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KBC Group. Financial reporting adjustments in 2006 January 2006. Introduction. This presentation gives an overview of some of our views on our financial reporting formats. It covers some methodological issues regarding segment reporting, reporting on hedging instruments and EPS reporting.

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KBC Group

Financial reporting adjustments in 2006January 2006


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Introduction

  • This presentation gives an overview of some of our views on our financial reporting formats. It covers some methodological issues regarding segment reporting, reporting on hedging instruments and EPS reporting.

  • The presentation is provided for information purposes only. The new reporting formats may be subject to further refinements and the information in this presentation is condensed and therefore incomplete.


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Changes in segment reporting format

Reminder: current segment reporting mix

1. Primary segmentation by business segment

2. Additional breakdown by area of activity

2

KBC Group NV

1

Banking

Insurance

Asset Management

European Private Banking

Gevaert

Retail

Corporate customers

CEE

Capital markets

European private banking

Gevaert


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Changes in segment reporting format (2)

Although KBC’s financial reporting is considered to be comprehensive and highly reliable, the performance analysis of the indivdual areas of activity is complicated by, among other things:

the use of different segmentation criteria;

the periodic restatements of previous-year figures in order to to assure consistency for internal management purposes;

the ‘normalization’ of segment equity levels;

the volatile ‘group center’ items and unclear reconciliation of individual P/L lines (except the bottom line);

terminology topics (e.g. ‘corporate’ is largely ‘SME’);

These problems are mostly related to the fact that the ‘area of activity’ reporting is primarly set up as a MIS (e.g. with impact on internal remuneration schemes). The methodological approach differs from the financial accounting system.

In order to further increase its financial transparency, KBC will….:

build its segment reporting around the financial accounting databases (separate from the MIS);

discontinue to use its current matrix reporting format and use its new business unit structure as the major segment reporting criterion (i.e.: Retail & PB Belgium, CEE, European private banking, merchant banking, Group Center); 1

no longer have to restate historical time series since the link with the MIS will be cut;

disclose its segment results in a full P&L format (incl. breakdown of income, which previously was not the case);

allocate the results of each subsidiary fully to a single segment (e.g. KBC Lease’s activities will be allocated entirely to the merchant banking division, whereas previously part of the results – although predominantly ‘corporate’ – had been recognized in the ‘retail’ division); 2

stop imputing the impact of capital ‘normalization’ adjustments on the segment bottom-line 3 . In return, the funding costs of the equity participations (e.g. in CEE) will be allocated to the relevant segments (recognized as ‘NII’);

considerably limit the number of ‘group center’ items.

UPCOMING IMPROVEMENTS

CURRENT OBSERVATIONS

1 In the annexes to the accounts, sufficient disclosure on KBC Bank and the insurance and asset management activities will be provided in order to, among other things, ensure transparancy towards holders of KBC Bank NV bonds.2 An exception has to be made for KBC Bank NV Belgium’s activities.3 However, for calculating the return on allocated capital, the current capital allocation methodology (8% Tier-1 etc.) will be left unchanged.


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Changes in segment reporting format (3)

The ‘group center’ items will be limited to the following areas:

The results of the holding company and the non-allocated expenses of KBC Bank NV that can be considered holding company overheads (e.g. strategic consultancy fees, BoD expenses, ‘group-level’ operating provisions, etc.)

The results of the co-sourcing vehicles (such as Fin-Force and Orbay) and special purpose funding vehicles. As a rule, within these entities, expenditure is covered by the services’ users and, barring timing differences, the bottom-line therefore tends to be immaterial;

Results of non-core equity holdings, such as Agfa Gevaert (as long as it belongs to the Group) and the equity investment portfolio of KBC Bank NV.

  • The new methodology is expected to be introduced as of 1Q 2006.

  • Internal simulations run on 2005 interim figures show that transparency and the reconciliation of indivdual items will be improved. The bottom-line impact for each individual segment is relatively limited. A full set of 2005 quarterly figures will be disclosed prior to the 1Q 2006 earnings release.

UPCOMING IMPROVEMENTS


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Changes in reporting on hedging instruments

Valuation (volatility impact)

Amortized cost (no impact from volatility)

Fair Value (adjustments in shareholders’ equity)

Fair Value (adjustments in P&L)

  • On the occasion of the introduction IAS 32/39, P&L volatility risk emerged due to the ‘asymmetric’ valuation of the loan portfolio on the one hand (recognized at amortized cost) and of the ALM derivatives which hedge the interest rate risk of the loan portfo!io on the other (recognized at market value).

  • In order to manage the volatility of its accounts, KBC opted to use the ‘fair value’ option in European IFRS, i.e. by intentionally qualifying part of the bond portfolio as ‘FIFV’. In this approach, the P&L impact of the M2M of hedging derivatives is to be offset by the opposite impact of the M2M of bonds at FV (e.g. increasing market rates generate a lower market value for bonds and a higher market value for IRS that swap long to short rates).

  • In this approach, the interest rate component of the hedging derivatives is recognized as ‘trading income’ (in full ‘net gains from FI at FV’) and no longer as NII. Compared with the 2004 accounts, in 2005 the NII was consequently higher and ‘trading income’ lower (at 30-09-05, both for an amount of 296 m euros).

  • This approach considerably neutralizes bottom-line volatility, but still includes ‘asymmetric’ treatment of the interest income from the loan portfolio on the one hand (booked as NII) and from derivatives hedging of the interest rate risk of the loan portfolio on the other hand (booked as trading income).

CURRENT APPROACH

Reminder

Asset classes

Examples

Mortgages, Consumer & Corporate loans

Loans and Receivables

Held To Maturityinstruments (HTM)

Bonds

Bonds & Equity

Available For Sale instruments (AFS)

Trading portfolios & hedging derivatives

Held For Trading instruments (HFT)

Financial Instruments at Fair Value (FIFV)

Bonds & Equity


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Changes in reporting on hedging instruments (2)

UPCOMING IMPOVEMENTS

  • In Nov-05, KBC decided to change the accounting treatment of a large part of its ALM derivatives using the ‘carve out’ option in European IFRS (aka ‘portfolio hedging’). This option enables us to recognize both ‘hedges’ (IRS) and underlying ‘portfolios’ on a M2M basis. By doing so, the P&L impact of the M2M of hedging derivatives is offset by the opposite M2M impact of the underlying assets.

  • Since, in the ‘carve out’ approach, ALM derivatives are qualified as ‘portfolio hedges’, their interest rate component will no longer be recognized as ‘trading income’, but as NII. Compared with the 2005 accounts, as of 2006 ‘trading income’ will consequently go up and the NII will go down (a time series of pro forma 2005 accounts will be provided for comparison purposes).

  • This approach not only considerably neutralizes M2M volatility in the bottom line but, moreover, also ensures a more ‘symmetrical’ treatment of NII from both the hedging derivatives and the underlying assets.

  • As announced earlier, the 2005 bottom line will be negatively impacted by approx. €25 m while shareholders’ equity will increase by around €100 m because the ‘carve out option’ will be introduced retroactively as of Jan 2005 (adjustments booked in Q4 2005). However, the presentation of the interest rate component of ALM derivatives will only be changed as of 1Q 2006. For 4Q 2005, the presentation will be consistent with the previous quarters.


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EPS reporting

  • We observe in the market that EPS are calculated in many ways, which obviously distorts the comparison of individual analysts’ estimates and makes the ‘consensus’ average figure unreliable.

  • KBC reports its EPS figure according to a well-defined method in IFRS. The number of MCB’s 1 has to be added to the number of ordinary shares and the number of treasury shares has to be deducted. Moreover, period averages are to be used.

  • With a net profit guidance for 2005 of €2.2 bn (as forecasted in Nov-05) and an average adjusted number of shares of 358.8 m (assumption based on 30-09-05 situation, see table) our indicative EPS comes to €6.13.

1 Mandatory convertible bonds are considered to be shareholders’ equity. As a consequence, the interest charge and related tax are not recognized in P&L and the number of MCBs has to be included in the (adjusted) number of shares for the calculation of earnings per share.


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Contact information

Investor Relations OfficeLuc CoolLuc AlbrechtTamara BollaertsMarina Kanamori Nele KindtWeb: www.kbc.comE-mail: [email protected]


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