Transcript Strategy update

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
Revenue breakdown - 2004*
Capital markets
11%
International
SME/corporate 7%
European
private banking
10%
Gevaert
2%
Belgium :
46% - retail bancassurance
- private banking
- asset management
- SME and corporates
24%
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
3
Market headlines
Market shares:
Insurance premiums
Mutual funds
Client deposits
FORTIS
KBC
FORTIS
KBC
FORTIS
ETHIAS
DEXIA
DEXIA
AXA
ING
ING
KBC
Argenta
ING
Other
0%
Other
10%
20%
30%
0%
Other
10%
20%
30%
0%
10%
20%
30%
31-Dec-03
4

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)
Financial highlights, Belgium
Net Profit (mln)
Retail
634
65
1
SME/Corporate
+8%
686
64
569
622
2002
2003
2
+23%
846
121
725
2004
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
2
5
Including bancassurance, private banking Belgium and asset management
Core SME/Corporate activities only (at parent company level)
Business model
Segmented approach by customer group:

Basic activity
(parent company)
Retail
1
6
Specific activities / segments
(subsidiaries)

820 retail bank branches

Funds management (KBC AM)

600 insurance agents

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

Corporate finance(KBC Securities)

4 social profit and public
sector branches

Leasing (KBC Lease)

Factoring (International Factors)

Multinational customers
branch

Diamond center (Antwerp Diamond Bank)

Real estate activities

Re-insurance (Secura)
Mostly SMEs (sales turnover > 8m), incl. 75 large corporate customers
Activities overview
Earnings drivers, retail
Earnings drivers, SME and corporate
Mid-term financial outlook
Sharp increase in productivity
Efficiency
strategy
Strong growth in revenue per FTE
Strong growth in revenue per branch
Revenues per FTE, 1998 = 100
Revenues per branch, 1998 = 100
+10% p.a.
236
154
+15% p.a.
218
143
+5% p.a.
170
116
119
115
152
139
100
93
1998
1999
2000
2001
2002
2003
2004
100
102
1998
1999
2000
2001
2002
2003
Sharp increase in productivity (to large extent driven by reduction in
density of branches and cutback in branch FTEs)
8
2004
Cost containment has been
successful
Efficiency
strategy
Up to 2004: significant decline in costs
1
Cost inflation
2
Cutbacks in branch FTEs and in number
of branches
3
Integration of ICT platforms and of
products and support services
Henceforth: upward pressure on costs
1
Core retail only, excl. activities of subsidiaries
2001 costs
2
2004 costs
Cost inflation
1
-4.0%
-7.5%
3
2007 costs
9
+4.2%
1
+3.6%
estimate
Target:
cost growth
below wage
inflation rate
Strict cost control remains
important
Efficiency
strategy
High density of network
High wage costs
(Competition does not permit further branch cutbacks)
(structural characteristic)
Number of bank branches
per million inhabitants
Netherlands
Sweden
UK
USA
Japan
Switzerland
France
Italy
Belgium
Germany
10
Source: Febelfin
200
219
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
245
275
289
371
427
514
537
611
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%
0.09%
2002
2003
2004
Target:
< 0.25%
0.00% over-the-cycle
1q05
Credit-loss charges in Belgian retail are expected to be relatively low over the
cycle (< 0.25%)
11
Focus on revenue growth
Growth
strategy
Core retail only (excl. activities in subsidiaries)
Revenue growth in 2001-2004
partly driven by positive pricing effects
2004 income
2001 income
Savings &
investments
Lending
Insurance (excl.
S&I)
Other
2004 income
12
Revenue growth in 2004-2007
mainly driven by positive volume effects
+5.7%
½ due to positive
pricing effects
+5% p.a.
Lending
+6.5%
+3.0%
Achieved
+5% p.a.
revenue growth
Savings &
investments
+1.8%
Insurance (excl.
S&I)
Other
2007 income
+9.0%
Slower income
growth due to
margin pressure
Mid-term ambition:
maintain
growth trend
+1.8%
+3.7%
0.3%
Growth in savings & investments
How to grow within a mature market?
Growth
strategy
1
Attracting new funds
Market potential
Proven performance
Estimated nominal GDP growth rate
1.7%
1.8%
Germany
Italy
1.0%
NL
Market share of mutual funds
2.7%
3.0%
Belgium
France
Savings rate
22%
23%
1995
1996
25%
1997
28%
29%
29%
30%
31%
31%
28%
1998
1999
2000
2001
2002
2003
2004
New funds attracted – in bn
15.0%
3.4
3.3
2002
2003
5.3
9.0%
Euro zone
13
Belgium
2004
Growth in insurance field
How to grow within a mature market?
Growth
strategy
1
2
Attracting new funds Insurance
High cross-selling potential
Proven performance
Premium growth, non-life
76%
80%
83%
8%
96%
98%
3%
24%
Home
20%
Family
17%
Car
4%
Hospital
2%
Accident
% bank client households w/o product
% bank client households w/ product
5%
3%
2000
8%
6%
2001
Bank branches
2002
56%
14%
6%
2003
5%
2004
Tied agents
X-sell results
2000
2004
60%
34%
bank x bank areas
(> 3 out of 6 products)
14
12%
40%
bank x insurance
Growth in lending field
How to grow within a mature market?
1
Attracting new funds
2
Insurance
3
Lending
Growth
strategy
High expectations for growth in retail lending
Total market – Mortgage loans
Small business loans:
CAGR 9%
100
2001
108
2002
118
2003
128
2004e
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
15
Source: NBB
• 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
Obstacles to growth
How to grow within a mature market?
1
2
Attracting new funds Insurance
Growth
strategy
3
Lending
Sharper price competition
Hardening credit-pricing cycle
Threats to growth according to analysts
Small business loans
Pressure on
margins
Mortgages
-0
5
Ja
n
l04
Ju
-0
4
Ja
n
l03
Ju
-0
3
Ja
n
l02
Ju
-0
2
Ja
n
Ju
Ja
n
16
l01
16%
-0
1
Slowdown in
economic
growth
85%
Catalysts for growth
How to grow within a mature market?
1
Attracting new funds
2
Insurance
Growth
strategy
3
Lending
Enhancing customer satisfaction
Customer satisfaction at KBC
Closure
of branches
Would you recommend your bank to others?
Yes, definitely + Yes, probably
Customer-orientation
program started
KBC
80%
Competitor A
76%
Competitor B
Competitor C
2001
* Extrapolation
17
2002
2003 (*)
2004
71%
68%
Top-4 bancassurers only
Activities overview
Earnings drivers, retail
Earnings drivers, SME and corporate
Mid-term financial outlook
Growth in lending income
Lending income vs. RWA
1.06%
0.88%

2002
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:


19
2004
Loan demand remains relatively limited (and competition increases
as a result)
Pressure on margins makes growth in fee income a key priority
Growth in fee business: key priority
Fee income vs. RWA
1.40%
1.30%
Mid-term target:
> 2%
2002

20
2004
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)
Growth potential in fee income
% change in commission income 2002-04*
peers with substantial investment
76banking acitivities
38
local players
8
7
5
5
2
Peer1 Peer2 KBC Peer3 Peer4 Peer5 Peer7
21
-3
-4
-7

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
* Boston Consulting survey, peers are corporate bankers in Western Europe
Monitoring credit risk
Risk
strategy
Impairments on loan portfolio 1
0.60%
LLR on RWA
0.34%
Mid-term target:
loan loss ratio < 0.35%
0.07%
0.00%
2002

1 KBC
22
2003
2004
1Q05
Average 3yr-loan losses at 0.35%, in line with target, but rather cyclical
(N.B. 2004/2005 historically low)
core SME/corporate banking excl. activities in specialized subsidiaries
Monitoring credit risk

23
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)
Strict cost control
Efficiency
strategy
Cost/income ratio 1
Expenses (m) 1
114
118
44%
38%
2002
2002
24
Mid-term cap:
43%
2004
2004

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
Activities overview
Earnings drivers, retail
Earnings drivers, SME and corporate
Mid-term financial outlook
Mid-term outlook, retail
Return on allocated capital 2
Contribution to Group profit (m) 1
725
583
19%
382
22%
14%
Mid-term target:
20%
2001
2004
2004
new
2001
Cost/income ratio, banking 1
92%
68%
93%
1 Adjusted
2
26
2004
2004
new
93%
Mid-term target:
max 95%
over-the-cycle
Mid-term target:
further down
to low 60s
2001
2004 new
Combined ratio, non-life
100%
72%
2004
2001
2004
2004
new
definition as of 2005: including asset management
Adjusted definition as of 2005: including asset management and 8% allocated Tier-1 capital (instead of 7%)
Mid-term outlook, SME and
corporate
Contribution to Group profit (m) 1
Return on allocated capital, banking 1
121
18%
65
Mid-term target:
CAGR >10%
2002
3%
2002
2004
Fee income vs. RWA, banking 1
2004
Total revenue vs. RWA, banking 1
1.40%
2.46%
1.30%
2.18%
Mid-term target:
3.30%
Mid-term target:
>2%
2002
1 KBC
27
2004
2002
core SME/corporate banking excl. activities in specialised subsidiaries
2004