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Rating Action:

Moody's downgrades hybrids of DZ BANK

20 Jan 2009

Frankfurt, January 20, 2009 -- Moody's Investors Service has today downgraded DZ BANK's Noncumulative Trust Preferred Securities ("TPS") issued by DZ BANK Capital Funding Trust II ("Trust II"), DZ BANK Capital Funding Trust III ("Trust III") and the Tier I Perpetual Limited Recourse Securities issued by DZ BANK Perpetual Funding Issuer (Jersey) Limited ("Funding Issuer") to Baa3 from A2. In addition, the Noncumulative Trust Preferred Securities issued by DZ BANK Capital Funding Trust I have been downgraded to A3 from A2. The outlook on all hybrid ratings has been changed to negative from stable.

DZ BANK's debt and deposit rating is Aa3 with a C- bank financial strength rating (BFSR). The C- maps into baseline credit assessment (BCA) of Baa1. The outlook on all ratings is stable.

Moody's said that the downgrade of the hybrid ratings of Trust II, Trust III and Funding Issuer to Baa3 reflects (i) the increased risk inherent to the mandatory non-payment triggers when compared to the predominant majority of European peer-structures; (ii) the anticipated loss at DZ BANK group which is a key trigger for the omission of interest payments; and (iii) the deeply subordinated nature of the securities, which, in the event of a bankruptcy, would rank junior to profit participation rights ("Genussscheine") and silent participations ("Stille Beteiligungen").

The hybrid securities have meaningful mandatory non-payment features, in particular a trigger linked to the Group's annual net income, obliging the bank to omit coupon payments upon the occurrence of a consolidated net loss. The general macroeconomic development as well as the adverse development in the capital markets in the fourth quarter 2008 in conjunction with Moody's internal asset stress tests at DZ BANK results in a loss expectation for DZ BANK at group level. This would cause a trigger breach for the net-loss-triggered hybrids. However, we believe that DZ BANK would have the ability and willingness to service the payments of their hybrids despite the contractual prohibition in such a scenario. We are aware that a voluntary payment of these coupons would be subject to regulatory approval. Given the current deteriorated operating banking environment we believe it to be most likely that the German regulator ("BaFin") would approve such payments, not only because i) DZ BANK has the ability and willingness to pay but also because ii) the bank has so far not approached SoFFin (Finanzmarktstabilisierungsanstalt, a special public law agency in charge for financial system stabilization through government support for financial institutions) for support, which in that case may put greater pressure on such voluntary payments to hybrid investors, and iii) at least in the short- to medium term, because of the uncertainty this could create among domestic and international investors which could undermine the government's efforts to restore confidence in the banking system.

Commenting on Trust I's TPS, the downgrade to A3 from A2 reflects the increased risk due to their deeply subordinated nature (in line with the Baa3 rated hybrids) in conjunction with a C- BSFR of DZ BANK. Furthermore, Moody's believes that a possible non-payment on the other hybrid securities mentioned above (rated Baa3) could trigger a similar regulatory treatment of these hybrids, acting as a further loss cushion. However, this security is significantly less risky since the triggers are linked to a balance sheet loss and are only breached if the bank's capital reserves/retained earnings (currently roughly EUR 2.5 billion) are completely depleted. In addition, DZ BANK has the right to optionally omit interest payments if it does not pay dividends to ordinary shareholders. However, we do not expect DZ BANK to report such a balance sheet loss for the financial year 2008 nor do we believe the bank will stop paying dividends for 2008 therefore Moody's view is that the company will also service the next coupon payments on this instrument; this results in a significantly lower expected loss of these instruments than the above hybrids rated Baa3, which is sufficiently reflected in the widened notching differential of three notches from the senior unsecured debt ratings.

The negative outlook on all hybrids factors in the uncertainty of DZ BANK's profitability development during 2009 in a rapidly weakening operating environment, with the scenario of a further loss in 2009 also increasing the expected loss for these instruments. However, currently Moody's has no indication that DZ BANK will indeed face a loss in 2009.

The following ratings have been affected:

Downgrades:

..Issuer: DZ BANK Capital Funding Trust I

....Preferred Stock Preferred Stock, Downgraded to A3 from A2

..Issuer: DZ BANK Capital Funding Trust II

....Preferred Stock Preferred Stock, Downgraded to Baa3 from A2

..Issuer: DZ BANK Capital Funding Trust III

....Preferred Stock Preferred Stock, Downgraded to Baa3 from A2

..Issuer: DZ Bank Perpetual Fund. Issuer (Jersey)

....Junior Subordinated Regular Bond/Debenture, Downgraded to Baa3 from A2

Outlook Actions:

..Issuer: DZ BANK Capital Funding Trust I

....Outlook, Changed To Negative From Stable

..Issuer: DZ BANK Capital Funding Trust II

....Outlook, Changed To Negative From Stable

..Issuer: DZ BANK Capital Funding Trust III

....Outlook, Changed To Negative From Stable

..Issuer: DZ Bank Perpetual Fund. Issuer (Jersey)

....Outlook, Changed To Negative From Stable

Moody's previous rating action on DZ BANK was on 5 March 2008, when the outlook on the C- BFSR was changed to stable from positive.

The principal methodologies used in rating DZ BANK are "Bank Financial Strength Ratings: Global Methodology" and "Guidelines for Rating Bank Junior Securities", which can be found on www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating DZ BANK can also be found in the Credit Policy & Methodologies directory.

Headquartered in Frankfurt, DZ BANK Group had total assets of around EUR430 billion as at 30 June 2008.

London
Johannes Wassenberg
Managing Director
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Frankfurt
Uwe Barth
Asst Vice President - Analyst
Financial Institutions Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades hybrids of DZ BANK
No Related Data.
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