Counterparty credit ratings on NCFB reflect the banks core status to its direct and 100% parent Norddeutsche Landesbank Luxembourg S.A. (NordLB Lux; A/Positive/A-1) and in turn to its ultimate parent Norddeutsche Landesbank Girozentrale (NORD/LB; A/Positive/A-1).

NCFB is a public-sector-focused covered bond bank set up in 2006 to issue LdGp and is regulated by the Luxembourg FSA ("Commission de Surveillance du Secteur Financier"; CSSF).

Owing to its specialist role within the NORD/LB group, NCFB predominantly focuses on prime, LdGp-eligible businesses. The latter also allows for the refinancing of senior secured debt of savings banks. As NORD/LB is 50% owned by the savings banks in the states of Lower Saxony, Mecklenburg Western Pomerania, and Saxony-Anhalt, this further supports its core status.

"The affirmation of the bank's LdGp primarily reflects the quality and cash flow adequacy of its cover pool to allow for timely repayments of principal and interest even in situation of severe economic stress," said Standard & Poor's credit analyst Karlo Fuchs. Legal protections provided by the Luxembourg Covered Bond Act are sufficiently robust to assign covered bond ratings primarily based on the strength of the provided structure with only very limited recourse on the issuer.

"The overcollateralization provided to mitigate credit, market, and liquidity risk of the covered bond structure has remained well above the rating requirements and is commensurate with target rating," said Mr. Fuchs. "While in the absence of contractual obligations, the risk structure as well as the level of overcollateralization could upon management discretion erode to the legally required minimum matching requirements, Standard & Poor's is of the opinion that NCFB is willing and able to maintain required levels."

At May 31, 2007, the cover pool had grown to €1.5 billion and, with €532 million outstanding LdGp, the overcollateralization stood at 285%.

With total assets of €1.9 billion (as of June 30, 2007) the bank is still in its startup phase and expected to continue to grow further. The asset quality is sound with non-LdGp-eligible assets expected to only comprise a small percentage of the balance sheet. Gradually, the banks current intragroup funding will become replaced by long-term Lettre de Gage funding and other wholesale and repo refinancing (for further details see article entitled "Presale: NORD/LB COVERED FINANCE BANK S.A. Covered Bond Program," published on April, 17 2007, on RatingsDirect.)

An analysis of NCFB's profitability is not yet meaningful as the bank only commenced operations on July 1, 2006. The bank focuses on low-risk and low-margin credit business and aims to minimize its exposure to market risks. In the short fiscal year in 2006, NCFB had not yet managed to balance its start-up-cost-driven profit-and-loss accounts. Consequently, net income for 2006 fell €288,000 short of a break even.

Owing to the typical low-risk weighting of its assets, NCFB boasted a regulatory capital ratio of 41.1% at year-end. Given its expected growth, this is not deemed to be an expected run rate for the future, but is expected to remain adequate for its risk profile.

The positive outlook on NCFB mirrors that on its ultimate parent NORD/LB and reflects its core status to the group. Any changes to the core status of the bank could lead to downward pressure on the ratings.