Fitch Removes HVB AG Mortgage Pfandbriefe From RWN; Affirms at 'AAA'.

LONDON -- Fitch Ratings, the international rating agency, has today removed Germany-based HVB AG's mortgage Pfandbriefe from Rating Watch Negative (RWN) and affirmed them at 'AAA'. At the same time, Fitch has affirmed public sector Pfandbriefe at 'AAA'.

The mortgage Pfandbriefe was placed on RWN in January 2005 when the bank announced a new provision of EUR2.5 billion and further restructuring of its real estate lending portfolio. HVB AG ('A-/F2', both on Rating Watch Positive following the planned acquisition by Unicredito of Italy) split off a large part of its commercial mortgage lending business by spinning off Hypo Real Estate AG in 2003, while the residential mortgage lending business remains as a strategic focus of the bank.

The removal of the RWN follows Fitch's careful analysis of the mortgage cover pool and is supported by sufficient available overcollateralisation (OC). Although Fitch did not receive information on the proportion of mortgage loans in the cover pool affected by the provisioning, the agency took comfort from the fact that, according to internal policies, only the loan amount net of provision can be taken into account in the cover pool. In addition, Fitch applied, in an 'AAA' scenario, 50% and 100% default likelihoods on the cover mortgage loans classified by HVB in the bank's lower internal rating categories. As data on current loan-to-value ratios was not available, it was conservatively assumed for the purpose of calculating the loss severity that all loans were near their maximum authorised limit of 60% of the assessed mortgage lending value. Furthermore, property type-specific factors such as property usage and geographical location were taken into account.

HVB's mortgage cover pool as of 31 March 2005 amounted to EUR56.4 billion, providing collateral for EUR51.6 billion of outstanding mortgage Pfandbriefe. While this is equivalent to a nominal OC of 9.2%, the issuer also calculates, in compliance with the German covered bond regulation, OC on a net present value basis, which was 10% at end the end of March 2005. The mortgage cover pool is split between residential mortgages (72%), commercial mortgages (25%), and substitution assets (3%). Mortgages are almost entirely secured on properties located in Germany (99.94%), with a 26% exposure to Eastern Germany, which was stressed in Fitch's analysis. Of the residential properties, 52% are not owner-occupied and their default likelihood was also increased in Fitch's analysis.

The rating of the public sector Pfandbriefe is based on the quality of the cover pool and high available OC. In its analysis of the public sector cover pool, Fitch derived default probabilities from external ratings and Fitch internal shadow ratings and also considered correlation between debtors. Loss given default was assumed to be high for sovereign exposure and low for municipal debt.

As of 31 March 2005, the cover pool serving as collateral for public sector Pfandbriefe amounted to nearly EUR18.5 billion, which, compared with EUR14.4 billion of bonds outstanding, results in a nominal OC of 28.5%. The creditworthiness of the assets within the pool is high, with around 53% of the pool being 'AAA' rated and a further 41% between 'AA+' and 'A+'. Of the cover pool 95% is made up of German obligors, with municipalities, German federal states, public sector credit institutions, and public sector companies accounting for 28%, 27%, 18%, and 15% of the pool, respectively.

In addition, some level of solidarity of Pfandbrief issuers to safeguard the reputation of Pfandbriefe has been considered, as the outstanding Pfandbriefe (both the mortgage and the public sector ones) have been issued under the current Mortgage Bank Act. The agency has publicly stated that its reliance on potential industry support is going to progressively reduce once the new Pfandbrief law comes into effect in July 2005 (For more information, see 'Analysis for German Pfandbriefe: Preparing for 2005,' dated 28 October 2004).

Fitch will closely monitor the collateral for mortgage and public sector Pfandbriefe, as the dynamic nature of the cover pools means the credit quality and OC could be eroded over time.

Fitch's rating definitions are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies and relevant policies and procedures are also available from this site, at all times. This document will remain on the public site for seven days.