As a result, pbb's B2 subordinated debt and Prime-1 short-term ratings have also been placed on review for downgrade. Moody's notes that pbb's senior debt and deposit ratings are likely to remain investment grade. The ratings of pbb's sister company, Depfa plc (Baa3 stable; E+/b2 stable), are not affected by this announcement.

The review reflects Moody's concerns regarding the bank's wholesale funded business model together with increased asset-side vulnerabilities, also as result of a deteriorating operating environment in Europe. The review will focus on pbb's ability (i) to raise funding in the debt capital markets at conditions that allow for a suitable margin; (ii) to bear potential losses in the context of its exposures to euro area peripheral countries; (iii) to write new business to replace the existing -- partly low yielding -- asset base; and (iv) to adjust its business profile to the changing regulatory and market environment, as a precondition for the bank to be privatised by 2015.

At the same time Moody's will reassess its current very high assumptions for support from the German government in the light of the pending privatisation and shifting policy towards support in Europe.

RATINGS RATIONALE

Moody's acknowledges the progress pbb has made in stabilising and rebuilding its business following the asset transfer to FMS Wertmanagement (Aaa stable) in October 2010. The bank has remained profitable in the last seven quarters and has re-entered the capital markets successfully, including issuing benchmark covered bonds. Moreover, pbb's liquidity levels remain satisfactory and its asset quality compares positively to its peer group as a result of the previous asset transfer. Moody's decision to place the bank's ratings on review for downgrade reflects its concerns regarding the bank's business model in the current operating environment.

REVIEW OF STANDALONE CREDIT ASSESSMENT

Today's rating announcement reflects several factors that are exerting downwards pressure on the long-term viability of pbb's franchise.

Moody's believes that pbb is constrained in its ability to obtain senior unsecured funds maturing beyond 2015, which is the date by which the German government -- the bank's current sole owner -- must sell its majority stake according to the state aid ruling of the European Commission (EC). pbb requires such funding to refinance the unsecured portion of its core business in the medium term.

Although pbb has a comfortable Tier 1 capital ratio of 15.9%, Moody's cautions that pbb's leverage is high as its Tier 1 capital only accounts for EUR2.8 billion or 2.8% of the operating balance sheet at the end of Q1 2012. In addition, pbb retains sizeable exposures to sectors and regions, which expose it to potentially material losses over the medium term, including exposure to the euro periphery, including Spain (EUR 5.1 billion) and Italy (EUR4.2 billion). Moody's considers commercial real estate to be an asset class that is particularly vulnerable to impairments in the weakening European operating environment.

Finally, Moody's believes that the longer-term viability of pbb's business model is under increasing pressure, given pbb's current low core profitability, which partly reflects its low yielding public-finance legacy portfolio. Challenges for the bank to build up more profitable businesses (including commercial real estate) have increased as market conditions and the operating environment have deteriorated as a result of the euro area debt crisis.

REVIEW OF SUPPORT ASSUMPTIONS

Moody's will also reassess its assumptions of support forthcoming from the German government in the event of need. The current assumptions are very high, resulting in seven notches of rating uplift from pbb's current b1 standalone credit assessment. This is more than the level of support assumed for pbb's peers, reflecting the strong support that has been evolving since pbb's parent Hypo Real Estate (HRE (unrated) first experienced distress and needed financial assistance in late September 2008, and the role the government has played in restoring pbb's capital and liquidity position.

The German government's commitment to supporting the bank, of which it is the sole shareholder, is credit positive for creditors. However, there remain uncertainties regarding the level of support creditors could expect over the rating horizon that arise from the government's need and desire to privatise the bank, and the challenges it will face in doing so given the weak market outlook and pbb's size and profile. Moody's also notes that the implementation of the bank resolution regime as part of the German Bank Restructuring Act in January 2011 allows for more flexibility to impose losses on certain debt classes and has made government support less predictable. The review will assess whether those uncertainties are consistent with such high uplift.

WHAT COULD MOVE THE RATINGS UP/DOWN

The review for downgrade indicates that there is currently no upwards rating pressure for pbb's ratings. Downwards pressure on the E+ BFSR could be triggered by (i) a failure to restore pbb's business franchise; (ii) renewed setbacks due to higher-than-anticipated credit losses in pbb's core business areas; (iii) difficulties in tapping the unsecured debt markets; and/or (iv) unforeseen losses on pbb's selective exposure to peripheral euro area economies.

Downward pressure on the A3 ratings could result from (i) a further downgrade of the E+ BFSR; (ii) an unexpected reduction in support or a sooner-than-warranted exit by the German government; and/or (iii) a gradual reduction in pbb's systemic importance.

PRINCIPAL METHODOLOGIES

The principal methodology used in these ratings was Moody's Consolidated Global Bank Rating Methodology published in June 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

The ratings have been disclosed to the rated entities or their designated agent(s) and issued with no amendment resulting from that disclosure.

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Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

In addition to the information provided below please find on the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued each of the ratings.

Mathias Kuelpmann Senior Vice President Financial Institutions Group Moody'sDeutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Carola Schuler MD - Banking Financial Institutions Group JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Releasing Office: Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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