MOODYS.COM

14 DECEMBER 2017

NEWS & ANALYSIS Corporates 2 » Boeing’s dividend increase and new share repurchase

authorization are credit negative » Corning’s planned acquisition of 3M’s communication markets

division is credit positive

Infrastructure 4 » For MEAG Power Project J bondholders, emerging litigation risk

is credit negative » Unitil will use equity issuance to pay down short-term debt at

its natural gas utility, a credit positive

Banks 6 » Basel Committee’s agreement on risk weights is

credit positive » Dismissal of HSBC’s deferred prosecution agreement is

credit positive » Hellenic Bank’s completion of employee buyout is

credit positive » China Guangfa Bank’s fine for illegal debt guarantees is

credit negative » ANZ’s sale of its life insurance business to Zurich is

credit positive

Insurers 14 » Zurich Insurance’s profitability will improve with acquisition of

ANZ’s life insurance business

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NEWS & ANALYSIS Credit implications of current events

2 MOODY’S CREDIT OUTLOOK 14 DECEMBER 2017

Corporates

Boeing’s dividend increase and new share repurchase authorization are credit negative Last Monday, The Boeing Company (A2 stable) said that its board had approved a 20% increase in its quarterly dividend and a new $18 billion share repurchase authorization that replaces an existing repurchase authorization with $4.8 billion remaining. The announcement is credit negative because it signals the continuation of what we consider to be an aggressive financial policy.

Year to date through 8 December, Boeing repurchased $9.2 billion shares, $2 billion more than in all of 2016. This compares with our 2017 estimate for free cash flow (after dividends) of about $6.9 billion. However, Boeing’s strong balance sheet, excellent liquidity and ability to curtail share repurchases in periods when cash generation declines mitigate the risk inherent in a continuing aggressive financial policy.

The new authorization implies that Boeing will sustain share repurchases at its recent high (or even higher) levels, notwithstanding a share price of $283.16 on 11 December that was close to its all-time high. According to the company’s third quarter 10-Q filing, 595.578 million shares were outstanding on 18 October. At the current share price, the $18 billion repurchase authorization equates to about 63 million shares, or around 10% of the outstanding float.

The 20% increase in the quarterly dividend to $1.71 per share, payable on 2 March 2018, would increase annual dividends to $4.1 billion before reductions for repurchased shares. If the company were to utilize the entire $18 billion authorization, leaving all else equal, the dollar amount of dividends at the announced higher rate would decline by about $400 million to about $3.6 billion.

Boeing is bullish on its cash generation ability in upcoming years, supported by higher production rates on commercial aircraft, its sharp focus on cost and working capital management across the company, concessions from suppliers pursuant to its Partnering For Success programs, and a strengthening of the franchise because of growth of the services segment. Expected improved performance on aircraft programs also should contribute favorably to operating results.

Monday’s announcement signifies management’s confidence in the business. However, we believe execution risk remains across a number of the company’s initiatives. And, at least one multi-billion dollar investment lies ahead – that of the New Market Aircraft, for which the company recently formalized a new program office, and which is typically a precursor to the launch of a new aircraft program. Developing this new passenger aircraft could require material capital, some of which Boeing might seek suppliers to fund. However, Boeing’s drive to bring more development and production of commercial aircraft in house could limit opportunities for it to defray development costs.

Jonathan Root, CFA Vice President - Senior Credit Officer +1.212.553.1672 jonathan.root@moodys.com

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 on www.moodys.com for the most updated credit rating action information and rating history.

NEWS & ANALYSIS Credit implications of current events

3 MOODY’S CREDIT OUTLOOK 14 DECEMBER 2017

Corning’s planned acquisition of 3M’s communication markets division is credit positive Last Monday, Corning Incorporated (Baa1 stable) said that it had agreed to acquire substantially all of 3M Company’s (A1 stable) communication markets division for $900 million. The planned transaction, which Corning expects to close in 2018, is credit positive because it will strengthen the company’s position in the global fiber optic market without increasing debt.

Corning plans to fund the acquisition primarily with cash. The company had a total cash balance of $3.9 billion as of 30 September and subsequently raised an additional $750 million through a November 2017 note offering. In addition, free cash flow should exceed $400 million in 2018. As a result, Corning should be able to fund the purchase of 3M’s fiber optic businesses while maintaining strong cash reserves. Completing the acquisition without taking on additional debt is a prudent use of the company’s capital for an investment of this size.

3M’s communication markets division generates about $400 million in annual revenue. The acquisition will increase revenue in Corning’s high-growth optical communications segment by more than 10%, enhancing the company’s leadership position in the sale of high-bandwidth and optical fiber products. The acquisition also expands Corning’s geographic footprint in fiber optic markets, particularly in Europe. The improved geographic diversity will additionally support the segment’s growth prospects, and the transaction will incrementally reduce the company’s reliance on its mature display technologies segment.

However, we estimate that earnings contributions from the acquired 3M businesses will not be sufficient to reduce leverage on their own. Corning’s adjusted debt/EBITDA as of 30 September (pro forma for the November notes offering) was about 2.1x, slightly above recent levels but within our expectations based on the company’s capital allocation plan. Pro forma for the acquisition, leverage should remain at about 2.0x.

David Berge, CFA Senior Vice President +1.212.553.1039 david.berge@moodys.com

NEWS & ANALYSIS Credit implications of current events

4 MOODY’S CREDIT OUTLOOK 14 DECEMBER 2017

Infrastructure

For MEAG Power Project J bondholders, emerging litigation risk is credit negative On 6 December, MEAG Power filed a document on the Municipal Securities Rulemaking Board disclosure website concerning the Vogtle Nuclear Units 3 & 4 (Vogtle 3&4) project in Georgia and JEA, FL (Aa2 negative), the initial off-taker on the take-or-pay contract that secures the $1.437 billion MEAG - PPA Project J Vogtle Units 3 & 4 (A2 negative) revenue bonds. JEA has suggested that Vogtle 3&4 should be canceled rather than completed, identified certain issues that it contends would eliminate its responsibility under the Project J power purchase agreement, and requested that MEAG Power or a third party replace it in the take-or-pay contract obligation.

These actions by JEA are credit negative for the MEAG Power Project J revenue bonds because both political and legal risks have raised the possibility of a challenge to the take-or-pay contract that secures the bonds between JEA and MEAG Power.

The Project J bonds constitute 41.175% of MEAG Power’s 22.7% financing interest in Vogtle 3&4. JEA has a take-or-pay obligation for the first 20 years and is responsible for paying operating expenses and debt-service costs. After the 20th year, 39 of MEAG Power’s participants are responsible for those expenses.

In October 2017, JEA became an intervener in the hearings before the Georgia Public Service Commission (GPSC) regarding Vogtle 3&4 co-owner Georgia Power Company’s (A3 negative) investment in the project, indicating a lack of unanimous support for the project to continue. We understand that JEA conveyed all decision-making to MEAG Power concerning this investment as part of an arrangement between JEA and MEAG Power. As such, JEA remains obligated under the terms of the take-or-pay arrangement, notwithstanding its views on continuing construction of the project.

The GPSC has been hearing testimony from stakeholders before deciding whether the project should continue, and is scheduled to make a decision before the end of 2017. Should the GPSC issue an order effectively stopping the construction of Vogtle 3&4 project because of unreasonableness of costs to be recovered, it could form the basis for future legal challenges by JEA. Moreover, should the project be cancelled, it would be credit negative for MEAG Power’s Project J bonds because JEA would be obligated for 20 years for the debt service on the bonds without getting any electricity delivered from the abandoned project.

A key consideration in the MEAG Power Project J revenue bonds’ current rating is the strength of the take-or-pay power sales contract with JEA. We note that the MEAG Power take-or-pay contracts as bond security for the Project J bonds were litigated in Georgia’s Fulton County Superior Court before bond issuance, upholding their validity and resolving the question of whether the obligation was binding.

Dan Aschenbach Senior Vice President +1.212.553.0880 dan.aschenbach@moodys.com

Kevin Rose Vice President - Senior Analyst +1.212.553.0389 kevin.rose@moodys.com

NEWS & ANALYSIS Credit implications of current events

5 MOODY’S CREDIT OUTLOOK 14 DECEMBER 2017

Unitil will use equity issuance to pay down short-term debt at its natural gas utility, a credit positive On Tuesday, Unitil Corporation (Baa2 stable) priced an offering of 600,000 shares at $48.30 each for gross proceeds of about $29 million. The equity issuance is credit positive because the company will use the net proceeds to make equity capital contributions and reduce short-term debt at Unitil’s regulated utilities, primarily its largest natural gas distribution company, Northern Utilities, Inc. (Baa1 stable), and for general corporate purposes. The company expects the equity offering by 14 December and gross proceeds could increase by an additional $4 million with the exercise of an overallotment option by underwriters to purchase an additional 90,000 shares.

The equity issuance bolsters the balance sheets of Unitil and its subsidiaries. This is particularly important for Northern Utilities as it continues its substantial capital investments through its gas main pipeline replacement program in Maine. For the 12 months that ended 30 September 2017, Northern Utilities’ ratio of cash flow from operations pre-working capital changes (CFO pre-W/C) to debt was 15.6%. Over the next year, we expect that Northern Utilities’ financial metrics will improve through short-term debt reduction and increased cash flow from customer rate increases. Interim rate increases, subject to reconciliation upon the completion of the final rate case proceeding in third-quarter 2018, took effect for Northern Utilities’ New Hampshire customers in third-quarter 2017 and we expect that rate increases for Maine customers will occur in first-quarter 2018. We expect Northern Utilities’ ratio of CFO pre-W/C to debt will improve to the high teens in 2018.

Hampton, New Hampshire-based Unitil is a utility holding company that serves more than 180,000 electric and gas customers in northern New England. In addition to Northern Utilities, Unitil’s regulated utility subsidiaries include Unitil Energy Systems, Inc. (Baa1 stable), an electric distribution utility in New Hampshire; Fitchburg Gas and Electric Light Company (Baa1 stable), a gas and electric distribution company in Massachusetts; and Granite State Gas Transmission, Inc. (Baa2 stable), an 86-mile natural gas pipeline in New Hampshire and Maine (see exhibit). For the 12 months that ended 30 September 2017, Unitil reported $1.2 billion in assets and $395 million in revenue.

Unitil’s revenue by subsidiaries for the 12 months that ended 30 June 2017

Source: Unitil Corporation

Northern Utilites 39%

Unitil Energy Systems34%

Fitchburg Gas & Electric Light24%

Granite State Gas2%

Other1%

Jeffrey Cassella Vice President - Senior Analyst +1.212.553.1665 jeffrey.cassella@moodys.com

NEWS & ANALYSIS Credit implications of current events

6 MOODY’S CREDIT OUTLOOK 14 DECEMBER 2017

Banks

Basel Committee’s agreement on risk weights is credit positive Last Thursday, the Group of Governors and Heads of Supervision (GHOS), the Basel Committee on Banking Supervision’s (BCBS) oversight body, endorsed and published a BCBS agreement on a new package for calculating risk-weighted assets (RWAs) under the Basel III framework. The package, which marks the end of the Basel III rulemaking process, will enhance the transparency and comparability of capital requirements among banks and prompt banks that most heavily rely on models (principally large European groups) to slightly increase capital. These developments are credit positive, even though the final package is a watered down version of the original BCBS proposals, mainly reflecting European Union (EU) authorities’ concerns about the package’s effect on European banks’ competitiveness.

The new measures aim to restore the credibility and limit the variability of bank-calculated RWAs, and improve the comparability of capital ratios. The new package revises the standardized approach for credit risk and removes the use of most advanced internal models for certain risk types. The package also imposes a leverage ratio buffer on global systemically important banks (G-SIBs) and an aggregate output floor on RWAs calculated using models (set at 72.5% of RWAs calculated using the standardized approach). The new framework takes effect 1 January 2022, although the output floor will be phased in between 2022 and 2027.

Although it slightly raises capital requirements for large European banks, the new framework relaxes risk-weighted capital requirements for all banks. But the effect is likely to be limited by leverage requirements and Pillar 2 or stress-test-driven add-ons. According to the BCBS, the new framework would lead to a reduction of 0.5% in the aggregate Tier 1 capital requirements of the largest internationally active banks, based on year-end 2015 data. This is in line with the BCBS’ goal of not significantly increasing the quantity of required capital at the system level. However, the effect of these changes does not fall evenly: although the aggregate capital requirement is declining, mostly driven by lower operational risk charges, it will increase for many banks, particularly those making more use of risk models.

A separate analysis that the European Banking Authority published shows that this mainly affects European banks, which will eventually be subject to a 12.9% increase in capital requirements (see exhibit). For EU G-SIBs, the increase is higher at 15.2%, suggesting that non-EU G-SIBs’ aggregate requirements would fall by about 7.3% if local regulators fully implement the latest agreement without any add-ons or additional requirements. This could lead non-EU G-SIBs to reduce their capital surplus to enhance shareholder returns (although other supervisory measures such as stress tests are likely to constrain such moves).

The Basel Committee’s capital requirement package will most affect Europe-based global systemically important banks

Change in minimum required Tier 1 capital

New Common Equity Tier 1 ratio New leverage ratio

Total G-SIBs Total G-SIBs Total G-SIBs

Internationally active banks

-0.50% -1.40% 11.60% 11.60% 5.50% 5.70%

EU banks 12.90% 15.20% 11.60% 10.90% 4.80% 4.50%

Non-EU banks - -7.30% - - - -

Sources: Basel Committee on Banking Supervision, European Banking Authority and Moody’s Investors Service calculations

Laurent Le Mouel Vice President - Senior Analyst +33.153.303.340 laurent.lemouel@moodys.com

Simon Ainsworth Senior Vice President +44.20.7772.5347 simon.ainsworth@moodys.com

NEWS & ANALYSIS Credit implications of current events

7 MOODY’S CREDIT OUTLOOK 14 DECEMBER 2017

The package will result in a modest rebalancing of capital requirements toward European banks, benefiting their solvency. European banks would have Common Equity Tier 1 ratios in line with their global peers, but continue to report lower Tier 1 leverage ratios. In practice, these changes are of marginal significance for most banks because they do not take full effect until 2027, and are likely to be offset by shifts in portfolio composition and retained earnings. Nevertheless, the introduction of an output floor and the removal of advanced models for some risk types will remove unwarranted variation between banks, increase comparability and consistency across capital ratios.

The new rules mark the final phase in the evolution of capital requirements. The most significant unresolved issue is the capital charge applicable on sovereign exposures, but the lack of agreement among regulators makes further change to capital requirements unlikely anytime soon.

NEWS & ANALYSIS Credit implications of current events

8 MOODY’S CREDIT OUTLOOK 14 DECEMBER 2017

Dismissal of HSBC’s deferred prosecution agreement is credit positive On Monday, HSBC Holdings plc (A2 negative, a21) announced that the US Department of Justice (DOJ) will file a motion to dismiss the five-year deferred prosecution agreement (DPA) that HSBC entered in December 2012 for breaches of US anti-money laundering (AML) and sanctions compliance regulations. The DPA’s dismissal is credit positive because it signals that HSBC has substantially improved and embedded stronger compliance processes and controls, and has removed a large tail risk.

In 2012, the DOJ fined HSBC $1.9 billion for breaching AML and sanctions compliance regulations and HSBC agreed to enter a five-year DPA and strengthen its AML and sanctions compliance capabilities. HSBC also agreed with DOJ and UK Financial Conduct Authority (FCA) calls for an independent monitor to review the firm’s AML and sanctions compliance programmes’ effectiveness.

Dismissing the DPA removes a large tail risk: a breach of the DPA terms risked exposing HSBC to serious regulatory and business consequences including, in the extreme, loss of its banking license in the US. The monitor also has been serving as a “skilled person” for the FCA and will continue in that capacity at the FCA’s discretion.

HSBC has made large investments in financial crime and compliance programmes over the past five years, in large part in response to meeting the terms of the DPA and evolving regulation and “know-your-customer” standards. By 1 January 2018, HSBC’s AML and sanctions policy framework will be in place and the bank will have introduced major compliance IT systems across the group, including for customer due diligence, transaction monitoring and sanctions screening.

During the past five years, HSBC has exited Brazil and reduced its presence in several countries including Turkey, which in our opinion has helped limit the risk of AML and compliance breaches. HSBC also plans to further embed the new financial crime and compliance program into its risk management framework.

1 The ratings shown in this report are HSBC’s senior unsecured debt rating and Baseline Credit Assessment.

Daniel Forssen, CFA Associate Analyst +44.20.7772.1553 daniel.forssen@moodys.com

Laurie Mayers Associate Managing Director +44.20.7772.5582 laurie.mayers@moodys.com

NEWS & ANALYSIS Credit implications of current events

9 MOODY’S CREDIT OUTLOOK 14 DECEMBER 2017

Hellenic Bank’s completion of employee buyout is credit positive Last Friday, Hellenic Bank Public Company Ltd. (Caa1 positive, caa22) announced that it had successfully completed an employee voluntary early exit scheme aimed at shrinking its operating costs and enhancing its profitability by reducing its annual payroll costs by €14 million. The credit-positive completion of the scheme marks an important step in the bank’s reorganisation and effort to strengthen its weak financial performance by improving its efficiency and supporting profitability. The bank’s financial performance is weak owing to a high stock of nonperforming loans of 48.6% as of September 2017.

The 220 workers approved to participate in the scheme equal approximately 14% of the bank’s personnel. This is the third and most successful scheme that Hellenic Bank has offered since the 2013 banking crisis and the headcount reduction will help close the gap with its European peers. Cypriot banks, and Hellenic Bank in particular, are overstaffed relative to euro area banks, with 20 employees per branch, versus 13 in the euro area in 2016, despite fewer customers per branch and a lower volume of assets per employee (see Exhibit 1).

EXHIBIT 1

Capacity indicators for Cypriot banks relative to the euro area average, 2016

Hellenic Bank’s metrics are latest available. Sources: Hellenic Bank, Central Bank of Cyprus and European Central Bank

Although the scheme will cost the bank around €42 million, reducing its capital by around 100 basis points for the quarter ending 31 December 2017,3 Hellenic Bank’s capital buffers will remain well above domestic and similarly rated peers (see Exhibit 2) and the bank will save €14 million of payroll costs per year. The reduction in payroll costs is significant, accounting for 10% of operating expenses for 2016. The bank will recover the cost of the exit plan over the next three years. It would otherwise take significantly longer for an organic reduction in personnel and operating expenses of this magnitude because the older, higher-paid employees who opted for the scheme tend to remain in their jobs, thus limiting the effect of hiring freezes to reduce costs. Although employees leave voluntarily, the approval of their early exit is at the discretion of the bank, based on its business interests and the value of the respective employee. Thus, the reduction in personnel will reorganise the bank into a leaner entity without adversely affecting its operations.

2 The bank ratings shown in this report are Hellenic Bank’s deposit rating and Baseline Credit Assessment. 3 Based on Moody’s adjusted ratios, which increase reported risk-weighted assets by assigning the Basel II standardised

weightings to sovereign debt securities to which the bank assigns lower risk weights. The decline is around 130 basis points for bank-reported ratios.

0

5

10

15

20

25

30

€ 0

€ 2

€ 4

€ 6

€ 8

€ 10

€ 12

€ 14

€ 16

Hellenic Cyprus Euro area

€M

illio

ns

Assets per employee - left axis Employees per branch - right axis

Antypas Asfour, CFA, PRM Associate Analyst +357.2569.3033 antypas.asfour@moodys.com

Melina Skouridou, CFA Assistant Vice President - Analyst +357.2569.3021 melina.skouridou@moodys.com

NEWS & ANALYSIS Credit implications of current events

10 MOODY’S CREDIT OUTLOOK 14 DECEMBER 2017

EXHIBIT 2

Cyprus’ key domestic banks’ tangible common equity to risk-weighted assets as of September 2017

Sources: Moody’s Financial Metrics and Moody’s Investors Service

In terms of efficiency, Hellenic Bank is weaker than similarly rated banks and has the poorest efficiency of banks in Cyprus, as reflected by a cost-to-income ratio of 64% as of September 2017 (see Exhibit 3). Although the employee buyouts will alleviate some of the bank’s cost strains, the improvement in the ratio will be moderated by lower income in 2018 because of the absence of a onetime gain from the sale of the management of its nonperforming exposures and real estate assets to servicer APS Debt Servicing Cyprus Ltd.

EXHIBIT 3

Cyprus’ key domestic banks’ cost-to-income ratio

Source: Moody’s Financial Metrics

The average compensation package per exited employee exceeds €190,000, near the scheme’s €200,000 maximum payout. The bank structured the scheme to entice older employees with many years of service, who, on average, were hired during the boom years, benefit from generous salaries and fixed pay increases and tend to remain in their jobs.

0%

2%

4%

6%

8%

10%

12%

14%

16%

Hellenic Bank Bank of Cyprus Cyprus Cooperative Bank

Tangible common equity/risk weighted assets Reduction in capital Global median - caa1 Global median - caa2 Global median - caa3

0%5%

10%15%20%25%30%35%40%45%50%55%60%65%

Year-end 2016 Third-quarter 2017 Year-end 2016 Third-quarter 2017 Year-end 2016 Third-quarter 2017

Hellenic Bank Bank of Cyprus Cyprus Cooperative Bank

Global caa1 median Global caa2 median Global caa3 median

NEWS & ANALYSIS Credit implications of current events

11 MOODY’S CREDIT OUTLOOK 14 DECEMBER 2017

China Guangfa Bank’s fine for illegal debt guarantees is credit negative Last Friday, the China Banking Regulatory Commission (CBRC) imposed a fine and forfeiture of RMB722 million ($109 million) on China Guangfa Bank Co. Ltd. (Baa3 stable, ba34) after having determined that the bank provided illegal guarantees on RMB1 billion of debt securities. The regulator’s investigation and subsequent findings identify highlighted deficiencies in the bank’s risk management system and internal controls, and are credit negative.

The investigation revealed that the illicit activities, which occurred at the bank’s Huizhou branch, went unnoticed by China Guangfa Bank’s headquarters, illustrating shortcomings in the bank’s internal control procedures. In its announcement, the CBRC stated that the bank’s performance evaluation placed too much emphasis on sales rankings and it cited the bank’s weakness in fulfilling its fiduciary duties.

The fine and forfeiture will significantly affect China Guangfa Bank’s financial performance, and is an industry record. The fine amounts to around 7% of the bank’s 2016 pretax profit and could significantly weaken its capitalization. Exacerbating the effect is that the bank already is experiencing profitability pressure mainly from high and rising funding costs. These new developments will further weigh on the bank’s ability to generate internal capital.

The CBRC announcement is unlikely to derail the bank’s current capital raising plan, which passed at the bank’s annual general meeting in April 2017, and will increase the bank’s capital base by RMB30 billion ($4.5 billion). Additionally, the fine and forfeiture’s credit effect is mitigated by the strong commitment of China Life Insurance Co. Ltd. (financial strength A1 stable), the bank’s largest shareholder with a 43.7% stake. We expect China Life to maintain its commitment to China Guangfa Bank and to participate in the bank’s capital raising plan.

China Life has integrated the bank as part of its strategy to provide a full range of financial services to attract customers and benefit from cross-selling opportunities. China Life has appointed people to senior management positions at the bank and is well represented on the bank’s board of directors.

4 The bank ratings shown in this report are China Guangfa Bank’s deposit rating and Baseline Credit Assessment.

Ray Heung Senior Vice President +852.3758.1514 ray.heung@moodys.com

NEWS & ANALYSIS Credit implications of current events

12 MOODY’S CREDIT OUTLOOK 14 DECEMBER 2017

ANZ’s sale of its life insurance business to Zurich is credit positive On Tuesday, Australia and New Zealand Banking Group Limited (ANZ, Aa3/Aa3 stable, a25) announced that it had agreed to sell its life insurance business to Zurich Financial Services Australia, a division of global insurer Zurich Insurance Company Ltd. (financial strength Aa3 stable), for a total consideration of AUD2.85 billion. The planned sale is credit positive for ANZ because it will lift the bank’s Common Equity Tier 1 (CET1) ratio by approximately 65 basis points.

The sale involves two transactions: a AUD1 billion upfront reinsurance commission to ANZ from Zurich and a AUD1.85 billion payment for 100% of ANZ’s life insurance operations. As part of the agreement, ANZ and Zurich will enter a 20-year strategic alliance to offer life insurance products through ANZ’s distribution channels. The companies expect to complete the sale in late 2018, subject to regulatory approval. The sale follows ANZ’s disposal of its OnePath pensions and investments and aligned dealer groups’ business to IOOF Holdings Limited in October for AUD975 million.

The sale comes as capital requirements for Australian banks are increasing. The Australian Prudential Regulation Authority announced in July that it is increasing the minimum capital requirements for ANZ and domestic peers Commonwealth Bank of Australia (Aa3/Aa3 stable, a2), National Australia Bank Limited (Aa3/Aa3 stable, a2) and Westpac Banking Corporation (Aa3/Aa3 stable, a2) to 9.5% by 2021 from 8% currently, including a Capital Conservation Buffer and a domestic systemically important bank charge. Although the higher capital requirements will take effect in early 2021, the regulator said that it expects banks to exceed the new requirement by 1 January 2020 at the latest.

We expect the life insurance business sale to increase ANZ’s CET1 ratio by approximately 65 basis points, 25 basis points from the reinsurance transaction and 40 basis points from the sale of the life insurance business. This would result in ANZ holding excess capital significantly above the regulator’s stipulated future requirements (see exhibit). ANZ also will receive a boost to its CET1 of approximately 15 basis points from the sale of the OnePath pensions and investments and aligned dealer groups’ business to IOOF Holdings Limited, bringing the CET1 increase to a total of 80 basis points.

ANZ’s sale will raise its Common Equity Tier 1 capital ratio significantly higher than regulatory minimum

Effect of previously announced sales includes sale of UDC, Shanghai Rural and Commercial Bank, sale of Asian retail business and Metrobank Card Corp. Sources: The company and Moody’s Investors Service

5 The bank ratings shown in this report are the bank’s deposit rating, senior unsecured debt rating and Baseline Credit

Assessment.

0%1%2%3%4%5%6%7%8%9%

10%11%12%13%

ANZ Minimum requirements

CET1 at September 2017 Sale to Zurich Sale to IOOFEffect of previously announced sales Current regulatory CET1 requirement Capital Conservation BufferD-SIB charge New additional requirement

Frank Mirenzi Vice President - Senior Credit Officer +61.2.9270.8176 frank.mirenzi@moodys.com

NEWS & ANALYSIS Credit implications of current events

13 MOODY’S CREDIT OUTLOOK 14 DECEMBER 2017

These sales, combined with the capital effect of previously announced sales of businesses that ANZ will complete in 2018, would result in a CET1 ratio of 12.1%, taken as of 30 September 2017, well in excess of the future regulatory requirement of 9.5%. Although future actual capital ratios are likely to be lower, reflecting any balance sheet growth and rising capital intensity, ANZ’s capital remains strong relative to future regulatory requirements and the bank has indicated the potential to return excess capital to shareholders.

We estimate that the sale also will result in an accounting loss on sale of approximately AUD520 million, with additional separation and transaction costs of AUD75 million post-tax. Furthermore, the divested business will reduce full-year 2017 cash profit after tax by AUD143 million. However, ANZ’s earnings profile remains strong, underpinned by the stable earnings of the bank’s Australia and New Zealand divisions.

NEWS & ANALYSIS Credit implications of current events

14 MOODY’S CREDIT OUTLOOK 14 DECEMBER 2017

Insurers

Zurich Insurance’s profitability will improve with acquisition of ANZ’s life insurance business On Monday, Zurich Insurance Company Ltd. (financial strength Aa3 stable) announced that it had agreed to acquire the life insurance business of Australian and New Zealand Banking Group Ltd. (ANZ, Aa3/Aa3 stable, a26) and sign a 20-year distribution agreement with the bank. The AUD2.85 billion ($2.152 billion) transaction, which the parties expect to complete by the end of 2018, is credit positive for Zurich Insurance because it will improve its profitability and strengthen its geographic and business diversification.

Zurich Insurance will acquire a profitable life insurance business that generated AUD189 million ($143 million) of net profit in the year that ended 30 September 2017 and will create synergies with its existing business in Australia. In total, the acquired business will add around $170 million to Zurich Insurance’s net profits (before goodwill and intangibles amortization), which is an increase of around 5% (based on 2016 profits). Such an increase will allow Zurich Insurance to raise its target of operating profits after tax on equity by 50 basis points to 12.5%, and the group’s return on capital will increase by around 20 basis points to around 6.4% on a pro forma basis.

The positive effect on profit will materialize gradually over the next three years. Zurich Insurance will initially reinsure a portion of ANZ’s life insurance business between May 2018 and November 2018 before acquiring 100% of the business. Additionally, Zurich Insurance will book restructuring charges of around $150 million before tax, which will be spread between 2018 and 2021, and around $15 million before tax per year of goodwill and intangibles amortization starting in 2019.

Australian life insurance products are not without risks, as evidenced by the deterioration in profits that the industry experienced in 2013 following an increase in policy lapses and claims. However, the industry took action to restore profits. Additionally, some of the segment’s challenges were in group insurance, and the business Zurich Insurance is acquiring is mostly individual business.

The transaction also will improve Zurich Insurance’s business profile. Following the acquisition, Zurich Insurance will be the leading life insurer in Australia, with a market share of 19% in the individual life segment, up from 7% today. The group’s geographic and business diversification also will improve. In particular, the balance of the group, which is still predominantly a property and casualty insurer, will improve. In 2016, the group generated 30% of its operating profit from the life segment, and this transaction will increase that level to a pro forma 34%.

Zurich Insurance’s lack of control of the banking distribution channel in Australia will be mitigated by the exclusive distribution agreement. Additionally, Zurich Insurance will focus on risk products, and not savings products, so there will be no competition between its products and ANZ’s products.

Zurich Insurance will fund a majority of the purchase with internal resources and partly through senior debt issuance. We expect the group’s ratio of Moody’s-adjusted debt to capital, which was 26% at year-end 2016, to increase by around one percentage point. The transaction also will have only a marginally negative effect on the group’s solvency ratio because future profit is largely recognized as regulatory available capital and the price of the transaction is broadly equal to the sum of discounted expected future profits. Expected cash from the acquired business, which encompasses expected profits and some release of capital from part of the business that is in run-off, should pay back the price of the transaction after 10 years.

6 The bank ratings shown in this report are ANZ’s deposit rating, senior unsecured debt rating and Baseline Credit Assessment.

Benjamin Serra Vice President - Senior Credit Officer +33.1.5330.1073 benjamin.serra@moodys.com

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15 MOODY’S CREDIT OUTLOOK 14 DECEMBER 2017

NEWS & ANALYSIS Corporates 2 » Delta Air Lines' joint venture with WestJet is credit positive » TTM Technologies' planned acquisition of Anaren is

credit negative » DaVita's planned sale of integrated care unit is credit positive » Novatek's launch of its Yamal LNG facility is credit positive » Polsat's offer for Netia is credit positive

Infrastructure 8 » Emera's equity issuance is credit positive, but financial

metrics remain weak

Banks 9 » Greek banks meet nonperforming exposure targets, a

credit positive » Landesbank Baden-Wüerttemberg's sale of legacy structured

credit portfolio is credit positive » Basel Committee’s low risk weight for covered bonds is credit

positive for issuing banks » China’s regulation on banks’ liquidity will help curtail

shadow-banking

Insurers 15 » UnitedHealth's Acquisition of DaVita Medical Group Is

Credit Positive

Sovereigns 16 » Venezuela's attempt to circumvent sanctions by creating a

cryptocurrency is unlikely to succeed

Securitization 18 » Loan limits in US higher education bill would be credit

positive for some student lenders and ABS

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Report: 1105130

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