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KBC Bank & Insurance Group

KBC Bank & Insurance Group. Full-Year results 2003 Analysts briefing. Content. Performance 2003, overview. Performance, banking. Performance, insurance. Question time. Full-year results 2003. In m EUR. + 8%. + 1%. Q avg ‘01-’03. Group result : up 8 % year-on-year. Performance 2003.

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KBC Bank & Insurance Group

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  1. KBC Bank & Insurance Group Full-Year results 2003 Analysts briefing

  2. Content Performance 2003, overview Performance, banking Performance, insurance Question time

  3. Full-year results 2003 In m EUR + 8% + 1% Q avg‘01-’03 Group result : up 8 % year-on-year

  4. Performance 2003 Net profit +8% in m EUR 1 119 +1% 1 022 1 034 ROE banking : 11.3 % ROE insurance : 17.4 % ROE Group: 12.7 % Banking : strong year-on-year performance Insurance : pressure on investment income, though high level of return

  5. Earnings growth peer group KBC Insurance Earnings level2000 = 100 KBC KBC Banking DJ ES Banks DJ ES Insurance Compared to the sector, earnings remained at a high level Note : estimate 2003 DJ ES Banks at 20 Feb. 2004 by KBC

  6. Performance 2003 Overall : Change yoy pre-tax • Positive impact : (m EUR) • Strong income trend for all basic banking activities (spread, commission) +232 • Strong premium growth, insurance +330 • Strong technical result, non-life +59 • Good cost control, banking +56 • Less impairments on equity portfolios, banking +238 • Negative impact : • Higher loan-loss provisions - 211 • Less gains on (‘free’) bonds, banking -148 • Less favourable trading results -135 • Less investment income, insurance -54 • Net profit : +85

  7. Performance 2003 Areas of activity : • Robust performance in Belgium • Further improving level of costs in banking (-5%) • Strong commission (+22%) and premium income (+8%) and interest spread slightly increasing (2.01% versus 1.97% in ‘02) • Low level of loan loss ratio (24 bp) and non-life claims ratio (59%) • Satisfactory operating performance in most CEE markets • ROAC for banking in Czech (CR) / Slovak republics (SR) : 17% • ROAC for banking in Hungary : 8% (20% excl. K&H Equities case) • Improving performance for insurance operations (still limited scale) • Higher profit of corporates (+19%) and markets(+35%) • … but still disappointing performance of banking business in Poland (high loan loss provisions: 365 m) Note : ROAC = return on allocated capital

  8. Growing dividend EUR Dividend per share : up 7.9% year-on-yearLast 5 years : every year growing dividend (CAGR : 8.5%)

  9. Enhancing efficiency in Belgium Strengthening the position in CEE Further downscaling of less-strategic areas Finalizing the merger Product complexity reduction program Pooling of back offices and co-sourcing of transaction processing Stronger governance model and controlling Intensified cross-border initiatives in such areas as e.g. card technology Restructuring program in Poland Majority stake in WARTA (Poland) Successful start of bancassurance in Slovenia Sale of retail activities in the Netherlands, broker-related consumer lending in Belgium, non-strategic operations in CEE (Ukraine, Lithuania) Business highlights 2003

  10. Content Performance 2003, overview Performance, banking Performance, insurance Question time

  11. Banking, income development • Interest income : + 5% organically (margin : 1.67%  1.73%) • Commission income : 12% organic growth (i.a. success of cap-guaranteed funds) • Lower trading income due to i.e. lower FX income and MtM of equity derivatives • Lower realized capital gains (250 m), mainly on the ‘free’ bond portfolio • Lower dividends, ‘other income’ on a par with 2002 (strong leasing revenue) Total income -1%organically 5 756 5 655 - 37% 4 977 - 22% +15% + 2% Excluding capital gains, income +1%

  12. Growth in banking assets • Customer deposits :up 5% (excl. repos) • Shift to demand deposits • Shift to life products and mutual funds • Customer loans :organically flat (excl. repos) • Strong organic mortgage growth : • Belgium : + 10% • C/SR : + 36% • Hungary : + 69% • Poland : + 24% • Corporate book (excl. repos) down 3 bn EUR, reflecting : • currency depreciations (2.4bn) • build down of ‘old book’ (IPB) in CR (1.7 bn) & in the Netherlands (0.4bn) • write-downs in Poland (0.3 bn) Customer deposits (bn EUR) Customer loans (bn EUR) Note : mortgage growth adjusted for currency depreciations

  13. Banking, expense development • Belgium : • Expenditures : - 5% (- 105 m) • Headcount reduction :target of 1 650 FTE (-12%) achieved • Central and Eastern Europe : • Expenditures : - 1% (-12 m) • Headcount reduction : • CR (HQ) : 54% of target of 1 000 FTE (-27%) achieved • Poland : 28% of target of 1000/1200 FTE (-15%) achieved • Other : • Expenditures : + 14% (+60 m) Cost/Income ratio: 65% (65% for FY 02) Ytd expenses (m EUR) -1% 3 751 3 695 3 510 2001: KB only 4Q01 Continuing cost control

  14. Cost control in Belgium • Merger completed, full extent of cost savings in bottom-line as of 1H 04 • Lower cost/income ratio ahead, thanks to : • Income growth • Co-sourcing of transaction processing and pooling of back-office activities within the group and with third-parties • Monitoring of real-estate-related and other non-FTE-costs • Reduction in product complexity in retail Although Belgium is a ‘mature’ market, further growth and improvement in performance can be expected

  15. Reducing product complexity Implementation running or further enquiry required Note : situation as of Feb-2004

  16. Banking, loan provisions Loan loss ratio : 0.71% (0.55% for FY 02) Loan loss provisions (m EUR) 676 465 321 Loan loss ratio excl. Poland : 0.35% Intensive clean-up of loan portfolio in Poland Note : Loan loss = specific provisions to average gross outstanding loans

  17. FY profit, banking: 225 m, ROAC : up to 12% from 2% Income growth : + 10% (strong commission and rebound in interest) Cost reduction : - 7% Provisions remain low (21 bp) Retailbankingin Belgium Return on allocated capital 16% 14% 13% Profit contribution after minorities x5 Marketing headlines 2004 : • New customer acquisition • Bancassurance • Wealth management 2003 has seen a strong turnaround in Belgian retail on the back of robust commission income and cost savings Note: Profit contribution excl. retail asset management and excl. retail insurance.Loan loss ratio on risk-weighted assets

  18. CR & SR : ROAC target of 17 % achieved in spite of pressure on margins (and fewer one-offs), thanks to commission income and modest expense growth Hungary : income and volume growth more than set off pressure on margin, but adverse impact of K&H Equities loss (pre-tax impact: 20 m) Poland : difficult economic conditions and high loan provisions due to thorough credit review (pre-tax impact 277m) Banking performance in CEE Contribution of banking operations to KBC Group profit CEE 2nd home Satisfactory performance in Czech Republic, Slovakia and Hungary (even further improvement expected). Polish turnaround being implemented Notes : profit contribution excl. minority interests. Change (%) adjusted for currency effect. Allocated capital: 7% on RWA + non-amortized goodwill.

  19. CEE banking, share of group wallet Improved cost structure under way Value-added products and commission income to grow Heavy credit risk charge in Poland in 2003 Impact of paid goodwill Pre-taxresult FY03 earnings Note : banking business lines , excluding group center

  20. Restructuring in Poland  • Capital base strengthened (265 m in 2 steps) • Risk sensitivity greatly reduced • Credit risk policies redefined and credit decision authority reduced • ‘Historic’ loan book cleaned up • Risk control and risk management improved • Cost base to be further reduced • Centralizing back offices, strengthening HR and performance measurement • Reducing headcount (driven by new central IT system) by 1000/1200 FTE,real estate expenses (15-20 %) and other tangible costs (5-10%) by ‘04 • Disinvesting non-strategic activities (Ukraine, Lithuania, PKB, Pension Fund,…) • Market position to be improved on the retail market • Thorough customer segmentation in the nationwide network • Intensified transfer of product knowhow (AM, retail lending, bancassurance,…) • Acceleration of bancassurance efforts with WARTA Insurance Central Europe 2nd home market     Profound restructuring plan being implemented

  21. Loan provisioning level in Poland Central Europe 2nd home market Adequately provisioned compared to peer group Sources: companies’ financial reports and presentations (consolidated basis)

  22. Improving economic indicators Outlook : • Economic growth is picking up • Corporate tax reduction (to 19% in ’04) • Credit demand is accelerating, notably mortgages/consumer lending • Shift from deposits to funds (off-balance) is likely, compensating further margin pressure Poland GDP growth (y/y)

  23. CEE, governance model - 2002 ExecutiveCommittee Situation as of Dec 2002 : the network model ManagementCommittee CEE (5) Co-ordination UnitCEE Banking (1) Co-ordination UnitCEE Insurance (2) Business co-ordinators (12) CEE Group companies • Initiating and followup of : • Transfer of knowhow • Shared business projects KBC expats(31) Moreover : audit and market and credit risk managment centralized (for credit risk in Poland only from end of 2002)

  24. CEE, governance model - 2003 • Key elements : • because of increased importance of 2ndhome market : • Increased management involvement • Intensified follow-up Renewed model,situation as ofDec. 2003 ExecutiveCommittee ManagementCommittee CEE (6) Day-to-daymanagement Performance monitoring General ManagerCEE (1) Controlling UnitCEE (5) Steering committees Co-ordination UnitCEE (8) Business co-ordinators(22) & task forces CEE Steering of business projects CEE Group companies • Initiating and followup of : • Transfer of knowhow • Business projects • Uniform methodology KBC expats(44)

  25. Asset Management division • FY profit : 116 m (stable) :income pressure (market context) compensated by lower costs and taxes • AUM : +10% • Retail assets : 10% • including retail funds : +11% • of which : ± 5% net inflow • Institutional (3rd party): + 6% • Group assets : + 18% Assets under management (in bn EUR) 89 82 81 +10% Corporate Retail Central Europe : 5 % Belgium :87 % Note: As of 2004, in financial reporting, incorporated in retail / corporate area

  26. FY profit : 220 m, +7% Cost decrease (- 6%) due to strict cost control, especially in Belgium / Western Europe Strong income growth in leasing, Ireland, diamond sector but no repeat of 2002 one-off revenues. As a balance, income down 2% Lower provisions for problem loans, i.a. in traditional banking in the US Corporate banking division Details on corporate activities(m EUR) Profit contribution corporate banking (in m EUR, excl. minorities) +7%

  27. FY profit : 125 m (+35%) Money and capital markets : strong performance (+ 43%) Equity trading : substantial loss situation reversed Derivatives :satisfactory result but negative MtM for long derivatives Financial markets division Profit contribution market activities (excl. minorities): m EUR +35% Details on market activities : m EUR FY 01 FY 02 FY 03 Note: including trading-, interest and commission incomefrom market activities,excluding trading income in CEE and related to treasury and investment book

  28. Going forward, 2004 • Faster asset growth in line with expected 'faster' GDP growth : • Full year impact of deposit rate cut in Belgium (if competition / capital market levels allow rates to be stable) and positive impact from higher interest rates/steeper yield curve • Asset Management driven by ‘private pension building’ and expansion in CEE • Expected higher contribution from equity subsidiaries • Cost control : • In Belgium : full impact of merger synergies + sustained cost discipline • In CEE : efficiency programs in progress • Cost sensitivity in all divisions • Strong decrease in loan loss levels : • Towards a 'normalized' level in Poland (versus 365 in 2003)

  29. Content Performance 2003, overview Performance, banking Performance, insurance Question time

  30. Underwriting result, life Total FY 03:2 438 Net premium income Premiums ytd 8%organic growth Total FY 02:2 246 Total FY 01:1 689 FY 03 :95%Belgium • Guaranteed rate (10y) in Belgium : • 1H 03 : 3.25% • 2H 03 : 2.75% FY 03 :5%CEE Very strong growth (bancassurance-driven)and shift to non-linked products

  31. Underwriting result, non-life Combined ratio Net premium income Premiums +15% organically Very low level 1 048 105% 104% 96% 910 821 Very sound business, partly driven by upward trend in rates and by strong risk and cost discipline

  32. Crossselling, bancassurance Cross selling 2003, Belgium : • Mortgage / fire insurance : 50% • Mortgage / death cover : 67% • Consumer loan / death cover : 66% • Clients with both banking and insurance productssold by KBC (Belgium) Crossselling continues

  33. Insurance, investment income Investment return in FY 03down to 5.9% from 7.2 % Suffering from low investment yields Note: capital gains on shares: 5.30 % on portfolio value (incl. write-back from provision for financial risk at 45 m in ‘03), excl. value adjustments for unit-linked products. Planned recurring value gains on shares in 2004 : 4.75 % on market value of portfolio.

  34. Insurance in CEE, overview Acquired at the end of 2002 Startup in 2003 : retail market share from zero to ± 4% Majority since end of 2003 Bancassurance models now set up in all target countries,but looking for more significant scale Note : premium growth adjusted for changes in currency value. Profit contribution to KBC result after minorities.

  35. Market position : Market share, non-life : 13 % (no 2) Nation-wide coverage Customers : ± 1.5 m Workforce : ± 4 000 FTE Premium income 2003 : 330 m EUR non-life 110 m EUR life Individual : 65% of premium income Leading product : motor insurance KBC’s footprint : 2000 : First stake (40%) 2003 : Majority stake (51%) 2004 : Clear control (75%) Strategic focus : Optimization of agency sales network Intensifiying bancassurance with KB Stronger expansion to small-sized enterprises Centralization of back-office activities and sustained cost discipline Insurance in CEE, Poland WARTA Poland Majority in WARTA (Poland), important leverage of scale for KBC’s insurance activities in CEE

  36. Insurance, non-recurring items Non-recurring income offset by value adjustments and allocation to the provision for financial risks Note: provision for financial risks, balance at 31 Dec. 2003 : 93 m EUR

  37. Going forward, 2004 • Full consolidation of WARTA Insurance (premium line impact : 435 m) • Organic premium growth : sustained high single-digit growth, driven by • Successful bancassurance model • Consumer trend for ‘private pension building’ (life) • Sustained good technical results (though '03 was ‘very’ good) • Mitigated pressure on investment income • Impairments on equity portfolio 2004 : Note : Available non-realized value gains in excess of 'normal' level of value gains of ±125 m(at 4.75% of market value of portfolio)

  38. Q&A sessionTeleconference with live audience in Brussels Willy Duron André Bergen Frans Florquin Herman Agneessens Jan Vanhevel Christian Defrancq Emile Celis Guido Segers Analysts who want to participate in the conference call,please dial the number given in the invitation

  39. Q&A sessionTeleconference with live audience in Brussels Willy Duron André Bergen Frans Florquin Herman Agneessens • Group CEO • Head of insurance business • Deputy Group CEO • Head of banking business • Co-ordination CEE • Retail bancassurance • HRM and Communication • Group CFRO • Transaction processing • Corporate banking • West-European,US & SE Asian bank network • Retail credit • Information technology • Insurance subsidiaries • Non-life & reinsurance • Claims management • Treasury & markets • Asset Management • International credit Jan Vanhevel Christian Defrancq Emile Celis Guido Segers Analysts who want to participate in the conference call,please dial the number given in the invitation

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