FINANCIAL INSTITUTIONS

CREDIT OPINION5 August 2020

Update

RATINGS

Domicile Munich, Germany

Long Term CRR Not Assigned

Long Term Debt Aaa

Type Senior Unsecured -Dom Curr

Outlook Stable

Long Term Deposit Aaa

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.

Contacts

Christina Holthaus +49.69.70730.721Analystchristina.holthaus@moodys.com

Alexander Hendricks,CFA

+49.69.70730.779

Associate Managing Directoralexander.hendricks@moodys.com

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454

LfA Foerderbank BayernUpdate to credit analysis

SummaryWe assign Aaa/P-1 deposit ratings and Aaa debt rating to LfA Förderbank Bayern (LfA), adevelopment bank of Free State of Bavaria (Bavaria, Aaa stable1). The outlook on the long-term ratings is stable.

LfA's ratings are based on the guarantee framework provided by Bavaria, which explicitly andunconditionally guarantees LfA's liabilities. As such, the bank's ratings are equalized with thatof Bavaria, based on a full risk transfer to the guarantor.

We recognise LfA's (1) important role as Bavaria's public development bank focused on theeconomic development of the region; (2) modest core operating performance, reflecting thebank's non-profit-maximising business model; and (3) conservative risk profile, supported byadequate capitalisation and asset quality. However, given the risk transfer to the guarantor,the bank's fundamentals have no bearing on our ratings.

Exhibit 1

Key financial ratios

1.4% 23.3% 0.3% 80.9% 82.2%

80%

81%

81%

82%

82%

83%

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)

LfA

So

lve

ncy F

acto

rs

Liq

uid

ity F

acto

rs

Note: Key financial ratios are for information onlySource: Moody's Financial Metrics

MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Credit strengths

» Ownership support via extensive guarantee framework

» Adequate regulatory loss-absorbing capacity

» Low liquidity risk, based on good market access and fallback options

» Role as Bavaria's economic development bank, which defines its franchise

Credit challenges

» Earnings pressure from low-yield environment

» Containing provisioning requirements in a more challenging operating environment

Outlook

» The outlook on LfA's long-term ratings is stable, reflecting the stable outlook on the bank's owner and guarantor, Bavaria.

» The outlook of the guarantor reflects our expectation that the regional government will maintain balanced financial accounts in thenear future and maintain its commitment to reduce its debt over the next 12 to 18 months.

Factors that could lead to an upgrade

» LfA's ratings are at the highest level and therefore cannot be upgraded.

Factors that could lead to a downgrade

» Negative pressure could be exerted on the ratings if (1) the credit profile of the bank's guarantor, Bavaria, weakens; or (2) the strongsupport mechanisms weaken or become disallowed, which we currently consider to be highly unlikely.

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.

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Key indicators

Exhibit 2

LfA Foerderbank Bayern (Consolidated Financials) [1]

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

Total Assets (EUR Billion) 21.8 21.1 21.5 22.1 22.0 (0.2)4

Total Assets (USD Billion) 24.5 24.1 25.8 23.3 23.9 0.64

Tangible Common Equity (EUR Billion) 1.8 1.7 1.7 1.6 1.5 4.24

Tangible Common Equity (USD Billion) 2.0 2.0 2.0 1.7 1.6 5.14

Problem Loans / Gross Loans (%) 1.0 1.3 1.7 4.0 5.5 2.75

Tangible Common Equity / Risk Weighted Assets (%) 23.3 23.7 20.2 17.6 22.6 21.56

Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) 1.4 1.8 2.3 5.9 8.2 3.95

Net Interest Margin (%) 0.5 0.5 0.5 0.5 0.6 0.55

PPI / Average RWA (%) 0.6 0.6 0.7 1.0 1.3 0.86

Net Income / Tangible Assets (%) 0.3 0.5 0.5 0.5 0.5 0.55

Cost / Income Ratio (%) 62.1 59.1 51.6 45.7 40.5 51.85

Market Funds / Tangible Banking Assets (%) 80.9 79.7 77.5 77.6 76.1 78.45

Liquid Banking Assets / Tangible Banking Assets (%) 82.2 82.2 85.0 85.2 86.0 84.15

Gross Loans / Due to Customers (%) 144.1 124.2 93.4 90.1 76.7 105.75

[1]All figures and ratios are adjusted using Moody's standard adjustments. [2]Basel III - fully loaded or transitional phase-in; LOCAL GAAP. [3]May include rounding differences because ofthe scale 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

ProfileLfA is a development bank of Bavaria and is wholly owned by the federal state. LfA’s objectives are to support the general economicdevelopment of Bavaria and to encourage employment. As of 31 December 2019, the bank reported an unconsolidated asset base of€21.8 billion. LfA provides financing products and services intended to improve the region’s commercial and transport infrastructure,and to enhance its environmental protection. The bank’s programmes are focused on small and medium-sized enterprises (SMEs) andstart-ups. Furthermore, LfA implements the development programmes of Bavaria, and provides guarantees guided by the state or onbehalf of the state. The bank is headquartered in Munich and operates offices in the Bavarian cities of Nuremberg and Hof, employing300 full-time equivalent staff. LfA holds a full banking licence and is regulated by the German Federal Financial Supervisory Authority(BaFin) and the Bundesbank.

For more information, please see our German Banking System Profile.

Recent developmentsThe coronavirus will cause unprecedented shock to the global economy. The full extent of the economic downswing will be unclear forsome time; however, G-20 economies will contract in 2020. We presently expect the G-20 advanced economies as a group to contractby 4.6% in 2020 and the euro area by 5.6%, followed by a gradual recovery in 2021.

Germany agreed on a €130 billion stimulus package to support the economic recovery during the phase of a gradual easing ofcontainment measures in June 2020. The stimulus package will support Germany's economic recovery as the contractive effects fromthe government's coronavirus containment measures abate.

Given LfA's role as development bank, it is responsible to execute the measures of the federal state of Bavaria. As such it offersguarantees and loans to Bavarian companies affected by the pandemic, for which it received a counter-guarantee covering up to €12billion from the federal state.

3 5 August 2020 LfA Foerderbank Bayern: Update to credit analysis

MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Detailed credit considerationsStrong support and extensive guarantee frameworkThe bank's Aaa/P-1 ratings are based on the following support mechanisms provided by its guarantor Bavaria: (1) Bavaria's explicit andunconditional guarantee for LfA's liabilities, which provides creditors with direct recourse to the obligor; and (2) a strong public sectorsupport arrangement in the form of Anstaltslast (maintenance obligation) and Gewährträgerhaftung (guarantee obligation) provided byBavaria for the bank's obligations.

The Anstaltslast requires the bank's owner to ensure that the entity has sufficient funds to meet all of its obligations on a timely basis.The Gewährträgerhaftung confers to LfA the benefit of unconditional support of the state for all its liabilities, once their claims cannotbe satisfied fully out of the bank's assets. However, the explicit and unconditional guarantee provides creditors with direct recourse tothe obligor, facilitating timely payment of all obligations. Accordingly, Bavaria explicitly and unconditionally guarantees LfA's liabilities.

Similar to other development banks, we consider LfA's franchise value to be incomparable with those of commercially oriented banks.The LfA statutes detail the scope of the bank's business activities, including the use of products to perform its role in developmentlending to commercial enterprises, as well as its risk diversification and liquidity management activities.

Recourse to ultimate borrower mitigates high concentration in the banking industryLfA adopts a low-risk approach in its lending operations and typically lends to ultimate borrowers' "house banks", which are primarilysmall regional institutions from the cooperative or savings banks sectors. These banks, in turn, pass the loans through with the positiveeffect of assured funding, while taking on the primary credit risk and pledging the claims to LfA. This concept mitigates LfA's significantcredit exposure to banks (€13.7 billion as of the end of 2019) and materially reduces economic capital requirements. In the event ofbank failure, LfA would benefit from its priority of claims over receivables from the ultimate borrowers, thereby providing anotherimportant layer of recourse to the bank.

LfA only occasionally assumes direct credit risks, particularly if guided by regional government objectives, either through guaranteeingrisks of house banks, when these institutions are not prepared to assume higher-risk levels, through providing working capitalguarantees for SMEs, or through participation in syndicated loans at the request of commercial banks. Syndicated loans have gainedimportance for LfA in recent years, compensating for a decline in promotional loans, which have seen prepayments and lower demandin the low interest rate environment.

Exhibit 3

LfA's development of problem loan and coverage ratiosExhibit 4

LfA's loan exposure by sectorAs of year-end 2019

1.7%1.3%

1.0%

97% 97%

114%

0%

20%

40%

60%

80%

100%

120%

140%

0%

1%

2%

3%

4%

5%

6%

7%

8%

2017 2018 2019

Problem Loans / Gross Loans (left axis) Coverage ratio (right axis)

Ratios as per Moody' definitionSource: Company reports and Moody's Investors Service

Banks and financial institutions77%

Public administration9%

Trade, service providers and production7%

Other7%

Source: Company data

As part of its special role, LfA's geographical concentration in Bavaria regularly exceeds 90% of its promotional loans. The relativelybroad diversity of direct loans granted to various industry sectors only partially offsets this concentration. LfA had not booked any riskcharges during the 2010 to 2016 period because of its sound asset quality and the improved economic environment in Bavaria andwider Germany. In 2017, however, risk provisions of €9.8 million had to be recorded, which increased the buffer of existing specific

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MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

loan-loss and guarantee provisions to €26.3 million as of the end of 2017 (2016: €16.5 million). In 2019, the bank was once again ableto book net recoveries of €7.4 million, which reduced the balance of existing specific loan-loss and guarantee provisions to €16 million.LfA's problem loan ratio meanwhile declined to 1.0% as of year-end 2019, from 1.3% as of year-end 20182.

Furthermore, LfA is exposed to the credit risks of banks, corporates and the public sector through its €5.0 billion high-quality fixed-income securities portfolio. LfA makes only very limited use of derivatives and is not exposed to lower-rated European sovereignsthrough its securities holdings.

Capital cushion further improved in 2019, following methodology change in 2016LfA is again comfortably capitalised in light of its low business risk and financial risk profile. The bank's transitional Common Equity Tier1 (CET1) ratio stood at 23.3% as of the end of 2019, unchanged from the 23.3% reported as of the end of 2018. Stable capitalisationlevels were supported by an increase in regulatory CET1 capital to €1.9 billion from €1.8 billion, that was slightly offset by a 4% increasein risk-weighted assets (RWA) to €7.7 billion.

In 2016, LfA had started to utilize public credit ratings for its bank exposures under the standardized approach for credit risk.Beforehand, LfA used the sovereign rating of a bank's domicile as a proxy instead. As a result, LfA now applies risk weights of 50%instead of 20% to more than half of its direct bank lending exposures and risk weights of 20% instead of 10% to two-thirds of itsbanking exposures in its investment portfolio. This methodology change had resulted in a dip in the CET1 ratio to 17.9% as of the end of2016 from 22.9% as of the end of 2015.

Exhibit 5

LfA's capital ratios are strong even after the change in risk weights in 2016

22.6%

17.6%

20.2%

23.7% 23.3%22.9%

17.9%

20.3%

23.3% 23.3%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2015 2016 2017 2018 2019

TCE ratio CET1 ratio

TCE = Tangible common equity (Moody's calculation); CET 1 = Common Equity Tier 1.Source: Company reports and Moody's Investors Service

In line with LfA's CET1 ratio, the bank's regulatory leverage ratio also improved to 7.59% as of the end of 2019 from 7.45% as of theend of 2018, which we view as comfortable, given LfA's low-risk profile. The bank's CET1 capital of €1.9 billion as of the end of 2019incorporates the bank's regular reserves and special reserves allowable under German local GAAP, the "fund for general banking risks"or 340g reserve. In 2019, LfA contributed €30 million to this reserve, which represented €690 million of the bank's CET1 capital asof the end of 2019. In addition to the bank's CET1 capital, LfA reported a €318.3 million 340f reserve as of the end of 2019, whichprovides further substantial loss-absorbing capacity, but was reduced by €20.1 million in 2019 in order to smooth the bank's reportednet income.

€18.8 million or 52% of the bank's 2019 net income will be retained (in line with the LfA Act), while the remaining 48% or €17.6 millionwill be distributed to its owner, the Free State of Bavaria.

Earnings pressure from the low-yield environmentLfA's performance reflects continuity and a low-risk business model, but also the low interest rate environment in recent years. Thebank's net revenue is predominantly based on interest income (87%), while fees and commissions from guarantees and other riskassumptions play a minor role.

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We consider a high level of operating efficiency (62% cost-to-income ratio in 2019, 59% in 2018) and low credit costs to be essentialfor the success of the bank's business model, since LfA's public mandate limits its revenue generation to relatively low-margin economicdevelopment activities. Given that profit maximisation is not part of the bank's mandate, the underlying level of profitability over thecycle is commensurate with its low-risk profile and should ensure a gradual capital generation in line with LfA's growth. However, inthe short to medium term, we expect the bank's underlying earnings generation capacity to decline somewhat further due to the lowinterest rate environment, which should be partly offset by cost containment measures and continued 340f reserve reversals, though.

For 2019, the bank reported a slightly lower net interest income of €96.9 for 2019 (2018: €97.9 million), while fee and commissionincome marginally increased to €14.7 million (2018: €14.4 million). The 1.1% decline in net interest income reflected the ongoingchallenges from the low interest rate environment, which drove the net interest margin down to 0.47% in 2019 from 0.48% in 2018.Negative operating leverage was also a result of a slight increase in personnel and other operating costs. These negative trends wereoffset, though, by the aforementioned €20.1 million in 340f reserve reversals, which are also recorded within loan-loss provisions.Overall, this allowed the bank to report a net profit (before the contribution to the bank's 340g reserve) of €66.3 million in 2019 (2018:€94.8 million).

Exhibit 6

LfA's profits are under pressure given the low-interest rate environment

122 117 106 98 97

20 1615

14 15

76

54 4

-61 -64 -65 -69 -72

31 39 5347

22

-100

-50

0

50

100

150

200

2015 2016 2017 2018 2019

€ m

illion

Net interest Income Net fees and commissions income Trading & other incomeAdmin. Expenses Risk provisions Extraordinary income and expensePre-tax profit

Source: Company reports, Moody's Financial Metrics

Sound and prudent liquidity managementLfA is reliant on regular access to market funding, as it predominantly refinances its lending activities from the issuance of bearerbonds, registered bonds and promissory notes. However, the bank's high standing as a quasi-sub-sovereign prime issuer has sofar ensured uninterrupted access to domestic and international capital markets at very attractive rates. We expect the favourableconditions to remain broadly unchanged. We consider the risk of market access interruption to be sufficiently mitigated by LfA'sportfolio of €4.2 billion liquid fixed-income securities, as well as the bank's ability to access the European Central Bank (ECB) for repotransactions.

6 5 August 2020 LfA Foerderbank Bayern: Update to credit analysis

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Exhibit 7

LfA's funding profile is largely driven by market funding

76% 78% 77% 80% 81%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015 2016 2017 2018 2019

Deposits Liabilities to banks Issued securitiesShort-term borrowings Other liabilities EquityMarket Funds Ratio* (right axis)

*Market funds ratio = market funds/tangible banking assetsSource: Company reports and Moody's Investors Service

LfA's funding strategy also includes federal development resources from Germany's largest development bank, Kreditanstaltfür Wiederaufbau (Aaa stable/Aaa stable3), which accounts for €6.6 billion of LfA's liabilites. The bank's capital market fundingrequirements, which are typically around €2.0 billion per year, slightly increased to €2.2 billion in 2019 from €2.1 billion in 2018.Interbank and ECB facilities cover temporary funding requirements. Funding and lending are closely matched, with the liquiditycoverage ratio (LCR) of 428% as of the end of 2019 expressing LfA's sound liquidity management.

Exhibit 8

LfA's liquid resources mainly consists of interbank loans and liquid securities

86% 85% 85%82% 82%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015 2016 2017 2018 2019

Cash Loans to banks Securities/ Investments Customer loans Other assets Liquid Banking Assets Ratio* (RHS)

*Liquid banking assets ratio = liquid assets/tangible banking assetsSource: Company reports and Moody's Investors Service

ESG considerationsIn line with our general view on the banking sector, LfA has a low exposure to environmental risks (see our environmental risk heatmap4 for further information). As part of its business model, LfA offers promotional lending products focusing on investments that shallimprove energy efficiency and protect resources.

For social risks, we also place LfA in line with our general view for the banking sector, which indicates a moderate exposure (see oursocial risk heat map5). This includes considerations in relation to the rapid and widening spread of the coronavirus outbreak, given thesubstantial implications for public health and safety and the deteriorating global economic outlook, creating a severe and extensivecredit shock across many sectors, regions and markets. In case of LfA, the development bank is responsible to distribute measures ofthe federal state to the customers in response to coronavirus. It provides promotional lending only through the house bank of thecustomers. Hence, social risks for LfA are even more limited than for traditional commercial banks.

7 5 August 2020 LfA Foerderbank Bayern: Update to credit analysis

MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Corporate governance6 is highly relevant for LfA, as it is to all participants in the banking industry. Corporate governance weaknessescan lead to a deterioration in a company’s credit quality, while governance strengths can benefit its credit profile. Governance risks arelargely internal rather than externally driven, and for LfA, we do not have any particular governance concerns. Nonetheless, corporategovernance remains a key credit consideration and requires ongoing monitoring.

MethodologyThe principal methodology we used in rating LfA was Government-Related Issuers published in February 2020.

Ratings

Exhibit 9

Category Moody's RatingLFA FOERDERBANK BAYERN

Outlook StableBank Deposits Aaa/P-1Senior Unsecured -Dom Curr Aaa

Source: Moody's Investors Service

8 5 August 2020 LfA Foerderbank Bayern: Update to credit analysis

MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Endnotes1 The rating shown is the Free State of Bavaria's long-term issuer rating and outlook

2 The problem loan ratio shown prior to 2017 in Exhibit 2 contains non-performing exposures from the bank's loan guarantee business. Including these non-performing off-balance sheet exposures, the problem loan ratio would have stood at 2.9% as of year-end 2019.

3 The ratings shown are Kreditanstalt für Wiederaufbau's deposit rating and outlook, and senior unsecured rating and outlook

4 Environmental risks can be defined as environmental hazards encompassing the impact of air pollution, soil/water pollution, water shortages and naturaland man-made hazards (physical risks). Additionally, regulatory or policy risks, like the impact of carbon regulation or other regulatory restrictions,including the related transition risks like policy, legal, technology and market shifts, which could impair the evaluation of assets are an important factor.Certain banks could face a higher risk from concentrated lending to individual sectors or operations exposed to the aforementioned risks.

5 Social risk considerations represent a broad spectrum, including customer relations, human capital, demographic and societal trends, health and safetyand responsible production. The most relevant social risks for banks arise from the way they interact with their customers. Social risks are particularlyhigh in the area of data security and customer privacy, which is 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 is a further social risk. Societal trends arealso relevant in a number of areas, such as shifting customer preferences towards digital banking services increasing information technology costs, ageingpopulation concerns in several countries affecting demand for financial services or socially driven policy agendas that may translate into regulations thataffect banks’ revenue bases.

6 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.

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Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’sOverseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a NationallyRecognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by anentity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registeredwith the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.

MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferredstock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and servicesrendered by it fees ranging from JPY125,000 to approximately JPY250,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

REPORT NUMBER 1229812

10 5 August 2020 LfA Foerderbank Bayern: Update to credit analysis

MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Contributors

Vasil MrachkovAssociate Analyst

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454

11 5 August 2020 LfA Foerderbank Bayern: Update to credit analysis