KBC Bank

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Foto gebouw
KBC Bank Insurance GroupAnalysts meeting
2
Overview of earnings headlines Performance,
banking Performance, insurance Performance, areas
of activities Outlook
3
Proud to deliver strong earnings
1H 04 profit 869 m EUR 44 year-on-yearROE
18.5
Net profit m EUR
1H04 profitcontribution
476
392
Insurance95 m EUR
316
304
300
287
Q avg02-03 (269)
280
259
256
Banking 786 m EUR
152
Holding- 12 m EUR
Especially strong momentum in banking
4
Key points 2nd quarter 2004

• Net profit (476 m) at very high level, up 59
  y-o-y and 21 q-o-q
• Strong operating result (26 y-o-y) driven by
  robust top-line growth (10) (especially in
  banking) and strict cost control (1)
• Operating result up 5 q-o-q on the back of lower
  expenses (-3) and the very low claims ratio in
  non-life (57)
• Record level in life premium income in Belgium (1
  030 m)
• Sustained low credit risk charges (77 m),
  including Poland (8 m)
• Strong rebound of the profit contribution from
  CEE operations (up 51 q-o-q and multiple 6
  y-o-y, bringing ROAC for the quarter to 18 )
• In line with previous quarter highly satisfying
  return of asset management, corporates and
  financial markets. Return of retail activities in
  Belgium somewhat less favourable than in previous
  quarters.
• Exceptional write-back of provisions (52 m),
  mainly thanks to a favourable courts decision on
  a tax-issue

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Key points 1st half 2004

• Substantial increase in profitability - net
  profit (869 m) up 44 y-o-y
• Very strong underlying revenue growth, especially
  in banking
• Top-line growth in banking 8
• Organic premium growth in insurance 11, but
  pressure on investment yields
• Expenses well under control and risk charges low
• Cost/income ratio, banking at 59
• Loan loss ratio, banking at 21bp
• Combined ratio (non-life) at 94
• No net support impact of exceptional items
• Extraordinary income (51 m), mainly the capital
  gain on Belgacom
• Significant provisioning for various other
  liabilities and charges(net -28 m after
  write-back of tax provision in Q2)
• In insurance impairments on equity portfolio
  (net -25 m after use of provision for financial
  risks and gains on investment securities)
• Well on track to deliver on all our financial
  targets

6
Key points 1st half 2004
Target
1H 04
FY 03
High profitability
Return on equity
18
13
16
Growth in EPS
40
8
10
Cost/income, banking
59
65
58
Efficiency
Expense ratio, non-life
31
30
0.71
Loan loss ratio, banking
0.21
Controlled risks
Claims ratio, non-life
63
66
9.5
Tier-1, banking
Solid solvency
9.4
8.0
316
Solvency, insurance
200
322
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Impact of consolidation changes

• Main changes in scope of consolidation
• Full consolidation of WARTA Insurance (Poland)as
  of 1Q 2004 (previously equity method)
• Premium income 195 m EUR(1H04),4/5 non-life
  (22 of non-life total of the Group)
• Impact on Group top-line (1H04) 1.9
• Impact on bottom-line (1H04) - 0.6

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Overview of earnings headlines Performance,
banking Performance, insurance Performance, areas
of activities Outlook

9
Solid quality of banking earnings
1H 2004
Year-on-year comparison
275 m
- 48 m
22 m
Positive impact of operational items 249 m EUR
459 m
Underlyingrevenue growth 10
Expenses- 1
Capitalgains- 26
Net profit1H 2003
Highlights Banking Insurance Areas of
activity Outlook
10
Strong growth of operational income
1H 2004
Quarterly income (m EUR)

• Total 1H04 income up 8 y-o-y
• Interest income up 7, driven by increased
  deposit spreads. Net interest margin up y-o-y
  from 1.63 to 1.73
• Sustained high commission income (4), partly on
  the back of income growth out of corporate
  finance and investment management
• Robust trading revenue (43) after somewhat
  depressed2003 numbers
• Capital gains on investments (4 of total) down
  26 y-o-y
• Q2 lower than Q1 mainly due to seasonal effect
  for commissions and lower trading income

1572
1522
1452
1424
1416
1364
Highlights Banking Insurance Areas of
activity Outlook
11
Asset growth

• Accelerating growth of customer loan book ytd up
  5 (gt 10 annualised)
• Sustained considerable growthin mortgages ytd
  up 8
• Belgium 4
• Hungary 21
• Czech Rep. 18
• Poland 11
• Sound growth in corporate lending, in line with
  economic cycle ytd up 4 (o/w in CEE Hungary
  and C/SR both 8, Poland 9)
• Risk-weighted assets (97 bn) ytd up 2

Customer loans (in bn EUR)
98
98
90
excl. reverse repos
Highlights Banking Insurance Areas of
activity Outlook
12
Development of interest margins
Interest margin, Group
Spread on new loans, Belgium
Highlights Banking Insurance Areas of
activity Outlook
13
Sensitivity to changes in interest rates
ALM TRANSFORMATION POSITION
Basis-Point-Value
90
80
70
60
50
(in mln. EUR)
40
30
20
10
0
May 02
Jul 02
Sep 02
Nov 02
Jan 03
Mar 03
May 03
Jul 03
Sep 03
Nov 03
Jan 04
Mar 04
May 04
Risk
Quarterly averages
Limit
The interest rate sensitivity has been greatly
reduced over time

• The BPV is the expected change in the market
  value of the banking bookif interests were to
  fall by 10 bp across the entire curve

Highlights Banking Insurance Areas of
activity Outlook
14
Sensitivity to changes in interest rates

• The interest rate risk of the customer loan book
  is fully (macro) hedged
• The interest rate is mainly related to the
  excess liquidity (the excess of the customer
  funding base that is not invested in loans). This
  deposit base (without notice) is cyclically
  re-invested in bonds (duration 3 years).
• The impact of an increase in interest rates
  (0.25 parallel shift of the yield curve)
• On the value of the banking book (BPV) -37 m
• On the unrealized gains of the bonds portfolio in
  the banking book -284 m
• On the P/L highly dependent on the need for
  repricing of the savings deposits (pricing quite
  inelastic to changes of market rates)

Highlights Banking Insurance Areas of
activity Outlook
15
Expenses well under control
1H 2004

• 1H04 cost basis down 1 y-o-y (-23 m)
• Q2 lower than Q1, though mainly on the back of
  lower trading income
• In Belgium 1H04 -3 y-o-y (-34 m). Headcount
  continued to reduce at 440 FTE ytd (y-o-y -860 m
  or -7)
• CEE 1H04 -1 y-o-y (-7m). 80 of planned
  headcount reduction achieved in CR and gt100 in
  Poland
• Elsewhere 1H04 7 (18 m), mainly related to
  trading bonuses
• Cost/income ratio significantly improved to 59
  from 65

Quarterly expenses (m EUR)
938
929
931
910
928
897
Highlights Banking Insurance Areas of
activity Outlook
16
The joint venture with Rabobank
Shared platform for securities processing

• Up front investment charge
• procurement of core system, customisation
  plug-in
• staff redundancy
• - cost saving for development of own platform

Recurring cost savings 15-20 m per year
Expected payback period of 2-3 yr
Highlights Banking Insurance Areas of
activity Outlook
17
Headcount development in Belgium

• Since end 2001 till mid 2004 zero hiring
  policy
• In principle, no new entrants
• Exception made for IT and very specific jobs
  (111 in 02, 58 in 03 and 21 in 04)
• Headcount down with 2 200 FTE without forced
  redundancies
• As of 2005
• New hirings 300-400 p.a. (to start gradually as
  of Oct-04)
• Trend to increased part-time employment and
  longer (higher age) employment (gradual closing
  down of early retirement concept)
• Headcount expected to remain more or less stable

Highlights Banking Insurance Areas of
activity Outlook
18
Limited loan provisioning
1H 2004
Quarterly loan provisions (m EUR)

• Loan loss provisions in 1H04 at very low level, ,
  down 45 y-o-y (charge of 21 bp versus 71 bp for
  FY03)
• Very low loan loss charges again in Belgium (16
  bp), in C/SR (13 bp, excl. recuperation of
  written-off loans) and in the international
  corporate loan book (18 bp)
• Loan losses in Poland only 12 m (charge of 64 bp,
  below market average)
• Somewhat higher loan loss charge in Hungary (83
  bp, excl. the write-back of a general provision),
  on the back of a small number of problem loans
  (no general deterioration of asset quality
  expected)

252
204
141
79
77

43
Net specific provisions to average gross customer
loans
Highlights Banking Insurance Areas of
activity Outlook
19
Overview of earnings headlines Performance,
banking Performance, insurance Performance, areas
of activities Outlook
20
Continued fast growth of premiums
1H 2004
Quarterly premium income (m EUR)

• Sustained robust growth in Life (mainly in
  Belgium)
• In organic terms, up again in 1H04 13 y-o-y
  (record level of 1.9 bn EUR)
• Higher interest for linked products in Q1
  reversed in Q2 (38 of 1H total)
• Belgian life market expected to continue to
  outgrow GDP driven by ageing population
• Non-life in organic terms up 5
• Primary (direct) business 8
• Drop in re-insurance -8
• 32 of premium volume is currently realized in CEE

1373
1245
1219
957
712
599
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Favourable underwriting performance in non-life
1H 2004

• 1H04 combined ratio at good level (94)
• Combined ratio down 2 pp y-o-y on the back of
  lower claims charges, especially in CEE and R/I
• Claims ratio CEE down y-o-y to 62 from 75
• Claims ratio R/I down to 66from 76
• Much more favourable claims environment in Q2,
  strong driver for q-o-q insurance earnings
  growth
• In Belgium claims charges q-o-q down 29 m (ratio
  56 vs 69)
• In CEE (esp. CR and Poland) claims charges q-o-q
  down 12 m (ratio 55 vs 76)

107
106
104
99
94
95
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Enhancing cross-selling of insurance products in
Belgium
Cross-sellingsmall business customers
Premium incomenon-life(1999 100)
KBC- bank branches
Insurance
Banking
Total market - traditional network
66
12
22
Total market - bank branches
6 months 2004

• Untapped potential, especially for SME customers
  (cross-selling ratio at 22 versus 40 for
  individuals)
• Non-life growth via banking network materially
  higher than traditional channels (though impact
  on market share still moderate)

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Insurance business suffering from low investment
yields
Investment return downto 5.4 from 6.0
Corresponds for 2004 with 7.3 of the market
value of the portfolio ( 10 years adjusted
average)
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Insurance business suffering from impairments on
equity portfolio

• Adverse P/L-impact (-163 m) partly compensated by
  write-back of provision for financial risks (93
  m) and capital gains (44 m)
• Additional impairment of 44 m expected in H2
  (mainly in Q3)(market level of Aug 2004)

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Investment strategy,insurance business
Portfolio Belgium 75 of total
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Investment strategy, insurance business
Inflow Belgium 80 of total
Tactical over/underweighting typically within
5-10 deviation margin. Further limits are
related to currency, type and rating of
counterparty, type and liquidity of security,
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Overview of earnings headlines Performance,
banking Performance, insurance Performance, areas
of activities Outlook
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Areas of activity
1H 2004
Areas of activity
Retail
CEE
AM
Corporate
Markets
Highlights Banking Insurance Areas of
activity Outlook
29
Robust performance in Belgian retail
Profit contribution (m EUR)
1H 2004

• 1H profit contribution 226 m (ROAC 15), down
  5 due to a 55 drop in contribution from
  insurance
• Banking profit up 57 y-o-y driven by strong
  income growth (9), maintained cost control (C/I
  down from 80 to 74 ) and sustained low level
  of problem loans (loan loss ratio 5 bp).
  Contribution from subsegment private banking up
  from 10 to 20 m.
• Although strong premium income, pressure on
  insurance contribution due to higher claims ratio
  (63 vs 60 in 1H 03), especially in Q1, and
  lower investment yields
• Q2 less favourable in banking (partly seasonal),
  but much better in insurance (low claims charges)

125
124
122
117
108
102
1H04 at a glance RevenueExpensesCredit risk
Highlights Banking Insurance Areas of
activity Outlook
30
Expanded horizons in CEE paying off
Banking results 1H04
Contribution to group profit excl. minority
interests, excl. return on excess capital and
incl. allocated Group overhead.

• CR SR strong contribution to Group profit
  driven by a) robust revenue growth in retail and
  treasury (improved interest-rate environment)
  and b) the sustained low loan loss ratio (13 bp,
  excl. recuperation of written-off loans)
• Hungary strong return on the back of favourable
  revenue development (but also including a one-off
  positive impact from a credit provision
  write-back)
• Poland "in black again" thanks to a) progress
  in the cost reduction program, bringing expenses
  down 6 y-o-y and b) much lower loan losses (12
  m)

Adjusted for currency effect
Highlights Banking Insurance Areas of
activity Outlook
31
Expanded horizons in CEE paying off
CEE
1H 04 (m EUR, chg yoy)
CSOB
KH
KB
NLB
Insurance
Highlights Banking Insurance Areas of
activity Outlook
32
Performing asset management activities
Belgium 86
CEE 5
1H 2004
Profit contribution (m EUR)

• Profit contribution 71 m (after allocation of
  distribution fee to retail business), up 8
  thanks to higher AUM, cost control and
  (structural) lower tax pressure
• Assets (97 bn) up 14 y-o-y (of which ½ net
  inflow)
• Mutual funds (47 bn) 13
• Private assets (17 bn) 20
• Institutional assets (21 bn) 13
• Group assets (11 bn) 11
• Assets in 2Q04 up 3 q-o-q (of which 85 net
  inflow) and in 1H04 up 9 ytd (of which 60 net
  inflow)

42
37
35
34
34
31
1H04 at a glance RevenueExpenses
Highlights Banking Insurance Areas of
activity Outlook
33
Corporate activities stepping up
1H 2004
Profit contribution (m EUR)

• 1H profit contribution 193 m, up 136 (ROAC 20)
  mainly driven by lower loan loss provisions (and
  increased revenue)
• Turnaround in banking (started in 2H03)
• Substantially lower cost of risk (21 bp in 1H04
  versus 65 bp in 1H03)
• Gross income margin up y-o-y from 2.4 to 2.7
  (increased fee business)
• Cost/income down from 39 to 36
• Profit increase most remarkable in ME/corporate
  Belgium, corporate US and the global
  structured finance activities.
• Better return in re-insurance thanks to improved
  underwriting performance (CR 92 versus 100 in
  1H03)

100
93
90
62
43
39
1H04 at a glance RevenueExpensesCredit risk
Highlights Banking Insurance Areas of
activity Outlook
34
Good performance in financial markets
1H 2004
Profit contribution (m EUR)

• 1H04 profit contribution 129 m, up 75 (ROAC
  23) mainly driven by strong income growth
• Sustained strong performance in M/CM
• Strong rebound in in equity derivatives business
  (up 153 y-o-y) driven by significant growth in
  trading income, the non-recurrence of negative
  MtM (for long derivatives taken in 2003) and
  additional commission income out of (structured)
  investment management
• In line with strategic focus, modest profit
  amount for cash equity business (7 m)
• Q2 profit apparantly similar to Q1, though thanks
  to a 15 m exceptional. Underlying trend down
  35 q-o-q to 51 m (lower income in 2nd half of
  Q2)

66
64
41
41
33
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1H04 at a glance RevenueExpenses
Highlights Banking Insurance Areas of
activity Outlook
35
Overview of earnings headlines Performance,
banking Performance, insurance Performance, areas
of activities Outlook
36
Outlook 2004

• Strong 1H04 revenue momentum is likely to
  slowdown in 2H04
• 2H04 loan loss level expected to be much lower
  than in 2H03
• Commitment to sustained strict cost and
  underwriting discipline in 2H04
• On balance, FY04 net earnings are expected to be
  at least 20 higher than FY03
• If the current economic and financial climate
  proves to be more or less sustainable
• Assuming stable stock exchange levels

Highlights Banking Insurance Areas of
activity Outlook
37
Foto gebouw
KBC Bank Insurance GroupAnalysts meeting