HYPO NOE Landesbank fur Niederosterreich und Wien AGHYPO NOE Landesbank fur Niederosterreich und Wien AG--Risk-Adjusted Capital Framework Data (Mil. €) Exposure* Basel III RWA Average

HYPO NOE Landesbank furNiederosterreich und Wien AG

Primary Credit Analyst:

Michal Selbka, Frankfurt +49 (0) 69-33999-300; [email protected]

Secondary Contacts:

Anna Lozmann, Frankfurt (49) 69-33-999-166; [email protected]

Claudio Hantzsche, Frankfurt + 4933919188; [email protected]

Table Of Contents

Major Rating Factors

Outlook

Rationale

Related Criteria

Related Research

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 8, 2019 1

HYPO NOE Landesbank fur Niederosterreich undWien AG

SACP bbb+

Anchor a-

Business

PositionWeak -2

Capital and

EarningsVery Strong +2

Risk Position Moderate -1

Funding Average

0

Liquidity Adequate

+ Support +2

ALACSupport 0

GRE Support +2

GroupSupport 0

SovereignSupport 0

+AdditionalFactors 0

Issuer Credit Rating

A/Positive/A-1

Major Rating Factors

Strengths: Weaknesses:

• Very strong capitalization even in global terms.

• Very strong link to and important role for the state

of Lower Austria, the bank's 100% owner.

• One of the lowest net interest margins and operating

efficiency ratios among peers.

• Limited geographic diversity and large reliance on

public-sector-related business.


Outlook: Positive

The positive outlook on HYPO NOE Landesbank fur Niederosterreich und Wien AG (HYPO NOE) indicates that

S&P Global Ratings could take a positive rating action in the next 24 months if HYPO NOE significantly improves

its cost efficiency toward that of higher-rated peers, thereby supporting more sustainable bottom-line profitability,

and maintains a risk-adjusted capital (RAC) ratio above 15%.

Since HYPO NOE is a government-related entity (GRE), the ratings on the bank are sensitive to the

creditworthiness of the state of Lower Austria. Therefore, any rating action on Lower Austria would lead us to

review our ratings on the bank. We could revise our outlook to stable if the bank slides behind its targets to

improve efficiency and profitability. We would also take a negative rating action, if, contrary to our base-case

expectations, the bank were to expand into riskier lending to small and midsize enterprises (SMEs) or commercial

real estate, exposing it to potential losses that exceed our expectations; or if extraordinary dividend payouts cause

a significant fall in capitalization, triggering a deterioration of the RAC ratio to below 15%.

In addition, we could lower our rating if the likelihood of extraordinary support from HYPO NOE's parent

diminished. We currently see this scenario as remote, however.

Rationale

In our opinion, HYPO NOE's overall economic risk is in line with that for the Austrian market, since the bank operates

mainly in the domestic environment and does not plan to expand its foreign activities.

The bank's business model remains highly reliant on the public-sector-related lending characterized by very low

margins. This disadvantage is somewhat compensated by the bank's very strong capitalization level built on the

one-off effects of the past, given HYPO NOE's only low dividend payouts. We expect that the RAC ratio will stay

comfortably above 15% over the next two years. We note some tail risks associated with the creditworthiness of some

commercial real estate customers or SME segment. Overall, we believe that the bank will continue to focus on low-risk

areas, such as public-sector-related lending and public sector leasing. HYPO NOE's funding and liquidity benefit from

its ownership structure and implicit links with the state of Lower Austria.

We consider HYPO NOE a government-related entity (GRE) with a high likelihood of receiving timely and sufficient

extraordinary government support from the state of Lower Austria if needed. We base this opinion on HYPO NOE's

important role for, and very important link with, the local government. This provides two notches of rating uplift above

the bank's stand-alone credit profile (SACP), resulting in a long-term issuer credit rating of 'A'.

Anchor: 'a-' in line with the anchor for banks operating only in Austria

HYPO NOE's foreign exposure is limited to ca. 10% outside Austria--the bank is active in Germany as well as in

Central and Eastern Europe. We expect the overall share of higher-risk countries in the portfolio to remain very low

and see the economic risks of operations to be in line with that of purely domestic Austrian banks.

Our economic risk assessment is based on Austria's highly competitive and diverse economy, with strong economic


HYPO NOE Landesbank fur Niederosterreich und Wien AG

fundamentals, high integration in Western European economies, and strong ties to Eastern and Southeastern Europe.

Economic growth is aiding the banking sector's performance. We believe that the Austrian economy will remain in an

expansionary phase, but don't expect an accumulation of imbalances due to further increases in real estate prices.

Credit risk in the economy is likely to remain low, reflecting a healthy private sector, low lending growth, and prudent

lending standards, which we expect will persist.

With regards to industry risk, Austrian banks face similar challenges as their global peers in terms of business model

optimization, ensuring sufficient and sustainable profitability, leveraging the benefits of the digital era, and introducing

measures to avoid disruption and franchise damage from cyber-attacks and customer data mismanagement. We

believe that most Austrian banks still have much work to do to improve profitability, given moderate overcapacity in

their domestic operations and low prices in core banking products, resulting in lower domestic margins than those of

many peers in other countries. In our view, enhanced focus on efficiency and profitability and recent de-risking

contribute to stability of the system over the cycle.

Table 1

HYPO NOE Landesbank fur Niederosterreich und Wien AG--Key Figures

--Year ended Dec. 31--

(Mil. €) 2019* 2018 2017 2016 2015

Adjusted assets 14,867.4 14,059.3 14,367.1 15,391.1 15,894.2

Customer loans (gross) 10,841.2 10,325.3 10,249.7 10,875.3 11,557.3

Adjusted common equity 652.6 638.9 628.0 601.0 544.2

Operating revenues 78.0 128.4 147.5 162.3 139.6

Noninterest expenses 61.6 112.8 115.8 128.9 129.1

Core earnings 14.9 19.9 31.1 19.1 6.4

*Data as of June 30.

Business position: Geographically concentrated business model with low efficiency

We think HYPO NOE's business model's main weaknesses are its regional focus and strong concentration on the

public sector and public-sector-related real estate, accompanied by one of the lowest efficiencies amongst its peers.

HYPO NOE is a small commercial bank based in Lower Austria, with reported total assets of €14.9 billion as of June

30, 2019. We expect the bank to remain the dominant player in Lower Austria in its business niche.

We view strategic ownership support from Lower Austria and implicit funding benefits as critical for the stability of

HYPO NOE's business model.



Chart 1

Excluding positive one-offs from revaluations, its cost-to-income ratio as we calculate it, oscillates between 75%-80%

(79% as of June 30, 2019). The management faces a challenging task to improve profitability amid increasing

headwinds in the low interest rates environment accompanied by high regulatory burdens, although it is taking steps

especially to address HYPO NOE's still relatively heavy noninterest expenses. We reflect those endeavors in our

positive outlook.



Chart 2

Table 2

HYPO NOE Landesbank fur Niederosterreich und Wien AG--Business Position


(%) 2019* 2018 2017 2016 2015

Total revenues from business line (currency in millions) 78.2 150.6 147.5 230.2 139.6

Commercial & retail banking/total revenues from

business line

78.0 81.0 100.0 100.0 100.0

Trading and sales income/total revenues from

business line

17.7 16.9 N/A N/A N/A

Other revenues/total revenues from business line 4.3 2.1 N/A N/A N/A

Investment banking/total revenues from business line 17.7 16.9 N/A N/A N/A

Return on average common equity 4.5 5.5 4.7 11.5 1.1

*Data as of June 30. N/A--Not applicable.

Capital and earnings: One of the highest capitalizations amongst peers

We consider HYPO NOE's RAC--one of the highest among peers--as a key rating strength. Our RAC ratio for HYPO

NOE increased to 20.7% as of Dec. 31, 2018, from 18.1% the year before. We expect it will comfortably remain above

15.0% over the next two years.



That significant increase in the bank's RAC results mainly from the capitalized one-off positive earnings effects, but

also the bank's reduction of its balance sheet by close to €2 billion between 2015 and 2018 reflecting ongoing decrease

of less profitable public-sector-related lending and the respective drop in our risk-weighted assets (RWA) figure. We

expect operating earnings for the next two years to remain under pressure, at a comparable level as reported today,

accompanied by a continuously low annual dividend distribution.

The projected earnings buffer for HYPO NOE is only slightly positive, indicating a relatively low capacity for earnings

to cover normalized losses. In our view, however, the bank's low internal capital generation capability is not a major

rating consideration. This is because HYPO NOE's management is not targeting aggressive growth, and we expect real

risk costs to remain materially below our normalized loss expectations.

We base our RAC expectation for the next 24 months on the following assumptions:

• Stable loan portfolio with no net growth.

• Stagnant net interest margin of 85-90 basis points per annum.

• A slight reduction in noninterest expenses by approximately 2% over the next two years.

• Annual credit losses of ca. €5 million.

• Dividend payout dropping to €2 million per annum (if compared with €3.5 million paid in 2018 for 2017).

Table 3

HYPO NOE Landesbank fur Niederosterreich und Wien AG--Capital And Earnings


(%) 2019* 2018 2017 2016 2015

Tier 1 capital ratio 19.1 21.0 19.9 16.3 13.5

S&P Global Ratings’ RAC ratio before diversification N/A 20.7 18.2 14.6 N/A

S&P Global Ratings’ RAC ratio after diversification N/A 12.8 12.4 11.2 N/A

Adjusted common equity/total adjusted capital 100.0 100.0 100.0 100.0 100.0

Net interest income/operating revenues 73.4 86.9 74.3 75.6 93.0

Fee income/operating revenues 11.8 11.5 10.4 8.3 9.9

Market-sensitive income/operating revenues 4.4 0.4 (3.7) (1.6) (18.2)

Noninterest expenses/operating revenues 79.0 87.8 78.5 79.5 92.5

Preprovision operating income/average assets 0.2 0.1 0.2 0.2 0.1

Core earnings/average managed assets 0.2 0.1 0.2 0.1 0.0


Table 4

HYPO NOE Landesbank fur Niederosterreich und Wien AG--Risk-Adjusted Capital Framework Data

(Mil. €) Exposure* Basel III RWA

Average Basel III

RW(%)

S&P Global

Ratings RWA

Average S&P Global

Ratings RW (%)

Credit risk

Government & central banks 5,785.7 83.5 1.4 258.7 4.5

Of which regional governments

and local authorities

4,441.9 76.0 1.7 192.0 4.3



Table 4

HYPO NOE Landesbank fur Niederosterreich und Wien AG--Risk-Adjusted Capital Framework Data (cont.)

Institutions and CCPs 709.8 110.2 15.5 101.7 14.3

Corporate 4,217.1 1,416.3 33.6 1,323.3 31.4

Retail 2,893.3 766.1 26.5 589.3 20.4

Of which mortgage 1,731.5 596.8 34.5 401.1 23.2

Securitization§ 7.8 0.0 0.0 0.2 3.0

Other assets† 264.8 314.7 118.8 262.2 99.0

Total credit risk 13,878.5 2,690.8 19.4 2,535.5 18.3

Credit valuation adjustment

Total credit valuation adjustment -- 86.2 -- 259.1 --

Market Risk

Equity in the banking book 0.0 0.0 0.0 0.0 0.0

Trading book market risk -- 0.0 -- 0.0 --

Total market risk -- 0.0 -- 0.0 --

Operational risk

Total operational risk -- 304.6 -- 297.3 --

Exposure Basel III RWA

Average Basel II

RW (%)

S&P Global

Ratings RWA

% of S&P Global

Ratings RWA

Diversification adjustments

RWA before diversification -- 3,081.6 -- 3,092.0 100.0

Total Diversification/

Concentration Adjustments

-- -- -- 1,914.4 61.9

RWA after diversification -- 3,081.6 -- 5,006.3 161.9

Tier 1 capital Tier 1 ratio (%)

Total adjusted

capital

S&P Global Ratings

RAC ratio (%)

Capital ratio

Capital ratio before adjustments 646.2 21.0 638.9 20.7

Capital ratio after adjustments‡ 646.2 21.0 638.9 12.8

*Exposure at default. §Securitization Exposure includes the securitization tranches deducted from capital in the regulatory framework. †Exposure

and S&P Global Ratings’ risk-weighted assets for equity in the banking book include minority equity holdings in financial institutions.

‡Adjustments to Tier 1 ratio are additional regulatory requirements (e.g. transitional floor or Pillar 2 add-ons). RWA--Risk-weighted assets.

RW--Risk weight. RAC--Risk-adjusted capital. Sources: Company data as of Dec. 31, 2018, S&P Global Ratings.



Chart 3

Risk position: Exposure mainly in low-risk areas but some tail risks exist

Apart from the higher customer and geographical concentration factors, we think it is possible that some risks to our

RAC forecast could emerge from HYPO NOE expanding into more profitable--but riskier--new business, which could

translate into RWAs exceeding our projections over the next two years. Some additional risk could for example stem

from the commercial real estate lending segment over time. Otherwise, we expect the bank will pursue lending in

low-risk areas such as public-sector lending and public-sector leasing. We do not expect HYPO NOE to move

meaningfully away from its high concentration in financing public-sector real estate over time. Owing to the

collateralized nature of the dominant portion of the bank's lending and the comparably high credit quality of its clients,

still primarily related to the public sector, we expect HYPO NOE to report overall lower loan losses than the

normalized losses we anticipate for comparable portfolios over the cycle.

The ratio of nonperforming assets (NPAs) to total loans was 1.84% at year-end 2018. We expect NPAs in the loan

portfolio to remain low, however with some additional risk potential stemming from the SME and commercial real

estate portfolios. Positively, coverage ratio of NPLs has recently improved to 51.2% as of June 30, 2019, from only

38.1% as of end-2017. The main business remains highly collateralized.



Table 5

HYPO NOE Landesbank fur Niederosterreich und Wien AG--Risk Position


(%) 2019* 2,018.0 2,017.0 2,016.0 2,015.0

Growth in customer loans 10.0 0.7 (5.8) (5.9) 3.2

Total diversification adjustment/S&P Global Ratings’ RWA

before diversification

N/A 61.9 47.0 30.3 N/A

Total managed assets/adjusted common equity (x) 22.8 22.0 22.9 25.6 29.2

New loan loss provisions/average customer loans (0.1) (0.1) (0.1) 0.1 (0.0)

Net charge-offs/average customer loans 0.0 0.0 0.1 0.1 0.1

Gross nonperforming assets/customer loans + other real

estate owned

1.3 1.8 2.2 2.4 3.7

Loan loss reserves/gross nonperforming assets 51.2 40.7 33.3 38.1 23.6


Chart 4

Funding and liquidity: Benefits from implicit state support

As of year-end 2018, our stable funding ratio for HYPO NOE was 98% and our liquidity ratio amounted to 1.18x. Both

of those quantitative measures place HYPO NOE at the lower end when compared with its domestic peers.



However, we expect HYPO NOE's funding profile assessment to remain in line with the industry average. We base this

on our view that the linkage to the state and state ownership, materially reduces its sensitivity to market confidence.

Since we believe that HYPO NOE will continue to rely on wholesale capital markets, parental support will remain

critical in our assessment of its funding and liquidity.

We expect deposit levels to remain stable in the next two years--customer deposits comprised almost a third of the

bank's funding base as of June 30, 2019, whereas 41% of the total funding were covered bonds. We expect the bank to

maintain a similar structure of its liabilities over the next years, while trying to shift further toward a matched model in

terms of maturities, to strengthen liquidity.

Table 6

HYPO NOE Landesbank fur Niederosterreich und Wien AG--Funding And Liquidity


(%) 2019* 2018 2017 2016 2015

Core deposits/funding base 30.7 28.3 32.9 29.1 23.5

Customer loans (net)/customer deposits 274.7 298.9 251.2 280.1 351.3

Long-term funding ratio 88.6 87.7 91.4 79.8 87.8

Stable funding ratio 97.2 98.1 102.0 88.6 97.0

Short-term wholesale funding/funding base 12.0 12.9 9.1 21.1 12.7

Broad liquid assets/short-term wholesale funding

(x)

1.1 1.2 1.7 0.7 1.0

Net broad liquid assets/short-term customer

deposits

3.9 9.0 21.5 (28.8) 0.0

Short-term wholesale funding/total wholesale

funding

17.3 18.0 13.5 29.8 16.6

Narrow liquid assets/3-month wholesale funding

(x)

5.2 5.1 10.0 3.0 1.4

*Data as of June 30.

Support: Two notches of uplift for government support

We see a high likelihood of timely and sufficient extraordinary government support from the government of Lower

Austria if needed. Our view is based on our assessment of HYPO NOE's:

• Important role for Lower Austria, because a default could tarnish Lower Austria's reputation. In addition, the bank

supports regional economic and social objectives; and

• Very strong link with the government of Lower Austria, owing to its very strong and durable relationship with the

state. We do not anticipate any changes to the state's full ownership of HYPO NOE either.

We believe that the prospect of extraordinary government support for Austrian banks is uncertain, following the full

implementation of the EU Bank Recovery and Resolution Directive, including bail-in powers, in January 2015.

However, we generally believe that resolution frameworks are less likely to impede the state owners' willingness to

provide extraordinary support to banks we consider GREs, including HYPO NOE.



Issue ratings

The 'BBB-' issue rating on HYPO NOE's nondeferrable subordinated debt is two notches lower than the bank's SACP.

The SACP indicates our view of a bank's credit risk without extraordinary support from the government. We believe

that by notching from the SACP assessment, instead of from the long-term issuer credit rating, we better capture the

risk of an increased uncertainty of government support for subordinated debt issues.

Related Criteria

• General Criteria: Group Rating Methodology, July 1, 2019

• Hybrid Capital: Methodology And Assumptions, July 1, 2019

• Criteria | Financial Institutions | General: Risk-Adjusted Capital Framework Methodology, July 20, 2017

• General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017

• Criteria | Financial Institutions | Banks: Bank Rating Methodology And Assumptions: Additional Loss-Absorbing

Capacity, April 27, 2015

• General Criteria: Rating Government-Related Entities: Methodology And Assumptions, March 25, 2015

• Criteria | Financial Institutions | Banks: Quantitative Metrics For Rating Banks Globally: Methodology And

Assumptions, July 17, 2013

• Criteria | Financial Institutions | Banks: Banks: Rating Methodology And Assumptions, Nov. 9, 2011

• Criteria | Financial Institutions | Banks: Banking Industry Country Risk Assessment Methodology And

Assumptions, Nov. 9, 2011

• General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009

• Criteria | Financial Institutions | Banks: Commercial Paper I: Banks, March 23, 2004

Related Research

• Summary: Austria, Sept. 13, 2019

• Banking Industry Country Risk Assessment Update: September 2019

• Banking Industry Country Risk Assessment: Austria, June 19, 2019

• Upper Austria (State of), June 7, 2019



Anchor Matrix

Industry

Risk

Economic Risk

1 2 3 4 5 6 7 8 9 10

1 a a a- bbb+ bbb+ bbb - - - -

2 a a- a- bbb+ bbb bbb bbb- - - -

3 a- a- bbb+ bbb+ bbb bbb- bbb- bb+ - -

4 bbb+ bbb+ bbb+ bbb bbb bbb- bb+ bb bb -

5 bbb+ bbb bbb bbb bbb- bbb- bb+ bb bb- b+

6 bbb bbb bbb- bbb- bbb- bb+ bb bb bb- b+

7 - bbb- bbb- bb+ bb+ bb bb bb- b+ b+

8 - - bb+ bb bb bb bb- bb- b+ b

9 - - - bb bb- bb- b+ b+ b+ b

10 - - - - b+ b+ b+ b b b-

Ratings Detail (As Of October 8, 2019)*


Issuer Credit Rating A/Positive/A-1

Senior Unsecured A

Short-Term Debt A-1

Subordinated BBB-

Issuer Credit Ratings History

30-May-2018 A/Positive/A-1

13-Aug-2014 A/Stable/A-1

10-Jun-2014 A/Watch Neg/A-1

Sovereign Rating

Austria AA+/Stable/A-1+

Related Entities

Lower Austria (State of)

Issuer Credit Rating AA/Stable/A-1+

*Unless otherwise noted, all ratings in this report are global scale ratings. S&P Global Ratings’ credit ratings on the global scale are comparable

across countries. S&P Global Ratings’ credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and

debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees.

Additional Contact:

Financial Institutions Ratings Europe; [email protected]




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HYPO NOE Landesbank fur Niederosterreich und Wien AGHYPO NOE Landesbank fur Niederosterreich und Wien AG--Risk-Adjusted Capital Framework Data (Mil. €) Exposure* Basel III RWA Average