Euroclear Bank S.A

Euroclear Bank S.A.

Primary Credit Analyst: Thierry Grunspan, Paris (33) 1-4420-6739; [email protected]

Secondary Contacts: Yulia Kozlova, CFA, London +44 207 176 3493; [email protected] Giles Edwards, London (44) 20-7176-7014; [email protected]

Table Of Contents

Major Rating Factors

Rationale

Outlook

Profile: Largest European Securities Settlement Franchise

Support And Ownership: Majority Owned By Users

Strategy: Deepen Relevance To Clients Through More Efficient And Expanded Post-Trade Services

Risk Management: A Vital Discipline And Key Strength

Accounting: Analysis Of Both Bank And Group

Profitability: Improved Efficiency

Capital: Sustained Strong Ratios Expected

Related Criteria And Research

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1354795 | 301084691 Euroclear Bank S.A.

Major Rating Factors

Strengths: Counterparty Credit Rating • Crucial role in supporting Euroclear's leading franchise in international AA/Stable/A-1+ securities markets. • Strong risk management and regulatory framework. • Very low risk profile. • Strong capitalization and limited leverage.

Weaknesses: • High operational risk inherent in settlement and custody activities. • Dynamic operating environment, requiring constant adaption to mitigate potential threats and leverage opportunities

Rationale

The ratings on Belgium-based Euroclear Bank S.A. reflect Standard & Poor's Ratings Services' view of its "core" status to ultimate parent Euroclear plc (Euroclear), and the crucial role that it maintains in the international securities markets. The ratings also reflect the strong and dynamic risk management framework, the Euroclear group's very low risk profile, and the strong regulatory framework under which it operates. While apparently well-managed, we consider high operational risk to be inherent in the settlement and custody business.

Euroclear Bank is one of the world's largest providers of cross-border settlement services, covering domestic and international bonds, equities, and investment funds. In addition to securities settlement, the bank continues to focus on related activities such as asset servicing, securities lending and borrowing, collateral management, money transfer, and ancillary banking services. In addition to the bank's role as one of the two leading international central securities depositaries (CSDs), the Euroclear group also operates the national CSDs for many countries in north-west Europe. Euroclear reports that it covers 57% (by value) of debt and equity securities issued by European Union issuers, and provides access to 90% of securities worldwide. It held €24.2 trillion in client assets at end-2013. Although Euroclear's client assets are about double those of Luxembourg-based competitor Clearstream group, we see the two as very close peers, given their hegemony as the leading international CSDs and broadly comparable financial strength.

Euroclear operates in a dynamic regulatory and competitive environment. We believe that it is protected to a large degree by its strong franchise, high barriers of entry, and we see no current initiatives that pose a conclusive threat to its leading position. However, to maintain this position Euroclear continues to innovate and adapt, for example in response to rising client demand for global collateral management services and, over the medium term, from the European Central Bank's planned Target2 Securities (T2S) initiative. While we see Euroclear as relatively well-positioned to deal with the prospective loss of some of its settlement revenues and the more competitive environment that T2S could well bring, we see currently it as an at-best neutral development for Euroclear. In our view, the EU CSD directive is unlikely to constitute a serious threat to Euroclear's current business model because we

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1354795 | 301084691 Euroclear Bank S.A. expect that it will continue to allow a CSD to undertake both depositary/settlement activities and related banking activities.

As a largely user-owned infrastructure provider, Euroclear is not a profit maximizer, but it does seek to generate a level of profitability that is satisfactory to its stakeholders. Euroclear's reported business metrics for 2013 showed growth in all areas, including a 5% year-on-year rise in client assets, a 6% rise in securities transaction settled, and a 12% rise in average daily collateral outstandings. Earnings followed the trends evident in the preceding year: that is, a slight rise in fee income, interest income continuing to be held back by super-low central bank interest rates, and solid cost management disciplines. Together, these combined to push reported operating profit to €353 million from €328 million the year before. We expect that Euroclear will see further traction in its major growth opportunities in the current and next financial years: notably from collateral management, expanding links into emerging markets, and growing funds-related activity. However, given our expectation of no strong and sustained rebound in market activity, a likely persistent very low interest rate environment, and now limited scope for further reductions in total operating expenses, we see only modest scope for profit growth in 2014 and 2015. But, equally we would expect any reduction in underlying profitability to be modest.

The operational risk inherent in the settlement and custody business is high, but we consider it well-managed by Euroclear. Euroclear Bank settles transactions in commercial bank money and faces sizable inherent intraday liquidity risk. However, we consider this risk to be substantially mitigated, aided by the delivery-versus-payment approach to settlement and associated processes, the bank's sizable liquidity resources, and its solid and stable customer franchise. While the bank cannot entirely avoid taking unsecured exposure to counterparts, we consider credit risk incurred in related banking services to be low, due in large part to the short duration of credit facilities granted, their generally highly secured nature, and the group's conservative investment policy.

The low risk profile of Euroclear Bank and the wider group contributes to both maintaining very strong regulatory capitalization. Euroclear reported a 48% Basel II Tier 1 ratio at end-2013 on a consolidated basis. While Euroclear maintained its dividend payout ratio at 40% in 2013 and undertook a share buyback in mid-year, there was no change in its capitalization from the year before. We consider that Standard & Poor's risk-adjusted capital (RAC) framework offers some insight into the capitalization of Euroclear, which is a regulated banking group. Based on this measure, we view the group's capitalization as a supportive factor, even at this high rating level. The RAC ratio at year-end 2013 was 17.3%, and we expect no significant change in future.

The group's only structural debt arises from the hybrid instrument issued by a subsidiary of Euroclear Bank and guaranteed by it. There is now just €98 million nominal remaining after the bank completed a tender offer for €196 million nominal in 2012. The instrument is not Basel III-compliant and has a 2015 call date.

Reflecting the vital role that it plays for the group, the material size of its capital base in a group context, and its continued strong contribution to group earnings, we consider Euroclear Bank to be "core" to Euroclear under our group ratings methodology. As a result, we equalize the ratings on Euroclear Bank with the "aa" group credit profile (GCP).

Until February 2014, we were applying our November 2013 criteria on rating companies above the sovereign as

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1354795 | 301084691 Euroclear Bank S.A.

Belgium was lower rated than Euroclear Bank. Our analysis suggested that Euroclear's business and financial drivers were relatively uncorrelated with the fortunes of the Belgium government and the domestic economy, and that a sovereign default was a relatively remote possibility. Belgium is now rated AA/Stable/A-1+, in line with the bank, so this criteria is no longer of immediate relevance to our rating on Euroclear Bank.

Outlook

The stable outlook reflects our view that Euroclear's creditworthiness is likely to remain resilient. We expect that it will maintain its low risk profile, satisfactory underlying profitability, strong capitalization, and a leading position in settlement and associated post-trade activities, despite a highly competitive environment and structural changes in the European securities industry.

We could lower the rating if Euroclear's business or financial profile was to deteriorate materially. This could result from a marked deterioration in the group's very strong market position or its profitability, an increase in its risk appetite, or from a material increase in financial leverage. While we consider this exceptionally unlikely, it could also result from a revision of Euroclear Bank's group status (from the current "core" status to Euroclear).

We consider an upgrade unlikely at this time, given the already high rating and the potential challenges to the group's business model and competitive position arising from initiatives such as T2S. Nevertheless, we could raise the rating if we expected that the group was able to materially strengthen its already very strong business profile, for example because earnings were rising as a result of it materially deepening its franchise among an ever-widening base of users.

Profile: Largest European Securities Settlement Franchise

Euroclear Bank is the most important subsidiary of Euroclear, whose other operating companies primarily comprise the national CSDs of France, Belgium, Netherlands, U.K. and Ireland, Sweden and Finland. The bank regularly contributes about two-thirds of group income, one-half of group pretax profits, and about 85% of the consolidated group balance sheet (see chart 1). One of the two leading global international CSDs (ICSDs), Euroclear Bank was originally established in 1968 to provide eurobond settlement services--a business that has been hugely successful. However, over time it has become increasingly active in asset servicing, and settling transactions in funds and equities. The bank has also developed ancillary services, including money transfer and custody, collateral management, and securities lending and borrowing. Euroclear Bank caters to a variety of financial institutions worldwide, including investment and universal banks, global custodians, central banks, and asset managers.

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1354795 | 301084691 Euroclear Bank S.A.

Chart 1

While legally a banking group, we rate Euroclear under our exchange and clearinghouse criteria since we consider that, as a piece of important financial market infrastructure (FMI), the creditworthiness of Euroclear Bank, and that of its group, is more closely linked to the risks and operating environment in the FMI sector than in the banking sector. In our view, Euroclear's business model is built around its crucial role in global capital markets, rather than as a Belgium-headquartered banking group, and its fee-based revenues are influenced by transaction volumes and values across the breadth of the international capital markets.

Unlike the Clearstream group, whose business is in part built on its position within the vertically integrated trading execution, clearing and settlement chain under Deutsche Boerse AG, Euroclear is a stand-alone provider of services within the securities settlement layer of the financial markets. Through 2000-2008, Euroclear's vision of horizontal integration in Europe led it to initiate mergers with national CSDs in France (2000), The Netherlands (2002), the U.K. and Ireland (2002), and Sweden and Finland (2008), and some bolt-on acquisitions. In our view, as a result of these consolidation efforts and the continued enhancement of its own infrastructure, services, and efficiency, Euroclear reinforced its position as Europe's leading securities settlement system for both equity and fixed-income transactions. The combined group now settles the equivalent of more than €570 trillion in securities transactions per year, representing 170 million domestic and cross-border transactions, and holds over €24 trillion of client assets (see chart

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1354795 | 301084691 Euroclear Bank S.A.

2).

Support And Ownership: Majority Owned By Users

Euroclear PLC, the U.K.-domiciled holding company of the group, is owned by a consortium of 167 user-shareholders, who have an 86% stake in the company (see chart 3). The remaining 14% is held by Sicovam Holding, the previous owners of the French CSD. Euroclear S.A./N.V., incorporated in Belgium, is the intermediate holding company for all the operating companies of the group, including Euroclear Bank. The ownership of Euroclear PLC has been remarkably stable for many years, notwithstanding the share buyback in 2013, and we expect that it will remain so.

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1354795 | 301084691 Euroclear Bank S.A.

As a licensed bank operating in Belgium, Euroclear Bank is subject to the prudential supervision and oversight of the Belgian National Bank (NBB), which exercises its supervision on a consolidated basis. Euroclear Bank and Euroclear Belgium are also subject to the supervision of the NBB in respect of their role as operators of the Euroclear system and the domestic securities settlement system, respectively. The securities settlement systems operated by the other Euroclear CSDs are overseen by their domestic regulators.

In our view, Euroclear Bank benefits from a sound regulatory framework specific to its role as operator of the Euroclear system. In particular, Article 31 of the Belgian Law of Aug. 2, 2002 provides a statutory lien in favor of Euroclear Bank, which gives it the right to liquidate assets to cover participants' debts, without the need for a collateral agreement (in cases of unsecured credit lines, for example). Belgian law also governs the contractual relationships between the system operator and participants. Euroclear Bank's holding of securities is governed by Belgian Royal Decree No. 62 of Nov. 10, 1967, which facilitates the circulation of securities on a fungible basis. Finally, under Euroclear's terms and conditions, contractual protection for Euroclear Bank includes the right of set-off and retention,

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1354795 | 301084691 Euroclear Bank S.A. and limitations on liability (negligence only, indirect damages only in case of gross negligence and wilful misconduct, and no liability for third parties, including sub-custodians).

Given the central role that Euroclear plays in the post-trade infrastructure in the European capital markets (and increasingly outside of Europe), we consider that there is a very strong incentive for, in particular, the user-owners of Euroclear Bank's ultimate parent, Euroclear PLC, to provide the bank with extraordinary support if needed. However, we do not notch up the ratings on Euroclear Bank beyond our view of the group's intrinsic creditworthiness.

Strategy: Deepen Relevance To Clients Through More Efficient And Expanded Post-Trade Services

Over the past four decades, the group's leading franchise and market position was built on its position as one of the two largest ICSD operators ]at the heart of the securities processing chain, and a reputation for strong risk control, facilitated by the relentless growth of the financial markets, principally in Europe. Since the 2008 onset of the global financial crisis, the market environment in Europe--that is, asset prices, transaction volumes, and interest rates--has been less supportive. However, while earnings are only now returning to pre-crisis levels, in our view the group has nevertheless prospered. It has consistently expanded its reach into geographies outside Europe, into newer and strongly growing asset classes such as funds, and ancillary services such as collateral management. In recent years, a strong focus on cost efficiency and service delivery has arguably improved the group's commercial position, without any apparent weakening in risk management.

Having focused heavily on cost control in the past few years, management has indicated that it is now moving the group to a growth-based strategy. In keeping with its focus on maintaining and, where possible, deepening its relevance to clients, we see Euroclear responding to four key factors:

• The needs of clients for effective collateral management services to improve the efficiency of their collateral pools and help them meet increasing demand for margin from clearinghouses and other counterparties; • The appetite of investors for reliable infrastructure to facilitate investment in growing markets outside of the most developed global economies; • The wish, and to some extent expectation, of investors that Euroclear can improve market efficiency in growing asset classes, such as mutual funds and ETFs; and • The focus of clients (notably the major banks) on cost efficiency at their service providers, at a time when they are themselves under pressure to improve returns in a low-growth market.

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1354795 | 301084691 Euroclear Bank S.A.

Within the above, we see collateral management as particularly important, and increasingly a differentiator for the largest CSDs and global custodians, who already sit on very large collateral pools and have the resources needed to fund the required sizeable investment in technology. While both have long been strong in triparty repo and securities lending, to a degree we see Euroclear as catching up Clearstream in this area. Clearstream developed its highly successful GC Repo product some years ago. Still, we see Euroclear as having developed a highly credible offering through its "Global Collateral Highway" service to compete with Clearstream's "Liquidity Hub", and the Euro GC product as a counterfoil to GC Repo. We also note Euroclear's plans to create a joint collateral processing service with Depository Trust Corp. (DTC) as potentially being a highly attractive proposition for clients.

While a threat and an opportunity, we consider that Euroclear appears relatively well positioned to respond to T2S, an ECB project that aims to provide an integrated settlement process for eurozone securities. Two drawbacks of T2S are the sizable upfront investment for Euroclear and other CSDs, of which relatively little may be recouped from clients, and the fact that settlement fees are likely to fall significantly once it is implemented, at least for Euroclear's national CSDs located in the eurozone. However, we believe that T2S will generally favor CSDs that are efficient and have strong service offerings in ancillary activities, such as asset servicing and collateral management. Overall, we see these factors as generally favoring Euroclear over some smaller competitors, but we currently view T2S as an at-best neutral development for the group.

Having addressed the trade layer through Markets in Financial Instruments Directive (MIFID II) and strengthened and expanded clearing through European Market Infrastructure Regulation (EMIR), the European lawmakers are now focused on enhancing minimum standards in the settlement layer of European post-trade. Overall, we see the CSD Regulation (CSD-R), which is due for implementation in 2015, as neutral for a conservatively-run and strongly capitalized group such as Euroclear. Importantly, in the one area that could have disrupted Euroclear's current business model, we expect that CSD-R will continue to allow Euroclear Bank to undertake both depositary/settlement activities and related banking activities.

Risk Management: A Vital Discipline And Key Strength

Euroclear Bank is fully integrated in the group's enterprise risk management (ERM) framework. We consider that framework to be strong, dynamic, and to have delivered a solid track record of operational effectiveness. We also consider that the bank's risk appetite appears cautious and conservative. Operational risk is, in our view, inherently high, but appears well managed. We also note that Euroclear suffered no material loss or disruption during the market crisis.

Credit risk: Highly collateralized short-term exposures We consider Euroclear Bank's asset quality to be strong, given both its delivery-versus-payment approach to settlement, and the highly secured, very short-term nature of its banking activities, and the group's conservative investment policy. In our view, these elements continue to support a very low risk profile that is also underpinned by the maintenance of apparently conservative risk policies and procedures and a supportive legal framework.

A key factor underpinning Euroclear Bank's strong credit risk profile is the legal framework from which it benefits. In this respect, Article 41 of the Belgian Law of 1995 provides for a statutory lien in favor of the Euroclear system

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1354795 | 301084691 Euroclear Bank S.A. operator. It is applicable to participants' assets (consisting of the balance of all securities in securities clearing accounts, and the balance of all cash in cash accounts). It permits the recovery of all debts to the operator related to securities clearance and settlement activity, and also provides for the immediate realization of securities and cash, as well as the recovery of loaned securities.

To ensure settlement efficiency, Euroclear Bank makes available credit facilities--mainly uncommitted and intraday (sometimes overnight) overdraft lines and securities lending--to clients that do not have sufficient funds on account with the bank. Unsecured intraday overdrafts have remained stable over the past several years at about €2 billion; more than 85% of which tends to be concentrated on high-investment-grade clients, mainly central banks who are unable to grant liens on their assets. We consider the credit risk incurred through these facilities to be very low given that 99% of the credit exposure is typically well-secured by collateral and the unsecured exposures are typically to highly rated clients. Euroclear Bank applies haircuts to the related pledged securities collateral, which vary according to the type of security, its liquidity, and the potential volatility in its value. The collateral, over which Euroclear Bank has retention rights in the event of client default, is marked-to-market on a daily basis and carefully monitored to avoid an undesirable build-up in concentrations. The haircuts are managed actively, aided by the back-testing and stress-testing of valuations.

Banking exposure also arises from the large deposit balances left by clients, which have more than doubled in recent years to in excess of €18 billion. Euroclear reinvests the cash with the dual objectives of limiting credit exposure and maintaining a very high degree of liquidity. The majority is invested in reverse repo, and placements with the Eurosystem via the NBB. The residual, typically around €2 billion, is placed on an unsecured basis or left with cash correspondents, with over 85% of balances typically with counterparts rated 'A-' or higher. Euroclear and Clearstream seek to avoid having unmitigated credit risk on each other through the careful management of settlement flow, use of letters of credit, and, as a backstop, the right of legal set-off.

We consider Euroclear's appetite for risk arising from the investment of its capital to be low: the main objectives being capital preservation and liquidity, with yield only a subsidiary consideration. These resources are invested in short-dated bonds issued by some of the strongest eurozone governments and agencies, with the remainder placed with the Eurosystem via the NBB.

Market risk: Minimized wherever possible Euroclear Bank faces market risk in four main ways: the effect of the absolute level of interest rates on income, the potentially uneven effect of currency movements on revenues and expenses, the potential for market movements to reduce the value of the investment portfolio, and the potential interest and currency risk on its treasury activities.

The first of these has, in our view, the greatest scope to influence reported profitability. This is because it is an inherent and largely unavoidable risk of the business, and because market risk is otherwise minimized. The bank routinely uses cashflow hedges to help to mitigate volatility in earnings. As noted above, Euroclear Bank manages its investment portfolio cautiously, in our view, seeking to eliminate the interest rate mismatch risk. Euroclear Bank does not keep open positions, and any foreign exchange transactions with clients are immediately unwound in the markets, thereby eliminating exchange risk.

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1354795 | 301084691 Euroclear Bank S.A.

Liquidity risk: Low risk appetite, conservatively managed We consider that at the parent company level, Euroclear faces minimal liquidity risk--the lack of debt leaving only dividends to pay. Similarly, liquidity risk for the domestic CSD subsidiaries is limited as they settle trades only on a delivery versus payment basis, typically in central bank money. The main source of potential liquidity risk to the group therefore comes from the bank, because of its nature as a deposit-funded institution and because, for reasons of settlement efficiency, it uses its resources intraday to bridge imbalances in client cashflows. In practice, however, we consider the bank's balance sheet liquidity risk to be modest, due to its liability-driven nature and aided by the high quality and short tenor of its financial assets, and its access to contingent sources of liquidity. We also note the bank's careful management of the intra-day credit provided to facilitate settlement.

The bank's balance sheet can be characterized as being split into an investment book and a treasury book. The treasury book comprises the substantial client funds left on deposit at the bank, mainly by clients wanting to facilitate the settlement of their transactions. Due to the relative stability of these balances and the bank's careful and short-term placement of them, we consider the treasury book as being a potential source of liquidity. The investment book, which relates the investment of the bank's capital, is structurally highly liquid and high quality and also available as a source of contingent liquidity.

In our view, the bank's main potential liquidity risk arises intraday; it needs sufficient liquidity to manage the billions of euros worth of transactions in the batch and real-time daily settlement routines. Across the day, inflows and outflows match very closely, but the bank allows sizable mismatches to occur during the day, bridging the gap with its discretionary extension of intra-day overdrafts. The largest scope for problems is early in the day. At the opening of the business day (after the night-time settlement process), the bank extends around €80 billion of intra-day credit to its clients--a figure that is not a cash amount. During the day, clients fund their accounts to pay down the overdrafts; others that open the day with the opposite long cash position will wire some of their proceeds out of the system. As a result, the bank only needs to find intraday liquidity sources during the day for four reasons:

• To the extent that those clients with accounts in credit (arising from settlement completion) withdraw cash faster than those with overdrawn accounts pay in cash to remediate this possible shortfall; (ii) To meet any rise in end-of-day client overdrafts; • To cover any unequal cashflows with Clearstream, where Euroclear pays out more cash more than it receives; and • To cover any difference between inflows and outflows in deposits generally.

To cover these potential gaps, sources of cash include Euroclear Bank's own on-balance-sheet resources noted above, sizable intraday multi-currency credit lines with cash correspondent banks, committed and backstop facilities, and the ability to monetize client securities at the discount window. We understand that in practice there is a relatively good matching of daily in-/out-cashflows in normal circumstances, meaning that the bank rarely moves beyond using on-balance-sheet sources of cash and some operational intra-day facilities. However, it runs liquidity stress scenarios to examine more extreme circumstances, which include simulating the effects of the largest intraday borrower, a settlement bank, or a major cash counterpart. This is in line with the Committee on Payment and Settlement Systems (CPSS) and International Organization of Securities Commissions (IOSCO) Principles for Financial Market Infrastructures (FMIs) that requires that a settlement system is, at the minimum, able to withstand the liquidity need arising from the default of the participant and its affiliates that would generate the largest aggregate payment

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1354795 | 301084691 Euroclear Bank S.A. obligation amid extreme but plausible market conditions. In extremis, and while Euroclear's liquidity risk modelling does not rely on this, the bank retains the rulebook power to delay trade settlement if the client's cash account has insufficient funds.

Operational risk: Well managed, but major inherent risk given huge volumes Given the enormous value of the transactions settled, and the number of transactions and counterparties involved, we consider operational risk as the main potential source of risk for Euroclear. However, in our opinion, the risk is well managed and controlled, and the level of operational risk losses--typically in the low single digit millions annually--is modest. Litigation expenses remain modest, with only one settlement--for a few million euros--of any note in recent years.

Operational risk management is enhanced by the highly integrated nature of the group's operations, the highly automated nature of the transaction processing, Euroclear's continuous investment in its systems, and the wealth of corporate memory derived from its stable workforce. Euroclear's business continuity plan is based on the use of two data centers with a monthly switch, complemented by a third data center, ensuring a short recovery time for the resumption of business should the need arise. In addition, Euroclear covers its global operational risk through a general blanket insurance policy that includes coverage for loss of securities in transit, professional liability, and third-party fraud and computer crime. Euroclear uses the Advanced Measurement Approach to calculate its Basel II operational risk charge.

Accounting: Analysis Of Both Bank And Group

In view of the importance of group financial strength to Euroclear Bank's creditworthiness and franchise, we analyze financial data for the consolidated group as well as the bank (solo) level. The tables at the end of this report reflect the consolidated group data that are an important determinant of our view of the GCP, and are presented in bank format--consistent with Euroclear's disclosure as a banking group. In addition, we calculate the key corporate-like measures for Euroclear, such EBITDA, as we do for other FMIs.

Euroclear issued €300 million in perpetual securities in 2005, of which €98 million nominal remain in issue. With the advent of Basel III from Jan. 1, 2013, the securities are being phased out of regulatory capital on an amortizing basis until their first call date in 2015. When calculating group-level leverage and debt servicing metrics, we classify the securities as being of "intermediate" equity content, and include 50% in total tangible equity (TTE), our measure of group-level capitalization for FMIs. In addition, when assessing group-level debt servicing capacity, we treat half the associated coupon as an equity dividend.

Profitability: Improved Efficiency

As a largely user-owned infrastructure provider, Euroclear is not a profit maximizer, but it does seek to generate a level of profitability that is satisfactory to its stakeholders; a stance that management describes as "profit-moderated". Broadly, management targets an 8%-10% return on equity, in keeping with the utility-like service that the group provides. Euroclear's reported business metrics for 2013 showed growth in all areas, including a 5% year-on-year rise

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1354795 | 301084691 Euroclear Bank S.A. in client assets, a 6% rise in securities transactions settled, and a 12% rise in average daily collateral outstandings. Earnings followed the trends evident in 2012: that is, a slight rise in fee income, interest income continuing to be held back by super-low central bank interest rates, and solid cost management disciplines. Together, these combined to push reported operating profit to €353 million from €328 million the year before.

Euroclear currently draws about 90% of its total income from fees and commissions, the remainder coming from net interest income. The majority of this fee income continues to stem from safekeeping, followed by fees arising from settlement. It is therefore influenced by transaction volumes, and securities prices--the basis on which safekeeping fees are charged. That said, debt securities are based on nominal values, making associated revenues less vulnerable to market sentiment. Net interest income fluctuates with the level of cash balances and the absolute level of interest rates--in recent years, super-low central bank rates have compressed the interest margin, leading to a sharp decline in net interest income (NII) despite inflows of extraordinarily high deposit balances. By contrast, however, a future normalization of interest rates would likely lead to a significant uplift to earnings; management indicates a 50bps rise in rates could translate to a €50 million rise in NII (assuming no change in deposit balances).

In our view, and in contrast to some key peers, Euroclear does not face such strong commercial pressures of highly return-focused shareholders, and historically was less focused on cost efficiency. However, we observe substantial progress in recent years, with reported operating expenses falling 17% between end-2008 and end-2013. We consider this to be an achievement given the high proportion of fixed costs inherent in this line of business and Euroclear's continued substantial investment spend through this period. As a result of this--and broadened service provision that has lifted non-interest income--efficiency improved in the four years to end-2013, despite the super-low interest rate environment and less-than-buoyant level of market activity (see chart 4).

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1354795 | 301084691 Euroclear Bank S.A.

Chart 4

We expect that Euroclear will see further traction in its principal growth opportunities: notably collateral management, expanding links into emerging markets, and growing funds-related activity. However, given our expectation of no strong and sustained rebound in market activity, a likely persistent low interest environment, and potentially limited scope for further reductions in total operating expenses, we see limited scope for material profit growth in the current and next financial years. But, we would equally expect any reduction in underlying profitability to be modest.

Although less relevant in a highly-liquid group such as Euroclear, Standard & Poor's monitors debt-servicing capacity and leverage in relation to the outstanding hybrid securities. For 2013, we calculated EBITDA coverage of interest expense as166x and gross debt/EBITDA as 0.1x: ratios that we see as indicative of a de minimis level of leverage.

Capital: Sustained Strong Ratios Expected

Euroclear Bank's low risk profile and solid base of tangible equity contribute to it maintaining very strong regulatory capitalization. While distributions to shareholders have increased in the past year, we expect that capitalization at bank and group level is likely to remain supportive at this rating level.

Euroclear measures its regulatory capital at both the bank and consolidated group level. Since 2007, these calculations

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1354795 | 301084691 Euroclear Bank S.A. have been in accordance with the Basel II framework. Euroclear reported a 48% Tier 1 ratio at end-2013 on a consolidated basis and 42% at Euroclear Bank level on a stand-alone basis. Euroclear has indicated an unchanged 40% dividend payout ratio in 2013, and it undertook a share buyback in mid-2013. In aggregate, the total distribution was in line with the group's post tax earnings for 2013.

Looking forward, Euroclear is now subject to the toughened requirements of Basel III, but aside from the reducing value ascribed to the hybrid instrument, we expect the transition to Basel III to have had no significant effect in the group's regulatory Tier 1 ratio. We anticipate no problem with the group meeting the minimum leverage ratio. Similarly, Euroclear reported a liquidity coverage ratio of 117% and a net stable funding ratio of 248% at end-2013, both comfortably above regulatory requirements.

Management has indicated that while the dividend payout ratio may not change significantly from 40%, Euroclear has an only modest requirement for exposure (and so risk-weighted asset) growth in the coming two years. Therefore, while we see no appetite from management to allow the group's capital ratios to weaken materially, we consider further share buybacks to be highly likely.

Although Euroclear's capital ratios remain far in excess of regulatory requirements, we believe that Basel ratios do not fully capture the inherent risk, especially the legal and operational risks, arising from the group's substantial settlement and custody volumes. We consider that our risk-adjusted capital (RAC) framework offers some insight into the capitalization of Euroclear, which is a regulated banking group. Based on this measure, we view the group's capitalization as a supportive factor, even at this high rating level. The RAC ratio at year-end 2013 was 17.3%, and we expect there to be no significant change in future.

Using our metric for FMIs, for end-2013, we calculate the group's TTE to be €2.2 billion, unchanged on end-2012. Again, we expect no meaningful future change to this figure.

Related Criteria And Research

Related Criteria • Ratings Above The Sovereign--Corporate And Government Ratings: Methodology And Assumptions, Nov. 19, 2013 • Group Rating Methodology And Assumptions, Nov. 19, 2013 • Bank Capital Methodology And Assumptions, Dec. 16, 2010 • Standard & Poor's Updated Methodology For Rating Exchanges And Clearinghouses, July 10, 2006 • Hybrid Capital Handbook: September 2008 Edition, Sept. 15, 2008

Related Research • Bulletin: Euroclear Bank Ratings Not Affected By Parent's Intended Acquisition Of Euronext Stock, May 28, 2014 • 2014 Global Exchange And Clearinghouse Outlook: Taking Care Of Unfinished Business, Dec. 9, 2014 • Rating Actions On Five Financial Market Infrastructure Companies Following Revised Ratings Above The Sovereign Criteria, Nov. 25, 2013 • Collateral Optimization Is Playing A Transformative Role For Depositories, Custodians, And Clearinghouses, Dec. 18, 2012

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1354795 | 301084691 Euroclear Bank S.A.

Table 1 Funding, And Liquidity Ratios -- Year ended Dec. 31--

(Mil. €) 2013 2012 2011 2010 2009 Customer deposits/funding base 0.0 0.0 3.8 2.0 2.8 Total loans/customer deposits N.M. N.M. 0.5 5.6 6.3 Customer loans (net)/assets (adjusted) 0.0 0.0 0.0 0.1 0.1

The following tables reflect financial data for Euroclear plc on a consolidated basis, rather than bank-level figures. N.M.--Not meaningful.

Table 2 Profitability Ratios -- Year ended Dec. 31--

(Mil. €) 2013 2012 2011 2010 2009 Net interest income/average earning assets 0.56 0.67 1.12 1.00 1.09 Net interest income/revenues 8.60 8.87 11.20 9.40 11.16 Fee income/revenues 88.91 89.76 87.17 89.52 86.21 Market-sensitive income/revenues 1.35 0.21 0.22 (0.38) 0.94 Personnel expense/revenues 38.42 38.55 38.40 43.18 44.39 Noninterest expenses/revenues 66.99 70.40 71.73 77.38 85.14 New loan loss provisions/revenues 0.15 0.08 0.04 0.03 0.00 Pretax profit/revenues 35.48 27.51 28.64 (25.25) (0.06) Tax/pretax profit 24.60 14.34 23.60 (19.15) N.M. Core earnings/revenues 24.13 25.28 21.57 17.79 10.56 Core earnings/average adjusted assets 1.23 1.43 1.68 1.64 0.86 Noninterest expenses/average adjusted assets 3.40 3.99 5.58 7.15 6.91 Core earnings/average adjusted common equity 11.39 12.44 11.66 9.42 5.48 Pretax profit/average common equity (%) 10.98 8.83 9.92 (7.89) (0.02)

N.M.--Not meaningful.

Table 3 Capital Ratios -- Year ended Dec. 31--

(Mil. €) 2013 2012 2011 2010 2009 Tier 1 capital ratio 47.60 47.70 50.00 42.70 34.10 Adjusted total equity/adjusted assets 10.76 10.64 12.44 19.87 20.75 Adjusted total equity/managed assets 10.27 10.16 11.70 18.15 18.32 Common dividend payout ratio 40.00 41.44 30.03 (15.03) (114.35)

Table 4 Summary Balance Sheet -- Year ended Dec. 31--

(Mil. €) 2013 2012 2011 2010 2009

Assets Cash and money market instruments 17,436 18,051 13,846 8,237 7,478

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1354795 | 301084691 Euroclear Bank S.A.

Table 4 Summary Balance Sheet (cont.) Securities 1,498 987 1,254 1,600 1,567 Trading securities (marked to market) 14 1 5 6 6 Nontrading securities 1,484 986 1,249 1,595 1,561 Customer loans (gross) 0 0 2 9 12 Loan loss reserves 0 0 0 0 0 Customer loans (net) 0 0 2 9 12 Earning assets 15,065 15,271 10,901 9,402 8,111 Investments in unconsolidated subsidiaries (financial companies) 12 11 14 12 12 Intangibles (nonservicing) 926 924 979 994 1,293 Fixed assets 116 104 97 110 127 Derivatives credit amount 1 3 0 2 0 Accrued receivables 113 94 103 116 89 All other assets 248 326 240 382 425 Total assets 20,350 20,502 16,535 11,462 11,003 Intangibles (nonservicing) -926 -924 -979 -994 -1,293 Adjusted assets 19,424 19,578 15,556 10,468 9,710 Liabilities Total deposits 16,164 16,568 12,673 7,750 7,036 Noncore deposits 16,164 16,568 12,182 7,594 6,842 Core/customer deposits 0 0 491 156 194 Other liabilities 973 749 851 583 534 Total liabilities 17,137 17,318 13,524 8,333 7,570 Total equity 3,212 3,185 3,011 3,129 3,433 Limited life preferred and quasi equity 0 0 0 0 0 Preferred stock and other capital 0 0 0 300 299 Common shareholders' equity 3,212 3,185 3,011 2,830 3,133 Share capital and surplus 147 147 147 147 147 Revaluation reserve 4 5 6 -3 7 Retained profits 2,166 2,128 1,969 1,751 1,822 Other equity 896 904 888 935 1,158 Total liabilities and equity 20,350 20,502 16,535 11,462 11,003

Table 5 Equity Reconciliation Table -- Year ended Dec. 31--

(Mil. €) 2013 2012 2011 2010 2009 Common shareholders' equity 3,212 3,185 3,011 2,830 3,133 Minus dividends (not yet distributed) -106 -97 -66 -42 -44 Minus revaluation reserves -4 -5 -6 3 -7 Minus nonservicing intangibles -926 -924 -979 -994 -1,293 Minus tax loss carryforwards -76 -63 -10 -3 -62 Adjusted common equity 2,101 2,095 1,949 1,793 1,728

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1354795 | 301084691 Euroclear Bank S.A.

Table 5 Equity Reconciliation Table (cont.) Plus admissible preferred and hybrids 0 0 0 300 299 Total Adjusted Capital 2,101 2,095 1,949 2,092 2,027 Minus equity in unconsolidated subsidiaries -12 -11 -14 -12 -12 Adjusted total equity 2,089 2,084 1,935 2,080 2,015

Table 6 Profit And Loss -- Year ended Dec. 31--

(Mil. €) 2013 2012 2011 2010 2009 Net interest income 85 88 113 88 98 Interest income 108 116 152 121 138 Interest expense 23 28 39 33 40 Operating noninterest income 905 907 898 844 782 Fees and commissions 880 893 882 834 759 Trading gains 13 2 2 -4 8 Equity in earnings of unconsolidated subsidiaries 0 0 0 0 0 Other noninterest income 11 12 14 14 15 Operating revenues 990 995 1,011 932 880 Noninterest expenses 663 700 725 721 749 Personnel expenses 380 383 388 402 391 Other general and administrative expense 258 281 287 264 304 Preprovision operating income 327 294 286 211 131 Credit loss provisions (net new) 1 1 0 0 0 Operating income after loss provisions 325 294 286 210 131 Nonrecurring/special income 26 33 10 21 54 Nonrecurring/special expense 0 53 6 45 0 Impairment of intangibles 0 0 0 421 185 Pretax profit 351 274 290 -235 -0 Tax expense/credit 86 39 68 45 38 Net income (before minority interest) 265 234 221 -280 -38 Net income before extraordinaries 265 234 221 -280 -38 Net income after extraordinaries 265 234 221 -280 -38

Table 7 Core Earnings Reconciliation Table -- Year ended Dec. 31--

(Mil. €) 2013 2012 2011 2010 2009 Net income (before minority interest) 265 234 221 -280 -38 Minus nonrecurring/special income -26 -33 -10 -21 -54 Plus nonrecurring/special expense 0 53 6 45 Plus or minus tax impact of adjustments 0 -3 1 0 0 Plus amortization/impairment of goodwill/intangibles 0 0 0 421 185

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1354795 | 301084691 Euroclear Bank S.A.

Table 7 Core Earnings Reconciliation Table (cont.) Minus preferred dividends 0 0 0 0 0 Core earnings 239 252 218 165 93

Ratings Detail (As Of August 22, 2014) Euroclear Bank S.A. Counterparty Credit Rating AA/Stable/A-1+ Junior Subordinated A+ Senior Unsecured A-1+ Senior Unsecured AA Counterparty Credit Ratings History 24-Feb-2012 AA/Stable/A-1+ 07-Dec-2011 AA+/Watch Neg/A-1+ 01-Aug-2000 AA+/Stable/A-1+ Sovereign Rating Belgium (Kingdom of) (Unsolicited Ratings) AA/Stable/A-1+ *Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country.

Additional Contact: Financial Institutions Ratings Europe; [email protected]

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1354795 | 301084691