GROWTH IN CEE COUNTRIES

1
GROWTH IN CEE COUNTRIESCzech Evidence

• Jaromír Sladkovský
• FPK Conference, London
• 14 December 2004

2
LEGAL DISCLAIMER

• THIS PRESENTATION IS PROVIDED FOR INFORMATIONAL
  PURPOSES ONLY AND DOES NOT CONSTITUTE AN OFFER TO
  SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY
  SECURITY.
• ALTHOUGH THE STATEMENTS OF FACT IN THIS
  PRESENTATION HAVE BEEN OBTAINED FROM AND ARE
  BASED UPON SOURCES THAT KBC BELIEVES TO BE
  RELIABLE, KBC DO NOT GUARANTEE THEIR ACCURACY,
  AND ANY SUCH INFORMATION MAY BE CONDENSED OR
  INCOMPLETE.
• THIS PRESENTATION CONTAINS FORWARD-LOOKING
  STATEMENTS WITH RESPECT TO OUR STRATEGIES AND
  EARNINGS DEVELOPMENT BY THEIR NATURE, THESE
  FORWARD-LOOKING STATEMNTS INVOLVE NUMEROUS
  ASSUMPTIONS, UNCERTAINTIES AND OPPORTUNITIES. THE
  RISK EXISTS THAT THESE STATEMENTS MAY NOT BE
  FULFILLED AND THAT FUTURE RESULTS DIFFER
  MATERIALLY.
• BY RECEIVING THIS PRESENTATION EACH INVESTOR IS
  DEEMED TO REPRESENT THAT IT IS A SOPHISTICATED
  INVESTOR AND POSSESSES SUFFICIENT INVESTMENT
  EXPERTISE TO UNDERSTAND THE RISKS INVOLVED.

3
TABLE OF CONTENTS

• INTRODUCTION
• CURRENT SITUATION IN CR
• FUTURE GROWTH POTENTIAL IN CR
• KBC POSITIONING IN CR

4
COUNTRIES WITH KBC PRESENCE
POLANDpopulation 38.2m GDP 46 bank
assets 104m
CZECH REPUBLICpopulation 10.2m GDP 73 bank
assets 80m
SLOVAKIApopulation 5.4m GDP 51 bank assets 24m
HUNGARY population 10.1m GDP 61 bank assets
56m
SLOVENIA population 2.0m GDP 77 bank assets 22m
) GDP per capita - EU25100 (PPP) ) as of
the end of 2003 (EUR)
Source OECD, Statistics of National Banks
5
WHERE WILL THE VALUE CREATION COME FROM IN CR IN
FUTURE ?

• MA Activities
• Limited on the local market (privatization
  completed 85 of bank equity and 96 of bank
  assets in hands of foreign strategic investors
  KBC, ERSTE, SG, HVB, GE etc.)
• Market concentrated enough (top 3 players have
  75 market share in total bank deposits and 50
  in bank loans the concentration in retail
  banking is even higher as top 4 players have 85
  in retail deposits and 90 in retail outstanding
  loans)

• Cost Management
• Main strategic focus after strategic takeover
  (centralization of processes such as back-office
  activities headcount rightsizing close control
  of central procurement etc.)
• Still not sufficiently exploited

• Revenue Based Growth
• Large potential (low penetration of the
  population and companies with financial products
  low loan to deposit volume ratio compared to EU
  countries etc.
• Dynamic volume growth in key products

6

• INTRODUCTION
• CURRENT SITUATION IN CR
• FUTURE GROWTH POTENTIAL IN CR
• KBC POSITIONING IN CR

7
RETAIL LOANS SPEEDED UP COMPARED TO RETAIL
DEPOSITS IN 2001-2003
Percent
Source CNB, Czech Statistical Bureau (data
without individual entrepreneurs)
8
LEVEL OF HOUSEHOLDS DEBT IS FAR BEHIND THE
EURO-ZONE AVERAGE
Retail loans as of GDP (2003)
48
10
8
) Including mortgages and building loans )
Including loans provided to individual
entrepreneurs, non-residents etc.
Source ECB, CNB, NBS
9
CZECH FAMILIES HAVE IMPROVED THEIR STANDARDS OF
LIVING
INCREASING PURCHASING POWER REDUCES FUTURE
UNCERTAINTY AND ENHANCES WILLINGNESS TO BOROW
MONEY
1990 BASE LINE 100
Source Czech Statistical Bureau
) Average Czech Family owes over EUR 3 thousand
at the end of 2003
10
PORTFOLIO OF THE MOST DEMANDED PRODUCTS HAS
CHANGED SINCE 1990
2004 Future
Mortgages SME Loans Consumer Lending Mutual
Funds Pension Funds Life Insurance
Consumer Lending Building Savings Building
Loans Mutual Funds Life Insurance
2001-2003
Building Savings Saving Deposits Car
Leasing Non-bank consumer credits
1996-2000
SME Loans Current Accounts Saving Deposits
1990-1995
Saving Deposits Social Loans
Before 1990
11
PENETRATION OF RETAIL CLIENTS WITH BASIC PRODUCTS
IS LOW
Source GfK Research Czech Republic (Spring
2004)
12
PENETRATION OF SME WITH PRODUCTS IS ALSO FAR
BEHIND THE POTENTIAL
COMPANIES
INDIVIDUAL ENTREPRENEURS
Source GfK Research Czech Republic (Spring
2004)
) firms with annual turnover up to EUR 10m
13

• INTRODUCTION
• CURRENT SITUATION IN CR
• FUTURE GROWTH POTENTIAL IN CR
• KBC POSITIONING IN CR

14
WHICH CLIENTS WILL BRING THE HIGHEST REVENUE
GROWTH?
RETAIL

• Insufficient penetration with financial products
• Growing wealth of the population
• Unexploited marketing instruments (propensity
  models etc.)
• Robust risk management techniques (scoring-based)

?

• Unsaturated clients needs (only 5 of SME have a
  loan)
• Interesting margins and fees
• New business opportunities resulting from EU
  accession
• Risk management (new scoring based methods)
• Gradually reducing fees from FX transaction
  (accession to the Euro-zone)

SME
?
CORPORATE

• Growing profits resulting in higher volume of
  deposits
• Limited potential in terms of number of customers
• Significantly penetrated with loan and leasing
  products
• Highly competitive market squeezing margins

?
15
WHAT FACTORS WILL SHAPE FUTURE RETAIL BANKING IN
CR ?

• Former antipathy of households against money
  borrowing originated from the communist-time has
  been gradually disappearing
• Demographic development
• strong generation in their 30s has financing and
  life-time investment needs (life insurance,
  pension funds)
• strong generation in their 50s (becoming retired
  in 5-10 years) require mainly short-term
  investments (mutual funds)
• Continuing enhancement of living standards
• Interest rates will very likely stay at current
  low level

16
STRONG POPULATION YEARS ARE BECOMING ACTIVE
Thousand of people
25-35 years old population now
Newly-born children in a given year
Source Czech Statistical Bureau
17
MORTGAGE SEEMS TO BE A KEY DRIVER IN RETAIL
LENDING
CAGR 2004-2007
EUR Billion
167
32
90
68
20
51
38
8
) Fixed exchange rate of 31 CZK/EUR )
2004 Forecast based on the actual results in
October 2004 ) Including consumer loans,
overdrafts, credit cards and other loans
Source CNB, CSOB Forecast
18
PENSION FUNDS AND MUTUAL FUNDS WILL MAINTAIN
THEIR HIGH GROWTH
EUR Billion
CAGR 2004-2007
543
10
435
405
17
376
354
10
15
3
) current and saving accounts ) technical
reserves of life insurance
Source CNB, CSOB Forecast
19

• INTRODUCTION
• CURRENT SITUATION IN CR
• FUTURE GROWTH POTENTIAL IN CR
• KBC POSITIONING IN CR

20
SUMMARY

• Revenue growth is the topic for value creation in
  the future
• Imbalance in deposit to loan ratio of the banking
  industry shows clear potential
• Key segments of growth potential are SME clients
  and individuals (specifically the affluent
  segment)
• Housing needs will drive the credit market growth
• Improving regulatory framework will play an
  important role

21
CSOB POTENTIAL
22
GROWTH IN CEE COUNTRIESCzech Evidence

• Jaromír Sladkovský
• FPK Conference, London
• 14 December 2004

23

• INTRODUCTION
• CURRENT SITUATION IN CR
• FUTURE GROWTH POTENTIAL IN CR
• KBC POSITIONING IN CR
• APPENDICES ON THE KBC GROUP

24
TOP-20 IN EUROLAND BANKING ()
Dec 2003
Nov 2004
Dec 2002
1 BNP Paribas (35 bn) 1 BNP Paribas (45 bn) 1 BSCH (57 bn)
2 BSCH (31 bn) 2 BSCH (45 bn) 2 BNP Paribas (48 bn)
3 BBVA (29 bn) 3 Deutsche Bank (38 bn) 3 BBVA (42 bn)
4 Deutsche Bank (26 bn) 4 BBVA (35 bn) 4 Deutsche Bank (35 bn)
5 ABN AMRO (25 bn) 5 Société Gén. (31 bn) 5 Crédit Agricole (35 bn)
6 Société Gén. (24 bn) 6 ABN AMRO (30 bn) 6 Société Gén. (34 bn)
7 Unicredit (24 bn) 7 Crédit Agricole (28 bn) 7 ABN AMRO (32 bn)
8 Fortis (22 bn) 8 Unicredit (27 bn) 8 Unicredit (27 bn)
9 Crédit Agricole (14 bn) 9 Fortis (21 bn) 9 Fortis (26 bn)
10 Dexia (14 bn) 10 Intesa BCI (18 bn) 10 Intesa BCI (21 bn)
11 Intesa BCI (12 bn) 11 Dexia (16 bn) 11 Dexia (18 bn)
12 Allied Irish Banks (12 bn) 12 San Paolo IMI (15 bn) 12 KBC (18 bn)
13 Bank of Ireland (10 bn) 13 KBC (11 bn) 13 San Paolo IMI (15 bn)
14 KBC (9 bn) 14 Bco Popular (11 bn) 14 Allied Irish Banks (12 bn)
15 San Paolo IMI (9 bn) 15 Allied Irish Banks (11 bn) 15 HVB (12 bn)
16 Banco Popular (8 bn) 16 Bank of Ireland (11 bn) 16 Bank of Ireland (11 bn)
17 HVB (7 bn) 17 HVB (10 bn) 17 Bco Popular (10 bn)
18 Mediobanca (6 bn) 18 Commerzbank (9 bn) 18 Commerzbank (9 bn)
19 Bca MPS (6 bn) 19 Mediobanca (7 bn) 19 BA-CA (9 bn)
20 Bco Popular (5 bn) 20 Bca MPS (6 bn) 20 Mediobanca (9 bn)
() DJ Euro Stoxx Banks Constituents - Ranking
by Market Capitalization Situation as at 16 Nov
2004
25
PROMINENT PLAYER IN 2 MARKETS
Breakdown of revenue
Treasury other 9
Belgium 48
Financial markets 11
Internaternational corporate 7
CEE25

• Top financial player in Belgium
• Succesfully expanded in 5 most advanced countries
  in CEE (new EU)
• Selected other areas international
  mid-corporate banking (mostly in W. Eur.) and
  financial markets
• As investments in CEE have continued to increase,
  the other activities have been progressively
  scaled down

26
TOP-3 PLAYER IN THE CEE REGION
International banks in CEE (by total assets, in
bn EUR)
Source RZB assets as at 31 Dec 03,
ownership structure as at 30 Jun 04

• KBC is one of the largest international players
  in the region
• In contrast to the other players, KBC limits its
  presence to the new EU Member States (the Czech
  Republic, Slovakia, Hungary, Poland and Slovenia)
  and is active in both the banking and insurance
  fields

27
CHALLENGING FINANCIAL TARGETS
Core targets
Minimumtargets for 2005
Cost/income ratio, banking 58 Combined ratio,
non-life insurance 95 EPS growth (4-y
CAGR) 10 Return on equity, Group 16 Return on
allocated capital - Retail in Belgium 16
- Central and Eastern Europe 17 -
Corporates 12 - Financial markets 18 Tier-1
ratio, banking 8 Solvency margin, insurance 200
Capital allocated on the basis of risk-weighted
assets and non-amortised goodwill
28
SOLID GROUP PERFORMANCE
Dec 02
Dec 03
Sep 04
Trend
Return on equity
Profitability
13
13
17

Growth in EPS
1
8
36

Efficiency
Cost/income, banking
65
65
60

Combined ratio, insurance
101
95
94

Solvency
Tier-1, banking
8.8
9.5
9.6

Solvency, insurance
320
316
341

Combined ratio, insurance excluding reinsurance.
Solvency, insurance including unrealized gains.
29
STRONG EARNINGS MOMENTUM
9M 04 profit 40 year-on-yearWell on track to
deliver on all our targets
3-y CAGR 15
Net profitin m EUR
1 537
Consensusestimate
1 119
1 034
1 022
1 201
Consensus estimate as at 7 December 2004
30
STEADILY GROWING DIVIDEND
EPS
DPS
EUR
EUR
Payout ratio
Dividend yield
31
VALUATION
Valuation relative to peer group

• Key figures
• Share price 57.3 EUR
• Net Asset Value 38.2 EUR
• Analysts estimates
• EPS 2004 consensus 4.97
• EPS 2005 consensus 5.27
• P/E 2005 10.9
• Analysts recommendations
• Positive 41
• Neutral 23
• Negative 36

P/E 05
CEE banks (1) 13.4
CEE-exposed banks (2) 12.1
Euro-zone banks (3) 11.6
KBC 10.9
BEL banks (4) 9.9
Unweighted average of IBES data (1) OTP,
Komercni, Pekao, BPH PBK, BRE (2) Erste,
Unicredit, BA-CA, Soc Gen, Intesa BCI (3) Top 20
of DJ Euro Stoxx banks (4) Fortis, Dexia
Situation as at 7 December 2004