KBC: update on structured credit and 4Q 08, str...

Regulated information* - 22 January 2009 (8.00 a.m. CET)

KBC strengthens capital base


Following the adverse share price trend in recent days, KBC wants  to
inform the market about a number  of decisions it has taken. KBC  has
written down in full the value of the (mezzanine) CDO notes in  which
it has invested  (retaining only  the super  senior tranches),  while
also measures were taken to further concentrate its activities on its
home markets, contain  costs and  reduce market  risk. Moreover,  the
group is further strengthening its capital  base by a 2 billion  euro
non-dilutive core  capital  issue to  be  subscribed by  the  Flemish
Regional Government (subject to approval of the qualification as core
capital by  the  sector  regulator).   An  additional,  standby  core
capital facility of 1.5 billion euros is also being provided.

According to André Bergen, Group CEO: "We took a conservative  stance
when marking down to zero all  CDO investments which do not have  the
highest, so-called super senior status.  We have also taken  decisive
measures to reduce costs  and to further reduce  the risk profile  of
our activity portfolio. We are pleased to see that the performance in
our core markets in  Belgium and Central and  Eastern Europe held  up
relatively well. Excluding  the impact of  the exceptional  financial
crisis, underlying profit  for the  year came to  around 2.2  billion
euros, a  positive  result achieved  in  a very  difficult  operating
environment. The financial position of the group remains solid  after
we obtained the commitment this morning to an additional non-dilutive
capital-strengthening transaction."

4Q earnings highlights
*          Net reported loss for the fourth quarter, bringing the
  full-year results to around -2.5 billion euros
*          The above earnings prognosis based on provisional,
  unaudited figures; subject to change
*          -2.6 billion, net, investment markdowns recorded
  (conservative valuation approach), as detailed in the following
  paragraph
*          Strong market position in Belgium underpinning business
  profitability despite weakening environment. Steady deposit inflow
  supporting excellent liquidity position (while interbank market
  funding on longer tenures also became accessible)

  * Volume trends in CEE resilient while also credit loss remained
    below market expectations
  * Merchant banking results negatively impacted by trading loss in
    the derivative products business while non-domestic loan losses
    increased
  * Earnings of European Private Banking impacted by adverse
    investment climate

Financial impact of additional value write-downs on investments in 4Q
2008
*          The structured credit portfolio was marked down to the
  tune of 1.9 billion euros (1.7 billion euros after tax), bringing
  the total markdown for 2008 to 4.0 billion euros (3.1 billion euros
  after tax). The amount for the fourth quarter includes the impact
  of downgrades of CDO notes (-0.6 billion euros), the impact of
  credit spread widening (-0.3 billion euros) and an increase in the
  provision for counterparty risk of monoline insurers (-0.4 billion
  euros). Another -0.5 billion euros was added for the full
  write-down of all remaining non-super senior exposure, partly
  offset by the reversal of existing deal reserves (+0.2 billion
  euros). A sudden rise in asset correlations caused an extraordinary
  loss of -0.3 billion euros.
*          Impairment in the amount of 0.7 billion euros was recorded
  on the equity investment portfolio, mainly held in the insurance
  business, as European share prices sank by around 20% during the
  quarter. This amount includes the impact of a more conservative
  methodology for impairment tests, as decided on in consultation
  with our external auditors. Impairment for the entire 2008
  financial year came to 1.1 billion euros.
*          Write-offs on exposures to Icelandic banks had a net
  negative impact of 0.2 billion euros on earnings.
Following the full  write-down of the  (mezzanine) CDO notes,  credit
rating downgrades  of remaining  CDO tranches  will have  no  further
impact on  their  valuation.  Moreover, a  hypothetical  25%  further
widening of the credit spread will have an estimated net impact of
 -0.2 billion  euros  on the  value  of the  remaining  super  senior
exposure.

Other relevant earnings items
*          In Q4 2008, the trend for loan losses was upwards,
  although loss charges remain well below levels expected by the
  market. Excluding losses on credit exposure to troubled US and
  Icelandic banks, a loan loss ratio of around 35 basis points is
  expected for the entire financial year. In CEE, the 2008 loan loss
  ratio is expected to end somewhere between 50 and 60 basis points.
*          Given the sudden rise in volatility and correlation
  levels, a trading loss in the amount of 0.2 billion euros was
  recognised for the derivative products business. Measures have been
  taken to downsize this business line and to reduce future earnings
  volatility, consequently.
*          Restructuring charges in the amount of 0.1 billion euros
  were recorded for all business units combined.
*          As in the past, KBC did not recognise the fair value gain
  on its own debt issued (currently roughly estimated at around 0.8
  billion euros before tax).

Core capital strengthening
This morning, KBC  has reached  agreement with  the Flemish  Regional
Government for a non-dilutive, core capital injection of 2.0  billion
euros (subject to approval  of the qualification  as core capital  by
the Belgian  financial sector  regulator CBFA).  The capital  support
will enable  KBC  to  maintain  its  tier-1  ratio  for  the  banking
activities at  approximately 10.5%  (of which  8% core  tier-1).  The
terms and conditions  will be similar  to those of  the core  capital
issue subscribed by the Belgian State in December 2008. In  addition,
an agreement was reached for  a stand-by (non-dilutive) core  capital
facility to the tune of 1.5 billion euros. If needed, KBC can draw on
this facility to maintain capital at adequate levels in the future.

Final figures will be published on 12 February 2009
As the above  prognosis is  based on  provisional, unaudited  figures
from an early stage in the process of consolidating the results,  the
results given in this press release are subject to change.  KBC  will
publish its definitive  quarterly results on  12 February 2009,  when
detailed reports  will  be  provided containing  information  on  the
results and the structured credit portfolio.

* This news item contains information that is subject to the
transparency regulations for listed companies.


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