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Rating Action:

Moody's downgrades WestLB's senior debt ratings to A3, negative outlook

04 May 2010

Downgrade follows Special Comment "Assessing Post-Crisis Support for German Banks"

Frankfurt, May 04, 2010 -- Moody's Investors Service has today downgraded the senior unsecured debt and deposit ratings of WestLB AG to A3 from A2 and its subordinated debt ratings to Baa1 from A3 following Moody's revision of its assumptions for future support for the bank. The rating action concludes the review for possible downgrade that Moody's initiated for these ratings on 8 December 2009. The E+ bank financial strength rating (BFSR, which maps directly to a B2 baseline credit assessment, BCA), was affirmed and the outlook on this rating changed to stable from developing. The Prime-1 short-term rating was also affirmed, while WestLB's hybrid ratings and the Aa1 rating for obligations that qualify for the grandfathering of "Gewaehrtraegerhaftung" (a guarantee obligation) remained unaffected by today's rating action.

In line with the rating action on WestLB AG, Moody's has also changed the outlook on the E+ BFSR of WestLB Covered Bond Bank plc, Dublin, to stable from developing and affirmed the subsidiary's Prime-1 short-term ratings. The review status of the bank's A2 senior unsecured debt and deposit ratings will be concluded shortly.

DOWNGRADE OF WESTLB'S LONG-TERM RATINGS DUE TO WEAKENING SUPPORT FROM PUBLIC SECTOR SHAREHOLDERS

"Today's rating action follows a review of the probability of future support for WestLB from its current owners," says Katharina Barten, a Vice President at Moody's in Frankfurt and lead analyst for WestLB. "Past support measures have reached such a scale that the two North-Rhine Westphalian savings bank associations, which together still hold a majority share in the bank, would likely compromise their own financial strength if they decided to offer further support measures in the foreseeable future. More importantly, the two associations have stated publicly that they are no longer willing to provide further support to the bank," Ms. Barten adds. Moody's therefore lowered its assumptions for the probability of future cooperative support -- which also captures support from public sector owners if these are themselves members of the group of public sector banks (the S-Financial Group), which in turn maintain and benefit from cross-sector support mechanisms. Another driver for this adjustment was the uncertainty of whether WestLB will remain a member of this group over the long term, given the European Commission's requirement that the current owners divest the majority of their shareholding by December 2011 at the latest.

At the same time, Moody's factored into WestLB's fully supported ratings a slightly higher probability of support from the German government, which, through a EUR 3.0 billion hybrid capital injection, for the first time offered direct support to a German Landesbank. "Moody's fully recognises that WestLB will remain in the hands of public sector owners for the time being and that the government's Financial Market Stabilisation Fund (SoFFIN) has been available to support the bank," Ms. Barten explains. "This offsetting effect has resulted in the relatively mild downgrade of just one notch to A3 for WestLB's senior unsecured debt ratings." The rating uplift from the bank's B2 BCA was lowered from nine to eight notches. This still implies Moody's expectation of very high support going forward, even though WestLB has lost some of its systemic relevance through the off-loading of approximately EUR 40 billion of its assets, together with the bulk of its grandfathered debt, into a wind-down entity.

Moody's decision should be viewed in the context of its recent analysis of changing support in Germany, as outlined in the Special Comment "Assessing Post-Crisis Support for German Banks". In this report Moody's points out that weakening support from public sector owners -- among other factors -- exerts pressure on several supported Landesbank ratings, while uncertainties for junior classes of debt are rising across the banking landscape. While the latter has not yet been factored into any German bank ratings -- whose subordinated debt ratings generally remain one notch below senior unsecured debt -- today's rating action reflects Moody's concern about the gradually weakening support for banks that needed large-scale support during the crisis and do not yet display sufficient financial recovery and stabilisation that would allow for a material upgrade in their BFSRs.

NEGATIVE OUTLOOK ON THE A3 RATING REFLECTS RISK OF FURTHER WEAKENING SUPPORT OVER LONG TERM

Moody's believes that, in a post-crisis situation with more normal market conditions and a potentially better-capitalised banking system, single banks in distress could be less likely to receive support than in the past. This should ultimately generate downward rating pressure, unless banks are able to offset this anticipated reduction in systemic support by strengthening their levels of stand-alone financial strength which would exert upward pressure on their BFSRs. In the case of WestLB, this likely trend could be exacerbated by the forthcoming change in its shareholder composition, in particular if the bank were to be taken over by private investors, which would in turn almost certainly jeopardise the bank's membership in the S-Financial Group's. Nevertheless, Moody's considers such an outcome to be unlikely and expects that a solution to the Commission's requirement of a change in the bank's ownership will be found within the S-Financial Group of public sector banks.

E+ BFSR CONSTRAINED BY WEAK FRANCHISE AND THE BANK'S UNCERTAIN FUTURE

Moody's change of the outlook on the BFSR to stable from developing reflects the improved financial profile of the core bank following the completion of a "bad bank" structure on 30 April 2010. (This included a transfer of sizeable portfolios of non-core and higher-risk assets into the wind-down vehicle Erste Abwicklungsanstalt (rated Aa1/Prime-1), along with capitalisation measures amounting to EUR 3.0 billion from the SoFFin.) The offloading transaction has a number of positive implications for WestLB's risk and business profile, including (i) a reduction in risk-weighted assets and thus capital relief, (ii) a reduction in certain risk concentrations and (iii) an improvement in the group's funding profile.

Moody's affirmation of the E+ BFSR and the change of its outlook to stable also reflects that, despite these positive developments, the BFSR remains constrained by the bank's weak franchise, which includes several core segments that do not (or only insufficiently) contribute to group profits, thus resulting in the bank's continued dependence on volatile, wholesale-focused sources of income. Moreover, Moody's does not rule out that the bank could be split up and unwound if efforts to divest the bank were to prove unsuccessful.

SUMMARY OF RATINGS AND RATING ACTIONS: WestLB

- Rating for senior unsecured debt and deposits: downgraded to A3

- Rating for senior subordinated debt: downgraded to Baa1

- Prime-1 short-term rating: affirmed

- E+ BFSR (B2 BCA): affirmed, outlook changed to stable from developing

- Aa1 rating for grandfathered obligations, stable outlook: unaffected

SUMMARY OF RATINGS AND RATING ACTIONS: WestLB Covered Bond Bank plc

- A2 rating for senior unsecured debt and deposits, on review for downgrade: no action yet

- Prime-1 short-term rating: affirmed

- E+ BFSR (B2 BCA): affirmed, outlook changed to stable from developing

RATING HISTORY AND MOODY'S METHODOLOGIES

The previous rating action on WestLB was implemented on 11 March 2010 when Moody's corrected the rating of one grandfathered security. In its previous rating action on 8 December 2009, Moody's had placed the A2 senior unsecured debt and deposit ratings and the A3 subordinated debt ratings on review for possible downgrade and changed the outlook on its E+ BFSR to developing from negative.

The principal methodologies used in rating WestLB were "Moody's Bank Financial Strength Ratings: Global Methodology", published in February 2007, "Incorporation of Joint-Default Analysis into Moody's Bank Ratings", published in March 2007, and " Moody's Guidelines for Rating Bank Hybrid Securities and Subordinated Debt", published in November 2009, which are available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

Headquartered in Duesseldorf, Germany, WestLB reported total assets of EUR242.3 billion as of the end of December 2009 and reported a pre-tax loss of EUR503 million for the 12-month period.

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

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

Moody's downgrades WestLB's senior debt ratings to A3, negative outlook
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