First Quarterly Report 2005.

First Quarterly Report 2005.

FIRST QUARTER AT A GLANCE. Business Development of Kf W Bankengruppe: First quarter operations went according to plan. First quarter 2005 commitments of KfW Bankengruppe totalled EUR 12.4 billion. As expected, the level was comparable to that of the previous year s first quarter (EUR 12.2 billion). Accordingly, the business development of the individual group brands was constant. KfW Mittelstandsbank a good start into the new year. With a financing volume of EUR 4.2 billion, KfW Mittelstandsbank did make clearly higher commitments than in the first quarter of the previous year. But this increase was due primarily to securitisation transactions, which turned out significantly higher at EUR 1.4 billion. Transactions of this sort distort the profile of quarterly business trends. They have to be considered against the year as a whole. KfW Mittelstandsbank expects the 2005 business volume to be roughly comparable to that of 2004. Loans made to business start-ups, self-employed professionals and SMEs in the first three months of the year amounted to EUR 2.6 billion, an increase of around 11%, or roughly EUR 270 million, against QI of the previous year. Mezzanine financings, in turn, were in less demand, amounting to EUR 123 million, while equity financings reached EUR 72 million, matching the previous year s level. Introduction of the risk-adjusted interest system on April 1, 2005. A central issue which KfW has intensively pursued in the first months is the introduction of a risk-adjusted interest system in the loan programmes for commercial enterprises from April 1, 2005.

As new pricing systems have been introduced in almost the entire market, the classical uniform interest rate system has lost its effectiveness. In the past, banks used to refuse long-term loans to small and medium-sized enterprises with a weak credit standing because the costs of handling and risk were unacceptably high for the onlending credit institution. The new system was developed in close cooperation with the banking industry. The interest rate for the borrower is determined in observance of prescribed limits and on the basis of the borrower s credit standing and the quality of collateral provided. Small and medium-sized enterprises are now been encouraged to improve their credit standing in order to obtain loans at better conditions. Special Microloans for company start-ups. A particular focus of KfW Mittelstandsbank s product offer is on the support of start-ups and young companies. Corporate finance analyses and surveys have shown that this group in particular often meets with difficulties if it wants to obtain debt capital, which in their case is mostly smallvolume loans. This is why KfW Mittelstandsbank offers the special programmes Mikrodarlehen (microloans) and StartGeld (start-up money) for start-ups and young enterprises. Since March 1 the programme Mikrodarlehen has received an additional financing window called Micro 10 for micro loans from EUR 5,000 to EUR 10,000 to make micro financings even more attractive. Here the onlending bank obtains an even higher handling fee. Besides, procedures may also be simplified for credit institutions that have entered into a partnership with start-up advisers and initiatives.

KfW Initiative Microfinancing. In addition to the special programmes for microloans, KfW Mittelstandsbank started an initiative for microfinancing. The members of the initiative are composed of experts from credit institutions, associations of the banking industry, ministries, municipalities and microfinance initiatives. The initiative pursues the objective of encouraging more intensive and more systematic partnerships between start-up advisers and onlending banks. This is to integrate the selection, qualification and advisory services offered by start-up advisers more effectively with the onlending banks lending process. The advantage of such partnerships is that specialised advisers can better prepare potential start-up enterprises for the start of their business and financing operations often associated with the start-up. For the bank this translates into better quality customers and lower administrative expenditure. The higher quality of the start-up enterprises financed and the intensive assistance which follows business establishment also lead to a reduction in the cost of risk. KfW Förderbank (KfW promotional bank). KfW Förderbank finances investments in environmental and climate protection, formation of home ownership, modernisation of homes and conversion of their energy systems, municipal infrastructure and education. In the first quarter of 2005 the commitment volume amounted to EUR 5.6 billion, nearly EUR 1.5 billion less than in the same period of the previous year. The reason for the decline is that the

Housing Modernisation Programme 2003 and the Special Fund Growth Impulses expired on schedule last year. Besides, no securitisation transaction has yet been conducted in the first three months of 2005 as opposed to 2004. For the promotion of the housing sector and climate protection in Germany in Europe KfW Förderbank committed promotional loans of EUR 2.2 billion in the first quarter of 2005. The new programmes of KfW Förderbank for rehabilitation and modernisation investments and for energy conservation and CO 2 reduction in residential buildings Housing Modernisation and Ecological Construction started as planned at the beginning of the year. For the general rehabilitation and modernisation of homes KfW Förderbank committed loans of around EUR 460 million in the first quarter of 2005. For energy conservation and CO 2 reduction measures an additional sum of just under EUR 0.5 billion was made available more than EUR 300 million of which was provided from the KfW CO 2 Building Rehabilitation Programme, in which the interest rate is particularly reduced from federal budget funds. In order to be able to meet the obligations Germany assumed under the Kyoto Protocol, the German federal government is working to reduce CO 2 emissions from the service sector, private households and transport by a further 7 million tonnes by the year 2012. Particularly in existing homes, there is still considerable potential to reduce CO 2 emissions. According to an evaluation performed by the Jülich

Research Centre, providing financial support for CO 2 reduction in existing homes is by far the most effective measure for promoting climate protection in the housing sector. The German federal government therefore has extended the KfW CO 2 Building Rehabilitation Programme, which was scheduled to expire at the end of 2005, by another two years. For the construction or acquisition of owner-occupied housing KfW Förderbank committed loans for EUR 1.3 billion in the first three months of the year, thereby supporting over 22,000 families in acquiring a home of their own. Loans of just under EUR 0.5 billion were committed to promote investment in municipal infrastructure. They were used primarily for investments in transport infrastructure, social infrastructure such as hospitals, nursing homes for senior and handicapped citizens, kindergartens, schools and sports facilities, waste and waste water management. Commitments for environmental protection investments rose strongly in the first quarter of 2005. KfW Förderbank committed a total of EUR 700 million to promote industrial pollution control investments and the use of renewable energies, an increase of 83% against the same period in the previous year. This increase was mainly a result of the ERP Environmental Protection and Energy Conservation Programme, which supports commercial investors in financing measures to improve environmental and climate protection. Commitments under these programmes more than doubled

against the first quarter of 2004, reaching EUR 395 million. The new KfW programme Solar Electricity Generation, which is being offered to finance small photovoltaic systems since January 1, 2005, is also being received by the market very well. Around 2700 loans were committed in a total volume of EUR 81 million already in the first three months of 2005. For the financing of investments in education KfW Förderbank made EUR 237 million available in loans an increase of 15% against the first quarter of the previous year. In particular, demand for the socalled Meister-BAföG (assistance for master craftsmen trainees) and the student loan rose strongly, a sign that taking loans to finance living expenses during vocational advancement or academic studies is being increasingly regarded as an alternative to taking side jobs. In addition, KfW Förderbank announced in the first quarter that a new student loan financing programme will be started with the 2005/2006 winter term. Students will be able to apply for the new KfW student loan for their first study programme regardless of their social origin, parents income and assets, or the subject they choose to study. With this loan students will have up to EUR 650 at their disposal every month from their first term to finance their living expenses. With the KfW student loan, which complements the BAföG government loan, students will not have to pursue time-consuming side jobs and have much more time for their actual studies. This not only shortens study times but may also contribute to reducing the number of students who give up their studies.

Promotion of Pollution Control and Climate Protection as a Cross-Cutting Task. In the year 2004 KfW Förderbank and KfW Mittelstandsbank again provided a high lending volume for investments in pollution control and climate protection, totalling EUR 6.5 billion after EUR 7.4 billion in the previous year. Of this sum, 49% was provided for measures to save energy in residential buildings, 26% for the promotion of renewable energies, 16% for the financing of municipal pollution control infrastructure and 9% for industrial pollution control. Altogether around EUR 5.4 billion was committed for climate protection. KfW is thus making a substantial contribution to the implementation of the national climate protection programme of the German federal government. KfW IPEX-Bank. In the first quarter KfW IPEX-Bank concluded new operations for EUR 2.1 billion, of which EUR 1.5 billion for projects outside Germany and EUR 0.6 billion for project and corporate financings within Germany. Particularly in its domestic business, but in foreign operations as well, products like short-term guarantees, which the bank has increasingly offered last year, again gained in importance. In the sectoral breakdown of its domestic business, loans to industrial enterprises, particularly manufacturing, shipping, construction and services, accounted for major individual shares. It its international business the financing of raw materials and transport infrastructure projects was the main focus.

The regions of Europe continued to be the most important partners of KfW IPEX-Bank s international business. A good 60% of new commitments went to European customers, also outside the EU. As before, however, the bank s business strategy is directed at operations in countries outside Europe as well. In Taiwan KfW IPEX-Bank financed the country s first commercially operated wind farm. Financing is in local currency with coverage from Euler Hermes. In Brazil it financed a biomass power station. KfW Entwicklungsbank (KfW development bank). In the first quarter of 2005 KfW Entwicklungsbank and DEG made commitments of EUR 0.4 billion. Disaster relief in Southeast Asia. KfW Entwicklungsbank has taken all necessary measures within its reach to implement reconstruction projects as quickly as possible in the countries affected by the devastating tsunami at the end of 2004. In agreement with the German Federal Ministry for Economic Cooperation and Development, Sri Lanka and Indonesia are the main relief recipients. KfW teams travelled to both countries shortly after the turn of the year to support the local governments in organising and preparing specific reconstruction measures in cooperation with other development organisations. Despite difficult local conditions they made swift progress in advancing the planning of suitable reconstruction programmes. Housing projects are planned in both countries. Hospitals and educational facilities are to be reconstructed in Indonesia, while in

Sri Lanka the drinking water supply system is to be repaired in the region of Galle as a follow-up to an ongoing Financial Cooperation project. The project conception extends beyond the mere reconstruction of destroyed infrastructure and is designed to promote development on a sustainable basis. The first operations can begin on short notice. In order to ensure that the planned measures can be implemented swiftly a local representative office was opened in Colombo, Sri Lanka, on April 1. Additional staff will be assigned to the existing office in Indonesia as well. Funding. In the first quarter of this year KfW raised nearly EUR 17 billion in the capital market. This was roughly one-third of the funding volume of EUR 50 55 billion planned for the year. Just under 40% of the funds was raised under KfW s Euro and US dollar Benchmark Programmes, and more than half were raised with other public bonds denominated in various currencies. Private placements accounted for 4%, and credit linked securities in connection with asset securitisation contributed 3%. The Euro remained the main funding currency of KfW Bankengruppe. At more than EUR 8 billion, securities denominated in Euro accounted for around half of the current issue volume. Nearly one-third of the funding volume was in US dollars, and pounds sterling ranked third with a share of 12%.

In the past months KfW offered a number of issues in Australian, Canadian and New Zealand dollars as well as in further currencies. Demand for these securities was so great that it enabled KfW to enter further markets and thus broaden its investor basis. Successful issue of Uridashi bond convertible into Deutsche Post shares in Japan. In January 2005 a further step in the privatisation process was taken with a bond convertible into shares of Deutsche Post AG worth EUR 1.1 billion. FW issued a five-year Euro bond in Japan in the Uridashi format, that is, in a currency foreign to the Japanese market. With this Uridashi bond, the first convertible bond in this market ever, KfW targeted retail investors for the first time since the IPO of Deutsche Post in 2000. The bond was placed in the market with circumspection. As a result, the share price of Deutsche Post AG rose even during the marketing phase. So KfW again utilised an innovative capital market instrument successfully in its privatisation activities. As KfW is very well known in Japan, this helped the transaction to succeed. For more than 20 years, Japanese investors have played a major role in KfW s funding strategy.

Key Figures for KfW Bankengruppe in EUR billion 2004 2004 2005 Jan 1 Mar 31 Jan 1 Mar 31 I. KfW Mittelstandsbank (KfW SME bank) 14.0 2.7 4.2 Loan financing 9.3 2.3 2.6 of which Unternehmerkredit 1 5.7 1.7 1.3 Global Loans for Commercial Enterprises 2.8 0.5 1.2 Mezzanine financing 0.6 0.2 0.1 Equity financing 0.3 0.1 0.1 Securitisations 3.7 1.4 II. KfW Förderbank (KfW promotional bank) 34.5 7.1 5.6 Housing investments 11.9 3.0 2.2 of which Global loans for the housing industry 2.9 0.5 Education 0.8 0.2 0.2 Municipal infrastructure 4.2 1.0 0.5 Environmental investments 2.2 0.4 0.7 Global credit lines for special credit institutions of the states 3.9 1.5 2.0 Securitisations 11.4 1.0 Investment finance in Germany and Europe 48.4 9.8 9.9 III. KfW IPEX-Bank 11.9 2.2 2.1 Manufacturing, Telecommunications 5.2 0.8 0.9 Energy, Environment 1.2 0.2 0.1 Transport and Transport Infrastructure 5.2 0.8 1.0 Other (AKA Export Loans, Grants) 0.3 0.3 0.1 IV. KfW Entwicklungsbank (KfW development bank) 1.9 0.2 0.3 V. DEG 0.6 0.1 0.1 Total financing volume 62.9 12.2 12.4 Environmental and climate protection 2 6.5 1.4 1.4 Funds raised 52.1 17.5 16.9 Balance-sheet total of KfW Bankengruppe 328 324 342 Differences in the totals are due to rounding. 1 Effective 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 Included in the total financing volume as general promotion by KfW Mittelstandsbank and KfW Förderbank. 18 0422 KfW Bankengruppe Palmengartenstrasse 5 9, 60325 Frankfurt am Main, Germany Telephone +49 69 7431-0, Fax +49 69 7431-2944 info@kfw.de, www.kfw.de