowings 141,395 149,535 99,137 million customers across 9 core markets in Europe and Other short-term borrowings 115,879 91,112 121,180 the Americas. Long-term borrowings 266,516 243,295 226,116 Equity 60,001 73,871 80,914 The group’s core activity, and the largest source of its Source: Bloomberg profits, is traditional retail banking. In continental Europe, it operates in Spain, Portugal and Germany, Table 543: Select financial metrics offering retail and wholesale banking, asset management FY 2008 FY 2009 FY 2010 and insurance products. In the UK it focuses mostly on NIM 2.0 2.7 2.8 ROA 0.9 0.8 0.7 retail banking. Outside of Europe, Santander has ROE 15.7 14.2 11.4 branches and subsidiaries in Latin America, mainly in ROC 1.8 1.9 1.9 Brazil, Mexico, Chile and Argentina and in the US, C:I 50.0 46.6 47.6 where it operates under the name Sovereign Bank. Core Capital 9.1 10.1 10.0 Source: Bloomberg The bank’s secondary focus is on commercial banking, insurance, asset management and global private banking.

Banco Santander issues both cédulas hipotecarias and territoriales.

Financial performance We set out below some of the key financial performance metrics:

Table 541: Key profit & loss figures, €mm FY 2008 FY 2009 FY 2010 Net interest income 18,091 26,735 29,586 Provisions for loan losses 5,897 11,088 10,267 NII less provisions 12,194 15,647 19,320

Comm.& fee income 9,741 10,726 11,680 Other operating income 1,302 1,155 1,411 Non-interest expense 17,051 20,870 22,579 Operating profit 9,661 10,904 12,437

PBT 10,849 10,588 12,052 Taxes 1,836 1,207 2,923 Net profit (loss) 8,876 8,943 8,181 Source: Bloomberg

234 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Cover pool overview We set out below some of the key cover pool characteristics:

Table 544: Mortgage Covered bond characteristics As at March 2011 Ratings S/M/F Covered Bond rating -/Aaa/AAA Issuer rating AA/Aa2/AA

Cover pool Cover pool size (€) 54,507,420,570 Outstanding liabilities (in €) 27,410,000,000 Current OC (in %) 98.9 Required OC for current rating (in %) 17.5

Residential properties (in %) 57.3 Commercial properties (in %) 42.7

Residential pool overview Number of loans 352,572 Average loan (in €) 88,587 WA Current LTV (%) 58.6 Second homes (in %) 5.0 Highest regional exposure (in %) Madrid - 21.3

LTV breakdown 0-40% 26.3 41-60% 23.8 61-80% 24.7 >80% 25.2

Commercial pool overview Estimated WA current LTV (in %) 56.1 Highest regional exposure (in %) Madrid - 23.2

LTV breakdown 0-40% 29.2 41-60% 24.4 61-80% 23.6 >80% 22.8 Source: Moody’s

Table 545: Public sector Covered bond characteristics As at June 2011 Ratings S/M/F Covered Bond rating -/Aaa/- Issuer rating AA/Aa2/AA

Cover pool Cover pool size (€) 7,858,309,241 Outstanding liabilities (in €) 3,000,000,000 Current OC (in %) 161.9

Average exposure (in €) 4,742,492 Exposure to 10 largest borrowers (in %) 50.3 Highest regional exposure (in %) Andalusia - 17.6

Borrower type Direct claim against region/municipality/federal state 95.5 Claim with guarantee of region/municipality 4.5 Source: Moody’s

235 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Bankia Table 547: Key balance sheet figures, €mm (BBG: BKIASM) FY 2008 FY 2009 FY 2010 Loans 196,283 Snapshot Total Assets 292,188 Bankia, the result of the institutional protection scheme Deposits 144,715 Short-term borrowings 49,496 (SIP) combining Caja Madrid, Bancaja, Caixa Layetana, Other short-term Caja Avila, Caja Segovia, Caja Rioja and Caja Insular de borrowings 15,735 Canarias, is one of the largest financial groups in Spain, Long-term borrowings 64,186 with pro forma total assets of €292bn at the end of 2010. Equity 13,413 The individual savings banks will be responsible for the Source: Bloomberg management of social welfare projects financed with the Table 548: Select financial metrics dividends paid by Bankia. FY 2008 FY 2009 FY 2010 There is still very little information on the breakdown of C:I 52.7 the group’s assets, but according to Moody's, as of March Source: Bloomberg 2011 loans to individuals contributed to 69% of the loans Cover pool overview book, followed by loans to corporates (28%). We set out below the latest key cover pool characteristics The group will have a market share of above 20% in 8 available for the two largest contributors to Bankia’s Spanish provinces and of 12-13% in the national market cover pool, Caja Madrid and Bancaja. for a number of key retail banking products, according to Table 549: Caja Madrid Mortgage Covered bond characteristics Moody's, although this is likely to be reduced somewhat as a number of branches will be closed as part of the As at March 2011 integration process. Cover pool Cover pool size (€) 68,412,875,072 The international presence of the bank is limited, with Outstanding liabilities (in €) 32,835,750,000 only Caja Madrid operating outside of the core domestic Current OC (in %) 46,790,943,750 market. Residential properties (in %) 73.9 Commercial properties (in %) 26.1 Financial performance Residential pool overview We set out below some of the key financial performance Average loan (in €) 99,050 metrics: WA current LTV (in %) 62.5 Highest regional exposure (in %) Madrid - 44.3

Table 546: Key profit & loss figures, €mm LTV breakdown FY 2008 FY 2009 FY 2010 0-40% LTV 16.0 Net interest income 3,289 41-50% LTV 11.0 Provisions for loan 51-60% LTV 14.7 losses 33 61-70% LTV 18.8 NII less provisions 3,256 71-80% LTV 25.0 >80% LTV 14.5 Comm.& fee income 150 Other operating Commercial pool overview income 150 WA current LTV (in %) 64.5 Non-interest expense 2,915 Highest regional exposure (in %) Madrid - 37.8 Operating profit 2,587 Real estate developments 76.0

PBT 359 LTV breakdown Taxes 3 0-40% LTV 17.6 Net profit (loss) 357 41-50% LTV 9.1 51-60% LTV 17.1 Source: Bloomberg 61-70% LTV 21.3 71-80% LTV 18.2 >80% LTV 16.7 Source: Moody’s

236 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Table 550: Bancaja Mortgage Covered bond characteristics Table 551: Caja Madrid Public sector Covered bond characteristics As at September 2010 As at March Cover pool 2011 Cover pool size (€) 31,270,373,785 Cover pool Outstanding liabilities (in €) 7,828,920,000 Cover pool size (€) 3,028,033,252 Estimated eligible collateral (in €) 14,326,923,600 Outstanding liabilities (in €) 1,825,000,000 Current OC (in %) 299.4 Current OC (in %) 65.9 Required OC for current rating (in %) 65.0 Average exposure (in €) 5,407,202 Residential properties (in %) 36.8 Exposure to 10 largest borrowers (in %) 40.9 Commercial properties (in %) 63.2 Highest regional exposure (in %) Madrid - 47.8

Residential pool overview Borrower type Number of loans 114,131 Direct claim against region/municipality/federal state 68.8 Average loan (in €) 100,738 Claim with guarantee of region/municipality 31.2 WA seasoning (mths) 34 WA remaining term (mths) 341 Source: Moody’s WA current LTV (in %) 66.3 Second homes (in %) 10.7 Prior ranks (in %) 3.3 Highest regional exposure (in %) Valencia - 49.5

LTV breakdown 0-40% LTV 12.4 41-50% LTV 9.2 51-60% LTV 13.3 61-70% LTV 19.5 71-80% LTV 28.4 >80% LTV 17.2

Commercial pool overview Number of loans 22,128 Average loan (in €) 893,577 WA seasoning (mths) 30 WA remaining term (mths) 167 WA current LTV (in %) 56.7 Largest 10 loans (in %) 4.9 Largest 10 borrowers (in %) 17.6 Highest regional exposure (in %) Valencia - 49.0

Property type Real estate developers 38.5 Land 36.2 Office 20.1 Industrial 5.2

LTV breakdown 0-40% LTV 22.5 41-50% LTV 11.8 51-60% LTV 16.2 61-70% LTV 26.3 71-80% LTV 14.8 >80% LTV 8.6 Source: Moody’s

237 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Bankinter Table 553: Key balance sheet figures, €mm (BBG: BKTSM) FY 2008 FY 2009 FY 2010 Real Estate Loans 29,300 29,153 32,396 Snapshot Loans 40,897 39,877 41,679 Bankinter was founded in 1962 as a JV between Total Assets 53,470 54,467 54,152 Deposits 17,294 16,601 19,215 Santander and Bank of America. Initially, it was set up as Short-term borrowings 11,256 7,583 5,764 an industrial bank, but it was transformed into a Other short-term commercial bank for its listing on the Madrid stock borrowings 1,598 1,900 2,114 exchange in 1972. Long-term borrowings 15,414 19,620 18,539 Equity 1,965 2,583 2,580 Source: Bloomberg It is currently amongst the top 6 Spanish financial institutions and provides a range of banking and financial Table 554: Select financial metrics services to individuals, SMEs and corporates in its core FY 2008 FY 2009 FY 2010 domestic market. NIM 1.4 1.5 1.1 ROA 0.5 0.5 0.3 The bank was one of the first to embrace the new ways to ROE 13.6 11.2 5.8 ROC 0.8 0.7 0.5 reach clients and do banking in the modern age: more C:I 54.1 62.2 60.9 than 60% of its retail banking transactions are now Core Capital 7.4 7.4 7.3 performed through remote channels, such as telephone Source: Bloomberg and the internet, which alone contributes for 46% of all transactions.

Bankinter has maintained relatively tight underwriting standards, despite growing through the years, and as a consequence it has one of the best performing mortgage books amongst Spanish financial institutions.

More than 20% of the bank is owned by France’s Credit Agricole. Bankinter issues cédulas hipotecarias.

Financial performance We set out below some of the key financial performance metrics:

Table 552: Key profit & loss figures, €mm FY 2008 FY 2009 FY 2010 Net interest income 681 796 564 Provisions for loan losses 186 219 216 NII less provisions 495 577 348

Comm.& fee income 303 271 261.479 Other operating income 29 470 234 Non-interest expense 639 1,037 745 Operating profit 291 370 219

PBT 337 346 205 Taxes 85 92 54 Net profit (loss) 252 254 151 Source: Bloomberg

238 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Cover pool overview We set out below some of the key cover pool characteristics:

Table 555: Covered bond characteristics As at June 2011 Ratings S/M/F Covered Bond rating -/Aaa/- Issuer rating A/A2/-

Cover pool Cover pool size (€) 17,638,034,450 Outstanding liabilities (in €) 7,029,325,166 Current OC (in %) 150.9 Required OC for current rating (in %) 46.0

Residential properties (in %) 59.9 Commercial properties (in %) 40.1

Residential pool overview Pool balance (in €) 10,563,599,110 Number of loans 89,919 Average loan (in €) 117,479 WA seasoning (mths) 46 WA current LTV (in %) 60.2 Highest regional exposure (in %) Madrid - 35.6 Second homes (in %) 8.6

LTV breakdown 0-40% LTV 22.8 41-50% LTV 13.2 51-60% LTV 16.3 61-70% LTV 17.8 71-80% LTV 20.3 >80% LTV 9.6

Commercial pool overview Pool balance (in €) 7,074,435,340 Number of loans 25,659 Average loan (in €) 275,710 WA seasoning (mths) 38 WA remaining term (mths) 196 WA current LTV (in %) 70.6 Largest 10 borrowers (in %) 4.9 Highest regional exposure (in %) Madrid - 29.1

Property type Retail 19.7 Real estate developments 11.1 Land 11.0 Office 1.6 Other 56.8

LTV breakdown 0-40% LTV 26.8 41-50% LTV 14.8 51-60% LTV 15.0 61-70% LTV 14.2 71-80% LTV 7.7 >80% LTV 21.5 Source: Moody’s

239 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Bilbao Bizkaia Kutxa (‘BBK’) Table 557: Key balance sheet figures, €mm (BBG: BILBIZ) FY 2008 FY 2009 FY 2010 Real Estate Loans 14,866 15,515 16,139 Snapshot Loans 20,978 21,178 21,601 Caja de Ahorros de Bilbao y Vizcaya (BBK) is a savings Total Assets 29,667 29,806 29,112 Deposits 17,095 16,884 17,133 bank based in the Basque Country, where most of its Short-term borrowings 2,074 4,332 4,606 client base is located. The bank is the product of the Other short-term merger of Caja de Ahorros Municipal de Bilbao and the borrowings 90 191 144 Bizkaiko Aurrezki Kutxa-Caja de Ahorros Vizcaína. Long-term borrowings 2,512 1,263 812 Equity 3,914 4,123 3,978 According to Moody's, the bank has leading market Source: Bloomberg shares in the Basque Country provinces: 42% and 28% of deposits and lending respectively. Table 558: Select financial metrics FY 2008 FY 2009 FY 2010 In 2010, BBK won a bid for Cajasur, the Cordoba-based NIM 2.0 1.8 1.9 caja that was put into administration earlier in the year. ROA 1.2 1.0 0.9 The acquisition became effective as of January 2011, ROE 7.8 7.3 6.4 ROC 2.9 2.5 2.3 when all assets and liabilities of Cajasur were transferred C:I 56.7 61.6 50.9 to BBK. Core Capital n/a 14.6 16.7 Source: Bloomberg In 2011, BBK signed an agreement with the other two Basque savings banks, Kutxa and Vital Kutxa, which will lead to the creation of Kutxa Bank in January 2012, although the three banks will keep their own brand names in their traditional territories. The three cajas will transfer assets and liabilities to the new entity but will continue to manage social welfare projects separately.

BBK will be the largest contributor to Kutxa Bank with 57%, followed by Kutxa (32%) and Vital Kutxa (11%).

The bank issues cédulas hipotecarias.

Financial performance We set out below some of the key financial performance metrics:

Table 556: Key profit & loss figures, €mm FY 2008 FY 2009 FY 2010 Net interest income 548 490 514 Provisions for loan losses 145 158 113 NII less provisions 404 332 401

Comm.& fee income 144 151 166 Other operating income 209 162 171 Non-interest expense 574 506 443 Operating profit 281 146 296

PBT 327 275 234 Taxes -15 -18 -29 Net profit (loss) 339 289 258 Source: Bloomberg

240 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Cover pool overview We set out below some of the key cover pool characteristics:

Table 559: Covered bond characteristics As at June 2011 Ratings S/M/F Covered Bond rating -/A1/- Issuer rating A/Baa3/A

Cover pool Cover pool size (€) 13,833,918,424 Outstanding liabilities (in €) 4,137,900,000 Estimated eligible collateral (in €) 9,033,035,700 Current OC (in %) 234.3 Required OC for current rating (in %) 17.0

Residential properties (in %) 80.9 Commercial properties (in %) 19.1

Residential pool overview Pool balance (in €) 11,190,810,150 Average loan (in €) 106,684 WA seasoning (mths) 47 WA current LTV (in %) 62.8 Highest regional exposure (in %) Basque Country - 50.6 Second homes (in %) 4.7

LTV breakdown 0-40% LTV 18.2 41-50% LTV 11.8 51-60% LTV 13.1 61-70% LTV 13.9 71-80% LTV 20.9 >80% LTV 22.1

Commercial pool overview Pool balance (in €) 2,643,108,092 Average loan (in €) 233,387 WA seasoning (mths) 53 WA current LTV (in %) 48.2 Highest regional exposure (in %) Basque Country - 67.4

Property type RED 41.7 Retail 19.9 Land 9.8 Industrial 9.1 Office 3.3 Other 13.8

LTV breakdown 0-40% LTV 43.7 41-50% LTV 13.0 51-60% LTV 12.4 61-70% LTV 11.8 71-80% LTV 9.0 >80% LTV 10.3 Source: Moody’s

241 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Caixa d’Estalvis de Catalunya, Table 561: Key balance sheet figures, €mm Tarragona i Manresa (‘CatalunyaCaixa’) FY 2008 FY 2009 FY 2010 Real Estate Loans 35,533 33,096 39,726 (BBG: CAIXAC) Loans 50,011 44,381 51,689 Snapshot Total Assets 63,627 63,650 76,585 Deposits 26,828 25,859 38,451 CatalunyaCaixa Group was formed in July 2010, the Short-term borrowings 9,884 26,319 25,219 outcome of the merger of Caixa Catalunya, Caixa Other short-term Tarragona and Caixa Manresa, three institutions closely borrowings 772 1,437 1,790 Long-term borrowings 19,806 2,302 3,782 linked to the Catalunya region. The merger took place Equity 2,765 2,835 2,106 under the framework of the FROB and the wider process Source: Bloomberg of the restructuring of the Spanish cajas system. Table 562: Select financial metrics The new institution has more than €81 billion in FY 2008 FY 2009 FY 2010 consolidated assets and offers local retail banking and NIM n/a n/a 0.5 personal financial advisory services and products through ROA 0.3 0.1 0.0 1,200 branches. ROE 6.3 2.9 0.7 ROC 0.5 0.2 0.1 C:I 53.5 77.5 92.6 The largest of the three underlying cajas is Caxia Core Capital 6.3 6.1 7.4 d’Estalvis de Catalunya, a Barcelona-based savings bank Source: Bloomberg with strong ties to the region, where it was the second largest savings bank in terms of market share.

Caixa Catalunya issues CH and CT.

Financial performance We set out below some of the key financial performance metrics:

Table 560: Key profit & loss figures, €mm FY 2008 FY 2009 FY 2010 Net interest income 943 869 325 Provisions for loan losses 771 33 3 NII less provisions 172 836 322

Comm.& fee income 350 327 194 Other operating income 12 1,344 277 Non-interest expense 735 2,091 764 Operating profit -131 563 56

PBT 205 75 12 Taxes 20 -2 -6 Net profit (loss) 194 79 18 Source: Bloomberg

242 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Cover pool overview Table 564: Public sector Covered bond characteristics We set out below some of the key characteristics of As at June Caixa Catalunya’s cover pool: 2011 Ratings S/M/F Covered Bond rating -/A3/- Table 563: Mortgage Covered bond characteristics Issuer rating -/Ba1/- As at June 2011 Cover pool Cover pool size (€) 1,647,028,278 Ratings S/M/F Outstanding liabilities (in €) 665,000,000 Covered Bond rating -/Baa1/- Current OC (in %) 147.7 Issuer rating -/Ba1/- Exposure to 10 largest borrowers (in %) 41.7 Highest regional exposure (in %) Catalonia - 79.4 Cover pool Cover pool size (€) 28,710,071,581 Borrower type Outstanding liabilities (in €) 11,574,700,000 Direct claim against region/municipality/federal state 68.8 Estimated eligible collateral (in €) 17,570,394,600 Claim with guarantee of region/municipality 31.2 Current OC (in %) 148.0 Required OC for current rating (in % 23.0 Source: Moody’s

Residential properties (in %) 46.6 Commercial properties (in %) 53.4

Residential pool overview Average loan (in €) 82,239 WA current LTV (in %) 65.1 Highest regional exposure (in %) Catalonia - 73.6

LTV breakdown 0-40% LTV 16.6 41-50% LTV 8.1 51-60% LTV 10.9 61-70% LTV 15.3 71-80% LTV 20.8 >80% LTV 28.3

Commercial pool overview WA current LTV (in %) 57.3 Largest 10 borrowers (in %) 22.1 Highest regional exposure (in %) Catalonia - 54.8

Property type RED 61.3 Retail 4.4 Office 1.1 Other 33.3

LTV breakdown 0-40% LTV 22.9 41-50% LTV 10.4 51-60% LTV 16.5 61-70% LTV 19.3 71-80% LTV 20.7 >80% LTV 9.9 Source: Moody’s

243 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

CaixaBank Table 566: La Caixa key balance sheet figures, €mm (BBG: CABKSM) FY 2008 FY 2009 FY 2010 Loans 172,492 166,811 180,876 Snapshot Total Assets 260,827 271,873 285,724 CaixaBank is a financial group offering banking, Deposits 136,284 130,847 142,072 Short-term borrowings 16,282 25,918 22,347 insurance and investment products. It is a leader in retail Other short-term banking in Spain and has a small, but growing borrowings 8,862 10,544 12,126 international presence. Long-term borrowings 50,149 48,421 60,404 Equity 21,921 26,301 21,980 Caja de Ahorros y Pensiones de Barcelona (La Caixa) Source: Bloomberg and Caixa Girona merged to form CaixaBank in January Table 567: La Caixa select financial metrics 2011, as part of the restructuring of the Spanish banking system. FY 2008 FY 2009 FY 2010 ROA 0.7 0.6 0.5 ROE 10.7 8.7 7.0 CaixaBank leverages off of La Caixa's position of ROC 2.2 1.9 1.6 strength in the market and offers retail and corporate C:I 63.8 57.5 59.7 banking services as well as investing directly in company Core Capital 10.1 10.4 n/a holdings. In fact, via its vehicle Criteria CaixaCorp, the Source: Bloomberg bank has a large portfolio of industrial holdings in companies involved in the infrastructure, energy and communications sectors, among others.

La Caixa, whose assets make up 95% of the mortgage cover pool, issues CH and CT.

Financial performance We set out below some of the key financial performance metrics:

Table 565: La Caixa key profit & loss figures, €mm FY 2008 FY 2009 FY 2010 Net interest income 3,903 4,331 3,612 Provisions for loan losses 796 1,840 2,115 NII less provisions 3,106 2,491 1,497

Comm.& fee income 1,497 1,530 1,629 Other operating income 1,100 777 1,185 Non-interest expense 4,340 3,988 4,075 Operating profit 1,526 942 488

PBT 2,074 1,868 1,440 Taxes 11 35 -247 Net profit (loss) 1,802 1,510 1,307 Source: Bloomberg

244 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Cover pool overview Table 569: La Caixa Public sector Covered bond characteristics We set out below some of the key characteristics of La As at March Caixa’s cover pool: 2011 Cover pool Cover pool size (€) 12,140,855,621 Table 568: La Caixa Mortgage Covered bond characteristics Outstanding liabilities (in €) 2,700,000,000 As at Current OC (in %) 349.7 December 2010 Average exposure (in €) 8,050,965 Cover pool Exposure to 10 largest borrowers (in %) 45.0 Cover pool size (€) 106,177,819,307 Highest regional exposure (in %) Catalonia - 39.5 Outstanding liabilities (in €) 38,713,881,637 Current OC (in %) 174.3 Borrower type Required OC for current rating (in % 11.0 Direct claim against region/municipality/federal state 73.5 Claim with guarantee of region/municipality 26.5 Residential properties (in %) 65.1 Commercial properties (in %) 30.9 Source: Moody’s

Residential pool overview Pool balance (in €) 69,124,959,981 Average loan (in €) 81,249 C Highest regional exposure (in %) Catalonia - 34.3

LTV breakdown 0-40% LTV 15.8 41-50% LTV 10.5 51-60% LTV 14.9 61-70% LTV 21.8 71-80% LTV 23.6 >80% LTV 13.4

Commercial pool overview Pool balance (in €) 32,776,408,031 Highest regional exposure (in %) Madrid-24.6 Real estate developments 47.8 Land 16.2 Mixed use 10.7 Retail 7.8 Industrial 4.1 Hotel 3.6 Office 2.8 Other 7.0

LTV breakdown 0-40% LTV 17.9 41-50% LTV 13.1 51-60% LTV 18.7 61-70% LTV 26.0 71-80% LTV 14.3 >80% LTV 10.0 Source: Moody’s

245 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Caja de Ahorros y Monte de Piedad de Cover pool overview Guipúzcoa y San Sebastián (‘Kutxa’) We set out below some of the key characteristics of the cover pool: (BBG: KUTXA) Snapshot Table 572: Mortgage Covered bond characteristics Kutxa is one of three Basque savings banks. As of As at March January 2012, it will join forces with the other two (BBK 2011 and Caja Vital Kutxa) to form Kutxa Bank. See BBK and Ratings S/M/F Caja Vital Kutxa profiles for further details. According to Covered Bond rating AAA/-/- Fitch, at this point it will rank as the 14th largest caja in Issuer rating A/-/A- Spain once the integration process is complete. While Cover pool based in its home province of Gipuzkoa, 209 of Kutxa’s Cover pool size (€) 8,626,500,000 347 branches at end H1 2010 were situated outside Outstanding liabilities (in €) 2,500,000,000 Eligible collateral (in €) 5,606,500,000 Gipuzkoa and mostly opened in the 2003-2007 expansion Current OC (in %) 145.1 plan. Its activities are predominantly retail in nature, with the bank focused on deposit-taking and retail lending. Residential properties (in %) 79.3 Commercial properties (in %) 20.7

Kutxa is mainly funded by a large deposit base which Residential pool overview accounted for 75% of lending at end H1 2010. Wholesale Pool balance (in €) 6,843,600,000 Average loan (in €) 97,495 funding is mainly through mortgage-covered bonds. WA seasoning (mths) 47.8 WA current LTV (in %) 58.2 Financial performance Highest regional exposure (in %) Basque Country We set out below some of the key financial performance Commercial pool overview metrics: Pool balance (in €) 1,782,900,000 Average loan (in €) 391,512 Table 570: Key profit & loss figures, €mm WA seasoning (mths) 46.8 WA current LTV (in %) 39.7 FY 2008 FY 2009 FY 2010 Highest regional exposure (in %) Basque Country Net interest income 311 327 279 Source: Moody’s Provisions for loan losses -32 139 97 NII less provisions 343 188 182

Comm.& fee income 124 117 122 Other operating income 44 83 66 Non-interest expense 368 396 362 Operating profit 288 146 88

PBT 60 12 4 Taxes -51 -38 -21 Net profit (loss) 111 50 24 Source: Bloomberg

Table 571: Key balance sheet figures, €mm FY 2008 FY 2009 FY 2010 Loans 16,062 15,711 15,683 Total Assets 21,266 21,095 20,851 Deposits 17,058 15,532 15,470 Short-term borrowings 558 1,032 1,276 Equity 2,175 2,310 2,188 Source: Bloomberg

246 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Caja Vital Kutxa Cover pool overview (BBG: VITAL) We set out below some of the key characteristics of the Snapshot cover pool: Caja Vital Kutxa (full name Caja de Ahorros de Vitoria y Table 576: Mortgage Covered bond characteristics Álava Araba eta Gasteizko Aurrezki Kutxa) was formed in 1990 through the merger of the Caja Provincial de As at March 2011 Ahorros de Álava and Caja de Ahorros y Monte de Ratings S/M/F Piedad de Vitoria – Gasteizko Aurrezki Kutxa. Covered Bond rating -/Aaa/- Issuer rating -/A3/A-

It offers retail banking products in its domestic Basque Cover pool Country region. From January 2012, it will join forces Cover pool size (€) 4,887,501,555 with the other two Basque savings banks, BBK and Outstanding liabilities (in €) 1,372,000,000 Estimated eligible collateral (in €) 2,354,352,000 Kutxa, to form Kutxa Bank (see BBK profile for details). Current OC (in %) 256.2 Required OC for current rating (in %) 47.5 Financial performance Residential properties (in %) 64.2 We set out below some of the key financial performance Commercial properties (in %) 35.8 metrics: Residential pool overview Table 573: Key profit & loss figures, €mm Pool balance (in €) 3,138,935,098 Average loan (in €) 97,229 FY 2008 FY 2009 FY 2010 WA seasoning (mths) 54 Net interest income 144 130 92 WA current LTV (in %) 62.2 Provisions for loan Highest regional exposure (in %) Basque Country losses 28 6 43 - 61.5 NII less provisions 117 123 49 Second homes (in %) 5.5

Comm.& fee income 42 42 43 LTV breakdown Other operating 0-40% LTV 18.2 income 16 24 23 41-50% LTV 10.8 Non-interest expense 115 105 122 51-60% LTV 13.7 Operating profit 91 112 -2 61-70% LTV 16.3 71-80% LTV 21.5 PBT 88 76 36 >80% LTV 19.5 Taxes 12 7 -2 Net profit (loss) 75 68 38 Commercial pool overview Pool balance (in €) 1,748,566,457 Source: Bloomberg Average loan (in €) 459,303 WA seasoning (mths) 45 Table 574: Key balance sheet figures, €mm WA current LTV (in %) 64.7 Highest regional exposure (in %) Basque Country FY 2008 FY 2009 FY 2010 - 56.1 Loans 6,505 6,556 6,529 Total Assets 8,726 9,252 8,644 Property type Deposits 5,764 6,040 6,421 Land 45.8 Short-term borrowings 379 415 246 RED 15.9 Other short-term Industrial 13.6 borrowings 39 34 33 Retail 10.2 Long-term borrowings 918 1,129 1,004 Other 14.5 Equity 802 854 844 Source: Bloomberg LTV breakdown 0-40% LTV 15.0 Table 575: Select financial metrics 41-50% LTV 9.6 51-60% LTV 12.0 FY 2008 FY 2009 FY 2010 61-70% LTV 16.5 NIM 2 2 1 71-80% LTV 26.0 ROA 1 1 0 >80% LTV 20.9 ROE 10 8 5 Source: Moody’s ROC 3 2 2 C:I 49 46 75 Source: Bloomberg

247 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Cajamar Caja Rural Table 579: Select financial metrics (BBG: CAJAMA) FY 2008 FY 2009 FY 2010 NIM 2.2 1.6 Snapshot ROA 0.2 0.1 Cajamar is the result of the fusion of the Rural Savings ROE 3.3 1.6 ROC 1.0 0.4 banks of Almería and Málaga, Caja Rural del Duero and C:I 53.6 64.7 the incorporation of the co-operatives Campo de Source: Bloomberg Cartagena and Grumeco. Finally, in 2010, Caja Rural de Baleares merged with Cajamar.

It is the largest bank in the Grupo Cooperativo Cajamar, which provides banking services across Spain. It is the 19th largest bank in Spain, reaching over 2.5mm customers via a thousand branches in 14 autonomous regions.

Cajamar issues cédulas hipotecarias.

Financial performance We set out below some of the key financial performance metrics:

Table 577: Key profit & loss figures, €mm FY 2008 FY 2009 FY 2010 Net interest income 498 546 428 Provisions for loan losses 12 200 n/a NII less provisions 486 345 428

Comm.& fee income 110 100 109 Other operating income 15 36 51 Non-interest expense 358 389 417 Operating profit 290 125 221

PBT 134 70 32 Taxes 8 5 0 Net profit (loss) 127 66 36 Source: Bloomberg

Table 578: Key balance sheet figures, €mm FY 2008 FY 2009 FY 2010 Real Estate Loans 17,711 19,073 19,609 Loans 23,319 24,188 24,982 Total Assets 25,154 27,679 29,809 Deposits 18,052 20,314 21,541 Short-term borrowings 3,150 1,649 1,625 Other short-term borrowings 18 6 31 Long-term borrowings 1,579 3,029 3,661 Equity 1,826 2,212 2,324 Source: Bloomberg

248 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Cover pool overview We set out below some of the key cover pool characteristics:

Table 580: Covered bond characteristics As at June 2011 Ratings S/M/F Covered Bond rating -/A1/- Issuer rating -/Baa3/A

Cover pool Cover pool size (€) 13,523,108,689 Outstanding liabilities (in €) 3,682,800,000 Estimated eligible collateral (in €) 8,006,407,200 Current OC (in %) 267.2 Required OC for current rating (in %) 28.0

Residential properties (in %) 55.1 Commercial properties (in %) 44.9

Residential pool overview Pool balance (in €) 7,454,013,799 Average loan (in €) 90,625 WA seasoning (mths) 40 WA current LTV (in %) 60.7 Highest regional exposure (in %) Andalusia - 43.7 Second homes (in %) 12.1

LTV breakdown 0-40% LTV 18.3 41-50% LTV 11.0 51-60% LTV 14.4 61-70% LTV 19.2 71-80% LTV 27.0 >80% LTV 10.1

Commercial pool overview Pool balance (in €) 6,069,094,890 Average loan (in €) 284,707 WA seasoning (mths) 41 WA current LTV (in %) 56.3 Highest regional exposure (in %) Andalusia - 57.5

Property type Real Estate Developers 41.6 Land 24.6 Retail 19.2 Other 14.5

LTV breakdown 0-40% LTV 33.5 41-50% LTV 13.4 51-60% LTV 15.5 61-70% LTV 14.7 71-80% LTV 8.4 >80% LTV 14.5 Source: Moody’s

249 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Ibercaja Cover pool overview (BBG: CAZAR) We set out below some of the key cover pool Snapshot characteristics: Caja de Ahorros y Monte de Piedad de Zaragoza, Aragon Table 584: Covered bond characteristics y Rioja (Ibercaja) is based in the Aragon region. Ibercaja offers traditional retail banking products to individuals As at June 2011 and SMEs. Despite enjoying a strong position in the Ratings S/M/F northern regions that constitute its core markets (19% Covered Bond rating AAA/Aa1/- market share in lending and 32% in deposits in 2010, Issuer rating A/Baa1/- according to Moody’s), it only has a 2.1% share of the Cover pool Spanish lending and deposits markets. Cover pool size (€) 22,219,652,885 Outstanding liabilities (in €) 6,105,000,000 Estimated eligible collateral (in €) 15,616,590,000 Financial performance Current OC (in %) 264.0 We set out below some of the key financial performance Required OC for current rating (in %) 35.5 metrics: Residential properties (in %) 69.2 Commercial properties (in %) 30.8 Table 581: Key profit & loss figures, €mm Residential pool overview FY 2008 FY 2009 FY 2010 Pool balance (in €) 15,369,760,418 Net interest income 668 694 548 Average loan (in €) 84,253 Provisions for loan WA seasoning (mths) 45 losses 154 174 104 WA current LTV (in %) 59.3 NII less provisions 514 520 444 Highest regional exposure (in %) Madrid - 27.5 Second homes (in %) 5.0 Comm.& fee income 224 219 242 Other operating LTV breakdown income 1,034 38 42 0-40% LTV 17.7 Non-interest expense 1,627 563 572 41-50% LTV 10.9 Operating profit 196 292 204 51-60% LTV 15.4 61-70% LTV 19.6 PBT 274 182 134 71-80% LTV 28.4 Taxes 54 39 32 >80% LTV 8.0 Net profit (loss) 220 144 104 Source: Bloomberg Commercial pool overview Pool balance (in €) 6,849,892,467 Table 582: Key balance sheet figures, €mm Average loan (in €) 242,354 WA seasoning (mths) 44 FY 2008 FY 2009 FY 2010 WA current LTV (in %) 59.9 Real Estate Loans 27,352 27,268 Highest regional exposure (in %) Aragon - 22.2 Loans 33,984 33,356 33,016 Total Assets 44,066 44,691 44,989 Property type Deposits 28,409 28,205 28,123 RED 39.1 Short-term borrowings 1,306 1,579 2,329 Land 23.2 Other short-term Retail 6.7 borrowings 7,355 144 220 Industrial 3.9 Long-term borrowings 842 7,207 6,370 Other 27.1 Equity 2,520 2,704 2,730 Source: Bloomberg LTV breakdown 0-40% LTV 19.1 41-50% LTV 11.2 Table 583: Select financial metrics 51-60% LTV 15.6 FY 2008 FY 2009 FY 2010 61-70% LTV 18.9 71-80% LTV 23.9 NIM 1.3 >80% LTV 11.3 ROA 0.5 0.3 0.2 ROE 8.5 5.5 3.8 Source: Moody’s ROC 4.3 1.7 0.8 C:I 82.1 54.1 64.5 Core Capital 8.8 9.7 Source: Bloomberg

250 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Santander Consumer Finance Cover pool overview (BBG: SANTAN) We set out below some of the key cover pool Snapshot characteristics: Santander Consumer Finance is a leading consumer Table 587: Covered bond characteristics finance company present in 17 countries: Austria, Belgium, the Czech Republic, Denmark, Finland, As at June 2010 Germany, Italy, Netherlands, Norway, Poland, Portugal, Ratings S/M/F Russia, the Slovak Republic, Spain, Sweden, UK and Covered Bond rating -/Aa1/- USA. Issuer rating (Santander Group) AA/Aa2/AA Cover pool The company is part of the Santander Group, one of the Cover pool size (€) 2,641,048,731 largest financial groups in the world (see separate Outstanding liabilities (in €) 1,350,000,000 Current OC (in %) 95.6 profile), and offers its products mainly though point of Required OC for current rating (in %) 26.0 sales but also branches, internet and telemarketing platforms. Residential properties (in %) 97.4 Commercial properties (in %) 2.6

Santander Consumer Finance issues cédulas Residential pool overview hipotecarias. Pool balance (in €) 2,572,289,079 Average loan (in €) 78,414 WA seasoning (mths) 56 Financial performance WA current LTV (in %) 66.3 We set out below some of the key financial performance Highest regional exposure (in %) Andalusia - 35.6 metrics: Second homes (in %) 0.4 LTV breakdown Table 585: Key profit & loss figures, €mm 0-40% LTV 13.8 41-50% LTV 8.9 FY 2008 FY 2009 FY 2010 51-60% LTV 10.5 Net interest income 214 106 61-70% LTV 16.7 Provisions for loan 71-80% LTV 22.8 losses -1 7 >80% LTV 27.3 NII less provisions 215 99 Source: Moody’s Comm.& fee income 43 39.528 Other operating income 5 0 Non-interest expense 52 34 Operating profit 397 417

PBT 484 434 Taxes 10 20 Net profit (loss) 466 455 Source: Bloomberg

Table 586: Key balance sheet figures, €mm FY 2008 FY 2009 FY 2010 Loans 21,625 21,922 Total Assets 26,205 26,769 Equity 6,377 7,380 Source: Bloomberg

251 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Unicaja Cover pool overview (BBG: UNICAJ) We set out below some of the key cover pool Snapshot characteristics: Montes de Piedad y Caja de Ahorros de Ronda, Cádiz, Table 591: Covered bond characteristics Almería, Málaga y Antequera (Unicaja) is a Malaga- based savings bank with a strong regional presence in As at June 2011 Andalusia. In 2010, as part of the Spanish saving banks Ratings S/M/F system restructuring, Caja Provincial de Ahorros de Jaen Covered Bond rating -/Aaa/- became the latest addition to the group. Issuer rating -/A1/A Cover pool Unicaja has a network of 935 branches in around Cover pool size (€) 17,077,087,276 eighteen Spanish provinces and international offices in Outstanding liabilities (in €) 9,499,100,000 Estimated eligible collateral (in €) 13,007,117,630 Brussels, London and Frankfurt. Furthermore, Unicaja's Current OC (in %) 79.8 international presence is widened through CECA’s Required OC for current rating (in %) 32.5 network of representative offices and 2,000 foreign corresponding banks. Residential properties (in %) 70.2 Commercial properties (in %) 29.8

Financial performance Residential pool overview Pool balance (in €) 11,984,660,862 We set out below some of the key financial performance Average loan (in €) 73,158 metrics: WA seasoning (mths) 59 WA current LTV (in %) 59.6 Table 588: Key profit & loss figures, €mm Highest regional exposure (in %) Andalusia - 93.3 Second homes (in %) 4.2 FY 2008 FY 2009 FY 2010 Net interest income 714 801 698 LTV breakdown Prov. for loan losses 260 342 206 0-40% LTV 18.6 NII less provisions 455 459 492 41-50% LTV 12.2 51-60% LTV 15.5 Comm.& fee income 160 150 146 61-70% LTV 20.6 Other operating inc. 61 50 54 71-80% LTV 26.2 Non-interest expense 507 504 539 >80% LTV 6.9 Operating profit 324 311 274 PBT 338 231 156 Commercial pool overview Taxes 52 26 5 Pool balance (in €) 5,092,426,414 Net profit (loss) 286 205 151 Average loan (in €) 203,779 WA seasoning (mths) 54 Source: Bloomberg WA current LTV (in %) 60.7 Highest regional exposure (in %) Andalusia - 90.0 Table 589: Key balance sheet figures, €mm Property type FY 2008 FY 2009 FY 2010 RED 36.5 Loans 24,396 23,955 25 Land 18.5 Total Assets 32,156 34,185 34 Retail 11.0 Deposits 24,422 21,969 25 Industrial 5.9 Short-term borrowings 1,022 1,591 2 Office 2.1 Other short-term Other 26.0 borrowings 44 81 0 Long-term borrowings 3,360 5,033 4 LTV breakdown Equity 2,724 2,908 3 0-40% LTV 28.1 Source: Bloomberg 41-50% LTV 16.6 51-60% LTV 15.6 Table 590: Select financial metrics 61-70% LTV 14.5 71-80% LTV 9.5 FY 2008 FY 2009 FY 2010 >80% LTV 15.7 ROA 1 1 1 Source: Moody’s ROE 10 7 10 ROC 4 2 3 C:I 45 42 52 Source: Bloomberg

252 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Multi-Cedulas A chain is however only as strong as its weakest link, and this is also true of any multi-cedula. Ratings (and by Multi-cedulas take a portfolio of mortgage or public- derivation, bond pricing) therefore consider the sector backed Spanish covered bonds (CH or CT) issued weakest/lowest rated contributing caja. Poor performance by a small group of Spanish financial institutions of the issuing entity, or in the collateral pools backing the (predominantly savings banks), and uses broadly similar individual bonds, therefore naturally affects the ratings of structural features as in an RMBS deal (over- the multi-cedulas. In the ABS space, only the collateralisation, liquidity facilities and rating agency performance of the pool affects ratings (ignoring any approaches) to package these individual bonds into a potential effects if the issuer was also a counterparty to combined, multi-cedula issue. the transaction). Each outstanding series of multi-cedula is backed by a different pool of underlying CH, with each CH being a Programmes full-recourse obligation of the individual issuer. The There are 7 multi-cedulas programmes, although one (IM underlying CH, as if directly holding a single-issue Cedulas GBP) is entirely made up of collateral from cedula, are backed by the issuing bank’s entire mortgage Grupo Banco Popular companies. pool. In the ABS world, there are also multi-seller Spanish RMBS backed by partial collateral pools Of the remaining six programmes, only one is a public contributed by a similarly small number of institutions. sector multi-cedula (AyT Cedulas Territoriales), while In fact there is a high degree of overlap between multi- the remaining five are backed by mortgage collateral. cedula issuers and multi-seller RMBS participants. Overall, outstanding bonds (for which we could find a Despite their ostensible similarities, there are, however, collateral split by lender) total €132bn, of which only some differences between multi-cedulas and RMBS. In a €1.6bn are multi-cedulas-territoriales (in addition, the multi-cedula transaction, investors are backed by a GBP platform account for another €6.4bn). The largest portfolio of CH that remains static throughout the life of programme is AyT Cedulas Cajas Global with an the transaction, (although the underlying collateral outstanding amount of €46.5bn, followed by AyT backing these CH bonds changes over time). Cedulas Cajas (€28.5bn) and Cedulas TDA (€26.4bn).

Where the two secured funding forms diverge however is in the revolving nature of the underlying pools. Under a multi-cedula, the ‘static’ CH in the transaction are each backed by a ‘dynamic’ pool of mortgage collateral on each individual issuer's balance sheet. In a multi-seller RMBS, the initial contributed collateral pools from each institution are static.

Furthermore, multi-cedulas are of a bullet nature and, being a covered bond, are full-recourse obligations of the issuer, collateralised by a pool of mortgages or loans. As in other securitisations, Spanish RMBS are not an obligation of the originator, but rather of the issuing vehicle (typically an SPV). Should the collateral pool prove insufficient to redeem outstanding bonds, then junior bondholders (in reverse order up the capital stack) will incur principal losses. Should underlying mortgages in the covered bond collateral pool default, however, the obligation remains on the issuing institution to repay the bond in full, with credit risk on the collateral pool only passing to investors on default of the issuing institution.

253 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Table 592: Multi-cedula contributors by post-merger institution (Banca Civica to Caja Espana-Duero), % of collateral % €mm t

) r n a l o a e r c - a l g a h y o a n g e u c t c l n

i e ñ r l u i p s l k t t v r e l a a a i a o e r S n n e l o p a / r d G P P t m o C M i a i s o O P u a n O c P a a o o o o i i p B E n ( o

E S a a l n c c c c c c k k k r a a x x a a e S K S e n n n n n n n n n j i i j t l p a a a a a a a a a A B a E a a a u a s o B B B V B B B E B B B B B C B C C C D T

AyT Cedulas Cajas III 10.3 4.1 15.9 4.6 4.0 3,500 AyT Cedulas Cajas IV 19.3 9.2 9.5 9.2 3,800 AyT Cedulas Cajas V 19.5 5.2 12.9 4.8 1.3 3.2 3,100 AyT Cedulas Cajas VI 26.4 19.4 9.1 12.1 0.9 3,300 AyT Cedulas Cajas VII 8.6 7.1 32.9 11.4 1,750 AyT Cedulas Cajas VIII 1.8 13.0 14.6 14.6 0.2 4.8 4,100 AyT Cedulas Cajas IX 13.7 8.7 16.0 4.0 0.5 8.0 5,000 AyT Cedulas Cajas X 6.4 9.9 12.8 7.7 10.3 3,900

CEDULAS TDA 2 3.0 9.3 7.5 10.0 2,000 CEDULAS TDA 3 7.5 3.0 15.3 15.0 2,000 CEDULAS TDA 5 6.0 7.0 28.3 1,500 CEDULAS TDA 6 2.3 22.8 20.0 3,000 CEDULAS TDA 7 1.5 17.3 8.8 5.0 2,000 CEDULAS TDA 13 2.3 23.4 29.4 4.7 1.9 23.4 2,140 CEDULAS TDA 15 9.7 1.5 2.7 1.2 0.5 4.8 2,070 CEDULAS TDA 17 15.4 15.4 1,950 CEDULAS TDA 18 16.9 2.8 16.9 28.2 4.0 1,770 CEDULAS TDA 19 33.3 33.3 33.3 4,500 CEDULAS TDA 21 21.7 29.0 3,450

IM Cedulas 2 16.9 27.1 10.2 1,475 IM Cedulas 3 4.7 9.4 7.5 1,060 IM Cedulas 4 8.4 24.1 9.6 24.1 7.2 2,075 IM Cedulas 5 20.0 8.0 12.0 1,250 IM Cedulas M1 6.3 6.0 6.0 1,655 IM Cedulas 7 22.0 20.0 1,250 IM Cedulas 9 19.6 7.8 3.9 5.9 1,275 IM Cedulas 10 11.5 19.2 7.7 1,300 IM Cedulas 14 41.7 1,200

Ayt Cedulas Territoriales Cajas 2 7.5 25.6 7.5 665 Ayt Cedulas Territoriales Cajas 4 32.6 2.1 10.4 25.9 965

IM CEDULAS 1 BANCO POPULAR 100.0 2,000 CEDULAS GBP 3 100.0 2,000 CEDULAS GBP 5 100.0 2,350

254 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

% €mm t

) r n a l o a e r c - a l g a h y o a n g e u c t c l n

i e ñ r l u i p s l k t t v r e l a a a i a o e r S n n e l o p a / r d G P P t m o C M i a i s o O P u a n O c P a a o o o o i i p B E n ( o

E S a a l n c c c c c c k k k r a a x x a a e S K S e n n n n n n n n n j i i j t l p a a a a a a a a a A B a E a a a u a s o B B B V B B B E B B B B B C B C C C D T AyT Cedulas Cajas Global - Series 1 11.1 9.0 16.5 8.4 3.4 2,640 AyT Cedulas Cajas Global - Series 2 10.9 9.0 12.1 14.5 0.3 3,600 AyT Cedulas Cajas Global - Series 3 9.6 11.1 21.8 11.1 7.1 1,400 AyT Cedulas Cajas Global - Series 4 15.1 13.0 16.7 1,195 AyT Cedulas Cajas Global - Series 6 20.0 16.7 20.0 1.7 1,500 AyT Cedulas Cajas Global - Series 7 5.0 10.0 1,000 AyT Cedulas Cajas Global - Series 8 4.9 11.2 30.3 4.5 2,230 AyT Cedulas Cajas Global - Series 9 9.6 19.2 15.4 1,300 AyT Cedulas Cajas Global - Series 10 12.5 20.3 15.6 6.3 1,600 AyT Cedulas Cajas Global - Series 11 5.8 9.7 14.6 15.5 2,575 AyT Cedulas Cajas Global - Series 12 12.5 35.0 15.0 2,000 AyT Cedulas Cajas Global - Series 13 16.2 14.9 12.9 6.5 1,545 AyT Cedulas Cajas Global - Series 14 11.8 425 AyT Cedulas Cajas Global - Series 16 24.9 5.7 14.2 14.2 2,810 AyT Cedulas Cajas Global - Series 18 26.7 13.3 26.7 13.3 750 AyT Cedulas Cajas Global - Series 19 15.5 11.9 21.4 4.8 11.9 4,200 AyT Cedulas Cajas Global - Series 20 25.6 14.9 16.4 3.7 4.9 4,105 AyT Cedulas Cajas Global - Series 21 25.6 14.9 16.4 3.7 4.9 4,105 AyT Cedulas Cajas Global - Series 22 24.3 10.2 17.2 8.2 2,323 AyT Cedulas Cajas Global - Series 23 2.2 6.5 14.2 0.4 4.4 2,295 AyT Cedulas Cajas Global - Series 24 10.3 27.6 13.8 1,450 AyT Cedulas Cajas Global - Series 25 15.4 23.0 30.8 500 AyT Cedulas Cajas Global - Series 26 990

Programa Cedulas TDA - Class A1 9.5 1.6 18.9 1,585 Programa Cedulas TDA - Class A3 26.1 17.4 8.7 1,150 Programa Cedulas TDA - Class A4 10.2 11.9 4.3 2,310 Programa Cedulas TDA - Class A5 15.3 22.9 26.7 7.6 1,310 Programa Cedulas TDA - Class A6 11.8 19.7 14.5 13.1 3,805 Source: J.P. Morgan Covered Bond Research, Investor reports

255 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Table 593: Multi-cedula contributors by post-merger institution (Caja Laboral to UNNIM), % of collateral % €mm a i a c p i x l i u a a l m o a r G C u r r a G a l a t o

x s l x S i a y s b a r l t / e t a a i n o a r x a a e j u i j O M u C L T V a d N a a a I l m K l a c a e x c a a a a a a M r r C N r t v i j j j j t t b

e a a a a a a A a u o n N a a o b p C C C C C C I I K L M N S U U T

AyT Cedulas Cajas III 5.3 4.3 8.6 8.6 16.0 4.4 14.0 3,500 AyT Cedulas Cajas IV 1.6 1.6 7.9 1.3 9.2 17.6 6.6 7.0 3,800 AyT Cedulas Cajas V 3.2 7.3 4.8 2.4 6.5 16.0 0.8 12.1 3,100 AyT Cedulas Cajas VI 3.0 3.0 7.6 3.0 9.1 6.4 3,300 AyT Cedulas Cajas VII 8.6 5.7 5.7 14.3 5.7 1,750 AyT Cedulas Cajas VIII 2.2 12.2 7.3 3.0 14.4 2.4 5.6 3.7 4,100 AyT Cedulas Cajas IX 4.0 8.0 2.0 13.1 8.0 4.0 10.0 5,000 AyT Cedulas Cajas X 6.8 10.3 9.0 20.5 3.8 2.6 3,900

CEDULAS TDA 2 15.0 18.8 5.0 10.0 10.0 11.5 2,000 CEDULAS TDA 3 15.0 3.8 3.8 15.0 3.0 12.5 6.3 2,000 CEDULAS TDA 5 6.7 4.7 20.0 14.0 13.3 1,500 CEDULAS TDA 6 4.0 16.7 8.3 6.7 13.3 5.8 3,000 CEDULAS TDA 7 20.0 5.0 30.0 7.5 5.0 2,000 CEDULAS TDA 13 14.0 0.9 2,140 CEDULAS TDA 15 12.1 19.3 24.2 12.1 2.4 9.7 2,070 CEDULAS TDA 17 25.6 25.6 2.6 15.4 1,950 CEDULAS TDA 18 25.4 5.6 1,770 CEDULAS TDA 19 4,500 CEDULAS TDA 21 14.5 17.4 2.9 14.5 3,450

IM Cedulas 2 33.9 11.9 1,475 IM Cedulas 3 18.9 47.2 12.3 1,060 IM Cedulas 4 9.6 4.8 4.8 7.2 2,075 IM Cedulas 5 40.0 4.0 8.0 8.0 1,250 IM Cedulas M1 30.2 30.2 21.1 1,655 IM Cedulas 7 42.0 8.0 8.0 1,250 IM Cedulas 9 23.5 39.2 1,275 IM Cedulas 10 15.4 7.7 23.1 15.4 1,300 IM Cedulas 14 33.3 25.0 1,200

Ayt Cedulas Territoriales Cajas 2 22.6 14.3 22.6 665 Ayt Cedulas Territoriales Cajas 4 10.4 4.1 5.2 9.3 965

IM CEDULAS 1 BANCO POPULAR 2,000 CEDULAS GBP 3 2,000 CEDULAS GBP 5 2,350

256 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

% €mm a i a c p i x l i u a a l m o a r G C u r r a G a l a t o

x s l x S i a y s b a r l t / e t a a i n o a r x a a e j u i j O M u C L T V a d N a a a I l m K l a c a e x c a a a a a a M r r C N r t v i j j j j t t b

e a a a a a a A a u o n N a a o b p C C C C C C I I K L M N S U U T AyT Cedulas Cajas Global - Series 1 1.1 0.8 7.4 3.6 10.8 16.5 2.8 8.7 2,640 AyT Cedulas Cajas Global - Series 2 2.2 0.3 4.2 7.9 1.3 17.2 7.9 3.2 9.1 3,600 AyT Cedulas Cajas Global - Series 3 1.4 6.8 1.3 2.3 9.3 9.3 3.7 5.2 1,400 AyT Cedulas Cajas Global - Series 4 4.2 6.3 8.4 8.4 19.7 8.4 1,195 AyT Cedulas Cajas Global - Series 6 5.0 10.0 20.0 6.7 1,500 AyT Cedulas Cajas Global - Series 7 5.0 10.0 15.0 5.0 20.0 20.0 10.0 1,000 AyT Cedulas Cajas Global - Series 8 7.6 6.7 4.5 9.0 11.2 4.5 5.6 2,230 AyT Cedulas Cajas Global - Series 9 3.8 15.4 7.7 23.1 5.8 1,300 AyT Cedulas Cajas Global - Series 10 4.7 9.4 6.3 6.3 12.5 6.3 1,600 AyT Cedulas Cajas Global - Series 11 1.9 19.4 7.8 11.7 11.7 1.9 2,575 AyT Cedulas Cajas Global - Series 12 7.5 15.0 2.5 10.0 2.5 2,000 AyT Cedulas Cajas Global - Series 13 10.7 12.9 12.9 6.5 6.5 1,545 AyT Cedulas Cajas Global - Series 14 5.9 11.8 47.1 23.5 425 AyT Cedulas Cajas Global - Series 16 4.3 27.8 8.9 2,810 AyT Cedulas Cajas Global - Series 18 6.7 13.3 750 AyT Cedulas Cajas Global - Series 19 6.0 17.9 10.7 4,200 AyT Cedulas Cajas Global - Series 20 3.0 1.2 4.9 16.4 3.7 5.4 4,105 AyT Cedulas Cajas Global - Series 21 3.0 1.2 4.9 16.4 3.7 5.4 4,105 AyT Cedulas Cajas Global - Series 22 3.0 4.8 6.5 2.2 15.1 6.5 2.2 2,323 AyT Cedulas Cajas Global - Series 23 9.2 6.5 13.1 17.4 8.7 8.7 8.7 2,295 AyT Cedulas Cajas Global - Series 24 6.9 10.3 31.0 1,450 AyT Cedulas Cajas Global - Series 25 30.8 500 AyT Cedulas Cajas Global - Series 26 9.1 15.2 25.3 40.4 10.1 990

Programa Cedulas TDA - Class A1 18.9 12.6 12.6 15.8 10.1 1,585 Programa Cedulas TDA - Class A3 8.7 26.1 13.0 1,150 Programa Cedulas TDA - Class A4 13.0 4.3 23.4 19.9 13.0 2,310 Programa Cedulas TDA - Class A5 7.6 19.8 1,310 Programa Cedulas TDA - Class A6 3.9 3.3 5.3 15.2 13.1 3,805 Source: J.P. Morgan Covered Bond Research, Investor reports

257 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

258 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected] s d n o B

d e r e v o C

h s i d e w S

259 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Swedish Covered Bonds

Legislative snapshot We set out in Table 594 a snapshot of key covered bond attributes in Sweden.

Table 594: Swedish Covered Bond legislative overview Attribute Commentary Framework Legislative Framework Covered Bond (Issuance) Act, 2004, as amended in 2010 Types of covered bonds One Structure of Issuer Direct issuance? Yes. On balance sheet issuance by a universal credit institution with a special license granted by the Swedish FSA Comments (if any) 2010 amendment gave the bankruptcy administrator an express mandate to take out liquidity loans and enter into other agreements for the purpose of maintaining matching between the cover pool, covered bonds and derivative contracts following issuer insolvency. The administrator now has an extensive mandate to enter into agreements, not only to achieve a liquidity balance but also to achieve a balance in respect of currencies, interest rates and interest periods Bankruptcy remoteness In the event of bankruptcy, holders of covered bonds and certain eligible counterparties to derivative contracts related to the covered bonds benefit from a priority claim over the cover pool. Holders continue to receive timely payments following the institution's bankruptcy as long as compliance with the Covered Bond Act broadly and specifically the asset-liability matching requirements are maintained. If the Cover Pool fails to meet the requirements of the Act, the holders of CB would instead benefit from a priority claim over the proceeds of a sale of the assets in the cover pool. In this case, the CB investors retain the benefit of any shortfall claim against the institution which ranks pari passu with other senior, unsecured claims Dual claim Yes. Should the cover pool be insufficient to satisfy CB bondholders, a claim pari passu to other unsecured bondholders within the insolvency estate exists Bond format Typically, fixed rate, hard bullet Supervision Swedish FSA monitors that the issuing institution complies with the Covered Bond Act and associated regulations Cover pool Eligible assets Mortgage Eligible collateral from the EEA for mortgage assets. Commercial property exposures are limited to a maximum of 10% of assets. LTV caps "Hard" (loans above the maximum can not be included in the cover pool). Maximum LTV for residential mortgages (75%), agricultural properties (70%), commercial properties (60% LTV and 10% of the collateral pool) Public Sector EEA and OECD for public sector assets Non-performing collateral NPLs greater than 60d must be removed from the cover pool calculations Substitution Assets Maximum 20% substitute assets (30% can be temporarily allowed). Can consist of cash, investments in sovereign and sub-sovereign assets Hedging Used to minimise interest rate, currency, credit or other risks Valuation Individual market values with regular revaluations of mortgage collateral required. Should LTVs rise above the maximum thresholds set out above through falling property valuations, the portion of the mortgage loan under these maximum levels may be included in the cover pool calculations Other comments (if any) All assets and eligible derivative contracts must be entered into a special register Requirements ALM matching Asset coverage The nominal value of the cover pool must at all times exceed the aggregate value of claims under the covered bonds. Same requirement on an NPV basis. The cover pool must also be matched in terms of currency, interest rate and maturity profile. Over-collateralisation requirements are not defined by legislation Interest coverage The issuing institution must ensure that the flow of payments regarding assets in the cover pool, derivative agreements and covered bonds are such that the institution is at all times able to fulfill its payment obligations Other (if any) Consequence of breach Monitoring In addition to the FSA, the regulator also appoints an independent asset inspector responsible for monitoring the cover pool Register. The Inspector ensures that only eligible collateral and substitute assets are included on the Register, the valuation of the underlying collateral is in compliance with the Covered Bond Act, and that matching requirements are met Other Compliance with EU UCITS and CRD compliant. legislation Source: National legislation, J.P. Morgan Covered Bond Research

260 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Swedish covered bond & macro backdrop

Figure 153: CB issuance, €mm Figure 154: CB outstanding, €mm 100,000 200,000

80,000 Mortgage Mortgage 150,000

60,000 100,000 40,000 50,000 20,000

0 0 2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 2007 2008 2009 2010 Source: ECBC. Latest data available displayed Source: ECBC. Latest data available displayed

Figure 155: Swedish real GDP growth, y-on-y, % Figure 156: Swedish unemployment level, %

10 Real GDP growth 10 Unemployment 8 9 6 8 4 7 2 6 5 0 4 -2 3 -4 2 -6 1 -8 0 0 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 1 1 ------r r r r r r r r r r r r r r r r r r r r r r r r a a a a a a a a a a a a a a a a a a a a a a a a M M M M M M M M M M M M M M M M M M M M M M M M

Source: Bloomberg Source: Bloomberg

Figure 157: Swedish CPI and base rate, % Figure 158: Swedish consumer confidence, balance of survey

6 Inflation Base rate 40 Cons. Confidence 5 30 4 20 3 2 10 1 0 0 -10 -1 -2 -20 -3 -30 0 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 1 1 ------r r r r r r r r r r r r r r r r r r r r r r r r a a a a a a a a a a a a a a a a a a a a a a a a M M M M M M M M M M M M M M M M M M M M M M M M

Source: Bloomberg Source: Bloomberg

Figure 159: Swedish house price growth, y-on-y, % Figure 160: Swedish residential building permits, #

16% OE CD HP nominal growth 14000 Residential building permits (sum of prev. 12 mths) 14% 12000 12% 10% 10000 8% 8000 6% 4% 6000 2% 4000 0% -2% 2000 -4% 0 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 1 1 ------r r r r r r r r r r r r r r r r r r r r r r r a a a a a a a a a a a a a a a a a a a a a a a M M M M M M M M M M M M M M M M M M M M M M M

Source: Bloomberg Source: Bloomberg

261 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Landshypotek AB Table 597: Select financial metrics (BBG: LANHYP) FY 2008 FY 2009 FY 2010 NIM n/a 0.57 0.78 Snapshot ROA n/a 0.23 0.44 Landshypotek is a cooperative credit institution ROE n/a 3.89 8.11 ROC n/a 0.24 0.45 specialising in the financing of Swedish agriculture and C:I 94.39 56.09 37.20 forestry industries. Customers are members of the Core capital n/a n/a n/a association that owns and operates the business, and are Source: Bloomberg required to be farm or forestry landowners. Landshypotek provides a wide array of financial products Cover pool overview to its members, including both banking and insurance We set out below some of the key cover pool services. characteristics:

The mainstay of Landshypotek’s product range is first- Table 598: Covered bond characteristics lien mortgages, with supplemental bank and insurance As at July 2011 services offered in partnership with other providers. Due Covered bond rating AAA/-/- to its cooperative structure, all members receive refunds Issuer rating A-/A3/A+ on their interest payments when the institution makes a SEK mm profit. The overwhelming majority of cover pool assets is Cover pool 49,849 secured on agricultural properties. Substitute assets 21,930 Covered bonds 53,529 Financial performance Over-collateralisation 14.60% We set out below some of the key financial performance Average LTV (%) 39.7 metrics: Number of loans 133,984 Average loan size (SEK) 372,054 Agricultural properties (%) 98.8 Table 595: Key profit & loss figures, SEKmm Residential properties (%) 1.2 FY 2008 FY 2009 FY 2010 Net interest income 345 304 472 Source: Investor Report Provisions for loan losses n/a n/a n/a NII less provisions 345 304 472 Commissions & fee income n/a n/a -9 Other operating income 58 39 96 Non-interest expense 220 220 208 Operating profit (loss) 13 172 351 PBT 13 172 351 Taxes 1 43 77 Net profit (loss) 12 129 274

Source: Bloomberg

Table 596: Key balance sheet figures, SEKmm FY 2008 FY 2009 FY 2010 Loans 41,301 46,456 51,773 Total Assets 51,254 59,796 64,161 Deposits 32 45 105 Short-term borrowings 7,510 5,710 84 Other ST borrowings n/a n/a n/a Long-term borrowings 38,837 49,027 58,963 Equity 3,318 3,320 3,429 Source: Bloomberg

262 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Länsförsäkringar Hypotek AB Table 600: Key balance sheet figures, SEKmm (BBG: LANSBK) FY 2008 FY 2009 FY 2010 Loans 39,831 44,311 43,438 Snapshot Total Assets 46,035 51,160 51,238 Twenty-three regional insurance companies own Deposits 23,327 26,936 28,306 Short-term borrowings 3,742 6,998 5,737 Länsförsäkringar AB, and its subsidiaries, including both Other ST borrowings 280 n/a n/a Länsförsäkringar Bank AB, and its mortgage subsidiary Long-term borrowings 14,789 12,411 11,732 Länsförsäkringar Hypotek AB. The Group offers Equity 2,961 3,636 3,751 insurance, pensions and banking services to its Source: Bloomberg customers. Table 601: Select financial metrics Länsförsäkringar Bank is the fifth largest retail bank in FY 2008 FY 2009 FY 2010 Sweden, focusing primarily on private individuals and NIM 2.28 2.06 2.15 ROA 0.88 0.82 1.07 farmers. Banking services are conducted at the 125 ROE 13.45 12.04 14.79 branches of the regional insurance companies, along with ROC 1.97 1.78 2.47 more modern distribution channels, including telephone C:I 46.36 48.02 44.85 and internet banking. Core capital 9.12 11.55 11.88 Source: Bloomberg Länsförsäkringar Hypotek is one of the largest retail Cover pool overview mortgage institutions in Sweden, with lending of some SEK82bn as at March 2011, predominantly funded We set out below some of the key cover pool through the issuance of covered bonds. 81% of its characteristics: lending is to private individuals, primarily in the form of Table 602: Covered bond characteristics mortgages. As at 31 March 2011 Financial performance Covered bond rating AAA/Aaa/- Issuer rating(Länsförsäkringar Bank) A/A2/- We set out below some of the key financial performance metrics: Cover pool (SEK bn) 99 Substitute assets (SEKbn) 16 Over-collateralisation 21.0 Table 599: Key profit & loss figures, SEKmm FY 2008 FY 2009 FY 2010 Average LTV (%) 59.0 Number of loans 203,395 Net interest income 965 985 1,055 Average loan size (SEK) 385,000 Provisions for loan Single family houses 79.0 losses 76 100 37 Tenant-owned apartments 20.0 NII less provisions 889 885 1,018 Leisure homes 1.0 Commissions & fee income 200 188 197 Other operating Source: Investor Report income 27 34 42 Non-interest expense 585 653 659 Table 603: Collateral pool LTV breakdown Operating profit (loss) 561 569 729 PBT 561 569 729 Current LTV ranges As at 31 March 2011 Taxes 166 162 184 0-<=40% 14.0 Net profit (loss) 395 407 546 >40%-<=50% 10.0 >50%-<=60% 16.0 Source: Bloomberg >60%-<=70% 29.0 >70%-<=75% 31.0 >75% 0.0 Source: Investor Report

263 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Nordea Hypotek AB Table 606: Select financial metrics (BBG: NHBSS) FY 2008 FY 2009 FY 2010 NIM 1.48 1.29 1.03 Snapshot ROA 0.62 0.47 0.49 Nordea Hypotek is a wholly owned subsidiary of Nordea ROE 15.35 11.55 11.36 ROC 1.56 1.16 1.22 Bank AB, the Nordic region’s largest financial C:I 53.05 49.99 51.96 institution. Nordea Hypotek is the third largest mortgage Core capital 7.40 11.40 11.40 lender in Sweden, granting loans to Swedish households, Source: Bloomberg municipalities, municipal housing companies and corporates. Cover pool overview We set out below some of the key cover pool The purpose of the lending is primarily to finance characteristics: properties, agriculture and municipal activities, with a central emphasis on housing finance. Collateral consists Table 607: Covered bond characteristics predominantly of mortgages on residential property, As at July 2011 tenant-owned apartments or municipal guarantees. Covered bond rating AAA/Aaa/- Nordea also issues covered bonds through its Danish Issuer rating AA-/Aa2/AA- subsidiary (Nordea Realkredit), alongside its Norwegian Cover pool (SEK bn) 403.8 and Finnish operations (Nordea Eiendomskreditt and Substitute assets (SEKbn) 11.3 Nordea Bank Finland Oyj). Over-collateralisation 25.8%

WA Current LTV (%) 59.4 Financial performance WA Indexed LTV (%) 53.2 We set out below some of the key financial performance metrics: Number of loans 725,002 Average loan size (SEK) 511,000 Single family houses 45.6 Table 604: Key profit & loss figures, SEKmm Tenant owned units 19.2 Multi family houses 16.0 FY 2008 FY 2009 FY 2010 Other houses, agricultural, commercial, public 19.3 Net interest income 49,055 56,096 49,223 sector Provisions for loan losses 4,488 15,785 8,387 NII less provisions 44,567 40,311 40,836 Source: Investor Report Commissions & fee income 24,388 26,215 28,194 Table 608: Collateral pool LTV breakdown Other operating income 1,657 1,115 1,107 Current LTV ranges As at 31 March 2011 Non-interest expense 48,025 56,159 53,573 0-<=40% 69.2 Operating profit (loss) 32,489 32,153 34,090 >40%-<=50% 12.0 PBT 32,710 32,663 34,720 >50%-<=60% 9.5 Taxes 6,974 8,041 9,312 >60%-<=70% 6.8 Net profit (loss) 25,727 24,580 25,351 >70%-<=75% 2.4 >75% 0.0 Source: Investor report Source: Bloomberg

Table 605: Key balance sheet figures, SEKmm FY 2008 FY 2009 FY 2010 Loans 2,905,450 2,896,371 2,824,328 Total Assets 5,196,220 5,205,288 5,220,950 Deposits 1,628,673 1,575,061 1,585,505 Short-term borrowings 569,215 535,252 366,161 Other ST borrowings 5,020 5,795 4,512 Long-term borrowings 1,284,581 1,412,270 1,432,240 Equity 195,135 229,936 220,563 Source: Bloomberg

264 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Skandinaviska Enskilda Banken AB Table 611: Select financial metrics (BBG: SEB) FY 2008 FY 2009 FY 2010 NIM 0.89 0.84 0.84 Snapshot ROA 0.41 0.05 0.30 Skandinaviska Enskilda Banken AB, or SEB, is one of ROE 12.55 1.22 6.79 ROC 0.94 0.11 0.73 Northern Europe’s leading financial groups, and the C:I 61.17 60.45 62.77 second largest bank in Sweden after Nordea. The group Core capital 10.10 13.90 14.20 is predominantly focused on banking activities (although Source: Bloomberg it also carries out life insurance business in selected markets) and is a leading universal bank in Sweden and Cover pool overview the Baltic states. We set out below some of the key cover pool characteristics: In other Nordic countries, SEB’s operations focus on wholesale and investment banking, along with wealth Table 612: Covered bond characteristics management. The group also offers banking services in As at July 2011 Germany, focusing on wholesale banking, commercial Covered bond rating -/Aaa/- real estate finance, asset management and retail banking. Issuer rating A/A1/A+

Total Cover Pool Balance: (SEKbn) 306.0 Financial performance OC (%) 46.0 We set out below some of the key financial performance WA Loan Balance: (SEK) 591,460 metrics: No. of Loans: 517,424 No. of Borrowers: 335,419 Table 609: Key profit & loss figures, SEKmm No. of Properties: 221,108

FY 2008 FY 2009 FY 2010 Single family properties (%) 61.0 Net interest income 18,832 18,154 16,173 Rental properties (%) 24.0 Provisions for loan Multifamily (%) 15.0 losses 3,268 12,030 1,837 NII less provisions 15,564 6,124 14,336 Floating rate loans (%) 61.0 3,444 4,646 3,226 WA Legal Maturity (in months): 508 Comm.& fee income 19,877 17,995 18,671 WA LTV (in %): 45.0 Other operating WA Interest Rate on Floating rate Loans (in %): 3.21 income 4,007 5,714 3,380 WA Interest Rate on Fixed rate Loans (in %): 3.46 Non-interest expense 30,030 29,977 27,698 Operating profit (loss) 12,862 4,502 11,915 391 151 810 Source: Investor Report PBT 12,471 4,351 11,105 Taxes 2,421 2,482 2,521 Table 613: Collateral pool LTV breakdown Net profit (loss) 10,041 1,114 6,745 Current LTV ranges As at 31 March 2011 Source: Bloomberg 0-<=40% 46% >40%-<=50% 14% Table 610: Key balance sheet figures, SEKmm >50%-<=60% 12% FY 2008 FY 2009 FY 2010 >60%-<=70% 11% >70%-<=75% 17% Loans 1,296,777 1,187,837 1,074,879 Total Assets 2,510,702 2,308,227 2,179,821 Deposits 841,034 801,088 711,541 Source: Investor report Short-term borrowings 429,425 397,433 212,624 Other ST borrowings 240,657 129,959 124,880 Long-term borrowings 576,449 492,406 556,035 Equity 83,729 99,669 99,543 Source: Bloomberg

265 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Stadshypotek Mortgage AB Table 616: Select financial metrics (BBG: SHBASS) FY 2008 FY 2009 FY 2010 NIM n/a 0.90 0.72 Snapshot ROA n/a 0.61 0.71 Stadshypotek AB is a wholly-owned domestic mortgage ROE n/a 20.33 16.20 ROC n/a 0.63 subsidiary of Svenska Handelsbanken AB. C:I 5.03 3.57 4.30 Handelsbanken is a universal bank offering both retail Core capital 5.90 28.40 36.80 and commercial banking services in Sweden, along with Source: Bloomberg operations in the other Nordic countries, as well as the UK. Its 461-strong branch network is organised along Cover pool overview twelve regional banks, 6 of which are in Sweden, one We set out below some of the key cover pool each in Denmark, Finland and Norway and three in the characteristics: UK. Table 617: Covered bond characteristics Stadshypotek issues covered bonds in accordance with As at 30 June 2011 the Swedish Covered Bond Act, with both a domestic Covered bond rating -/Aaa/- and international programme available to investors. The Issuer rating (Stadshypotek AB) AA-/-/AA- bonds are backed by a pool of Swedish mortgages. Cover pool (SEKbn) 661.6 Substitute assets 5.0 Financial performance Covered bonds (SEKbn) 437.1 We set out below some of the key financial performance Over-collateralisation (%) 10.0 metrics: Average LTV 48.4 Number of loans 881,121 Table 614: Key profit & loss figures, SEKmm Average loan size (€) 584,100 Single family houses 37.1 FY 2008 FY 2009 FY 2010 Multi family houses 19.9 Net interest income 3,900 6,067 5,501 Other houses, commercial, agricultural 43.0 Provisions for loan losses -75 -31 -38 Source: Investor Report NII less provisions 3,975 6,098 5,463

Comm.& fee income 12 10 10 Table 618: Collateral pool LTV breakdown Other operating Current LTV ranges As at 30 June 2011 income n/a n/a n/a 0-<=40% 82.4 Non-interest expense 234 246 270 >40%-<=50% 10.5 Operating profit (loss) 3,682 5,761 5,408 >50%-<=60% 6.9 >60%-<=70% 0.1 PBT 3,682 5,761 5,408 >70%-<=75% 0.0 Taxes 1,027 1,521 1,423 Net profit (loss) 2,655 4,240 3,895 Source: Investor report Source: Bloomberg

Table 615: Key balance sheet figures, SEKmm FY 2008 FY 2009 FY 2010 Loans 615,263 684,920 758,855 Total Assets 659,498 722,790 796,681 Deposits n/a n/a n/a Short-term borrowings 182,602 212,983 294,417 Other ST borrowings 3,231 3,860 8,607 Long-term borrowings 439,204 467,335 458,681 Equity 20,018 21,692 24,431 Source: Bloomberg

266 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Swedbank Mortgage AB Table 621: Select financial metrics (BBG: SPNTAB) FY 2008 FY 2009 FY 2010 NIM 1.37 1.24 1.01 Snapshot ROA 0.64 -0.58 0.42 Swedbank Mortgage is the largest mortgage institution in ROE 14.12 -11.95 8.07 ROC 1.10 -0.99 0.75 Sweden. It has more than 1 million customers, financing C:I 51.79 52.62 57.99 more than one third of all the houses in Sweden. Core capital 10.60 13.50 15.20 Swedbank Mortgage is a fully owned subsidiary of Source: Bloomberg Swedbank, with its products primarily sold through the branch network of Swedbank and the savings banks Cover pool overview (approximately 680 branches). Swedbank Mortgage We set out below some of the key cover pool lends only domestically. Its parent company focuses on characteristics: the provision of banking services to private customers and small-and-medium-sized enterprises in Sweden and Table 622: Covered bond characteristics the Baltic states. As at July 2011 Covered bond rating AAA/Aaa/- Swedbank Mortgage funds itself on both the Swedish and Issuer rating A/A2/A international capital markets, issuing covered bonds Cover pool (SEKbn) 642.9 under its domestic bond programme, its EMTN Covered bonds (SEKbn) 506.1 programme as well as its Swedish MTN programme. The Over-collateralisation (%) 27.0 covered bonds are backed by a pool of Swedish Average LTV 56.0 mortgages. Number of loans 1,535,061 Average loan size (€) 418,774 Financial performance Single family houses 62.1 Multi family houses 28.8 We set out below some of the key financial performance Other houses, commercial, agricultural 9.1 metrics: Source: Investor Report Table 619: Key profit & loss figures, SEKmm FY 2008 FY 2009 FY 2010 Net interest income 21,702 20,765 16,329 Provisions for loan losses 3,156 24,641 2,810 NII less provisions 18,546 -3,876 13,519 2,351 2,770 2,400 Comm.& fee income 12,241 11,397 13,099 Other operating income 4,179 2,556 2,166 Non-interest expense 22,607 21,420 21,216 Operating profit (loss) 14,710 -8,573 9,968 891 888 13 PBT 13,819 -9,461 9,955 Taxes 2,880 981 2,472 Net profit (loss) 10,887 -10,511 7,444 Source: Bloomberg

Table 620: Key balance sheet figures, SEKmm FY 2008 FY 2009 FY 2010 Loans 1,287,424 1,290,667 1,187,226 Total Assets 1,811,690 1,794,687 1,715,681 Deposits 508,456 504,424 534,237 Short-term borrowings 316,730 231,687 136,766 Other ST borrowings 117,910 73,667 66,252 Long-term borrowings 638,120 741,241 713,704 Equity 86,462 89,974 95,035 Source: Bloomberg

267 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Swedish Covered Bond Corporation Table 625: Select financial metrics (BBG: SCBCC) FY 2008 FY 2009 FY 2010 NIM n/a n/a n/a Snapshot ROA n/a n/a n/a The Swedish Covered Bond Corporation (SCBC) is a ROE 6.70 13.80 7.50 ROC n/a n/a n/a wholly-owned subsidiary of the Swedish Housing C:I n/a n/a n/a Finance Corporation (SBAB), which in turn is owned in Core capital 7.60 7.40 8.70 its entirety by the Kingdom of Sweden. SBAB offers Source: Bloomberg loans and savings products, with a 100% domestic mortgage portfolio. SCBC does not engage in any Cover pool overview lending activities itself, instead acquiring loans from We set out below some of the key cover pool SBAB as required. characteristics:

SCBC's business activities are predominantly focused on Table 626: Covered bond characteristics issuing covered bonds, both domestically and on the As at July 2011 international capital markets (accounting for 36% and S/M/F 22% of its funding requirements respectively). The bonds Covered bond rating AAA/Aaa/- are backed by Swedish residential mortgages. Issuer rating (SBAB Bank AB) A+/A1/- Mortgage certificate (SEK bn) 147.7 Financial performance Pledges (SEK bn) 45.6 Municipal & govt g'tee (SEK bn) 4.9 We set out below some of the key financial performance KFA-Municipal g'tee (SEK bn) 0.3 metrics: BKN-Public sector g'tee (SEK bn) 0.4 Direct loans to municipalities (SEK bn) 0.6 Table 623: Key profit & loss figures, SEKmm Other (SEK bn) - FY 2008 FY 2009 FY 2010 WA LTV mortgages 56.1 Net interest income 1,141 1,519 1,762 WA LTV pledges 63.9 Provisions for loan losses n/a n/a n/a Source: Investor Report NII less provisions n/a n/a n/a

Comm.& fee income n/a 44 50 Table 627: Collateral pool LTV breakdown Other operating Current LTV ranges As at 30 June 2011 income -14 6 0 0-<=40% 19.9 Non-interest expense 520 578 604 >40%-<=50% 10.2 Operating profit (loss) 585 1,289 785 >50%-<=60% 18.5 >60%-<=70% 14.1 PBT n/a n/a n/a >70%-<=75% 37.3 Taxes 161 338 208 Net profit (loss) 424 951 577 Source: Investor report Source: Bloomberg

Table 624: Key balance sheet figures, SEKmm FY 2008 FY 2009 FY 2010 Loans Total Assets 253,294 294,075 316,925 Deposits 3,542 4,653 6,083 Short-term borrowings n/a n/a n/a Other ST borrowings n/a n/a n/a Long-term borrowings n/a n/a n/a Equity 6,432 7,377 8,014 Source: Bloomberg

268 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

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269 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Swiss Covered Bonds

Legislative snapshot We set out in Table 628 a snapshot of key covered bond attributes in Switzerland.

Table 628: Swiss Covered Bond legislative overview Attribute Commentary Framework Legislative Framework Issuance of Swiss Pfandbriefe is limited to just two institutions by law (Pfandbriefgesetz).One is used by cantonal banks and the other by non-cantonal banks. Bonds are issued in Swiss Francs only. Types of covered bonds Swiss Pfandbriefe and the structured covered bonds issued by the large universal banks. Structure of Issuer Direct issuance? Both PBB and PBZ use the proceeds raised through pfandbrief issuance and pass them on to the member institutions who originated the loans. The underlying mortgages remain on the member bank’s balance sheets, but PBB and PBZ receive a lien on the eligible cover assets. Bonds issued in the international capital markets by the two universal banks (Credit Suisse and UBS) have used a UK-style structured covered bond technology. The covered bonds are direct, senior unsecured and unconditional obligations of the issuer but guaranteed by a third party SPV that receives security over the cover pool upon issuer default. Comments (if any) UBS and CS CB - Under the Swiss law concept of Pre-funding, the issuer has to pre-fund all of the guarantor's payment obligations to the bond holders and other transaction parties. The cover pool effectively collateralises these payments after the issuer has defaulted: if the issuer fails to make such payments, the guarantor can then use cashflows from the assets. No acceleration upon issuer default; only upon guarantor or Pfandbrief institute default. Bankruptcy remoteness PfG – upon member bank insolvency, pfandbrief issuers would have a direct priority claim on the interest and principal payments of registered collateral. Finma can also require transfer of the collateral pool or arrange for sale of the cover assets. For UBS and CS, bankruptcy will result in the transfer of the security over the cover pool to the Guarantor. As mentioned above, the security will be perfected only if the issuer fails to meet its pre-funding obligations. Dual claim Yes in both case. In case of PfG, the bondholder does not have direct recourse to the member bank, but only to the Pfandbrief institute. The institute, however, has direct recourse to the member banks. For UBS and CS covered bonds, immediate claim pari passu with unsecured bondholders and recourse to the cover pool. Bond format UBS and CS covered bonds are fixed rate; the docs allow for the issuance of both hard and soft bullets. Supervision Swiss Banking Regulator (Finma), along with external, third-party audits. Cover pool Eligible assets Mortgage Only Swiss prime mortgages residential mortgages. LTV caps PfG allows only for mortgages on real property and land. LTV limits stand at 67% for homes, 50% for weekend holiday homes and 33% for apartments in holiday resorts. UBS has a hard cap of 100%. CS has soft cap of 70% but hard cap of 100% LTV. Public Sector n/a Non-performing collateral UBS and CS do not have to substitute loans in arrears but less credit is given to them in the calculation of the coverage ratio. Substitution Assets PfG: Substitute assets are defined as cash or Swiss marketable securities. There is no explicit cap on the level of substitute assets. UBS and CS allow up to 15% substitute collateral. Hedging Permitted under UBS and CS to reduce risk. Natural matching under PfG and no derivatives allowed. Valuation Market values. Other comments (if any) Requirements ALM matching Asset coverage UBS and CS have committed to at least 11% OC or 90% asset percentage. Asset Coverage tests are designed to ensure that pool collateral is sufficient to meet future interest and principal cashflows on the outstanding covered bonds. Under the PfG, OC of at least 8%. Interest coverage Interest Coverage test to ensure interest from the cover pool after hedges always exceeds payments due on the covered bonds. Other (if any) UBS and CS have a pre-maturity test to ensure liquidity if the issuer is downgraded. They also need ot maintain a reserve fund for liquidity reasons. Consequence of breach For UBS and CS, a breach of the ACT and ICT can lead to issuer EoD. Monitoring For PfG, there are the two Pfandbrief institutes. For UBS and CS, the are nominated trustee/cover pool monitors. Other Compliance with EU PfG is compliant with both UCITS and CRD; UBS and CS are not/ legislation Source: National legislation, J.P. Morgan Covered Bond Research

270 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Swiss covered bond backdrop

Figure 161: CB Issuance, €mm Figure 162: CB outstanding, €mm 16,000 70,000

14,000 Mortgage Structured 60,000 Mortgage Structured 12,000 50,000 10,000 40,000 8,000 30,000 6,000 4,000 20,000 2,000 10,000 0 0 2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 2007 2008 2009 2010 Source: ECBC, latest data available Source: ECBC, latest data available

271 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Credit Suisse Group AG Table 630: Key balance sheet figures, CHFmm (BBG: CS) FY 2008 FY 2009 FY 2010 Commercial Loans 114,754 112,929 139,298 Snapshot Consumer Loans 107,027 108,810 49,316 CS is a global financial services firm, headquartered in Other Loans 15,655 16,836 31,245 Total Assets 1,170,350 1,031,427 1,032,005 Zurich. The firm has a strong global presence with over Deposits 296,986 286,694 287,564 400 offices in 55 countries. It is the sixth largest bank Short-term borrowings 69,147 43,859 59,176 globally by assets and market capitalisation and the Other ST borrowings 360,253 299,406 297,968 fourth largest by assets under management, totaling just Long-term borrowings 153,373 159,365 173,752 Equity 47,221 50,416 45,151 under CHF 1.3trn. The bank operates along three main Source: Bloomberg business lines: private banking, investment banking and asset management and also provides retail banking Table 631: Select financial metrics services in Switzerland. FY 2008 FY 2009 FY 2010 NIM 0.9 0.9 0.8 Private banking offers wealth management and banking ROA -0.6 0.6 0.5 services to individuals, high net-worth clients, SMEs and ROE -21.8 18.7 13.6 ROC -1.9 1.3 1.3 corporates. Assets under management total CHF 933bn C:I 300.0 72.9 75.2 and the bank can count over two million private banking Core capital 13.3 16.3 17.2 clients worldwide, in addition to over 100,000 corporates Source: Bloomberg and institutions, mostly located in Switzerland. Cover pool overview Through its investment banking business, the group We set out below some of the key cover pool offers global securities sales, trading and execution, characteristics: prime brokerage and capital raising and advisory services, as well as comprehensive investment research Table 632: Covered bond characteristics to institutional clients around the world. As at July 2011 Ratings S/M/F Asset management offers institutional and individual Covered bond rating -/Aaa/AAA clients a range of products, both traditional and Issuer rating A/Aa2/AA- alternative. Clients are reached through the private and Cover pool investment banking networks, a separate asset Cover pool size (CHF) 7,703,982,578 management distribution network and third-party Number of properties 14,892 Number of contracts 22,148 channels Average loan balance (CHF) 347,841 Available over-collateralisation (in %) 211 Financial performance Excess over-collateralisation (in %) 162 We set out below some of the key financial performance WA remaining term of loans (yrs) 3.0 metrics: WA LTV (%) 68.7 Fixed rate assets (in %) 79.4 Table 629: Key profit & loss figures, CHFmm Highest regional concentration (in %) Zurich - 23 Source: Investor Report FY 2008 FY 2009 FY 2010 Net interest income 8,536 6,891 6,541 Table 633: Collateral pool LTV breakdown Provisions for loan losses 813 506 -79 Current LTV ranges As at July 2011 NII less provisions 7,723 6,385 6,620 0-<=40% 6.4 >40%-<=50% 7.1 Comm.& fee income 14,812 13,750 14,078 >50%-<=60% 11.3 Other operating >60%-<=70% 24.8 income 385 619 397 >70%-<=80% 26.5 Non-interest expense 23,297 24,711 23,978 >80% 23.9 Operating profit (loss) -14,816 7,933 7,278 Source: Investor Report PBT -14,902 8,077 7,487 Taxes -4,596 1,835 1,548 Net profit (loss) -8,218 6,724 5,098 Source: Bloomberg

272 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

UBS AG Table 635: Key balance sheet figures, CHFmm (BBG: UBS) FY 2008 FY 2009 FY 2010 Loans 340,308 306,827 262,676 Snapshot Total Assets 2,014,815 1,340,538 1,317,247 Headquartered in Zurich and Basel, UBS is a global Deposits 465,741 410,475 332,301 Short-term borrowings 251,310 124,740 104,180 financial services firm, offering wealth management, Long-term borrowings 187,181 192,426 174,990 asset management and investment banking services in Equity 40,533 48,633 51,863 over 50 countries. The bank is by far the largest by assets Source: Bloomberg under management (CHF 2.3trn) and focuses on the provision of financial services to private, corporate and Table 636: Select financial metrics institutional clients across a four-division structure. FY 2008 FY 2009 FY 2010 NIM 0.4 0.7 0.7 Wealth Management & Swiss Bank focuses on HNW ROA -1.0 -0.2 0.6 ROE -61.4 -7.4 17.2 individuals (with the exception of clients in the ROC -2.7 -0.4 1.9 Americas, who are served by Wealth Management C:I 485.1 107.9 78.5 Americas) and retail and corporate banking business in Core capital 11.0 15.4 17.8 Switzerland. The division reaches clients in over 40 Source: Bloomberg countries but maintains a strong foothold in the domestic market, where it maintains a leading position. Cover pool overview We set out below some of the key cover pool The two other divisions are Global Asset Management characteristics: and the institution's Investment Bank. Table 637: Covered bond characteristics The firm operates mostly out of the Americas and As at July 2011 Switzerland, which together account for 74% of the Ratings S/M/F group's workforce, while 16% is located in other Covered bond rating -/Aaa/AAA Issuer rating A+/Aa3/A+ European countries and 10% in Asia. Cover pool UBS has a 20% mortgage market share in Switzerland, Cover pool size (CHF) 14,196,519,368 Number of loans 36,328 despite the strong competition from local cantonal banks, Average loan balance (CHF) 391,758 and 28% of its funding comes from customer deposits. Available over-collateralisation (in %) 45.5 Excess over-collateralisation (in %) 22.6

Financial performance WA remaining term of loans (yrs) 3.3 We set out below some of the key financial performance WA LTV (%) 55.4 metrics: Fixed rate assets (in %) 82.2 Highest regional concentration (in %) Lake Geneva Area - 33 Table 634: Key profit & loss figures, CHFmm Source: Investor Report FY 2008 FY 2009 FY 2010 Table 638: Collateral pool LTV breakdown Net interest income 5,993 6,445 6,216 Provisions for loan Current LTV ranges As at July 2011 losses 2,996 1,832 66 0-<=40% 17.4 NII less provisions 2,997 4,613 6,150 >40%-<=50% 17.2 >50%-<=60% 23.4 Comm.& fee income 26,677 20,827 19,216 >60%-<=70% 21.2 Other operating >70%-<=80% 19.1 income 269 707 834 >80% 1.7 Non-interest expense 31,962 27,155 26,597 Source: Investor Report Operating profit (loss) -25,394 -3,594 6,658

PBT -27,758 -2,562 7,455 Taxes -6,837 -443 -381 Net profit (loss) -21,292 -2,736 7,534 Source: Bloomberg

273 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

274 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected] s d n o B

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275 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

UK Covered Bonds

Legislative snapshot We set out in Table 639 a snapshot of key covered bond attributes in the UK.

Table 639: UK Covered Bond legislative overview Attribute Commentary Framework Legislative Framework Yes. The Regulated Covered Bonds (RCB) Regulations 2008 (as subsequently amended). Previously a contract-law based covered bond regime Types of covered bonds RCBs and non-RCBs Structure of Issuer Direct issuance? Yes and No. Unsecured bonds are directly issued by the institution, but guaranteed by a third party vehicle Comments (if any) UKCB are issued by credit institutions, where the CB are direct, unsecured, unsubordinated and unconditional obligations of the Issuer. Under the typical structure, the Issuer lends the sums received from bond issuance to a guarantor (usually a Limited Liability Partnership (LLP) SPV), with the LLP using the funds to purchase collateral from the originator. Under this structure, the LLP agrees to guarantee the Issuer’s obligations to covered bond investors, collateralising the guarantee with the purchased loans and securities acquired from the Issuer. This structure is similar to that used in the Netherlands. Bankruptcy remoteness Similar to the Netherlands, in case of insolvency of the originator, the issuer exercises the financial guarantee over the pledged assets; if the issuer is insolvent, assets are formerly transferred to the SPV. No acceleration on issuer default, only on breach of the Asset Percentage Test Dual claim Yes Bond format Typically, fixed rate, hard bullet. However, an ability to extend maturities by up to 12 months following issuer insolvency Supervision Financial Services Authority Cover pool Eligible assets Mortgage Owing to the (initial) non-statutory nature of the UK covered bond framework, originators typically define their own eligibility criteria (see individual programme snapshots). Most programmes are backed by UK residential mortgages, with Bank of Scotland’s Social Housing CB programme being the exception LTV caps "Soft" (loans above the maximum can be included in the cover pool, with 'credit' given for only the eligible portion of the asset under the Asset Coverage Test). RCB legislation says an 80% maximum LTV, most programmes use 75% maximum. BoS Social Housing CB uses 60% Public Sector N/a as of today Non-performing collateral Can remain in the cover pool, with declining recognition of 90d+ collateral contribution in calculating the programme tests Substitution Assets Substitution assets consisting of highly liquid, non-mortgage assets are also eligible for inclusion, up to certain, pre-defined programme limits Hedging Used to minimise interest rate, currency, credit or other risks Valuation Individual market values. Partial indexation occurs on any increases in asset values, full indexation occurs on declines in asset values Other comments (if any) Requirements ALM matching Asset coverage Exact requirements prescribed by the issuers. Asset Coverage Test (ACT) is designed to ensure that pool collateral is sufficient to meet future interest and principal cashflows on the outstanding covered bonds. Pre- maturity tests designed to ensure the borrower can provide sufficient liquidity in case of downgrade (i.e. pre-defined period prior to scheduled bond redemption, if a borrower's short-term rating is below threshold, the borrower must fund a cash collateral account to ensure redemption). Amortisation tests are designed to ensure the issuer has the capacity to meet its obligations following a borrower EOD (nominal value of assets has to be greater than principal amount of o/s bonds, plus the costs associated with running the programme). Interest coverage n/a Other (if any) Shelves must also comply with any other programme requirements. The RCB framework is proposed to be tightened following a FSA consultation which ended in July 2011. Changes are expected to be adopted from 2013. Main developments are expected to include introduction of a formalised third party asset monitor, additional disclosure requirements, the ability to designate a programme as being single-asset, and the removal of eligibility of own-firm AAA securitisation bonds. Consequence of breach Failure to rectify breach of ACT within a pre-defined period results in issuer insolvency. Breach of the Amortisation Test following issuer insolvency results in programme acceleration Monitoring By issuer Other Compliance with EU Dependant on programme, but generally UCITS and CRD compliant for RCBs legislation Source: National legislation, J.P. Morgan Covered Bond Research

276 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

UK covered bond & macro backdrop

Figure 163: CB issuance, €mm Figure 164: CB outstanding, €mm 140,000 250,000

120,000 Mortgage Public Sector Mortgage Public Sector 200,000 100,000 80,000 150,000

60,000 100,000 40,000 50,000 20,000 0 0 2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 2007 2008 2009 2010 Source: ECBC. Latest data available displayed Source: ECBC. Latest data available displayed

Figure 165: UK real GDP growth, y-on-y, % Figure 166: UK unemployment level, %

6 Real GDP growth 9 4 8 7 2 6 0 5 -2 4 3 -4 Unemployment 2 -6 1 -8 0 0 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 1 1 ------r r r r r r r r r r r r r r r r r r r r r r r r a a a a a a a a a a a a a a a a a a a a a a a a M M M M M M M M M M M M M M M M M M M M M M M M

Source: Bloomberg Source: Bloomberg

Figure 167: UK CPI and base rate, % Figure 168: UK consumer confidence, balance of survey

7 Inflation Base rate 10 Cons. Confidence 6 5 0 5 -5 4 -10 -15 3 -20 2 -25 -30 1 -35 0 -40 0 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 1 1 ------r r r r r r r r r r r r r r r r r r r r r r r r a a a a a a a a a a a a a a a a a a a a a a a a M M M M M M M M M M M M M M M M M M M M M M M M

Source: Bloomberg Source: Bloomberg

Figure 169: UK house price growth, y-on-y, % Figure 170: UK mortgage loan approvals, #

30 Nationwide house price growth 100000 BBA Mortgage loan approvals 25 90000 20 80000 15 70000 10 60000 5 50000 0 40000 -5 30000 -10 20000 -15 10000 -20 0 0 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 1 1 ------r r r r r r r r r r r r n n n n n n n n n n n n a a a a a a a a a a a a a a a a a a a a a a a a M M M M M M M M M M M M J J J J J J J J J J J J

Source: Bloomberg Source: Bloomberg

277 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Barclays Bank PLC (‘Barclays’) Table 642: Select financial metrics (BBG: BACR) FY 2008 FY 2009 FY 2010 NIM 1.2 1.3 1.5 Snapshot ROA 0.3 0.5 0.2 Barclays is one of the world’s largest financial services ROE 14.6 22.4 7.3 ROC 1.1 2.0 0.9 companies, with operations in over 50 countries. Its C:I 63.2 57.3 63.6 businesses currently include retail and commercial Core capital 8.6 13.0 13.5 banking, credit cards, investment banking, wealth Source: Bloomberg management and investment management services. Cover pool overview The Group is constructed around two ‘clusters’: Retail We set out below some of the key cover pool and Business Banking; and Corporate and Investment characteristics: Banking and Wealth Management. Retail and Business Banking is focused on international financial services Table 643: Select covered bond terms and includes its UK Retail and Business Banking, Terms Barclaycard, Africa Retail and Business Banking and Asset Coverage Test (ACT) Europe Retail and Business Banking operations. The <3m in arrears 0.75 second cluster includes Barclays Capital, its investment 3m+ true balance & LTV<75% 0.4 3m+ true balance & LTV>75% 0.25 banking arm, Barclays Corporate, its large corporate banking division and Barclays Wealth, its global wealth Asset percentage 94.00% manager. Max. subs assets n/a

Reps & warranties Barclays Bank PLC has been approved for issuance of Min. current payments 1 Regulated Covered Bonds in the UK. Min. margin n/a Max. balance 1,500,000 Max. term (yr) 50 Financial performance BTL eligible? Y We set out below some of the key financial performance metrics: Source: J.P. Morgan Covered Bond Research, Offering Circulars

Table 640: Key profit & loss figures, £mm FY 2008 FY 2009 FY 2010 Net interest income 12,149 11,974 14,000 Provisions for loan losses 5,419 8,071 5,672 NII less provisions 6,730 3,903 8,328

Comm.& fee income 7,573 9,946 1,255 Other operating income 1,220 1,730 1,255 Non-interest expense 14,479 18,210 21,989 Operating profit (loss) 2,383 4,370 6,040

PBT 5,136 4,585 6,065 Taxes 453 1,074 1,516 Net profit (loss) 4,382 9,393 3,564 Source: Bloomberg

Table 641: Key balance sheet figures, £mm FY 2008 FY 2009 FY 2010 Loans 461,815 420,224 427,942 Total Assets 2,052,980 1,378,929 1,489,645 Deposits 335,505 322,429 345,788 Short-term borrowings 221,659 154,912 177,823 Other ST borrowings 223,192 155,832 172,389 Long-term borrowings 72,660 83,252 85,274 Equity 47,411 58,478 62,262 Source: Bloomberg

278 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Table 644: Covered bond characteristics As at July 2011 Ratings S/M/F Covered bond rating AAA/Aaa/AAA Issuer rating A+/Aa3/AA- Fitch D:factor 18.60% Moody's TPI Probable

Cover pool Jul-11 Total pool 14,007,522,766 Asset type: Mortgages 14,007,522,766 Cash n/a Bonds outstanding 7,657,082,715

# mortgages 105,413 Avg loan balance 132,882 WA Indexed LTV 60.8 Indexed LTV>80% 9.9 Indexed LTV>90% 5.3 Indexed LTV>100% -

Interest only (%) 46.4 Fixed rate mtges (%) 34.3 Asset seasoning (mths) 35.7 Current asset percentage (%) 74.9 Amt of credit support n/a Source: Investor Report

279 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Bradford & Bingley PLC (‘Bradbi’) Table 647: Select financial metrics (BBG: BRADBI) FY 2007 FY 2008 FY 2009 FY 2010 NIM 1.2 1.5 1.3 1.4 Snapshot ROA 0.2 0.0 -0.2 1.7 Bradford & Bingley Plc (‘Bradbi’) was the UK’s largest ROE 7.1 1.5 -7.7 45.5 ROC 0.4 0.1 -0.4 4.3 specialist Buy-to-Let mortgage lender, before its C:I 49.0 31.2 31.9 19.9 nationalisation in September 2008. In a two-part Core capital 8.6 8.9 n/a n/a transaction, the savings arm and branch network of Source: Bloomberg Bradbi were transferred to Santander (see Santander UK plc profile), while the rest of the group's operations, Cover pool overview including the mortgage business, were transferred to We set out below some of the key cover pool public ownership. The covered bonds remain an characteristics: obligation of the publicly-owned institution. Table 648: Select covered bond terms Approval of State Aid support was received from the EC Terms on 25th January 2010. This extends the HM Treasury Asset Coverage Test (ACT) guarantee on Bradbi's covered bonds until institutional <3m in arrears 0.75 run-off is complete. Bradford & Bingley operations sit 3m+ true balance & LTV<75% 0.4 3m+ true balance & LTV>75% 0.4 alongside those of Northern Rock (Asset Management) plc, the run-off institution of Northern Rock, under a Asset percentage 91.00% single holding company called UK Asset Resolution Max. subs assets 10.00% (‘UKAR’). The companies remain separate legal entities, with their own balance sheets, liabilities and government Reps & warranties support arrangements. Min. current payments 2 Min. margin Max. balance 1,000,000 Financial performance Max. term (yr) 50 BTL eligible? Y We set out below some of the key financial performance metrics: Source: J.P. Morgan Covered Bond Research, Offering Circulars

Table 645: Key profit & loss figures, £mm Table 649: Covered bond characteristics FY 2007 FY 2008 FY 2009 FY 2010 As at July 2011 Net interest income 548 737 612 608 Ratings S/M/F Provisions for loan Covered bond rating AAA/Aa1/AAA losses 117 699 687 262 Issuer rating -/Aa3/A+ NII less provisions 431 38 -75 346 Fitch D:factor Not disclosed Moody's TPI Improbable Comm.& fee income 82 63 53 21 Other operating income -64 206 45 6 Cover pool Jul-11 Non-interest expense 280 277 224 136 Total pool 9,652,130,114 Operating profit (loss) 175 -90 -209 284 Asset type: Mortgages 9,651,077,323 PBT 126 134 -196 1,082 Cash 1,052,791 Taxes 33 116 -98 262 Bonds outstanding 2,733,670,456 Net profit (loss) 93 18 -98 819 Source: Bloomberg # mortgages 85,388 Avg loan balance 113,026 Table 646: Key balance sheet figures, £mm WA Indexed LTV 85.1 Indexed LTV>80% 70.6 FY 2007 FY 2008 FY 2009 FY 2010 Indexed LTV>90% 47.4 Loans 40,445 41,826 38,986 36,402 Indexed LTV>100% 21.8 Total Assets 51,985 55,923 49,395 45,359 Deposits 24,153 828 458 n/a Asset seasoning (mths) 65.3 Short-term borrowings 8,221 10,945 8,298 4,965 Other ST borrowings 658 22,067 27,776 27,794 Long-term borrowings 17,576 20,657 11,200 10,132 Current asset percentage 71.0 Equity 1,211 1,158 1,394 2,207 Amt of credit support 3,816,558,422 Source: Bloomberg Source: Investor Report

280 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Coventry Building Society (‘Coventry’) Cover pool overview (BBG: COVBS) We set out below some of the key cover pool Snapshot characteristics: The Coventry Building Society (‘Coventry’) was formed Table 653: Select covered bond terms in 1884, as a small localised financial institution in the English midlands. Over time, and through a number of Terms Asset Coverage Test (ACT) mergers, including the most recent with the Stroud & <3m in arrears 0.75 Swindon Building Society in 2010, the Coventry now sits 3m+ true balance & LTV<75% 0.4 as the UK’s third largest society with some £22bn of 3m+ true balance & LTV>75% 0.25 assets. Asset percentage 90.00% Max. subs assets 10.00% Coventry has been approved for issuance of Regulated Reps & warranties Covered Bonds in the UK. Min. current payments 2 Min. margin 0.40% Financial performance Max. balance 1,000,000 Max. term (yr) 50 We set out below some of the key financial performance BTL eligible? N/A metrics: Source: J.P. Morgan Covered Bond Research, Offering Circulars Table 650: Key profit & loss figures, £mm Table 654: Covered bond characteristics FY 2009 FY 2010 Net interest income 125 146 As at July 2011 Provisions for loan Ratings S/M/F losses n/a 0 Covered bond rating -/Aaa/AAA NII less provisions 125 146 Issuer rating -/A3/A Fitch D:factor 15.7 Comm.& fee income 17 16 Moody's TPI Probable Other operating income 1 0 Non-interest expense 66 77 Cover pool Jul-11 Operating profit (loss) 77 85 Total pool 3,418,853,341 Asset type: PBT 56 101 Mortgages 3,357,161,114 Taxes 13 16 Substitution assets 1,012,112 Net profit (loss) 44 85 Bonds outstanding 2,200,000,000 Source: Bloomberg # mortgages 32,856 Table 651: Key balance sheet figures, £mm Avg loan balance WA Indexed LTV 53.3 FY 2009 FY 2010 Indexed LTV>80% 0.2 Loans 14,075 17,574 Indexed LTV>90% - Total Assets 18,402 22,302 Indexed LTV>100% - Short-term borrowings 2,018 1,333 Other ST borrowings n/a n/a Asset seasoning (mths) 34.6 Long-term borrowings 1,430 1,741 Equity 13,803 18,485 Current asset percentage n/a Amt of credit support 133,066,550 Source: Bloomberg

Table 652: Select financial metrics Source: Investor Report FY 2007 FY 2008 FY 2009 FY 2010 NIM n/a 0.8 ROA n/a 0.4 ROE n/a 0.5 ROC n/a 0.4 C:I 45.5 47.0 Core capital n/a n/a Source: Bloomberg

281 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

HSBC Bank PLC (‘HSBC’) Table 657: Select financial metrics (BBG: HSBC) FY 2007 FY 2008 FY 2009 FY 2010 NIM 2.2 2.2 2.0 Snapshot ROA 0.2 0.2 0.5 HSBC Bank plc (‘HSBC’) is a wholly owned subsidiary ROE 5.1 5.1 9.5 ROC 1.3 1.5 3.2 of HSBC Group, one of the world’s largest financial C:I 53.1 47.5 55.0 institutions. Headquartered in London, the Group Core capital 8.3 10.8 12.1 operates in five regions: Europe, Hong Kong, the rest of Source: Bloomberg Asia Pacific including the Middle East and Africa, North America and South America. The Group provides a Cover pool overview range of financial services to personal, commercial, We set out below some of the key cover pool corporate, institutional and investment, and private characteristics: banking clients. Table 658: Select covered bond terms HSBC Bank plc has established positions in UK Retail Terms Banking and Wealth Management, Commercial Banking, Asset Coverage Test (ACT) Global Private Banking and Global Banking and <3m in arrears 0.75 Markets; with UK operations accounting for the majority 3m+ true balance & LTV<75% 0.4 3m+ true balance & LTV>75% 0.25 of the European PBT in 2010 (56%). Asset percentage 92.50% HSBC has been approved for issuance of Regulated Max. subs assets Covered Bonds in the UK. Reps & warranties Financial performance Min. current payments 1 Min. margin We set out below some of the key financial performance Max. balance 1,000,000 metrics: Max. term (yr) 2056 BTL eligible? Y Table 655: Key profit & loss figures, £mm Source: J.P. Morgan Covered Bond Research, Offering Circulars FY 2008 FY 2009 FY 2010 Net interest income 23,373 26,194 25,609 Table 659: Covered bond characteristics Provisions for loan losses 13,607 16,982 9,090 As at July 2011 NII less provisions 9,766 9,212 16,519 Ratings S/M/F Covered bond rating AAA/Aaa/AAA Comm.& fee income 13,513 13,722 13,672 Issuer rating AA/Aa2/AA Other operating income 1,605 2,260 1,257 Fitch D:factor 19.00 Non-interest expense 23,614 24,449 26,837 Moody's TPI Probable Operating profit (loss) 4,958 7,402 10,863 Cover pool Jul-11 PBT 5,078 4,539 12,326 Total pool Taxes 1,533 247 3,138 Asset type: 11,147,765,216 Net profit (loss) 3,126 3,740 8,520 Mortgages 11,147,765,216 Source: Bloomberg Bonds outstanding 2,350,684,133

Table 656: Key balance sheet figures, £mm # mortgages 117,781 Avg loan balance 94,648 FY 2008 FY 2009 FY 2010 WA Indexed LTV 47.2 Loans 640,047 555,011 614,692 Indexed LTV>80% - Total Assets 1,734,110 1,464,238 1,574,427 Indexed LTV>90% - Deposits 765,233 717,757 787,458 Indexed LTV>100% - Short-term borrowings 162,729 129,095 122,864 Other ST borrowings 238,049 416,042 300,246 Asset seasoning (mths) 45.9 Long-term borrowings 70,005 58,078 62,737 Equity 68,768 84,011 99,362 Current asset percentage 78.2 Source: Bloomberg Amt of credit support 7,109,715,459

Source: Investor Report

282 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Leeds Building Society (‘Leeds’) Cover pool overview (BBG: LEED) We set out below some of the key cover pool Snapshot characteristics: The Leeds Building Society (‘Leeds’) was established in Table 663: Select covered bond terms 1875, and has grown since to become the UK’s fifth largest building society by assets (£9.5bn of assets at the Terms Asset Coverage Test (ACT) end of 2010, of which £6.5bn related to residential <3m in arrears 0.75 mortgages) with a branch network of 65 sites and some 3m+ true balance & LTV<75% 0.4 684k customers. The society remains committed to its 3m+ true balance & LTV>75% 0.25 mutual status, being owned by its members. Asset percentage 93.50% Max. subs assets 15.00% Leeds has been approved for issuance of Regulated Reps & warranties Covered Bonds in the UK. Min. current payments 1 Min. margin 0.15% Financial performance Max. balance 1,000,000 Max. term (yr) 50 We set out below some of the key financial performance BTL eligible? Y (<15%) metrics: Source: J.P. Morgan Covered Bond Research, Offering Circulars Table 660: Key profit & loss figures, £mm Table 664: Covered bond characteristics FY 2008 FY 2009 FY 2010 Net interest income 93 110 109 As at June 2011 Provisions for loan Ratings S/M/F losses n/a 53 44 Covered bond rating -/Aaa/AAA NII less provisions 93 57 65 Issuer rating -/A2/A Fitch D:factor 15.0 Comm.& fee income 20 19 19.7 Moody's TPI Probable Other operating income 1 n/a 2 Non-interest expense 46 42 41 Cover pool Jun-11 Operating profit (loss) 68 35 45 Total pool 1,276,695,029 Asset type: PBT 20 32 42 Mortgages 1,276,695,029 Taxes 6 9 11 Bonds outstanding 586,200,000 Net profit (loss) 14 23 31 Source: Bloomberg # mortgages 14,729 Avg loan balance 86,679 Table 661: Key balance sheet figures, £mm WA Indexed LTV 73.5 Indexed LTV>80% 44.8 FY 2008 FY 2009 FY 2010 Indexed LTV>90% 27.2 Loans 7,479 7,334 7,314 Indexed LTV>100% 12.0 Total Assets 10,137 9,545 9,503 Deposits 739 710 439 Asset seasoning (mths) 51.1 Short-term borrowings 689 539 483 BTL (%) 14.6 Other ST borrowings 6,944 7,090 7,307 Long-term borrowings 1,285 715 761 Current asset percentage 75.6 Equity 461 478 505 Amt of credit support n/a Source: Bloomberg Source: Investor Report Table 662: Select financial metrics FY 2008 FY 2009 FY 2010 NIM n/a n/a n/a ROA n/a 0.2 0.3 ROE n/a 4.8 6.3 ROC n/a 1.1 1.8 C:I 40.3 32.5 31.5 Core capital n/a n/a n/a Source: Bloomberg

283 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Lloyds Banking Group PLC (‘Lloyds’) Table 667: Select financial metrics (BBG: LLOYDS) FY 2007 FY 2008 FY 2009 FY2010 NIM 1.9 2.2 1.4 1.4 Snapshot ROA 0.9 0.2 0.4 -0.0 Following the acquisition of HBoS PLC, Lloyds TSB ROE 28.2 7.2 10.7 -0.7 ROC 2.9 0.6 1.0 -0.1 Group PLC was renamed Lloyds Banking Group PLC C:I 52.0 154.7 52.2 44.4 (‘LBG’), becoming at the same time the largest retail Core capital 9.5 8.0 9.6 11.6 bank in the UK. Away from banking, LBG also owns Source: Bloomberg Scottish Widows and Clerical Medical, which specialise in Pensions, Investments and Insurance. The Group is Cover pool overview currently 41% owned by the UK government. We set out below some of the key cover pool characteristics: Bank of Scotland has two distributed covered bond programmes, one backed by residential mortgages (BoS Table 668: Select covered bond terms Resi) and another backed by social housing (BoS SH) Terms BoS SH BoS Resi L Resi collateral. Lloyds TSB also has its own CB programme, Asset Coverage Test (ACT) backed by residential mortgages (L Resi). <3m in arrears n/a 0.6 0.75 3m+ true balance & LTV<75% n/a 0.6 0.4 3m+ true balance & LTV>75% n/a 0.6 0.25 LBG has been approved for issuance of Regulated Covered Bonds in the UK for the BoS Resi and L Resi Asset percentage 100.00% 92.50% 93.00% programmes. Max. subs assets 25.00% 10.00% 10.00%

Financial performance Reps & warranties Min. current payments n/a 2 1 We set out below some of the key financial performance Min. margin n/a metrics: Max. balance n/a 1,000,000 1,000,000 Max. term (yr) n/a 50 Table 665: Key profit & loss figures, £mm BTL eligible? n/a Y

FY 2007 FY 2008 FY 2009 FY2010 Source: J.P. Morgan Covered Bond Research, Offering Circulars Net interest income 6,099 7,718 9,026 12,546 Provisions for loan Table 669: Covered bond characteristics losses 1,796 3,012 16,673 10,952 NII less provisions 4,303 4,706 -7,647 1,594 BoS SH BoS Resi L Resi Ratings S/M/F S/M/F S/M/F Comm.& fee income 3,224 3,231 4,254 4,415 Covered bond rating AAA/Aaa/AAA AAA/Aaa/AAA -/Aaa/AAA Other operating income -1,145 8,780 -7,680 -6,047 Issuer rating A/A1/AA- A/A1/AA- A/A1/AA- Non-interest expense 6,167 15,957 13,670 12,774 Fitch D:factor 6.90% 18.40% 14.10% Operating profit (loss) 3,343 -8,407 -5,548 2,912 Moody's TPI Probable-High Probable Probable

PBT 4,000 760 1,042 281 Cover pool Jun-11 Jun-11 Jun-11 Taxes 679 -38 -1,911 539 Total pool 4,114,150,227 45,709,111,804 18,829,517,368 Net profit (loss) 3,289 772 2,827 -320 Asset type: Source: Bloomberg Mortgages 3,411,989,120 39,243,270,568 14,641,547,552 Cash 702,161,107 6,465,841,235 4,187,969,816 Table 666: Key balance sheet figures, £mm Bonds outstanding 2,400,000,000 28,687,138,595 10,498,836,033 FY 2007 FY 2008 FY 2009 FY2010 # mortgages 68 407,590 144,005 Loans 209,814 240,344 626,969 592,597 Avg loan balance 50,176,311 96,281 101,674 Total Assets 353,346 436,033 1,027,255 991,574 WA Indexed LTV n/a 71 59 Deposits 156,555 170,938 406,741 393,633 Indexed LTV>80% n/a 40 13 Short-term borrowings 74,948 125,040 188,108 148,907 Indexed LTV>90% n/a 24 2 Other ST borrowings 78,444 93,915 223,754 233,376 Indexed LTV>100% n/a 11 0 Long-term borrowings 27,673 34,440 162,573 166,554 Seasoning (mths) n/a 66 45 Equity 12,425 9,699 44,107 46,902 Current asset % 86 70 80 Amt of credit support 61,353,981 1,083,345,123 3,894,380,698 Source: Bloomberg

Source: Investor Report

284 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Nationwide Building Society Table 671: Key balance sheet figures, £mm (‘Nationwide’) FY 2007 FY 2008 FY 2009 FY 2010 Loans 115,938 142,804 155,469 152,429 (BBG: NWIDE) Total Assets 137,379 179,027 202,353 191,397 Snapshot Deposits 86,795 113,816 128,292 120,943 Short-term borrowings 27,395 37,204 40,003 30,656 Nationwide Building Society (‘Nationwide’) is the Other ST borrowings 3,373 1,940 6,947 5,619 world’s largest building society with assets of around Long-term borrowings 12,716 18,403 21,877 27,461 £190bn, and is the UK’s third largest mortgage lender Equity 6,510 7,253 4,278 5,716 and savings provider. It operates 700 branches Source: Bloomberg throughout the UK, with fifteen million members. Table 672: Select financial metrics Following an earlier merger with the Portman Building Society in 2007, Nationwide merged with two smaller FY 2007 FY 2008 FY 2009 FY 2010 NIM 1.2 1.2 n/a n/a societies since the start of the financial crisis (Derbyshire ROA 0.4 0.3 0.1 0.1 BS and Cheshire BS), as well as acquiring the assets and ROE 8.8 8.6 2.8 5.3 liabilities of the Dumfermline BS. ROC 1.0 0.9 0.2 0.4 C:I 59.3 61.2 73.9 59.2 Core capital 8.7 9.7 15.1 15.3 As a mutual organisation, Nationwide has no Source: Bloomberg shareholders and is ultimately owned by its retail savings and residential mortgage customers. As such, bottom-line Cover pool overview profitability is not the primary driver of activity, with We set out below some of the key cover pool some of the value generated by the business being given characteristics: back to members through more competitive pricing. Table 673: Select covered bond terms Nationwide has been approved for issuance of Regulated Covered Bonds in the UK. Terms Asset Coverage Test (ACT) <3m in arrears 0.75 Financial performance 3m+ true balance & LTV<75% 0.4 We set out below some of the key financial performance 3m+ true balance & LTV>75% 0.25 metrics: Asset percentage 93.00% Max. subs assets 10% Table 670: Key profit & loss figures, £mm Reps & warranties FY 2007 FY 2008 FY 2009 FY 2010 Min. current payments 2 Net interest income 1,502 1,821 1,774 1,715 Min. margin 0.15% Provisions for loan Max. balance 1,000,000 losses 134 106 394 549 Max. term (yr) 50 NII less provisions 1,369 1,715 1,380 1,166 BTL eligible? Y

Comm.& fee income 335 334 359 378 Source: J.P. Morgan Covered Bond Research, Offering Circulars Other operating income 91 44 123 47 Non-interest expense 1,149 1,284 1,631 1,248 Operating profit (loss) 651 707 180 307

PBT 652 686 190 341 Taxes 188 191 44 77 Net profit (loss) 464 495 146 264 Source: Bloomberg

285 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Table 674: Covered bond characteristics As at June 2011 Ratings S/M/F Covered bond rating AAA/Aaa/AAA Issuer rating A+/Aa3/AA- Fitch D:factor 14.60% Moody's TPI Probable

Cover pool Jun-11 Total pool 34,165,849,182 Asset type: Mortgages 33,647,697,875 Cash 518,151,307 Bonds outstanding 20,533,344,812

# mortgages 411,249 Avg loan balance 81,818.3 WA Indexed LTV 54.3 LTV>80% 15.4 LTV>90% 5.3 LTV>100% 1.0

Asset seasoning 76.0

Current asset percentage 76.3 Amt of credit support 1,613,847,814

Source: Investor Report

286 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Northern Rock Asset Management Table 676: Key balance sheet figures, £mm (‘NRAM’) FY 2007 FY 2008 FY 2009 FY 2010 Loans 98,835 74,424 65,400 48,298 (BBG: NRKLN) Total Assets 109,321 104,346 87,446 66,277 Snapshot Deposits 11,563 20,723 20,608 n/a Short-term borrowings 80,347 67,107 6,022 4,901 Northern Rock (AM) plc ('NRAM') is the UK Other ST borrowings 2,017 2,555 322 253 government-owned run-off vehicle (formerly referred to Long-term borrowings 12,709 13,389 57,224 58,527 as ‘AssetCo’), created by the nationalisation, and Equity 1,664 -402 1,055 1,318 subsequent split of Northern Rock plc into two separate Source: Bloomberg legal entities (the other, successor institution retaining the Table 677: Select financial metrics original name of the pre-nationalisation entity). FY 2007 FY 2008 FY 2009 FY 2010 NIM 0.7 0.1 1.6 2.0 The outstanding covered bonds remain obligations of ROA -0.2 -1.3 -0.3 0.5 NRAM, and are currently beneficiaries of a guarantee ROE -13.1 n/a n/a 34.5 from HM Treasury. Unlike the guarantee on Bradford & ROC -0.2 -1.5 -0.4 0.6 Bingley’s existing covered bonds however, this C:I 42.1 119.2 55.7 41.6 Core capital 7.7 -0.4 n/a n/a guarantee can be terminated with no less than three Source: Bloomberg months’ notice. The terms of the guarantee for NRAM's covered bonds remain under review with the objective of Cover pool overview sustaining the programme's credit rating. NRAM We set out below some of the key cover pool operations sit alongside those of Bradford & Bingley plc, characteristics: under a single holding company called UK Asset Resolution (‘UKAR’). The companies remain separate Table 678: Select covered bond terms legal entities, with their own balance sheets, liabilities and government support arrangements. Terms Asset Coverage Test (ACT) <3m in arrears 0.75 Financial performance 3m+ true balance & LTV<75% 0.4 We set out below some of the key financial performance 3m+ true balance & LTV>75% 0.25 metrics: Asset percentage 90.00% Max. subs assets 10.00% Table 675: Key profit & loss figures, £mm FY 2007 FY 2008 FY 2009 FY 2010 Reps & warranties Net interest income 761 51 1,259 1,260 Min. current payments 1 Provisions for loan Min. margin 0.15% losses 240 894 1,045 813 Max. balance 1,000,000 NII less provisions 522 -844 214 447 Max. term (yr) 50 BTL eligible? Y Comm.& fee income 185 56 27 19 Other operating income 25 53 13 7 Source: J.P. Morgan Covered Bond Research, Offering Circulars Non-interest expense 352 363 760 545 Operating profit (loss) 179 -943 -507 -71

PBT -168 -1,356 -258 401 Taxes 31 -46 19 -9 Net profit (loss) -199 -1,378 -277 410 Source: Bloomberg

287 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Table 679: Covered bond characteristics As at June 2011 Ratings S/M/F Covered bond rating AAA/Aaa/AAA Issuer rating A/Aa3/A+ Fitch D:factor 18.50% Moody's TPI Improbable

Cover pool Jun-11 Total pool 18,916,703,298 Asset type: Mortgages 11,006,708,489 Cash 2,136,411,116 Bonds outstanding 7,305,976,411

# mortgages 80,426 Avg loan balance 136,855 WA Indexed LTV 95.2 LTV>80% 70.6 LTV>90% 24.9 LTV>100% 1.8

Asset seasoning 57.4

Current asset percentage 66.0 Amt of credit support 754,598,735

Source: Investor Report

288 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Royal Bank of Scotland PLC (‘RBS’) Table 681: Key balance sheet figures, £mm (BBG: RBS) FY 2008 FY 2009 FY 2010 Loans 874,722 728,393 555,260 Snapshot Total Assets 2,401,652 1,696,486 1,453,576 Royal Bank of Scotland Group (‘RBS’) is one of Deposits 581,369 545,849 428,599 Short-term borrowings 403,162 295,840 214,208 Europe's largest financial groups. It is structured around Other ST borrowings 225,849 97,962 368,335 six business lines: UK Personal which includes its retail, Long-term borrowings 120,659 113,518 97,268 corporate and commercial banking and wealth Equity 80,498 94,631 76,851 management services; UK Corporate which serves UK Source: Annual Report corporate customers; RBS Insurance which includes the brands Direct Line, Churchill and Privilege; US Retail Table 682: Select financial metrics and Commercial Banking provided through the Group's FY 2008 FY 2009 FY 2010 Citizen Financial Group; European & Middle East Retail NIM 1.4 1.1 1.4 ROA -1.1 -0.2 -0.1 & Commercial Banking and its Global Banking & ROE -43.4 -5.3 -1.5 Markets division. ROC -4.3 -0.3 -0.3 C:I 101.9 67.9 68.1 The Group remains majority owned by the UK Core capital 10.0 14.1 12.9 government, with the ultimate goal of returning the Source: Bloomberg institution to the private sector once restructuring is Cover pool overview completed. RBS introduced its covered bond programme and issued its inaugural bond in 2010. RBS PLC has We set out below some of the key cover pool been approved for issuance of Regulated Covered Bonds characteristics: in the UK. Table 683: Select covered bond terms Financial performance Terms Asset Coverage Test (ACT) We set out below some of the key financial performance <3m in arrears 75% metrics: >3m in arrears 40%

Table 680: Key profit & loss figures, £mm Asset percentage 90% Max. subs assets 15% FY 2008 FY 2009 FY 2010 Net interest income 18,675 13,388 14,209 Reps & warranties Provisions for loan Min. current payments 1m losses 8,072 13,899 9,256 Min. margin n/a NII less provisions 10,603 -511 4,953 Max. balance £2,600,000 Max. term (yr) n/a Comm.& fee income 9,831 8,738 8,193 BTL eligible? n/a <3m in arrears 75% Other operating income 3,113 1,872 1,544 Non-interest expense 23,881 19,844 20,429 Source: J.P. Morgan Covered Bond Research, Offering Circulars Operating profit (loss) -8,469 -5,822 -726

PBT -40,836 -2,647 -399 Taxes -2,323 -429 634 Net profit (loss) -23,710 -2,672 -1,001 Source: Annual Report

289 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Table 684: Covered bond characteristics As at July 2011 Ratings S/M/F Covered bond rating -/Aaa/AAA Issuer rating A/A1/AA- Fitch D:factor 14.80% Moody's TPI Probable

Cover pool Jul-11 Total pool 12,675,836,123 Asset type: Mortgages 12,675,836,123 Cash n/a Bonds outstanding (€) 6,596,782,977

# mortgages 96,208 Avg loan balance 131,754 WA Indexed LTV 64.1 Indexed LTV>80% 17.8 Indexed LTV>90% 4.1 Indexed LTV>100% 0.4 Asset seasoning 15.0

Current asset percentage 79.1 Amt of credit support 2,539,405,599 Source: Investor Report

290 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Santander UK plc (‘Santander’) Table 686: Key balance sheet figures, £mm (BBG: ABBEY) FY 2007 FY 2008 FY 2009 FY 2010 Loans 112,147 180,176 186,804 195,132 Snapshot Total Assets 199,623 297,310 285,291 302,860 Santander UK (‘Santander’), is the umbrella name for the Deposits 69,650 130,245 143,893 152,643 Short-term borrowings 9,342 13,631 7,008 5,331 broader Santander Group’s UK operations, and includes Other ST borrowings 75,091 77,081 72,161 53,644 the businesses of Abbey (since 2004), alongside its other Long-term borrowings 40,444 68,231 53,510 46,701 UK brands, including Alliance & Leicester (full Equity 3,442 6,697 7,222 12,274 acquisition) and Bradford & Bingley (deposits & Source: Bloomberg branches only) – both acquired during the financial crisis. In August 2010, Santander UK also agreed to purchase Table 687: Select financial metrics the parts of the banking businesses of RBS which are FY 2007 FY 2008 FY 2009 FY 2010 carried out through its RBS branches in England and NIM 0.8 0.9 1.5 1.9 ROA 0.4 0.3 0.4 0.5 Wales, as well as its NatWest branches in Scotland. ROE 21.2 17.4 19.1 16.5 Operating across 1,400 branches, the UK entity is ROC 1.4 1.2 1.6 n/a organised into four main divisions: retail banking, C:I 56.6 52.0 46.1 41.0 corporate banking, global banking & markets and private Core capital 5.4 6.2 6.8 11.5 banking. Source: Bloomberg Cover pool overview Abbey National Treasury Services Plc (‘ANTS’) is a wholly owned subsidiary of Santander UK and is the We set out below some of the key cover pool issuing entity for its UKCB programme. characteristics:

Table 688: Select covered bond terms Santander has been approved for issuance of Regulated Covered Bonds in the UK. Terms Asset Coverage Test (ACT) <3m in arrears 0.75 Financial performance 3m+ true balance & LTV<75% 0.4 We set out below some of the key financial performance 3m+ true balance & LTV>75% 0.25 metrics: Asset percentage 91.00% Max. subs assets 10.00% Table 685: Key profit & loss figures, £mm Reps & warranties FY 2007 FY 2008 FY 2009 FY 2010 Min. current payments 1 Net interest income 1,500 1,772 3,412 3,814 Min. margin 0.50% Provisions for loan Max. balance 1,000,000 losses 344 348 842 712 Max. term (yr) 50 NII less provisions 1,156 1,424 2,570 3,102 BTL eligible? Y Comm.& fee income 785 768 986 902 Other operating income n/a n/a n/a n/a Source: J.P. Morgan Covered Bond Research, Offering Circulars Non-interest expense 1,664 1,659 2,326 2,400 Operating profit (loss) 864 1,094 1,690 2,125

PBT 864 1,094 1,690 2,125 Taxes 179 275 445 542 Net profit (loss) 685 811 1,190 1,583 Source: Bloomberg

291 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Table 689: Covered bond characteristics As at June 2011 Ratings S/M/F Covered bond rating AAA/Aaa/AAA Issuer rating AA/Aa3/AA- Fitch D:factor 17.90% Moody's TPI Probable

Cover pool Jun-11 Total pool 30,153,385,785 Asset type: Mortgages 29,153,385,785 Cash 1,000,000,000 Bonds outstanding 19,953,700,113

# mortgages Avg loan balance 112,575 WA Indexed LTV 67.7 LTV>80% 19.1 LTV>90% 1.8 LTV>100% 0.2

Current asset percentage 76.7 Amt of credit support 992,101,675

Source: Investor Report

292 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Yorkshire Building Society (‘Yorkshire’) Table 692: Select financial metrics (BBG: YBS) FY 2007 FY 2008 FY 2009 HY 2010 NIM n/a n/a n/a Snapshot ROA 0.2 0.0 0.0 Yorkshire Building Society (‘YBS’) is the UK’s second ROE 4.2 0.9 -0.4 ROC 0.6 0.1 0.0 largest building society, and started in 1864. Following C:I 71.0 77.1 70.1 its recent merger (2010) with Chelsea BS, the institution Core capital n/a n/a n/a has assets of over £30bn, with close to three million Source: Bloomberg members and a branch network of more than 175 sites. YBS continues to be a mutual organisation owned by its Cover pool overview depositors and mortgage borrowers. We set out below some of the key cover pool characteristics: YBS is currently in the process of merging with the Norwich & Peterborough BS, as well as acquiring the Table 693: Select covered bond terms mortgage and savings businesses of Egg Banking PLC. Terms Asset Coverage Test (ACT) Yorkshire has been approved for issuance of Regulated <3m in arrears 0.75 Covered Bonds in the UK. 3m+ true balance & LTV<75% 0.4 3m+ true balance & LTV>75% 0.25

Financial performance Asset percentage 93.50% We set out below some of the key financial performance Max. subs assets 10.00% metrics: Reps & warranties Min. current payments 2 Table 690: Key profit & loss figures, £mm Min. margin 0.75 Max. balance 1,000,000 FY 2007 FY 2008 FY 2009 HY 2010 Max. term (yr) 50 Net interest income 188 165 148 112 BTL eligible? N Provisions for loan Source: J.P. Morgan Covered Bond Research, Offering Circulars losses n/a n/a 0 0 NII less provisions 188 165 148 112 Table 694: Covered bond characteristics Comm.& fee income 34 32 34 19 As at June 2011 Other operating income 14 5 16 18 Non-interest expense 170 157 141 84 Ratings S/M/F Operating profit (loss) 67 45 57 40 Covered bond rating -/Aa1/AAA Issuer rating A-/Baa1/A- PBT 55 8 -13 65 Fitch D:factor 14.00% Taxes 15 -1 -9 12 Moody's TPI Probable Net profit (loss) 39 9 -3 54 Cover pool Jun-11 Source: Bloomberg Total pool 7,322,724,781 Asset type: Table 691: Key balance sheet figures, £mm Mortgages 4,634,187,816 Cash 2,688,536,965 FY 2007 FY 2008 FY 2009 HY 2010 Bonds outstanding 2,259,840,000 Loans 15,362 16,292 14,979 23,221 Total Assets 20,498 23,032 22,722 31,103 # mortgages 46,441 Deposits 12,448 13,683 13,793 22,699 Avg loan balance 99,787 Short-term borrowings 2,424 1,762 1,091 1,109 WA Indexed LTV 62.3 Other ST borrowings 160 748 553 779 Indexed LTV>80% 24.7 Long-term borrowings 4,468 5,848 6,363 4,952 Indexed LTV>90% 12.5 Equity 954 909 900 1,282 Indexed LTV>100% 5.4 Source: Bloomberg Asset seasoning 56.9

Current asset percentage 72.9 Amt of credit support 952,869,207

Source: Investor Report

293 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

294 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected] d n o B

d e r e v o C

S U

295 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

US Covered Bonds

Legislative snapshot We set out in Table 695 a snapshot of key covered bond attributes in the USA.

Table 695: US Covered Bond legislative overview Attribute Commentary Framework Legislative Framework There is currently no special covered bond legislation. The current two covered bond programmes are governed by the contractual law, together with a number of other US Federal regulations including SEC Rule 144a and FDIA Reg S. Types of covered bonds n/a Structure of Issuer Direct issuance? Two tier approach, whereby the bonds are issued by an SPV. The sponsor bank issues $-denominated floating rate mortgage bonds backed by loans that remain on the bank's balance sheet. The SPV’s sole purpose is to purchase these bonds using the funds from the issuance of covered bonds. Comments (if any) A covered bond legislative framework is being discussed by Congress. The main issue remains the role of the FDIC in case of default and whether this may reduce the claim of covered bonds holders on the assets. Bankruptcy remoteness If the sponsor bank defaults, substitution ceases. Following default of the SPV, the bonds can be declared immediately due and payable and the covered bond collateral can be liquidated to repay the covered bonds. Dual claim Yes Bond format Fixed, bullet. Supervision Current issuers are regulated by the Office of the Comptroller of the Currency, part of the US Department of Treasury. Cover pool Eligible assets Mortgage Current issuers allow inclusions of first and second lien loans and home equity lines (JPM). LTV caps n/a Public Sector n/a Non-performing collateral n/a Substitution Assets Substitute collateral in the form of cash, debt guaranteed by 0% risk weight entities, exposure to 10%/20% risk weight entities and AAA-rated $-denominated RMBS is allowed. Hedging Derivatives are allowed to manage mismatches. Valuation The value of the properties is that estimated by the sponsor bank adjusted by the Office of Federal Housing Enterprise Oversight HPI; falls in this index are fully passed on to the valuation but only 85% of the increases is considered. Only the first 75% of the property value is used in the ACT. Other comments (if any) Requirements ALM matching Asset coverage The individual programmes have ACTs that ensure that the asset percentage remains below 96% for BA and 93% for JPM. A proceeds compliance test is also carried out to establish if the amounts credited to the bond and the outstanding principal amount of each underlying mortgage bond is greater than outstanding CB amounts. Interest coverage n/a Other (if any) Consequence of breach If after breach of coverage test no new collateral is added to ensure that ACT is passed, then there is an issuer EoD. Monitoring Trustee/cover pool monitor. Other Compliance with EU legislation Non UCITS and Non CRD compliant Source: National legislation, J.P. Morgan Covered Bond Research

296 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

US covered bond & macro backdrop

Figure 171: Mortgage CB Issuance, €mm Figure 172: Mortgage CB outstanding, €mm

10,000 14,000 12,000 8,000 10,000 6,000 8,000

4,000 6,000 4,000 2,000 2,000 0 0 2003 2004 2005 2006 2007 2008 2009 2003 2004 2005 2006 2007 2008 2009

Source: J.P. Morgan Covered Bond Research Source: J.P. Morgan Covered Bond Research

Figure 173: USA real GDP growth, y-on-y, % Figure 174: USA unemployment level, %

6 Real GDP growth 12 Unemployment 4 10 2 8 0 6 -2 4 -4 2 -6 0 0 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 1 1 ------r r r r r r r r r r r r r r r r r r r r r r r r a a a a a a a a a a a a a a a a a a a a a a a a M M M M M M M M M M M M M M M M M M M M M M M M

Source: Bloomberg Source: Bloomberg

Figure 175: USA CPI and base rate, % Figure 176: USA consumer confidence index, #

7 Inflation Base rate Cons. Confidence 6 140 5 120 4 100 3 80 2 1 60 0 40 -1 20 -2

3 3 4 4 5 5 6 6 7 7 8 8 9 9 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 1 ------0 1 2 3 4 5 6 7 8 9 0 1 r r r r r r r r r p p p p p p p p 0 0 0 0 0 0 0 0 0 0 1 1 a a a a a a a a a ------e e e e e e e e r r r r r r r r r r r r M S M S M S M S M S M S M S M S M a a a a a a a a a a a a M M M M M M M M M M M M

Source: Bloomberg Source: Bloomberg

Figure 177: USA house price growth, % Figure 178: USA existing home sales (mm), and housing starts index (RHS), 000s

14% House price growth 8 Existing home sales New home sales (RHS) 1600 12% 7 1400 10% 8% 6 1200 6% 5 1000 4% 2% 4 800 0% 3 600 -2% 2 400 -4% -6% 1 200 -8% 0 0 1 2 3 4 5 6 7 8 9 0 1 0 1 2 3 4 5 6 7 8 9 0 1 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 1 1 ------r r r r r r r r r r r n n n n n n n n n n n n a a a a a a a a a a a a a a a a a a a a a a a M M M M M M M M M M M J J J J J J J J J J J J

Source: OECD Source: Bloomberg

297 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Bank of America Table 697: Key balance sheet figures, $mm (BBG: BAC) FY 2008 FY 2009 FY 2010 Real Estate Loans 485,228 475,556 458,455 Snapshot Commercial Loans 359,913 344,220 324,455 Bank of America is one of the leading global financial Consumer Loans 571,533 555,908 615,985 Loans 908,375 862,928 898,555 institutions and the largest American bank by assets, Total Assets 1,817,943 2,230,232 2,264,909 since its acquisition of both Countrywide Financial and Deposits 882,997 991,611 1,010,430 Merrill Lynch in 2008. Short-term borrowings 464,823 489,285 466,557 Other short-term borrowings 30,709 178,515 200,494 Through its banking and non-banking subsidiaries in Long-term borrowings 225,410 339,377 359,180 over 40 countries, BAC operates along six distinct Equity 177,052 231,444 228,248 business lines: Deposits, Global Card Services, through Source: Bloomberg which it offers traditional retail banking services to 57 million customers in the domestic US market. Home Table 698: Select financial metrics Loans & Insurance products are sold in the USA through FY 2008 FY 2009 FY 2010 a network of over 5,900 branches, independent mortgage NIM 3.2 3.1 3.1 ROA 0.1 -0.1 -0.2 loan officers and a sales force offering online and ROE 1.8 -1.3 -1.8 telephone access. Global Commercial Banking provides ROC 0.5 0.7 -0.2 a range of lending related products and services, C:I 54.9 49.7 61.3 integrated working capital management and treasury Core Capital 9.2 10.4 11.2 solutions to middle market companies, commercial real Source: Bloomberg estate firms and governments. Cover pool overview Global Banking & Markets offers financial products, We set out below some of the key cover pool advisory services, financing, securities clearing, characteristics: settlement and custody services globally to its institutional investor clients in support of their investing Table 699: Covered bond characteristics and trading activities. The bank also provides debt and As at March equity underwriting and distribution capabilities, merger- 2011 Ratings S/M/F related and other advisory services, and risk management Covered Bond rating AA/Aa2/AAA products. Global Wealth & Investment Management Issuer rating (Bank of America Corp) A/A2/A+ focuses on wealthy individuals and offers tailored Cover pool financial solutions. Cover pool size ($) 9,733,000,000 Outstanding liabilities (in $) 7,342,000,000 Financial performance Nominal asset percentage (in %) 75.4 Supporting asset percentage (in %) 78 We set out below some of the key financial performance metrics: Number of loans 14,130.0 Average loan balance ($) 688,836 Table 696: Key profit & loss figures, $mm WA seasoning (mths) 46.0 Highest geographic exposure (in %) California - 41.1 FY 2008 FY 2009 FY 2010 Source: Fitch Ratings Net interest income 45,360 47,109 51,523 Provisions for loan losses 26,825 48,570 28,435 NII less provisions 18,535 -1,461 23,088

Comm.& fee income 36,785 48,412 39440 Other operating income -5,115 -14 2,384 Non-interest expense 40,594 61,530 68,888 Operating profit 5,363 12,379 13,864

PBT 4,428 4,360 -1,323 Taxes 420 -1,916 915 Net profit (loss) 4,008 6,276 -2,238 Source: Bloomberg

298 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

J.P. Morgan Chase Financial performance (BBG: JPM) We set out below some of the key financial performance Snapshot metrics: J.P. Morgan Chase is a leading global financial services Table 700: Key profit & loss figures, $mm firm with over $2.1tr in assets and operating in over 60 countries. The bank is organised along six business units FY 2008 FY 2009 FY 2010 Net interest income 38,779 51,152 51,001 and two core brands: Chase, which offers consumer and Provisions for loan commercial banking in the US, and J.P. Morgan, which losses 20,979 32,015 16,639 offers investment banking, asset management, treasury NII less provisions 17,800 19,137 34,362 and private banking services globally. Comm.& fee income 35,443 37,460 35,790 Other operating The retail business offers traditional financial products to income 2,169 916 2,044 Non-interest expense 42,621 50,096 55,304 customers in 23 different US states through branches, Operating profit 3,652 18,323 30,751 auto dealerships and universities. Chase credit cards met $313bn of customers’ spending needs in 2010. PBT 2,773 16,067 24,859 Taxes -926 4,415 7,489 Net profit (loss) 5,605 11,728 17,370 Asset Management (AM) clients include institutions, Source: Bloomberg retail investors and high-net-worth individuals in markets throughout the world. AM also provides trust and estate, Table 701: Key balance sheet figures, $mm banking and brokerage services to high-net-worth clients, FY 2008 FY 2009 FY 2010 and retirement services for corporations and individuals. Real Estate Loans 275,163 244,347 298,862 The majority of AM’s client assets are in actively Commercial Loans 262,044 204,175 227,633 managed portfolios. Consumer Loans 482,854 429,283 465,294 Loans 721,734 601,856 660,661 Total Assets 2,175,052 2,031,989 2,117,605 The Investment Bank offers corporations, financial Deposits 1,009,277 938,367 930,369 institutions, governments and institutional investors a Short-term borrowings 444,091 460,968 492,141 range of investment banking products and services in all Other short-term borrowings 121,604 60,125 69,219 major capital markets, including advising on corporate Long-term borrowings 245,218 244,468 279,440 strategy and structure, capital-raising in equity and debt Equity 166,884 165,365 176,106 markets, sophisticated risk management, market-making Source: Bloomberg in cash securities and derivative instruments, prime brokerage, and research. Table 702: Select financial metrics FY 2008 FY 2009 FY 2010 J.P. Morgan Chase assumed stewardship of the WaMu NIM 2.4 2.8 2.8 covered bond programme after it took over the bank in ROA 0.3 0.4 0.8 ROE 3.8 6.4 10.3 2008. ROC 0.7 1.4 1.9 C:I 62.8 49.7 53.6 Core Capital 10.9 11.1 12.1 Source: Bloomberg

299 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

Cover pool overview We set out below some of the key cover pool characteristics:

Table 703: Covered bond characteristics As at Jul 2011 Ratings S/M/F Covered Bond rating AA/-/AA Issuer rating (J.P. Morgan Chase Bank NA) AA-/Aa1/AA-

Cover pool Cover pool size ($) 11,625,581,494 Outstanding liabilities (in $) 7,784,300,000 Excess credit support by asset coverage test (in %) 0.3 Excess credit support by total loan balance (in %) 49.4

WA seasoning (mths) 73 WA LTV (in %) 64.8 Highest geographic exposure (in %) California - 53.1 Interest only loans (in %) 60.2 Primary residence (in %) 80.3 Single family residential property (in %) 87.3 Full documentation (in %) 32.0 WA FICO score 734.0

Loan purpose distribution (in %) Purchase 32.8 Construction 2.7 Improvement 0.5 Cash out refi 36.8 Non-cash out refi 27.2

FICO Score breakdown (in %) <600 2.2 600-700 25.7 700-800 58.7 >=800 13.5

Current LTV breakdown (in %) <=50 17.4 50.01-60 17.0 60.01-65 11.3 65.01-70 12.6 70.01-75 13.8 75.01-80 16.6 >80 11.4 Source: Investor report

300 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

301 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

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Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

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303 Gareth Davies, CFA Europe Credit Research (44-20) 7325-7283 12 September 2011 [email protected]

Flavio Marco Rusconi (44-20) 7777-4461 [email protected]

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