unicredit bank ag - hypovereinsbank (hvb) · 2020-02-10 · unicredit bank ag domicile germany long...

FINANCIAL INSTITUTIONS

CREDIT OPINION10 February 2020

Update

RATINGS

UniCredit Bank AGDomicile Germany

Long Term CRR A1

Type LT Counterparty RiskRating - Fgn Curr

Outlook Not Assigned

Long Term Debt A2

Type Senior Unsecured - FgnCurr

Outlook Stable

Long Term Deposit A2

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-Sr Credit [email protected]

Mark C Jenkinson +44.20.7772.5432Associate [email protected]

Alexander Hendricks,CFA

+49.69.70730.779

Associate Managing [email protected]

UniCredit Bank AGUpdate to credit analysis

SummaryWe assign A2(stable)/P-1 deposit and A2(stable) senior unsecured debt ratings to UniCreditBank AG (UCB). We also assign Baa3 junior senior unsecured debt ratings and A1/P-1Counterparty Risk Ratings (CRRs) to UCB. Further, we assign UCB a baa2 Baseline CreditAssessment (BCA) and Adjusted BCA.

UCB's ratings reflect its baa2 BCA; the results of our Advanced Loss Given Failure (LGF)analysis, which provides two notches of rating uplift from the baa2 Adjusted BCA for seniorunsecured debt and deposit ratings; and a moderate probability of government support,yielding one notch of rating uplift.

UCB's baa2 BCA reflects the bank's strong cushions of capital and liquid resources. Inaddition, the BCA incorporates the bank's exposure to the non-credit risks related to itsrole as the group's global investment banking centre, which contributes to a volatile profitgeneration. UCB's BCA is one notch above the BCA of its parent UniCredit S.p.A. (Baa1/Baa1stable, baa31) and this gap reflects that UCB has sufficient restrictions in place to sustain itslow intragroup exposures at a manageable level.

Exhibit 1

Rating Scorecard - Key financial ratios

2.7%

20.6%

0.2%

41.7% 39.3%

0%

10%

20%

30%

40%

50%

0%

5%

10%

15%

20%

25%

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)

UniCredit Bank AG (BCA: baa2) Median baa2-rated banks

So

lve

ncy F

acto

rs

Liq

uid

ity F

acto

rs

Source: Moody's Investors Service

http://www.surveygizmo.com/s3/1133212/Rate-this-research?pubid=PBM_1209735

https://www.moodys.com/credit-ratings/UniCredit-Bank-AG-credit-rating-96025

https://www.moodys.com/credit-ratings/UniCredit-Bank-AG-credit-rating-96025

https://www.moodys.com/credit-ratings/UniCredit-SpA-credit-rating-212250

MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Credit strengths

» Very strong capitalisation

» High levels of liquid assets

» Some protection from its limited exposure to its weaker parent

Credit challenges

» UCB's capital markets business creates volatility in profit.

» Interconnectedness with the UniCredit Group somewhat limits the potential for higher UCB ratings.

» UCB has only a modest volume of subordinated instruments and senior unsecured debt outstanding, which implies a high loss-given-failure for holders of junior senior unsecured debt.

OutlookThe rating outlook is stable and reflects our view that UCB will show a stable performance of key solvency and funding metrics during2020.

Factors that could lead to an upgrade

» An upgrade of UCB's ratings could be prompted by a higher BCA or by a more favourable result of our LGF analysis.

» Upward pressure on UCB's BCA could be exerted by changes in the bank's earnings profile, that is, with larger earningscontributions from less volatile businesses; and sustained improvements in asset-risk indicators, including reduction in risk withinits capital markets segment from current levels. Sustainably improved liquidity levels could also result in a higher BCA. Existinginterrelationships with UniCredit S.p.A. could offset the benefits of an improvement in UCB's financial profile.

» We may upgrade UCB's senior unsecured debt and deposit ratings in case higher volumes of lower-ranking liabilities are included inUCB's liability structure, for example, in case this is required by banking authorities to fulfill internal minimum requirements for ownfunds and eligible liabilities (MREL) under a possible single point of entry resolution approach to the UniCredit group.

Factors that could lead to a downgrade

» A downgrade of UCB's ratings could be triggered by a downgrade of the bank's BCA, a reduction in rating uplift as a result of ourLGF analysis or by a reduction in our government support assumptions.

» UCB's BCA could be downgraded if the bank's financial fundamentals deteriorate materially (although there is some leeway at thebaa2 BCA level); the degree of interconnectedness with its Italian parent increased significantly; or within the context of unchangedparent-subsidiary relations, UniCredit S.p.A.'s BCA were downgraded.

» UCB's deposits and senior unsecured bonds may be downgraded as a result of a reduction in rating uplift from our LGF analysis. Thiscould reflect the declining trend in liabilities designed to absorb losses in resolution ahead of deposits and senior unsecured debt,unless these are supplemented by a material volume of internal MREL liabilities, which we expect regulators to require if a singlepoint of entry resolution approach is adopted for the UniCredit group. Such downgrade potential only applies to UCB's deposit andsenior unsecured ratings, as the junior senior unsecured debt rating already includes the weakest possible LGF result.

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 10 February 2020 UniCredit Bank AG: Update to credit analysis


Key indicators

Exhibit 2

UniCredit Bank AG (Consolidated Financials) [1]

06-192 12-182 12-172 12-162 12-152 CAGR/Avg.3

Total Assets (EUR Billion) 265.8 261.9 273.2 264.6 257.8 0.94

Total Assets (USD Billion) 302.6 299.3 328.1 279.1 280.0 2.24

Tangible Common Equity (EUR Billion) 17.4 17.0 17.0 16.8 20.1 (4.1)4

Tangible Common Equity (USD Billion) 19.8 19.5 20.5 17.7 21.9 (2.8)4

Problem Loans / Gross Loans (%) 2.1 2.2 2.9 3.8 4.6 3.15

Tangible Common Equity / Risk Weighted Assets (%) 20.8 20.6 21.7 20.5 25.8 21.96

Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) 15.2 15.7 18.8 24.2 23.7 19.55

Net Interest Margin (%) 0.9 0.9 1.0 1.0 1.1 1.05

PPI / Average RWA (%) 1.6 2.0 2.3 1.9 1.4 1.86

Net Income / Tangible Assets (%) 0.3 0.2 0.5 0.1 0.3 0.25

Cost / Income Ratio (%) 70.8 66.2 65.3 70.8 76.9 70.05

Market Funds / Tangible Banking Assets (%) 42.9 41.7 42.5 42.2 44.3 42.75

Liquid Banking Assets / Tangible Banking Assets (%) 37.5 39.3 46.6 42.8 44.9 42.25

Gross Loans / Due to Customers (%) 118.1 112.1 99.2 105.8 107.8 108.65

[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 Investors Service; Company Filings

ProfileWith a reported total balance sheet size of €295 billion as of June 2019, UniCredit Bank AG (UCB) is Germany's fifth-largest bankinggroup by assets. It has been a member of the UniCredit Group since 2005 and pursues a universal banking model.

UCB offers retail, corporate, private and investment banking, as well as commercial real estate financing, wealth management andinternational capital markets services, to private, corporate and public-sector customers. UCB's strategy is increasingly aligned withthat of UniCredit S.p.A, and it operates as the corporate and investment banking (CIB) hub for the group, which includes the role as thecentral counterparty for derivatives transactions with clients.

In line with UniCredit S.p.A's groupwide restructuring plan Transform 2019, UCB has undergone strategic and operational streamliningthat focuses on enhancing efficiency and overall returns, and reducing risks as well as the complexity of its CIB operations. In December2019, UniCredit S.p.A. announced a new strategic plan for 2020 to 2023, Team 23, under which the banking group commits to growingits franchise and maximising productivity, while managing risk and capital tightly.

For more information, please refer to the bank's Issuer Profile (published in October 2019), the German Banking System Profile(published in December 2018) and the German Banking System Outlook (published in November 2019).

Weighted Macro Profile of Strong +UCB is focused on the German market and the bank's assigned Strong + Weighted Macro Profile is in line with the Strong + MacroProfile of Germany, which we lowered in 2019 from Very Strong -.

Recent developmentsOn February 6, UniCredit S.p.A. reported preliminary full year results for 2019. The operations of UCB are primarily comprised withinthe segments Commercial Banking Germany and Corporate & Investment Banking, UCB is the largest contributor to this lattersegment.

Commercial Banking Germany improved its annual pre-tax profit by 17% to €849 million, based on a stable net interest income of€1.5 billion and net fee income of €0.7 billion. The average interest rate charged in this divison remained at 2.1% in 2019, 6 basis pointsbelow 2018 while outstanding loans grew by 4% to €87.2 billion, marking the strongest segment loan volume growth within UniCreditS.p.A. Operating costs also remained flat at €1.6 billion. The improvement in pre-tax profit was supported by a net reversal of charges


https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1190187

https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1144148





and provisions of €69 million vs a booking of provisions in the magnitude of €361 million in 2018. The segment further benefitted fromlower loan loss provisions of €100 million, down from €145 million in 2018. The segments 2019 pre-tax result included €219 millionof integration costs booked upon the announcement of further staff reduction measures as part of the 2020-23 strategic plan of thegroup.

Corporate & Investment Banking reported a strongly improved pre-tax profit of €2.0 billion (+49% vs 2018), despite a decline in bothinterest (-2%) and fee income (-10%) and an increase in loan loss provisions by €30 million to still moderate €106 million. Net tradingincome was up by 27% to €1 billion thanks to sound client activity and better market making conditions and the segment reducedits operating costs by 2% to €1.5 billion. The main determinant of the strong improvement in results was the reversal of provisionsby €165 million, following the creation of €817 million of provisions in 2018, foremost related to the settlement of the legal case thegroup settled with US authorities in 2019 after a breach of sanctions against Iran years ago. Integration costs related to the new groupstrategy in the case of this segment were €95 million and the sale of its Ocean Breeze windpark contributed more than half (€178million) of the €299 million loss from investments.

Across the two segments, problem loans and risk-weighted assets remained broadly stable year-over-year.

Detailed credit considerationsInterconnectedness with UniCredit Group limits UCB's ratings upside potentialAs a result of UCB's strategic, financial and business-related operational interconnectedness with its parent bank, any further upgradepotential of its baa2 BCA is limited to one notch, which would result in a two-notch inverse rating gap above UniCredit S.p.A.'s baa3BCA. UCB's position as the group's centre for CIB activities implies correlation in the areas of reputation and investor confidence, whichis a material constraining factor. However, UCB tightly manages the collateral of its derivatives positions and has reduced unsecuredintragroup exposures to a level considerably below the exposure allowed by the German Banking Act, which permits up to 100% ofcapital. We understand that the bank's internal limits for secured and unsecured intragroup exposures are also materially below thisthreshold. Balancing these factors, we currently allow UCB's BCA to be above that of UniCredit S.p.A.

UniCredit S.p.A. has largely completed its 2019 strategic plan and in December it announced a new multiyear strategic plan (Team2023) for 2020-23, through which it aims to achieve a return on tangible equity at above 8% and an underlying net profit of about €5billion in 2023. Job cuts at group level will also entail a further reduction in UCB's workforce by approximately 1,300 employees.

UniCredit S.p.A. and UCB have agreed with their respective national regulators that UCB's own funds ratio must not fall below 13%. IfUCB raises its direct exposures (or exposure limits) to group members, or if UniCredit S.p.A. were to withdraw core capital resourcesfrom UCB, an option that is also limited by expected upcoming internal total loss-absorbing capacity requirements for UCB, this couldaffect our assessment of the bank's standalone credit strength.

Very strong regulatory capitalisationWe assign a Capital score of aa2, one notch below the initial score, which leaves room for rising risk-weighted assets in the context ofUCB's ambitious growth plans in its core lending businesses. The adjustment reflects UCB's relatively low regulatory leverage ratio andalso captures the typical full upstreaming of profit to the parent.

UCB is strongly capitalised, with a 20.8% tangible common equity (TCE) ratio as of 30 June 2019 (down from 21.7% as of 30 June2018). It reported a very solid Common Equity Tier 1 capital ratio of 19.4% as of 30 June 2019, down from 19.9% as of year-end 2018.UCB's capitalisation remains well above the peer group average and is a key factor supporting the baa2 BCA.

In 2017, UCB upstreamed a €3 billion special dividend to its Italian parent. Our aa2 assigned Capital score incorporates our expectationthat the capital upstream was a one-off event within the context of UniCredit S.p.A.'s €13 billion capital increase. For 2018, thedividend to the parent declined to €520 million, reflecting the full earnings transfer under UCB's local GAAP accounts.

While UCB's TCE leverage remains comfortably above 5% (see Exhibit 3), UCB's regulatory Tier 1 leverage ratio of 4.9% as of 30 June2019 (unchanged from year-end 2018) reflects the bank's significant off-balance-sheet exposures related to the bank's investmentbanking business. Within the €359 billion of exposures for the purpose of UCB's regulatory leverage ratio as of 30 September 2019,€24.0 billion related to derivatives transactions and €26.4 billion originated from securities financing transactions, both of which weexpect to remain important drivers of UCB's relatively low leverage ratio compared with its risk-weighted capitalisation.



Exhibit 3

UCB's CET1 ratio remains at high levels and clearly exceeds theregulatory minima

Exhibit 4

UCB's regulatory CET1 capital requirements

21.7%20.6% 20.8%

21.1%

19.9% 19.4%

6.2% 6.5% 6.5%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2017 2018 H1 2019

TCE ratio CET1 ratio (transitional) TCE leverage ratio

TCE = Tangible common equity (Moody's calculation); CET1 = Common Equity Tier 1capital.Sources: Company reports and Moody's Investors Service

9.5% 9.5% 9.5%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

2018 2019 2020

Pillar 1 - CET1 Pillar 2 requirement* Capital conservation buffer

Countercyclical buffer O-SII buffer

*Calculated based on the bank's agreement with regulators for 2019 and previous years tomaintain at least a 13% total capital ratio.Source: Company reports

Asset quality has improved, while focus on investment banking drives non-credit risksWe assign an Asset Risk score of baa3, four notches below the initial score to reflect the market and operational risk inherent in UCB'sCIB business. While we expect UCB to maintain its sound asset-risk profile in 2019, the bank maintains high concentration risks in itsloan book and securities investment portfolio, which exposes the bank to the risk of occasional large losses related to individual namesand transactions. In addition, market risks are not captured in the initial score and, therefore, we adjust it to account for UCB's exposureto changes in volatilities, correlations or liquidity.

UCB's market and operational risk exposures are mostly driven by the bank's role as UniCredit Group's competence centre for CIBactivities, which therefore play a much larger role for UCB than for other German universal banks. UCB's CIB activities are closelyintegrated with the group's commercial banking activities and beyond the bank's markets business (interest rate, foreign exchange,commodities and equity products) also includes global transaction banking (cash management and trade finance), and financing andadvisory (syndication, structured finance and capital markets).

UCB's nonperforming loan ratio improved in H1 2019 to 2.1% from 2.2% as of year-end 2018 (2017: 2.9%), whereby the bank's totalproblem loans stood at around €3.0 billion (year-end 2018: €3.0 billion, 2017: €3.6 billion, 2016: €4.7 billion). The continued decreasemostly reflects impaired asset sales and 6.5% annual loan growth as of June 2019. In H1 2019, UCB's problem loan coverage ratio stoodat a solid level of 65.3%, almost unchanged from the year-end 2018 level but up from 59.5% as of December 2017, because of thesignificant reduction in IFRS 9 Stage 3 impaired assets, supported by a strong economic environment, particularly in Germany.

UCB's main sector concentrations as of 30 June 2019 include €28.6 billion of real estate lending (12% of the total €241.1 billionexposure), €14.3 billion to the energy sector (6%) and €2.7 billion for ship finance (1.1%). Other concentrations are related tointernational project finance, as well as debt capital market underwriting for corporates. UCB started investing in asset-backedsecurities (third party) again in 2015, after phasing out residual positions that dated back to the banking crisis. In 2019, the yearlyincrease in UCB's asset-backed securities reached 30% and were equal to €8.8 billion.

With 58% of its credit risk exposure in Germany, UCB remains strongly focused on its home market. As of 30 June 2019, the bankincreased its exposure to Italy (Baa3 stable) to €10.3 billion (+15.9%) from €8.9 billion as of 30 June 2018. UCB's internationalexposures are reflected by its weighted Macro Profile of Strong +, which is nevertheless in line with the Strong + assessment forGermany.


https://www.moodys.com/credit-ratings/Italy-Government-of-credit-rating-423690


Exhibit 5

UCB has successfully reduced its problem loan ratioCoverage ratio gradually increased

0%

10%

20%

30%

40%

50%

60%

70%

0%

1%

2%

3%

4%

5%

6%

2014 2015 2016 2017 2018

Problem Loans / Gross Loans (left axis) Coverage ratio (right axis)

Problem loan ratio in accordance with our definition.Sources: Company reports and Moody's Investors Service

Profitability is adequate but volatileUCB's assigned Profitability score is b1, at the level of the initial score. The positioning captures our expectation that difficult marketconditions may expose UCB to a volatile earnings trajectory in its investment banking business. Such volatility and earnings pressurewill only partly be offset by the bank's continued cost-efficiency efforts and medium-term scope for improvement.

UCB is one of the more profitable banks in Germany, although profit is modest compared with levels across Europe and the rest ofthe world. Its two segments — commercial banking and CIB — both strongly contribute to group results, but CIB generates relativelyvolatile revenue and profit. The segment's activities lead to a higher contribution of the trading result to total operating revenue thanat most domestic peers and has in the past repeatedly been a source of large risk provisions originating from non-credit risks.

The reported net profit for year-end 2018 was €238 million, down -82.2% from a year earlier. The reduction was driven by riskprovisions of €919 million, largely to cover legal risks. On an adjusted basis, pretax profit was flat at €1.6 billion. Lower payroll costs andcost savings associated with the group's Transform 2019 programme drove the 5.8% operating cost decrease to €3,079 million, butwere not able to create positive operating leverage. Lower market valuations following the Italian election results in May 2018 resultedin significantly lower net trading income in the group's fixed income and currencies unit. Net interest income remained stable becauseof significant loan book growth as margin pressures persisted.

UCB's reported H1 2019 net income was €603 million and included a €259 million write-down ahead of the disposal in the secondhalf of 2019 of an offshore windpark (Ocean Breeze). The H1 results were supported by a release of €288 million of excess provisionsbooked for the now-settled Iran sanctions case with US authorities, as well as by a €365 million extraordinary gain from the sale of realestate assets. With limited additional cost savings benefits in H1 2019, UCB's operating results were strained, with net interest and feeincome both below the results of last year's first six months' values and the trading income was significantly below the level in H1 2018.



Exhibit 6

UCB's earnings split is diversified by significant trading and fee and commission incomeAdministrative expenses decreased recently

3.5 2.9 2.6 2.7 2.52.5 2.5

1.11.1 1.1 1.0 1.1 1.1 1.0

1.8 1.8

1.3 1.1 1.6 1.7 1.2

-3.8 -3.7 -3.9 -3.8 -3.7 -3.5 -3.2

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

2012 2013 2014 2015 2016 2017 2018

EU

R b

illion

Net interest Income Net fees and commissions income Trading & other income

Admin. Expenses Risk provisions Extraordinary income and expense

Pre-tax profit

Sources: Company reports, Moody's Financial Metrics and Moody's Investors Service estimates

Funding is adequate, with long maturitiesWe assign a Market Funding score of ba2, two notches above the initial score. The upward adjustment captures UCB's substantialdeposit base and the long-term structure of its market funding.

UCB's funding profile is adequate, although it relies on market funds for a large share of its funding needs. The upward adjustmentto the assigned score takes into account the fact that with the combination of relatively long maturities of its outstanding debtand sizeable deposit base, UCB needs to tap the market for relatively modest amounts of €5 billion-€8 billion annually. The futuredevelopment of the bank's funding profile, particularly in terms of loss-absorbing debt components, will depend to a large extent onthe resolution strategy and loss-absorption requirements that have not yet been disclosed for UCB. However, as a material subsidiaryof UniCredit S.p.A., which is subject to the minimum total loss-absorbing capacity requirement, we expect UCB to receive internal loss-absorbing instruments from its parent to meet its standalone requirements. With respect to its groupwide funding structure, UniCreditS.p.A. targets an optimisation that would improve the group's preparedness for macroeconomic downside scenarios.

UCB's dependence on the market for a relatively large proportion of its balance sheet is mitigated by several factors: (1) a considerableportion of market funds is raised through covered bonds (€24.6 billion as of June 2019, up from €22.7 billion as of year-end 2018), andthere is additional potential for raising funds through covered bonds based on €34.0 billion of cover pool assets as of June 2019; (2) asof year-end 2018 promotional funds of €11 billion were provided by development banks, for which UCB does not require market access;and (3) there are ample liquid resources. The former two mitigating factors are included in our calculation of adjusted market funds andthe resulting ba2 Funding Structure score.



Exhibit 7

UCB remains significantly reliant on wholesale funding sources

0%

10%

20%

30%

40%

50%

0%

20%

40%

60%

80%

100%

2015 2016 2017 2018 H1 2019

Equity Other liabilities Trading liabilities Issued securities

Interbank Deposits Market Funds Ratio* (right axis)

*Market funds ratio = Market funds/tangible banking assets.Sources: Company reports and Moody's Investors Service

High levels of liquid assetsWe assign a Liquid Resources score of a3, two notches below the initial score. The downward adjustment takes into considerationUCB's encumbered assets.

While the CIB segment also contributes significantly to the bank's overall loan book (€42.8 billion as of 30 June 2019), this segmentoperates with a significant amount of cash reserves and other liquid resources contributing to the high initial score of the bank. Since2017, the bank's robust growth in customer lending has shifted its asset profile somewhat towards more profitable assets with a lowerdegree of liquidity.

The assigned a3 Liquid Resources score reflects UCB's large liquid resources and its liquidity coverage ratio significantly above 100%,as well as our adjustments to the Liquid Resources ratio for encumbrance of liquid assets under the bank's repo operations. As of June2019, retail and corporate deposits represented 41% of total liabilities, and UCB has good access to the German covered bond market.Liquidity reserves remained high in 2019, with unencumbered securities available as collateral for central bank borrowings at €17.1billion as of H1 2019 (30 June 2018: €19.2 billion) and cash holdings of €17.6 billion (H1 2018: €13.2 billion). UCB's H1 2019 €141.1billion customer loan book was largely covered by customer deposits.

Exhibit 8

UCB's balance-sheet liquidity decreased recently, but remains at a high level

0%

10%

20%

30%

40%

50%

0%

20%

40%

60%

80%

100%

2015 2016 2017 2018 H1 2019

Other assets Loans Securities/Investments Interbank Cash Liquid Banking Asset Ratio (right axis)

Liquid banking assets ratio = Liquid assets/tangible banking assets.Sources: Company reports and Moody's Investors Service



ESG considerationsIn line with our general view on the banking sector, UCB has a low exposure to environmental risks (see our environmental risk heatmap2 for further information).

For social risks, we also place UCB in line with our general view on the banking sector, which indicates a moderate exposure (see oursocial risk heat map3).

Governance4 is highly relevant for UCB, as it is to all banks, but more specifically because of the complexity of its investment bankingoperations, which in the past have been the source of investigations and fines against the bank. However, we do not have any particulargovernance concern for UCB, and we do not apply any corporate behaviour adjustment to the bank.

Support and structural considerationsAffiliate supportUniCredit S.p.A. would likely support its German subsidiary in case of need. However, parental support does not result in any ratinguplift because UCB's BCA is higher than that of its parent bank. UCB's Adjusted BCA is, therefore, baa2, in line with its BCA.

Loss Given Failure (LGF) analysisUCB is subject to the European Union Bank Recovery and Resolution Directive, which we consider to be an operational resolutionregime. We, therefore, apply our Advanced LGF analysis, where we consider the risks faced by the different debt and deposit classesacross the liability structure should the bank enter resolution.

We further assume residual TCE of 3% and losses post-failure of 8% of tangible banking assets, a 25% run-off in "junior" wholesaledeposits, and a 5% run-off in preferred deposits. These ratios are in line with our standard assumptions.

» For deposits and senior unsecured debt of UCB, with an A2 rating, our LGF analysis indicates a very low loss-given-failure, leading toa two-notch uplift from the bank's baa2 Adjusted BCA.

» For junior senior unsecured debt, as well as subordinated debt issued by UCB, with a Baa3 rating, our LGF analysis indicates a highloss-given-failure, leading us to position the rating one notch below the Adjusted BCA.

» The dated silent partnership certificates issued by HVB Funding Trust and HVB Funding Trust II and HBV Funding Trust III are ratedBa1(hyb). The notching reflects their deeply subordinated claim in liquidation and the non-cumulative coupon-skip mechanism tiedto the breach of a regulatory minimum requirement trigger.

Government support considerationsAlthough German banks operate in an environment of materially weakened prospects for financial assistance from the government,we maintain one notch of rating uplift in our senior unsecured debt and deposit ratings, reflecting our expectation of a moderateprobability of government support for senior debt and deposits. This support takes into account UCB's substantial size and strongnational market shares in retail and corporate lending.

For junior senior unsecured debt, subordinated debt and hybrid instruments, we believe that the potential for government support islow and these ratings, therefore, do not benefit from any government support uplift.

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








https://www.moodys.com/credit-ratings/HVB-Funding-Trust-credit-rating-600049395

https://www.moodys.com/credit-ratings/HVB-Funding-Trust-II-credit-rating-600050149

https://www.moodys.com/credit-ratings/HVB-Funding-Trust-III-credit-rating-600050565


UCB's CRRs are positioned at A1/P-1The CRRs are positioned four notches above the Adjusted BCA of baa2, reflecting (1) the extremely low loss given failure from the highvolume of instruments that are subordinated to CRR liabilities, reflected in three notches of uplift, and (2) one notch of rating upliftbased on government support, in line with our support assumptions on deposits and senior unsecured debt.

Counterparty Risk (CR) AssessmentThe CR Assessment is an opinion of how counterparty obligations are likely to be treated if a bank fails and is distinct from debt anddeposit ratings in that it (1) considers only the risk of default rather than both the likelihood of default and the expected financial losssuffered in the event of default; and (2) applies to counterparty obligations and contractual commitments, rather than debt or depositinstruments. The CR Assessment is an opinion of the counterparty risk related to a bank's covered bonds, contractual performanceobligations (servicing), derivatives (for example, swaps), letters of credit, guarantees and liquidity facilities.

UCB's CR Assessment is positioned at A1(cr)/P-1(cr)The bank's CR Assessment is positioned four notches above its baa2 Adjusted BCA, based on the buffer against default provided tothe senior obligations represented by the CR Assessment by more subordinated instruments, primarily senior unsecured debt; andgovernment support uplift, assuming a moderate level of support. To determine the CR Assessment, we focus purely on subordination,without taking into account the volume of the instrument class.

Methodology and scorecardMethodology usedThe principal methodology we used in rating UCB was the Banks methodology, published in November 2019.

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.




Rating methodology and scorecard factors

Exhibit 9

UniCredit Bank AG

Macro FactorsWeighted Macro Profile Strong + 100%

Factor HistoricRatio

InitialScore

ExpectedTrend

Assigned Score Key driver #1 Key driver #2

SolvencyAsset RiskProblem Loans / Gross Loans 2.7% a2 ←→ baa3 Market risk Operational risk

CapitalTangible Common Equity / Risk Weighted Assets(Basel III - transitional phase-in)

20.8% aa1 ←→ aa2 Nominal leverage Expected trend

ProfitabilityNet Income / Tangible Assets 0.2% b1 ←→ b1 Earnings quality Expected trend

Combined Solvency Score a2 baa1LiquidityFunding StructureMarket Funds / Tangible Banking Assets 41.7% b1 ←→ ba2 Market

funding qualityTerm structure

Liquid ResourcesLiquid Banking Assets / Tangible Banking Assets 39.3% a1 ←→ a3 Asset encumbrance Stock of liquid assets

Combined Liquidity Score baa3 baa3Financial Profile baa2Qualitative Adjustments Adjustment

Business Diversification 0Opacity and Complexity 0Corporate Behavior 0

Total Qualitative Adjustments 0Sovereign or Affiliate constraint -BCA Scorecard-indicated Outcome - Range baa1 - baa3Assigned BCA baa2Affiliate Support notching 0Adjusted BCA baa2

Balance Sheet is not applicable.



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 a2Counterparty Risk Assessment - - - - - - - 3 0 a2 (cr)Deposits - - - - - - - 2 0 a3Senior unsecured bank debt - - - - - - - 2 0 a3Junior senior unsecured bank debt - - - - - - - -1 0 baa3Dated subordinated bank debt - - - - - - - -1 0 baa3

Instrument Class Loss GivenFailure notching

Additionalnotching

Preliminary RatingAssessment

GovernmentSupport notching

Local CurrencyRating

ForeignCurrency

RatingCounterparty Risk Rating 3 0 a2 1 A1 A1Counterparty Risk Assessment 3 0 a2 (cr) 1 A1(cr)Deposits 2 0 a3 1 A2 A2Senior unsecured bank debt 2 0 a3 1 A2 A2Junior senior unsecured bank debt -1 0 baa3 0 Baa3 Baa3Dated subordinated bank debt -1 0 baa3 0 Baa3 (P)Baa3[1]Where dashes are shown for a particular factor (or sub-factor), the score is based on non-public information.Source: Moody’s Investors Service



Ratings

Exhibit 10

Category Moody's RatingUNICREDIT BANK AG

Outlook StableCounterparty Risk Rating A1/P-1Bank Deposits A2/P-1Baseline Credit Assessment baa2Adjusted Baseline Credit Assessment baa2Counterparty Risk Assessment A1(cr)/P-1(cr)Issuer Rating A2Senior Unsecured A2Junior Senior Unsecured Baa3Junior Senior Unsecured MTN -Dom Curr (P)Baa3Subordinate -Dom Curr Baa3Other Short Term (P)P-1

PARENT: UNICREDIT S.P.A.

Outlook StableCounterparty Risk Rating Baa1/P-2Bank Deposits Baa1/P-2Baseline Credit Assessment baa3Adjusted Baseline Credit Assessment baa3Counterparty Risk Assessment Baa2(cr)/P-2(cr)Senior Unsecured Baa1Junior Senior Unsecured Baa2Junior Senior Unsecured MTN (P)Baa2Subordinate Baa3Pref. Stock Non-cumulative -Dom Curr Ba3 (hyb)Other Short Term -Dom Curr (P)P-2

UNICREDIT BANK AG, LONDON BRANCH

Outlook StableCounterparty Risk Rating A1/P-1Bank Deposits A2/P-1Counterparty Risk Assessment A1(cr)/P-1(cr)Issuer Rating -Dom Curr A2

UNICREDIT BANK AG, NEW YORK BRANCH

Outlook StableCounterparty Risk Rating A1/P-1Bank Deposits A2/P-1Counterparty Risk Assessment A1(cr)/P-1(cr)Issuer Rating A2

UNICREDIT BANK AG, PARIS BRANCH

Outlook StableCounterparty Risk Rating A1/P-1Bank Deposits -Dom Curr A2/P-1Counterparty Risk Assessment A1(cr)/P-1(cr)

UNICREDIT U.S. FINANCE INC.

Bkd Commercial Paper P-1UNICREDIT BANK AG, HONG KONG BRANCH

Outlook StableCounterparty Risk Rating A1/P-1Counterparty Risk Assessment A1(cr)/P-1(cr)Senior Unsecured MTN (P)A2Subordinate MTN (P)Baa3Other Short Term (P)P-1

UNICREDIT BANK AG, TOKYO BRANCH

Outlook StableCounterparty Risk Rating A1/P-1Counterparty Risk Assessment A1(cr)/P-1(cr)



Senior Unsecured MTN (P)A2Subordinate MTN (P)Baa3Commercial Paper -Dom Curr P-1Other Short Term (P)P-1

UNICREDIT BANK AG, SINGAPORE BRANCH

Outlook StableCounterparty Risk Rating A1/P-1Counterparty Risk Assessment A1(cr)/P-1(cr)Senior Unsecured MTN (P)A2Subordinate MTN (P)Baa3Other Short Term (P)P-1

HVB FUNDING TRUST

Pref. Stock Non-cumulative Ba1 (hyb)HVB FUNDING TRUST III

Pref. Stock Non-cumulative Ba1 (hyb)HVB FUNDING TRUST II

Pref. Stock Non-cumulative Ba1 (hyb)Source: Moody's Investors Service



Endnotes1 The ratings shown are the bank's deposit rating, the senior unsecured debt rating and outlook, and the BCA.

2 Environmental risks can be defined as environmental hazards encompassing the impacts of air pollution, soil/water pollution, water shortages and naturaland man-made hazards (physical risks). Additionally, regulatory or policy risks, such as the impact of carbon regulation or other regulatory restrictions,including the related transition risks such as policy, legal, technology and market shifts, that could impair the evaluation of assets are an importantfactors. Certain banks could face a higher risk from concentrated lending to individual sectors or operations exposed to the aforementioned risks.

3 Social risk considerations represent a broad spectrum, including customer relations, human capital, demographic and social trends, health and safety, andresponsible production. The most relevant social risks for banks arise from the way they interact with their customers. Social risks are articularly high inthe area of data security and customer privacy, which are partly mitigated by sizeable technology investments and banks’ long track record of handlingsensitive client data. Fines and reputational damage because of product mis-selling or other types of misconduct are further social risks. Social trendsare also relevant in a number of areas, such as shifting customer preferences towards digital banking services, which increased information technologycosts, ageing population concerns in several countries, which affects demand for financial services or socially driven policy agendas that translate intoregulations that affect banks’ revenue bases.

4 Corporate governance is a well-established key driver for banks and related risks are typically included in our evaluation of the banks' financial profile.Further factors such as specific corporate behaviour, key-person risk, insider and related-party risk, strategy and management risk factors, and dividendpolicy may be captured in individual adjustments to the BCA, if deemed applicable. Corporate governance weaknesses can lead to a deterioration in acompany’s credit quality, while governance strengths can benefit its credit profile. When credit quality deteriorates because of poor governance, such as abreakdown in controls resulting in financial misconduct, it can take a long time to recover. Governance risks are also largely internal rather than externallydriven.



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