KBC Bank & Insurance Group
Full-Year results 2003
Analysts briefing
2
Content
Question time
Performance 2003, overview
Performance, banking Performance, insurance
3
Group result : up 8 % year-on-year
Full-year results 2003
355
230
159
278316
280
152
287 304 300256 259
1 119
1 0341 022
1Q 01 2Q 01 3Q 01 4Q 01 FY 01 1Q 02 2Q 02 3Q 02 4Q 02 FY 02 1Q 03 2Q 03 3Q 03 Q4 03 FY 03
Q avg‘01-’03
+ 8%
In m EUR
+ 1%
4
698 708858
360 348
275
FY 01 FY 02 FY 03
Banking Insurance
1 022 1 034
Net profit
ROE banking : 11.3 %
ROE insurance : 17.4 %
ROE Group: 12.7 %
1 119
Performance 2003
+8%+1%
Banking : strong year-on-year performance Insurance : pressure on investment income, though high level of return
in m EUR
5
Earnings growth peer group
2000 2001 2002 2003
KBC
DJ ES Banks
DJ ES Insurance
KBC Insurance
KBC Banking
Note : estimate 2003 DJ ES Banks at 20 Feb. 2004 by KBC
Compared to the sector, earnings remained at a high level
Earnings level2000 = 100
6
Performance 2003
Overall : Change yoy pre-tax
Positive impact : (m EUR)Strong income trend for all basic banking activities (spread, commission) +232Strong premium growth, insurance +330Strong technical result, non-life +59Good cost control, banking +56Less impairments on equity portfolios, banking +238
Negative impact : Higher loan-loss provisions - 211Less gains on (‘free’) bonds, banking -148Less favourable trading results -135Less investment income, insurance -54
Net profit : +85
7
Performance 2003
Areas of activity :
Robust performance in Belgium Further improving level of costs in banking (-5%)
Strong commission (+22%) and premium income (+8%) and interest spread slightly increasing (2.01% versus 1.97% in ‘02)
Low level of loan loss ratio (24 bp) and non-life claims ratio (59%)
Satisfactory operating performance in most CEE markets ROAC for banking in Czech (CR) / Slovak republics (SR) : 17% ROAC for banking in Hungary : 8% (20% excl. K&H Equities case)
Improving performance for insurance operations (still limited scale)
Higher profit of corporates (+19%) and markets (+35%)
… but still disappointing performance of banking business in Poland (high loan loss provisions: 365 m)
Note : ROAC = return on allocated capital
8
Growing dividend
2.69
3.26
3.90
3.39 3.423.68
1.091.23
1.42 1.48 1.52 1.64
1998 1999 2000 2001 2002 2003
Net profit per share Gross dividend per share
EUR
Dividend per share : up 7.9% year-on-yearLast 5 years : every year growing dividend (CAGR : 8.5%)
9
Business highlights 2003 Enhancing efficiency
in Belgium
Strengthening the position in CEE
Further downscaling of less-strategic areas
Finalizing the merger
Product complexity reduction program
Pooling of back offices and co-sourcing of transaction processing
Stronger governance model and controlling
Intensified cross-border initiatives in such areas as e.g. card technology
Restructuring program in Poland
Majority stake in WARTA (Poland)
Successful start of bancassurance in Slovenia
Sale of retail activities in the Netherlands, broker-related consumer lending in Belgium, non-strategic operations in CEE (Ukraine, Lithuania)
10
Performance 2003, overview
Performance, banking
Content
Performance, insurance
Question time
11
Banking, income development Interest income : + 5% organically
(margin : 1.67% 1.73%)
Commission income : 12% organic growth (i.a. success of cap-guaranteed funds)
Lower trading income due to i.e. lower FX income and MtM of equity derivatives
Lower realized capital gains (250 m), mainly on the ‘free’ bond portfolio
Lower dividends, ‘other income’ on a par with 2002 (strong leasing revenue)
2 5413 046 3 118
1 057
1 0901 251
610
615480
275
250495
605 557
398
0
1 000
2 000
3 000
4 000
5 000
6 000
FY01 FY02 FY03
Interest CommissionTrading Realized capital gainsOther
Total income -1%organically
- 37%
+ 2%
- 22%
+15%
Excluding capital gains, income + 1%
4 977
5 6555 756
12
Growth in banking assetsCustomer deposits (bn EUR)
Customer loans (bn EUR)
121 123128
1015 5
2001 2002 2003
Customer deposits Repos
Note : mortgage growth adjusted for currency depreciations
64 62 59
21 23 252 13 6
2001 2002 2003
Corporate Private Repos
Customer deposits : up 5% (excl. repos)
Shift to demand deposits Shift to life products and mutual funds
Customer loans : organically flat (excl. repos)
Strong organic mortgage growth : Belgium : + 10% C/SR : + 36% Hungary : + 69% Poland : + 24%
Corporate book (excl. repos) down 3 bn EUR, reflecting :
currency depreciations (2.4bn) build down of ‘old book’ (IPB) in CR
(1.7 bn) & in the Netherlands (0.4bn) write-downs in Poland (0.3 bn)
13
Banking, expense development Belgium :
Expenditures : - 5% (- 105 m) Headcount reduction :
target of 1 650 FTE (-12%) achieved
Central and Eastern Europe : Expenditures : - 1% (-12 m) Headcount reduction :
CR (HQ) : 54% of target of 1 000 FTE (-27%) achieved
Poland : 28% of target of 1000/1200 FTE (-15%) achieved
Other : Expenditures : + 14% (+60 m)
2 197
724 1 006
2 3022 398
1 018
491431389
FY 01 FY 02 FY 03
Belgium CEE Other
Cost/Income ratio: 65%(65% for FY 02)
3 5103 751 3 695
2001: KB only 4Q01
Ytd expenses (m EUR)
Continuing cost control
-1%
14
Cost control in Belgium
Merger completed, full extent of cost savings in bottom-line as of 1H 04
Lower cost/income ratio ahead, thanks to : Income growth Co-sourcing of transaction processing and pooling
of back-office activities within the group and with third-parties
Monitoring of real-estate-related and other non-FTE-costs
Reduction in product complexity in retail
Although Belgium is a ‘mature’ market, further growth and improvement in performance can be expected
15
Reducing product complexity
Planned Realized Example : To do Example :
Paymentservices 59 24% No of types of credit
cards from 8 to 4 76% No of transactionsforms from 34 to 5
Investmentproducts 129 40%
No of types of savings accounts from 8 to 1
60% Reduction in highly complex orders
Home, carand travelservices
45 38%No add’l floating rates for consumer loans
62%No of types of mortgages from 50 to 15
Services tocompanies 131 40%
Reduction in interest rate formulas for cash facilities
60%
Integrating 15 types of insurance policies in more comprehensive policies
TOTAL 364 37% 63%
Note : situation as of Feb-2004
Implementation running or further enquiry required
16
Banking, loan provisions
Customerloan book
Gross loans
Dec. 03
Lossratio
FY 03
Lossratio
FY 02
Belgium 49.9 bn 0.24% 0.29%
Hungary 3.8 bn 0.32% 0.34%
CR / SR 6.0 bn 0.34% -0.62%
Poland 3.8 bn 8.68% 4.20%
International 29.4 bn 0.48% 0.70%
Total 92.9 bn 0.71% 0.55%
Loan loss provisions (m EUR)
Loan loss ratio : 0.71%(0.55% for FY 02)
156 144 117
23153
403142
168
156
FY 01 FY 02 FY 03
Belgium CEE Other
Note : Loan loss = specific provisions to average gross outstanding loans
Intensive clean-up of loan portfolio in Poland
Loan loss ratio excl. Poland : 0.35%
676
321
465
17
Note: Profit contribution excl. retail asset management and excl. retail insurance.Loan loss ratio on risk-weighted assets
70
225
41
2001 2002 2003
Retail banking in Belgium
2%4%12%
42% 37%
27%
2001 2002 2003
banking insurance
Return on allocated capital
14% 13%
x5
16%
FY profit, banking: 225 m, ROAC : up to 12% from 2%
Income growth : + 10% (strong commission and rebound in interest)
Cost reduction : - 7%
Provisions remain low (21 bp)
Marketing headlines 2004 :
New customer acquisition Bancassurance Wealth management
2003 has seen a strong turnaround in Belgian retail on the back of robust commission income and cost savings
Profit contribution after minorities
18
Banking performance in CEE
CR & SR : ROAC target of 17 % achieved in spite of pressure on margins (and fewer one-offs), thanks to commission income and modest expense growth
Hungary : income and volume growth more than set off pressure on margin, but adverse impact of K&H Equities loss (pre-tax impact: 20 m)
Poland : difficult economic conditions and high loan provisions due to thorough credit review (pre-tax impact 277m)
Notes : profit contribution excl. minority interests. Change (%) adjusted for currency effect. Allocated capital: 7% on RWA + non-amortized goodwill.
CEE2nd home
In m EUR FY 03 % Chg ROAC 03
CR / SR 143 +0 % 17%
Hungary 13 -13% (+97%) 8% (20%)
Poland -295 - -
Slovenia 10 - -
Contribution of banking operations to KBC Group profit
Satisfactory performance in Czech Republic, Slovakia and Hungary (even further improvement expected). Polish turnaround being implemented
19
CEE banking, share of group wallet
35%28%
43% 35%
16% 27%
27%
19%
-17%
36% 28%17%
33%
12% 17% 14% 13%
55%
39%
23%
Risk-weighted assets Allocated capital Gross operatingincome
Net operating income
Belgian retail (incl. AM) CEE Corporates Market activities
Impact of paid
goodwill
Improved cost structure
under way
Heavy credit risk charge
in Poland in 2003
Value-added products andcommission
income to grow
Note : banking business lines , excluding group centerFY03 earnings
Pre-taxresult
20
Restructuring in Poland Capital base strengthened (265 m in 2 steps)
Risk sensitivity greatly reduced Credit risk policies redefined and credit decision authority reduced ‘Historic’ loan book cleaned up Risk control and risk management improved
Cost base to be further reduced Centralizing back offices, strengthening HR and performance measurement Reducing headcount (driven by new central IT system) by 1000/1200 FTE,
real estate expenses (15-20 %) and other tangible costs (5-10%) by ‘04 Disinvesting non-strategic activities (Ukraine, Lithuania, PKB, Pension Fund,…)
Market position to be improved on the retail market Thorough customer segmentation in the nationwide network Intensified transfer of product knowhow (AM, retail lending, bancassurance,…) Acceleration of bancassurance efforts with WARTA Insurance
Profound restructuring plan being implemented
Central Europe2nd home market
21
Central Europe2nd home market
Loan provisioning level in Poland
12.6%
17.6%19.1%
23.9% 24.7%
28.5%
5.1%
8.5%
11.8%
14.6% 14.8%
0%
5%
10%
15%
20%
25%
30%
BZ WBK BRE BPH Mill Pekao KB
Non performing loansNPLs covered by provisions (specific and general)
Adequately provisioned compared to peer group
Sources: companies’ financial reports and presentations (consolidated basis)
22
Improving economic indicators
Outlook :
Economic growth is picking up
Corporate tax reduction (to 19% in ’04)
Credit demand is accelerating, notably mortgages/consumer lending
Shift from deposits to funds (off-balance) is likely, compensating further margin pressure
7.0%
5.0%
4.0% 4.0%
1.0% 1.0%
3.9%4.4%
5.0%
1997 1998 1999 2000 2001 2002 2003e 2004e 2005e
PolandGDP growth (y/y)
23
Situation as of Dec 2002 : the network model
CEE, governance model - 2002
CEE Group companies
Co-ordination UnitCEE Insurance (2)
Business co-ordinators (12)
KBC expats(31)
Co-ordination UnitCEE Banking (1)
Moreover : audit and market and credit risk managment centralized (for credit risk in Poland only from end of 2002)
ExecutiveCommittee
ManagementCommittee CEE (5)
Initiating and followup of :• Transfer of knowhow• Shared business projects
24
CEE, governance model - 2003
ExecutiveCommittee
ManagementCommittee CEE (6)
General ManagerCEE (1)
Controlling UnitCEE (5)
Steering committees Co-ordination UnitCEE (8)
Business co-ordinators(22) & task forces CEE
Performance monitoring
CEE Group companies
KBC expats(44)
Day-to-daymanagement
Steering of business projects
Initiating and followup of :• Transfer of knowhow• Business projects• Uniform methodology
Key elements :because of increased importance of 2nd
home market :• Increased management involvement• Intensified follow-up
Renewed model,situation as ofDec. 2003
25
Profit contribution (in m EUR)
91116 116
2001 2002 2003
Asset Management division FY profit : 116 m (stable) :
income pressure (market context) compensated by lower costs and taxes
AUM : + 10% Retail assets : 10%
including retail funds : + 11% of which : ± 5% net inflow
Institutional (3rd party): + 6% Group assets : + 18%
Note: As of 2004, in financial reporting, incorporated in retail / corporate area
Assets under management (in bn EUR)
82 8189
Retail
Corporate
42
14
17
9
40
14
17
9
45
15
19
11
2001 2002 2003
Institutional, group assets Institutional, third-party assets Retail, private assets Retail, funds
Belgium :87 %
Central Europe : 5 %
+10%
26
FY profit : 220 m, + 7%
Cost decrease (- 6%) due to strict cost control, especially in Belgium / Western Europe
Strong income growth in leasing, Ireland, diamond sector but no repeat of 2002 one-off revenues. As a balance, income down 2%
Lower provisions for problem loans, i.a. in traditional banking in the US
Corporate banking division
Profit contribution corporate banking (in m EUR, excl. minorities)
214 220206
FY 01 FY 02 FY 03
+7% 6490
643
12 128
-26
96 111
FY 02 FY 03
Belgium W. Europe USASE Asia Other
Details on corporate activities(m EUR)
27
Financial markets division
FY profit : 125 m (+ 35%)
Money and capital markets : strong performance (+ 43%)
Equity trading : substantial loss situation reversed
Derivatives :satisfactory result but negative MtM for long derivatives
Profit contribution market activities (excl. minorities):
Details on market activities :
125
4693
FY 01 FY 02 FY 03
9681
115
-34
0
-46
46
10
-12
Fixed income Equity Derivatives
FY 01 FY 02 FY 03
m EUR
m EUR
Note: including trading-, interest and commission incomefrom market activities,excluding trading income in CEE and related to treasury and investment book
+35%
28
Faster asset growth in line with expected 'faster' GDP growth :
Full year impact of deposit rate cut in Belgium (if competition / capital market levels allow rates to be stable) and positive impact from higher interest rates/steeper yield curve
Asset Management driven by ‘private pension building’ and expansion in CEE
Expected higher contribution from equity subsidiaries
Cost control : In Belgium : full impact of merger synergies + sustained cost discipline In CEE : efficiency programs in progress Cost sensitivity in all divisions
Strong decrease in loan loss levels : Towards a 'normalized' level in Poland (versus 365 in 2003)
Going forward, 2004
2004 Real growth GDP Inflation 10y-yield
Belgium
CEE
0.9% 1.8%
2.5 / 4% 3.5 / 4.5%
1.3% 1%
Diverse
4.1% 4.5%
Diverse
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Performance 2003, overview
Performance, banking
Content
Performance, insurance
Question time
30
459
1 275
1 676
1 229
971
762
FY 01 FY 02 FY 03
Interest-guaranteed Unit-linked
Underwriting result, life
FY 03 :5%
CEE
Premiums ytd 8%
organic growth
FY 03 :95%
Belgium
Very strong growth (bancassurance-driven)and shift to non-linked products
Guaranteed rate (10y) in Belgium :• 1H 03 : 3.25%• 2H 03 : 2.75%
Net premium income
Total FY 01:1 689
Total FY 02:2 246
Total FY 03:2 438
31
69% 72%65%
34% 33%31%
FY 01 FY 02 FY 03
Claims ratio Expense ratio
Underwriting result, non-life
Verylow level
Combined ratioPremiums
+15% organically 104% 105%
96%
608 637 678
3387
120179
186
249
FY 01 FY 02 FY 03
Belgium CEE R/I
821910
1 048
Very sound business, partly driven by upward trend in rates and by strong risk and cost discipline
Net premium income
32
Cross selling, bancassurance
34,5%35,2%
37,5%
39,1% 40,0%
2000 2001 2002 2003 Target
Clients with both banking and insurance productssold by KBC (Belgium)
Cross selling 2003, Belgium :
Mortgage / fire insurance : 50%
Mortgage / death cover : 67%
Consumer loan / death cover : 66%
Cross selling continues
33
Insurance, investment income
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%
7.0%
1Q01
2Q01
3Q01
4Q01
1Q02
2Q02
3Q02
4Q02
1Q03
2Q03
3Q03
4Q03
Interest income, bonds10 y EUR T-bonds
FY 02 FY 03
Interest, dividend,rent 449 455 +1%
Capital gains on shares 198 138 -30%
Total 647 593 -8%
Investment return in FY 03down to 5.9% from 7.2 %
Suffering from low investment yields
Note: capital gains on shares: 5.30 % on portfolio value (incl. write-back from provision for financial risk at 45 m in ‘03), excl. value adjustments for unit-linked products. Planned recurring value gains on shares in 2004 : 4.75 % on market value of portfolio.
34
Insurance in CEE, overview
Premium2003
Premiumgrowth
Profit contribution
2002
Profitcontribution
2003
Czech Republic 165 +9% -12.1 -1.6
Hungary 67 +40% 1.7 0.3
Slovak Republic 22 - - -0.3
Poland 440 - -6.2 -1.9
Slovenia 10 - - -0.8
Startup in 2003 : retail market share from zero to ± 4%
Acquired at the end of 2002
Note : premium growth adjusted for changes in currency value. Profit contribution to KBC result after minorities.
Bancassurance models now set up in all target countries,but looking for more significant scale
Majority since end of 2003
35
Insurance in CEE, Poland WARTA
Market position : Market share, non-life :
13 % (no 2) Nation-wide coverage Customers : ± 1.5 m Workforce : ± 4 000 FTE Premium income 2003 :
330 m EUR non-life 110 m EUR life
Individual : 65% of premium income
Leading product : motor insurance
KBC’s footprint : 2000 : First stake (40%) 2003 : Majority stake (51%) 2004 : Clear control (75%)
Strategic focus : Optimization of agency sales network Intensifiying bancassurance with KB Stronger expansion to small-sized
enterprises Centralization of back-office activities
and sustained cost discipline
Majority in WARTA (Poland), important leverage of scale for KBC’s insurance activities in CEE
Poland
36
Insurance, non-recurring items
In m EUR FY 02 FY 03
Non-recurring result :
Value adjustments, shares - 299 - 96
Non-recurring gains on securities +113 +122
Other (write-back from egalization reserve in ’03 and other) +38 + 79
Transfer from (to) provision for fin. risks +157 -140
Total non-recurring result 9 -35
Note: provision for financial risks, balance at 31 Dec. 2003 : 93 m EUR
Non-recurring income offset by value adjustments and allocation to the provision for financial risks
37
Going forward, 2004 Full consolidation of WARTA Insurance (premium line impact : 435 m)
Organic premium growth : sustained high single-digit growth, driven by Successful bancassurance model Consumer trend for ‘private pension building’ (life)
Sustained good technical results (though '03 was ‘very’ good)
Mitigated pressure on investment income
Impairments on equity portfolio 2004 :
In m EUR Market levelDec 2003 + 5% + 10% + 15%
Expected impairments 190 170 150 130
Available provision for fin. risks 93 93 93 93
Potential impact on P/L 97 77 57 37
Available non-realized value gains 115 175 240 300
Note : Available non-realized value gains in excess of 'normal' level of value gains of ±125 m(at 4.75% of market value of portfolio)
38
Emile CelisChristian DefrancqJan Vanhevel Guido Segers
Herman AgneessensAndré BergenWilly Duron Frans Florquin
Q&A sessionTeleconference with live audience in Brussels
Analysts who want to participate in the conference call,please dial the number given in the invitation
39
•Group CEO•Head of insurance business
•Deputy Group CEO•Head of banking business
•Co-ordination CEE
•Retail bancassurance
•HRM and Communication
•Group CFRO•Transaction processing
•Non-life & reinsurance
•Claims management
•Corporate banking•West-European,US & SE Asian bank network
•Retail credit
• Information technology
• Insurance subsidiaries
•Treasury & markets•Asset Management• International credit
Emile CelisChristian DefrancqJan Vanhevel Guido Segers
Analysts who want to participate in the conference call,please dial the number given in the invitation
Herman AgneessensAndré BergenWilly Duron Frans Florquin
Q&A sessionTeleconference with live audience in Brussels