MOODYS.COM

30 JANUARY 2014

NEWS & ANALYSIS Corporates 2

» Ericsson and Samsung Cross-Licensing Deal Is Credit Positive for Ericsson

» Evergrande's Bank Investment Will Reduce Its Liquidity, a Credit Negative

Infrastructure 5

» Argentina's Utilities Will Take a Credit-Negative Hit from Peso Devaluation

Banks 6

» Panama Expects Asset Quality Deterioration in Banks' Loans to Colon Free Trade Zone

» Swiss Banks Are Closer to Resolving US Tax Evasion Issues

» BayernLB Plans €1 Billion Reserve for Legal Risks Related to Hypo-Alpe Adria, a Credit Negative

» China Credit Trust Settlement Does Not Address Shadow Banking Risks

» Korea Development Bank and Industrial Bank of Korea Will Again Be Public-Sector Banks, a Credit Positive

Insurers 15

» Japan's Approval of Kampo Life's New Product Is Negative for Insurers

Sovereigns 16

» Portugal Comfortably Meets 2013 Budget Deficit Target, a Credit Positive

RECENTLY IN CREDIT OUTLOOK

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NEWS & ANALYSIS Credit implications of current events

2 MOODY’S CREDIT OUTLOOK 30 JANUARY 2014

Corporates

Ericsson and Samsung Cross-Licensing Deal Is Credit Positive for Ericsson

Last Monday, Telefonaktiebolaget LM Ericsson (A3 negative) announced that it had reached a cross-license agreement with Samsung Electronics Co. Ltd. (A1 positive), ending a dispute between the companies. The cross-license agreement covers patents relating to global system for mobile communications, universal mobile telecommunications systems and long-term evolution standards for both networks and handsets.

The agreement is credit positive for Ericsson. Samsung will make an upfront payment of SEK4.2 billion ($652 million) to Ericsson this quarter that Ericsson will book in its fourth-quarter 2013 results to be announced 30 January. Based on our adjusted figures, the payment equals Ericsson’s free cash flow (after dividends) over the 12 months ended 30 September 2013, and compares with the SEK7.7 billion of retained cash flow it generated over the same period.

Ericsson will also receive undisclosed net royalty payments from Samsung from this year onward, positively affecting its profits and cash flows. Although patent agreements generally cover a period of between four and seven years, no further details of the deal were disclosed.

The deal signals a more cooperative stance between two key players in the telecom equipment industry and potentially signals Ericsson’s currently greater research and development (R&D) efficiency versus Samsung’s in the telecom equipment business. Samsung has invested heavily in R&D over the past five years, including the equivalent of $10.4 billion 2012, up from $6.5 billion in 2008. In comparison, Ericsson has consistently spent $4-$5 billion on R&D over the past five years.

Although Ericsson has not disclosed the terms of the future royalty payments it will receive from Samsung, we expect Ericsson to experience moderate revenue growth and improve its profitability in the next 12-18 months. We also expect Ericsson’s key debt metrics to improve, with an EBIT interest cover of 8x-9x, up from 6.5x in the last 12 months, debt/EBITDA of 1.5x-1.8x, down from 1.9x, and retained cash flow (RCF)/debt of 20%-30%, up from 16% in the last 12 months.

Despite the payments, the outlook on Ericsson’s rating remains negative, reflecting our expectation of still-weak debt metrics, particularly its debt/EBITDA and RCF/net debt ratios (as adjusted by us), compared with our expectations for the current rating.

Roberto Pozzi Vice President - Senior Analyst +49.69.7073.0719 roberto.pozzi@moodys.com

Janko Lukac Associate Analyst +49.69.7073.0713 janko.lukac@moodys.com

NEWS & ANALYSIS Credit implications of current events

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Evergrande’s Bank Investment Will Reduce Its Liquidity, a Credit Negative Last Friday, Evergrande Real Estate Group Limited (B1 stable), one of China’s largest property developers, announced that it had acquired 403 million shares of Huaxia Bank (unrated) in the open market for total consideration of about RMB3.3 billion. The acquisition is credit negative for Evergrande because it will reduce its liquidity buffer and increase its investment risk while offering little strategic benefit.

The purchase makes Evergrande one of Huaxia Bank’s top five shareholders, with about 4.522% of the bank’s total issued share capital. The acquisition consumed about 8% of Evergrande’s reported cash balance of about RMB42 billion at the end of June 2013. Nevertheless, we believe Evergrande still has adequate internal resources to meet its outstanding land and construction payments, which have increased materially in the past six to 12 months as a result of its business expansion. We estimate that Evergrande had more than RMB50 billion in cash on hand at the end of 2013, driven by its sales growth.

We do not see business synergies resulting from the acquisition. Evergrande will not be involved in the operations of the bank. However, we expect the company to form business alliances with the bank to provide mortgage financing to its customers, but the benefits will be small.

In addition, Evergrande’s move into the banking industry increases its investment risk. However, we believe the risk of this acquisition is manageable given its small scale. The purchase equals about 1.2% of Evergrande’s total assets of RMB275 billion as of the end of June 2013.

This transaction follows a number of investments in non-property businesses (e.g., bottled water and recreation and sports) that Evergrande has made in recent years to diversify its business.

We believe the company expects these non-property investments to help drive its growth in the next two years amid slowing growth in its property business since 2012 (see exhibit below). In 2013, Evergrande’s year-over-year contracted sales increased about 8.8%, lower than the 27% average for our rated China property companies. The company has indicated a full-year sales target of RMB110 billion for 2014, up about 10% from its 2013 sales.

Evergrande’s Contracted Sales and Year-over-Year Growth Rate

Source: The company’s 2010-12 annual reports and 2013 newsletters

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Contracted Sales - left axis Y-o-Y Growth - right axis

Lisa Tao Associate Analyst +852.3758.1307 lisa.tao@moodys.com

Franco Leung Assistant Vice President - Analyst +852.3758.1521 franco.leung@moodys.com

NEWS & ANALYSIS Credit implications of current events

4 MOODY’S CREDIT OUTLOOK 30 JANUARY 2014

However, the non-property businesses are still small relative to Evergrande’s property operations and it will take a number of years for them to grow to meaningful size. In 2012, we estimate that Evergrande generated less than 1% of its total revenue from its non-property related businesses, mainly from its football and volleyball clubs’ advertising revenues.

Evergrande’s bank investment follows similar investments in banks by Chinese property groups such as China Vanke Co., Ltd. (Baa2 stable) and Yuexiu Group (unrated), parent of Yuexiu Property Company Limited (Baa3 stable), in late 2013, and Hopson Development Holdings Limited (B3 stable) in early 2011. The strategic value of the investments is not readily apparent: we believe the rationale is to diversify and provide growth potential against a backdrop of slowing property sales growth.

However, China Vanke’s, Hopson’s and Evergrande’s shareholdings in their respective banks are small, and their property development businesses remain their dominant segments.

NEWS & ANALYSIS Credit implications of current events

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Infrastructure

Argentina’s Utilities Will Take a Credit-Negative Hit from Peso Devaluation Last week, the Argentinean peso dropped 17% against the US dollar, closing Friday at ARS8. The peso’s devaluation is credit negative for Argentine utilities Empresa Distribuidora Norte S.A. (Edenor, Caa3 negative), MetroGas S.A. (Caa3 negative) and Empresa Distribuidora de Electricidad Salta (EDESA, B3 negative) because all three have US dollar-denominated debt while 100% of their revenues are in pesos.

The devaluation increased the utilities’ peso-reported debt by 22% over the exchange rate in effect on 30 December 2013 and by 38% over the exchange rate in effect in September. We expect the peso to devalue to ARS12 by the end of 2014, further weakening the utilities’ leverage metrics.

Of the three, EDESA is less at risk because it periodically receives tariff increases from its provincial regulator that will allow it to partially offset the negative effect of the peso devaluation on its debt burden.

However, the peso devaluation will fully hit Edenor and Metrogas given that all of their revenues are generated in pesos and that their tariffs have remained frozen for years. The frozen tariffs pressure the companies’ profits in Argentina’s inflationary environment, which private economists estimate is at above 25%.

The exhibit below depicts the US dollar debt outstanding for each of the companies and their respective amounts in local currency as of the 24 January closing exchange rate and at previous dates to illustrate the magnitude of the devaluation on the utilities balance sheet.

Argentina Utilities Debt Climbs as Consequence of Peso Devaluation (Millions)

Issuer USD Debt September

2013 ARS Debt @ 5.8 December

2013 ARS Debt @ 6.5 24 January

ARS Debt @ 8.0

Increase in ARS Debt September-24

January

EDESA $63 ARS 365 ARS 411 ARS 504 ARS 139

EDENOR $325 ARS 1,882 ARS 2,119 ARS 2,598 ARS 716

METROGAS $140 ARS 811 ARS 914 ARS 1,120 ARS 309

Source: Companies’ financials and Banco de la Nación Argentina (Exchange Rate)

We also expect 30% inflation in 2014 and there has been no indication to date that the government will allow utilities to increase their tariffs to at least partially recover their increased costs, particularly when any tariff increase will fuel inflation further.

Daniela Cuan Vice President - Senior Analyst +54.11.5129.2617 daniela.cuan@moodys.com

NEWS & ANALYSIS Credit implications of current events

6 MOODY’S CREDIT OUTLOOK 30 JANUARY 2014

Banks

Panama Expects Asset Quality Deterioration in Banks’ Loans to Colon Free Trade Zone Last Thursday, Panama’s Official Gazette published a regulation from the Superintendency of Banks (SBP) that mandates specific provisions of up to 50% for uncollateralized bank loans to companies operating in Panama’s Colon Free Trade Zone (ZLC). The new provisioning goes into effect 28 February.

The creation of new specific provisions is in line with the SBP’s expectation of further deterioration in the quality of loans to the ZLC, a credit negative for Panamanian banks. That expectation is largely based on tightening foreign currency restrictions in Venezuela and import tariffs imposed by Colombia, two of its most active trading partners and which have impaired the cash flow of bank borrowers at the ZLC. As a result, the ZLC saw its trade volumes decline by 9.4% to $27.9 billion as of December 2013 from a year earlier.

As of November 2013, Panamanian banks’ exposure to the ZLC totaled $2.9 billion, or 8% of the system’s domestic loans. Main lenders to the ZLC include Banistmo (unrated), Banco General (unrated), Banco Aliado (unrated), Banesco (unrated) and BAC International Bank, Inc (Baa3 stable, D+/baa3 stable1) (which includes Banco Bilbao Vizcaya Argentaria (Panama)), with about half of total loans. Among the large banks, Banco Aliado has the highest share of loans to the ZLC relative to its own loan portfolio, at 23% or about twice that of Banesco at 14% and Multibank (unrated) at 11%.

Exposures are more moderate for the other Panamanian banks we rate, including Global Bank Corporation and Subsidiaries (Ba1 stable, D+/ba1 stable) (4% of its loan portfolio) and Banco Internacional de Costa Rica, S.A. (Ba1 stable, D+/ba1 stable) (8% of its loan portfolio).

New provisioning requirements put special emphasis on borrowers’ leverage, defined as total liabilities relative to equity. Rates range from 10% for borrowers with between 3x and 4.9x leverage to as high as 50% if leverage is higher than 13x or if equity is negative. Furthermore, the leverage calculation requires banks to deduct from the borrowers’ equity their exposures to receivables from Venezuela, which signals that regulators expect a low recovery value for these accounts. We also note that the extra provisioning will apply to the uncollateralized portion of loans. Acceptable collateral includes time deposits and guarantees backed by property, the latter of which will depend on its appraised value.

In addition, loans to the ZLC will also have to be reclassified according to the borrowers’ indebtedness in order to reflect the higher provisioning requirements, as shown in the exhibit below. This measure aims to ensure that all banks classify these loans in line with the perceived higher risk toward the ZLC.

1 The ratings shown are the banks’ deposit ratings and standalone bank financial strength ratings/baseline credit assessments, and

respective outlooks.

Georges Hatcherian Analyst +52.55.1555.5301 georges.hatcherian@moodys.com

NEWS & ANALYSIS Credit implications of current events

7 MOODY’S CREDIT OUTLOOK 30 JANUARY 2014

Summary of the Panamanian Banks’ New Provisioning and Classification Requirements for Loans to the Colon Free Trade Zone Classification Borrowers’ Leverage Required Bank Provisioning

Special Mention 3x - 4.9x 10%

Sub-normal 5x - 7.9x 15%

8x - 12.9x 20%

Doubtful 13x or more, or negative equity 50%

Source: Panama’s Official Gazette, 23 January 2014

NEWS & ANALYSIS Credit implications of current events

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Swiss Banks Are Closer to Resolving US Tax Evasion Issues Last Saturday, US Department of Justice (DOJ) Assistant Attorney General Kathryn Keneally reported that 106 Swiss banks (or 36% of the system’s total) had announced they were participating in the US-Swiss tax program2 and seeking non-prosecution agreements.3 The high participation rate in the program moves Swiss banks closer to individual bank settlements, including potential onetime fines to compensate for past misconduct, and to resolving the longstanding issue of the US tax evasion probe.4 These banks seek to be classified as Category 2 banks in the US-Swiss classification system of Swiss banks, as shown in the exhibit below.

US-Swiss Categorization of Swiss Banks in Tax Dispute

Category Suggested Measure Penalty Desired Action by US Department of Justice Moody’s-Rated Banks

1 - Banks under formal investigation by the DOJ (not part of the program)

Negotiations with the DOJ on continued information exchange and fine

Individually negotiated Deferred prosecution agreement or non-prosecution agreement

Credit Suisse, Julius Baer, Zuercher Kantonalbank

2 - Banks that have reason to believe that they have committed tax-related offenses

Negotiations with the DOJ on information exchange and fine

20%-50% of affected assets

Non-prosecution agreement

Banque Cantonale Vaudoise, Berner Kantonalbank, BSI AG, EFG Bank, EFG International, St. Galler Kantonalbank

3 - Banks that have not committed any tax-related offenses

Verification and delivery of internal investigation by independent examiner

No fine Non-target letter Bank Vontobel; To be decided if Category 3 or 4: Raiffeisen Schweiz, LGT Bank AG, Clientis AG

4 - Banks with a local client base (in line with Foreign Account Tax Compliance Act)

Verification by independent examiner

No fine Non-target letter

Source: Moody’s Investors Service

A final resolution of the US tax evasion probe will alleviate the reputational and legal risks that have made it difficult for banks to attract new customers, especially in the US, and subdued the growth of net new assets. Banks participating in the program substantially reduce the risk of the US seeking indictments against them, which would jeopardize their ability to settle trades in US dollars, even if they have no physical operations in the US. Therefore, a settlement reduces the risk of losing business relations with US correspondent banks, and thus customers who rely on Swiss banks to settle in US dollars.

2 See Joint Statement between the U.S. Department of Justice and the Swiss Federal Department of Finance, 29 August 2013. 3 See US Department of Justice American Bar Association meeting materials. 4 See Swiss Rejection of Plan to Aid US Tax Evasion Probe is Credit Negative for Bank, 24 June 2013; Switzerland Permits Banks to

Provide Leaver Lists to US Tax Authorities, a Credit Positive, 1 August 2013 and Swiss Banks Benefit from US-Swiss Agreement on Tax Evasion Dispute, 9 September 2013.

Michael Rohr Vice President - Senior Analyst +49.69.7073.0901 michael.rohr@moodys.com

NEWS & ANALYSIS Credit implications of current events

9 MOODY’S CREDIT OUTLOOK 30 JANUARY 2014

Full compliance with the non-prosecution agreement (or non-target letter requirements in Categories 3 and 4) will add administrative costs for the banks involved in the US tax dispute and result in uncertain penalties for Category 2 banks, which may be significant relative to the banks’ net profits and could limit their internal capital-generation capacity. Although the fines will have a onetime negative effect on the banks’ credit profiles, we expect claim settlements to be largely absorbed by rated Swiss banks’ sound capitalization and stable profitability metrics displayed in 2012 and during the first nine months of 2013.

We expect the potential final penalties to be significantly higher than the fines negotiated on earlier settlements, which totalled 4% of undeclared assets for UBS AG (A2 stable, C-/baa2 stable5) and 6% for Wegelin & Co. (unrated). We expect the US to treat more severely those banks that became host to US clients who shifted undeclared assets away from UBS AG in 2008, when the bank was prosecuted by the US authorities.

Category 1 banks already under DOJ investigation – including Credit Suisse AG (A1 stable, C-/baa1 stable), Bank Julius Baer & Co. AG (A1 negative, C+/a2 negative) and Zuercher Kantonalbank (Aaa stable, C+/a2 stable) – will continue to cooperate with the DOJ and negotiate fines on an individual basis. For this group of banks, we expect final penalties to depend on the estimated amount of undeclared assets (and resulting tax loss), the degree of cooperation with the US authorities, the severity of the offense and potentially the profitability of the business.

5 The ratings shown are the banks’ deposit ratings and standalone bank financial strength ratings/baseline credit assessments, and

respective outlooks.

NEWS & ANALYSIS Credit implications of current events

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BayernLB Plans €1 Billion Reserve for Legal Risks Related to Hypo-Alpe Adria, a Credit Negative Last Monday, German newspaper Boersenzeitung reported that Bayerische Landesbank (BayernLB, Baa1 stable, D-/ba3 stable6) will reserve €1 billion against legal risks associated with €2.3 billion extended to its former subsidiary, Austria’s Hypo Alpe-Adria-Bank International AG (HAA, A1 negative). The two banks are locked in a lawsuit that BayernLB filed in December 2012 against HAA, in which BayernLB claimed that the amount extended to the former subsidiary in 2008 constituted a loan and not equity, as claimed by HAA.

The €1 billion reserve is credit negative for BayernLB because it is not an addition to reserves and does not bolster its loss-absorption capacity; on the contrary, it will be deducted from BayernLB’s core Tier 1 (CET1) capital, thereby reducing its regulatory ratios, its available cushion for loss absorption and potentially its ability to return €4 billion of state aid to its majority owner, the Free State of Bavaria (Aaa negative) by 2019.

The €1 billion is roughly 45% of a €2.3 billion loan that is currently outstanding. Tranches under this loan worth €1.8 billion matured at year-end 2013 and are now in arrears, requiring BayernLB to reserve up to €800 million of capital, with the remainder required in 2015. The reserve will not affect BayernLB’s income statement because it does not constitute a risk provision.

Although the matured €1.8 billion will be 90 days past due at the end of first-quarter 2014, it will not be automatically classified as a nonperforming loan (NPL) because HAA is in a position – although is unwilling – to redeem the loan. The difference is important: if the €1.8 billion amount in arrears were classified as impaired, it would add substantially to BayernLB’s existing €3.75 billion of NPLs.

It remains to be seen whether the European Banking Authority, which is in charge of defining new standards of financial reporting, will agree with this view in its upcoming asset quality review. However, by earmarking material capital resources against the risk, the planned reserve will effectively preempt stricter treatment.

Our view is that the timing and the amount to be deducted from BayernLB’s regulatory capital does not imply anything about whether BayernLB faces increased risk of not winning the lawsuit. BayernLB assesses the risk of losing money on its exposure to HAA as low, which justifies its choice of not making risk provisions that would otherwise burden the income statement.

Although BayernLB is sufficiently capitalised, as reflected by its projected 12.1% CET1 ratio as of January 2014 under Basel III, the deduction from regulatory capital makes it more difficult for the bank to restructure and return €4 billion of state aid, which is one third of its CET1 capital. The former entails the unwinding of a large non-core unit that held one fourth of the group’s risk-weighted assets as of June 2013. The requirement to return €4 billion in capital is the most crucial item on the list of compensation measures that BayernLB has to perform in return for state aid it received during the banking crisis.

6 The ratings shown are the banks’ deposit ratings and standalone bank financial strength ratings/baseline credit assessments, and

respective outlooks.

Katharina Barten Vice President - Senior Credit Officer +49.69.707.30.765 katharina.barten@moodys.com

NEWS & ANALYSIS Credit implications of current events

11 MOODY’S CREDIT OUTLOOK 30 JANUARY 2014

If we deduct up front the whole €4 billion amount to be returned and the €1 billion capital for legal risks from the bank’s CET1 capital, the Basel III CET1 ratio would be a materially lower 7.1% on a pro forma basis. However, the pro forma calculation overstates the risk because the five-year repayment schedule for returning state aid will allow the bank to gradually unwind its legacy portfolios and benefit from major capital relief as respective risk-weighted assets decrease over time.

NEWS & ANALYSIS Credit implications of current events

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China Credit Trust Settlement Does Not Address Shadow Banking Risks Last Monday, the Financial Times reported that China Credit Trust Co. (CCT, unrated) had reached a last-minute agreement to repay investors of a failed trust product. The product, named Credit Equals Gold No. 1, matures on 31 January, with a principal amount of RMB3 billion. According to the Financial Times, investors in the product have been offered a deal to recoup all their principal, but only part of their third year’s expected interest. CCT structured the product, which was distributed nationally by Industrial & Commercial Bank of China Ltd (ICBC, A1 stable, D+/ba1 stable7) in 2011 to raise funds for a coal miner in Shanxi Province which collapsed in 2012.

This settlement avoids the risks of contagion and system instability that a principal default might have caused, given the scale of the product. The settlement mitigates fear about defaults of other trust products, which are a core portion of China’s shadow banking sector. However, the reported settlement does not address the underlying fundamental moral hazard issues that encourage excessive risk-taking in China’s shadow banking sector. Nor does it address the risk of the shadow banking system being a source of financial system instability.

As the exhibit below shows, trust assets have grown quite rapidly in the past few years and totaled about RMB9.6 trillion as of 30 September 2013. Some trust assets are backed by exposures to borrowers such as miners, property developers and local government financing vehicles, some of which are risky credits and lack regular access to bank loans. Because these assets are generally packaged into wealth management products and sold to investors primarily through bank distribution channels, Chinese banks could be affected by trust defaults in a number of ways, including direct credit exposure and indirect reputational, regulatory and legal risks.8

Investments Underlying Chinese Shadow Banking Trust Assets

Note: “Securities Market” is investments in stocks, mutual funds and bonds. Source: China Trustee Association

The successful restructuring of this product, with an outcome that is agreeable to all parties, is likely to contain potential contagion risks. The alternative outcome of a principal default by Credit Equals Gold No. 1, given its considerable size of RMB3 billion, could have triggered knock-on effects difficult to dimension.

7 The bank ratings shown in this report are the banks’ deposit ratings, their standalone bank financial strength ratings/baseline credit

assessments and the corresponding rating outlooks. 8 See Risks to China’s Lenders from Shadow Banking: Frequently Asked Questions, 13 May 2013.

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New York +1.212.553.1653

NEWS & ANALYSIS Credit implications of current events

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This settlement, if constructed as reported by the Financial Times, shows that in some cases, banks do not assume the direct repayment obligation in case of product default. However, substantial risks for banks remain. First, there is no detail on where the money to pay off the trust investors has come from. This begs the question of whether the money is wholly or partially funded by loans from banks (e.g., ICBC) to relevant parties involved in a potential restructuring of the coal miner, which make such settlements little more than a delaying tactic.

Furthermore, this settlement does not remove the risk of future trust-product claims on Chinese banks because it is unlikely to create a precedent for future solutions. We expect the government and regulators to tackle future failures and disputes on an ad hoc, case-by-case basis. Given the substantial scale and growth of shadow banking activities in China, we are doubtful of banks’ ability to isolate themselves from related defaults going forward. And although the current proposed settlement does entail losses to investors in terms of foregone interest, by fully repaying their principal, it reinforces the perception that investors will be bailed out one way or another when the products go sour, which is contrary to the establishment of sound market discipline and a healthy credit market.

NEWS & ANALYSIS Credit implications of current events

14 MOODY’S CREDIT OUTLOOK 30 JANUARY 2014

Korea Development Bank and Industrial Bank of Korea Will Again Be Public-Sector Banks, a Credit Positive Last Friday, Korea’s Ministry of Strategy and Finance announced that it would re-designate Korea Development Bank (KDB, Aa3 stable, D/ba2 stable9) and Industrial Bank of Korea (IBK, Aa3 stable, D+/baa3 stable) as public-sector organizations, two years after the previous administration announced plans to privatize the banks and removed them from the list of public organizations.

The re-designation confirms that Korean President Park Geun-hye’s administration has dropped its predecessor’s privatization plan for KDB and IBK, essentially affirming its support to both public policy banks, a credit positive for both. Re-designation is a clear indication that the government will maintain a stake of at least 50% plus one share in IBK, despite a plan announced 14 January to sell KRW586.2 billion of shares in IBK to raise money to meet the government’s growing fiscal needs.10

The previous administration tried to privatize KDB and reduce its ownership in IBK to less than 50%, which would have weakened the case for it to receive government support.

As public organizations, the banks will be obliged to publicize more information regarding their management strategy, performance and auditing results by the government and the National Assembly, thereby increasing their transparency and accountability. Furthermore, we now expect the government to deepen its involvement in the banks’ performance assessments and budget decisions, including those related to remuneration, which will help the banks improve their cost efficiencies.

The finance ministry’s announcement is also credit positive for other Korean commercial banks, because it means there is less risk that KDB and IBK will become aggressive competitors in commercial banking. In recent years, KDB has pushed aggressively to attract retail deposits in anticipation of its privatization. This deposit push via products such as KDB Direct accounts that offered higher deposit rates resulted in funding and margin pressures on other banks. However, KDB stopped selling KDB Direct accounts after the privatization plan was dropped. We also expect IBK to become less aggressive in its retail banking business, where it has gained a substantial retail customer base in the two-year period before this latest announcement.

9 The bank ratings shown in this report are the bank’s deposit rating, its standalone bank financial strength rating/baseline credit

assessment and the corresponding rating outlooks. 10 Currently, the government and other government-related agencies hold a combined 63.4% stake in the IBK after the government

sold an 8.9% stake totaling KRW565 billion in 2013.

Hyun Hee Park Analyst +852.3758.1514 hyunhee.park@moodys.com

NEWS & ANALYSIS Credit implications of current events

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Insurers

Japan’s Approval of Kampo Life’s New Product Is Negative for Insurers Last Friday, the government of Japan authorized the sale of a new product by Japan Post Insurance Co., Ltd.(Kampo Life, unrated), the insurance operation of Japan Post (unrated), after determining that Kampo Life had met the government’s requirement that it improve its management, risk control, portfolio management and claims management.

The new product approval is credit positive for Kampo Life, but credit negative for private sector insurers because it suggests that the company, which has the largest share in the life market (17.5% based on fiscal 2013 premium income) and a national distribution network, is once again allowed to develop new products to compete with domestic private insurers.

The new product is a redesign of Kampo Life’s previous educational insurance, a kind of savings plan marketed as an education fund with death coverage for children and parents. Kampo Life said that it planned to begin sales of the product in April, which is the start of Japan’s new fiscal year. The government’s approval is the first approved new financial product for the Japan Post group since the Postal Reform Bill was legislated in 2012.

Kampo Life’s product will also add downward pressure on the pricing of educational insurance products in general, because Kampo Life currently has a strong 20% market share in that market. We believe this will particularly hurt Sony Life Insurance Co., Ltd. (financial strength Aa3 stable) and Nippon Life Insurance Company (financial strength Aa3 stable). Both are key players in this market segment, and the latter has tried to deepen its presence by cutting premium rates in the past year.

Although educational insurance products are not as profitable as other products such as medical insurance or death coverage, they are an effective platform for insurers to acquire young customers who would be prospective customers of other more lucrative products. Japanese life insurers have been focusing on acquiring young customers as a way to counteract the effects from an aging and shrinking population.

Kenji Kawada Vice President - Senior Analyst +81.3.5408.4056 kenji.kawada@moodys.com

Eiji Kubo Associate Analyst +81.3.5408.4038 eiji.kubo@moodys.com

NEWS & ANALYSIS Credit implications of current events

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Sovereigns

Portugal Comfortably Meets 2013 Budget Deficit Target, a Credit Positive On 23 January, the government of Portugal (Ba3 stable) released budget data for 2013 that show a significantly smaller budget deficit than the target agreed with its international lenders, the International Monetary Fund, European Union and European Central Bank (the so-called Troika). Portugal cut its general government deficit (in cash terms) to 4.3% of estimated 2013 GDP, versus a target of 5.4% of GDP. This strong fiscal performance is positive for Portugal’s credit standing because the sovereign achieved it against a very difficult economic backdrop, pointing to the authorities’ determination and ability to improve Portugal’s public finances.

The budget deficit was €1.75 billion lower than the target agreed with the Troika on a cash basis. According to Eurostat accrual accounting rules (which we follow), the budget deficit will be published at the end of March by the National Institute of Statistics, and will likely be higher than the figures just released, but should nevertheless come in significantly below the target. According to government estimates, the budget deficit in accrual terms was around 5% of GDP, versus a target of 5.9% of GDP in accrual terms.11 This is a significant achievement, given that we estimate Portugal’s economy contracted by around 1.5% last year and the fiscal situation was complicated when Portugal’s Constitutional Court deemed several planned government measures unconstitutional.

Steep increases in direct taxes and social security contributions were primary contributors to the better-than-expected results. Central government tax revenues increased by 12.8% over 2012 levels and by 3.7% over the target in the 2013 supplementary budget. At the same time, expenditures stayed broadly in line with the budget, increasing by 2.8% from a year earlier.

This year, the government targets a further deficit reduction to 4% of GDP. In contrast to 2013, the government plans for the improvement to come mainly from reduced spending, as shown in the exhibit below. Although further adverse rulings by the Constitutional Court are a major risk to achieving the fiscal targets, the government has so far managed to implement alternative measures when the court ruled initial measures unconstitutional.12 At the same time, the starting position has clearly improved with the 2013 outperformance. In addition, we now expect the Portuguese economy to grow by1.0%, versus our earlier forecast of 0.7% growth and the forecast underlying the 2014 budget of 0.8% growth. We therefore believe that the 2014 budget deficit target can also be achieved.

11 The main difference between cash and accrual accounting arises from the treatment of the state’s capital injection into Banif (0.4%

of GDP). 12 Given the rejection of one pension-related measure by the Constitutional Court already (worth €388 million, or 0.2% of estimated

2014 GDP), the government presented an alternative tax increase that was approved in the first reading in parliament last week.

Kathrin Muehlbronner Vice President - Senior Credit Officer +44.20.7772.1383 kathrin.muehlbronner@moodys.com

Aukse Montvilaite Associate Analyst +44.20.7772.1085 aukse.montvilaite@moodys.com

NEWS & ANALYSIS Credit implications of current events

17 MOODY’S CREDIT OUTLOOK 30 JANUARY 2014

Portugal’s 2014 Budget Consolidation Measures Centre on Expenditures

* Includes budgeted cuts to public-sector pensions that the Constitutional Court rejected. Alternative measures are currently being considered. ** Mainly reduction in healthcare spending and public investment. Source: Portugal Ministry of Finance

A key question will be Portugal’s exit strategy from its current external support program. From our perspective, it is less relevant whether Portugal manages to exit the program without further support, as Ireland (Baa3 positive) did, or uses the safety net of a precautionary credit line from the European Stability Mechanism (ESM).

Given Portugal’s strong performance, evident determination to follow the program targets and the government’s successful return to market funding, we believe it will be eligible for such precautionary support. Portugal’s high refinancing needs in the coming years of around €10 billion annually mean the sovereign must maintain low funding costs for an extended period of time if it is to achieve sustained economic growth and reduce its debt ratio, something that it is likely to achieve more easily in the context of a precautionary ESM credit line. Similar to Ireland, we expect the final decision on whether Portugal will apply for any further support to be taken very close to the end of the current program in June 2014.

Wage Bill€1,320 million

Social Benefits* €891 million

Direct and Indirect Taxes €535 million

Other Expenditures**€972 million

€0.0

€0.5

€1.0

€1.5

€2.0

€2.5

€3.0

€3.5

1 2

€Bi

llion

s

Net Revenue-IncreasingMeasures

Expenditure Reduction Measures

RECENTLY IN CREDIT OUTLOOK Select any article below to go to last Monday’s Credit Outlook on moodys.com

18 MOODY’S CREDIT OUTLOOK 30 JANUARY 2014

NEWS & ANALYSIS Argentina Devaluation 2

» Argentina Devaluation Is Credit Negative for Banks, Corporates, Insurers and Securitizations and No Sovereign Panacea

Corporates 10

» Anheuser-Busch InBev Buys Back South Korean Brewer, a Credit Positive

» IBM’s Server Sale Is Credit Positive for IBM, Negative for Dell and Hewlett-Packard

» EBay’s $5 Billion Share Repurchase Authorization Is Credit Negative

» Quest’s Acquisition of Solstas Is Credit Negative » Ceridian’s Tentative Settlement of Comdata Litigation Is

Credit Negative » ABB’s Charges for Offshore Wind Are Credit Negative » Uralkali’s Pact to Ship Potash to China Is Credit Positive » Jardine Strategic Holdings’ Investment in Zhongsheng Is

Credit Positive

Banks 19

» Regions’ Charge on Residential Troubled Debt Restructurings Is a Bad Omen for US Banks

» US Banks’ Exit from Deposit Advance Loans Is Positive for Banks, Negative for Payday Lenders

» Royal Bank of Canada’s Non-Viability Contingent Capital Is Credit Positive for Senior Bondholders

» Europe’s Open Access Rule Will Not Affect Exchange Credit Quality

» Bank of England’s Measures to Improve Bank Liquidity Are Credit Positive

» Switzerland’s Increased Countercyclical Capital Buffer Is Credit Positive for Banks

» Japan’s Incentive for Banks to Take on Credit Risk Is Credit Positive

» ORIX’s Consolidation of Daikyo Is Credit Positive » Data Breach Among Korean Credit Card Companies Is Credit

Negative » Sri Lanka’s Plan to Consolidate Non-Bank Financial

Institutions Is Credit Positive

Insurers 34 » Aetna’s Health Insurance ‘CAT’ Bonds Provide Limited Risk

Protection » Record Decline in UK Motor Premium Rates Is Credit

Negative for General Insurers

Sovereigns 38

» Tunisia’s Adoption of a Constitution and Imminent Appointment of Caretaker Government Are Credit Positive

US Public Finance 40 » California’s Drought Declaration Will Weaken Local Water

Agencies’ Credit Quality

Covered Bonds 42 » Turkey’s Covered Bond Legislation Enhances Bondholders’

Credit Protection

RATINGS & RESEARCH Rating Changes 44

Last week we downgraded Eesti Energia and upgraded Bord Gais Eireann, DirectRoute (Limerick) Finance, Electricity Supply Board/ESB Finance, Allied Irish Banks, p.l.c., Bank of Ireland, EBS Ltd. and Permanent tsb, among other rating actions.

Research Highlights 50

Last week we published on US broadcasters, European retailers, US speculative grade liquidity, corporate defaults, Canadian broadband, US health insurers, US banks, Uganda, California, US CMBS, Spanish RMBS, US RMBS and CLOs, among other reports.

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