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Rating Action:

Moody's downgrades KBC Bank to Aa3/C+, maintains negative outlook

26 Jan 2009

KBC Group downgraded to A1 with a negative outlook

Paris, January 26, 2009 -- Moody's Investors Service today downgraded KBC Bank's bank financial strength rating (BFSR) to C+ from B- and its long-term debt and deposit ratings to Aa3 from Aa2. At the same time, KBC Group's long-term debt rating was also downgraded to A1 from Aa3. All long-term ratings and the bank's BFSR continue to carry a negative outlook. All short-term ratings were affirmed at Prime-1. As a consequence of the rating action on KBC Bank, a number of its subsidiaries ratings have also been affected. Please refer to the list of rating changes at the end of this press release.

The rating actions follow -- but are not solely driven by -- KBC's announcement today of further impairments on its Structured Finance portfolio (EUR1.9 billon) as well as on the group's equity portfolio (EUR0.7 billion) beyond the impairments that had already been announced in December 2008. Over FY2008, KBC will have written down over EUR5 billion and is expected to post a net loss of around EUR2.5 billion.

Moody's acknowledges that a significant part of the potential impairments on the structured finance portfolio have already been recognised by KBC. However, the group still maintains a sizeable exposure to structured finance asset classes, in particular to those from the super senior CDO and RMBS portfolios. In addition, Moody's views the KBC Financial Products (KBC FP) activities as an area of concern in the current volatile environment although KBC has stated that it will take measures to scale down its derivatives activities. The negative outlook on KBC's ratings is primarily a reflection of those concerns and going forward Moody's will closely review the performance and the risks entailed by KBC FP's activities and actively monitor the effectiveness of the de-risking measures, to determine whether the current ratings remain compatible with the associated level of risk.

Beyond the challenges caused by the financial markets activities the downgrade to Aa3/C+ for the bank, and to A1 for the group, was also triggered by Moody's expectation of deteriorating operating environments in the markets where KBC operates. In particular, Moody's noted significantly weakening market conditions in Central and Eastern Europe and Russia (CEER) and in Ireland (please refer to our press release issued on 16 December 2008 on the downgrade of KBC Ireland). CEER and Ireland represented approximately 37% and 5%, respectively, of KBC's net banking income for the first nine months of 2008. Furthermore, Moody's expects a more challenging macro-economic environment in Belgium.

On the positive side supporting the C+ BFSR, Moody's notes that KBC's liquidity position remains solid, that its capital position provides it with a significant buffer and that the franchise in Flanders has been strengthening in recent months, with the bank seeing a net inflow of deposits.

KBC also announced yesterday that it would receive a capital injection in the form of hybrid securities subscribed by the Flemish Government. Those hybrid securities are similar to those subscribed by the Federal Government in December 2008 and are thus expected to be considered as Core Tier 1 by the Belgian regulator. KBC Bank will receive EUR2 billion by the end of the first quarter of 2009 while another EUR1.5 billion will be available over the coming five years for the Group through a stand-by facility.

Moody's notes that KBC has actively sought to increase its regulatory capital since 2Q 2008, including through the EUR2 billion tier 1 issuance of May 2008, the December 2008 EUR3.5 billion capital injection from the Belgian Government and the above-mentioned EUR2 billion capital injection from the Flemish Government.

In respect of the group's main units, the following rating actions have been taken:

- KBC Bank N.V.'s BFSR downgraded to C+ from B-, long-term deposits and senior unsecured debt ratings downgraded to Aa3 from Aa2, junior subordinated and backed junior subordinated debt downgraded to A2 from A1. All ratings continue to carry a negative outlook. The Prime-1 short-term deposit ratings are affirmed.

- KBC Group N.V.'s long-term senior unsecured debt rating and issuer rating downgraded to A1 from Aa3. All ratings continue to carry a negative outlook. The Prime-1 short-term issuer rating is affirmed.

In respect of the group's funding vehicles, the following rating actions have been taken:

- Kredietbank North America Finance Corp's Prime-1 backed commercial paper rating is affirmed.

- KBC International Finance N.V. backed long-term senior unsecured ratings downgraded to Aa3 from Aa2, and backed long-term subordinated and junior subordinated ratings downgraded to A1 from Aa3. All ratings continue to carry a negative outlook.

- KBC Bank Funding Trust II's backed preferred stock rating downgraded to A2 from A1. The rating continues to carry a negative outlook.

- KBC Bank Funding Trust III's backed preferred stock rating downgraded to A2 from A1. The rating continues to carry a negative outlook.

- KBC Bank Funding Trust IV's backed preferred stock rating downgraded to A2 from A1. The rating continues to carry a negative outlook.

- KBC IFIMA N.V.'s backed senior unsecured rating downgraded to Aa3 from Aa2, backed subordinated debt rating downgraded to A1 from Aa3. The ratings continue to carry a negative outlook. The Prime-1 short-term debt rating is affirmed.

- KBC Dublin Capital Prime-1 backed commercial paper rating is affirmed.

- KBC Financial Products International Ltd's backed senior unsecured debt rating downgraded to Aa3 from Aa2. The rating continues to carry a negative outlook. The Prime-1 short-term debt and commercial paper ratings are affirmed.

- KBC Financial Products International VI Ltd's backed senior unsecured debt rating downgraded to Aa3 from Aa2. The rating continues to carry a negative outlook.

In respect of the bank's operating subsidiaries, the following rating actions have been taken:

- KBC Bank's Irish subsidiary KBC Bank Ireland's long-term deposit and senior unsecured debt ratings were downgraded to A2 from A1, and the subordinated debt and junior subordinated debt ratings were downgraded to A3 from A2. The short-term Prime-1 rating was affirmed as was the C- BFSR (mapping to a baseline credit assessment of Baa1). The rating outlook is stable. The downgrade of the long-term ratings is a result of the similar rating action on KBC Bank N.V. The A2 senior rating of KBC Bank Ireland reflects Moody's assessment of a very high probability of parental support from KBC Bank N.V. as well as a high probability of systemic support.

Due to the downgrade to A2 of the senior debt rating of KBC Bank Ireland, Moody's has also downgraded the Mortgage Backed Promissory Notes of the bank to Aa3. The rating of the Mortgage Backed Promissory Notes benefit from a two notch uplift from the issuers' senior debt rating. Please refer to the "Framework Agreement in Respect of the issue of Mortgage Backed Promissory Notes" on www.moodys.com.

Moody's last rating action on KBC Bank Ireland was on December 16, 2008 when the BFSR was downgraded to C- from C. At the same time the A1 long-term bank deposit and senior debt ratings were affirmed with a negative outlook, in line with the outlook on KBC Bank N.V.

- KBC Bank N.V.'s Czech subsidiary Ceskoslovenska obchodni Banka, a.s.(CSOB CZ)'s long-term local currency deposit ratings downgraded to Aa3 from Aa2. The rating continues to carry a negative outlook. The bank's long-term foreign currency deposit rating of A1 with stable outlook, BFSR of C with stable outlook and Prime-1 short-term deposit ratings were not affected by the rating action on the parent.

Moody's previous rating action on CSOB CZ was on 9 December 2008, when the outlook on the long-term foreign currency deposit rating was changed to stable from positive due to the same change in the outlook on the Czech Republic's A1 ceiling for foreign currency deposits.

- KBC Bank N.V.'s Slovak subsidiary Ceskoslovenska obchodna Banka, a.s.(CSOB SK)'s foreign and local currency long-term deposit ratings affirmed at A2. The outlook was changed to negative from stable. The bank's Prime-1 short-term deposit ratings and the BFSR of D with stable outlook were not affected by the rating action on the parent.

Moody's previous rating action on CSOB SK was on 27 February 2008, when Moody's assigned first-time ratings to the bank.

- KBC Bank N.V.'s Slovak subsidiary Istrobanka, a.s.'s national scale ratings of Aa1.sk/SK-1 and BFSR of D- with positive outlook were not affected by the rating action on the parent.

Moody's previous rating action on Istrobanka was on 7 July 2008, when Moody's upgraded Istrobanka's national scale deposit rating to Aa1.sk from A1.sk and affirmed the BFSR of D- with positive outlook after KBC Bank N.V. concluded the acquisition of the entity.

- KBC Bank N.V.'s Hungarian subsidiary Kereskedelmi & Hitel bank Rt.(K&H)'s local currency long-term deposit rating was affirmed at Aa3 while the outlook was changed to negative from stable. The bank's foreign currency long-term deposit rating of A3 with negative outlook, BFSR of C- with stable outlook, Prime-1 short-term local currency deposit ratings and Prime-2 short-term foreign currency deposit ratings were not affected by the rating action on the parent.

Moody's previous rating action on K&H Bank was on 7 November 2008, when its foreign currency deposit ratings were downgraded to A3 (negative outlook)/Prime-2 from A2 (stable outlook)/Prime-1 due to a sovereign rating action that resulted in the downgrade of Hungary's ceiling for foreign currency deposits to A3 (negative outlook) from A2 (stable outlook).

- KBC Bank N.V.'s Polish subsidiary Kredyt Bank's foreign and local currency long-term deposit ratings were affirmed at A2. The outlook was changed to negative from stable. The bank's Prime-1 short-term deposit ratings and the BFSR of D with stable outlook were not affected by the rating action on the parent.

Moody's last rating action on Kredyt Bank was on 14 February 2008, when Moody's affirmed its ratings with a stable outlook following change in outlook to negative from stable on KBC Bank N.V.'s BFSR.

- KBC Bank N.V.'s Russian subsidiary Absolut Bank's foreign and local currency long-term deposit and foreign currency long-term senior unsecured ratings were affirmed at Baa3. The outlook was changed to negative from stable. The bank's BFSR of D- with stable outlook, the long-term National Scale Rating of Aaa.ru and the bank's Prime-3 foreign and local short-term deposit ratings were not affected by the rating action on the parent.

The negative outlook on Absolut Bank's long-term deposit and debt ratings reflects Moody's downgrade of the parent bank's BFSR and the negative outlook assigned to it and means that a further downgrade of KBC's BFSR by one notch would result in a respective one-notch downgrade of Absolut Bank's deposit and debt ratings.

Moody's previous rating action on Absolut Bank was taken on 14 February 2008, when the rating agency affirmed the bank's Baa3/Prime 3 long- and short-term local and foreign currency deposit ratings and its D- BFSR, as well as Baa3 long-term foreign currency senior unsecured debt rating of Absolut Bank with stable outlook on all of the ratings.

The last rating action on KBC Bank N.V. and KBC Group N.V. was on 14 February 2008, when Moody's assigned negative outlooks to KBC Bank's BFSR and KBC Bank's and KBC Group's long-term deposit and debt ratings, as Moody's concluded that there was a strong likelihood that KBC's ratings could come under pressure if the market turmoil were to develop further and specifically affect KBC's CDO portfolio.

The principal methodologies used in rating the issuers affected by this press release are "Bank Financial Strength Ratings: Global Methodology" and "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology", which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies sub-directory. Other methodologies and factors that may have been considered in the process of rating these issuers can also be found in the Credit Policy & Methodologies directory.

Based in Brussels, KBC Group had total assets amounting to EUR383.6 billion at end-September 2008. KBC Group's consolidated total income for the first nine months of 2008 (IFRS) stood at EUR4.771 billion, down 35% from EUR7.329 billion for the first nine months of 2007. In the same period, the net profit group share stood at EUR141 million (9M 2007: EUR2.572 billion).

Paris
Stephane Le Priol
VP - Senior Credit Officer
Financial Institutions Group
Moody's France S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Reynold R. Leegerstee
Managing Director
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades KBC Bank to Aa3/C+, maintains negative outlook
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