FINANCIAL INSTITUTIONS

CREDIT OPINION25 February 2019

Update

RATINGS

Landesbank Baden-WuerttembergDomicile Germany

Long Term CRR Aa3

Type LT Counterparty RiskRating - Fgn Curr

Outlook Not Assigned

Long Term Debt Aa3

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

Andrea Wehmeier +49.69.70730.782VP-Senior Analystandrea.wehmeier@moodys.com

Alexander Hendricks,CFA

+49.69.70730.779

Associate Managing Directoralexander.hendricks@moodys.com

Landesbank Baden-WuerttembergUpdate to credit analysis

SummaryWe assign Aa3(Stable)/P-1 deposit and senior unsecured ratings to Landesbank Baden-Wuerttemberg (LBBW). We further assign A2 junior senior unsecured ratings, Aa3/P-1Counterparty Risk Ratings (CRRs), a baa2 Baseline Credit Assessment (BCA) and a baa1Adjusted BCA to the bank.

LBBW's senior unsecured ratings reflect (1) the bank's baa2 BCA; (2) its baa1 AdjustedBCA, incorporating one notch of rating uplift because of affiliate support from Sparkassen-Finanzgruppe (S-Group, Aa2 stable, a2)1; (3) the result of our Advanced Loss Given Failure(LGF) analysis, which provides three notches of rating uplift for the bank's senior debt; and(4) our assumption of moderate support from the Government of Germany (Aaa stable2),resulting in onenotch of rating uplift.

The baa2 BCA reflects LBBW's strong risk-weighted capitalisation and a relatively weakerleverage ratio, its moderate asset risk as indicated by a low ratio of nonperforming loans andvery comfortable liquid resources. The BCA incorporates LBBW's asset risk concentrations incommercial real estate (CRE) and its material exposure to the automotive industry. The BCAalso incorporates the bank's market risk, modest profitability and reliance on confidence-sensitive wholesale market funding, despite some mitigation because of LBBW's access tosector funds. These factors represent a relative weakness in LBBW's financial profile.

Exhibit 1

Rating Scorecard - Key financial ratios

1.2%

16.1%

0.2%

50.5%

45.3%

0%

10%

20%

30%

40%

50%

60%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Asset Risk:Problem Loans/

Gross Loans

Capital:Tangible Common

Equity/Risk-WeightedAssets

Profitability:Net Income/

Tangible Assets

Funding Structure:Market Funds/

Tangible BankingAssets

Liquid Resources:Liquid Banking

Assets/TangibleBanking Assets

Solvency Factors (LHS) Liquidity Factors (RHS)

LBBW (BCA: baa2) Median baa2-rated banks

So

lve

ncy F

acto

rs

Liq

uid

ity F

acto

rs

Source: Moody's Banking Financial Metrics

MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Credit strengths

» Strong capitalisation, which provides a substantial buffer for investors

» Low problem loan ratio, which reflects a benign economic environment and the bank's limited risk appetite

» Generally sound liquid resources and liquidity management

Credit challenges

» Risk concentrations in cyclical sectors such as CRE and the automotive industry

» Low and strained profitability and efficiency metrics

» Dependence on material confidence-sensitive capital market funding, which is only partly mitigated by the bank's access to sectorfunds

OutlookThe outlook is stable, reflecting our expectation of a stable financial profile and unchanged sector relationships, as well as the bank'sunchanged significant bail-in-able instruments ranking lower in resolution.

Factors that could lead to an upgrade

» An upgrade of LBBW's ratings would be likely in the event of an upgrade of its BCA. Because LBBW's senior unsecured and depositratings already benefit from the highest possible rating uplift of three notches, there is no upgrade potential from our LGF analysis.

» Upward pressure on LBBW's baa2 BCA could result from (1) a further significant and sustained reduction in the bank’s marketfunding dependence and/or meaningful higher liquid reserves, (2) a pronounced reduction in single-name credit concentrations andsector concentrations, and (3) a marked and sustained improvement in the bank's capitalisation.

Factors that could lead to a downgrade

» A downgrade of LBBW's ratings could be triggered following (1) a multi-notch downgrade of its BCA; (2) a weakening in our cross-sector support assumptions; and/or (3) a reduction in rating uplift, resulting from our LGF analysis.

» Downward pressure on LBBW's BCA could result only from a very significant deterioration in its overall credit profile, especially ifthis deterioration is followed by an unexpected and sustained weakening in its capital adequacy metrics and a material deteriorationin its asset quality, illustrated by a strongly rising problem loan ratio.

» In addition, LBBW's debt and deposit ratings could be downgraded if these instruments' volume, or that of the bank's subordinatedinstruments, decreases pronouncedly relative to the bank's tangible banking assets. This situation could result in fewer notchesof uplift from our LGF analysis. Junior senior instruments could be downgraded if future tranche volumes and/or subordinatedinstruments' volumes do not meet our current expectations.

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 25 February 2019 Landesbank Baden-Wuerttemberg: Update to credit analysis

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Key indicators

Exhibit 2

Landesbank Baden-Wuerttemberg (Consolidated Financials) [1]6-182 12-172 12-162 12-152 12-142 CAGR/Avg.3

Total Assets (EUR billion) 241 219 228 218 245 -0.54

Total Assets (USD billion) 281 263 241 237 296 -1.54

Tangible Common Equity (EUR billion) 13 13 13 13 13 0.34

Tangible Common Equity (USD billion) 15 15 13 14 15 -0.74

Problem Loans / Gross Loans (%) 0.8 0.9 1.2 1.8 2.4 1.45

Tangible Common Equity / Risk Weighted Assets (%) 16.1 16.8 16.2 17.0 15.3 16.36

Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) 6.8 7.4 10.3 14.4 19.0 11.65

Net Interest Margin (%) 0.7 0.7 0.7 0.7 0.7 0.75

PPI / Average RWA (%) 0.7 1.0 0.9 0.8 0.6 0.86

Net Income / Tangible Assets (%) 0.2 0.2 0.2 0.2 0.2 0.25

Cost / Income Ratio (%) 79.4 73.4 74.4 77.3 80.4 77.05

Market Funds / Tangible Banking Assets (%) 52.1 50.5 56.5 58.6 60.3 55.65

Liquid Banking Assets / Tangible Banking Assets (%) 49.0 45.3 42.0 40.5 44.4 44.35

Gross Loans / Due to Customers (%) 133.7 143.7 168.0 188.8 178.9 162.65

[1] All figures and ratios are adjusted using Moody's standard adjustments. [2] Basel III - fully-loaded or transitional phase-in; IFRS. [3] May include rounding differences due to scaleof reported amounts. [4] Compound Annual Growth Rate (%) based on time period presented for the latest accounting regime. [5] Simple average of periods presented for the latestaccounting regime. [6] Simple average of Basel III periods presented.Source: Moody's Financial Metrics

ProfileLandesbank Baden-Wuerttemberg (LBBW) is a German universal bank. The bank provides retail and commercial banking, leasing,factoring, asset management, real estate, and equity and project finance services, either directly or through its subsidiaries. The LBBWGroup comprises LBBW and the regional client banks, Baden-Württembergische Bank and LBBW Rheinland-Pfalz Bank.

LBBW also offers key German and international account management, capital market and real estate finance services, and acts as thecentral bank for savings banks in Baden-Württemberg, Rhineland-Palatinate and Saxony3.

Weighted Macro Profile of Very Strong (-)Because it is predominantly active in Germany, LBBW's Macro Profile is aligned with that of its home country at Very Strong-. The veryhigh economic, institutional and government financial strength and, therefore, the very low susceptibility to event risk support thebank's BCA. However, operating conditions for the German banking system are constrained by high fragmentation in an oversaturatedmarket, low fee income generation and intensifying competition for domestic businesses. A deterioration in the bank's Macro Profilemay hurt its financial profile, all other things being equal.

Detailed credit considerationsSustainable improvement in the bank's asset risk profile, despite some concentrations in higher-risk sectorsWe assign a baa1 Asset Risk score to LBBW, five notches below the initial score4 of aa2. The score reflects the strong asset quality ofLBBW's loan book, represented by a problem loan ratio of 0.8% as of the end of June 2018, and the bank's exposure to more cyclicalindustries such as the automotive and CRE industries. It also incorporates the bank's dependence on its capital market business. Apartfrom its role as the central bank for the regional savings banks (for example, money market and hedging activities), we take account ofthe bank's relatively high proportion of trading assets as a percentage of total assets and its declining, but still relatively high, share ofnet interest income generated from trading derivatives.

The bank's single-name and risk concentrations to highly cyclical industries within its corporate loan and CRE book, and its exposuresto financial institutions remain high. LBBW's net corporate credit exposures amounted to €73 billion as of 30 June 2018. The bank's netexposure to the more cyclical CRE sector and automotive industry accounted for €6.8 billion and €13.3 billion, respectively, as of 30June 2018. The aforementioned exposures could trigger large losses in a highly adverse macroeconomic scenario.

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LBBW's strong capital ratios start to declineOur assigned a1 Capital score for LBBW is two notches below the aa2 initial score and reflects (1) our expectation regarding thepotential negative impact of the upcoming regulatory changes; and (2) the expected increase in the bank's risk-weighted assets, drivenby business growth in the medium term.

In the third quarter of 2018, LBBW's reported fully loaded Common Equity Tier 1 (CET1) capital ratio stood at 14.7%, down from 15.7%as of year-end 2017. Moreover, the bank's total capital fell to 21.2% from 22.2% as of year-end 2017. The decline in regulatory ratioswas driven by the effect of the implementation of IFRS 9, as well as lending growth. We expect the bank's tangible common equityratio to develop in a similar way, after falling to around 16.1% in H1 2018. Going forward, lending growth related to LBBW's mediumterm strategy, as well as the implementation of upcoming regulatory changes may lead to a downwards trend from its presently strongcapital ratios, given the bank's yet limited capital generation capacity.

However, the bank's regulatory capital ratios are still significantly above the required total regulatory ratio of 12.3% (Tier 1: 10.3%and CET1: 8.80% for 2018)5, which the regulator determined following the supervisory review and evaluation process. The bank's fullyloaded leverage ratio stood at 4.2% as of September 2018, down from 4.6% as of year-end 2017.

Profitability and efficiency metrics are under strainWe assign the bank a b1 Profitability score, in line with the initial score, based on our expectation that for the next two to three years,the group's earnings will remain low compared with its overall risk profile and, therefore, modest by global standards.

Our assessment reflects our expectation of persistent strain on earnings resulting from the low interest rate environment; a slightpotential increase in retained earnings is already captured in our b1 Profitability score.

As of the end of September 2018, LBBW reported a pretax profit of €457 million (IFRS), up from €447 million in the same period a yearearlier, mainly driven by lower operating expenses. In particular, LBBW's administrative expenses were slightly below the figures forthe same period a year earlier (first nine months of 2018: €1,332 million and first nine months 2017: €1,354 million) in contrast to theprevious upward trend in costs. In addition, LBBW's net interest income stabilised at €1.2 billion for the first three quarters.

The sale of LBBW's guaranteed structured credit portfolio (Sealink) in December 2017 will slightly enhance the bank's earnings capacitybecause of the easing burden of related state-aid costs (2017: €61 million).

Funding profile supported by the bank's access to the savings banks sectorWe assign a ba3 Market Funding score to LBBW, which is two notches above the b2 initial score. The assigned score takes intoconsideration LBBW's high dependence on wholesale funding for a part of its lending business. This dependence is partially mitigatedby the bank's good access to funds from regional savings banks (and their retail clients), as well as its own retail client base and strongcovered bond franchise. The Market Funding score further takes into account the bank's stable funding sources, such as developmentbank loans.

Given the stabilisation of LBBW's balance-sheet size, we expect the bank's funding needs to stabilise at around €10 billion-€11 billionper annum. Nevertheless, LBBW is not entirely immune to market shocks, given its large derivatives book, the related risk of volatilecollateralisation requirements and its sizeable deposits from institutional clients.

LBBW funded itself with €71.5 billion in deposits and €42.2 billion in due from banks as of H1 2018. More confidence-sensitive fundingsources such as bonds and promissory notes stood at €30.6 billion, while more stable covered bonds provided an €18.3 billion share inthe funding mix.

Sound liquidity counterbalances market funding relianceWe assign an a1 Liquid Resources score to LBBW, two notches below the initial score of aa2. Our consideration of pledged liquidassets for cover bond pools, repos and development bank activities results in a two-notch downward adjustment to the bank's LiquidResources score.

LBBW’s liquid resources comprised €32.5 billion in cash as of H1 2018, €28.4 billion in due from banks and €20.1 billion in securities.The bank's ample liquidity and good access to sector funds are its key credit strengths that mitigate potential funding challenges.

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Support and structural considerationsAffiliate supportLBBW benefits from cross-sector support from S-Group. Cross-sector support reduces the probability of default because the supportwould be available to stabilise a distressed member bank and not just to compensate for losses in resolution. The ownership structuresof the individual banks or banking groups determine the assigned level of support (either high or very high). Full S-Group ownership,combined with the membership in the cross-liability scheme, constitutes a very high level of support. The high support assumptionassigned to LBBW and also to most Landesbanks reflects their cross-liability scheme membership and only partial ownership byS-Group members. Cross-sector support, therefore, provides one notch of rating uplift to LBBW's debt, deposit and subordinatedinstrument ratings.

Loss Given Failure (LGF) analysisLBBW is subject to the EU Bank Recovery and Resolution Directive, which we consider to be an operational resolution regime. Wetherefore apply our Advanced LGF analysis, where we consider the risks faced by the different debt and deposit classes across theliability structure should the bank enter resolution.

Our Advanced LGF analysis follows the revised insolvency legislation in Germany that became effective on 21 July 2018 and is nowconsistent with that of most other EU countries, where statutes do not provide full preference to deposits over senior unsecureddebt. In line with our standard assumptions, we assume that equity and asset losses stand at 3% and 8%, respectively, of tangiblebanking assets in a failure scenario. We also assume a 25% run-off in junior wholesale deposits and a 5% run-off in preferred deposits.Moreover, we assign a 25% probability to junior deposits being preferred to senior unsecured debt. We apply a standard assumption forEuropean banks that 26% of deposits are junior.

For LBBW, our revised LGF analysis indicates an extremely low loss given failure for deposits and for senior unsecured debt. Therefore,deposits and senior instruments benefit from three notches of rating uplift, while junior senior debt benefits from two notches of ratinguplift above the bank's baa1 Adjusted BCA. For LBBW, the two-notch uplift currently assigned is sensitive to the downside, given thesubordination and volume available for this liability class.

Furthermore, our LGF analysis continues to indicate a high loss given failure for subordinated debt classes, leading us to position theseinstruments one notch below the bank's baa1 Adjusted BCA.

Government support considerationsFollowing the introduction of the Bank Recovery and Resolution Directive, we have lowered our expectations about the degree ofsupport the government might provide to a bank in Germany in the event of need. Because of its size on a consolidated basis, weconsider S-Group to be systemically relevant. We, therefore, attribute a moderate probability of German government support for allmembers of the sector, in line with support assumptions for other systemically relevant banking groups in Europe. We, therefore, stillinclude one notch of government support uplift in our CRRs, senior unsecured debt and deposit ratings for S-Group member banks thatare incorporated in Germany, including LBBW. For junior debt, we continue to believe that the likelihood of government support is lowand these ratings do not include any related uplift. Subordinated debt instruments do not benefit from any government support.

In particular, for junior senior unsecured debt, the legal change to the German banks’ insolvency rank order has lowered the likelihoodof government support being available for these instruments because legally they rank pari passu with the majority of outstanding(statutorily subordinated) senior unsecured instruments, issued up until 20 July 2018. This pari passu ranking of new junior seniorunsecured debt with legacy (statutorily subordinated) senior unsecured instruments makes it less likely that German authoritieswould selectively support the legacy instruments (which we reclassified into junior senior unsecured debt), following the clarificationthat German authorities expect these liabilities to bear losses in a resolution. As a result, we have reduced our government supportassumption for these instruments to low from moderate.

Counterparty Risk Ratings (CRRs)CRRs are opinions of the ability of entities to honour the uncollateralised portion of non-debt counterparty financial liabilities (CRRliabilities) and also reflect the expected financial losses in the event such liabilities are not honoured. CRRs are distinct from ratingsassigned to senior unsecured debt instruments and from issuer ratings because they reflect that, in a resolution, CRR liabilities mightbenefit from preferential treatment compared with senior unsecured debt. Examples of CRR liabilities include the uncollateralised

5 25 February 2019 Landesbank Baden-Wuerttemberg: Update to credit analysis

MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

portion of payables arising from derivatives transactions and the uncollateralised portion of liabilities under sale and repurchaseagreements.

LBBW's CRRs are positioned at Aa3/P-1The CRRs, prior to government support, are positioned three notches above the bank's baa1 Adjusted BCA, reflecting the extremely lowloss given failure from the high volume of instruments that are subordinated to CRR liabilities.

LBBW's CRRs benefit from one notch of rating uplift based on government support, in line with our assumptions on deposits and seniorunsecured debt.

Counterparty Risk (CR) AssessmentCR Assessments are opinions of how counterparty obligations are likely to be treated if a bank fails and are distinct from debt anddeposit ratings in that they (1) consider only the risk of default rather than both the likelihood of default and the expected financialloss, and (2) apply to counterparty obligations and contractual commitments rather than debt or deposit instruments. The CRAssessment is an opinion of the counterparty risk related to a bank's covered bonds, contractual performance obligations (servicing),derivatives (for example, swaps), letters of credit, guarantees and liquidity facilities.

LBBW's CR Assessment is positioned at Aa3(cr)/Prime-1(cr)The CR Assessment, prior to government support, is positioned three notches above the Adjusted BCA of baa1, based on the bufferagainst default provided to the senior obligations represented by the CR Assessment by more subordinated instruments, includingjunior deposits and senior unsecured debt.

LBBW's CR Assessment benefits from one notch of rating uplift based on government support, in line with our support assumptions ondeposits and senior unsecured debt.

Methodology and scorecardThe principal methodology we used in rating LBBW was the Banks rating methodology, published in August 2018.

About Moody's Bank ScorecardOur Bank Scorecard is designed to capture, express and explain in summary form our Rating Committee's judgement. When readin conjunction with our research, a fulsome presentation of our judgement 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.

6 25 February 2019 Landesbank Baden-Wuerttemberg: Update to credit analysis

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Rating methodology and scorecard factors

Exhibit 3

Landesbank Baden-WuerttembergMacro FactorsWeighted Macro Profile Very

Strong -100%

Factor HistoricRatio

InitialScore

ExpectedTrend

Assigned Score Key driver #1 Key driver #2

SolvencyAsset RiskProblem Loans / Gross Loans 1.2% aa2 ↓ baa1 Sector concentration Market risk

CapitalTCE / RWA 16.1% aa2 ← → a1 Risk-weighted

capitalisationExpected trend

ProfitabilityNet Income / Tangible Assets 0.2% b1 ← → b1 Return on assets Expected trend

Combined Solvency Score a2 baa1LiquidityFunding StructureMarket Funds / Tangible Banking Assets 50.5% b2 ← → ba3 Extent of market

funding relianceMarket funding quality

Liquid ResourcesLiquid Banking Assets / Tangible Banking Assets 45.3% aa2 ← → a1 Stock of liquid assets Quality of liquid assets

Combined Liquidity Score baa3 baa3Financial Profile baa2

Business Diversification 0Opacity and Complexity 0Corporate Behavior 0

Total Qualitative Adjustments 0Sovereign or Affiliate constraint: AaaScorecard Calculated BCA range baa1-baa3Assigned BCA baa2Affiliate Support notching 1Adjusted BCA baa1

Balance Sheet is not applicable.

7 25 February 2019 Landesbank Baden-Wuerttemberg: Update to credit analysis

MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

De Jure waterfall De Facto waterfall NotchingDebt classInstrumentvolume +

subordination

Sub-ordination

Instrumentvolume +

subordination

Sub-ordination

De Jure De FactoLGF

NotchingGuidance

vs.Adjusted

BCA

AssignedLGF

notching

Additionalnotching

PreliminaryRating

Assessment

Counterparty Risk Rating -- -- -- -- -- -- -- 3 0 a1Counterparty Risk Assessment -- -- -- -- -- -- -- 3 0 a1 (cr)Deposits -- -- -- -- -- -- -- 3 0 a1Senior unsecured bank debt -- -- -- -- -- -- -- 3 0 a1Junior senior unsecured bank debt -- -- -- -- -- -- -- 2 0 a2Dated subordinated bank debt -- -- -- -- -- -- -- -1 0 baa2

Instrument class Loss GivenFailure notching

AdditionalNotching

Preliminary RatingAssessment

GovernmentSupport notching

Local CurrencyRating

ForeignCurrency

RatingCounterparty Risk Rating 3 0 a1 1 Aa3 Aa3Counterparty Risk Assessment 3 0 a1 (cr) 1 Aa3 (cr) --Deposits 3 0 a1 1 Aa3 Aa3Senior unsecured bank debt 3 0 a1 1 Aa3 Aa3Junior senior unsecured bank debt 2 0 a2 0 A2 A2Dated subordinated bank debt -1 0 baa2 0 Baa2 Baa2[1] Where dashes are shown for a particular factor (or sub-factor), the score is based on non-public information.Source: Moody's Financial Metrics

Ratings

Exhibit 4Category Moody's RatingLANDESBANK BADEN-WUERTTEMBERG

Outlook StableCounterparty Risk Rating Aa3/P-1Bank Deposits Aa3/P-1Baseline Credit Assessment baa2Adjusted Baseline Credit Assessment baa1Counterparty Risk Assessment Aa3(cr)/P-1(cr)Issuer Rating Aa3Senior Unsecured -Dom Curr Aa3Junior Senior Unsecured A2Junior Senior Unsecured MTN -Dom Curr (P)A2Subordinate Baa2Commercial Paper -Dom Curr P-1Other Short Term -Dom Curr (P)P-1

Source: Moody's Investors Service

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MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Endnotes1 The ratings shown are S-Group's corporate family rating and outlook, as well as its BCA.

2 The rating shown is the German government's issuer rating and outlook.

3 For further details, please refer to LBBW's Company Profile and the German Banking System Profile.

4 The initial score is referred to as the Macro-Adjusted score in our Bank Scorecard.

5 Required regulatory ratios according to transitional rules.

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MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

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10 25 February 2019 Landesbank Baden-Wuerttemberg: Update to credit analysis

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11 25 February 2019 Landesbank Baden-Wuerttemberg: Update to credit analysis