15 April 2019

NEWS AND ANALYSISCorporates» Chevron's buyout of Anadarko will increase buyer’s

leverage while strengthening its smaller oil rival2

» Indivior's DOJ indictment is credit negative 3

» Brazil will reimburse Petrobras $9 billion for transfer ofrights to various oil blocks, a credit positive

4

» For Reckitt Benckiser, US government seeking $3 billionfine against former subsidiary Indivior is credit negative

5

» Mitsubishi Estate's credit-positive 50-year seniorunsecured notes broaden financing at a low cost

7

Infrastructure» DPL’s debt management initiatives strengthen the

group’s balance sheet8

Banks» European financial authorities recommend cybersecurity

legislation, a credit positive for financial institutions9

» Bank of Ireland's first nonperforming loan securitizationagreement is credit positive

11

» Russian Central Bank’s tighter rules for large creditexposures are credit positive for systemically importantbanks

13

» Russian banks lower their approval rate of retail loans, acredit positive

15

» Alpha Bank Romania's inaugural covered bond issue iscredit positive

17

» Egypt establishes a Shariah Board to oversee sukukissuance, a credit positive

18

» Emirates NBD’s partial sale of its stake in NetworkInternational is credit positive

19

» Japanese government’s plan to sell Japan Post Holdings’shares is credit positive for Japan Post Bank

20

» Resona lowers its net income forecast after booking largesecurities losses, a credit negative

21

» Korea’s adoption of Basel III reforms is credit negative 23

Sovereigns» Costa Rica’s first-quarter deficit points to continuing

need to lower financing costs25

» Extension of Brexit process avoids imminent no-dealoutcome, but uncertainty remains

27

» Papua New Guinea's gas agreement is credit positive forGDP growth and liquidity

28

US Public Finance» Detroit's 2020 budget passage continues positive

financial momentum30

CREDIT IN DEPTH» Energy trade shift supports US economy but is negative

for some LatAm exporters32

The US energy trade balance with Latin America is shifting fromdeficit toward surplus, a trend that has credit implications for energyproducers in both regions.

RECENTLY IN CREDIT OUTLOOK» Articles in last Thursday's Credit Outlook 33

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containing Moody’s Analytics’ review of market activity,

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NEWS AND ANALYSIS CORPORATES

Chevron's buyout of Anadarko will increase buyer’s leverage whilestrengthening its smaller oil rivalOn 12 April, Chevron Corporation (Aa2 stable) announced that it plans to buy Anadarko Petroleum Corporation (Ba1 review forupgrade) for $33 billion in stock and cash. The acquisition will make Chevron one of the world’s biggest integrated oil companies, butraise its financial leverage. For smaller US exploration and production rival Anadarko, the transaction is credit positive.

We affirmed Chevron’s rating and changed its outlook to stable from positive because of the merger, while placing Anadarko and itssubsidiaries including partially owned Western Gas Partners, LP (Ba1 review for upgrade), on review for upgrade.

For Anadarko, a debt guarantee from Chevron would effectively raise its credit quality to the same level as Chevron. Even if Chevronleaves Anadarko as an unguaranteed subsidiary, anticipated parental support would still enhance its credit quality, if not as much as anoutright guarantee.

Chevron will likely step into Anadarko’s position of partially owning and controlling Western Gas after the deal, benefiting its creditquality by providing it with a more creditworthy key customer for its services and anticipated parental support.

Chevron will pay roughly $33 billion for Anadarko’s stock, using 75% Chevron equity and 25% cash. The overall transaction value isalmost $50 billion, including Anadarko and Western Gas’s outstanding debt. We expect that the acquisition will close in the secondhalf of 2019.

Overall the acquisition provides compelling strategic and cost benefits to Chevron and enhances its strong upstream business profileand competitiveness compared with its major oil company peers. Anadarko’s sizable Delaware Basin acreage lies close to Chevron’sproperties in that basin in western Texas and southeastern New Mexico, the most prolific shale basin in North America today. Anadarkoalso gives Chevron additional scale, infrastructure and discoveries in the US Gulf of Mexico that overlap with Chevron’s existing assets.In a region lacking sufficient transportation infrastructure for its intense oil and gas production today, buying Western Gas will giveChevron strategic gathering, processing and transportation infrastructure for its Permian production. And, Anadarko’s Mozambiqueliquefied natural gas (LNG) project adds to Chevron’s existing LNG business and fits better with its LNG experience and financialcapability.

Still, the acquisition will weaken Chevron’s credit metrics because high debt burdens the strong asset bases of Anadarko and WesternGas. Pro forma for the Anadarko acquisition, Chevron’s retained cash flow (RCF)/net debt ratio would have been around 50% as of31 December 2018, compared to Chevron’s actual 73% for the year. Similarly, Chevron’s debt/capitalization ratio would have beenabout 26% versus the actual 18%. Chevron will likely reduce debt over the next several years through free cash flow and asset sales toimprove its leverage metrics. And while buying Anadarko strengthens Chevron’s upstream portfolio, the deal poses inherent integrationand execution risks for Chevron as it pursues synergies and returns on investment from this acquisition.

Peter Speer, Senior Vice PresidentMoody’s Investors Servicepeter.speer@moodys.com+1.212.553.4565

Steven Wood, MD-Corporate FinanceMoody’s Investors Servicesteven.wood@moodys.com+1.212.553.0591

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

2 Credit Outlook: 15 April 2019

NEWS AND ANALYSIS CORPORATES

Indivior's DOJ indictment is credit negativeOriginally published on 12 April 2019

On 9 April, the US Department of Justice (DOJ) charged Indivior PLC and Indivior Inc. (RBP Global Holdings Ltd., B3 negative) withfraudulent marketing of its largest drug, Suboxone Film. The indictment is credit negative because, if convicted, Indivior would be at riskof a large cash outflow. It would also would need to forfeit most of the patents that protect its drugs, including two recently launchedinjectable drugs, Sublocade and Perseris. These two drugs are the key growth drivers for Indivior as it faces rapid revenue erosion inSuboxone Film due to generic competition.

Suboxone FIlm is an opioid-based drug for the treatment of opioid dependence. The allegations in the indictment, which was returnedby a federal grand jury in the Western District of Virginia, include that Indivior promoted Suboxone Film as safer and less susceptible toabuse and diversion than similar drugs. The indictment charges Indivior with conspiracy to commit wire fraud, mail fraud, and healthcare fraud. In addition to the criminal case, we believe the US Attorney's Office for the State of Virginia will bring forth a civil suitfollowing the criminal proceedings.

The DOJ is seeking $3 billion in a monetary judgment to the US government, well above the $438 million provision that Indivior hadreserved on its balance sheet at 31 December 2018 related to the investigation. The amount and timing of potential payments remainsuncertain. Unless settled, we believe it could be several years before a final judgment, after all appeals, is made. Indivior's liquidityis good, supported by a large cash balance. However, if required to pay the full $3 billion, the ratings would come under significantpressure.

Indivior had $924 million of cash at 31 December 2018 and $243 million of funded debt. While cash balances will decline over the nextyear due to rapid and significant share erosion in Suboxone Film from generic competition, we believe that Indivior will maintain cashin excess of its funded debt. US sales of Suboxone Film comprised about 80% of Indivior's 2018 revenues.

The rating outlook is negative reflecting the risk that Indivior is unsuccessful at gaining meaningful market uptake in recently launchedSublocade to offset the significant declines that we expect over the next year in Suboxone Film. The negative outlook also incorporatesrisks and uncertainty around litigation.

Indivior is a UK-based global specialty pharmaceutical company headquartered in Richmond, Virginia. Indivior is primarily focused onthe treatment of opioid addiction with its suite of buprenorphine-based products. Reported revenues for the twelve months ended 31December 2018 approximated $1.0 billion.

Morris Borenstein, VP-Senior AnalystMoody’s Investors Servicemorris.borenstein@moodys.com+1.212.553.1409

Jessica Gladstone, CFA, Associate Managing DirectorMoody’s Investors Servicejessica.gladstone@moodys.com+1.212.553.2988

3 Credit Outlook: 15 April 2019

NEWS AND ANALYSIS CORPORATES

Brazil will reimburse Petrobras $9 billion for transfer of rights to variousoil blocks, a credit positiveOriginally published on 11 April 2019

On 9 April, the Government of Brazil (Ba2 stable) announced that it will reimburse Petroleo Brasileiro S.A. (Petrobras, Ba2 stable) $9billion later this year, a result of the renegotiation of its transfer of rights agreement.

The $9 billion payment will allow Petrobras to strengthen its balance sheet by using the proceeds to add resources to its asset baseor to reduce debt, both credit positive outcomes. Any combination of higher capital investments and debt repayment will help thecompany accelerate its approach to its target leverage of 1.5x net debt/EBITDA, from 2.3x in 2018, reducing its credit risk.

Petrobras' case for a reimbursement was based primarily on oil prices and development costs that differed from those anticipated in2010, when the transfer of rights agreement was established, setting production at 5 billion barrels of oil equivalent in certain pre-saltblocks. Petrobras had argued for reimbursement since 2014, after the last block was declared commercially viable.

The sizable payment supports Petrobras’ ba3 Baseline Credit Assessment, a measure of the company's standalone credit risk withoutconsidering government support. However, given Petrobras’ strong links with the government, along with its vulnerability topotential changes in its regulatory framework and corporate strategy, we are unlikely to change its Ba2 ratings after the $9 billionreimbursement. And, because it was unclear if or when the government would repay Petrobras and whether the payment would be incash or in additional reserves, we did not consider the reimbursement in our analysis of the company’s credit risk.

The government’s motivation to resolve the case increased when Petrobras discovered about three times the original 5 billion barrels ithad rights to produce, creating an opportunity for the government to re-acquire the blocks from the company and potentially auctionthem for a significant amount of cash.

The government plans to auction the blocks in the transfer of rights area in October 2019. As is typical in the industry, Petrobrasexpects the winning bidder for the transfer rights to reimburse it for the as yet undisclosed amount of capital it has so far invested inthe area.

Petrobras is an integrated energy company. In 2018, it had $222 billion of total assets and $95.5 billion revenue. The companydominates Brazil's oil and natural gas production, as well as downstream refining and marketing. The Brazilian government directly andindirectly owns about 44.9% of Petrobras' outstanding capital stock and 63.7% of its voting shares.

Nymia Almeida, Senior Vice PresidentMoody’s Investors Servicenymia.almeida@moodys.com+52.55.1253.5707

Marianna Waltz, CFA, MD-Corporate FinanceMoody’s Investors Servicemarianna.waltz@moodys.com+55.11.3043.7309

4 Credit Outlook: 15 April 2019

NEWS AND ANALYSIS CORPORATES

For Reckitt Benckiser, US government seeking $3 billion fine againstformer subsidiary Indivior is credit negativeOriginally published on 12 April 2019

On 9 April, the US Department of Justice (DOJ) charged Indivior plc with using illicit marketing practices to increase prescriptions of itsflagship opioid drug, and is seeking at least $3 billion in fines from the company. Invidior was previously known as RB Pharmaceuticalsbefore its 2014 spin-off from Reckitt Benckiser Group Plc (RB, A3 stable), and the alleged fraud began eight years before the spin-offfrom RB.

The charge against Indivior is credit negative for RB because it increases the likelihood that RB will pay substantially highercompensation than it expected in connection with the investigation and related litigation proceedings. Additionally, the charge mayprompt RB to have to raise additional debt to deal with the potentially higher liability, thus eroding its credit quality.

We understand that there is no mechanism under which Indivior can force RB to pay any fine or damage awards for which Indivior isliable because of indemnity arrangements between the companies. However, we believe that the DOJ could bring an action directlyagainst RB, or that other parties bring civil actions directly against RB, and that RB settles one or more of these actions.

Indeed, RB has provisioned $400 million to cover any legal liability related to the Indivior investigation. RB stated in its annualreport that the result of the investigation “could not be predicted with any certainty” and that “the final cost for the group may besubstantially higher than this provision.”

Assuming RB has to pay $400 million (£313 million) in compensation for the charges against Indivior, and that the company generatesfree cash flow of around £1.0 billion, we estimate that RB’s Moody's-adjusted debt/EBITDA ratio would be around 3.0x in 2019. In aworst-case scenario in which RB is responsible for compensation of $3.0 billion, we estimate RB’s debt/EBITDA ratio would be 3.5x thisyear.

RB’s Moody's-adjusted leverage of 3.3x as of December 2018, based on our preliminary assessment, is relatively high for its A3 rating,but is likely to decline over the next two years thanks to moderate EBITDA growth and strong free cash flow generation, which weanticipate the company will apply to reducing debt. Negative pressure on RB’s ratings could develop if, among other factors, thecompany fails to reduce leverage, as defined as Moody’s-adjusted gross debt/EBITDA, to around 3.0x.

The federal grand jury investigation into Indivior began in December 2013. According to the indictment, Indivior sold several billionsof dollars of Suboxone Film, an opioid drug, by deceiving healthcare providers and healthcare benefit programs into believing that thedrug was safer than other opioid-addiction treatments. An indictment merely alleges that crimes have been committed. Indivior said itintends to contest the charges, and that it made multiple attempts over several years to settle with the DOJ and that the charges werebased “almost exclusively on years-old events from before Indivior became an independent company in 2014.”

With revenue of around £1 billion in 2018, Indivior develops, manufacture and sells buprenorphine-based prescription drugs for thetreatment of opioid dependence. The company had a cash balance of $924 million and net cash of $681 million at the end of 2018.Indivior had recognised a provision of $438 million, mostly related to the DOJ investigations, and stated that “the final settlementamount may be materially higher than this provision.”

5 Credit Outlook: 15 April 2019

Roberto Pozzi, Senior Vice PresidentMoody’s Investors Serviceroberto.pozzi@moodys.com+44.20.7772.1030

Richard Etheridge, Associate Managing DirectorMoody’s Investors Servicerichard.etheridge@moodys.com+44.20.7772.1035

Ilaria Borino, Associate AnalystMoody’s Investors Serviceilaria.borino@moodys.com+44.20.7772.8633

6 Credit Outlook: 15 April 2019

NEWS AND ANALYSIS CORPORATES

Mitsubishi Estate's credit-positive 50-year senior unsecured notesbroaden financing at a low costOriginally published on 12 April 2019

On 12 April, real estate developer Mitsubishi Estate Co., Ltd. (MEC, A2 stable) priced its ¥15 billion senior unsecured notes to be issuedon 18 April. These will be the first bonds in the Japanese bond market with a term to maturity of 50 years, including bonds issued bythe Government of Japan (A1 stable). The issuance is credit positive for MEC because the company will be able to expand its financingoptions with low debt costs.

The 50-year senior unsecured notes demonstrate the exceptional financing capabilities of MEC, which has shown financing flexibilityin the past. In 2016, the company raised ¥350 billion through the issuance of subordinated notes and a subordinated loan. It has alsoissued senior unsecured 40-year bonds periodically since 2016.

As a core member of the Mitsubishi Group, MEC benefits from strong investor confidence among domestic investors and lenders. Thecompany's relationships with major lenders, especially the financial institutions that are part of the Mitsubishi Group, will continue tocontribute its excellent access to capital markets and bank financing.

MEC has lengthened the term to maturity of its long-term bonds, and the coupon rate of 1.132% for the 50-year notes is lower thanmost of MEC's past 30-year and 40-year notes, as shown in Exhibit 1. We believe MEC’s super long-term bonds will attract long-terminvestors in Japan, who struggle to find bonds from high-profile issuers that have attractive yields in Japan's historically low interest rateenvironment. This is especially the case since the Bank of Japan introduced a negative interest-rate policy in January 2016.

The addition of a 50-year bond demonstrates Mitsubishi Estate's strong financing capabilities

Issuance Issue amount Term to maturity Coupon rates

Oct 2002 ¥10 billion 30-year 2.900%

Dec 2002 ¥10 billion 30-year 2.615%

Apr 2003 ¥20 billion 30-year 2.040%

Jun 2003 ¥10 billion 30-year 1.720%

Jun 2016 ¥15 billion 40-year 0.789%

Dec 2017 ¥15 billion 40-year 1.402%

Mar 2018 ¥10 billion 40-year 1.313%

Apr 2019 ¥15 billion 50-year 1.132%

Sources: Company disclosures and Moody’s Investors Service

We expect MEC’s leverage will increase at least for the next two to three years compared with the fiscal 2017 (which ended 31 March2018). Net debt/EBITDA will rise to the high 7x range toward fiscal 2020 from 7.1x in fiscal 2017.

As one of the major real estate developers in Japan, MEC will invest around ¥300 billion (net of asset sales) annually, mainly in its officeleasing segment. It is critical for MEC to maintain stable financing sources and flexible financing options to meet its financing needs in atimely manner for those investments.

Akifumi Fukushi, VP-Senior AnalystMoody’s Japan K.K.akifumi.fukushi@moodys.com81-3-5408-4167

Mihoko Manabe, Associate Managing DirectorMoody’s Japan K.K.mihoko.manabe@moodys.com81-3-5408-4033

7 Credit Outlook: 15 April 2019

NEWS AND ANALYSIS INFRASTRUCTURE

DPL’s debt management initiatives strengthen the group’s balancesheetOn 8 April, utility holding company DPL Inc. (DPL, Ba1 positive) issued $400 million of 4.35% senior unsecured notes due in 2029. Inearly May, DPL intends to use the net proceeds and cash on hand to redeem $400 million of the $780 million remaining balance of its7.25% senior unsecured notes due in 2021 and pay the make-whole premium. These transactions follow repayment on 4 April of $99million of outstanding 6.75% notes of 2019, which equaled 11% of the parent's outstanding debt at year-end 2018.

The material deleveraging of DPL’s capital structure and the 290 basis point differential between the coupon of its 2029 4.35% notesand the 2021 7.25% notes are credit positive for DPL and its regulated utility subsidiary Dayton Power & Light Company (DP&L, Baa2positive). Together, we expect them to reduce the holding company’s annual interest cash payments by around $18 million (around30% of the parent’s 2018 annualized cash interest payments). The parent's lower capital requirements will also leave DP&L with moreof its cash flow to re-invest in growing its regulated rate base (currently $840 million). The lower outstanding balance of 2021 notesalso helps DPL lengthen its debt maturity profile and reduce its refinancing risk since the group’s next maturity is DP&L’s $140 millionnotes due in 2020.

In 2018, DPL reported consolidated cash flow of $102 million, a large improvement compared with $10 million in 2017. The improvedcash flow drivers include higher electricity sales, tax savings associated with DPL's operating loss carry-forwards, and positive changesin operating assets and liabilities, including an $81 million increase in working capital related to the sale of its peaking generation unitsand regulatory collections. For 2019, we anticipate the effect of these items will remain largely muted.

Other key factors that contributed to DPL’s positive free cash flow last year were the $105 million annual non-bypassable charges, theso called Distribution Modernization Rider that DP&L started collecting from end-users in November 2017 following Public UtilitiesCommission of Ohio approval. The $105 million of charges replaced previous annual charges of $73 million that DP&L began collectingagain in September 2016. The regulator also authorized DP&L to use, through 2020, the funds associated with this rider to service debt(including at parent DPL) and to grow the utility’s rate base.

In January 2019, DP&L filed to extend the rider through 2022 but also requested authorization to increase the non-bypassablecharge to $199 million. DP&L estimates that for customers with average monthly bills of $100 the increase would ratchet up theiramounts due by around $4.60 per month, a manageable increase. Our base case assumes that the regulator will approve the extensionof the charges through 2022, at least for the current amount of $105 million – although this amount would only permit limitedadditional deleveraging of the group's capital structure. The possible authorization to upsize the collected amount to $199 millionwould be significantly credit positive because it would increase DP&L’s funds available to finance $628 million of its planned 2019-21investments and gradually reduce its reliance on the Distribution Modernization Rider. Its approval, along with DPL’s commitment notto upstream any dividends and/or tax sharing payments to its parent company, The AES Corporation (Ba1 stable), will also strengthenDPL’s balance sheet and reduce the consolidated equity book deficit, which was $471.1 million at year-end 2018, versus $584.3 millionin 2017.

Between 2014 and April 2019, DPL repaid nearly $900 million in consolidated debt, which was approximately 35% of its outstandingbalance at year-end 2013, aided by positive free cash flow and net proceeds of nearly $400 million generated from the sale of its retailoperations and some generation and transmission assets.

Natividad Martel, CFA, VP-Senior AnalystMoody’s Investors Servicenatividad.martel@moodys.com+1.212.553.4561

8 Credit Outlook: 15 April 2019

NEWS AND ANALYSIS BANKS

European financial authorities recommend cybersecurity legislation, acredit positive for financial institutionsOriginally published on 12 April 2019

On 10 April, the three European Supervisory Authorities1 (ESAs) for financial institutions advised the European Commission (EC) onthe need for legislative improvements relating to cybersecurity and other technology risks in their sectors. Because cybersecurity risksthreaten the stability of the financial system and financial institutions are vulnerable to cyberattacks, cross-border legislative efforts toimprove the risk management and resiliency of cybersecurity and promote stronger operational resilience and harmonization are creditpositive for European financial institutions.

Three financial institution sectors (banks, securities firms and market infrastructure providers) are among the four sectors (the otherbeing hospitals) with the highest level of inherent cyber risk exposure among 35 broad sectors we recently assessed. Moreover, on thesame day as the ESA's report to the EC, the CEOs of the largest US banks2 testified to the US House Financial Services Committee thatcybersecurity was among the most significant risks to the US financial system.

The ESAs analyzed existing legislation and said there is typically a lack of explicit reference to information and communicationtechnology and cybersecurity risk, and that common, targeted minimum requirements should be legislated to explicitly cover theserisks. According to the ESAs, every relevant entity should be subject to general requirements on governance of these risks to ensure safeprovision of regulated services, and to help set appropriate supervisory expectations, aid good governance and, in turn, promote greatersecurity.

To facilitate better operational resilience and business continuity and improve the efficiency and effectiveness of interactions betweenauthorities and financial institutions, the ESAs recommended that incident reporting requirements should be introduced, or bestreamlined and standardized in the areas of legislation where they already exist.

In addition to making sectoral proposals on banking and payments, insurance and the securities markets, the ESAs said there shouldbe an appropriate oversight framework for monitoring the activities of critical third-party service providers to financial institutions. TheESAs made specific reference to cloud service providers, indicating concerns with the repercussions of a serious breach at one of thefew large providers of such services on interconnected financial institutions.

The ESAs provided an accompanying report addressing the costs and benefits of developing a coherent cyber resilience testingframework for significant market participants and infrastructures within the whole EU financial sector. This report advised establishingan explicit legal basis for the development and implementation of such a framework across the EU’s financial sectors, under the ESAs’remit.

The ESAs said the most advanced tool for cyber resilience testing is threat-led penetration testing (so-called red team testing), whichis a controlled attempt to compromise an entity's cyber resilience by simulating the behaviors of cyber criminals. However, the reportsaid a coordinated EU-wide threat-led penetration-testing framework is a long-term ambition. It is not feasible to introduce such aframework in the short term because there are significant differences across and within financial sectors in terms of cyber maturity, andonly a few authorities currently organize such testing. The ESAs recommended that the EC consider facilitating the establishment of anEU-wide coherent cyber-resilience testing framework on a voluntary basis, focusing on threat-intelligence-led penetration testing. Inthe short term, the ESAs advised that efforts should be made to obtain a minimum level of cyber resilience across EU financial sectors.In this respect, the ESAs said that insurance-sector cybersecurity maturity is more diverse than the banking sector because of the widervariety in the size of insurance companies.

9 Credit Outlook: 15 April 2019

Endnotes1 The European Banking Authority, The European Insurance and Occupational Pensions Authority and The European Securities and Markets Authority.

2 Bank of America Corporation (A2 stable), The Bank of New York Mellon Corporation (A1 stable), Citigroup Inc. (A3 stable), The Goldman Sachs Group Inc.(A3 stable), JPMorgan Chase & Co. (A2 stable), Morgan Stanley (A3 stable) and State Street Corporation (A1 stable).

Donald Robertson, Senior Vice PresidentMoody’s Investors Servicedonald.robertson@moodys.com+1.212.553.4762

10 Credit Outlook: 15 April 2019

NEWS AND ANALYSIS BANKS

Bank of Ireland's first nonperforming loan securitization agreement iscredit positive

On 10 April, Bank of Ireland Group plc (Baa3 positive), the holding company of Bank of Ireland (BOI, A2 stable/A3 positive, baa31),announced that it had entered a securitization agreement involving €370 million of legacy nonperforming buy-to-let mortgages. Thetransaction, which is scheduled to close on 18 April, is credit positive because it will reduce the bank's problem loans ratio and modestlyimprove asset risk, which remains a constraint on the bank's standalone credit strength.

We estimate that following the transaction, the bank's ratio of problem loans to gross loans will improve to 5.4% from 5.9% as of year-end 2018, a step closer to European Central Bank guidance of 5%. The bank is on track to achieve the 5% nonperforming exposuretarget by end of this year. As of year-end 2018, the bank's domestic peers reported problem loan ratios of 5.9%-11.9%, with BOI havingthe strongest ratio (see Exhibit 1).

Exhibit 1

Irish banks' ratios of problem loans to gross loans are improvingOperating environment and sales of impairments support the decline

11%

19%

47%

24% 24%

8%

14%

43%

16%

27%

5%

10%

35%

14%

26%

6%

9%12%

10%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

BOI AIB KBCI* UBIDAC PTSB

2015 2016 2017 2018

Key: BOI = Bank of Ireland; AIB = Allied Irish Bank; KBCI= KBC Bank Ireland; UBIDAC = Ulster Bank Ireland DAC; PTSB =Permanent tsb p.l.c.Note: * Data as of 2017. Pre-2018 data is stated under IAS 39, while 2018 data is stated under IFRS 9,Sources: The banks and Moody's Investors Service

The transaction will boost BOI's ratio of tangible common equity (TCE) to risk-weighted assets (RWAs) by 30 basis points from the18.3% it reported for 2018 owing to the reduction in RWAs. The transaction will also improve the bank's Texas ratio, the ratio ofproblem loans to loan-loss reserves and TCE, to 40% from 44% in 2018, which is one of the strongest among its peers (see Exhibit 2).Overall, these improvements strengthen BOI's solvency and provide an improved base to support new lending. We expect Ireland'soperating environment to remain supportive over the next 12-18 months, and that new lending will outweigh bad loan sales, leading tomodest growth in the bank's overall loan book this year.

11 Credit Outlook: 15 April 2019

Exhibit 2

Irish banks maintained strong capitalization in 2018

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

0%

5%

10%

15%

20%

25%

30%

35%

BOI AIB KBCI* UBIDAC PTSB

TCE/RWA (right axis) Texas ratio (left axis)

Notes: * Data as of 2017. Key: AIB = Allied Irish Bank; BOI = Bank of Ireland; KBCI= KBC Bank Ireland; UBIDAC = Ulster Bank Ireland DAC; PTSB = Permanent tsb p.l.c.Sources: The banks and Moody's Investors Service

The securitization of the impaired loans is an alternative to a direct sale, and allows BOI to maintain the customer relationship as themortgage servicer. So far, in other impaired-loan securitizations, the originator has not stayed on as mortgage servicer. The BOI assetsare notionally impaired performing loans which generate good predictable cashflows, and will typically not require active management,making them suitable for securitization.

In Ireland, banks must give borrowers at least 60 days’ notice before a change of servicer can can take place, and the transaction cannotclose until this period has elapsed. During this period, the bank retains the assets on its balance sheet. However, since BOI is continuingto service the securitized loans, this notice period is not required, and NPL reduction is recognized the day the deal closes.

The sale of owner-occupied nonperforming mortgage loans has attracted close political scrutiny in Ireland amid claims that debtpurchasers have taken a more aggressive approach to borrowers in arrears, including repossessing properties, than traditional banks.However, Permanent tsb p.l.c. (Baa3/Baa3 positive, ba2) and Ulster Bank Ireland DAC (Baa1 positive, ba1) last year each successfullycompleted sales of NPL portfolios backed by residential mortgages that helped reduce their legacy impairments. Allied Irish Banks,p.l.c. (AIB, A2 stable/A3 positive, baa3) recently announced an agreement to sell a pool of nonperforming mortgages that are primarilyinvestment properties. Irish banks have been taking solid steps to reduce their impaired assets we expect this to continue, resulting inimproving asset risk for the sector.

Endnotes1 The bank ratings shown in this report are the bank’s deposit rating, senior unsecured debt rating (where available) and Baseline Credit Assessment.

Arif Bekiroglu, VP-Senior AnalystMoody’s Investors Servicearif.bekiroglu@moodys.com+44.20.7772.1713

12 Credit Outlook: 15 April 2019

NEWS AND ANALYSIS BANKS

Russian Central Bank’s tighter rules for large credit exposures are creditpositive for systemically important banksOriginally published on 12 April 2019

On 11 April, the Central Bank of Russia (CBR) published Request For Comments (RFC) on proposed stricter rules for banks' underwritingof large corporate loans. The proposal seeks to limit credit risks associated with banks’ lending to large overleveraged corporateborrowers, and primarily targets systemically important banks (SIBs), because, according to the CBR, these banks are most involved inissuing loans to large corporates. The gradual phase-in of tighter regulation, initially beginning from SIBs, would be credit positive forSIBs because it will incentivise them to either limit lending to overleveraged large single borrowers or set aside more capital for suchloans.

Banks' high credit concentrations to single borrowers raise their potential credit losses because a borrower's default may trigger anabrupt large loss and erosion of the bank's capital, while simultaneously hampering interest income generation and underminingliquidity. Russian banks' loan books historically have had high concentrations of a narrow pool of large corporates, whereby the 20largest credit exposures, on average, account for approximately 44% of a Russian bank's total gross loans. The CBR's initiative seeks tolimit banks' appetite to lend to large corporates, especially those whose indebtedness is already high.

To gauge whether a corporate qualifies as “a large entity whose indebtedness may be systemically important,” the regulatorsuggests applying a number of criteria, including the entity's total indebtedness exceeding 0.05% of Russia's GDP and/or the entity'sindebtedness owed to a single bank exceeds RUB100 billion. The CBR estimates that the aggregate indebtedness of all Russia-basedentities whose individual debt exceeds 0.05% of GDP surpasses 22% of the country's GDP, while their aggregate revenue exceeds 45%of GDP (see Exhibit 1).

Exhibit 1

Aggregate indebtedness of the 92 largest Russia-based corporates is high as a percentage of GDP

0%

5%

10%

15%

20%

25%

30%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Sources: Russian state statistical service and corporates' financial reports

The CBR also suggests that creditors define how they consider large corporates' indebtedness to be high, and proposes applying aleverage ratio (measured as the entity's net debt to its own capital) and interest coverage ratio (measured as the entity's operationalprofit to its interest payable). The RFC then proposes applying different thresholds that as a rule of thumb call for the leverage ratio tonot be higher than 80% and the interest coverage ratio not lower than 300%.

If the analysis using the above guidance results in the borrower defined as both large and highly indebted, the regulator wouldprescribe higher risk weights for the banks lending to such borrowers. Banks generally use risks weights for regulatory capital adequacycomputation, and the higher the applying risk weight, the more capital should be allocated by the bank against the underlyingtransaction.

13 Credit Outlook: 15 April 2019

The CBR intends to phase in the new requirements first for SIBs because it estimates that, as of 1 December 2018, SIB issued 96% of allloans to large and overleveraged companies (as per the criteria discussed above). Initially, such loans will be monitored by the CBR andwill trigger any increased capital requirements. However, the regulator aims to subsequently raise the risk weights applied to such riskyloans and thus stimulate SIBs' more prudent approach to underwriting of concentrated credit exposures.

The CBR defines 11 Russian banks as SIBs (see Exhibit 2). Compared with other local banks, the SIBs are subject to closer regulatoryscrutiny and should comply with stricter regulatory and reporting requirements.

Exhibit 2

Russia's systemically important banks

Bank name

Total assets, 31 December 2018, IFRS,

consolidated, RUB billions Rating

1 Sberbank 31,198 Baa3 stable, ba1

2 Bank VTB, PJSC 14,761 Baa3/Baa3 stable, b1

3 Gazprombank 6,532 Ba1/Ba1 stable, b1

4 Alfa-Bank 3,216 Ba1/Ba1 stable, ba2

5 Russian Agricultural Bank 3,115 Ba1/Ba1 stable, b3

7 Bank Otkritie Financial Corporation PJSC 2,199 Ba2/Ba2 stable, b3

6 Credit Bank of Moscow 2,146 Ba3/Ba3 stable, b2

9 UniCreditBank 1,363 Unrated

8 Promsvyazbank 1,281 Ba3/Ba3 positive, caa1

10 PJSB Rosbank 1,153 Ba1/Ba1 stable, ba3

11 AO Raiffaisenbank 1,126 Baa3 stable, ba1

The bank ratings shown in this report are the bank’s domestic deposit rating, senior unsecured debt rating (where available) and Baseline Credit Assessment.Source: The Central Bank of Russia, banks' financial reports and Moody's Investors Service

Olga Ulyanova, VP-Sr Credit OfficerMoody’s Investors Serviceolga.ulyanova@moodys.com+7.495.228.6078

14 Credit Outlook: 15 April 2019

NEWS AND ANALYSIS BANKS

Russian banks lower their approval rate of retail loans, a credit positiveOriginally published on 12 April 2019

On 8 April, Russian business news agency Prime published data compiled by Russia's United Credit Bureau showing that the averagerate of approval of retail loan applications fell in the first quarter of 2019 by 8%-11% for all loan categories, except credit cards (seeExhibit 1). The lower approval rate signals banks’ reduced risk appetite for retail loans, a credit positive for their asset quality.

Exhibit 1

Russian banks' average rate of approval of retail loan applications by product

43% 44%

80%

45%

32% 33%

72%

45%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Cash loans Car loans Mortgages Credit cards

Q1 2018 Q1 2019

Sources: Prime and United Credit Bureau

The demand for retail loans in Russia remains strong: in January-February 2019, retail lending growth continued accelerating, reaching23.5% year on year as of 1 March 2019 and significantly outpacing the growth of households' income over the same period (see Exhibit2). The banks reacted to the resulting increase of consumer leverage by reducing their risk appetite, which will help them preventsignificant asset quality deterioration over the next 12 months.

Exhibit 2

Russian households' nominal debt burdens are increasing as debt grows faster than income

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Retail lending growth, year on year Money income per capita growth, year on year Household debt/annual income

Sources: Central Bank of Russia and Rosstat

In recent months, retail problem loans have continued to trend downward both as a proportion of banks' loan books and in absoluteterms, with a similar trend occurring with early delinquencies (see Exhibit 3). We expect no severe deterioration of retail loan qualityover the next 12 months, given that households' debt-servicing capacity, as measured by the payment-to-income ratio, has recentlystrengthened even as their debt burdens have increased.1

15 Credit Outlook: 15 April 2019

Exhibit 3

Declines in retail delinquencies suggest an asset quality crisis is not imminent

0

200

400

600

800

1,000

1,200

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

RU

B b

illio

ns

90+ overdue retail loans, % of total retail loans (LHS) Early delinquency rate in the respective month (LHS) 90+ overdue retail loans (RHS)

Note: The early delinquency rate shows that retail loan repayments delayed by a day or longer as a percent of total repayments due during a given monthSource: Central Bank of Russia

We expect that any potential negative pressure on households' debt-servicing capacity will remain contained this year because banksare becoming more selective, reducing the approval rate and focusing on borrowers who are wealthier and have good credit histories.2

Additionally, the Central Bank of Russia and the Parliament are working towards introducing a limit on borrower’s payment-to-income(PTI) ratio,3 with the first step being obligatory reporting of the ratio to the Central Bank of Russia (CBR) starting 1 October 2019.

According to the CBR's recent comments, the new PTI regulation will, in particular, address the risk of mortgage loan qualitydeterioration, which may result from borrowers increasingly using consumer loans to finance their mortgage down payment. Accordingto the CBR, such a practice occurred with 3%-5% of mortgages granted in January-September last year.

The key beneficiaries of the systemwide reduction in risk appetite for retail lending are banks with the largest share of consumer loansin gross loans and whose credit profiles are the most sensitive to retail loan quality (see Exhibit 4).

Exhibit 4

Rated Russian banks with the highest share of consumer loans in their loan portfolio

Bank

Consumer loans %

Gross loan book

Growth rate of consumer loan portfolio

(9M 2018 / YE2017)

Tinkoff Bank (Ba3/Ba3 stable, ba3) 98.6% 46.7%

Russian Standard Bank (Caa2/Caa2 stable, caa2) 74.8% 8.1%

Orient Express Bank (Caa1 negative, caa1) 63.3% 8.7%

Locko-bank (B1 stable, b1) 63.0% 37.5%

Notes: Consumer loans include cash loans, point-of-sale loans, credit cards, secured consumer loans and other consumer loans.The bank ratings shown in this exhibit are the bank’s deposit rating, senior unsecured debt rating (where available) and Baseline Credit Assessment.Source: Banks' IFRS reports as of 30 September 2018 for all but Tinkoff Bank, whose data is based on its 2018 IFRS report

Endnotes1 See Risks from retail loans are milder than in the previous crisis, 7 February 2019.

2 See Russian banks grant larger loans as households' debt-service capacity rises, a credit positive, 25 January 2019.

3 See Russia proposes legal restrictions on consumers' debt burden, a credit positive, 13 September 2018.

Svetlana Pavlova, AVP-AnalystMoody’s Investors Servicesvetlana.pavlova@moodys.com+7.495.228.6052

Maksim Maliutin, Associate AnalystMoody’s Investors Servicemaksim.maliutin@moodys.com+7.495.228.6117

16 Credit Outlook: 15 April 2019

NEWS AND ANALYSIS BANKS

Alpha Bank Romania's inaugural covered bond issue is credit positiveOn 9 April, Alpha Bank Romania S.A. (ABRO, Ba2 stable, b11) launched a €1 billion covered bond programme, Romania's first. Thecovered bonds to be issued have full recourse to the issuer and are secured by a cover pool of residential mortgages in Romania. Thebank expects to complete its first covered bond issue of €200 million by the end of the second quarter.

The issuance is credit positive because it will diversify ABRO's funding base, reduce its reliance on funding from Greece-based parentAlpha Bank AE (Caa1/(P)Caa1 stable, caa1), reduce the maturity mismatch of its euro assets and liabilities, and lower funding costs. Theissue also paves the way for potential covered bond issuance by other Romanian banks, which are currently funded almost entirely bydeposits, which comprised 73% of their non-equity funding as of September 2018.

ABRO's funding from its parent bank comprised 26% of total assets as of year-end 2017, down from 35% at year-end 2016, though stillthe highest among Romanian rated banks. The bank's reliance on its parent raises ABRO's funding risks given the parent's weak creditprofile and vulnerable financial position, which constrain ABRO's credit profile.

The covered bond issue will have a five-year maturity, reducing the maturity mismatch between ABRO's euro-denominated assets,which are predominantly residential mortgages and loans to local corporates, and its liabilities, which are mainly short-term retail euro-denominated deposits. ABRO has the highest exposure to euro-denominated loans among our rated Romanian banks at 61% of grossloans at year-end 2017, while residential mortgages comprised 43% of the total loan book at year-end 2017.

The covered bond issue will also reduce ABRO's funding costs because it will replace usually more costly subordinated debt the parentholds, which matures this year. However, the covered bond issue will also reduce the loss-absorbing buffers for the bank’s seniorcreditors because of structural subordination. Unlike subordinated or senior unsecured debt, cover pool assets are not available tocreditors until after covered bond claims are met.

Under covered bond law, Romanian banks' covered bond issuances are limited to 8% of total assets. However, the minimumrequirement for own funds and eligible liabilities (MREL) may hinder growth in covered bond issuance as banks seek a balance betweendeposit collection and secured stable funding sources at low cost and confidence-sensitive senior unsecured or subordinated debtat higher cost. Although, the authorities have yet to announce details of MREL implementation, Romanian banks need to meet thisrequirement by issuing bail-in-able debt by 2024.

Endnotes1 The bank ratings shown in this report are the banks' long-term deposit rating, senior unsecured debt rating (where available) and Baseline Credit

Assessment

Melina Skouridou, CFA, AVP-AnalystMoody’s Investors Servicemelina.skouridou@moodys.com+357.2569.3021

Carola Schuler, MD-BankingMoody’s Investors Servicecarola.schuler@moodys.com+49.69.70730.766

17 Credit Outlook: 15 April 2019

NEWS AND ANALYSIS BANKS

Egypt establishes a Shariah Board to oversee sukuk issuance, a creditpositiveOn 8 April, Egypt’s (B3 positive) Financial Regulatory Authority (FRA) announced that it is establishing a Shariah SupervisoryCommittee (SSC) to oversee Islamic bond (sukuk) issuance. The committee's establishment is credit positive for Islamic financialinstitutions because it adds depth to the Islamic finance sector and will facilitate sukuk issuance. It also shows Egypt's commitment toincrease the Islamic finance market, which will allow new funding opportunities and increase foreign investment attractiveness.

The SSC's establishment will enhance supervision and guidance of financial market participants and help align Egypt with peers throughthe enforcement of global standards, making it more appealing to foreign investors. We expect the potential increase in Egypt's capitalmarket activity to increase fee income for banks that facilitate/structure such transactions and potentially lower funding costs forsukuk-issuing entities.

The newly formed SSC will have nine members and act independently. Its main function will be to approve Sukuk issuance, as wellas oversee sector developments. We also expect the SSC to act as the Shariah advisor to the government if and when it decides toissue its first sukuk, which market participants anticipate in 2019. Egypt, as well as Malaysia, Indonesia, Pakistan, Bahrain, the UAEand Morocco, have established supervisory entities to mitigate Shariah compliance risks, while Turkey, Qatar, Algeria and Kuwait havesimilar projects underway.

We expect Africa's contribution to total global sukuk issuance to increase as more African sovereigns endeavor to diversify theirfunding base. In addition to Egypt, Algeria, Morocco (Ba1 stable) and Sudan have expressed interest and we expect at least $1 billion(equivalent) of sukuk issuance in Africa during 2019. In 2017, both the federal government of Nigeria (B2 stable) and pan-Africandevelopment bank Africa Finance Corporation (AFC, A3 stable) came to the market with inaugural sukuk issuances of $280 million and$150 million, respectively. Other African government issuers include Mali with a $285 million issuance while Cote d'Ivoire (Ba3 stable)and South Africa (Baa3 stable) have issued the largest volumes of sukuk in Africa at around $500 million each.

Potential for Islamic finance growth is substantial in Egypt because its Muslim population is large but Islamic banking and sukukpenetration is very low. In addition to Islamic banking services provided by some conventional banks' Islamic windows, there are threeIslamic banks with a market share of around 4% of total banking sector assets as of end-December 2018.

Sovereign sukuk issuance would also drive other market participants' sukuk issuance, which will allow issuers to tap a new pool ofinvestors that include sovereign wealth funds in the Gulf Co-operation Council countries, Malaysia and regional Islamic banks. Egyptcan take advantage of increasing global interest in Shariah-compliant investment opportunities because of the growing understandingand comfort relating to the complex legal structure of Islamic instruments.1

Endnotes1 See Promising growth prospects for Islamic finance in 18 African countries, 17 Sept 2018.

Constantinos Kypreos, Senior Vice PresidentMoody’s Investors Serviceconstantinos.kypreos@moodys.com+357.2569.3009

Nitish Bhojnagarwala, VP-Sr Credit OfficerMoody’s Investors Servicenitish.bhojnagarwala@moodys.com+971.4.237.9563

Savina Joseph, Associate AnalystMoody’s Investors Servicesavina.joseph@moodys.com+357.2569.3045

18 Credit Outlook: 15 April 2019

NEWS AND ANALYSIS BANKS

Emirates NBD’s partial sale of its stake in Network International iscredit positiveOn 14 April, United Arab Emirates-based bank Emirates NBD PJSC (ENBD, A3/A3 stable, ba11) announced that, after halving its stakein card processing company Network International LLC through a secondary listing on the London Stock Exchange on 10 April, ENBDsold a further 3.1% stake after the stabilising manager of the transaction exercised an over-allotment option (greenshoe option). Thepartial sale of the stake in Network international (ENBD will retain a 22.4% interest) is credit positive for ENBD because the realisedgains will increase 2019 profitability and build capital buffers to meet capital needs, including from 2019 asset growth and the effectsof its planned acquisition of Turkey's Denizbank A.S. (B2 negative, b3).

We estimate that ENBD’s realised gains from the transaction will be around AED2.0 billion, which equates to around 20% of the bank's2018 profit or 0.4% of the bank's tangible assets at the end of 2018. The realised gains reflect the difference between disclosed grosssale proceeds (including the exercise of the over-allotment option) of £621 million and our conservative estimate of around AED800million for the accounting value at which ENBD carried on its books the stake it sold. Given that ENBD only reports a combined figurefor its investment in both associates and joint ventures (AED1.6 billion at 31 December 2018), we conservatively estimate that thecarrying value of its 51% stake in Network International was AED1.6 billion.

The sale will also give ENBD an opportunity to further build its solid capital buffers. The bank's tangible common equity (TCE) was17.4% of its risk-weighted assets as of 31 December 20182, and we estimate the bank will realise a gain of around 70 basis points inTCE, which when combined with a potential rights issue of up to $2 billion (up to 261 basis points in TCE), will help moderate thecapital effect of the Denizbank acquisition.

We do not expect the sale of Network International to have negative strategic implications for ENBD, given that the bank will remaina customer of Network International, and retain the ability to use the services of other card processing companies if necessary. Also,we expect a limited effect on ENBD’s future profitability from Network International's reduced contribution to ENBD. For 2018, thereported share of profit from associates and joint ventures was AED136 million, or 1.4% of ENBD’s total net income for the year.

Network International is a pan-regional provider of digital payments solutions in the Middle East and Africa region. The company hadtotal assets of $949 million as of 31 December 2018.

Endnotes1 The bank ratings shown in this report are the bank's deposit rating, senior unsecured debt rating (where available) and Baseline Credit Assessment.

2 As per the local regulatory regime, banks do not fully risk weight the credit extended to the Dubai government. For the purpose of our internal analysis,we adjust ENBD's risk weight on its AED150 billion ($41 billion) exposure to the Dubai government and other related parties

Mik Kabeya, AVP-AnalystMoody’s Investors Servicemik.kabeya@moodys.com+971.4.237.9590

Francesca Paolino, Associate AnalystMoody’s Investors Servicefrancesca.paolino@moodys.com+971.4.237.9568

19 Credit Outlook: 15 April 2019

NEWS AND ANALYSIS BANKS

Japanese government’s plan to sell Japan Post Holdings’ shares is creditpositive for Japan Post BankOriginally published on 11 April 2019

On 9 April, Japan's Ministry of Finance announced that it will sell a part of its holdings in Japan Post Holdings Co., Ltd., which nowowns 89% of Japan Post Bank Co., Ltd. (A1 stable, baa11). If the stake sale lowers Japan Post Bank's deposit balance, the Government ofJapan's (A1 stable) reduction of its indirect ownership in Japan Post Bank would be credit positive for the bank because it would improvethe bank's profitability and raise its nominal leverage ratio.

A decrease in Japan Post Bank's deposit balance would improve the bank's profitability because it would lower the bank's cost ofdeposits. This cost has a material effect on the bank's return on assets because of the bank's sizable deposits as Japan's largest deposit-taking institution and its already-low profitability, which has long been challenged by persistent ultralow domestic interest rates.

For Japan Post Bank, the cost of deposits – in addition to traditional fund-raising costs such as interest payments to depositors anddeposit insurance fees – includes 0.1% interest paid for a certain portion of its deposits at the Bank of Japan (BoJ) under currentnegative interest rate policy. A decrease in the bank's deposit balance would translate into a lower balance of deposits at the BoJ, andtherefore less interest paid to the BoJ. The bank's deposits at the BoJ totaled approximately ¥50 trillion as of the end of 2018.

Additionally, Japan Post Bank's nominal leverage ratio – as measured by tangible common equity as a percentage of total assets –would improve. The ratio was low at 4.2% as of the end of 2018. Any decrease in its deposit balance would raise this ratio.

Even if the Japanese government's indirect ownership of Japan Post Bank through Japan Post Holdings decreases, our governmentsupport assumption would not change. Our support assumption reflects not only the Japanese government's ownership but also thebank's importance to the country's banking system as the largest deposit-taking institution in Japan. Japan Post Bank's A1 deposit ratingincorporates a three-notch uplift from the bank’s Baseline Credit Assessment of baa1, based on our assessment of a very high likelihoodof support from the Japanese government during a period of stress.

According to the Postal Service Privatization Act, the Japanese government must reduce its equity interest in Japan Post Holdingswithin the earliest possible time frame. However, the act also states that it shall maintain an equity interest that exceeds one-third.Assuming the government's stake in Japan Post Holdings declines to 34% from 63% currently, the government's indirect ownership ofJapan Post Bank will decline to around 30% from 56% currently.

Endnotes1 The bank ratings shown in this report are Japan Post Bank’s deposit rating and Baseline Credit Assessment.

Tetsuya Yamamoto, VP-Sr Credit OfficerMoody’s Japan K.K.tetsuya.yamamoto@moodys.com+81.3.5408.4053

Atsushi Goto, Associate AnalystMoody’s Japan K.K.atsushi.goto@moodys.com+81.3.5408.4027

20 Credit Outlook: 15 April 2019

NEWS AND ANALYSIS BANKS

Resona lowers its net income forecast after booking large securitieslosses, a credit negativeOriginally published on 12 April 2019

On 5 April, Resona Holdings, Inc. reported a 15% downward revision to its consolidated net income forecast for fiscal 2018 (whichended 31 March 2019), primarily because of a restructuring of its investment portfolio. The revision by Resona, whose major bankoperating subsidiaries are Resona Bank, Limited (A2 stable, baa11) and Saitama Resona Bank, Limited (A2 stable, baa1), is creditnegative and highlights the risks facing many Japanese banks. In particular, Resona's revision serves as a warning to other banks withunrealized losses in their securities investment portfolios and which will have to take similar action.

We believe the losses related to Resona's securities portfolio primarily resulted from losses on the sales of foreign bonds with unrealizedlosses. Unrealized losses on securities investments, excluding domestic bonds and equity holdings, were ¥17.5 billion as of the end ofSeptember 2018 and ¥27.4 billion as of the end of December 2018. By realizing the losses, Resona aims to curtail earnings volatility andreduce the banks' dependence on the markets for earnings.

Relying on securities investments to generate earnings is credit negative for Resona and other Japanese banks. Resona's other securities,including foreign securities and mutual funds, as percentage of total securities investment increased to 22% at the end of December2018 from 8% at the end of March 2016. Its other securities balances have increased more than three times during the same period.

The downward earnings revision highlights the structural difficulties that Japanese banks face from persistently low domestic interestrates. Banks are reinvesting some funds from maturing Japanese Government Bond (JGB) holdings in assets such as foreign securitiesand mutual funds because declining yields on domestic bonds are weighing on net interest margins (see exhibit). Most Japanese bankshave been increasing investments in overseas bonds to boost their earnings, but rising rates increase the risk of valuation losses. Forexample, Mizuho Financial Group, Inc. (A1 stable) previously announced onetime losses of about ¥680 billion for fiscal 2018, of whichlosses of about ¥180 billion were to restructure its securities portfolio in connection with past investments in foreign bonds.2

Japanese banks' investments in so-called other securities has increased to reinvest alternatives to maturing low yield bondsAggregate of all Japanese banks' investment portfolio composition

51% 46%41%

37% 35% 32%

5%5%

5%

6% 7% 7%

12%11%

12%

13% 13% 13%

8%10%

10%

11% 12% 12%

24% 28%

32%

33% 33% 36%

¥0

¥50

¥100

¥150

¥200

¥250

¥300

FY2013 FY2014 FY2015 FY2016 FY2017 1H FY2018

￥tr

illio

ns

JGBs Municipal bonds Coporate bonds Equities Other securities

Other securities include foreign bonds and mutual funds.Fiscal years end 31 March.Source: Japanese Bankers Association

Banks are shunning JGBs, which still make up the bulk of their investments, because generating profits from them has becomeextremely difficult amid the Bank of Japan's negative rate policy, implemented in February 2016. In the past, banks were able to eke outincome from coupons on JGBs or book unrealized gains when yields declined and bond prices consequently rose. However, with the

21 Credit Outlook: 15 April 2019

yield on 10-year JGBs around zero, newly issued JGBs hardly generate interest income, and there is not much room for bond yields tofall. Thus, unrealized gains from JGBs are dwindling.

Although the asset quality of Japanese banks remains generally strong, even a small losses on securities investments or an increase incredit costs can result in a significant deterioration in earnings because pre-provision profit is weak.

Endnotes1 The bank ratings shown in this report are the bank’s deposit rating and Baseline Credit Assessment.

2 See Large one-off losses highlight key risks for Japanese banks, a credit negative, 7 March 2019.

Tomoya Suzuki, AVP-AnalystMoody’s Japan K.K.tomoya.suzuki@moodys.com+81.3.5408.4204

Shunsaku Sato, VP-Sr Credit OfficerMoody’s Japan K.K.shunsaku.sato@moodys.com+81.3.5408.4159

Tetsuya Yamamoto, VP-Sr Credit OfficerMoody’s Japan K.K.tetsuya.yamamoto@moodys.com+81.3.5408.4053

22 Credit Outlook: 15 April 2019

NEWS AND ANALYSIS BANKS

Korea’s adoption of Basel III reforms is credit negativeOn 10 April, Korea's Financial Supervisory Service (FSS) issued a consultation paper proposing the adoption of Basel III reforms by 2022.The reforms, announced by the Basel Committee on Banking Supervision in December 2017, aim to improve the comparability ofcapital ratios across banks and jurisdictions and restore credibility in the risk-weighted calculation.

Applying the reform standards is credit negative for Korean banks because the net effect will lower the risk weights that Korean banksuse, resulting in reduced risk-weighted assets (RWAs). The FSS estimated that Korean banks' total capital adequacy ratio will increaseon average by 50-70 basis points after adopting the reforms. We expect banks to use the released capital to make new loans ordistribute to shareholders, resulting in a reduced capital buffer against the risks banks are taking.

Under the FSS proposal, the risk weight for unrated exposures to small and midsize enterprises (SMEs) will decrease to 85% from 100%for those banks using the standardized approach for their credit risk. Since most SMEs in Korea do not have external ratings, the reformsare likely to release a sizable amount of capital for Korean banks that have large SME exposures and are also under the standardizedapproach (see exhibit).

Breakdown of banks' local currency loans by sectors

55% 50% 49% 31%

29%

79%64% 61% 58%

46% 41%38% 38% 38% 37%

27%

11%

44%

1% 1% 2%9%

71%

3% 6% 6% 5% 3% 7% 5% 8% 6% 8%

70%

12% 10%0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Large corporates SMEs Mortgages Retail loans Public sector

Standardised approach Internal ratings-based approach

Note: SCBK refers to Standard Chartered Bank KoreaSources: Korea's Financial Supervisory Service and Moody's Investors Service

Under the foundation internal ratings-based (IRB) approach to credit risk, used by 12 banks in Korea, the loss given default used tocalculate the risk weight for unsecured claims on corporates will decline to 40% from 45%, while the loss given default used for claimswith property collateral will decline to 20% from 35%. Banks using the IRB approach that have significant exposure to corporate loansinclude the Industrial Bank of Korea (IBK, Aa2/Aa2 stable, baa21), the Korea Development Bank (KDB, Aa2/Aa2 stable, ba2) and regionalbanks. Furthermore, the output floor, which limits the benefits that banks can derive from using IRB models, will be lowered to 72.5%of standardized RWAs, which will be phased in 2022-27 from the current 80%.

The FSS will maintain the higher risk weights applied to household loans that were introduced as part of policy measures to curbgrowth in household debt. For example, mortgage loans with a loan/value ratio above 60% will continue to have a risk weight of 50%,which is higher than the 30% risk weight set by Basel III for mortgages with a loan/value ratio between 60%-80%. As a result, weexpect stronger growth of corporate loans in the future.

Endnotes1 The bank ratings shown in this report are the bank's local-currency deposit rating, senior unsecured debt rating and Baseline Credit Assessment.

23 Credit Outlook: 15 April 2019

Sophia Lee, VP-Sr Credit OfficerMoody’s Investors Servicesophia.lee@moodys.com+852.3758.1357

Minyan Liu, Associate Managing DirectorMoody’s Investors Serviceminyan.liu@moodys.com+852.3758.1553

24 Credit Outlook: 15 April 2019

NEWS AND ANALYSIS SOVEREIGNS

Costa Rica’s first-quarter deficit points to continuing need to lowerfinancing costsOn 9 April, the Government of Costa Rica (B1 negative) published first-quarter 2019 fiscal results that showed a primary deficit of0.55% of GDP and an overall fiscal deficit of 1.51% of GDP, versus a 0.59% primary deficit and 1.52% overall deficit in first-quarter2018. Although financing conditions eased and Costa Rica secured about CRC1.4 trillion ($2.3 billion) in domestic financing this yearand tax revenue increased, its financing needs remain high and its slow fiscal adjustment continues to weigh on debt metrics.

In the first quarter, total revenue was 3.6% of GDP, up 15% versus first-quarter 2018 and the highest growth rate in 11 years. Theincrease mainly reflects a sharp 24.9% rise in income taxes, which benefitted from tax amnesty, and general sales tax (4.7%). Totalrevenue intake from the tax amnesty was 0.5% of GDP. However, total expenditures increased 12.7% to a record-high 5.1% of GDP,which led to a first-quarter fiscal deficit of 1.51% of GDP (see Exhibit 1).

Exhibit 1

Costa Rica’s first-quarter 2019 fiscal results versus first-quarter 2018Percent of GDP

2019 2018 Difference

Total revenue 3.62 3.40 0.22

Tax revenue 3.29 3.21 0.08

Other revenue 0.33 0.19 0.14

Total expenditure 5.14 4.92 0.22

Current transfers 1.83 1.84 0.00

Salaries 1.81 1.86 -0.05

Interest payments 0.96 0.93 0.03

Other expenditure 0.53 0.29 0.24

Primary balance -0.55 -0.59 -0.04

Fiscal balance -1.51 -1.52 -0.01

Source: Ministerio de Hacienda Costa Rica

Although most expenditure items were broadly stable versus first-quarter 2018, a sharp rise in capital expenditure and increasinginterest payments drove a spending increase of 0.2 percentage point of GDP (Exhibits 2 and 3). Interest payments were 0.96% of GDP,11.76% higher than first-quarter 2018, driven by interest payments on domestic debt. The increased capital expenditures, which rose96% versus first-quarter 2018, were mainly for public funding of programs related to agriculture and rehabilitation of the nationaltransportation network, which are both part of the government’s plan to revitalize the economy.

25 Credit Outlook: 15 April 2019

Exhibit 2

Public spending is increasing…First quarter, % of GDP

Exhibit 3

…partly from increasing interest expenseFirst quarter, % of GDP

3.4 3.3 3.4 3.5 3.63.4

3.6

4.8 4.74.9

4.7 4.9 4.95.1

-1.4 -1.5 -1.5-1.3 -1.2

-1.5 -1.5-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2013 2014 2015 2016 2017 2018 2019

Total revenue Total expenditure Fiscal balance

Source: Ministerio de Hacienda Costa Rica

4.16 4.16

4.28

3.95

4.10

3.99

4.17

0.640.59

0.66

0.76

0.77

0.93

0.96

0.00

0.20

0.40

0.60

0.80

1.00

1.20

3.70

3.80

3.90

4.00

4.10

4.20

4.30

2013 2014 2015 2016 2017 2018 2019

Total expenditure w/o interest payments Interest payments

Source: Ministerio de Hacienda Costa Rica

Rollover risk has declined, but financing needs remain elevated

Gross borrowing needs for 2019 are high at 12.3%, despite multiple downward revisions after reduced primary spending reduced the2018 deficit to 5.9% of GDP, versus the government’s projected 7.2% deficit.

After very tight funding conditions in fourth-quarter 2018, local capital markets are beginning to normalize. In the 2019 first quarter,the government secured about CRC1.4 trillion ($2.3 billion) in financing, equal to its original planned financing for the entire first half ofthe year. The bulk of this year’s bonds are fixed rate with maturities of more than five years, although interest rates remained elevatedat above 9% for US-denominated debt.

To lessen the interest burden and avoid crowding out the domestic market, the government has sought legislative approval for a $6billion multi-year eurobond issuance. In 2019-20, the government plans to issue $3 billion, and thereafter $1 billion per year through2023. Costa Rica's Finance Minister Rocío Aguilar confirmed political support for this year's $1.5 billion issuance, but subsequentissuances may be subject to further conditions.

The strong positive effect of the tax amnesty is unlikely to last because the reduced penalty for paying tax liabilities expired on 4March. The government next plans to introduce the new VAT regime in July and cut spending in the second half of the year, in linewith the fiscal rule. For 2020, the government has stipulated that expenditure growth is not allowed to exceed 4.67% because of thefiscal rule. While these efforts are critical steps to restore fiscal sustainability, implementation risks associated with the consolidationefforts remain substantial, and any slowing of the already very gradual fiscal adjustment will postpone the debt burden's much neededstabilization.

Barbara Wennerholm, Associate AnalystMoody’s Investors Servicebarbara.wennerholm@moodys.com+1.212.553.4749

Gabriel Torres, VP-Sr Credit OfficerMoody’s Investors Servicegabriel.torres@moodys.com+1.212.553.3769

Mauro Leos, Associate Managing DirectorMoody’s Investors Servicemauro.leos@moodys.com+1.212.553.1947

26 Credit Outlook: 15 April 2019

NEWS AND ANALYSIS SOVEREIGNS

Extension of Brexit process avoids imminent no-deal outcome, butuncertainty remainsOriginally published on 11 April 2019

On 10 April, the European Council agreed to extend the Article 50 process and postpone the exit date of the United Kingdom (UK, Aa2stable) from the European Union (EU, Aaa stable) to 31 October 2019. The delay is positive to the extent that it avoids an imminentno-deal Brexit on 12 April, which would have had a significant negative impact on the UK economy and on the economies of certainEU member states. A no-deal outcome also would have posed credit challenges for UK issuers in various sectors,1 and this secondextension indicates that both the UK and the EU are keen to avoid such a scenario. However, uncertainty remains given that the UKParliament has still not agreed on terms for leaving the EU, while ambiguity surrounding the country's future status will continue toweigh on the economy.

The European Council granted the extension at an emergency summit in Brussels, following a request from UK Prime Minister TheresaMay for a shorter delay to 30 June 2019. However, there is some flexibility in the new extension. The European Council has stated thatit would be willing to allow the UK to leave the EU before 31 October, if the UK Parliament ratifies the Withdrawal Agreement that setsout the terms of the UK's departure. This gives the UK the means to leave the EU prior to European Parliament elections on 23-26 May2019. If the UK has not ratified the Withdrawal Agreement by 22 May, and does not hold elections to the European Parliament, it mustleave the EU on 1 June 2019.

The European Council has reiterated that the current Withdrawal Agreement, which sets out the terms of the UK's departure fromthe EU, is not open for renegotiation. However, the Council is willing to reconsider the political declaration, which sets out the futurerelationship between the EU and the UK.

With this second extension to the Brexit process, both the UK and the EU have clearly indicated that they wish to avoid a damagingno-deal outcome. The UK Parliament on multiple occasions has rejected proposals to leave the EU without an exit deal in place, whilethe EU signalled both with the previous extension and at this latest summit that it hopes to avoid a no-deal outcome.

However, without immediate pressure for the UK Parliament to achieve consensus on the withdrawal terms, the willingness of UKpoliticians to agree a way forward may wane. There is still no proposal for Brexit that presently commands a parliamentary majority;and the current state of uncertainty will continue to have credit negative effects on the UK economy and companies across thebusiness spectrum, holding back investment and spending. The onus remains on the UK Parliament to agree a way forward.

Endnotes1 See Probability of a 'no-deal' Brexit has risen, and would be negative for an array of issuers, 13 September 2018.

Colin Ellis, MD-Credit StrategyMoody’s Investors Servicecolin.ellis@moodys.com+44.20.7772.1609

Emilia Gyoerk, Associate AnalystMoody’s Investors Serviceemilia.gyoerk@moodys.com+44.20.7772.1728

Sarah Carlson, Senior Vice PresidentMoody’s Investors Servicesarah.carlson@moodys.com+33.1.5330.3353

Simon Ainsworth, Senior Vice President/RPOMoody’s Investors Servicesimon.ainsworth@moodys.com+44 207 772 5347

27 Credit Outlook: 15 April 2019

NEWS AND ANALYSIS SOVEREIGNS

Papua New Guinea's gas agreement is credit positive for GDP growthand liquidityOn 9 April, Papua New Guinea (PNG, B2 stable) signed an agreement for the $15 billion Papua LNG project (about 60% of PNG’sGDP) with Total S.A. (Aa3 positive), Exxon Mobil Corporation (Aaa stable) and Oil Search, which would double the country’s liquefiednatural gas (LNG) production and exports. The credit-positive investment in PNG’s natural resources will bolster GDP growth, as well assupport the sovereign's revenue generation and foreign exchange inflows, thereby easing government and external liquidity risks.

The development of the large-scale Papua LNG resource project will boost investment, employment and incomes in the 2020s,enhancing the economy’s long-run productive capacity. The gas agreement allows energy operators and the government to advancedevelopment of the Papua LNG project, including front-end engineering design.

According to Oil Search, the project will move toward a final investment decision in late 2020 and production will start in late 2024.The Papua LNG project will be the second-largest foreign investment in PNG after the Exxon Mobil-operated PNG LNG project.

Construction of the PNG LNG project boosted real GDP growth to 6.5% per year on average between 2009 and 2014, from 3.1%between 2003 and 2008, nearly doubled the size of the economy to $23 billion and raised per capita income to about $3,400 from$2,700 in 2008 on a purchasing-power parity basis.

We expect real GDP to grow at an average annual rate of 4.0%-4.5% between 2019 and 2022 as construction work on Papua LNGcommences, yet slightly slower than the rates achieved during the construction period of the PNG LNG project given that Papua LNGwill benefit from synergies with already established infrastructure.

Since the first full year of production in 2015, the PNG LNG project has produced on average 20 million of barrels of oil equivalent(mmboe) per year, notwithstanding disruption from the February 2018 earthquake (see exhibit). The operators expect the Papua LNGproject and a planned additional train from the PNG LNG project to double the country's gas production.

Ramp-up in LNG construction and production will boost real GDP growth in the 2020s(LNG production, mmboe - left axis; real GDP growth - right axis)

0%

2%

4%

6%

8%

10%

12%

14%

0

5

10

15

20

25

30

35

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019F 2020F

PNG LNG production (left axis) Other production (left axis) Real GDP growth (right axis)

Note: Real GDP forecast is Moody's Investors Service; LNG production forecast is by Oil Search.Sources: Oil Search, national authorities and Moody's Investors Service

Given the low cost of domestic LNG production and PNG's proximity to regional Asia-Pacific markets, PNG's LNG production is wellplaced to serve growing regional demand. In particular, China (A1 stable) will remain a key source of demand as its LNG consumptionincreases because of cleaner energy requirements and insufficient domestic supply.

The project will also enhance PNG's domestic gas supply. The agreement includes a domestic market obligation, ensuring domesticgas supply at competitive prices and allowing other developers to access pipelines and infrastructure. Greater domestic energy supply

28 Credit Outlook: 15 April 2019

supports the government’s ongoing aim to provide access to electricity for 70% of PNG’s population by 2030, up from 15% currently,which will support economic development.

The gas agreement also allows the government to take an equity stake in the project, which ensures any profits flow to the governmentfrom the beginning of production and support public finances, in addition to any associated royalties and taxes.

We expect foreign direct investment inflows related to construction of the Papua LNG project to bolster the availability of foreigncurrency over the next few years, although some of these funds will likely be used for capital imports. We also expect that a portion ofLNG export receipts will flow through to PNG accounts onshore, in contrast to existing arrangements of the PNG LNG project. As aresult, the Papua LNG project will help strengthen PNG's balance of payments and ease external liquidity risks over time.

Matthew Circosta, AnalystMoody’s Investors Servicematthew.circosta@moodys.com+65.6398.8324

Michael S. Higgins, Associate AnalystMoody’s Investors Servicemichael.higgins@moodys.com+65.6311.2655

Gene Fang, Associate Managing DirectorMoody’s Investors Servicegene.fang@moodys.com+65.6398.8311

Marie Diron, MD-Sovereign RiskMoody’s Investors Servicemarie.diron@moodys.com+65.6398.8310

29 Credit Outlook: 15 April 2019

NEWS AND ANALYSIS US PUBLIC FINANCE

Detroit's 2020 budget passage continues positive financial momentumOriginally published on 10 April 2019

On 8 April, the Detroit (Ba3 stable) City Council approved the city’s budget for fiscal 2020 (ending 30 June 2020), which paves the wayfor the city's continued financial recovery. The credit-positive budget reflects sound financial practices, including conservative revenueassumptions and long-range projections, a significant capital investment and continues to set aside funds for a scheduled pension costspike in fiscal 2024.

The fiscal 2020 spending plan will grow the city's irrevocable pension trust to $168 million from $123 million. Additional contributionswill be made over the following three years until the trust reaches $335 million, plus investment income, by the end of fiscal 2023. Thetrust was established in preparation for a large pension contribution increase in fiscal 2024.

Detroit's bankruptcy plan of adjustment requires the city to make only modest annual general fund pension contributions throughfiscal 2023 until actuarially determined contributions resume in fiscal 2024. The city's most recent estimates indicate that the fiscal2024 payment from the general fund will approximate $163 million (equal to a significant 16% of fiscal 2018 revenue and an estimated14% of projected fiscal 2024 revenue). Beginning in fiscal 2024, the trust will be used to smooth annual pension payments, which areprojected to increase modestly each year.

Beyond pensions, the fiscal 2020 budget includes a targeted use of reserves accumulated through a series of recent operatingsurpluses. As of the most recent audited financial statement (fiscal 2018), the city had assigned approximately $225 million of availablefund balance for planned capital improvements, blight remediation and risk management. The city's ability to make greater capitalinvestments from its annual operating budget, including through use of some funds on hand, reflects the strength of its financialoperations.

Similar to fiscal 2019, the city has budgeted to use more than $100 million of assigned fund balance for capital projects and blightremediation in fiscal 2020. The use of assigned fund balance, however, will not impact the city's ability to bolster its rainy day fund,which the city projects to rise to $107 million from $62 million (see Exhibit 1, green bar). The city projects overall reserves will remainhealthy at more than 30% of revenue.

Exhibit 1

City projects use of assigned fund balance for capital projects will be partially offset by an increase in the city's rainy day fund

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

2015 2016 2017 2018 2019 Est 2020 Budget

$ m

illio

ns

Fiscal year

Available fund balance (assigned for specific projects, including capital) - left axis

Available fund balance (budget reserve and unassigned, including rainy day) - left axis

Available general fund balance as % of revenues - right axis

Does not include non-spendable and restricted fund balance, including the irrevocable pension trust.Sources: City of Detroit consolidated annual financial report and Moody's Investors Service

30 Credit Outlook: 15 April 2019

The fiscal 2020 budget uses reasonable revenue assumptions, which is crucial because Detroit's primary revenue streams are sensitiveto economic trends. The city's top revenue sources are income taxes (see Exhibit 2), wagering taxes from casinos (see Exhibit 3) andstate-shared revenue. For fiscal 2020, the city has budgeted for a decline in revenue growth relative to fiscal 2019 estimates.

Exhibit 2

Detroit's income tax revenue continues to grow

-2.0% -0.7%

-12.9%

-10.1%

5.3%2.2%

6.4%

2.3% 3.8%

-0.1%

8.1%9.0%

2.4% 2.1%

$0

$50

$100

$150

$200

$250

$300

$350

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019Estimated

2020Budgeted

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

Fiscal year

$ m

illio

ns

Annual rate of growth (right axis) Total income tax collections (left axis)

Sources: City of Detroit consolidated annual financial report and Moody's Investors Service

Exhibit 3

Detroit's wagering taxes are trending higher $160

2007 2008 2009 2010

14.8%

0.3%

-4.1%

6.0%

-3.5%

2.6%

-3.8% -3.8%

2.7%4.5%

-1.7%

1.0% 2.0% 1.0%

$155

$160

$165

$170

$175

$180

$185

$190

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019Estimated

2020Budgeted

-10%

-5%

0%

5%

10%

15%

20%

Fiscal year

$ m

illio

ns

Annual rate of growth (right axis) Total wagering tax collections (left axis)

Sources: City of Detroit consolidated annual financial report and Moody's Investors Service

Detroit prepares the annual budget in conjunction with multiyear projections. The city projects four years of revenue and expenses andrevises those projections annually. Twice a year, Detroit's chief financial officer meets with an official from the Michigan Departmentof Treasury and a professor of economics to develop a consensus on revenue estimates. Even if revenue outperforms budgetedassumptions during the fiscal year, the city cannot appropriate expenditures in excess of the consensus revenue figures.

David Levett, VP-Senior AnalystMoody’s Investors Servicedavid.levett@moodys.com+1.312.706.9990

Andrew T. Van Dyck Dobos, AnalystMoody’s Investors Serviceandrew.vandyckdobos@moodys.com+1.312.706.9974

Alexandra S. Parker, MD-Public FinanceMoody’s Investors Servicealexandra.parker@moodys.com+1.212.553.4889

Rachel Cortez, Senior Vice President/ManagerMoody’s Investors Servicerachel.cortez@moodys.com+1.312.706.9956

31 Credit Outlook: 15 April 2019

CREDIT IN DEPTH

Energy trade shift supports US economy but is negative for someLatAm exportersOriginally published on 11 April 2019

SummaryThe US is now the world’s largest oil and natural gas producer while some Latin American energy producers face crude output lossesand fuel supply import dependency. Consequently, the US energy trade balance with Latin America is shifting from deficit towardsurplus. This trend is credit positive for US oil and gas producers, refiners and exporters, as well as for the US economy overall. Butit has negative credit implications for Latin America. First, the price impact of US output entering the global energy market lowersrevenue for Latin American producers. Second, as Latin American markets import more petroleum products from outside the region,particularly from the US, their trade balances weaken.

» Rising US energy independence stems from increased output and greater efficiency in energy utilization. The US oil andgas industry is growing significantly, owing to the steady growth of US natural gas supply and shale development. As a result ofefficiency gains, the US also now requires less of the world’s energy resources, while it produces and consumes more of its ownresources.

» The US will import less oil from Latin America in the next three to five years and export more refined petroleumproducts and natural gas to the region. As a large market for their exports is becoming less assured, Latin American exportersmay have to seek alternative destinations for their crude. These new markets will probably not be as receptive or dependable buyersas the US has been, owing to the quality of the crude, the reliability of supply and other considerations. Lower revenue constrainsexporters' capacity to invest in projects to reverse declining production and integrate the local energy supply chain to convert crudeinto usable fuel.

» Mexico and Colombia have more exposure than Brazil; Venezuela faces broader challenges. In addition to confrontingthe shift within the US, Latin American oil producers face energy supply challenges rooted in domestic developments. Mexicois focusing more on refining than on crude oil production, raising the chances of the country becoming a net crude importer.Colombia’s fiscal reliance on oil royalties and taxes makes it more exposed to a decline in crude reserves. Brazil consumes most ofits own crude output and is seeking to reduce imports of petroleum products, which will lessen its exposure to the shift in US energytrade. Venezuela's fiscal and economic reliance on oil exports heightens its vulnerability to losing a once-reliable buyer of its heavycrude, but the country is grappling with broader challenges.

Click here for the full report.

32 Credit Outlook: 15 April 2019

RECENTLY IN CREDIT OUTLOOK

Articles in last Thursday's Credit OutlookNEWS & ANALYSISCorporates

» Boeing will reduce 737 MAX production to 42 per month, implying a longer grounding

» EU emissions collusion claims are modestly credit negative for BMW, Daimler and VW

» Befesa's agreement to build a second steel dust recycling plant in China is credit positive

» Ronshine China's additional share placement is credit positive

Banks

» Fed proposes easing regulatory framework for foreign banks in the US, a credit negative

» Société Générale’s latest initiatives in its strategic restructuring plan are credit positive

» Georgian banks will benefit from the country’s increased tourism

» Union Bank of Nigeria's large stock of IFRS 9 stage 3 loans reflects high asset risk, a credit negative

» Nomura announces structural reform, a credit positive

Insurers

» Principal Financial Group's acquisition of Wells Fargo’s retirement and trust business is credit positive

Asset Managers

» New pan-European pension product is credit positive for asset managers and insurers

Sovereigns

» Policy continuity is likely regardless of composition of Israel’s next government

» ASEAN green infrastructure facility will benefit climate-vulnerable sovereigns across Southeast Asia

Sub-Sovereigns

» Mexico's plan to federalize Michoacan's teacher payroll is credit positive for the state

» Lower Saxony and Saxony-Anhalt's capital injections to Norddeutsche Landesbank will burden them, a credit negative

Credit in Depth

» US auto tariffs would pose risks to global growth and weigh on auto sectors in Germany, Japan and Korea

Click here for last Thursday's Credit Outlook.

33 Credit Outlook: 15 April 2019

EditorsElisa Herr, Jay Sherman, Andrew Bullard, Julian Halliburton and Phil Macdonald

Production SpecialistSol Vivero

34 Credit Outlook: 15 April 2019

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35 Credit Outlook: 15 April 2019