Frankfurt am Main, November 29, 2012 -- Moody's Investors Service has today downgraded Hypo Tirol Bank AG's (Hypo Tirol) long-term debt and deposit ratings to Baa2 from A2 and its standalone bank financial strength rating (BFSR) to E+ from D, equivalent to a standalone credit assessment of b1 from ba2 previously, reflecting the continuous challenges the bank is facing in restoring its risk profile as well as its vulnerability to a more adverse economic environment. Concurrently, Hypo Tirol's short-term ratings were downgraded to Prime-2 from Prime-1. Further, the bank's subordinated MTN program was downgraded to (P)B2 from (P)A3, reflecting the lowering of Hypo Tirol's BFSR and the removal of regional government and systemic support uplift from the rating of this debt class. All ratings carry a negative outlook.

Today's rating actions conclude Moody's review, initiated on 9 December 2011 and extended on 6 June 2012, that was triggered by very large impairment charges at the bank's Italian subsidiary which resulted in a capital injection from its sole owner, the Austrian Federal State of Tyrol (unrated) and the recent approval by the European Commission (EC) of a restructuring plan as a prerequisite for compensation for state aid.

Please refer to the end of this press release for a list of affected ratings.

RATINGS RATIONALE

RATIONALE FOR LOWERING STANDALONE RATINGS

The decision to lower Hypo Tirol's standalone credit assessment to E+/b1 reflects Moody's view that the bank continues to display weak financial fundamentals and heightened vulnerability to a more adverse economic environment despite the recent recapitalisation measure and in view of the EC's imposed restructuring plan which -- once executed -- will leave the bank with a much more constrained regional footprint and franchise with little potential for sufficient future earnings generation capacity, in Moody's view.

On 4 October 2012, the EC approved the restructuring plan for Hypo Tirol and also confirmed that the EUR220 million capital injection from the State of Tyrol was in line with EU state aid rules. The key components of the restructuring plan are a balance-sheet reduction of around 30% of the bank's total assets to EUR8 billion by 2015 from EUR11 billion as per unaudited, interim 30 June 2012 financials and the discontinuation of lending activities in Germany and Italy (except in South Tyrol). Following the capital injection, Moody's expects a year-end 2012 Tier 1 capital ratio of 9.5% -- from 6.1% as per audited year-end 2011 financials -- which is in the middle of the range of 9%-10%, which has been agreed with the EC as part of Hypo Tirol's restructuring plan.

Furthermore, Hypo Tirol carries a very large portfolio of problem loans. The bank's non-performing loan (NPL) ratio was 11.7% at year-end 2011, driven by a high amount of NPLs in its Italian loan portfolio that includes significant exposures to commercial real estate (CRE) loans. The credit quality of Hypo Tirol's domestic loan book is similar to its Austrian peers, however, it exhibits concentration risks from relatively large single-ticket exposures. Against this background and in light of the continued difficult operating conditions for banks in Italy, Moody's remains concerned that the total coverage ratio for problem loans -- which was around 41% as of year-end 2011 -- may prove insufficient to compensate for crystallising losses during the anticipated extended work-out period, and even more so under a more adverse economic scenario, thereby potentially eroding the bank's capital base.

At the same time, Moody's believes that the bank's earnings-generation capacity will remain weak. The anticipated balance sheet reduction and the retrenchment of business activities to Hypo Tirol's core regions, which are characterised by high competition and generally low profitability -- reasons that led the bank to expand to Germany and Italy years ago -- are likely to expose Hypo Tirol to reduced revenue prospects, while its ability to reduce operating cost will be limited due to a lack of scale. Hypo Tirol reported a net profit of EUR7 million through the first six months of 2012.

Over the medium term, Moody's considers Hypo Tirol's liquidity and funding position to be comfortable, as the bank continues to benefit from sizeable guaranteed debt (a deficiency guarantee provided by the State of Tyrol) and also manages a large unencumbered, central-bank eligible securities portfolio. However, Hypo Tirol faces a considerable funding gap in 2016 and 2017, when the majority of grandfathered debt matures. As a result, Moody's expects that the bank will strive to pre-fund a material share of these looming funding needs in the next few years in order to keep the balance sheet at the expected EUR8 billion level from 2015 onwards.

As a result, and given the bank's weak earnings capacity, the downgrade to a standalone credit assessment of E+/b1 with negative outlook indicates heightened risk over the medium term that Hypo Tirol may require further capital support as problem loans remain large compared to the bank's overall loss absorption capacity including its capital buffers and loan loss reserves.

RATIONALE FOR DOWNGRADE OF LONG-TERM RATINGS

The downgrade of Hypo Tirol's long-term debt and deposit ratings follows the lowering of the bank's standalone credit assessment and reflects Moody's assumption of very high probability of external support, which implies that Hypo Tirol would likely benefit from multiple sources of support (in particular from the State of Tyrol, its sole owner, and systemic support). In Moody's opinion, these levels of support are closely interlinked for public sector banks and the unified approach of applying support uplift from multiple sources anticipates concerted support solutions in case of need. These support assumptions reflect the track record of assistance from the State of Tyrol -- as again demonstrated by the recent capital injection -- and are further underpinned by the fact that the State continues to guarantee large portions of the bank's liabilities, with major maturities not before 2016. Moody's support assessments give Hypo Tirol's debt and deposit ratings a five-notch uplift from its b1 standalone credit assessment. The negative outlook on the long-term ratings follows the negative outlook on the bank's BFSR.

DOWNGRADE OF SUBORDINATED MTN PROGRAMME RATING (LOWER TIER 2)

Hypo Tirol's provisional subordinated medium-term note (MTN) programme was downgraded to (P)B2 from (P)A3 which is one notch below the bank's b1 adjusted standalone credit assessment, and excludes external support factors like regional government or systemic support. Please refer to Moody's press release from 6 June 2012 (http://www.moodys.com/research/Moodys-downgrades-Austrian-banks-ratings-carry-stable-or-negative-outlooks--PR_247329), when the rating agency downgraded senior subordinated debt for Austrian banks, following the removal of assumption of government (or systemic) support for this debt class.

Senior subordinated debt ratings are notched off the banks' adjusted standalone credit profile. This reflects Moody's view that regional government and systemic support for the subordinated debt of Austrian banks may no longer be sufficiently predictable or reliable to warrant incorporating uplift into Moody's ratings.

WHAT COULD MOVE THE RATINGS UP/DOWN

Currently, there is no upwards rating pressure as indicated by the negative outlook on Hypo Tirol's ratings. In the longer term, upwards pressure on Hypo Tirol's standalone credit strength and deposit rating could arise from (1) a reduction of its balance sheet as mandated by the EC restructuring plan without impairing the bank's locally focused franchise; (2) running-down the Italian loan portfolio without requiring additional capital support; and (3) over the medium term, improving the bank's underlying risk-adjusted profitability allowing for higher internal capital generation to improve the bank's loss-absorption capacity.

Downwards pressure could develop on Hypo Tirol's standalone credit profile if further asset-quality deterioration, in particular as a result of the bank's elevated stock of problem loans compared to its provisioning and capital levels, triggers additional capital support. In Moody's view, this is likely to take the form of regional local government support, in view of the State's ownership of the bank, its historical track record to support the bank and continued high willingness and ability to provide support to Hypo Tirol, in case of need.

In addition, downward pressure on the bank's long-term ratings could result from pressure on Hypo Tirol's standalone credit profile, a change in its ownership structure, a deterioration in the implied creditworthiness of the State of Tyrol, and/or a weakening of Moody's systemic support assumptions.

LIST OF AFFECTED RATINGS

The following ratings of Hypo Tirol were downgraded:

- Standalone BFSR at E+, mapping to a standalone credit assessment of b1;

- Bank debt and deposits rating at Baa2;

- Subordinated MTN programme (LT2) at (P)B2;

- Short-term ratings at Prime-2.

All the above ratings carry negative outlooks.

PRINCIPAL METHODOLOGIES

The principal methodology used in this rating 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.

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Swen Metzler Vice President - Senior Analyst 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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