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Strategy updates

Strategy updates

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Strategy updates

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  1. Strategy updates Foto gebouw

  2. Start of a new decade In Q1 2005, KBC merged with its parent company Almanij: • ‘Quick wins’ included: • The re-rating of the share due to increased corporate transparency, company visibility and share liquidity • Operational synergies, particularly in the field of wealth management • Further value-creating potential includes: • shifting the earnings trend in the private banking area into a much higher gear Clearly, KBC continues to be ambitious and maintains its performance commitments in both Belgium and the CEE

  3. The first harvest is in An initial layer of ‘merger benefits’ has already appeared: • The ‘ugly duckling’ discount has disappeared (indication: at pre-merger price of 48 € - avg. 3Q04 - a hypothetical 10% discount represents 4.8 €/share - total 1.8 bn) • Today, KBC has grown to 25 bn market cap with a ytd average daily trading turnover of 47 m (velocity, last 12 months: 50%) Share price, 31 May 05, ytd (KBC +17% vs. DJES banks 4%) (Dec04 = 100) DJES DJES DJES DJES DJES DJES • Outperformance driven by strong fundamentals • Outperformance facilitated by increased stock visibility and liquidity

  4. Operational synergies - reminder • In Q1 2005, we announced operational synergies in the areas of private banking and fund management of net 1.4 €/ share - total 500 m (75 m pre-tax recurring per year, 50% of which as of 2006) Type of Benefits* Source of Benefits* €m Securities €m Payments Securities Revenue(40%) Fin. Markets Corporate Insurance Asset Management Cost (60%) ICT & Overheads Cross Sales NewBus'ness Pro-cure-ment People CostsAvoided Total Optimi-zation * Synergy benefits described as peak recurring annual increase in pre-tax bottom-line result (peak level as of 2009)

  5. Operational synergies - update • In Q2 2005, group-wide risk management methodology implemented in enlarged Group • At the same time, detailed implementation of synergy projects started: • Agreed milestones and delivery profile for 33 projects • Transparency on execution risks • Incorporation into business & individual targets • At end of Q2 2005, 4 m in recurring synergies already realized (6% of total) • By end of 2005, 8 m is expected - in 2006, level will increase to 37 m

  6. Gevaert portfolio - update Gevaert is expected to upstream ca. 300 m cash dividend in Q3 2005 (1) 30 m capital gains realized in Q2 2005, excl. gains on KBL and KBC (150 m) eliminated in consolidated group P&L (2) Position of 34.1 m shares booked in KBC’s accounts at 17 euros/share(3) 2004 profit contribution (42 m) excludes one-off loss of consumer imaging (-81 m) and amortization of goodwill (-27 m) (4) Legal and practical winding-up and exit from discontinued operations may be drawn out

  7. We build a solid future • We still see a lot of ‘growth and value’ in our current strategic scope: • Retail- and wealth-management-oriented, with focus on Belgium and CEE-5 and selected Western-European activities • Further enhancement of efficiency (with emphasis on, but not exclusively, in CEE and European private banking) • Standalone basis (opportunistic operational alliances in certain areas to generate economies of scale, if needed) • Stable dividend policy and solid level of financial strength/solvency • This outlook is reflected in ambitious financial targets, valid until 2008 • In 2H 2005, we will re-assess our strategic horizons to ensure ‘growth and value’ post-2008 (project ‘next’)

  8. Enhancing efficiency - banking • Well on track to deliver on current 2005 cost/income target (58%) • Adverse impact by Group enlargement and IFRS reclassificiations - new C/I target (58%) therefore more ambitious than previous target (58%) Cost/income, banking • Branch closures in Belgium • IT integrations • FTE reductions • Impact of co-sourcing with 3rd parties • Cost savings due to ‘private banking hub’ • Further cost cutting in CEE • Bus’ss-process simplification • Centralized procurement (KBC Mergco, IFRS) (KBC Old, GAAP)

  9. Enhancing efficiency - insurance • Well on track to deliver on current 2005 combined ratio target (95%) • Positive view on underlying drivers (market growth, claims frequency, claims inflation, etc.), but market is expected to soften - new C/R target (95%) therefore more ambitious than previous target (95%) Combined ratio, non-life • Optimization of inbound R/I • Increased underwriting discipline in CEE • Pricing discipline (hard market) • Increased price competition • Further improvement in CEE KBC Mergco, IFRS KBC Old, GAAP

  10. Enhancing bottom-line profit • Expected to exceed current 2005 EPS growth target (10% CAGR) • Downward impact of IFRS reclassificiations and Group enlargement • Growth outlook: our reality check makes us believe a 10% CAGR is sustainable at least until 2008 - growth target reconfirmed Earnings per share * CAGR target> 10% 4.49 • Sound business growth • Strict cost management • Risks adequately managed CAGR target+10% (KBC Mergco, IFRS) (KBC Old, GAAP) * Adjusted 2004 level after adding back 210 m in one-off charges

  11. Securing financial strength • In the last few years, we stayed above our minimum safety levels and accumulated excess capital for add-on investments in CEE • Minimum solvency levels are maintained (8% Tier-1, banking – incl. 15% hybrid, and 200% solvency margin, insurance)* • Solid earnings momentum • Stable dividend payout range • Recovery of capital markets * under Basel I / Solvency I regulatory frameworks

  12. Securing financial strength 1 Regulatory capital under Basel I/Solvency I, (incl. hybrids and minority interests, after elimination of intangibles and goodwill) 2 Difference between available capital and internal minimum level 3 Surplus capital excl. adverse IFRS impact on Tier-1 (as of 2006), unrealized gains on tied-up assets and value of Agfa- Gevaert (timing of disposal uncertain)

  13. Generating high return level • Well on track to exceed current 2005 ROE target (16%) • Carry-on of excess capital for add-on investments in CEE and higher capital base according to IFRS - new ROE target (16%1) is therefore more ambitious than previous target (16%) Return on equity • Strong earnings growth (19% CAGR) • Dividend payout of 40-45% • Signifcant capital accumulation • Sound EPS growth (>10% CAGR) • Stable dividend policy • Further accumulation of capital (KBC Old, GAAP) (KBC Mergco, IFRS) 1 Equity excl. changes in revaluation reserve on AFS assets.

  14. Financial targets - overview • By 2008 at the latest • Equity excl. change revaluation reserve AFS assets • For 2006-2008 period

  15. Assessing the Romanian opportunity • Since the largest bank (BCR) is up for privatization now, we cannot postpone our views on this until our new strategy charter is defined in 2H05 (project ‘next’) • Since optimization of CEE activities has progressed well and an immediate acquisition in Poland is rather unlikely, management capacity and capital gradually becomes available for new areas of investment • At first sight, the BCR opportunity may be attractive and is in line with our past CEE strategy: • Material size (5.5 bn assets) and dominant market position (29% share) • Profitable franchise • Possibility to pursue double-digit growth, based on fast growing market • Possibility to focus on retail/SME • Availability of an insurance operation, allowing start-up of bancassurance • Progressive development in legal and political environment since EU accession schedule is expected • In order to understand the opportunity fully, assess the risks and quantify the value-creation potential, KBC is studying the case