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Remaining highly profitable on the Belgian market

Remaining highly profitable on the Belgian market. Foto gebouw. Activities overview Earnings drivers, retail Earnings drivers, SME and corporate Mid-term financial outlook. Reminder : business portfolio.

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Remaining highly profitable on the Belgian market

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  1. Remaining highly profitableon the Belgian market Foto gebouw

  2. Activities overview Earnings drivers, retail Earnings drivers, SME and corporate Mid-term financial outlook

  3. Reminder : business portfolio Although KBC has successfully expanded its operations in CEE, it is primarily a top bancassurer and asset manager in Belgium, its historical home market Revenue breakdown - 2004* Capital markets Gevaert International SME/corporate Belgium :- retail bancassurance- private banking- asset management- SME and corporates Europeanprivate banking CEE * 2004 pro-forma figures, excl. group items

  4. Market headlines Market shares: 31-Dec-03 • Belgium’s banking landscape is highly consolidated (80% held by top-4 banks) • KBC is a top-3 player, especially strong in the Northern region • The market is highly receptive to cross-selling of AM & insurance products • Growth in the field of wealth management is significant (high savings rate)

  5. Financial highlights, Belgium Net Profit (mln) 1 2 846 686 +8% +23% 634 • Financial performance in Belgium has been strong, mainly due to: • Solid growth momentum for commission business (investment products in retail, non-lending income in SME/Corporate • Consecutive years of cost reduction • Over-the-cycle low loan losses 1 Including bancassurance, private banking Belgium and asset management 2 Core SME/Corporate activities only (at parent company level)

  6. Business model • Segmented approach by customer group: 1 Mostly SMEs (sales turnover > 8m), incl. 75 large corporate customers

  7. Activities overview Earnings drivers, retail Earnings drivers, SME and corporate Mid-term financial outlook

  8. Sharp increase in productivity Efficiencystrategy Strong growth in revenue per FTE Strong growth in revenue per branch Revenues per FTE, 1998 = 100 Revenues per branch, 1998 = 100 Sharp increase in productivity (to large extent driven by reduction in density of branches and cutback in branch FTEs)

  9. Cost containment has been successful Efficiencystrategy Core retail only, excl. activities of subsidiaries Up to 2004: significant decline in costs 2001 costs Cost inflation 1 1 Cutbacks in branch FTEs and in number of branches 2 2 Integration of ICT platforms and of products and support services 3 3 Henceforth: upward pressure on costs 2004 costs Target:cost growth below wageinflation rate Cost inflation 1 1 2007 costs

  10. Strict cost control remains important Efficiency strategy High density of network (Competition does not permit further branch cutbacks) High wage costs (structural characteristic) • Wage costs in Belgium are higher than in other European countries • Average level of education of branch staff is higher than in other European countries Source: Febelfin

  11. Low over-the-cycle credit-loss charges Risk strategy Trend of impairments of credit portfolio Net write-downs vs. risk-weighted assets 0.21% 0.21% Target:< 0.25%over-the-cycle 0.09% 0.00% 2002 2003 2004 1q05 Credit-loss charges in Belgian retail are expected to be relatively low over the cycle (< 0.25%)

  12. Focus on revenue growth Growth strategy Core retail only (excl. activities in subsidiaries) Revenue growth in 2001-2004 partly driven by positive pricing effects Revenue growth in 2004-2007 mainly driven by positive volume effects Slower income growth due to margin pressure ½ due to positive pricing effects Mid-term ambition:maintain growth trend Achieved+5% p.a.revenue growth

  13. Growth in savings & investments How to grow within a mature market? Growthstrategy 1 Attracting new funds Market potential Proven performance Estimated nominal GDP growth rate Market share of mutual funds Savings rate New funds attracted – in bn

  14. Growth in insurance field How to grow within a mature market? Growthstrategy 1 2 Insurance Attracting new funds High cross-selling potential Proven performance Premium growth, non-life X-sell results

  15. Growth in lending field 3 Lending High expectations for growth in retail lending Total market – Mortgage loans • Small business loans: • Moderate growth trend, in line with nominal GDP growth (+2.7% in 2005) • But, further additional growth potential via raising amounts of advances in current account (with higher margins) and increasing non-credit-linked revenues CAGR 9% • Strong mortgage loans growth on the back of: • sustained rise in Belgian real estate prices • real estate prices still below level of other European markets Source: NBB How to grow within a mature market? Growth strategy 1 2 Attracting new funds Insurance

  16. Obstacles to growth How to grow within a mature market? Growthstrategy 1 2 3 Attracting new funds Lending Insurance Sharper price competition Hardening credit-pricing cycle Threats to growth according to analysts Small business loans Mortgages

  17. Catalysts for growth How to grow within a mature market? Growthstrategy 1 2 3 Attracting new funds Insurance Lending Enhancing customer satisfaction Customer-orientation program started Closure of branches Top-4 bancassurers only * Extrapolation

  18. Activities overview Earnings drivers, retail Earnings drivers, SME and corporate Mid-term financial outlook

  19. Growth in lending income Lending income vs. RWA • Until 2004: • Revenue growth driven by increased credit margins (up from 0.88% in 2002 to 1.06% in ‘04) • Despite low credit demand (and ensuing greater competition ), KBC consolidated its market share in lending (even rising slightly from 22% in 2002 to 23% in ‘04) • Recent trends: • Loan demand remains relatively limited (and competition increases as a result) • Pressure on margins makes growth in fee income a key priority

  20. Growth in fee business: key priority Fee income vs. RWA Mid-term target: > 2% • Fee revenue increased slightly in 2002-04 period due to higher sales of: • corporate risk management products (average growth 15% p.a.) • foreign trade products (average growth 28% p.a.) • insurance products (average growth 59% p.a., but from a low base) … offsetting stagnation of revenues from payment services (adverse impact of EU regulation)

  21. Growth potential in fee income • Further growth of fee income targeted (to reach >2% on RWA) by means of: • Continued growth in risk management, foreign trade and insurance products • Increasing sale of ‘investment banking products’, in line with market trend, giving SMEs direct access to capital markets (e.g., debt capital, private equity) • Implementation of training / tools to assist sales force in shifting from ‘operational’ relationship to ‘partnership’ with client • Internal performance / remuneration model increasingly focused on boosting fee income % change in commission income 2002-04* peers with substantial investment banking acitivities local players * Boston Consulting survey, peers are corporate bankers in Western Europe

  22. Monitoring credit risk Risk strategy Impairments on loan portfolio 1 LLR on RWA Mid-term target:loan loss ratio < 0.35% • Average 3yr-loan losses at 0.35%, in line with target, but rather cyclical (N.B. 2004/2005 historically low) 1 KBC core SME/corporate banking excl. activities in specialized subsidiaries

  23. Monitoring credit risk • To maintain loan losses below ‘maximum’ level (0.35%): • Increased monitoring of individual credit risks • Active credit portfolio management: • avoiding risk concentration • hedging credit risk exposure • limits/caps on sub-portfolios (e.g., real estate, acquisition finance)

  24. Strict cost control Efficiencystrategy Cost/income ratio 1 Expenses (m)1 Mid-term cap:43% • Up to 2004: • significant decline in C/I ratio to very low level (38%) • cost inflation offset by FTE cutbacks and operational cost savings (reduced number of branches) • Future: • Continued cost control (without lessening commercial clout) 1 KBC core SME/corporate banking excl. activities in specialized subsidiaries

  25. Activities overview Earnings drivers, retail Earnings drivers, SME and corporate Mid-term financial outlook

  26. Mid-term outlook, retail Return on allocated capital 2 Contribution to Group profit (m)1 Mid-term target:20% Cost/income ratio, banking 1 Combined ratio, non-life Mid-term target:max 95% over-the-cycle Mid-term target:further down to low 60s 1 Adjusted definition as of 2005: including asset management 2 Adjusted definition as of 2005: including asset management and 8% allocated Tier-1 capital (instead of 7%)

  27. Mid-term outlook, SME and corporate Return on allocated capital, banking 1 Contribution to Group profit (m)1 Mid-term target:CAGR >10% Total revenue vs. RWA, banking 1 Fee income vs. RWA, banking 1 Mid-term target: 3.30% Mid-term target: >2% 1 KBC core SME/corporate banking excl. activities in specialised subsidiaries

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