Ratings

Description of the notes	Prelim. credit rating*	Preliminary amount	Available credit support (%)	Legal final maturity
German public sector covered bonds (�?ffentliche Pfandbriefe)	AAA	Up to �?�1 billion	Dynamic (see "Structural Enhancements")	According to terms and conditions of the notes
*The rating is preliminary as of July 1, 2009, and subject to change at any time. An initial credit rating is expected to be assigned on the closing date. Standard & Poor's ratings address timely payment of interest and ultimate payment of principal according to the original terms and conditions.

Program Participants
Issuer	Deutsche Postbank AG
Trustee	Heinz Eberhardt, and Dr. Wilhelm Schopen as deputy

Standard & Poor's Ratings Services has assigned a preliminary credit rating to the inaugural �?ffentlicher Pfandbrief (German legislation-enabled public sector covered bonds) issuance to be drawn under Deutsche Postbank AG's (Postbank) �?�15 billion debt issuance program.

Depending on market conditions, the first issuance of public sector covered bonds is expected in the third quarter of 2009. According to their terms and conditions, the public sector covered bonds will constitute senior secured unsubordinated obligations and will rank pari passu among themselves and, for public sector bonds, at least pari passu with other obligations of the issuer under public sector covered bonds. The notes and all other documentation relating to the program are governed by German law.

If used by Postbank (A-/Positive/A-2), the asset composition of the �?�1.8 billion public sector cover pool would in our view be unique: nearly half of the cover pool will comprise residential mortgage loans that, as we understand, became eligible for inclusion in the cover pool under the German Covered Bond Act (PfandBG) via an unconditional guarantee by a 'AAA' rated public-sector entity. Based on the documentation reviewed by us the guarantee payments cover all losses on these mortgage loans. We expect the other half to comprise public sector European sovereign bonds and German federal state bonds. We understand that the public sector covered bond will comply with the German Covered Bond Act (PfandBG).

From a credit risk perspective leaving aside the guarantee for mortgage loans we see no rating-relevant difference (i.e., low average loan-to-value (LTV) ratios, high seasoning, or high proportion of owner-occupied properties) between these loans and those that were used to cover Postbank's Hypothekenpfandbriefe issued in February 2008 (see "New Issue: Deutsche Postbank AG�??Hypothekenpfandbrief" in "Related Research"). We understand that primarily documentary requirements (e.g., current onsite visits of the properties for the valuation) imposed by the PfandBG, and low average sizes of collateral loans did not allow the bank to use this mortgage collateral for its Hypothekenpfandbrief (German legislation-enabled mortgage covered bonds).

Postbank still has some public sector covered bonds outstanding that were issued by DSL Bank (a public sector entity, owned since 2000 by Postbank). These bonds were issued according to former �?ffentliches Pfandbriefgesetz, and there are no further issuances. Since the DSL acquisition in 2000, Postbank issued another covered bond type that was introduced in the course of DSL Bank's privatization (according to paragraph 7 of the DSL Bank Transformation Act; DSL Bank is not rated). We understand that these DSL covered bonds were mainly issued as private placements to domestic institutional investors.

According to Postbank, its current public sector cover pool of �?�1.8 billion will comprise approximately 50% residential mortgage loans, which are eligible as a result of a guarantee by a public sector entity attached to individual loans. The remainder will comprise secondary-market-sourced European public sector bonds (see chart 1).

We expect Postbank to issue up to �?�1 billion as a jumbo public sector covered bond. The maturity of the covered bonds is expected to be between three and five years. We understand that liabilities will pay a fixed rate and that redemption will be specified as bullet, and that the date of issuance, maturity, and interest rate will depend on market conditions.

Postbank's current �?�1.8 billion public sector cover pool comprises approximately one half residential mortgage loans guaranteed by a public sector entity, and the other half European public sector bonds, according to the information we have reviewed.

We have reviewed Postbank's mortgage loan underwriting process recently for its Hypothekenpfandbrief rating evaluation and summarized it in the according presale (see "New Issue: Deutsche Postbank AG�??Hypothekenpfandbrief" in "Related Research").

We have reviewed Postbank's property valuation process recently for its Hypothekenpfandbrief rating evaluation and summarized it in the according presale (see "New Issue: Deutsche Postbank AG�??Hypothekenpfandbrief" in "Related Research").

We have reviewed Postbank's arrears process recently for its Hypothekenpfandbrief rating evaluation and summarized it in the according presale (see "New Issue: Deutsche Postbank AG�??Hypothekenpfandbrief" in "Related Research").

We will repeat such reviews on a regular basis.

Based on the information received by Postbank, all loans are guaranteed by a public sector entity, and as such we understand them to be eligible for inclusion in the public sector cover pool. We understand that the mortgage loan portfolio was originated in Germany by Postbank/DSL or BHW Bausparkasse AG, Hameln, a subsidiary of Postbank. We consider the current pool of residential mortgage loans to be very granular relative to other pools we have reviewed, comprising 15,846 loans that exhibit a relatively low average exposure size of �?�63,169. We note that the preliminary pool does not comprise loans in excess of �?�400,000 (see table 1). Table 1 Key Features Of The Guaranteed Mortgage Part Of The Cover Pool as of Jan. 31, 2009* Collateral description 100% residential mortgage loans Country of origin Germany Number of loans 15,846 Largest loan 392,420 Average loan 63,169 Weighted-average loan to value (%) 50.3 Geographic concentration within Germany North Rhine-Westphalia: 29.6%; Eastern Germany (without Berlin): 17.6% Weighted-average seasoning 120 months/10.1 years Interest-only loans (%) 57.5 Letting loans (%) 14.6 Self-employed (%) 2.9 Arrears No�??according to Postbank all loans in arrears will be removed from the cover pool *Note that the information provided in table 1 and in the following charts is based on the pool cut as of the end of January 2009. The total principal balance reduced to �?�933 million as of May 31, 2009, due to the amortization of underlying loans. According to stratified data as of May 31, there were no major changes to the figures presented above. The weighted-average LTV ratio for the mortgage part of the cover pool is 50.3%, and only 27.7% of the loans have an LTV ratio higher than 60% (see chart 2). The pool shows a weighted-average seasoning of 10.1 years (see chart 3). Relative to other cover pools we have reviewed, we believe the cover pool is well diversified across Germany. With 29.6% of cover assets (measured by principal amount outstanding; see chart 4), the largest concentration by geographic area is in North Rhine-Westphalia (NRW). Being the most populous state in Germany, we do not see this concentration as a negative factor for the pool's creditworthiness, and consider it about average compared with the population distribution in Germany. The exposure in Eastern Germany (excluding the State of Berlin), representing 17.6% of loans by principal balance outstanding, is regarded as relatively modest. We see the underlying assets as highly granular relative to other cover pools we have reviewed, with loans smaller than �?�200,000 comprising over 96.2% of the total cover pool. No loans are higher than �?�400,000.

The matching requirements of the PfandBG also prescribe that certain stress tests must be performed and that an adequate risk management on a cover pool basis must be in place. Rather than use derivatives, Postbank has stated its intent to hedge within the allowed market risk limits by way of natural hedging. As most of the mortgage loans are granted at fixed rates, we believe that exposure to interest rate risks will remain manageable, as the covered bonds that will be issued against, are also expected to be issued as fixed-rate-paying bonds. Currently, Postbank only intends to issue euro-denominated covered bonds and, and within the allowed market risk limits, primarily to rely on natural hedging, rather than on using derivatives. We stress-test the cash flows to form an opinion on whether market risks are addressed to a level commensurate with a target rating.

The preliminary 'AAA' rating assigned to the covered bonds reflects our opinion that the cover pool backing the bonds is such that these can withstand credit losses in the cover pool associated with this rating level. It also reflects our view on the ability of the cash flows from the assets to meet the debt service requirements on the liabilities so that timely interest and full principal are repaid on the scheduled maturity of the covered bonds. We analyze the collateral quality to form a view on the expected loss in a stressed situation.

Our credit analysis for the European bonds in the cover pool included an exposure review of underlying bonds to estimate the credit risk of each individual exposure. Together with correlation assumptions of the assets and recovery assumptions, we generated a default probability for the target rating. We then used the derived default probability and recovery assumption as the input for the cash flow analysis.

For the mortgage assets, we analyze the collateral quality to form a view on the expected loss in a stressed situation. Cash flow shortfalls in the collateral would mainly result, we think, from asset quality problems, i.e., credit losses on the respective mortgage loans that would reduce the amounts available to service the secured debt. The 'AAA' preliminary rating assumes that credit enhancement will be provided for the issued covered bonds, which is typical for covered bond programs. This credit enhancement is usually achieved through overcollateralization.

The credit analysis on the mortgage loans involves assessing the individual credit quality of the cover pool by estimating the credit risk associated with each mortgage loan. We then calculate the aggregated risk is to form a view on the overall credit quality of the cover pool. We quantify the credit risk associated with each mortgage loan in the pool by estimating each loan's probability of default leading to a portfolio-wide weighted-average foreclosure frequency (WAFF) and its corresponding weighted-average loss severity (WALS), which we expect to be realized if foreclosure occurs. We calculate the expected loss associated with a loan by multiplying the foreclosure frequency with the loss severity. To quantify the expected losses associated with the entire cover pool, we weight each mortgage loan's foreclosure frequency and loss severity by its percentage of the total cover pool. Please see table 3 for further details.

Table 3 Portfolio WAFF And WALS*
Rating level	WAFF (%)	WALS (%)	Credit cover (%)
AAA	14.1	8.1	1.14
*Please note that the calculated figures are based on a pool cut as presented above, as of Jan. 31, 2009.

We used the probability of default (WAFF) and the recovery assumption of 100% (giving full benefit to the guarantee) in the cash flow model to determine the level of overcollateralization considered commensurate with the 'AAA' rating.

For this covered bond credit analysis we modeled two scenarios.

The first scenario gives no benefit to the guarantee. We input the WAFF and the stressed expected recovery (the inverse of the WALS in table 3 above) into the cash flow model to determine the level of overcollateralization considered to be commensurate with a preliminary 'AAA' rating. We concluded that the current overcollateralization addresses the amount of realized losses and resulting liquidity stresses.

In the second scenario we have addressed the risk that defaults may occur to a large extent directly after the first optional termination date of the guarantee. In this analysis we assumed a five-year backloaded default pattern, thus starting defaults in year one and applying defaults over five years, with most defaults occurring in year five. Additionally, we assumed that the recovery rate after the optional termination date of the guarantee is equal to the stressed expected recovery (the inverse of the WALS in table 3). We concluded that the current overcollateralization addresses the amount of realized losses occurring after the first optional termination date and resulting liquidity stresses.

We consider that with the expected issuance of a jumbo bullet maturity up to five years, the bank will introduce a cash flow mismatch between constantly amortizing loans and a single-bullet maturity. Over time, however, the cash flow profile is expected to become more balanced, and the bank is expected to be able to include highly liquid assets to facilitate the illiquidity management of the pool on a stand-alone basis. In our preliminary cash flow analysis we assumed the maximum issuance amount of �?� 1 billion.

In a run-down scenario, the amortization of the cover pool ends with the maturity of the last asset in 2024 (see chart 6).

All assets and liabilities cash flows are euro-denominated, so that currently there is no currency risk. Interest rates for assets are fixed, and covered bonds are set at fixed rates.

We generally evaluate a pool of covered bonds on a cash flow basis to form an opinion on whether, under conditions of severe economic stress, the cash flow generated by the assets would be sufficient to meet the timely debt service payments due on the liabilities. The aim of the cash flow analysis is to assess the pools with regard to:

• Credit risk as described above;
• Market risk in the form of interest rate and eventual currency risk;
• Liquidity risk as a result of cash flow mismatches between assets and liabilities in terms of maturity;
• Prepayment risks and servicing costs; and
• A stress-testing of these risks using the Covered Bond Monitor (CBM).

CBM is a Monte Carlo model, which simulates approximately 100,000 different economic scenarios, or more if required, to establish a default distribution. Each scenario produces a different path for interest rates and exchange rates for each currency included in the issuer's cover pool. Using these input parameters, a corresponding set of cash flows is computed to determine whether the pool exhibits sufficient strength under these stressed assumptions to pass the target rating eligibility test. The average maturity of outstanding covered bonds defines the target rating default probability against which the cash flows are benchmarked. Generally, if the respective cover pool cash flows exhibit fewer defaults than accepted under the threshold, the cover pool passes the rating eligibility test from a quantitative point of view.

The cash flow analysis is based on the assumption of a static pool�??i.e., no active pool management or new issues other than servicing the liabilities as they come due and, if necessary, taking out bridge financing to cover temporary liquidity needs. This assumption stems in turn from our central rating assumption, where the issuer is insolvent and the pool is managed until it has fully amortized.

As a result of the typical uneven maturity profiles between cover assets and outstanding covered bonds, we stress the liquidity costs in our cash flow analysis. In a situation where the program has excess cash, we assume that the proceeds can be invested at the then-simulated market rates. The PfandBG allows the special receiver-in-bankruptcy (Sachwalter) to refinance maturing covered bonds by selling assets or taking out bridge loans.

In the rating scenario, we assume that the issuer is insolvent and cannot manage liquidity as previously. Therefore, we assume that the Sachwalter would be able to invest excess cash at a discount of 50 basis points (bps) to the then-simulated interest rate.

In a situation where insufficient proceeds have been accumulated before upcoming maturities, we assume that the trustee can take out a bridge loan. Because of the distressed situation, we assume that in the 'AAA' scenario, the pool must be able to service the simulated rates plus a premium of 100 bps.

In addition, to maintain the currently assigned ratings, we assume the bank will always provide sufficient amounts of liquid assets to allow for timely payment of principal and interest during the 180 days following a potential issuer insolvency. In the absence of other structural features, we think this provides a time buffer, and should allow for the monetization of cover assets, if needed. While the 180-day rule has been introduced into the PfandBG, compliance with that rule will only become mandatory in November 2009.

On June 26, 2009, we affirmed our 'A-/A-2' counterparty credit ratings on Postbank, and our 'BBB+/A-2' counterparty credit ratings on Postbank's 100%-owned strategically important subsidiary, BHW. The outlook on both entities remains positive. At the same time, we lowered our ratings on Postbank's hybrid capital securities to 'BB' from 'BB+.'

Our ratings affirmation reflects our view that Postbank continues to benefit from its relatively reliable retail business model and franchise as Germany's largest private-sector retail bank. Postbank continues to demonstrate a strong, granular retail funding position, which remains a particular rating strength against the ongoing global liquidity squeeze. Moreover, its granular and highly collateralized retail lending structure should restrict credit losses to manageable levels overall.

Despite our affirmation, we are mindful that the elements contributing to our ratings assessment have changed. We lowered by one notch our appraisal of Postbank's stand-alone credit quality to reflect Postbank's weak capitalization and financial flexibility and bleak earnings prospects in difficult markets. At the same time, we incorporated a one-notch uplift for implicit government support. Postbank has not yet applied for support from the German government's Financial Markets Stabilization Fund. However, we believe it would receive government support, if necessary, because of its high systemic importance in Germany, owing to its size, large retail deposits and operations, and capital market activities.

The downgrade of Postbank's hybrid capital securities reflects Postbank's weakened stand-alone financial profile and our base-case assumption that the bank could incur further cumulative losses in 2009�??2011, in light of our negative economic forecasts and unstable financial markets.

We remain concerned, however, about potential pressure on Postbank's already low 6.1% regulatory Tier 1 capital ratio (including market risk), despite beneficial Basel II treatments, and the potential volatility of this ratio because of the market-sensitivity of some components of Postbank's equity. This ratio compares with our estimate of a regulatory 4.5% ratio, based on Basel I on March 31, 2009. However, we expect Postbank's risk-adjusted capital ratio under our new framework to be much lower, underlining Postbank's remaining impairment risks from low quality in �?�6.5 billion of structured credit investments; higher risk charges for its cyclical and less seasoned commercial real estate financings, particularly development loans; and bulk risk from larger corporate financings. Moreover, our adjusted total capital figure is 10% lower than Postbank's regulatory Tier 1 capital. This difference did not result from our new methodology, but because we continue to deduct goodwill and intangibles, which are sizable, and continue to limit perpetual hybrid instruments to 33% of adjusted common equity.

Our ratings on Postbank do not yet benefit from implicit ownership support from Deutsche Bank AG (A+/Stable/A-1). This is because arrangements between Deutsche Bank and Postbank's 37% shareholder, Deutsche Post AG (BBB+/Negative/A-2), afford Deutsche Bank significant flexibility as to whether, and when, it will proceed to majority ownership by early 2012.

In the event of a capital increase at Postbank, both Deutsche Bank and Deutsche Post are obliged to participate on a pro rata basis to prevent dilution of their stakes and to protect their investment. (See "Deutsche Postbank AG" and "Deutsche Postbank 'A-/A-2' And BHW Bausparkasse 'BBB+/A-2' Ratings Affirmed; Outlooks Positive; Hybrids Cut To 'BB' in "Related Research".)

The German Covered Bond Act (PfandBG) and the respective secondary legislation provide the legal framework for the issuance of covered bonds in Germany.

In our analysis of the legal framework, we reviewed the legal issues that we deem key for our delinked rating approach:

• The isolation of and priority to the assets in the cover pool on the issuer's insolvency;
• No acceleration or forced restructuring of debt on the issuer's insolvency;
• The survival of the hedging agreements on the issuer's insolvency;
• The capacity for a manager to generate liquidity to mitigate any maturity mismatch risk between the assets and the liabilities; and
• The ability to provide and maintain overcollateralization over and above the regulatory minimum requirements if the issuer becomes insolvent.

The PfandBG defines eligibility criteria for the type of assets (public sector assets, or mortgage- or shipping-secured loans) that may and may not be included in the cover pool. For each distinct asset type, the issuer must maintain a segregated cover pool and the respective matching and management requirements must be performed on a per-pool basis. Furthermore, a covered bond issuer must disclose key risk indicators at least quarterly for each cover pool (composition of the cover pool by certain standardized criteria, overcollateralization based on a nominal and an NPV basis before and after stress, etc.).

If Postbank becomes insolvent, the PfandBG provides that covered bondholders will have a preferential claim on the proceeds arising from the cover assets. Based on our analysis of the law, we assume that German covered bonds do not automatically accelerate if the issuer becomes insolvent. While the trustee's role is to continue to ensure adherence to the PfandBG in all material aspects, the dedicated cover pool manager ("Sachwalter") is to take over the cover pool management. The Sachwalter must manage the cover pool to ensure timely payment of interest and principal for the covered bonds. According to the law, he is entitled to take appropriate measures to raise liquidity by selling or borrowing against cover pool assets to repay covered bonds becoming due, and generally must act in the bondholders' interest to avoid becoming personally liable. Expenses for the Sachwalter and the trustee must be borne by the cover pool and are senior to the covered bondholders.

We will maintain regular surveillance on Postbank's public sector covered bonds until the notes mature or are otherwise redeemed. We will:

• Analyze reports(which we expect to receive regularly) detailing the quality and performance of the underlying collateral;
• Simulate the potential market risk to determine whether currently provided levels of overcollateralization are sufficient, in our opinion, to mitigate the stresses at a level commensurate with the target rating;
• Monitor supporting ratings; and
• Make regular contact with the issuer to form a view on whether servicing standards are sustained and to analyze the bank's ability and willingness to maintain overcollateralization at a level considered commensurate with the target rating.

Additionally, as this is a new program, for each new covered bonds issuance we will review whether the overcollateralization levels remain commensurate, in our opinion, with the then-current rating on the program.

• Standard & Poor's Ratingansatz fuer Covered Bonds und Pfandbriefe (published on www.standardandpoors.com)
• Expanding European Covered Bond Universe Puts Spotlight on Key Analytics (published on July 16, 2004)
• Assumptions: German Law Change Affects Mortgage Foreclosure Period Stresses (published on Nov. 28, 2008)
• Germany Farewells Mortgage Bank Act For New Covered Bond Act To Take Center Stage (published on May 21, 2005)
• All Covered Bonds Are Not Created Equal (published on Sept. 13, 2007)
• Methodology & Assumptions: Applying The Derivative Counterparty Framework To Covered Bonds (published on Feb. 26, 2008)
• New Issue: Deutsche Postbank AG�??Hypothekenpfandbrief (published on Feb. 21, 2008)
• Deutsche Postbank AG (counterparty credit analysis, published on Dec. 13, 2007)
• Deutsche Postbank 'A-/A-2' And BHW Bausparkasse 'BBB+/A-2' Ratings Affirmed; Outlooks Positive; Hybrids Cut To 'BB' (published on June 26, 2009)

Related articles are available on RatingsDirect. Criteria, presales, servicer evaluations, and ratings information can also be found on Standard & Poor's Web site at www.standardandpoors.com. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow (7) 495-783-4011.