Transcript KBC Bank & Insurance Group

KBC Group
Sanford Bernstein Conference
Merrill Lynch Conference
28 September 2005 - 5 October 2005
Web site: www.kbc.com
Important information

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

KBC believes that this presentation is reliable, although some information may be condensed or
incomplete

This presentation contains forward-looking statements with respect to our earnings development
involving assumptions and uncertainties. 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 possesses sufficient
expertise to understand the risks involved
2
Introduction: strategic framework

The strategic framework entails:

Focused business scope:

Retail-, bancassurance- and wealth-management-oriented

Geographical focus on Belgium and CEE and selected Western European markets

Standalone basis:

no M&A ambitions (neither domestic, nor cross-border - neither as acquirer, nor as
target)

however, opportunistic operational alliances possible in certain areas to generate
cost advantages through scale (‘industralization’ of operations)

Solid level of financial strength/solvency

Attractive shareholder return, including steady dividend growth
3
Introduction: business mix
Selected other markets (mostly in W. Europe):
20%
CEE:
- retail bancassurance
- asset management
- private banking
- commercial banking
(SME/corporate)
- private banking
- commercial banking (SME/corporate)
- capital markets
55% Belgium:
25%
Revenu geographical breakdown
(1H 2005)
- retail bancassurance
- asset management
- private banking
- commercial banking
(SME/corporate)

KBC is a top bancassurer and asset manager in Belgium and has successfully expanded its
operations in CEE-5, its 2nd home market

Recently, private banking has become more of a key focus. The PB business was expanded to
include a Western European network.
4
Market share
HIGH
Business mix: growth profile
Commercial
banking
Belgium
Slovenia
Retail
Belgium
Czech Rep.
Private
banking
Belgium
Hungary
LOW
Slovakia
International
commercial
banking
LOW
European
private banking
Market growth
potential
Poland
HIGH
Based on KBC estimates

Main facts:

70% of gross income is realized in markets with leading market positions (i.e. Belgium and
most CEE countries)

An increasing share of income (currently 30%) is generated in high-growth markets (CEE)

Key strategic topics:

Topic 1: securing growth trend in (mature) Belgian market, given its size

Topic 2: further increasing share in high-growth markets, inter alia, by boosting market
power in countries where KBC has sub-optimal scale (mainly Poland)
5
HIGH
LOW
Retun on allocated capital
Business mix: value profile
Private banking
Belgium
Bancassurance
CEE
Retail
bancassurance
Belgium
Commerial banking
Belgium
International
commercial banking
European
private banking
LOW
Allocated capital
HIGH
Based on selective 1H2005 data, adjusted for one-offs

Main facts:

85% of capital employed is allocated to businesses yielding 20% or more (roughly twice
the cost of capital) – no activity is value-destroying

On the other hand: 15% of total capital base (2.3 bn) is ‘immediate free surplus’ capital

Key strategic topics:

Topic 3: shifting European private banking into much higher gear

Topic 4: adequately employing excess capital
6
Topic 1: drivers for growth, Belgium
Do not underestimate market potential:





Savings ratio amongst highest in the world (every
year, ca. 15% of GDP flows into fin. assets)
Market highly receptive to cross-selling of AM &
insurance, fueling strong growth trend in AM and
life insurance business
Strong mortgage growth trend (ca. 10% per year)
expected to continue, as residential property
price levels are still below other European
markets
After a temporary surge of price competition (late
2004/early 2005), epecially for interest-bearing
products, pricing rationality is tending to be
restored
Fee rates for retail banking services only 50% of
European average (gradual increase expected)
KBC Group is well positioned:





Top-3 market position, esp. strong in Northern
region (one of the wealthiest regions in the EU)
Innovative product offering in retail AM (steadily
increasing market share over the past 10 yrs.)
Still high cross-selling potential for insurance
products and well-performing bancassurance
distribution model
Well-diversified revenue structure (50% fee
income) and further increase in fee income
targeted (e.g. in SME/corporate)
Of the top players, level of customer satisfaction
is high(est)
7
Mid-term financial outlook, Belgium
Gross income
C/I, banking
LLR
Net profit
Retail
5% CAGR
Low 60s
< 0.25%
>10% CAGR
Business
customers
>2% on RWA
< 43%
< 0.35%
>10% CAGR
8
Topic 2: growth drivers in CEE
Strong market-growth momentum:
KBC Group is well positioned:

Nom. GDP growth in 2005-07 at 6.5% yearly,
outgrowing EMU by 3-3.5%
 Solid market position in retail and corporate
Ongoing catch-up in product penetration
(currently, on avg., only 45% of the population
has a bank account and 5% a mortgage loan)
 Competitive advantage in enhancing cross-selling of


Mortgage volumes growing at double-digit pace
(up by 32%, annualized, in 1H05)

Financial sector could grow five-fold if financial
assets to GDP were to reach current levels of S.
Europe
businesses with nationwide branch networks

asset management and insurance products and well
positioned in HNWI and private banking through epb
know-how
Availability of capital within the Group for:

buy-out of third-party interests or
selective bolt-on M&A

more aggressive organic growth in
Poland since immediate M&A
opportunies are not expected

Potential entrance into Romanian market
9
Bancassurance fueling CEE earnings
Now the model is in place:



=
Transfer of know-how and streamlining of
business processes and IT systems
Implementation of KBC’s distribution model
and setting up of sales incentives and
adequate sales approach
Unified management responsibility (joint
management committee of bank and
insurance)
competitive advantage relative to other CEE
players
Cross-selling results are encouraging:
KBC
Cross-sell
rates
2004
CZ
HU
PL
SK
BE
Consumer
loan
X
Life
83%
50%
100%
94%
67%
Mortgage
loan
X
Life
45%
50%
100%
75%
67%
Mortgage
loan
X
Property
insurance
54%
71%
42%
30%
50%
10
Growth in AM fueling CEE earnings
KBC is well positioned:
Results are encouraging:

Strong appetite for ‘risk-free’ investments in
the market, fully in line with KBC’s core
competencies and successful track record in
Belgium for capital-guaranteed funds

Cost/AUM below average (around 15 bps vs.
20 bps for Europe)
=

AUM grew in 1H05 by 40%, annualized.
Continued high growth expected in coming
years

Via the funds business, new customers are
being recruited. Existing customers who use
deposits to buy funds replenish their deposit
accounts after one year
competitive advantage relative to other CEE
players
Market
share
2003
2004
1H05
Trend
CZ
19%
22%
26%
+++
HU
8%
9%
11%
++
SK
6%
7%
8%
+
SLO
-
8%
10%
++
PL
3%
4%
4%
+
11
Mid-term financial outlook, CEE
Banking
Insurance
AM
RWA
CAGR
Net profit
CAGR
Loan-loss
ratio
Cost/Income
ratio
10% – 15%
10% – 15%
< 0.50%
< 60%
Premium income
CAGR
Net profit
CAGR
Combined
ratio
15% – 25%
25% - 35%
95%
AUM growth,
mutual funds
AUM growth,
pension producs
15% – 20%
10% - 20%
12
Topic 3 : value drivers in private banking
Business model: integrated private banking business in selected European markets focusing on clients
with >€1m of investable assets. The network has been built over the past few years via separate
acquisitions. Operations need to be further integrated. Total assets currently amount to 76 bn (Sep-05)
Belgium
W. Europe onshore
W. Europe offshore
CEE

Dual brand strategy:
network-led vs.
‘independent boutique’

Integrated network of local
pure-play private banking
brands (boutique style)

Low-growth market, focus
on profitability (leveraging
the hub)

Small today, but strong
market growth expected
(>15% p.a.)

Growth drivers: network
trade-up, extension of
product offering and
hiring of private bankers

Priority of reducing costs by
creating synergies within a
central ‘hub’

If possible, steer repatriated
assets to KBC onshore


Growth drivers: increased
share of wallets, hiring of
PB managers and
opportunistic M&A
Strengthening a
network-led model,
leveraging Belgian
experience
AUM 27 bn
AUM 18 bn
AUM 3 bn
AUM 28 bn
AUM expected to growth at 9% CAGR on an organic basis.
Opportunistic acquisitions may imply investments of 150-250 m per year
13
Merger synergies in private banking
The KBC-Almanij merger enables synergies to be achieved via cost-cutting and cross-selling.
The total benefit amounts to 75 m euros (pre-tax) per year (50% will already be realized as of 2006)
Source of benefits*
€m
80
3.9
1.0
74.6
70
12.6
60
50
27.7
40
30
12.6
20
10
0
16.7
Cross
New
Optimisales business zation
Pro- People
curement
Costs Total
avoided
* Synergy benefits defined as peak recurring annual increase in pre-tax bottom-line result (2009 - peak level)
14
The private banking hub
Our endgame vision of the hub



Centralized global custody services,
processing/settlement of international
payments and processing of financial
market transactions (for all major asset
classes i.e., Cash, Bonds, Equities, Funds,
Structured Products)
Full harmonization of major IT tools
Front-office support: product sourcing and
design capability and ‘Centres of
Excellence’
Organizational impact

Back office: great majority of local back-office costs
eliminated

Dealing rooms: a minimum level of local market
activities will remain

IT: only local IT support will remain

Significant reduction in other overheads
Cost/income ratio to be improved from 67% (2004) to 55%
15
Mid-term financial outlook, private banking
Private Banking
AUM growth
Net profit
Cost/Income
9% CAGR *
10% CAGR
< 55%
*14% Belgium, 15% CEE, 0% offshore and 10% W. Eur. onshore
16
Topic 4: valuing excess capital
Capital position
Total
Available
capital 1
Surplus
capital 2
Immediate
free surplus 3
14.7 bn
4.3 bn
2.3 bn
Internal capital budget requirements
Deleveraging of the holding company
0.4 – 0.6 bn
Buy-out of 3rd parties in CEE
0.8 – 1.3 bn
External growth in CEE
1.0 – 2.0 bn
Total
2.2 – 3.9 bn

Immediate free surplus capital amounts to 2.3 bn, primarily to be spend in CEE

KBC currently conducting ‘due diligence’ for BCR in Romania. Outcome expected to be
known in the coming months
1 Regulatory
capital under Basel I/Solvency I (incl. hybrids and minority interests, after elimination of intangibles and goodwill),
based on capital position as at 30/03/2005
2 Difference between available capital and internal minimum level
3 Surplus capital excl. expected adverse IFRS impact on Tier-1 banking as of 2006 (ca. 0.6 bn), unrealized gains on tied-up assets
(insurance, 0.8 bn) and value of Agfa-Gevaert
17
HIGH
Conclusion: growth and value proposition
Third-party buy-outs
Acceleration of bancassurance/AM
Assessment of entrance into
Romania (by end 2005)
Slovenia
Higher share of wallet
Higher margin
products
Commercial
Market share
banking
Belgium
Czech Rep.
Selective approach
Efficiency enhancement
International
LOW
Private
banking
Belgium
Retail
Belgium
commercial
banking
LOW
Hungary
Slovakia
European
private banking
Poland
Organic growth acceleration
M&A (mid-term)
HIGH
Market growth
Based on KBC estimates

Attractive growth and value proposal within current franchises.

Main focus is on execution - shift to completely new markets/business lines unlikely

Use of excess capital highly dependent on outcome of privatization round in Romania
18
Conclusion: growth and value proposition
 The ‘growth and value’ outlook is reflected in ambitious mid-term financial targets:
Efficiency:
Financial strength:
Value creation:
Cost/income, banking
max. 58%
Combined ratio, non-life
max. 95%
Tier-1, banking
min. 8%
Solvency margin, insurance
min. 200%
Adjusted ROE
min. 16%
EPS growth (CAGR)
min. 10%
Outlook for 2005: On the basis of the solid 1H 05 earnings and the prevailing view
regarding the relevant economic and financial parameters, KBC’s 2005 net profit is
expected to exceed the10% growth level, amounting to more than 2 bn euros
19
Foto gebouw
Appendices
Market cap ranking in Euroland
DJ Euro
Stoxx Banks
constituents
1
2
BSCH (63 bn)
BNP Paribas (53 bn)
3
BBVA (47 bn)
4
Deutsche Bank (39 bn)
5
Société Générale (39 bn)
6
7
ABN AMRO (37 bn)
Crédit Agricole (33 bn)
8
9
Fortis (31 bn)
Unicredit (29 bn)
10
KBC (25 bn)
11
Intesa BCI (23 bn)
12
Dexia (20bn)
13
San Paolo IMI (18 bn)
14
15
16
HVB (17 bn)
Allied Irish Banks (16 bn)
Bank Austria (13 bn)
17
Commerzbank (13bn)
18
Mediobanca (12 bn)
19
Bank of Ireland (12 bn)
20
Bco Popular (12 bn)
August 2005
21
Shareholder structure
CERA/Almancora
27.1%
MRBB
11.6%
Free float
47.3%
Other committed
shareholders 11.7%
(own shares: 2.3%,
including ESOP hedge)
Situation as at 30 June 2005

KBC is majority-owned by a group of committed shareholders, thereby providing continuity for the pursuit of longterm strategic goals

Core shareholders include the Cera/Almancora Group (co-operative investment company), a farmers’ association
(MRBB) and a syndicate of industrialist families
22
KBC’s presence in CEE
CEE profit contribution to KBC Group
Profit contribution, Poland
25%
2005
H1
2003
2004
-295 m
25 m
Share of business segments
in gross income, CEE Banking
Other
22%
Total assets, bank:
5 bn EUR
Market share, bank:
5% (No. 8)
Market share, life:
3% (No. 7)
Market share, non-life: 11% (No. 2)
SME/Corp
21%
Retail
57%
Profit contribution, CZ + SK
2003
2004
143 m
162 m
Czech Republic
Total assets, bank: 18 bn EUR
Market share, bank: 21% (No. 2)
Market share, life:
8% (No. 5)
Market share, non-life: 4% (No. 6)
Profit contribution, Slovenia
2003
2004
10 m
26 m
Minority stake (34%)
Market share, bank: 41% (No. 1)
Market share, life:
6% (No. 5)
Slovakia
Total assets, bank: 2 bn EUR
Market share, bank: 6% (No. 4)
Market share, life: 4% (No. 8)
Market share, non-life: 2% (No. 7)
Profit contribution, Hungary
2003
2004
11 m
31 m
Total assets, bank:
7 bn EUR
Market share, bank: 11% (No. 2)
Market share, life:
4% (No. 7)
Market share, non-life: 4% (No. 6)
23
Group income statement, 1H 2005
(in m euros)
Banking
Insurance
Net interest income
Gross earned premium, insurance
Dividend income
Net gains from FI at FV
Net realised gains from AFS assets
Net fee and commission income
Other income
1 807
0
67
121
63
605
223
266
1 707
86
4
144
-148
29
-1
0
7
8
1
184
1
Gross income
2 887
2 088
-1 685
-34
-34
1
0
0
17
Profit before taxes
Income tax expense
Minority interests
Operating expenses
Impairments
- o/w on loans and receivables
- o/w on AFS assets
Gross technical charges, insurance
Ceded reinsurance result
Share in results, associated companies
Net profit
Excl. intrasegment eliminations
AM
KBL
epb
Gevaert
Holding
Group
79
0
7
82
21
206
33
-2
0
3
14
37
0
49
-30
0
0
-4
0
-2
235
2 122
1 707
169
225
265
839
330
199
429
101
200
5 660
-254
-20
-1
-18
- 1464
-33
0
-30
0
0
0
0
0
0
-287
-5
0
1
0
0
2
-42
1
1
1
0
0
15
-257
0
0
0
0
0
0
-2 313
-57
-34
-16
-1 464
-33
33
1 185
316
169
137
75
-57
1 826
-306
-96
-66
-4
-43
0
-39
-4
-12
-1
-2
0
-469
-104
784
246
126
94
63
-59
1 253
24
Areas of activity overview, 1H 2005
(in m euros)
Retail
CEE
SME/
Corp.
Markets
KBL epb
1 288
-734
+7
-178
0
383
925
-526
-7
-71
-41
282
508
-183
-34
-84
0
208
410
-235
-2
-67
0
106
429
-289
-5
-39
-4
94
373
-156
-15
-46
-1
155
131
-83
-1
-10
-7
30
47
-15
-4
-10
0
17
Gevaert
Total
Banking and AM
Gross income
Operating expenses
Impairments
Income tax expense
Minority interests
Net profit – group share
3 515
-2 004
-39
-415
-100
1 003
Insurance
Gross income (- tech. chg.)
Operating expenses
Impairments
Income tax expense
Minority interests
Net profit – group share
591
-254
-20
-66
-4
246
Holding Co
Net profit – group share
63
3
63
5%
11%
1 253
Group total
Net profit – Group share
Share in group result
ROAC
Excl. non-allocated results
539
43%
29%
312
25%
54%
225
18%
20%
106
8%
28%
94
8%
16%
20%
25
Valuation
Key figures:

Share price: 66.6 euros

Net asset value: 40.0 euros

1H 2005 EPS: 3.50 euros
Analysts’ estimates: 1



2005 EPS consensus: 5.97 (+33% y/y)
2006 EPS consensus: 6.24 (+4% y/y)
2005-06 P/E: 10.9
Recommendations:



Positive: 42%
Neutral: 42%
Negative: 16%
Valuation relative to peer group:
weighted P/E
2005-06
unweighted P/E
2005-06
CEE banks 2
15.0
15.1
CEE-exposed banks 3
11.6
12.4
Euro-zone banks 4
11.5
12.4
KBC 1
10.9
10.9
BEL banks 5
10.3
10.4
Weighted and unweighted averages of IBES data :
2 OTP, Komercni, Pekao, BPH PBK, BRE
3 BA-CA, Erste, Unicredit, Soc. Gen., Intesa BCI
4 Top-20 DJ Euro Stoxx Banks
5 Fortis, Dexia
Situation as at 18 August 2005
5
Smart consensus collected by KBC (18 estimates)
26
Contact information
Investor Relations Office
Luc Cool
Nele Kindt
Marina Kanamori
[email protected]
Surf to www.kbc.com for the latest update.
27