Scorecard Ratios of Muenchener Hypothekenbank … INSTITUTIONS CREDIT OPINION 23 December 2016...

FINANCIAL INSTITUTIONS

CREDIT OPINION23 December 2016

Update

RATINGS

Muenchener Hypothekenbank eGDomicile Germany

Long Term Debt A1

Type Senior Unsecured -Dom Curr

Outlook Stable

Long Term Deposit Aa3

Type LT Bank Deposits - FgnCurr

Outlook Stable

Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.

Contacts

Bernhard Held, CFA 49-69-70730-973VP - Senior [email protected]

Alexander Hendricks,CFA

49-69-70730-779

Associate ManagingDirector - [email protected]

Carola Schuler 49-69-70730-766Managing Director [email protected]

Muenchener Hypothekenbank eGUpdate Following Assignment of Aa3 Senior-Senior Rating

Summary Rating RationaleWe assign Aa3/P-1 deposit ratings and A1/P-1 senior unsecured debt ratings to MuenchenerHypothekenbank eG's (Muenchener Hyp). We further assign a ba2 baseline credit assessment(BCA), a baa1 Adjusted BCA, and an Aa3(cr)/P-1(cr) Counterparty Risk (CR) Assessment.On 21 November, we changed for certain debt instruments issued by Muenchener Hyp theseniority level to senior-senior unsecured debt from senior unsecured debt and upgradedtheir rating to Aa3 from A1. This change and rating upgrade reflects Germany's revisedinsolvency framework in conjunction with a clarifying implementation guidance provided bythe German regulator; the common characteristic of the upgraded instruments is that certainstructural features make these harder to value, resulting in additional complexity in case ofbail-in.

Muenchener Hyp's ratings incorporate (1) the bank's ba2 BCA; (2) our expectation of a veryhigh probability of Muenchener Hyp receiving affiliate support from Bundesverband derDeutschen Volksbanken und Raiffeisenbanken (BVR, unrated), which results in four notchesof rating uplift; (3) the results of our Advanced Loss Given Failure (LGF) analysis, whichcurrently result in two notches of rating uplift for the bank's debt ratings and three notchesof uplift for its deposit and senior-senior debt ratings; and (4) our "moderate" governmentsupport assumption, resulting in one notch of rating uplift for Muenchener Hyp's debt anddeposits.

Exhibit 1

Scorecard Ratios of Muenchener Hypothekenbank eG

Note: TCE = Tangible Common Equity, TBA = Tangible Banking AssetsSource: Moody's Investors Service

http://www.surveygizmo.com/s3/1133212/Rate-this-research?pubid=PBC_1046971

MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Muenchener Hyp's ba2 BCA reflects (1) its moderate asset risk, as captured through its low 1.2% non-performing loan ratio and highcollateralisation ratio; (2) its satisfactory funding profile, which benefits from Muenchener Hyp's embeddedness within the Germanco-operative banking sector, despite its high market funding reliance. However, the group's dual-line business model and the resultingsector concentration as well as considerable balance-sheet leverage constrain the bank's BCA.

Credit Strengths

» Asset quality is dependent on the development of international commercial real estate (CRE) markets, but the bank's asset baseremains supported by the high granularity of the residential mortgage portfolio in Germany

» Strong regulatory capital metrics

» Senior creditors benefit from the large volume of outstanding debt as well as subordinated instruments in the unlikely event ofresolution

Credit Challenges

» High leverage levels constrain the impact of capitalisation improvements

» Weak risk-adjusted profitability and thus very limited ability to generate capital internally

» Very high degree of liquid asset encumbrance, despite some improvement in 2015

Rating Outlook

» Muenchener Hyp's Aa3 long-term deposit and senior-senior unsecured debt ratings and its A1 long-term senior unsecured debtratings carry a stable outlook.

» The stable outlook reflects our expectation that (1) the risk of bank failure after considering standalone credit profile and sectorsupport will not materially change; and (2) Muenchener Hyp will maintain its current funding structure.

Factors that Could Lead to an Upgrade

» An upgrade of Muenchener Hyp's BCA may translate into an upgrade of the bank's long-term debt and deposit ratings, if weconclude the "very high" likelihood of cooperative sector support warrants an unchanged four notches of support despite theimprovement in the bank's standalone credit profile.

» Upward pressure on Muenchener Hyp's BCA could result from a combination of (1) a medium-term upward trend of recentlyimproved quality and quantity of capital, in particular from a significant and sustainable increase in the bank's Tangible CommonEquity (TCE) leverage ratio; (2) rising and sustained profitability, without compromising underwriting standards or risk appetite; and(3) a greater diversification of funding tools beyond the current market funding focus.

» Material additions to its volume of subordinated instruments would imply higher protection for senior creditors and a lower loss-given-failure in resolution, which could lead to additional uplift for the senior unsecured debt ratings. The same does not apply toMuenchener Hyp's deposit and senior-senior unsecured debt ratings because, with three notches of rating uplift from the adjustedBCA, these already benefit from the highest possible LGF result.

Factors that Could Lead to a Downgrade

» Muenchener Hyp's long-term debt and deposit ratings may be downgraded if the bank's BCA comes under pressure.

» Downward pressure could develop on the bank's BCA if (1) the bank's cushion of liquid resources declines significantly belowthe currently reported level - unless offset by an improvement in encumbrance levels; (2) the bank over time returns to its

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 23 December 2016 Muenchener Hypothekenbank eG: Update Following Assignment of Aa3 Senior-Senior Rating


historically weaker capital cushions to regulatory minimum levels; or (3) Muenchener Hyp's asset quality deteriorates, leading torisk provisioning in excess of pre-provision income; or (4) the bank's weighted Macro Profile of Very Strong- were to deteriorate.

» We could downgrade Muenchener Hyp's A1 long-term debt ratings if the size of Muenchener Hyp's volume of unsecured debtinstruments materially decreases relative to its total banking assets.

Key Indicators

Exhibit 2

Muenchener Hypothekenbank eG (Consolidated Financials) [1]6-162 12-152 12-142 12-133 12-123 Avg.

Total Assets (EUR billion) 38.1 37.5 36.3 34.7 36.6 1.04

Total Assets (USD billion) 42.3 40.7 44.0 47.8 48.3 -3.24

Tangible Common Equity (EUR billion) 1.0 1.0 1.0 0.5 0.4 23.24

Tangible Common Equity (USD billion) 1.1 1.1 1.2 0.7 0.6 18.14

Problem Loans / Gross Loans (%) - 1.0 1.1 1.4 1.4 1.25

Tangible Common Equity / Risk Weighted Assets (%) 18.0 18.1 12.9 7.3 5.2 16.36

Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) - 27.6 29.4 63.6 73.0 48.45

Net Interest Margin (%) 0.6 0.6 0.5 0.4 0.3 0.55

PPI / Average RWA (%) 0.9 0.8 0.3 0.2 0.1 0.76

Net Income / Tangible Assets (%) 0.1 0.1 0.0 0.0 0.0 0.05

Cost / Income Ratio (%) 66.9 62.2 77.5 84.8 88.4 75.95

Market Funds / Tangible Banking Assets (%) 62.8 39.6 42.7 43.0 48.4 47.35

Liquid Banking Assets / Tangible Banking Assets (%) 18.8 19.6 20.4 22.1 26.2 21.45

Gross loans / Due to customers (%) - 206.6 215.2 210.7 241.2 218.45

[1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel III - fully-loaded or transitional phase-in; LOCAL GAAP [3] Basel II; LOCAL GAAP [4] Compound AnnualGrowth Rate based on LOCAL GAAP reporting periods [5] LOCAL GAAP reporting periods have been used for average calculation [6] Basel III - fully-loaded or transitional phase-in &LOCAL GAAP reporting periods have been used for average calculationSource: Moody's Financial Metrics

Detailed Rating ConsiderationsThird quarter growth has improved the bank's moderate absolute core capital basisThe €90 million growth of Muenchener Hyp's capital basis in the third quarter of 2016 followed the confirmation of Europeanauthorities that a 3% leverage ratio will also apply to mortgage lenders. In our view, Muenchener Hyp's increase in subscribed membercapital in the third quarter indicates the bank's willingness to sustainably raise its leverage ratio above the 3% threshold, which affordsstronger structural protection for the bank's creditors. While the bank grows its balance sheet, we will monitor the extent to whichthe bank continues committed to staying comfortably above the 3% regulatory minimum ratio that is expected to become binding inJanuary 2018.

The additional member capital has provided a further boost to Muenchener Hyp's risk-weighted capital ratios, as evidenced by a 19.0%Common Equity Tier 1 (CET1) ratio as of 30 September 2016, up from 17.6% as of 30 June 2016 and 12.5% as of year-end 2014. Themarked growth in risk-weighted capital ratios since 2014 is (in addition to the sourcing of member capital) foremost attributable to theextended use of internal models to determine the risk weights of the bank's mortgage portfolio.

The intense use of the internal-ratings-based approach (IRBA) which the bank applies for determining credit-risk-related risk-weightassets for more than 80% of its total exposure, may result in a significant decline of the bank's risk-weighted capital ratios if currentreform proposals to Basel III calculation approaches were introduced. An increase in risk-weighted assets would be driven in particularby minimum risk floors for the bank's conservatively underwritten residential mortgages. We believe, however, that under the currentproposals the bank would remain well above minimum regulatory requirements, including the European Central Bank-mandatedminimum Pillar 2 supervisory review and evaluation process ratio of 9.25% the bank disclosed for 2016.

In the case of need, we believe Muenchener Hyp to have good and repeatedly demonstrated access to additional member capital fromentities affiliated with the German cooperative sector.



The bank's asset base remains supported by high portfolio granularity, despite some risk concentrations in internationalcommercial real estate lendingWe believe that asset quality pressures on Muenchener Hyp's international CRE portfolio and its selected financial institution andsovereign exposures have diminished following pro-active portfolio management and improving market conditions. Nevertheless,the size of these exposures relative to the bank's loss-absorbing capital and the limited earnings generation power in comparisonto potential CRE loan loss provision requirements in an economic downturn continue to constitute a challenge for the bank. SinceMuenchener Hyp exhibits low revenue and income diversity outside of the residential and commercial mortgage-lending businesses,we deduct one notch from the bank's Financial Profile.

The bank's conservative underwriting has translated into a continued improvement in problem loans to €306.8 million as of 31December 2015 (down from €684 million in 2010), also benefitting from positive work-out results in the bank's US CRE portfolio. Thebank has successfully reduced exposures related to international CRE, as well as to financial institutions and sovereigns in the euro areaperiphery. Muenchener Hyp reduced its US CRE exposures to approximately €0.3 billion as of year-end 2015, down from €1.6 billion atyear-end 2012. Overall, non-domestic loans represented 22% of Muenchener Hyp's mortgage loan book as of 31 December 2015. Evenso, Muenchener Hyp's exposures to international CRE as well as countries and financial institutions in the euro-area periphery, whichtotal almost three times the bank's Tangible Common Equity, could exert undue pressure on the bank's capital ratios in an adversescenario.

Since 2008, Muenchener Hyp refocused its lending operations towards residential mortgages in Germany and Switzerland throughits partnership with PostFinance, unrated. The significance of commercial mortgage lending has been reduced over the past yearsby Muenchener Hyp and new business underwriting concentrates foremost on domestic activities. However for 2016, the bank hasannounced its intention to increase the CRE loan portfolio again, whilst maintaining its conservative underwriting standards. Thebank's domestic residential real-estate portfolio is very granular and the loan portfolio has strong characteristics, comprising more than177,000 single loans, with overall loan-to-value (LTV) levels across the portfolio reflecting management's conservative underwritingstandards.

The vast majority of MueHyp's assets are in Germany (Aaa stable)1 and Switzerland (Aaa stable), resulting in a 'Very Strong-' MacroProfile, in line with Germany's and Switzerland's Macro Profiles. The strength of the bank's Macro Profile is supportive not only of itscredit portfolio quality, but more broadly helps to keep solvency and liquidity risks at adequate levels for Muenchener Hyp.

Weak risk-adjusted profitability leads to limited ability to generate capital internallyThe bank's very low profitability and resulting limited internal capital generation capacity - coupled with its limited loss-absorptioncapacity - remain key constraining factors for its credit profile. The Profitability score of b2 reflects moderately positive profitability,characterized by currently very low risk costs and by the bank's limited ability to generate pre-provision income and achieve earningsretention.

For the first nine months of 2016, Muenchener Hyp reported a net income of €27.1 million (local GAAP), up from €21.8 million inJanuary-September 2015, benefitting from higher net interest income and from a windfall recovery under its now disposed of €50million exposure to Heta Asset Resolution AG (Heta, Ca stable)2. The improved net interest income reflects the bank's strong newbusiness volumes in previous quarters combined with lower interest expenses. During 2015, the cost-to-income ratio improved to62.2% from 77.5% previously, and the bank has been able to maintain the ratio below 70% during the first six months of 2016. Forthe full year 2016, Muenchener Hyp expects to moderately improve its net income to a level slightly above that of 2015, driven by theincrease in mortgage lending volumes.

The bank's profitability has historically been low, principally reflecting its focus on low-yielding residential mortgage and public-sectorlending activities. In addition, the lack of an own distribution franchise forces the bank to pay upfront fees and commissions in order tocompensate third parties for their distribution capabilities. We do not expect that this situation will change.



Very high degree of liquid asset encumbrance, despite some improvement in 2015The majority of Muenchener Hyp's funding is raised through covered bonds (more than €25 billion as of September 2016) resulting inhigh cover pool requirements. As of year-end 2015, the level of encumbered liquid assets remained high at around 74%. However, thisrepresents a significant improvement from 83% in 2014.

Our Liquid Resources score of ba2 recognises this development as well as Muenchener Hyp's ability to maintain a Net Stable FundingRatio of 103% and a Liquidity Coverage Ratio of 255% as of year-end 2015.

Notching ConsiderationsAffiliate SupportBased on Muenchener Hyp's key service function for the sector and its majority ownership by the sector's member banks, the bank ishighly likely to receive support in case of need. This support materially reduces the probability of default as the co-operative group'scross-sector support mechanism aims to stabilise its members by avoiding any form of loss-participation by creditors, or bail-in. Cross-sector support currently provides four notches of rating uplift to Muenchener Hyp's debt and deposit ratings.

Loss Given Failure AnalysisMuenchener Hyp is subject to the EU Bank Recovery and Resolution Directive, which we consider an Operational Resolution Regime.We therefore apply our advanced LGF analysis, considering the risks faced by the different debt and deposit classes across the liabilitystructure should the bank enter resolution. With one exception, we apply our standard assumptions for the LGF analysis of losses post-failure of 8% of tangible banking assets, a 25% run-off in "junior" wholesale deposits, a 5% run-off in preferred deposits, and assign a25% probability to deposits being preferred to senior unsecured debt. In light of Muenchener Hyp's December 2015 TCE leverage ratioof 2.7%, we deviate from our standard assumption of 3.0% residual TCE at failure and apply 2.7% instead. In line with the new Germaninsolvency legislation that will effectively subordinate senior bonds and notes to deposits in resolution from January 2017, we base ourcalculation on the assumption that deposits are preferred to most senior unsecured debt instruments.

For deposits and senior-senior unsecured debt, our LGF analysis indicates an extremely low loss-given-failure, leading to a three-notchuplift from the bank's baa1 adjusted BCA.

For senior unsecured debt, our LGF analysis indicates a very low loss-given-failure, leading to a two-notch uplift from the bank's baa1adjusted BCA.

Government SupportBecause of its size on a consolidated basis, we consider the group of German co-operative banks to be systemically relevantand attribute a "moderate" probability of German government support for all members of the sector. This is in line with supportassumptions for other systemically relevant banking groups in Europe. This results in one notch of government support uplift in thesenior debt and deposits ratings of those co-operative banks that are incorporated in Germany, including Muenchener Hyp.



Rating Methodology and Scorecard Factors

Exhibit 3

Muenchener Hypothekenbank eGMacro FactorsWeighted Macro Profile Very

Strong -100%

Financial ProfileFactor Historic

RatioMacro

AdjustedScore

CreditTrend

Assigned Score Key driver #1 Key driver #2

SolvencyAsset RiskProblem Loans / Gross Loans 1.2% aa2 ← → baa1 Sector concentration Collateral and

provisioning coverageCapitalTCE / RWA 18.0% aa2 ← → ba1 Nominal leverage Risk-weighted

capitalisationProfitabilityNet Income / Tangible Assets 0.1% b2 ← → b2 Expected trend

Combined Solvency Score a2 ba1LiquidityFunding StructureMarket Funds / Tangible Banking Assets 39.6% ba2 ← → ba1 Market

funding qualityLiquid ResourcesLiquid Banking Assets / Tangible Banking Assets 19.6% baa2 ← → ba2 Asset encumbrance Additional

liquidity resourcesCombined Liquidity Score ba1 ba1Financial Profile ba1

Business Diversification -1Opacity and Complexity 0Corporate Behavior 0

Total Qualitative Adjustments -1Sovereign or Affiliate constraint: AaaScorecard Calculated BCA range ba1-ba3Assigned BCA ba2Affiliate Support notching --Adjusted BCA baa1

Balance Sheet in-scope(EUR million)

% in-scope at-failure(EUR million)

% at-failure

Other liabilities -- -- -- --Deposits -- -- -- --

Preferred deposits -- -- -- --Junior Deposits -- -- -- --

Senior unsecured bank debt -- -- -- --Dated subordinated bank debt -- -- -- --Junior subordinated bank debt -- -- -- --Preference shares (bank) -- -- -- --Senior unsecured holding company debt -- -- -- --Dated subordinated holding company debt -- -- -- --Junior subordinated holding company debt -- -- -- --Preference shares (holding company) -- -- -- --Equity -- -- -- --Total Tangible Banking Assets -- -- -- --



De jure waterfall De facto waterfall NotchingDebt classInstrumentvolume +

subordination

Sub-ordination

Instrumentvolume +

subordination

Sub-ordination

De jure De factoLGF

notchingguidance

versusBCA

AssignedLGF

notching

Additionalnotching

PreliminaryRating

Assessment

Counterparty Risk Assessment -- -- -- -- -- -- -- 3 0 a1 (cr)Deposits -- -- -- -- -- -- -- 3 0 a1Senior unsecured bank debt -- -- -- -- -- -- -- 2 0 a2

Instrument Class Loss GivenFailure notching

Additionalnotching

Preliminary RatingAssessment

GovernmentSupport notching

Local Currency rating ForeignCurrency

ratingCounterparty Risk Assessment 3 0 a1 (cr) 1 Aa3 (cr) --Deposits 3 0 a1 1 Aa3 Aa3Senior unsecured bank debt 2 0 a2 1 A1 --Source: Moody's Financial Metrics

About Moody's Bank ScorecardOur Scorecard is designed to capture, express and explain in summary form our Rating Committee's judgment. When read inconjunction with our research, a fulsome presentation of our judgment is expressed. As a result, the output of our Scorecardmay materially differ from that suggested by raw data alone (though it has been calibrated to avoid the frequent need for strongdivergence). The Scorecard output and the individual scores are discussed in rating committees and may be adjusted up or down toreflect conditions specific to each rated entity.

Ratings

Exhibit 4Category Moody's RatingMUENCHENER HYPOTHEKENBANK EG

Outlook StableBank Deposits Aa3/P-1Baseline Credit Assessment ba2Adjusted Baseline Credit Assessment baa1Counterparty Risk Assessment Aa3(cr)/P-1(cr)Senior Unsecured -Dom Curr A1Commercial Paper -Dom Curr P-1Other Short Term -Dom Curr (P)P-1

Source: Moody's Investors Service



Endnotes1 The sovereign ratings shown are the senior unsecured ratings and outlooks.

2 The rating shown is Heta's Carinthian state-guaranteed senior unsecured debt rating and outlook



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Scorecard Ratios of Muenchener Hypothekenbank … INSTITUTIONS CREDIT OPINION 23 December 2016...

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