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Rating Action:

Moody's downgrades EssenHyp's BFSR to C-

14 Feb 2008

Senior debt and deposit ratings affirmed at A1 with stable outlook

Frankfurt, February 14, 2008 -- Moody's Investors Service today downgraded the bank financial strength rating ("BFSR") of Hypothekenbank in Essen ("EssenHyp") to C- from C. The outlook on this rating is now stable. The bank's A1 senior debt and deposit ratings, A2 local currency debt ratings for senior and junior subordinated debt (including Genussscheine) and Prime-1 short-term rating were all affirmed with their stable outlooks.

Today's rating action follows EssenHyp's report of substantial losses of EUR241 million for the year 2007 (based on IFRS), which compares to an average pre-tax profit of EUR130 million between 2004 and 2006. "These losses point to the inherent weaknesses of EssenHyp's business model. Indeed, the bank would have posted losses even without the negative impact of the current financial crisis on its financial bond portfolio, driven by the implications of the flat yield curve prevalent during 2007", says Katharina Barten, Vice-President/Senior Analyst and lead analyst for EssenHyp at Moody's.

Ms Barten adds: "The bank's traditionally large market risk exposure relating to gapping risk exposes it to large swings in its net interest income such as those reported today. These developments were severely worsened by major marked-to-market losses on EssenHyp's financial bond portfolio which had to be charged to the income statement."

Moody's notes positively that Essenhyp is not invested in sub-prime mortgage assets or any other high-risk structured credit products, and that the risk of actual defaults of assets affected by revaluations is low.

The announcement by parent bank Commerzbank on 31 January 2008 that it plans to merge EssenHyp into its larger sister bank Eurohypo (A1/Prime-1/C+) within the next six months effectively means that Essenhyp's intrinsic risk profile will migrate to that of Eurohypo's to the extent that the integration proceeds as planned. However, Moody's will continue to monitor Essenhyp's BFSR and deposit ratings until the merger is legally finalised and the debt has been assumed by Eurohypo.

The downgrade of the BFSR is based on the assumption that EssenHyp will for some time continue its operations as a separate entity. As such, the C- BFSR also takes into consideration some of the positive implications of a stronger integration into the Commerzbank Group since the parent acquired the remaining 49% of EssenHyp's share capital earlier in 2008. "The key factors underpinning EssenHyp's BFSR are the bank's access to group funding, given that the parent bank has assumed all unsecured funding needs for the subsidiary, as well as its integration into the group-wide risk management and the significantly larger franchise of the group, which should allow a greater focus on core business activities with an acceptable risk return profile," Ms Barten says.

Against this background, Moody's has affirmed the A1 long-term deposit rating of EssenHyp, which continues to incorporate the rating agency's assumption of a very high probability of support from the parent Commerzbank (Aa3/P-1/C+) and a moderate probability of the bank receiving systemic support in the case of need -- thus resulting in a four-notch uplift for this rating from the bank's Baseline Credit Assessment of Baa2 (which maps from its BFSR of C-).

Headquartered in Essen, Germany, EssenHyp reported total consolidated assets of EUR90.2 billion and pre-tax loss of EUR 241.2 million as of 31 December 2007.

Frankfurt
Johannes Wassenberg
Managing Director
Financial Institutions Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Frankfurt
Katharina Barten
Vice President - Senior Analyst
Financial Institutions Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades EssenHyp's BFSR to C-
No Related Data.
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