hamburg commercial bank ag · 2020-07-10 · commercial real estate 25% industry 18% shipping 10%...

FINANCIAL INSTITUTIONS

CREDIT OPINION1 July 2020

Update

RATINGS

Hamburg Commercial Bank AGDomicile Hamburg, Germany

Long Term CRR Baa2

Type LT Counterparty RiskRating - Fgn Curr

Outlook Not Assigned

Long Term Debt Baa2

Type Senior Unsecured - FgnCurr

Outlook Stable

Long Term Deposit Baa2

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.

Analyst 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]

Hamburg Commercial Bank AGUpdate to credit analysis

SummaryWe assign Baa2 (stable)/P-2 deposit and Baa2 (stable) senior unsecured debt ratings toHamburg Commercial Bank AG (HCOB). We also assign a ba2 Baseline Credit Assessment(BCA) and Adjusted BCA, as well as Baa2/P-2 Counterparty Risk Ratings (CRRs) to HCOB.

HCOB's current ratings reflect its ba2 BCA and Adjusted BCA; the result of our AdvancedLoss Given Failure (LGF) analysis, which provides three notches of rating uplift for seniorunsecured debt and deposits; and our low government and affiliate support assumptions,which result in no rating uplift.

HCOB's ba2 BCA reflects the bank's satisfactory solvency profile, supported by its strongcapitalisation, which we expect to remain at a high level during the coming years. HCOB'ssolvency further benefits from its significantly improved asset quality because of an assetportfolio carveout consisting of the bulk of the bank's nonperforming legacy assets andreduced complexity since the beginning of 2019. The ba2 BCA also reflects the bank'sprogress towards diversifying its funding base and lengthening its maturity profile. Our viewon the bank's BCA could change if the coronavirus pandemic-induced credit shock led to asustained erosion of HCOB's solvency strengths.

Exhibit 1

Rating Scorecard - Key financial ratios

7.9%

18.5%

-0.4%

31.1%

27.7%

-10%

0%

10%

20%

30%

40%

50%

-5%

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)

Hamburg Commercial Bank AG (BCA: ba2) Median ba2-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=PBC_1226314

https://www.moodys.com/credit-ratings/Hamburg-Commercial-Bank-AG-credit-rating-806604822

MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Credit strengths

» HCOB benefits from strong capitalisation, which is required as part of its managed transition between sectors.

» HCOB maintains substantial liquidity buffers.

» The bank's asset portfolio has been substantially de-risked and simplified.

Credit challenges

» HCOB's current funding profile requires a significant transformation and maturity extension.

» Asset-risk concentrations remain high as the bank places a strong focus on commercial real estate (CRE) lending and remainsexposed to shipping loans, although the portfolio is reducing.

» The significant transformation of the bank limits the predictability of its ability to achieve future profit targets.

OutlookHCOB's ratings carry a stable outlook, which reflects our expectation that the bank will only gradually build a track record of successfulexecution of its transformation plan.

Factors that could lead to an upgrade

» An upgrade of HCOB's Baa2 debt and deposit ratings will be subject to an upgrade of the bank's ba2 BCA. HCOB's senior unsecuredand deposit debt classes already benefit from the maximum achievable uplift of three notches under our Advanced LGF analysis.

» An upgrade of HCOB's BCA would be subject to the establishment of a track record of sustainable profit generation withoutincurring significant new asset risks, the maintenance or medium-term reestablishment of the bank's strong capitalisation despiteeconomic friction, the bank's ability to maintain an ample buffer of liquid resources, or a successful diversification of the bank'sfunding profile if this results in lower dependence on market funding, or a combination of these.

Factors that could lead to a downgrade

» HCOB's Baa2 debt and deposit ratings could be downgraded if the bank's BCA is downgraded or if the transformation of its liabilitystructure leads to a less favourable outcome under our Advanced LGF analysis.

» A downgrade of HCOB's BCA could result from a pronounced negative deviation of HCOB's future financial performance from thesolvency and liquidity metrics that we currently expect. In particular, underperformance within HCOB's cyclical exposures to CRE,as well as in its remaining portfolio of performing shipping loans, or a failure of HCOB to execute its transition plan for its fundingprofile may result in a BCA downgrade.

» Based on our Advanced LGF analysis, in particular, the bank's junior senior debt ratings could be downgraded if the volume of lower-ranking liabilities is not replenished within the context of the bank's planned liability and capital structure transformation.

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 1 July 2020 Hamburg Commercial Bank AG: Update to credit analysis


Key indicators

Exhibit 2

Hamburg Commercial Bank AG (Consolidated Financials) [1]

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

Total Assets (EUR Billion) 46.7 53.6 68.3 81.1 93.4 (15.9)4

Total Assets (USD Billion) 52.4 61.2 82.0 85.5 101.4 (15.2)4

Tangible Common Equity (EUR Billion) 3.9 3.9 3.9 4.5 4.5 (3.5)4

Tangible Common Equity (USD Billion) 4.4 4.4 4.7 4.7 4.8 (2.7)4

Problem Loans / Gross Loans (%) 2.1 2.9 18.8 22.5 26.4 14.65

Tangible Common Equity / Risk Weighted Assets (%) 18.5 17.5 17.6 15.7 11.9 16.26

Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) 14.2 20.3 229.1 352.3 295.7 182.35

Net Interest Margin (%) 1.0 1.0 1.1 0.7 1.0 0.95

PPI / Average RWA (%) 0.8 0.3 3.8 0.2 0.5 1.16

Net Income / Tangible Assets (%) 0.2 -0.8 -0.8 0.1 0.2 -0.25

Cost / Income Ratio (%) 71.6 89.0 41.1 93.3 85.2 76.05

Market Funds / Tangible Banking Assets (%) 31.1 31.7 33.3 36.1 39.8 34.45

Liquid Banking Assets / Tangible Banking Assets (%) 27.7 33.9 33.9 25.4 25.3 29.35

Gross Loans / Due to Customers (%) 147.9 116.8 108.6 130.2 138.3 128.45

[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 because of thescale of reported amounts. [4] Compound annual growth rate (%) based on the periods for the latest accounting regime. [5] Simple average of periods for the latest accounting regime. [6]Simple average of Basel III periods.Sources: Moody's Investors Service and company filings

ProfileBased in northern Germany, Hamburg Commercial Bank AG (HCOB) is a regional commercial bank with a focus on asset-based lendingfor CRE and renewable energy projects. The bank re-branded to HCOB from HSH Nordbank AG in early 2019 and aims to operate asan efficient commercial bank focused on domestic clients, yet with an appetite for international expansion into select neighbouringcountries.

HCOB is the first former Landesbank to transform into a privately owned bank. Since November 2018, the bank has been owned by aconsortium of private-equity funds led by Cerberus Capital Management L.P. and J.C. Flowers & Co.

The bank's ties with its previous public-sector owners, the federal state of Schleswig-Holstein and the city state of Hamburg havebeen largely severed, through the early settlement of the €10 billion asset guarantee provided by them. HCOB's historical ownersremain responsible as guarantors of payment obligations under liabilities incurred by HCOB's predecessor banks until 18 July 2001 andassumed by HCOB subsequently.

HCOB will remain a member of Sparkassen-Finanzgruppe's (S-Finanzgruppe, Aa2 negative, a21) institutional protection scheme (IPS)during the three-year transition period until HCOB becomes a full member of the voluntary deposit guarantee fund for Germany'sprivate banks, subject to a positive assessment of its financial strength at that point by the Bundesverband deutscher Banken (BdB).This fund protects the claims of retail and small and medium-sized enterprise investors that exceed the coverage of the statutorydeposit guarantee scheme and, to a lesser extent, also covers deposits of select institutional investors.

HCOB's owners have committed to additional capital strengthening measures for HCOB in case the BdB would otherwise rejectHCOB's full-membership application in two years on the basis of the BdB's membership criteria for financial metrics not being met.

For more information, please refer to the bank's Issuer Profile and to our German Banking System Profile.


https://www.moodys.com/credit-ratings/Sparkassen-Finanzgruppe-credit-rating-806929216

https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1135375



Weighted Macro Profile of StrongAlthough HCOB is focused on the German market, the bank's assigned Strong Weighted Macro Profile is set one notch belowthe Strong(+) Macro Profile of Germany, reflecting the issuer's international activities in countries with a less benign operatingenvironment, including its shipping exposures, which are sensitive to global trade and macroeconomic conditions.

Recent developmentsThe coronavirus outbreak will cause unprecedented shock to the global economy. The full extent of the economic downswing will beunclear for some time; however, G-20 economies will contract in 2020. We presently expect the G-20 advanced economies as a groupto contract by 6.4% in 2020 and the euro area by 8.5%, followed by a gradual recovery in 2021. In Europe, the coronavirus outbreakadds to late-cycle risks for European banks. The recession in 2020 will weigh on banks' asset quality and profitability. We expect fiscalpolicy measures, as already announced by a variety of euro-area governments, to mitigate the economic contraction caused by theoutbreak. In the current coronavirus-induced recession and its aftermath, capital levels will be a key differentiator of credit profilesamong banks. Generally, banks are facing a sharp deterioration in asset quality and reductions in profitability from already-low levels,while central banks are providing extraordinary levels of liquidity and governments have strong incentives to support banking systemsto foster an eventual recovery. Thus, when comparing a bank to its peers, the level of capital with which it entered this recession and itsability to retain capital throughout the next several years take on particular importance.

The European Central Bank (ECB) announced a series of measures to help European Union (EU) economies weather the wideningeffects of the coronavirus pandemic, temporarily increasing banks’ liquidity provisions, as well as lowering regulatory capital andliquidity requirements. As part of these temporary measures, the ECB increased its targeted long-term refinancing operations (TLTROIII) under more favourable terms as well as its financial asset purchase programme, while refraining from lowering the ultralow interestrates further. The temporary suspension of buffer requirements for regulatory capital and the liquidity coverage ratio (LCR) gives banksgreater flexibility and additional leeway to absorb the economic impacts, such as asset-quality declines. Overall, the package aimsto help banks continue to finance corporates and small and medium-sized businesses suffering from the effects of the coronavirusoutbreak. We believe that the ECB’s measures will provide a limited relief for banks and their borrowers, and that it will requiresignificant fiscal policy measures by the EU and its member states to avert higher default rates in banks’ lending books.

Germany launched a large stimulus package and the government's support is crucial for corporate borrowers in industries immediatelyhurt by the coronavirus outbreak like the airlines, tourism, retail and the shipping sectors, as well as smaller companies experiencingweak liquidity and high leverage. The scale of the support package is unprecedented and is far larger than the support provided duringthe financial crisis. At the same time, the government made it easier to access its furlough scheme and extended it to a broader pool ofworkers, which will limit the spike in unemployment and the fall in domestic consumption. The measures, which are adapted accordingto the evolution of the economic effects of the pandemic, add to Germany's already expansionary fiscal policy stance, as well as toautomatic stabilisers that support household incomes when unemployment increases.

Detailed credit considerationsAsset-risk concentrations remain high after the substantial de-risking through an asset carveoutWe assign a ba1 Asset Risk score to HCOB, which reflects a level of problem loans between 3% and 4% of gross loans, following thecarveout of large parts of its nonperforming exposures, and also the remaining concentration risks.

The coronavirus pandemic will represent a first test for HCOB's more cautious risk management of the past year's. HCOB'sconcentration on commercial real estate (CRE) lending and its remaining shipping assets leave it exposed to cyclical exposures for witha relatively short track record of sound performance. As a cover against a weaker economic environment, the bank had set aside ahigh level of €364 million or €1.2% of its gross customer loans as of year-end 2019 for currently performing loans in addition to €344million of specific loan loss reserves.

HCOB focuses on the business areas it has been concentrating its underwriting on recently, primarily domestic CRE and corporatelending, including, to a large extent, renewable energy financing. In CRE, HCOB underwrote €4.0 billion of new business in 2019(including syndications, 2018: €4.6 billion). This was far greater than the €1.3 billion (2018: €1.0 billion) of newly underwritten shippingexposures in 2019 and the €2.0 billion (2018: €2.8 billion) of other corporate lending exposures, which were focused on renewableenergy projects. As a result of the significantly worsened economic outlook and because HCOB provides neither large-scale committed





corporate credit lines nor pass-through funding from development banks, we expect the bank's new lending to decelerate furtherduring 2020.

Exhibit 3

HCOB's corporate lending exposures are concentrated in asset-based lending exposures, with shipping and some CRE lending typesparticularly exposed to adverse economic scenariosHCOB's €47 billion of corporate, public sector and household credit exposures as of year-end 2019 broken down by industry

Commercial Real Estate25%

Industry18%

Shipping10%

Trade / Transport6%

Other services12%

Public sector24%

Non-bank financials3%

Households1%

others1%

Each 8% of credit exposure represented around 1x the bank's tangible common equity (TCE) as of year-end 2019.Source: Company report

The bank's problem loan ratio has now stabilised and further improved to 2.1% as of year-end 2019 (December 2018: 2.9%; December2017: 18.8%), following a final one in 2018 within a series of transfers of legacy assets over the past few years.

Exhibit 4

HCOB's much-reduced problem loans are well covered by loan-loss reservesVolume in € billion

0%

5%

10%

15%

20%

25%

30%

35%

0.0

2.5

5.0

7.5

10.0

12.5

15.0

17.5

2014 2015 2016 2017 2018 2019

in €

billion

Problem loans Loan loss reserves* Problem loans / Gross loans (RHS)

*Loan-loss reserves excluding the compensation item under the former guarantee.Source: Moody's Financial Metrics

Successful privatisation supports a sustained improvement in capital adequacyWe expect HCOB to maintain substantial core capital buffers over the medium term, as reflected in the assigned a1 Capital score. Theassigned a1 Capital score is one notch below the aa3 initial score as the bank's capitalisation will remain exposed to an updrift in risk-weighted assets based on tighter regulatory measurement requirements. We believe the bank will be highly committed to reaching andmaintaining its target Common Equity Tier 1 (CET1) capital ratio of close to 20% (which we expect to be a close proxy for the TCE ratiowe use to measure capitalisation) to reassure investors and stakeholders during its multiyear sector transition process.

We believe the bank's slower lending growth plans and resulting balance-sheet reduction will, until the bank's entry into the BdB, helpoffset the credit risk-weighted assets (RWA) updrift resulting from higher expected losses and increases in RWA upon tighter regulatorymeasurement requirements expected over the course of the next few years. Risks to HCOB's capitalisation from litigation with



investors in its Basel III noncompliant Additional Tier 1 instruments have been largely eliminated, following a settlement agreement2

reached in 2019 with the vast majority of investors.

As of 31 December 2019, HCOB reported a strong TCE ratio of 18.5% (year-end 2018: 17.5%). HCOB's reported CET1 ratio of 18.5% asof 31 December 2019 equalled its TCE ratio, and its regulatory Tier 1 leverage ratio was at an equally strong 8.2%.

Exhibit 5

HCOB is well capitalised…Exhibit 6

…and significantly exceeds its capital requirements

17.6% 17.5%18.5%18.7% 18.4% 18.5%

5.7%

7.2%

8.3%

0%

5%

10%

15%

20%

2017 2018 2019

TCE ratio CET1 ratio TCE leverage ratio

Source: Moody's Financial Metrics

8.6%

10.6%

13.3%

0%

5%

10%

15%

20%

CET1 Tier1 Total Capital

2020 minimum capital requirements

Requirements include the 2.5% capital conservation buffer and assume a partialfulfillment of the Pillar 2 requirement through AT1 and Tier 2 instruments.Source: Company data

After the removal of complexity, HCOB can focus on establishing a track record of improving profitabilityWe assign a b3 Profitability score to HCOB, one notch above the caa1 initial score, which reflects our expectation that the bank will beable to defend moderate levels of profitability despite far-reaching restructuring measures within a difficult economic environment.

Amid 2020's weak operating environment, we believe HCOB will find less opportunities than initially planned to diversify its lendinginto new business areas and seize additional revenue potential that could replenish revenue lost as a result of the bank's deleveraging.As a result, efficiency improvements will remain paramount for the bank to improve its operating results. We believe that the bank'sownership structure will give HCOB access to additional process optimisation skills that will help it reposition its cost base. Even so, thebank's revised target of a cost-to-income ratio in the mid-40% area sets an ambitious benchmark that would position HCOB at themore efficient end of the German banking industry and reflect the bank's focus on corporate banking and CRE lending.

Driven by more cautious macroeconomic expectations, HCOB's management targets an even leaner setup than initially foreseen afterthe ownership change, resulting in its employee base being cut by more than half from 1,482 as of December 2019 to 710 full-timeequivalents by year-end 2021.

For 2019, HCOB reported a pretax profit of €77 million (2018: €97 million), but we expect the bank's underlying profit in 2020 todecline because of higher credit costs and reduced new lending opportunities. In 2019, HCOB booked an additional €80 million ofrestructuring expenses (2018: €345 million) in relation to the bank's realignment.



Exhibit 7

Following the final cleanup of its balance sheet, HCOB is likely to become structurally profitableIn € million; balance-sheet size as of year-end on X-axis

561986

578856

561 502

355

284

319

723

75

-1,232 -1,155-899

-669 -549 -457

586

191

165

-1,350

-553-67

-2,500

-2,000

-1,500

-1,000

-500

0

500

1,000

1,500

2,000

2014 2015 2016 2017 2018 2019

€110 billion €97 billion €84 billion €70 billion €55 billion €48 billion

in €

millio

n

Net interest income Net fee and commission income Trading & other income Operating expenses

Risk provisions Extraordinary income and expenses Pre-tax profit

Includes Moody's adjustments for significant nonrecurring and unusual items.Source: Moody's Financial Metrics

Far-reaching transformation of HCOB's funding profile is a challengeWe assign a b1 Funding Structure score to HCOB, three notches below the ba1 initial score, based on our forward-looking expectationthat the bank will need to transform its funding structure and extend its maturity profile.

Following HCOB's exit from S-Finanzgruppe, the bank's solvency profile and liquidity buffers will gain additional relevance for thewholesale funding markets, which had already factored in the expected eventual loss of IPS support over the past few years. This hadled to a shortening of maturities for HCOB's new issuances, and we expect the bank to restore a better diversified maturity profileduring the three-year transition period. Following the bank's additional reduction in its future total asset size to around €35 billion as ofyear-end 2021 from €47.7 billion reported as of December 2019, HCOB will be able to further scale back its new issuance plans, whichreduces the refinancing risk over the next couple of years.

On its way to tapping longer-term funding, HCOB successfully debuted a three-year benchmark senior unsecured bond issuance inMay 2019. Prospectively, HCOB aims to reduce its dependence on institutional deposits over time and instead plans to complementthese with an online retail deposit franchise initially launched in 2017. However, the bank reduced the usage of this funding channelsignificantly in 2019 because of its high cost relative to market funds. As of year-end 2019, HCOB's liabilities to retail customers onlycontributed €1.3 billion to overall client liabilities, down from €4.0 billion as of year-end 2018.

Exhibit 8

HCOB has reduced its reliance on confidence-sensitive wholesale funding sourcesComposition of funding sources

4% 5% 6% 6% 8% 9%

30%23% 24% 21%

20%26%

39%46%

48%51%

51% 45%

13% 15% 11% 12% 10% 11%

0%

10%

20%

30%

40%

50%

0%

20%

40%

60%

80%

100%

2014 2015 2016 2017 2018 2019

Equity Other liabilities Issued securities Derivative liabilities Deposits Interbank Market Funds Ratio (RHS)

Market funds ratio = Market funds as a percentage of tangible banking assets.Source: Moody's Financial Metrics



Substantial liquidity buffers and IPS transition arrangement grant time to execute funding transformationWe assign a baa2 Liquidity score to HCOB, one notch below the baa1 initial score, based on our forward-looking expectation that thebank will gradually shrink the initial unencumbered liquidity levels.

In 2019, HCOB maintained a liquidity buffer of cash and assets recognised for its regulatory LCR of close to €10 billion. As of year-end2019, the bank's reported cash position declined moderately to €4.8 billion from an elevated level of €5.4 billion as of 31 December2018.

HCOB's regulatory LCR on average stood at 194.2% in 2019 and closed the year at 165%, indicating sound coverage of expected near-term liquidity outflows.

Exhibit 9

HCOB maintains sufficient balance-sheet liquidityComposition of assets

59%57% 62%

57% 58%65%

18% 19% 19%

20% 19%13%

6%6% 5%

5% 6% 5%

5%3% 4%

9% 10% 10%

0%

10%

20%

30%

40%

50%

0%

20%

40%

60%

80%

100%

2014 2015 2016 2017 2018 2019

Other assets Loans Derivative assets Securities & investments Interbank Cash Liquid Resources Ratio (RHS)

Liquid resources ratio = Liquid banking assets as a percentage of tangible banking assets.Source: Moody's Financial Metrics

As an additional temporary backstop for HCOB's refinancing transformation, we expect the money markets and shorter-term capitalmarket funding to be available for HCOB in light of its continuity within the IPS of S-Finanzgruppe until the definite transition to theprivate bank sector as of year-end 2021. By year-end 2021, HCOB's expected entry into the private-sector deposit protection scheme,a discretionary scheme offering compensation for depositor losses for amounts above €100,000, will be key to maintaining access tomarket funds beyond retail deposits.

Business diversification adjustmentTo reflect the risks stemming from HCOB's focused asset-based lending business model, we also apply a one-notch qualitativeadjustment for its limited Business Diversification in our scorecard, which leads to a ba2 BCA from the bank's ba1 Financial Profile.

Following the privatisation, HCOB plans to maintain its business focus on asset-based lending, with a strong emphasis on domestic CRElending and renewable energy projects. A greater degree of specialisation may limit a bank's ability to mitigate unexpected earningsvolatility from its core activities.

Business diversification is an important gauge of a bank's sensitivity to stress in a single business line. It is related to earnings stabilityin the sense that earnings diversification across distinct and relatively uncorrelated lines of business increases the reliability of a bank'searnings streams and its potential to absorb shocks affecting a business line.

In particular, through its emphasis on CRE lending, HCOB will be exposed to a rather volatile banking business through the cycle. Weconsider CRE lending a highly cyclical and, therefore, higher-risk sector exposure. CRE exposures can cause high losses in times offinancial market stress.


https://www.moodys.com/research/The-Association-of-German-Banks-Deposit-Protection-Fund-2017-Reforms--PBC_1061202


Environmental, social and governance (ESG) considerationsIn line with our general view on the banking sector, HCOB has a low exposure to environmental risks (see our environmental risk heatmap3 for further information).

HCOB is exposed to environmental risks foremost through its shipping loan portfolio. The global shipping industry is classified as“elevated risk - emerging” in our environmental risk heat map, as it faces the prospect of tightening pollution standards with regard toengine exhausts. At the same time, HCOB actively engages in renewable energy financing in its home region of northern Germany.

For social risks, we also place HCOB in line with our general view on the banking sector, which indicates a moderate exposure. Thisincludes considerations in relation to the rapid and widening spread of the coronavirus outbreak, given the substantial implicationsfor public health and safety and the deteriorating global economic outlook, creating a severe and extensive credit shock across manysectors, regions and markets. For further information, see our social risk heat map4).

Governance5 is highly relevant for HCOB, as it is to all banks, but more specifically because of the comprehensive repositioning andredimensioning of the former Landesbank. However, we do not have any particular governance concern for HCOB, not least becausethe solid transition framework from the S-Finanzgruppe sector to the private sector outlines multiyear transition targets the bank'sstrategy needs to focus on. Accordingly, we do not apply any corporate behaviour adjustment to the bank. Nonetheless, corporategovernance remains a key credit consideration and continues to be a subject of our ongoing monitoring.

Support and structural considerationsAffiliate supportWe assume a low probability of affiliate support, which results in no uplift for the ba2 Adjusted BCA from the bank's BCA. Thisassumption reflects the fact that HCOB will leave the cross-sector support scheme from S-Finanzgruppe as of the end of 2021. Onlyuntil then would the group's IPS be committed to stabilising the bank to avert a failure to fulfil its contractual payment obligations.

We believe HCOB's capitalisation and refinancing position will temporarily benefit from the close alignment of S-Finanzgruppe, theBdB and the new owners to ensure a seamless sector transition as of year-end 2021, and we consider these benefits directly in therespective scores within the BCA Scorecard.

Loss Given Failure (LGF) analysisHCOB is subject to the EU Bank Recovery and Resolution Directive (BRRD), which we consider an operational resolution regime. We,therefore, 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.

In line with our standard assumptions, we assume residual TCE of 3% and post-failure losses of 8% of tangible banking assets, a 25%run-off in junior wholesale deposits and a 5% run-off in preferred deposits.

» For deposits and senior unsecured debt, rated Baa2, our LGF analysis indicates an extremely low loss given failure, leading to athree-notch uplift above the ba2 Adjusted BCA.

» For junior senior unsecured debt, rated Baa3, our LGF analysis indicates a very low loss given failure, leading to a two-notch upliftabove the ba2 Adjusted BCA.

» For HCOB's subordinated programme, rated (P)Ba3, our LGF analysis indicates a high loss given failure, leading us to position itsrating one notch below the ba2 Adjusted BCA.

» Trust-preferred securitiesbased on silent participations(Stille Einlagen) are rated C (hyb). These ratings relate to the entities HSH NFunding I, HSH N Funding II, RESPARCS Funding Limited Partnership I and RESPARCS Funding II Limited Partnership, and are basedon our expected loss calculation. The C (hyb) ratings reflect principal write-downs to currently 8.1% of the nominal amounts, andHCOB's announcement on 29 November 2019 that it has agreed a settlement with most of these instruments holders, which wasfollowed by a tender offer at the same 36.24% settlement price to the remaining investors. We understand that the bank intendsto repay the remaining called instruments without resuming coupon payments at the future local GAAP book value as of year-end2020, which the bank predicts to be below 5%.






Government support considerationsFollowing the introduction of the BRRD, we have lowered our expectations about the degree of support the government might provideto a bank in Germany in the event of need. Because of its size on a consolidated basis, we consider S-Finanzgruppe systemicallyrelevant and, therefore, attribute a moderate probability of German government support for all members of the sector, in line with oursupport assumptions for other systemically relevant banking groups in Europe.

In light of the bank's exit from S-Finanzgruppe, we assign a low probability of government support, resulting in no rating 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.

HCOB's CRRs are positioned at Baa2/P-2The CRRs are positioned three notches above the bank's ba2 Adjusted BCA, based on the extremely low loss given failure from the highvolume of instruments that are subordinated to CRR liabilities, reflected in three notches of uplift.

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.

HCOB's CR Assessment is positioned at Baa2(cr)/P-2(cr)The bank's CR Assessment is positioned three notches above its ba2 Adjusted BCA, based on the buffer against default provided bymore subordinated instruments to the senior obligations represented by the CR Assessment. To determine the CR Assessment, wefocus purely on subordination, taking no account of the volume of the instrument class.

Methodology and scorecardThe principal methodology we used in rating HCOB was our Banks rating 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 10

Hamburg Commercial 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 7.9% ba1 ↑↑ ba1 Sector concentration Expected trend

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

18.5% aa2 ←→ a1 Access to capital Stress capital resilience

ProfitabilityNet Income / Tangible Assets -0.4% caa1 ↑ b3 Expected trend Return on assets

Combined Solvency Score baa2 baa3LiquidityFunding StructureMarket Funds / Tangible Banking Assets 31.1% ba1 ↓↓ b1 Market

funding qualityDeposit quality

Liquid ResourcesLiquid Banking Assets / Tangible Banking Assets 27.7% baa1 ↓ baa2 Stock of liquid assets Expected trend

Combined Liquidity Score baa3 ba2Financial Profile ba1Qualitative Adjustments Adjustment

Business Diversification -1Opacity and Complexity 0Corporate Behavior 0

Total Qualitative Adjustments -1Sovereign or Affiliate constraint AaaBCA Scorecard-indicated Outcome - Range ba1 - ba3Assigned BCA ba2Affiliate Support notching 0Adjusted BCA ba2

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 baa2Counterparty Risk Assessment - - - - - - - 3 0 baa2 (cr)Deposits - - - - - - - 3 0 baa2Senior unsecured bank debt - - - - - - - 3 0 baa2Junior senior unsecured bank debt - - - - - - - 2 0 baa3Dated subordinated bank debt - - - - - - - -1 0 ba3

Instrument Class Loss GivenFailure notching

Additionalnotching

Preliminary RatingAssessment

GovernmentSupport notching

Local CurrencyRating

ForeignCurrency

RatingCounterparty Risk Rating 3 0 baa2 0 Baa2 Baa2Counterparty Risk Assessment 3 0 baa2 (cr) 0 Baa2(cr)Deposits 3 0 baa2 0 Baa2 Baa2Senior unsecured bank debt 3 0 baa2 0 Baa2 Baa2Junior senior unsecured bank debt 2 0 baa3 0 Baa3 Baa3Dated subordinated bank debt -1 0 ba3 0 (P)Ba3[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 11

Category Moody's RatingHAMBURG COMMERCIAL BANK AG

Outlook StableCounterparty Risk Rating Baa2/P-2Bank Deposits Baa2/P-2Baseline Credit Assessment ba2Adjusted Baseline Credit Assessment ba2Counterparty Risk Assessment Baa2(cr)/P-2(cr)Issuer Rating Baa2Senior Unsecured Baa2Junior Senior Unsecured Baa3Junior Senior Unsecured MTN -Dom Curr (P)Baa3Subordinate MTN -Dom Curr (P)Ba3ST Issuer Rating P-2Other Short Term -Dom Curr (P)P-2

HSH N FUNDING I

BACKED Pref. Stock Non-cumulative C (hyb)HSH N FUNDING II

Jr Subordinate C (hyb)Source: Moody's Investors Service

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

2 For additional information, please refer to Hamburg Commercial's settlement with hybrid creditors is credit positive, December 2019.

3 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 regulations or other regulatory restrictions,including the related transition risks such as policy, legal, technology and market shifts, which could impair the evaluation of assets are important factors.Certain banks could face a higher risk from concentrated lending to individual sectors or operations exposed to the aforementioned risks.

4 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 particularly 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.

5 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 like specific corporate behaviour, key person risk, insider and related-party risk, strategy and management risk factors and dividend policymay be captured in individual adjustments to the BCA, if deemed applicable. Corporate governance weaknesses can lead to a deterioration in a company’scredit quality, while governance strengths can benefit its credit profile. When credit quality deteriorates because of poor governance, such as breakdownin controls resulting in financial misconduct, it can take a long time to recover. Governance risks are also largely internal rather than externally driven.




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