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2 up.date News for Investors. January Money and Capital Markets: Review of 2004 and Outlook for 2005.

3 e.ditorial Dear Readers, In 2004 KfW s activities in the capital market were marked by a mixture of well-established instruments and innovation. Whereas the Benchmark Programmes set up in the years before were continued almost without any changes, new products were introduced and there were interesting developments in the demand for individual products. Just to mention a few highlights: We were pleased about the strong demand for KfW bonds denominated in British pounds, which has noticeably increased in comparison with the previous years. The FSA s new financial rules for UK life insurers have certainly contributed to the recovery of the market. According to these rules KfW bonds are put on a par with securities of sovereign issuers in terms of equity capital requirements. This makes them, even more than before, a good alternative to British government bonds. Another trend which we noticed in 2004 was the remarkably strong demand for indexed bonds from institutional investors. In this segment KfW issued structured bonds indexed to a capital market rate in the form of private placements, but also a public bond tied to the development of prices in Europe. A new issue for EUR 1 billion based on the TEC 10 index, which calculates the average yield of French government bonds, received special attention. This issue was very well accepted in the market and could even be increased to EUR 1.25 billion at the beginning of On the other side of the Atlantic, KfW focused particularly on the Canadian market in the last year. For the first time we issued a bond for 1 billion Canadian dollars in global format and successfully placed it in the market. In this edition of update we give you a short survey of KfW s funding activities in the year 2004, first covering our money market issues and then our long-term borrowing. Of course, we also report on our issue plans for the year Dr. Frank Czichowski Treasurer Money Markets. KfW s money market activities were a success again in In the Euro Commercial Paper Programme KfW issued EUR 45.7 billion in the course of the year, topping the previous year s volume by 23%. Once again, KfW was able to strengthen its position as one of the largest issuers in this market. Roughly half of all issues were denominated in euros. Thus, the euro for the first time slightly outperformed the US dollar as the most important currency in KfW s shortterm funding. The US Dollar Commercial Paper Program of KfW International Finance again showed a positive record at the end of In the course of the year KfW International Finance launched more than 700 individual transactions for USD 38.0 billion. As the market still offers considerable opportunities for placing commercial paper, KfW intends to increase the programme volume of its US Dollar Commercial Paper Program as of February 1, 2005 to USD 10 billion. Both money market programmes are KfW s most important source of short-term funding.

4 Capital Markets in Benchmark Program and private placements). The table shown on the left presents the shares of the individual currencies in KfW's longterm borrowings. Foreign currency bonds are converted into euro at the exchange rate applicable on the day of trading. increases of outstanding issues, and at the same time to ensure the positive performance of these bonds. In 2004, the pound sterling replaced the Japanese yen (JPY) as the third most important Volume issued in 2004 by currency Currency (in EUR billion) in % EUR % USD % GBP % JPY % AUD % CAD % Other currencies % Total 52.1* 100%* * Deviation in the total is due to rounding Benchmarks in GBP (as of January 2005) Maturity Coupon Outstanding volume (in GBP million) % 1, % 1, % % 1, % 1, % % In 2004 KfW raised a total volume of EUR 52.1 billion in different currencies and with different instruments in the capital market. This was in the middle of the range of EUR 50 to 55 billion announced at the beginning of the year. Altogether more than 371 individual transactions were recorded, of which more than 97% in the form of bonds and notes whereas only a small number was issued in the context of synthetic asset securitisation. As for the composition of new borrowings by currency, the share of the euro declined compared with the previous year, so that US dollar and euro now account for almost equal shares. This is due to the strong demand for US dollar securities, which were placed very successfully with institutional investors around the world in all segments (benchmark bonds, public bonds outside the In addition, we were pleased to see a recovery of the KfW programme in British pounds (GBP) in The issue volume reached GBP 4.5 billion, which is equivalent to EUR 6.7 billion. Given a total of 37 transactions in pound sterling both new issues and increases of outstanding bonds and notes in order to improve their liquidity the yield curve of KfW s outstanding GBP bonds was further completed. For the benefit of investors we are aiming in 2005 as well to continuously step up our offers of large-volume bonds, among others through issue currency. New issues in JPY declined, partly because there was a low demand for reinvestment in structured JPY securities. In the last few years KfW had issued large volumes of callable JPY bonds. In 2004 only a small portion of these call options was exercised and so less capital was invested in new bonds than in earlier years. The Japanese market is still of strategic importance for KfW. KfW held an investor conference in Tokyo in 2004 to celebrate 20 years of successful presence in the Japanese capital market. The ten other currencies in which KfW Funding volume and number of transactions by instrument Issue volume in EUR billion Share of total funding volume Number of transactions Benchmark bonds % 5 Other public bonds % 104 Private placements % 244 Securities (total) % 353 Loans against debt certificates 0.3 1% 9 CLS (synthetic asset securitisation) 1.2 2% 9 Loans (total) 1.5 3% 18 Total funding volume 52.1* 100%* 371 * Deviation in the total is due to rounding

5 issued in 2004 included for the first time Hungarian forint and Singapore dollars. If investor demand is sufficient and if there are suitable opportunities to hedge the risks, KfW will further extend its range of currencies in As regards the products offered, KfW s funding is based on three pillars, as in the years before: the benchmark programmes, the public bonds issued outside the benchmark programmes and the private placements. First, of course, there are the two benchmark programmes in euro and US dollar. Altogether three EUR benchmark bonds and two USD global bonds with maturities of three, five and ten years were issued under the two KfW benchmark programmes, thus covering 35% of KfW s total funding requirements. But in terms of total volume, the benchmark programmes were outperformed by public bonds issued outside the benchmark programmes. This includes securities in 14 currencies, some of which have structured coupons. The bonds and notes of this second pillar make up almost half of total borrowings. The third major pillar is tailor-made private placements, which account for almost one fifth of all borrowings. They also include a product which specifically targets retail investors, the so-called KfW-Privatpapiere. These securities are offered on a weekly basis and were first issued in January Further information is available under Funding Outlook For the year 2005 we expect our funding volume to stay the same as in 2004, that is between EUR 50 and 55 billion. The volume of EUR benchmark bonds will range between EUR 3 and 5 billion. USD global bonds issued under the KfW benchmark programme will have a volume of USD 2 to 3 billion with a maturity of up to five years. Bonds with a maturity of more than five years will have a minimum volume of at least USD 1 billion. We intend to optimise our products so as to ensure that, for the benefit of investors, products offered are always priced fairly and at the same time show a good performance. This does not just apply to our benchmark programmes. Of course, we will make all possible efforts, also in the segment of other public bonds and private placements, to meet investors interest in the flexible form they have grown accustomed to. We want to carry on as one of the most reliable issuers in Europe in 2005 as well. KEY FIGURES FOR THE KFW BANKING GROUP. Group Figures for KfW Bankengruppe, in EUR billion I. KfW Mittelstandsbank Loan Financing of which: Unternehmerkredit Global Loans for Commercial Enterprises Mezzanine Financing Equity Financing Securitisations II. KfW Förderbank Housing Investments of which: Global Loans for the Housing Industry Education Municipal Infrastructure Environmental Investments Global Credit Lines to Special Credit Institutions of the Federal States Securitisations Investment Finance in Germany and Europe III. KfW IPEX-Bank Manufacturing, Telecommunications Energy, Environment Transport, Transport Infrastructure Other (AKA Export Credits, Grants) IV. KfW Entwicklungsbank V. DEG Total Financing Volume Environmental and Climate Protection Funds raised Group Balance-sheet Total Differences in the totals are due to rounding. 1 As of September 1, 2003, the KfW SME Programme and the DtA Start-up Programme were combined to create a new product the Unternehmerkredit, or Entrepreneur Loan including the variants Leasing, Abroad, Working Capital, and GuW (Start-up and Growth Financing). 2 Contained in the total financing volume as cross-cutting promotion of KfW Mittelstandsbank and KfW Förderbank. 3 Preliminary balance-sheet total before certification by the auditor.

6 STICKER FROM THE NEWSTICKER FROM THE NEWSTICKER FRO SUPPORT FOR PRIVATISATION. In 2004 KfW continued the privatisation of Deutsche Telekom AG and Deutsche Post AG. In October 2004 KfW sold shares of Deutsche Telekom in a transaction combining a share placement in the total volume of approximately EUR 3 billion and warrants on Deutsche Telekom shares worth about EUR 1 billion. With this combined placement of shares and warrants KfW added a new and innovative element to its range of placement structures. At the end of November it sold shares of Deutsche Post for a total of EUR 1.15 billion. Under new holding arrangements with the German government, KfW acquired around 3.3% of the shares of Deutsche Telekom worth EUR 1.6 billion in December 2004 and around 142 million shares of Deutsche Post World Net in January Currently KfW holds approximately 15% of the shares of Deutsche Telekom AG (around 642 million shares) and approximately 49% of the shares of Deutsche Post World Net (around 543 million shares). KfW s goal of selling its holdings in both companies in the capital market in the medium term remains unchanged. Against this background KfW became the first non-japanese issuer to offer Uridashi bonds exchangeable into shares of Deutsche Post AG in Japan at the beginning of EDUCATION AS AN INVESTMENT IN THE FUTURE. In the year 2004, too, KfW provided more loans to finance education. About 70,000 students and pupils as well as skilled professionals finance their education and training with KfW funds. The lending volume rose by 4 % to EUR 812 million. There was a particularly strong increase in the demand for financial support in the final phase of studies or training courses. Commitments under the student loan programme ( Bildungskredit ) rose by 37 % to EUR 90 million. This is an indication that more and more students consider the possibility of taking a loan to finance their costs of living and to reduce their periods of study as a serious alternative to jobbing. SUCCESSFUL START FOR KFW IPEX-BANK. At the end of 2004 new commitments made by KfW IPEX-Bank, which combines the business areas of project and corporate finance in Germany and international export and project finance, amounted to EUR 11.8 billion (2003: EUR 11.5 billion), EUR 5.7 billion of which were for projects in Germany and EUR 6.1 billion for projects in other countries. The very good results achieved can be attributed to the highly favourable market conditions in specific business segments, such as ship finance, but also to the fact that the Bank could win new customers in other segments and successfully introduced new products. KFW ENTWICKLUNGSBANK ACTIVELY INVOLVED IN MICROFINANCE is the United Nations Year of Microfinance. Given a financing volume of around EUR 400 million, KfW Entwicklungsbank (KfW development bank) is one of the leading banks worldwide in the field of microfinance. On behalf of the German Federal Ministry for Economic Cooperation and Development KfW supports the establishment of microfinance institutions in altogether 82 projects in 36 countries. Microfinance institutions concentrate specifically on the financial needs of people with low incomes. Improved access to financial services makes it possible for small and micro enterprises to increase their turnover, create jobs and raise their incomes. Besides setting up microfinance institutions, KfW Entwicklungsbank also supports local commercial banks and non-governmental organisations active in the field of microfinance. CKER FROM THE NEWSTICKER FROM THE NEWSTICKER FROM T

7 M THE KfW Bankengruppe Palmengartenstraße 5-9, Frankfurt am Main Telephone , Fax Investor Relations Dr. Axel Breitbach Telephone , Telefax Press Office Capital Markets: Nathalie Drücke Telephone , Telefax WHAT OUR BONDS STAND FOR. Quality Transparency Liquidity Performance Quality Liquidity E

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