Remaining highly profitable on the Belgian market

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
Revenue breakdown - 2004
Capital markets
Gevaert
International SME/corporate
Belgium - retail bancassurance- private
banking- asset management- SME and corporates
Europeanprivate banking
CEE

• Although KBC has successfully expanded its
  operations in CEE, it is primarily a top
  bancassurer and asset manager in Belgium, its
  historical home market

2004 pro-forma figures, excl. group items
4
Market headlines
Market shares
31-Dec-03

• Belgiums 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)

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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)
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Business model

• Segmented approach by customer group

Basic activity (parent company) Specific activities / segments (subsidiaries)
Retail 820 retail bank branches 600 insurance agents Funds management (KBC AM) Network of bank agents (Centea) and insurance brokers (Fidea) 110 branches in South Belgium (CBC)
HNW individuals 20 private banking branches 4 private banking boutiques (Puilaetco)
SME / Corporate 1 16 branches 4 social profit and public sector branches Multinational customers branch Real estate activities Corporate finance(KBC Securities) Leasing (KBC Lease) Factoring (International Factors) Diamond center (Antwerp Diamond Bank) Re-insurance (Secura)
1 Mostly SMEs (sales turnover gt 8m), incl. 75
large corporate customers
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Activities overview Earnings drivers,
retail Earnings drivers, SME and
corporate Mid-term financial outlook
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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)
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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
Targetcost growth below wageinflation rate
Cost inflation
1
1
2007 costs
10
Strict cost control remains important
Efficiency strategy
High wage costs (structural characteristic)
High density of network (Competition does not
permit further branch cutbacks)

1. Wage costs in Belgium are higher than in other
   European countries
2. Average level of education of branch staff is
   higher than in other European countries

Source Febelfin
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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
Targetlt 0.25over-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 (lt
0.25)
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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 ambitionmaintain growth trend
Achieved5 p.a.revenue growth
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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
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Growth in lending field
How to grow within a mature market?
Growth strategy
1
2
Attracting new funds
Insurance
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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
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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
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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

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Growth in fee business key priority
Fee income vs. RWA
Mid-term target gt 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)

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Growth potential in fee income
change in commission income 2002-04
peers with substantial investment banking
acitivities
local players

• Further growth of fee income targeted (to reach
  gt2 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

Boston Consulting survey, peers are corporate
bankers in Western Europe
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Monitoring credit risk
Risk strategy
Impairments on loan portfolio 1
LLR on RWA
Mid-term targetloan loss ratio lt 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
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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)

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Strict cost control
Efficiencystrategy
Cost/income ratio 1
Expenses (m) 1
Mid-term cap43

• 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
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Activities overview Earnings drivers,
retail Earnings drivers, SME and
corporate Mid-term financial outlook
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Mid-term outlook, retail
Return on allocated capital 2
Contribution to Group profit (m) 1
Mid-term target20
Cost/income ratio, banking 1
Combined ratio, non-life
Mid-term targetmax 95 over-the-cycle
Mid-term targetfurther 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)
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Mid-term outlook, SME and corporate
Return on allocated capital, banking 1
Contribution to Group profit (m) 1
Mid-term targetCAGR gt10
Total revenue vs. RWA, banking 1
Fee income vs. RWA, banking 1
Mid-term target 3.30
Mid-term target gt2
1 KBC core SME/corporate banking excl. activities
in specialised subsidiaries