Earnings Statement KBC Group, 3Q 2011

Regulated information* - 10 November 2011 (07.00 a.m. CET)
 
Summary:  Considerable  progress  on  execution  of  strategic  plan, 3Q results
affected by exceptional and one-off items.
 
KBC ended the third quarter of 2011 with an underlying net result of -248
million euros but excluding one-off items induced by the prevailing and
exceptional market circumstances, the net result would have amounted to 222
million euros. This compares with +528 million euros in 2Q2011 and +445 million
euros in 3Q2010. The underlying result for the first nine months of 2011
amounted to +937 million euros, compared to +1 542 million euros for the
corresponding period in 2010.
 
The IFRS-based net result reported for the quarter under review came to a net
loss of 1 579 million euros, compared with a net profit of 333 million euros in
the previous quarter and 545 million euros in the year-earlier quarter. This
means that the group has generated a total net loss of 424 million euros in the
first nine months of 2011, as opposed to a net profit of 1 136 million euros for
the corresponding period in 2010.
 
Jan Vanhevel, Group CEO: 'The third quarter for KBC was characterised by a
continuing good level of underlying income and considerable progress in both our
divestment and de-risking plans. We concluded the sales agreements for KBL EPB
and Fidea. We further reduced our CDO and ABS exposure and have already reached
our initial target (capital relief of 0.5 billion euros). We have also
substantially reduced our exposure to Southern European government bonds.
 
Unfortunately, the third quarter results were also affected significantly by
exceptional items related to the uncertain macroeconomic climate and
challenging, turbulent market conditions. We are disappointed to record a loss
in the third quarter, largely on account of these market-driven items.
 
However, our core strengths remain fundamentally sound and we have a very solid
customer base in our core markets of Belgium and Central Europe, where there was
further loan and deposit growth, and an excellent underlying insurance
performance. Our liquidity profile is robust and supported by a stable and
resilient customer deposit base. Moreover, our solvency position is and remains
strong and has enabled us to continue to increase lending to our customers.
 
I would like to add that our already comfortable capital position has been
further enhanced by the fact that the Belgian regulator has recognised the Yield
Enhanced Securities (YES) as common equity under the current CRD4 proposal. We
continue to strive to reimburse 7 billion euros to the state by the end of
2013, in line with the European plan.
KBC has expressed its intention to repay a first tranche of the YES to the
amount of 500 million euros by year end to the Federal Government under the
conversion mechanism. The Federal Government has confirmed that the 15% penalty
will be applicable. The Flemish Government has agreed to waive its "pari passu"
rights for this repayment and any further repayments effected before end of
2012.
 
We remain committed to executing our strategic plan with the same diligence and
determination to ensure timely repayment of the state aid and are committed to
playing an active role in the European financial sector, which will benefit our
customers, employees, shareholders and other stakeholders. The good results we
have observed during October, lead us to guide for a full year underlying net
profit of 1.2 billion to 1.4 billion euros.'
 
Further to a continued strong RWA management (RWA reduction of 6.7 billion euros
in the third quarter),
KBC has also acted to reduce volatility in its results.
·  CDO exposure
During the third quarter, ourCDO exposure was reduced by 2.5 billion euros,
which constitutes a 12% decline in the notional amount outstanding. This was
achieved by early terminations and sales at limited cost.
·  ABS exposure
During the third quarter, our ABSexposure was reduced by 0.7 billion euros,
which constitutes a 17% decline in the notional amount outstanding. This was
achieved by sales at limited cost.
·  Southern European government bond exposure
In the third quarter, we substantially reduced our exposure to Southern European
government bonds. Thereduction amounted to 2.9 billion euros, or more than 30%
compared to the exposure at the end of June. We have further reduced this
exposure since the end of September by another 1.6 billion euros.
 
Main exceptional factors in 3Q2011 that have impacted the reported IFRS result:
·  Divestments: one-off impact
Notwithstanding the particularly challenging market circumstances, the execution
of our strategic plan has gained further momentum with, for instance, sales
agreements being signed for KBL EPB and Fidea. The transactions related to the
sale of Centea and KBC Asset Management's stake in KBC Concord Asset Management
Co. Ltd. (Taiwan) have been closed, and KBC Securities completed the divestment
of its operations in Serbia and Romania. Other planned divestments are well on
track. The divestments of KBL EPB and Fidea had a combined negative impact of
0.6 billion euros on KBC's third-quarter net result, but a positive impact on
our capital.
·  Impact of the credit spread on CDOs
During the third quarter, global economic uncertainty intensified, resulting in
volatile markets and significantly wider corporate and ABS credit spreads. This
resulted in a valuation markdown of some 0.6 billion euros on the CDO exposure.
30% of the unrealised losses booked in 3Q11 could already be reversed in October
2011.
 
Main important one-off factors in 3Q2011 that have impacted the underlying
result:
·  Greece: one-off impact
As a result of the deteriorating credit position of Greece in the financial
markets, we recorded an additional impairment of 126 million euros after tax
(176 million pre-tax) on our Greek government bond portfolio in this quarter (as
a result, the impairment on Greek government bonds at 30 September 2011 was
recognised in full at 58% of the nominal amount of these bonds).
We also recorded a provision of 174 million euros after tax (263 million pre-
tax) on the contingent intention to repurchase on a voluntary basis the bonds
(KBC IFIMA 5/5/5 and KBC Group 5-5-5) sold to retail customers, conditional on
the occurrence of a credit event. These structured bonds were launched in the
spring of 2008, have a term to maturity of five years, a gross coupon of 5%
(which so far have all been paid) and are linked until their maturity to the
creditworthiness of five countries (Belgium, France, Spain, Italy and Greece).
All holders of these bonds had been informed in March 2011 of this contingent
intention. Untill the date of this press release no credit event occurred, but
since the probability of a credit event is estimated by the financial markets to
be higher than 50% on 30 September 2011, we decided to book the provision in the
third quarter results. If no credit event under ISDA definitions occurs, the
provision will be reversed.
·  Hungary: one-off impact
During September, new legislation designed to help households with foreign-
currency-based mortgages was introduced in Hungary. This legislation allows
households during a limited period to pay off foreign-currency debts in one lump
sum at a fixed, discounted exchange rate. The shortfall between the fixed and
market rates is to be covered by the banks. The Hungarian Banking Association
has taken the matter to the Constitutional Court in Budapest. Nevertheless, KBC
has recorded an impairment of 74 million euros (after tax) on its FX retail
mortgage portfolio (92 million euros, pre-tax), reflecting that an estimated
20% of all debtors will pay off their foreign currency loans.
·  Bulgaria: one-off impact
KBC performed an in-depth evaluation of its Bulgarian assets for which the Group
has recorded an additional impairment of 96 million euros.
 
Main special items in 3Q2011 that have impacted the underlying result:
·  Share portfolio
Following the downturn on the stock market, an impairment of 87 million euros
(before and after tax) had to be booked on the share portfolio.
·  Ireland
We indicated during the 2Q11 results presentation in August that we had seen
some deterioration in the number of payment arrears. The economic situation and
the Irish marketplace have not improved in the way we envisaged and the
austerity measures put in place by the Irish authorities have had a considerable
impact on the financial strength of households. Besides that, we have observed a
change in behaviour of some borrowers. As a consequence, a loan loss provision
of 164 million euros after tax (187 million euros, pre-tax) was recorded in
3Q2011.
 
These factors aside, underlying income in the third quarter was characterised by
a good level of net interest income, strict cost control, an excellent combined
ratio, good life insurance results, and robust liquidity and solvency positions.
The credit cost ratio in our core markets remains low (barring the specific
situation in Hungary and Bulgaria). Fundamentally, KBC continues to have a
strong loan-to-deposit ratio (85% at the end of September 2011) which translates
into a robust liquidity position.
 
With a total tier-1 ratio of 14.4% and a core tier-1 ratio of 12.6% (including
the impact of the sale of KBL EPB and Fidea), solvency remains not only firm,
but also exceeds the threshold set under the recent EBA stress test.
 
Under the preliminary EBA exercise based on data as at the end of June (see
press release of 27 October 2011), both KBC group and KBC Bank complied with the
9% core tier-1 threshold as determined by the EBA (capital position according to
Basel2.5, corrected with the marked-down sovereign exposures based on market
prices as at 30 September 2011). The preliminary capital buffer as identified at
the end of June is sufficient to cover 3Q11 results. An update of the outcome of
the EBA exercise based on positions and market prices as of 30 September is
expected to be published in November 2011.
 
Jan Vanhevel concludes: 'The operating environment has been harsh in the third
quarter and we realise that these are tough times for most economies and for
millions of people. KBC has obviously not been immune to this and our results
have been severely impacted. However, KBC continues to build on and reap the
benefits of its sound customer-driven bancassurance model, as illustrated by the
good results during October. This resulted in a strong liquidity and robust
solvency position, helping us to remain a solid European financial player
committed to actively financing our customers' projects, even in extremely
difficult conditions. The Executive Committee has decided to forego all variable
remuneration for financial year 2011, regardless of how profits develop in the
remainder of the year.'
Financial highlights 3Q2011 (underlying)
 
Jan Vanhevel, Group CEO, summarises the underlying business performance for
3Q2011 as follows:
 
Gross income benefits from stable interest income and better technical insurance
results, but is affected by lower commission income, weak trading results and
the provision set aside for the 5-5-5 products.
 
  * Underlying net interest income stood at 1 342 million euros, at first sight
    -5% year-on-year and -3% quarter-on-quarter, but this was due mainly to the
    deconsolidation of Centea (excluding this factor, net interest income was
    virtually flat). The net interest margin came to 1.98% for the quarter under
    review, stable compared to the previous quarter and up 6 basis points on its
    level of 3Q2010. In the Belgium Business Unit, both credit and deposit
    volumes were up year-on-year and quarter-on-quarter (credit: +5% year-on-
    year and +2% quarter-on-quarter; deposits +9% year-on-year and +3% quarter-
    on-quarter). The loan book in the CEE Business Unit increased by 3% year-on-
    year (thanks to the Czech Republic and Slovakia) and by 1% quarter-on-
    quarter, while deposits also increased 3% year-on-year and 1% quarter-on-
    quarter. In line with the strategy to run down the international loan books,
    the loan portfolio in the Merchant Banking Business Unit fell 4% year-on-
    year (stable in the last quarter), while the deposit base shrunk by 17%
    year-on-year (8% in the last quarter), commensurate with the reduction in
    the international loan book.
  * A very good performance was turned in on the technical insurance front
    during the quarter under review: net of technical charges and ceded
    reinsurance result, technical insurance income came to 138 million euros in
    3Q2011, up 52% year-on-year and 12% quarter-on-quarter. Moreover, non-life
    premium income increased by 7% year-on-year on a comparable basis, and the
    year-to-date combined ratio came to an excellent 90%. In life insurance, we
    witnessed a significant increase in the sale of unit-linked products, both
    in Belgium and in CEE, which more than offset the decrease in interest-
    guaranteed products.
  * The net result from financial instruments at fair value amounted to 10
    million in 3Q2011, significantly below its level both in the previous
    quarter and a year earlier, due to the weak performance turned in by the
    dealing room in the quarter under review.
  * Net fee and commission income amounted to 367 million euros, unchanged on
    the year-earlier quarter, but down 7% on the previous quarter. Net fee and
    commission income was hit by the relatively low level of fees generated by
    the asset management business (reduced investor risk appetite).
  * The other income components came to an aggregate -185 million euros. The
    263-million-euro provision set aside for the contingent repayment intention
    that KBC has provided its retail clients in relation to the  5-5-5 products
    had a significantly adverse impact in this regard (recorded under 'Other net
    income').
 
Operating  expenses  stable,  significant  loan  loss  provisions  for  Hungary,
Bulgaria and Ireland, and additional impairment on Greek government bonds.
 
  * Operating expenses came to 1 172 million euros in the third quarter of
    2011. This was in line (+1%) with the previous quarter and - disregarding
    the booking in 3Q2010 of the Hungarian bank tax for FY2010 - also comparable
    to its year-earlier level. The year-to-date cost/income ratio came to 61%
    (58% excluding the impact of the 5-5-5 product), a clear indication that
    costs remain under control.
  * Loan loss impairment stood at 475 million euros in the third quarter, up on
    the 356 million euros recorded a year ago, and up on the 164 million euros
    recorded in the previous quarter, due to significant additional provisions
    being set aside for Ireland, Hungary (following the new legislation on forex
    loans) and Bulgaria. As a consequence, the annualised credit cost ratio
    stood at 0.61% for the first nine months of 2011; this breaks down into an
    excellent 0.09% for the Belgian retail book (down even further on the 0.15%
    recorded for FY2010), 1.44% in Central and Eastern Europe (up from 1.16% for
    FY2010) and 0.90% for Merchant Banking (down from 1.38% for FY2010).
  * Other impairment charges came to 265 million in the quarter under review and
    related mainly to shares in the investment portfolio (87 million euros) and
    an additional impairment on Greek government bonds (176 million euros, over
    and above the 139 million euros booked in the previous quarter), bringing
    the fully recognised impairment to 58% of the nominal amount of these bonds.
 
Strong solvency capital position under Basel II.
 
  * The group's tier-1 ratio (under Basel II) came to a strong 13.6% at 30
    September 2011 (core tier-1 ratio of 11.7%). Including the effect of
    divestments for which a sale agreement has been signed to date (Fidea and
    KBL EPB), the pro forma tier-1 ratio even stands at approximately 14.4%
    (core tier-1 ratio of 12.6%).
 
Highlights of underlying performance per business unit.
 
  * The Belgium Business Unit contributed 32 million euros to profit in 3Q2011.
    This was 206 million euros less than in 2Q2011. The quarter was
    characterized by stable net interest income, excellent insurance results and
    a very low level of loan impairments. The quarter-on-quarter decrease is
    entirely related to a provision of 132 million euros (pre-tax) on the
    contingent repayment intention that KBC has provided its retail clients in
    relation to 5-5-5 products, and to significant impairment on shares and
    Greek government bonds in the investment portfolio.
  * The CEE Business Unit (Czech Republic, Slovakia, Hungary and Bulgaria)
    posted a loss of 40 million euros in 3Q2011, as opposed to a profit of 146
    million euros in the previous quarter. Good life insurance sales, a
    favourable combined ratio and a stable net interest income defined this
    quarter. The decrease was almost entirely due to the impairment taken on the
    loan portfolios of Hungary (forex mortgages) and Bulgaria, and on Greek
    government bonds.
  * The Merchant Banking Business Unit posted a loss of 196 million euros in
    3Q2011, as opposed to 63 million euros in profit recorded in 2Q2011. The
    decrease is due mainly to the provision of 132 million euros (pre-tax) on
    the contingent repayment intention the KBC has provided its retail clients
    in relation to the 5-5-5 products, to higher impairment charges on loans and
    receivables in Ireland and a weak dealing room result.
  * It should be noted that all planned divestments in the KBC group (including
    those that originated from the change to the strategic plan in mid-2011,
    i.e. Kredyt Bank and Warta in Poland) are not included in the respective
    business units, but have been grouped together in the Group Centre in order
    to clearly indicate the financial performance of the long-term activities
    and the planned divestments separately. In 3Q2011, the Group Centre's net
    result came to -44 million euros, compared to 81 million euros in the
    previous quarter. The result was impacted by the -43-million-euro (pre-tax)
    impairment on Greek bonds (over and above the -36 million euros recorded in
    the previous quarter) and the divestment of Centea, among other factors.
 
Substantial negative value adjustments dominate exceptional items.
 
  * The quarter was also characterised by a number of exceptional items that
    were not part of the normal course of business and were therefore excluded
    from the underlying results. Their combined impact in 3Q2011 amounted to a
    negative 1.3 billion euros. Apart from some smaller items, the main non-
    operating items in 3Q2011 were:
 
      * a valuation markdown of 0.6 billion euros on the CDO exposure (resulting
        mainly from a widening of corporate and ABS credit spreads).
      * a negative 0.2 billion euros marked-to-market change in the value of the
        position in trading derivatives used for hedging purposes, primarily
        because of a further widening of government spreads.
      * a positive 0.2 billion euros marked-to-market change regarding KBC's own
        credit risk.
      * a negative 0.1 billion euros impairment on goodwill for CIBank in
        Bulgaria.
      * a negative 0.6 billion euros as a result of the sales agreements signed
        for KBC EPB and Fidea.
 
First nine months of 2011: results per heading (IFRS)
 
Explanations  per heading of the IFRS income statement for the first nine months
of 2011 (see summary table on the next page):
 
  * The IFRS net result for the first nine months of 2011 (further referred to
    as 9M2011) amounted to -424 million euros, as opposed to +1 136 million
    euros recorded in the same period of 2010.
  * Net interest income amounted to 4 142 million euros in 9M2011. On an
    underlying basis and excluding companies that have since been sold, net
    interest income was up 1% year-on-year. On a comparable basis, the loan book
    increased by 1% year-on-year. In line with our intention to scale down our
    international loan book outside our home markets, the loan portfolio
    contracted by 4% year-on-year in Merchant Banking and by 2% in the Group
    Centre. On the other hand, the loan books in our core markets of Belgium and
    CEE, grew by 5% and 3% year-on-year, respectively. Mortgage loans
    contributed significantly to this growth, with a year-on-year increase of as
    much as 8% for Belgium and 4% for CEE. Customer deposits rose by 9% in
    Belgium, by 3% in CEE and fell significantly in Merchant Banking and the
    Group Centre. The net interest margin remained more or less the same, both
    in Belgium and in CEE.
  * Net of technical charges and the ceded reinsurance result, technical
    insurance income came to 379 million euros, up a good 57% on the year-
    earlier figure. The first nine months of 2011 were characterised by a
    relatively low level of claims. The combined ratio for the group's non-life
    insurance companies came to an excellent 90% for 9M2011 (85% in Belgium,
    93% in CEE), a significant improvement on the 100% for FY2010.
  * Net fee and commission income amounted to 877 million euros in 9M2011, down
    4% on its 9M2010 level. In the period under review, sales of commission-
    based products remained subdued, and assets under management fell 9% year-
    on-year to 193 billion euros at the end of September 2011(150 billion euros
    when excluding KBL EPB), both on account of the negative investment
    performance and net entry effect.
  * The net result from financial instruments at fair value (trading and fair
    value income) came to -613 million euros in 9M2011, compared to -506 million
    euros in 9M2010. On an underlying basis (i.e. excluding exceptional items
    such as value adjustments to structured credit, results related to the
    activities of KBC Financial Products that are being wound down, and after
    shifting all trading-related income items to this income statement line),
    trading and fair value income amounted to 371 million euros in 9M2011, down
    49% on its year-earlier figure.
  * The remaining income components were as follows: dividend income from equity
    investments amounted to 70 million euros, the net realised result from
    available-for-sale assets (bonds and shares) stood at 86 million euros and
    other net income totalled 53 million euros. This last item has been impacted
    by a provision of 263 million euros recorded in 3Q2011 for the contingent
    repayment intention that KBC has provided its retail clients in relation to
    the  5-5-5 products.
  * Operating expenses amounted to 3 301 million euros in 9M2011, 2% higher than
    in 9M2010, with such factors as inflation, wage increases and the higher
    banking tax  offsetting the effect of deconsolidated entities. The
    underlying cost/income ratio for banking - a measure of cost efficiency -
    stood at 61% in 9M2011, up on the 56% recorded for FY2010 (increase also
    clearly attributable to the lower level of total income, cf. provisioning
    for the 5-5-5 product).
  * Total impairment stood at 1 377 million euros in 9M2011. Impairment on loans
    and receivables amounted to 733 million euros, down on the 990 million euros
    recorded in 9M2010, notwithstanding the high level recorded in 3Q2011 for
    Ireland, Hungary and Bulgaria. As a result, the annualised credit cost ratio
    for 9M2011 came to 0.61%, an improvement on the figure of 0.91% for FY2010.
    Other impairment charges totalled 644 million euros in 9M2011 (versus 111
    million euros in 9M2010) and relate mainly to the impairment recorded on
    Greek government bonds in the second and third quarters (315 million euros,
    pre-tax), on shares in the investment portfolio (106 million euros) and on
    goodwill (79 million euros, related to CIBank in Bulgaria, among other
    things).
  * Income tax amounted to 245 million euros for 9M2011.
  * At the end of September 2011, total equity came to 17.4 billion euros, a
    1.3-billion-euro decrease compared to the start of the year, due mainly to
    the inclusion of the negative result (-0.4 billion euros) for 9M2011 and the
    dividend and state coupon paid (-0.9 billion euros, combined). The group's
    tier-1 capital ratio - a measure of financial strength - stood at a sound
    13.6% at end-September 2011.
 
Other information
 
Strategy highlights and main events
 
  * KBC's core strategy remains centred around bancassurance in Belgium and a
    selection of countries in CEE (Czech Republic, Slovakia, Hungary and
    Bulgaria). In line with its strategic plan, which was amended in July 2011
    (the intended IPO of a minority share in CSOB was replaced by the divestment
    of Kredyt Bank and Warta in Poland, among other things), the group is
    continuing with the sale or run-down of a number of (non-core) activities
    (see further).
 
  * In 3Q2011, we continued to implement our strategic refocusing plan:
 
      * On 1 July 2011, the sale of Centea to Crédit Agricole (Belgium) was
        closed. This deal freed up around 0.4 billion euros of capital for KBC,
        primarily by reducing risk-weighted assets by 4.2 billion euros, which
        boosted KBC's tier-1 ratio by around 0.4%. The gain on the deal is
        limited.
      * On 3 August 2011, it was announced that KBC Securities had divested its
        operations in Serbia and Romania, after reaching an agreement on
        management buy-outs with local management (very limited impact on the
        earnings and capital of the group).
      * On 10 August 2011, the sale of KBC Asset Management's 55.46% stake in
        KBC Concord Asset Management Co. Ltd. to Value Partners Ltd. was closed
        (very limited impact on the earnings and capital of the group).
      * On 10 October 2011, KBC reached an agreement with Precision Capital for
        the sale of its private banking subsidiary KBL European Private Bankers
        ('KBL EPB') for a total consideration of 1 050 million euros (50 million
        of which depends on the results of KBL EPB ('conditional earn out')).
        The transaction will release a total of approximately 0.7 billion euros
        in capital for KBC, resulting in a 0.6 % increase in KBC's tier-1 ratio.
        In addition, over the last 18 months, some 115 million euros in capital
        has already been released as a result of a reduction in risk-weighted
        assets. The transaction impacted the 3Q2011 results to the tune of
        approximately -0.4 billion euros. Closure of the transaction is subject
        to the customary regulatory approval.
      * On 17 October 2011, KBC reached an agreement with J.C. Flowers & Co. for
        the sale of its subsidiary Fidea for a total consideration of 243.6
        million euros, including a 22.6 million euros pre-completion dividend
        and subject to pricing adjustments on closing accounts. In total, this
        deal will free up around 0.1 billion euros in capital for KBC, primarily
        by reducing risk-weighted assets by 1.8 billion euros. The overall
        positive impact on KBC's tier-1 ratio is around 0.1%. The transaction
        impacted the results to the tune of roughly -0.1 billion euros. Closure
        of the transaction is subject to the customary regulatory approval.
      * A number of companies are still scheduled for divestment. The sales
        processes for Kredyt Bank, Warta and KBC Bank Deutschland have started,
        and the files for the sales process for Antwerp Diamond Bank are being
        prepared.
      * KBC's main objective in this respect is and remains to implement the
        plan within the agreed timeframe and to repay the Belgian authorities in
        a timely manner. KBC also intends to maintain a regulatory tier-1
        capital ratio of 11%, according to Basel II banking capital adequacy
        rules.
 
* Other main events in 3Q2011:
 
      * The deteriorating credit position of Greece in the financial markets led
        to an impairment of an additional 126 million euros (after tax) being
        recorded on our Greek government bond portfolio (fully recognised at
        58% of the nominal amount), while a provision of 174 million euros
        (after tax) was set aside for the contingent repayment intention that
        KBC has provided its retail clients in relation to the  5-5-5 products.
      * During September, the bill on FX debt rescheduling became law in
        Hungary. Although the matter has been taken to the Constitutional Court
        in Budapest, KBC has recorded an impairment of 74 million euros (after
        tax) on this portfolio, reflecting an anticipated 20% participation rate
        in the scheme.
      * In Bulgaria, a thorough evaluation of the underlying asset values has
        led to an impairment of 96 million euros being recorded. An impairment
        of 53 million euros has also been recorded on the goodwill for CIBank.
      * Following the stock market downturn, impairment of 87 million euros
        (before and after tax) had to be recorded on the share portfolio.
      * Given that the economy and Irish marketplace have not improved in the
        way we envisaged and that the austerity measures have had a considerable
        impact on households, a loan loss provision of 164 million euros (after
        tax) was recorded for the Irish loan book.
      * The substantial widening of corporate ABS credit spreads between end-
        June and end-September resulted in a valuation markdown of 0.6 billion
        euros (after tax) on the CDO exposure.
      * The considerable widening of government spreads between end-June and
        end-September resulted in a negative 0.2 billion euros (after tax)
        marked-to-market change in the value of the position in trading
        derivatives used for hedging purposes.
      * The widening of KBC's credit spread between end-June and end-September
        resulted in a positive 0.2 billion euros (after tax) marked-to-market
        change regarding KBC's own credit risk.
      * Under the preliminary EBA exercise based on data as at the end of June
        (see press release of 27 October 2011), both KBC group and KBC Bank
        complied with the 9% core tier-1 threshold as determined by the EBA
        (capital position according to B2.5, corrected with the marked-down
        sovereign exposures based on market prices as at 30 September 2011). The
        preliminary capital buffer as identified at the end of June is
        sufficient to cover 3Q11 results. An update of the outcome of the EBA
        exercise based on positions and market prices as of 30 September is
        expected to be published in November 2011.
      * We have also acted to reduce volatility in our results. During the third
        quarter, our CDO exposure was reduced by 2.5 billion euros, which
        constitutes a 12% decline in the notional amount outstanding. This was
        achieved  by early terminations and sales at limited cost. During the
        third quarter, our ABS exposure was reduced by 0.7 billion euros, which
        constitutes a 17% decline in the notional amount outstanding. This was
        achieved by sales at limited cost.
      * KBC responded to the market developments of recent months by further
        reducing in an efficient manner its government bond exposure to PIIGS
        countries, cutting it from 9.6 billion euros at 30 June 2011 to 6.7
        billion euros at 30 September 2011. Moreover, KBC has since further
        reduced its exposure by a nominal amount of 1.6 billion euros (by the
        end of October).
      * The Belgian regulator has confirmed to us that the YES (Yield Enhanced
        Securities) will be fully grandfathered as common equity under the
        current CRD4 proposal.
 
* This news item contains information that is subject to the transparency
regulations for listed companies.
 
Quarterly report 3Q2011: 
http://hugin.info/133947/R/1561833/484176.pdf
 
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Source: KBC Groep via Thomson Reuters ONE
 
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