pillar iii report 2014 - caring for generations · pdf filethe control of hedges and other...

PILLAR III REPORT 2013 | 1

PILLAR III REPORT 2014

1

Glossary ..................................................................................................................... 4

Note to Readers ......................................................................................................... 5

1 Introduction ................................................................................................................ 6

2 Structure of KBL epb .................................................................................................. 7

List of Subsidiaries & Associates ..................................................................................... 7

Corporate Governance & Decision Structure ................................................................... 8

Governance Culture ...................................................................................................... 8

Board & Executive Committee: Structure and Key Governance Principles .................. 9

Responsibility Scope, Reporting Lines and Decision Delegation per Key Domain ..... 10

3 Risk Management at KBL epb ................................................................................. 11

Five Lines of Defence ..................................................................................................... 11

The Risk Control Function .............................................................................................. 12

Board Risk Committee ................................................................................................... 14

Sub Risk Committees ..................................................................................................... 14

4 Own Funds, Capital Adequacy & Group Solvency ................................................... 15

Own Funds Instruments ................................................................................................. 15

Own Funds Figures ........................................................................................................ 15

Internal Own Funds Adequacy Evaluation ..................................................................... 16

Capital Requirements ..................................................................................................... 16

5 Credit Risk ............................................................................................................... 17

Credit Risk Management ................................................................................................ 17

Governance of the Credit Risk Management Process................................................... 18

Counterparty Credit Risk ................................................................................................ 18

Management of Wrong-Way Risk ............................................................................... 20

Counterparty Credit Risk Arising from Derivative Transactions ................................. 20

Credit Risk Exposures .................................................................................................... 21

Standardised Approach (STA) .................................................................................... 21

Credit Risk Exposures Data ........................................................................................ 22

Defaulted Exposures ...................................................................................................... 25

Credit Risk Mitigation Techniques .................................................................................. 27

Netting Agreements .................................................................................................... 27

Collateral with Private Customers (Lombard Loans)................................................... 28

Collateral with Professional Counterparties ................................................................ 28

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Credit Risk Mitigation Data ......................................................................................... 29

6 Market Risk .............................................................................................................. 31

First Line of Defence: the Dealing Room ........................................................................ 31

Second Line of Defence: the Risk Control/Middle Office ................................................ 31

Group Trading Risk Meeting .......................................................................................... 32

The Control of Hedges and Other Risk Mitigation Techniques ....................................... 32

7 Operational Risk ...................................................................................................... 33

Capital Requirements for Operational Risk .................................................................... 33

Governance of Operational Risk Management .............................................................. 33

Central Operational Risk Management (CORM) ............................................................ 34

Local Operational Risk Management (LORM) ................................................................ 34

Entities in Charge of Operational Risk ............................................................................ 34

First Level Controls ..................................................................................................... 34

Second Level Controls ................................................................................................ 34

Operational Risk Mitigation Techniques ......................................................................... 34

8 Equity Holdings ........................................................................................................ 36

9 ALM Risk .................................................................................................................. 36

Interest Rate Risk ................................................................................................. 36

Credit Spread Risk ................................................................................................ 37

Foreign Exchange Risk ......................................................................................... 37

Equity Price Risk ................................................................................................... 37

Liquidity Risk......................................................................................................... 37

ALM Governance ........................................................................................................... 38

Underlying Objectives of the ALM at KBL epb ............................................................... 39

Measures and Methodologies ........................................................................................ 39

Interest Rate Risk ....................................................................................................... 39

Foreign Exchange Risk ............................................................................................... 40

Equity Risk .................................................................................................................. 40

Global ALM Risk ......................................................................................................... 40

10 Encumbered Assets ................................................................................................. 40

Liquidity Risk ............................................................................................................ 41

Definition ........................................................................................................................ 41

Governance .................................................................................................................... 42

Liquidity policy ................................................................................................................ 42

Contingent liquidity risk .................................................................................................. 42

Risk Measurement and Methodologies .......................................................................... 43

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Other Risks .............................................................................................................. 44

Remuneration Policy ................................................................................................ 46

Context and Principles ................................................................................................... 46

The Board of Directors and the Executive Committee ................................................ 46

Material Risk Takers ................................................................................................... 46

The Board Remuneration & Nomination Committee ...................................................... 46

Role and responsibilities ............................................................................................. 47

Information on the Management Body ........................................................................... 49

Identification of the Material Risk Takers ........................................................................ 49

The Remuneration Process ............................................................................................ 50

Compensation of the Board Members ............................................................................ 50

Compensation of the Members of the Executive Committee .......................................... 50

Fixed compensation .................................................................................................... 50

Variable compensation ............................................................................................... 51

Control Functions Compensation ................................................................................... 51

Compensation of Other Material Risk Takers ................................................................. 51

Remuneration, Performance and Risk Appetite ............................................................. 52

Level of Remuneration ................................................................................................... 53

Risk-Adjusted Remuneration, Malus and Clawback Provisions ..................................... 53

Remuneration figures – 2014 ......................................................................................... 54

Appendix 1 – Declaration of the Management Body .......................................................... 56

Appendix 2 – Risk Statement ............................................................................................. 57

Appendix 3 – Transitional Own Funds Disclosure ............................................................. 59

Appendix 4 – Balance Sheet Reconciliation ...................................................................... 62

Appendix 5 – CET I Instrument Full Terms and Conditions ............................................... 63

Appendix 6 – Tier II Instrument Full Terms and Conditions (Subordinated Bond) ............. 71

Appendix 7 – Tier II Instrument Full Terms and Conditions (Subordinated Notes) ............ 75

Appendix 8 – Main Features of Capital Instruments .......................................................... 76

5

Note to Readers KBL European Private Bankers S.A., hereafter referred to as the 'Bank', the 'Group' or 'KBL epb', is a banking group headquartered in Luxembourg which provides private banking services through its network of European private banks. All figures published in this report refer to Group consolidated figures. As a European significant banking group incorporated in Luxembourg, KBL epb is directly subject to the prudential supervision of the European Central Bank (ECB). This report meets the consolidated disclosure requirements, or Pillar III disclosures, enclosed in Part Eight of the Regulation (EU) No 575/2013, broadly known as the Capital Requirements Regulation (CRR). This particular regulation, along with Luxembourg circulars derived from Directive 2013/36/EU, set the regulatory prudential framework applicable to credit institutions following the recommendations of the Basel Committee on Banking Supervision. The quantitative tables in the following pages may sometimes show small differences due to the use of concealed decimals. These differences, however, do not in any way affect the true and fair view of this document. Similarly, the value zero '0.0' in the following tables indicates the presence of a number after the decimal, while ' - ' represents the value nil. Through this report, references are made to the annual consolidated accounts which are publicly available in the OAM section of Luxembourg Stock Exchange’s website (www.bourse.lu).

6

Introduction This Pillar III Report 2014 represents the first of its kind to be published by KBL epb considering the entry into force of the Capital Requirements Directive Package IV (CRD IV) on 01/01/2014. It is also the first Pillar III report to be published by the Bank under the direct supervision of the European Central Bank (ECB) in the framework of the Single Supervisory Mechanism (SSM) binding since November 2014. Furthermore, in the course of 2014, the Bank undertook further steps towards the implementation of its strategic transformation launched in 2013 which aims at a refocus and consolidation of its private banking activities. In this context, the Bank made two major announcements through 2014. First, the acquisition by the Group’s Belgian entity of the operations of UBS in Belgium. Second, the reach of an agreement with Banque Internationale à Luxembourg S.A. (BIL) enacting the sale of the Group’s private banking entity in Switzerland and the acquisition of BIL’s operations in Belgium. This background in mind, the goal of the Pillar III Report 2014 is twofold. First, the report aims at giving a precise idea of the way the risks faced by the Bank are processed internally through each of its entities. Second, the report draws a fair picture of the risks to which the Bank is exposed by providing various datasets related to those risks from a prudential point of view under the new regulatory framework brought by CRD IV. In order to achieve this twofold goal, the report is organised as follows:

৹ Section 2 presents the structure of the Bank and more precisely its entities in the accounting and prudential scopes of consolidation as of 31/12/2014, its global decision structure and corporate governance;

৹ Section 3 describes the structure and the roles played by the departments involved in the risk management of the Bank at each of the levels of control;

৹ Section 4 summarises KBL epb's Pillar I prudential figures; ৹ Section 5 focuses on the governance and data related to credit risk; ৹ Section 6 focuses on the governance and data related to market risk; ৹ Section 7 focuses on the governance and data related to operational risk; ৹ Sections 8, 9 and 10 respectively focus on equity holdings, ALM risk and

encumbered assets; ৹ Sections 11 and 12 are respectively devoted to liquidity risk and other risks; ৹ Finally, Section 13 presents the remuneration policy of the Bank.

7

Structure of KBL epb

The Bank provides private banking services to its customers throughout Europe thanks to a dense network of local private banking subsidiaries. The Bank's total portfolio is composed of equity participations in 16 entities. The Bank is itself part of Precision Capital S.A., a Luxembourg-based financial holding which also encompasses Banque Internationale à Luxembourg S.A..

List of Subsidiaries & Associates

PRECISION CAPITAL SA

BANQUE INTERNATIONALE À

LUXEMBOURG SAKBL EUROPEAN PRIVATE

BANKERS SA

KBL epb SUBSIDIARIES

DenominationCapital

Held

Statutory

Prudential

Supervision

Prudential

Scope of

ConsolidationDescription

KBL (Switzerland) Ltd 99.99% Yes Yes Private banking, Switzerland

Kredietrust Luxembourg S.A. 100% Yes Yes Financial services, Luxembourg

KBL Informatique G.I.E. 100% No Yes Other (non-financial), Luxembourg

KBL Immo S.A. 100% No Yes Real estate, Luxembourg

KBL Beteiligungs A.G. 100% No Yes Holding, Germany

Merck, Finck & Co. 100% Yes Yes Private banking, Germany

KBL Monaco Private Bankers 100% Yes Yes Private banking, Monaco

KBL Richelieu Banque Privée S.A. 100% Yes Yes Private banking, France

Brown, Shipley & Co. Limited 100% Yes Yes Private banking, United-Kingdom

Theodoor Gilissen Bankiers N.V. 100% Yes Yes Private banking, the Netherlands

Puilaetco Dewaay Private Bankers S.A. 100% Yes Yes Private banking, Belgium

Banque Puilaetco Dewaay Luxembourg S.A. 100% Yes Yes Private banking, Luxembourg

Vitis Life S.A. 100% Yes Yes Insurance, Luxembourg

EFA Partners S.A. 52.70% No Yes Holding, Luxembourg

European Fund Administration S.A. 48.58% Yes Yes Fund administration, Luxembourg

Forest Value Investment Management S.A. 25.60% No No SICAV-SIF, Luxembourg

Horacio sàrl 100% No No Real estate, Luxembourg

Fully Consolidated Subsidiaries

Associates

Non-Consolidated Subsidiaries

8

The accounting scope of consolidation includes all entities at the exception of Forest Value Investment Management S.A. and Horacio sàrl which fall below the consolidation materiality threshold. The prudential scope of consolidation is identical to the accounting scope of consolidation.

Corporate Governance & Decision Structure

To sustain the ambitions of the Group in terms of commercial positioning and financial targets while leveraging the benefits of being a group, a strong and integrated governance framework has been approved by the Group Board of the Bank and rolled out throughout the Group taking into account the proportionality principle as well as local laws and regulations. This group governance framework is articulated around the main following principles :

৹ Governance culture: principles all employees should thrive for. ৹ Board & Executive Committee: structure and governance principles. ৹ Reinforcement of the steering of the Group notably by:

¬ a clear allocation of responsibilities within the Bank;

¬ the definition of decision delegation right per key domain;

¬ the strengthening of functional reporting lines between the group and subsidiary functions.

Governance Culture

Throughout the Group, management and employees should in all their decisions and respective activities thrive to:

৹ Serve clients’ specific needs with the highest quality in advisory and wealth management while taking account of client and local business specificities.

৹ Continuously build up and protect the Group’s reputation acting in line with all relevant rules and regulations.

৹ Act and manage being fully aware of their responsibilities relating to risk management.

৹ Generate sustainable profits.

৹ Leverage the benefits of being a Group.

৹ Manage the Group on a day-to-day basis in the most professional and efficient way, actively focusing senior management attention where it matters the most.

৹ Be a trusted employer of choice to attract, develop and retain the best talent.

9

Board & Executive Committee: Structure and Key Governance Principles

Group Board The Group Board upon delegation from the shareholder sets the overall Group strategy and ensures that effective control mechanisms are put in place. This board shall be composed of a minimum of 8 directors, including at least one shareholder representative, six independent directors, the group CEO plus such number of staff representatives directors as may be required by relevant legal provisions. The Group Board is supported by five sub-committees : Risk, Strategy, Audit, Compliance and Legal, Remuneration and Nomination, each of them being composed of a sub-set of the Group Board Directors. Each committee is chaired by a non-executive Director, and assisted by the occasional/permanent presence of managers and external advisors when relevant. Responsibility for the evaluation and compensation of Directors of the Group Board lies with the Board Remuneration and Nomination Committee. Decision regarding nomination or mandate termination of a director lies with the Shareholder Assembly. Subsidiary Board A subsidiary Board validates the strategy, enforces its implementation and ensures that internal control mechanisms are in place at local level. This type of board has in target state at least two members of the Group Executive Committee and two independent directors. Such an independent director shall not have a simultaneous mandate at the Group Board unless an individual exception is granted by the Board Remuneration and Nomination Committee of the Group Board. A subsidiary Board is supported by three committees: first Audit, second Remuneration and Nomination, and third, Compliance, Legal and Risk. These committees are chaired by a non-executive director and are composed of a sub-set of members of the Subsidiary Board which are assisted by the occasional/permanent presence of Group and subsidiary managers. The composition of the aforementioned Subsidiary Board (and Board Committees) is further adjusted to strictly comply with local laws and regulations. Group Executive Committee and Subsidiary Management Team The Group Executive Committee (Group EXCO) operates under delegated authority of the Group Board to implement the Group strategy and objectives set by the Group Board. It is composed, in target state, of five to six members, each with a focused individual mandate translating into clear (P&L) accountability and separation between business and support/control roles.

The Group EXCO is supported by two kind of sub-committees:

Functional Committees: Group ALCO, Group Credit Committee, Group New Products and Services Approval Committee, Group Information Security Committee, Staff Pension Committee, Luxembourg Coordination Committee, Luxembourg Audit Committee, Luxembourg Compliance Committee and the Luxembourg Credit Committee.

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Operational Committees: Client Acceptation Committee, Custodian Acceptance Committee, Client Committee for the Authorization and Supervision of Financial Instruments and Project Alignment Committee. Responsibility for Group EXCO members evaluation, compensation, nomination or dismissal lies within the Board Remuneration and Nomination Committee of the Group Board. At subsidiary level, the management team shall at least be composed of a CEO and a CFRO. A local CIO (managing investments) and COO (managing IT and Operations) shall also be appointed but do not necessarily need to be members of the subsidiary management team. The subsidiary management team where relevant is supported by a set of sub-committees.

Responsibility Scope, Reporting Lines and Decision Delegation per Key Domain

৹ Financial performance accountability and ownership: any component of the Group

financial performance is assigned to a clear owner in a cascaded way (Group EXCO members, subsidiaries/Business Units or departments). These owners are accountable for reaching objectives set in the strategic and budget plans within the guidelines set by the Group.

৹ Reporting lines between Group and subsidiary functions are set up to ensure smooth coordination between entities.

৹ The Group function head has an end-to-end responsibility for the adequate performance of its function.

Group Executive Committee Structure (31/12/2014)

Group CIO

Compliance

Kredietrust Luxembourg

& Asset Management

Global Financial Markets

Private Banking

Strategic Planning

Vitis Life

Corporate Center &

Legal

KBL Monaco Private Bankers

KBL España

Human Resources

Luxembourg

Group Human

Resources

Brown, Shipley & Co.

Puilaetco Dewaay

Luxembourg Risk Control Project Management Office

KBL Swiss Private Banking

Real Estate, Logisitcs &

Procurement

Assets & Liabilities

Management

KBL Richelieu

Merck, Finck & Co.

Accounting IT Services Corporate

Communication

Puilaetco Dewaay

Credits

Tax Operations

COO

Deputy CEO

Theodoor Gilissen

KBL Private Banking Finance Global Investor Services

Internal Audit Group CEO

CEO Private Banking CEO Luxembourg CFRO

11

৹ Each subsidiary CEO or business unit leader is the primary responsible for the financial performance of its entity.

৹ Escalation procedure are put in place such that any fundamental disagreement between a subsidiary function Head and the Group function Head is escalated to the subsidiary CEO by the Group function Head, then to the CEO Private Banking or CEO Luxembourg – and in last resort to the Group EXCO - to reach an agreement through a peer-to-peer discussion.

Finally, the Group governance framework provides detailed information about the scope of responsibility per key area within the Bank, the decision delegation as well as the role of key decision bodies.

Risk Management at KBL epb

At KBL epb, Risk Management is seen as a transversal process which involves all the Bank’s entities at different levels and which is organised according to 5 levels of control or 'lines of defence'.

Five Lines of Defence

The three first levels of control correspond to the subset of internal controls. The first level of Risk Management is directly carried out by the departments generating risks: front office, back office or support. They are responsible for the management of their risks on a daily basis. They carry out the first level of control which results are escalated to the management and to the departments responsible for the second level of control. The second level of risk management comprises several departments that intervene in their specific areas of expertise. First, the Risk Control Function (described more precisely at page 9) operates in the management of financial risks - mainly credit risk, market/trading risk, Assets and Liabilities Management (ALM) risk and liquidity risk, either for own accounts or for clients accounts - and non-financial risks, of which operational risks, business risks and strategic risks. The Compliance department is responsible for second-level management of compliance risks. Finally, other second-level control departments comprise Finance, Human Resources, Legal, Tax and Corporate Center that are operating in their respective areas of specialisation. The goals of the departments in charge of the 2nd level of controls are to:

৹ ensure an exhaustive risk coverage by 1st level of control; ৹ ensure that they provide a comprehensive view of the underlying risks; ৹ verify the adequacy and efficiency of the corrective measures that are implemented.

In order to achieve these objectives, 2nd level control entities perform the following tasks:

৹ independently reprocess controls performed at the 1st level and compare results; ৹ perform the analysis of exception reports (outstanding vs. limit);

12

৹ challenge the justification provided by the risk owner; ৹ require additional information on any specific exception/warning; ৹ require corrective measures based on their findings and conclusions; ৹ escalate to management body any issue that could not be settled between the two

first levels of control. The Internal Audit is the third level of risk management that performs a regular and independent review of all entities and activities of the Group, including second level of control departments. External audit is the fourth level of risk management and Regulatory Authorities are the fifth and final level. They are part of the pool of 'external controls'. Each of the five lines of defence interact with each other, with the Executive Committee (EXCO) as well as with the Group Board Committee and sub-Committees.

The Risk Control Function

As part of the 2nd level of control, the mission of the Risk Control Function is to ensure that each key risk the Bank faces is identified and properly managed by the relevant departments and that a comprehensive view on all relevant risks is reported to the Bank’s supervisory and management functions represented respectively by the Board of Directors and the EXCO. Therefore, the tasks of the Risk Control Function consist in identifying, measuring, monitoring, addressing and reporting the risks that fall within its scope of competence. In addition, the Risk Control Function provides relevant independent information and analyses, provides expert judgement on risk exposures, issues advices on proposals and risk decisions made by the management as regards to their compliance with the Group’s risk appetite. The aim is to assist the management, the EXCO and the Board so that they can take risk informed decisions. A key aspect of the Risk Control Function is to react quickly and efficiently in periods of crisis/stress. Therefore, any material risk development (such as a large operational incident, a major fraud, etc.) detected is immediately assessed and escalated to the EXCO. The local Risk Control Functions escalate in the same manner material risk developments to the Group Risk Control Function. Two principles govern the mission of the Risk Control Function; these principles are the proportionality and the subsidiarity. The proportionality principle states that the depth of analysis and the frequency of reports are proportional to the risks at stake after all mitigating measures have been set up. The subsidiarity principle implies that controls are performed at the level that ensures the best efficiency (at Group or local level for example). In order to ensure its independence, the Risk Control Function is organisationally separate from the monitored and controlled activities and does not perform any task that falls under its own monitoring and control role.

13

The Group Risk Control Function is organised around six departments:

৹ The Operational Risk Control department is responsible for overseeing operational

risk issues. This department also manages the insurance programme for the Group. ৹ The Process Management department is in charge of the creation and

implementation of the transversal procedures of the Bank, mainly for the parent company, but also for certain branches/subsidiaries.

৹ The Market Risk Control department is in charge of market risks (interest rate, equity, currency, real estate, and liquidity risks) for the bank’s entire balance sheet, including both ALM and trading activities. The department maintains and runs models dedicated to the measurement of market risk indicators (i.e. Value at Risk indicators).

৹ The Credit Risk Control department is in charge of credit risk control for KBL epb

including borrower risk, issuer risk, counterparty risk, recovery risk, migration risk, country risk, credit risk concentration. This department also plays a role in drawing up and ensuring the respect of the criteria for accepting securities as collateral, as well as in monitoring credit risk for custodian banking activities.

৹ The Group Risk Advisory department is the subsidiaries’ single point of contact with

the Group Risk Control, it is responsible for coordinating general risk issues within the Group and for overseeing specific local files. Amongst other things, the department is in charge of preparing subsidiaries’ Board Risk Committee meeting.

৹ The Risk Projects & Reporting department covers transversal risk matters, such as risk reporting to the Management Bodies, regulatory watch, and management of risk related projects. The department also develops controls for detecting potential risks in client portfolios.

In order to perform its mission at the level of the Group, the Risk Control Function also relies on local Risk Functions. Although the latter hierarchically report to local management, there is a functional link between the local Risk Control departments and the Risk Control Function:

৹ recruitment and annual appraisal of the Head of local Risk Control departments is a joint decision by the Risk Control Function and the relevant local hierarchical reporting line;

৹ local Risk Control departments benefit from a full support from the Risk Control Function in terms of methodological help, alerts and guidance;

৹ local Risk Control departments report immediately to the Risk Control Function any significant risk, exposure or issue.

14

Board Risk Committee

In all major entities of the Group, the Board, while keeping the entire responsibility for the set up and oversight of risk management, has delegated the follow-up and performance of the risk framework to sub-Committees, such as the Board Risk Committee at KBL epb’s level, which is dedicated to financial, operational, client and reputation risks. This committee decides on the level of risk appetite (i.e. expression of the amount and type of risk that the Bank is able and willing to accept in the pursuit of its business objectives) to be approved by the Board and applied to all entities of the Group. Then, this Committee delegates to the EXCO the responsibility of implementation of the appropriate risk management framework to ensure that the risk profile of the Group remains within the defined risk appetite. The latter is formalised in the ‘Risk Appetite statement’, based on which a recurrent risk reporting is presented to both monthly ALCO and quarterly BRC Committees (the BRC has met 4 times in 2014). This reporting provides backward and forward looking empirical measures regarding all the key risks.

Sub Risk Committees

Sub Risk Committees have been created in order to handle specific types of risks. The Asset and Liability Committee (ALCO) initially dedicated to financial risks covers all risks defined in the Risk Appetite Statement (a.o. credit, ALM, liquidity and trading risks, operational, reputation, regulatory, client risks). The Group Credit Committee (GCC) deals with new credit proposals (accompanied by a mandatory opinion from the Credit Risk Control). Should the case arise, this committee also deals with first discussion about credit risk issues. The Structured Products & OTC Derivatives Approval Committee (SPODAC) ensures that our clients fully understand the mechanics of sophisticated products (e.g. structured products) and that, in each entity of the Group, these products are in line with customers’ needs and risk profile. Permanent members of the SPODAC belong to Risk Control, Financial Markets, Compliance, Legal, KBL Private Banking/KTL Asset Management, and Marketing departments. The Committee is held every month and upon request. The Group New Products and Services Approval Committee (NPAC) approves the launch of each new product / service (or alternatively material changes in the terms or nature of existing products / services) in order to a.o. ensure that they fit the group risk appetite and strategy, that the new product or service can be operated efficiently from an IT/Ops perspective, and that adequate risk management processes / internal controls have been implemented to mitigate the implied risks and comply with Group Risk Appetite, law and regulation applicable.

15

Own Funds, Capital Adequacy & Group Solvency

Own Funds Instruments

Ordinary shares – The share capital of the Bank consists of 20.14 million of ordinary shares with a nominal par value of EUR 9.30 per share. All ordinary shares carry voting rights each share representing one vote. No participation certificate or non-voting right share has been issued. Treasury Shares – As at the end of 2014, the Bank held 844 ordinary shares in portfolio. The voting-rights attached to these shares have been suspended.

Preference shares – As at the end of 2014, 4,041 preference shares were outstanding, these shares are entitled to receive an initial dividend of EUR 0.248 per share. If there are no profits, this dividend entitlement is carried forward to subsequent periods. Any profits remaining once this first dividend has been paid are shared out between all shareholders.

Non-voting capital securities – In February 2001 the Bank issued a subordinated bond, due 23 February 2016, listed on Luxembourg Stock Exchange. These non-voting securities rank pari passu, without any preference among themselves, with all other present and future unsecured and subordinated obligations of the Bank. Therefore, upon liquidation a bondholder will be subordinated in right of payment to the claims of depositors and all other unsubordinated creditors of the Bank. These subordinated bonds have been syndicated and subscribed pursuant to an underwriting agreement entered into with the Manager appointed for the issue. The Bank used the proceeds of this issuance for general corporate purpose.

Non-voting capital securities also include various subordinated notes ‘bons de caisse’ issued between 2005 and 2010.

Own Funds Figures

Prudential Own Funds 31/12/2013 31/12/2014

Tier 1 Capital 522.6 559.2

Capital, share premium, reserves and retained earnings 788.9 832.9

Minority interests* 0.3 -

Treasury shares -0.1 -0.1

IAS 19R application -18.4 -40.8

Intangible assets and goodwill -231.7 -230.7

Deferred tax assets -16.4 -2.1

Defined benefit pension fund assets* - 0.1

Tier 2 Capital 179.9 44.9

Preference shares 0.1 0.1

Positive Available-for-sale reserve* 60.3 -

Subordinated liabilities 119.5 44.9

Deductions -0.6 -

Participation in Forest Value Investment Management* -0.6 -

Total Prudential Own Funds 701.9 604.2 The mark (*) indicates an evolution of the applicable prudential treatment as a consequence of the entry into force of CDR IV.

0

100

200

300

400

500

600

700

31/12/2013 31/12/2014

Mill

ion

s

Tier 2 Capital Tier 1 Capital (CET 1)

+7%

-75%

16

Internal Own Funds Adequacy Evaluation

In order to assess its internal capital adequacy, the Bank has adopted an internal Economic Capital model (i.e. ECap) encompassing the main risks to which the Group is or might be exposed, i.e. credit risk, ALM risks, operational risk, trading risks and business risk. ECap is calibrated to reflect the worst unexpected loss in the fair value of the Group on a one-year time horizon within a confidence interval of 99.9%.

Capital Requirements

Complementary to the internal own funds adequacy, the Bank complies with supervisory capital requirements brought by the entry into force of the CRR as from 01/01/2014. These requirements are related to Credit Risk, Credit Valuation Adjustment (CVA), Market Risk (decomposed in Settlement Risk, Position Risk and Foreign Exchange Risk) and Operational Risk. Prudential ratios are computed as the quotient between the appropriate measure of own funds and the Risk Weighted Assets equivalent of Own Funds Requirements, i.e. OFRs divided by 8%. As of 31/12/2014, the Bank comfortably complied with its specific minimum ECB CET 1 and Total Capital Ratios constraints of respectively, 9.8% and 10.5% as per the draft KBL SREP of the ECB letter dated 18/12/2014.

Own Funds Requirements (8% of Risk-Weighted Assets)

EUR million

Credit Risk 239.4 242.6

Central goverments or central banks 2.8 2.6

Regional governments or local authorities 0.0 0.3

Public sector entities 0.1 0.1

International organisations (including multilateral development banks) 0.0 -

Institutions 21.2 32.0

Corporate 112.3 112.9

Retail 15.3 8.8

Secured by mortgages on immovable property 25.9 31.2

Exposures in default 2.2 2.0

Items associated with particularly high risk - 3.7

Covered bonds 0.6 0.4

Claims on institutions and corporate with a short-term rating (as from 2014) - 1.8

Claims in the form of CIU 21.2 11.7

Other items (including equity exposures in 2013) 35.7 28.3

Equity exposures - 6.8

Securitisation 2.3 -

Credit Valuation Adjustment - CVA (as from 2014) - 1.0

Settlement Risk 0.0 0.0

Position Risk 5.3 16.7

Interest rate risk 5.1 15.7

Equity risk 0.3 1.0

Foreign Exchange Risk 0.8 0.6

Operational Risk 63.3 66.7

Total Own Funds Requirements 308.8 327.7

Tier 1 Ratio 13.5% 13.7%

Total Capital Ratio 18.2% 14.7%

31/12/2013 31/12/2014

0

50

100

150

200

250

300

350

31/12/2013 31/12/2014

Mil

lio

ns

Credit Risk OFRs CVA OFRs Market Risk OFRs Operational Risk OFRs

+1%

+185%

+5%

17

Credit Risk

Credit Risk Management

Proprietary credit risks within the Group mainly originate from: ৹ private banking activities in the form of Lombard and mortgage loans; ৹ uncommitted lines covering the trading activity and counterparty exposures with

banks, e.g. foreign exchange transactions, money markets, swaps, reverse repurchase agreements, securities lending, derivatives;

৹ bond positions in ALM portfolios in the form of liquid floating/fixed rate notes and synthetic asset swaps;

৹ granting of uncommitted lines to clients of the 'Global Institutional Services' division or 'GIS' in Luxembourg (mainly Collective Investment Undertakings) to cover temporary overdrafts.

Credit risk also arises from other activities, such as the Institutional Management and Global Custody divisions. For more clarity, the following table maps the major types of credit risk by activities within KBL epb:

The objectives of the credit risk management process can be described as follows:

৹ identify credit risk in due time, enabling to act adequately upon risks; ৹ translate the KBL Group Risk Appetite Statement into a set of workable measures,

ensuring that credit risk stays within the limits set; ৹ monitor the quality of the credit risk within the Group; ৹ deliver input for strategic decisions regarding credit risk through useful and timely

information to senior management.

Private

Banking

Loans

Market

Professional

Activities

ALM

Portfolios

GIS

Clients

Global

Custody

Borrower Risk V VIssuer Risk VCounterparty Risk V VRecovery Risk V V V VMigration Risk V V V VCountry Risk V V V VConcentration Risk V V V V V

18

Governance of the Credit Risk Management Process

The first line of defence is composed by the business entities. Therefore, several entities play a role in the first line of defence in the Credit Risk Management framework, such as Wealth Management ('commercial network'), the Lending function, the ALM function, the Global Financial Markets function and GIS- Network Management.

Each entity/business unit relies on specific procedures and processes in order to assess the risks prior to and after accepting individual credit risk exposures.

The second line of defence is managed by the Credit Risk Control entity whose tasks include:

৹ the development of credit risk frameworks; ৹ the development of credit risk measurements; ৹ the monitoring of credit risk arising from the bank’s portfolio (at the Group level); ৹ issuance of opinion on credit risk issues and reporting to BRC, EXCO and any

relevant risk committees;

Counterparty Credit Risk

The credit risk relating to professional market activities is managed through the interbank limit system that aims at managing KBL Dealing Room’s credit risk exposures.

The following exposures are part of this sub-section: ৹ treasury exposures (money market loans, commercial papers, certificates of

deposit, treasury portfolios, interest rate swaps, floating-rate notes, cross currency interest rate swap, repurchase agreements, securities lending transactions, etc.);

৹ foreign exchange (FX) exposures (spot transactions, outright, FX swaps, etc.); ৹ main exposures on structured products (equity swaps, OTC options, etc.)

Additionally, the interbank limit system covers long and medium term exposures on banking counterparties under the form of credit lines granted and securities (bonds and shares) held. The management of the credit risk related to banking counterparties is carried out on a consolidated basis, including all the Group's entities exposures and their related counterparties / groups of counterparties.

The interbank limit system defines ceilings which represent the maximum exposures the Bank deems acceptable to undertake upon banking counterparties and groups of banking counterparties given their size and credit quality. The system ensures compliance with the large exposures limit. Schematically, the interbank limit system may be presented as follows:

19

Large exposure limit: the largest theoretical limits have always to be lower than the

regulatory Large Exposure limit, the standard case is 25% of KBL epb’s eligible own funds.

The calculation of the Bank's internal eligible own funds, for the purpose of the interbank

limit system, incorporates a buffer of +/- 10%.

Maximum limits are the maximum amount of risk KBL epb is willing to take on a counterparty. Such limits are based on the size and the quality of the counterparty as well as on the Bank's own funds. Operational limits are determined after an in-depth analysis by the Group Credit Risk Control. Such lines have to be lower than the maximum limits. Exposures have to be lower than operational limits. Exposures are charged against two distinct lines according to their maturity:

৹ the weighted outstanding exposure, which is the current exposure to every counterparty, weighted by type of product; representing either market or credit risk;

৹ the settlement exposure, corresponding to exposures to counterparties on the due date of the transaction (delivery/payment); representing pure credit risk.

In order to mitigate counterparty credit risk, the Bank enters into Credit Support Annex (CSA) contracts with several counterparties. In such a case, the risk exposure is derived from the net amount of contracts alive with a counterparty taking margin calls into account. Additionally to individual limits represented by operational lines that are defined at counterparties' level, the aggregated exposure amount of counterparties by incorporation country shall stay below predefined levels. Finally, the management and supervision of collateral received for secured transactions, in addition to contract management, is handled by Collateral Management, which is part of the Operations function, having been transferred from the Risk Control during 2014. The respect of the eligibility of the collateral, as the concentration and correlation limits, is monitored on a daily basis by the Group Credit Risk Control department.

Large Exposure Limit

Maximum Limit

Operational Limit

Actual Exposure

20

Management of Wrong-Way Risk

KBL epb adopts a conservative policy towards the wrong-way risk, i.e. the risk that occurs when the exposure to a counterparty is adversely correlated with the credit quality of that counterparty. Regarding the specific wrong-way risk, the Bank never enters into contracts with underlying instruments linked to the counterparty (i.e. derivative contracts based on the counterparty’s own securities, reverse repo transactions with counterparty’s securities used as collateral, etc.). Regarding the systemic wrong-way risk, the risk of exposure increases due to market factors is mitigated, on the one hand, by the use of cash margin call in euro for derivatives (all covered by CSA contracts) and on the other hand, by the use of correlation limits between counterparty and collateral per country for secured cash or securities lending and borrowing transactions.

Counterparty Credit Risk Arising from Derivative Transactions

As at year-end 2014, the Counterparty Credit Risk related positive fair value arising from derivative transactions amounted to EUR 264.9 million. This amount was matched up to EUR 232.8 million by negative fair value transactions within eligible netting agreements and margin calls received from counterparties.

These transactions led to the recognition of a Counterparty Credit Risk prudential exposure of EUR 141.8 million, corresponding respectively to EUR 108.2 million derived from the ‘Mark-to-Market Method’ (positive fair value plus nominal based add-on which is function of both the residual maturity and the type of underlying) and EUR 33.6 million from the ‘Original Exposure Method’ (computed as percentage of the nominal which is function of both the original maturity of a contract and its type of underlying asset).

EUR millionGross Positive

Fair Value Netting benefit

Netted

Exposures Collateral Held

Derivative

Transactions 264.9 -180.1 84.8 -52.7


EUR million

Derivative

Transactions


Mark-to-Market Method

Exposures

Original Exposure

Method

33.6 108.2

Total CCR Exposure 141.8

21

This total CCR exposure is the basis for derivative transactions RWA calculation, which reached the total value of EUR 89.2 million.

Credit Risk Exposures

This subsection presents the methodology and the data related to the Group's value of exposures arising from credit risk under the standardised approach for credit risk weighting.

Standardised Approach (STA)

KBL epb applies the Standardised Approach for weighting exposures to credit risk. This method uses a combination of exposure segregation by type of debtor/transaction (i.e. exposure classes) and a differentiation by creditworthiness in order to weight the exposure value that is used to compute the required corresponding own funds. As stated under the CRR, the bank allocates its banking book credit risk and counterparty credit risk into seventeen exposure classes:

Central Governments or Central Banks Regional Governments or Local Authorities Public Sector Entities Multilateral Development Banks International Organisations Institutions Corporate Retail Secured by Mortgages on Immovable Properties Exposures in Default Items Associated with Particularly High Risk Covered Bonds Claims on Institutions and Corporate with a Short-Term Credit Assessment Collective Investment Undertakings (CIU) Other items Equity Exposures Securitisation

The prudential risk weight that is assigned to exposures in most classes depends on the credit assessment, published by an External Credit Assessment Institution (ECAI), related to the obligor KBL epb is exposed to. ECAIs providing the Bank’s credit assessments are the three leading rating agencies: Moody's, Standard & Poor's and Fitch Ratings. These assessments are used following the principle of the 'worst of the two best', which corresponds to picking the higher risk weight from those induced by the two most favourable credit assessments available.

22

This treatment is used for determining the risk weights applicable to exposures belonging to the following credit risk classes: central governments or central banks, regional governments or local authorities, public sector entities, multilateral developments banks, international organisations, institutions, corporates, covered bonds, claims on institutions and corporate with a short-term credit assessment, and finally securitisations. When by nature or by the rules, no external credit assessment can be used for weighting credit risk, the regulatory rules determine the risk weight to apply, e.g. under the Standardised Approach, exposures in default that are not secured by a mortgage on an immovable property receive a risk weight depending on their level of impairment.

Credit Risk Exposures Data

Unless otherwise specified, the figures reported in the tables presented hereafter take account of relevant netting agreements and correspond to:

৹ on-balance sheet items accounting value net of specific credit risk adjustments; ৹ the prudential exposure value of derivative contracts following as applicable, the

Mark-to-Market method or the Original Exposure method; ৹ the pre-conversion factor value of off-balance sheet items, corresponding to the full

commitment the Bank has agreed to undertake, after potential specific credit risk adjustments.

Comparison of Average and Year-End Credit Risk Exposures - 2014

The year-end total credit risk exposure reached EUR 11.81 billion, 1.5% lower than the 2014 average of the same measure based on quarterly data. The main credit risk classes composing the total exposure were Central Governments or Central Banks (23%), Retail (23%) and Corporate (17%). In this regard, year-on-year figures show a relatively high degree of stability. Throughout 2014, specific exposure variations deserve however to be emphasized. First, some exposure variations are caused by usual business evolutions, it is the case in classes such as institutions and public sector entities. Second, the decline or growth of specific exposure classes, such as the surge in exposures secured by mortgages or the total liquidation of securitisation exposures, are the consequence of the implementation of the Bank’s strategy.

23

* It should be noted that the amount of exposure in the retail class of credit risk is inflated by EUR 2.06 billion that corresponds to off-balance sheet revocable credit lines not giving rise to any capital requirement (conversion factor of 0% applied to low risk off-balance sheet items).

Geographical Breakdown of Credit Risk Exposure – 2014 The geographical structure of KBL epb as well as its business model naturally imply a relatively high concentration of exposures in Europe globally (87%, supranational entities excluded) and especially in the Eurozone (69%).

2,690

2,673

2,024

1,130

871

539

474

400

290

282

148

112

84

46

31

22

-

2,691

2,527

2,048

1,492

810

593

245

401

292

173

233

212

141

54

18

36

35

- 500 1,000 1,500 2,000 2,500 3,000

Central Gov. & Central Banks

Retail

Corporate

Institutions

Secured on Real Estate

Other Exposures

Public Sector Entities

Multilateral Dev. Banks

International Organisations

Regional Gov. & Local Authorities

CIUs

Short-Term Rating

Equity

Covered Bonds

High Risk

Exposures in Default

Securitisation

Millions

Average Exposure 2014 Exposure Q4 2014

69% 5% 7% 6% 15% 29% 2% 18% 2% 1% 1% 6% 3%

EUR million Eurozoneof which

Belgium

of which

France

of which

Germany

of which

Lux.

of which the

Netherlands

of which

Spain

Rest of

Europe

North

AmerciaAsia

Middle-

East

Supranational

Entities

Rest of the

World

Collective Investment Undertakings 126.1 0.0 3.3 34.2 88.6 - - 0.0 20.1 1.7 - - -

Corporate 1,272.6 72.8 218.9 205.1 360.3 172.5 107.0 351.6 101.0 21.0 10.8 - 267.3

Covered Bonds 29.1 - 19.4 - - 7.3 - 16.6 - - - - -

Equity 65.2 2.6 18.8 15.3 9.9 4.2 3.7 8.9 9.7 - - - 0.0

High Risk 31.0 4.6 - 0.1 26.3 - - 0.0 - - - - -

Institutions 592.5 90.1 167.1 83.7 89.7 100.2 14.7 346.2 43.4 61.3 45.0 - 41.2

Multilateral Development Banks - - - - - - - - - - - 400.2 -

Other Exposures 396.1 36.1 49.5 44.8 241.2 13.7 10.7 136.0 0.0 0.0 0.0 - 6.6

Exposures in Default 18.5 0.8 2.4 8.9 6.4 0.0 - 0.4 2.9 - - - 0.0

Public Sector Entities 473.7 - 7.4 14.8 1.1 450.4 - - - - - - -

Retail 2,598.0 161.3 31.0 154.3 3.4 2,244.2 1.2 59.5 0.2 2.5 0.6 - 12.0

Regional Gov. & Local Authorities 184.0 55.8 64.7 63.6 - - - 16.0 82.0 - - - -

Secured on Real Estate 545.5 40.1 166.3 3.0 50.3 217.4 60.5 311.7 0.3 1.3 1.7 - 10.5

Short-Term (Rating) Exposures 54.1 4.8 26.0 0.6 0.0 4.4 7.9 58.0 - - - - -

Central Gov. & Central Banks 1,813.7 163.5 104.2 39.2 870.5 171.7 55.5 781.6 - 23.2 54.0 - 17.4

International Organisations 6.5 - - - 6.5 - - - - - - 283.1 -

Total 8,206.9 632.5 879.0 667.6 1,754.4 3,385.9 261.2 2,086.5 259.4 110.9 112.2 683.3 355.1

24

Residual Maturity Distribution of Credit Risk Exposures – 2014

As at the end of 2014, the Bank continued to show a relatively short-term profile of its exposures with 49% of them maturing prior to 5 years. Moreover the majority of undefined maturity exposure items features short-term characteristics. This is for example the case of own interbank current account deposits and exposures arising from off-balance sheet commitments which are cancellable at any time.

Sector Distribution of Credit Risk Exposures – 2014

Without significant year-on-year variation in the distribution of its exposures across sectors, in 2014, financial counterparties, public administrations and natural persons (within the ‘Other’ category) accounted for 82% of the Bank’s credit risk obligors or counterparties.

21% 28% 7% 3% 40%

EUR million Less than a Year From 1 to 5 Years From 5 to 10 Years More than 10 Years Undefined Maturity

Collective Investment Undertakings 1.7 - - - 146.2

Corporate 388.9 1,166.2 119.4 5.8 344.2

Covered Bonds 18.8 8.2 18.7 - -

Equity 0.2 0.0 - - 83.6

High Risk - 5.6 - - 25.4

Institutions 98.8 388.3 93.6 - 548.8

Multilateral Development Banks 57.7 205.1 130.2 7.2 -

Other Exposures 118.2 78.2 11.5 6.9 324.0

Exposures in Default 0.3 1.8 0.0 0.1 19.5

Public Sector Entities 455.1 2.5 - 1.1 15.0

Retail 132.8 152.2 8.2 0.2 2,379.4

Regional Gov. & Local Authorities 43.2 158.7 80.1 - -

Secured on Real Estate 147.0 333.9 54.4 329.5 6.2

Short-Term (Rating) Exposures 112.0 0.2 - - -

Central Gov. & Central Banks 873.8 652.2 290.4 14.4 859.0

International Organisations 49.6 211.7 28.3 - -

Total 2,498.1 3,364.8 834.8 365.3 4,751.4

EUR millionCollective

Investment

Undertakings Corporate

Covered

Bonds Equity High Risk Institutions

Multilateral

Dev. Banks

Other

Exposures

Exposures

in Default

Public

Sector

Entities Retail

Regional

Gov. &

Local

Authorities

Secured

on Real

Estate

Short-Term

(Rating)

Exposures

Central

Gov. &

Central

Banks Intl' Org.

Agriculture - 27.6 - - - - - 0.0 - - 5.4 - - - - -

Mining and extraction - 117.6 - 0.8 - - - - 0.8 - 0.0 - 11.1 - - -

Manufacture - 184.0 - 23.9 0.0 - - 0.0 2.2 - 4.8 - 0.8 - - -

Electricity, gas, steam and air conditioning - 151.9 - 4.9 - - - - 1.6 - 0.2 - 0.0 - - -

Water and waste utilities - 4.3 - - - - - - - - - - - - - -

Construction and engineering - 32.7 - 0.5 - - - - 0.0 - 1.2 - 9.4 - - -

Wholesale of motor vehicle - 53.8 - 1.3 - - - - 2.6 - 3.3 - - - - -

Transport and courrier - 16.8 - 0.3 - - - - 0.0 - - - - - - -

Accomodation and restauration - 2.9 - - - - - - - - 0.9 - 3.2 - - -

of which SMEs - - - - - - - - - - 0.0 - - - - -

Media, IT and telecommunications - 97.6 - 10.1 - - - - - - 1.1 - - - - -

Financial service activities 99.0 764.0 45.7 20.2 30.9 1,058.3 14.1 16.3 7.5 - 1.5 - 69.3 86.0 1,021.5 29.0

Insurance, reinsurance and pension funding - 56.3 - 0.5 - - - 4.0 - - 3.0 - 12.7 - - -

of which SMEs - - - - - - - - - - - - 10.3 - - -

Auxiliary to financial services and insurance 49.0 53.6 - 7.6 0.1 59.6 - - 0.0 - 0.5 - 21.9 0.5 - -

Real estate activities - 88.7 - 0.2 - - - 19.8 3.4 - 5.4 - 248.4 - - -

of which SMEs - 5.2 - - - - - - - - 0.3 - 36.6 - - -

Consulting and resaerch activities - 41.3 - 2.7 - - - 0.4 1.4 - 13.2 - 0.0 - - -

of which SMEs - 0.0 - - - - - - - - - - 0.0 - - -

Public administration and defense - 39.6 - - - 4.1 283.6 0.7 - 458.5 57.6 257.1 0.7 - 1,556.7 15.5

Education - - - - - - - 0.5 - - - - - - - -

Human health, care and social activities - 8.8 - - - - - - - - 6.5 - - - - -

Arts, gambling and sports activities - 0.1 - - - - - - - 0.8 5.4 - 0.4 - - -

of which SMEs - - - - - - - - - - 0.0 - - - - -

Personal service activities 0.0 182.3 - 10.3 - 7.5 - 13.6 0.4 0.0 184.1 - 30.5 3.1 0.2 -

of which SMEs - 20.6 - - - - - - - - 11.6 - - - - -

Services to households - - - - - - - 17.4 - - 2,244.8 - 222.2 - - -

Extraterritorial organisations and bodies - 0.2 - - - - 102.5 - 0.0 0.4 - 8.9 - - 111.4 245.1

Other - 100.3 - 0.4 - 0.1 - 466.1 1.8 14.1 133.9 16.0 240.3 22.6 - -

Total 147.9 2,024.3 45.7 83.8 31.0 1,129.6 400.2 538.8 21.8 473.7 2,672.8 282.0 871.0 112.1 2,689.9 289.7

25

Defaulted Exposures

In line with the applicable regulatory framework, defaulted exposures are recognised across the Group in the following cases:

৹ the exposure is more than 90 days past due; and/or ৹ the obligor is considered “unlikely to pay” its obligation(s) towards the Bank without

taking actions such as the realisation of its collateral. Consequently, defaulted exposures will always at least include debt instruments considered as impaired under IAS 39. In all entities of the Group, the need for impairment is justified on a case by case analysis, ratified in management discussion (local Credit Committees) and through the consolidation process. Impairment levels always take into account the expected future cash flows, including those from realisation of collateral (less estimated foreclosure costs), if any (reference to market valuation, discounted cash flow approach or percentage of residual exposure). The Credit Risk Control department recommends impairment adjustments to the Group Credit Committee on the basis of proposals from lending entities of the Group and after discussion with the Accounting Department. At the end of the first three quarters, the Group Credit Committee decides the adjustments to perform. In the last quarter impairments are decided by the Executive Committee relying on the opinion of the Credit Committee. Various elements can justify classification under the default exposure category and booking of specific impairments. Most of the indicators leading to recognition of impairments are derived from the permanent monitoring of the portfolio at the first level of risk management defence. Potential triggers for classification under this category may also arise from formal review of credit files, including by the second level of defence, request for waiver or modifications of covenants, renegotiation of terms and conditions, late payments of interest and/or principal, decrease of the value of the pledged portfolio (for Lombard loans), 'downgrades' or 'credit watches' of external credit ratings, the price evolution of quoted assets, external information (press articles, published financial results), etc. For loans and receivables from clients which are not individually impaired, a portfolio-based impairment is calculated based on the “Fall Back Methodology”, being a percentage of the total unimpaired loan portfolio corresponding to the average loss on the portfolio over the last seven years (in terms of net impairment charge). The percentage is reduced by 50% as we take into account an “emergence period” of 6 months (frequency of impairment revisions). Geographic Distribution of Credit Risk Exposures in Default – 2014 The Bank’s total amount of exposures for which an impairment was outstanding as at 31/12/2014 amounted to EUR 61.6 million with an average impairment rate of 63%, 8% of which recognized in 2014. Additionally, the right-end of the chart presents data related to exposures that are not impaired but which have at least one day of past due.

26

Naturally, the geographic distribution of such exposures follow the same pattern as the Bank’s total exposure, which shows a relatively high concentration in Europe:

* Impairments that are determined at the level of non-individually impaired loan portfolios are considered as specific credit risk adjustments because they relate to incurred losses not yet identified.

Sector Distribution of Credit Risk Exposures in Default – 2014 In the continuum of 2013, the real estate activities sector was the most representative sector in terms of exposures for which an impairment is recognised (41%), this sector also shows the greatest amount of exposures which has not been repaid on due date (40%).

* Impairments that are determined at the level of non-individually impaired loan portfolios are considered as specific credit risk adjustments because they relate to incurred losses not yet identified.

EUR million Impaired

Exposures

Specifc

Credit Risk

Adjustments

Of which

impairement

charge of 2014

Impaired

Exposures

General

Credit Risk

Adjustments

Of which

impairement

charge of

2014

Past Due

Exposures

not

impaired

Eurozone 53.8 -33.1 -2.9 - - - 29.0

of which Belgium 4.9 -4.4 -1.1 - - - 0.6

of which France 4.4 -2.5 -0.0 - - - 13.4

of which Germany 20.8 -14.7 -1.1 - - - 2.8

of which Luxembourg 7.5 -2.6 -0.3 - - - 12.2

of which the Netherlands 13.6 -6.8 - - - - 0.0

of which Spain - - - - - - -

Rest of Europe 3.6 -3.6 -0.1 - - - 27.4

North Amercia 4.2 -1.8 -0.0 - - - 0.5

Asia - - - - - - -

Middle-East - - - - - - -

Supranational Entities - - - - - - -

Rest of the World 0.0 -0.0 - - - - 0.0

Total 61.6 -38.5 -3.0 - - - 57.0

EUR million Impaired

Exposures

Specifc

Credit Risk

Adjustments

Of which

impairement

charge of

2014

Impaired

Exposures

General

Credit Risk

Adjustments

Of which

impairement

charge of

2014

Past Due

Exposures

not

impaired

Agriculture - - - - - - -

Mining and extraction 1.4 -0.6 -0.0 - - - 0.0

Manufacture 3.6 -2.1 -0.0 - - - 1.0

Electricity, gas, steam and air conditioning 2.8 -1.2 -0.0 - - - 0.0

Water and waste utilities - - - - - - -

Construction and engineering 0.1 -0.1 -0.0 - - - -

Wholesale of motor vehicle 4.7 -3.7 - - - - 1.7

Transport and courrier 2.1 -2.1 -0.2 - - - 0.0

Accomodation and restauration - - - - - - -

Media, IT and telecommunications - - - - - - -

Financial service activities 10.1 -4.1 -0.6 - - - 14.4

Insurance, reinsurance and pension funding - - - - - - 6.8

Auxiliary to financial services and insurance 0.0 -0.0 -0.0 - - - 0.0

Real estate activities 25.1 -15.2 -0.3 - - - 22.9

Consulting and resaerch activities 2.3 -0.9 -0.0 - - - -

Public administration and defense - - - - - - 1.4

Education - - - - - - -

Human health, care and social activities - - - - - - -

Arts, gambling and sports activities - - - - - - -

Personal service activities 3.4 -3.2 -0.1 - - - 0.1

Services to households - - - - - - -

Extraterritorial organisations and bodies 0.0 -0.0 - - - - -

Other 5.9 -5.3 -1.7 - - - 8.5

Total 61.6 -38.5 -3.0 - - - 57.0

27

Figures related to exposures recognised as defaulted or which haven’t been repaid on due date shall however be put in perspective given their low significance compared to the Bank’s total credit risk exposure, as shown by figures presented hereunder.

Evolution of credit Risk Adjustments – 2014

* Amounts presented above only refer to specific credit risk adjustments as the Bank does not make use of general credit risk adjustments.

Credit Risk Mitigation Techniques

Collateral Management aims to mitigate the default risk which entails the following risk: ৹ Counterparty risk (pre-settlement / settlement risk) ৹ Debtor risk (borrower / issuer) ৹ Guarantor risk

Netting Agreements

All OTC transactions with market counterparties must be covered by an appropriate Master Agreement:

৹ securities lending operations by a Global Master Securities Lending (GMSLA) Agreement (or equivalent);

৹ (Reverse)Repurchase operations by a Global Master Repurchase Agreement (GMRA);

৹ other OTC Derivatives by an ISDA Master Agreement (ISDA), completed with a Credit Support Annex (CSA) which enables the exchange of collateral.

Legally, these framework agreements allow, in case of default of the counterparty involved in the agreement (or 'event of default' or 'termination event' depending on the agreement's terminology), to consider all the operations with the counterparty, to close them all and to apply one netted "close-out" amount due to the Bank by the counterparty or due by the Bank to the counterparty. Hence, in assessing the credit risk, they allow the calculation of an aggregated exposure amount (sum of exposures on each operation) per counterparty (group of counterparties).

2014Impaired Exposures

(Gross) vs. Total

Exposure (Gross)

Impaired Exposures

(Net) vs. Total

Expsoure (Net)

0.52% 0.20%

EUR millionCredit risk

adjustments opening

balance 2014

Amount taken

against credit risk

adjustments in 2014

Credit risk adjsutments

set aside (+) / reversed

(-) in 2014

Credit risk

adjustments closing

balance 2014

Individual credit risk adjusments (+)

and recoveries (-) directly recorded in

the income statement:

Specific and General Credit

Risk Adjusments 56.3 -19.4 1.6 38.5 0.0

28

Those operations are in general subject to daily exposure calculations (aggregated exposure amount per counterparty involved in an agreement) followed by potential margin-calls and exchange of collateral mitigating the credit risk.

Collateral with Private Customers (Lombard Loans)

The security types accepted as collateral and a grid of pledge value rates, by type of securities (cash, bonds, shares, funds, structured products, etc.), are provided by the Credit Risk Control entity for inclusion within the 'KBL Credit Policy and Procedures', as validated by the EXCO and BRC. The grid provides pre-defined pledge value rates for the largest part of the securities proposed by customers as collateral (most liquid and less volatile securities). Securities not specifically addressed by the grid may also be accepted and valued as collateral. In these cases, the Credit Committee, when analysing the credit request, and after proposal from the Lending department and the opinion of Credit Risk Control, will determine the applicable level of pledge value.

A pledge value is associated to each security in the portfolio accepted as collateral in Lombard loans, representing a percentage of the market value of this security. As a matter of principle, the pledge value of the portfolio (sum of all securities’ pledge values) has to cover the amount of the loan . In other words, the Loan-to-Pledge-Value ratio has always to remain below 100%, meaning a Loan-to-Market Value largely lower than 100%. This method ensures that the Bank's exposures are secured in the event of adverse market movements. In such a case, it also gives the opportunity to process margin calls without losing the advantage of the credit protection. The Standard Pledge Value of the collateral portfolio is calculated by using the applicable pledge value rates, security by security. Additional haircuts may then be applied to the Standard Pledge Value, which may be justified by:

৹ concentration (significant proportion of a specific asset or type of asset in the portfolio);

৹ illiquidity (unreasonable time frame to liquidate the position in the market); ৹ currency mismatch (between the currency of the loan and the currency of the

pledged securities).

Collateral with Professional Counterparties

Criteria for securities used as collateral in securities lending and (reverse) repurchase transactions are validated by the EXCO upon request from the Global Markets Function and opinion from the Risk Control Function. The criteria used refer to the type of securities/issuers (e.g. sovereign, bank & corporate bonds; commercial papers and certificates of deposit, asset backed securities, etc.), eligible countries, currencies and maximum residual maturities. Specific rules also apply to the concentration risk by counterparty and by security accepted as collateral, as well as correlation risk limits between debtors and the financial collaterals given as protection.

29

The Dealing Room, in particular the 'Repo' Entity, is the first line of defence regarding the quality of the securities bought and sold back in a reverse repurchase transaction (GMRA contract). In addition, the respect of the rules is monitored on a daily basis by the Credit Risk Control department. It is the responsibility of the Risk Control Function to update the list of eligible collaterals based on risk evolution and market practices.

Throughout the Group, the collateral management is performed by the Collateral Management Department which is part of the Operations Function (or through third collateral management services: Clearstream). The Collateral management department consists of several sections, of which the most important are:

Margin call: staff members are responsible for the daily monitoring of the margins (the amount of additional collateral that should be posted or received) and for contacting external counterparties from which collateral should be received. This entity is responsible for correct and complete upload of outstanding exposure to the collateral management application. Collateral Quality Control: staff members constitute the first line of defence regarding collateral adequacy in ISDA-CSA, GMSLA and GMRA margin call process. On a day-to-day basis, the Collateral Management department monitors ex ante the quality of the collateral to be received, referring to the criteria agreed in the executed agreements and to the criteria approved by the EXCO.

Credit Risk Mitigation Data

Figures relating to the Bank’s use of credit risk mitigation techniques in 2014 are presented hereunder. These figures correspond to two different regulatory approaches of credit risk mitigation, the substitution method and the financial comprehensive method. The first technique applied at KBL epb is the substitution method for guaranteed exposures, which occurs when exposures towards counterparties receive a guarantee from a third party. Under this technique, the risk weight actually applied to the exposure is the one assigned to the guarantor as if it was the original bearer of the debt. The second technique used at KBL epb to mitigate credit risk is the financial collateral comprehensive method. Under this method, the exposure value towards counterparties is diminished by the prudentially corrected amount of the financial collateral (e.g. securities) received under each transaction. In order to compute the resulting value of exposure under each transaction, the value of both the exposure and the collateral are assigned a prudential haircut which raises the exposure value and diminishes the collateral one depending on the nature of the transaction and the securities involved.

30

Eligible Credit Risk Mitigation Techniques – 2014 As at 31/12/2014, KBL epb globally achieved a reduction of EUR 660.5 million of its credit risk exposure, corresponding to the amount of prudentially eligible financial securities pledged by debtors after subtraction of applicable prudential volatility haircuts. Furthermore, EUR 624.9 million and EUR 177.8 million where fully secured (maximum 100% loan-to-market value) by respectively mortgages on residential and commercial immovable properties. Finally, a total exposure of EUR 54.6 million enjoyed the benefit of other guarantees such as the pledge of life insurance polices and third party guarantees.

An insight in the use of eligible financial collaterals is given hereunder through the decomposition of credit risk exposures pre- and post-subtraction of these collaterals across applicable Credit Quality Steps (i.e. buckets that determine an applicable risk weight that depends on an exposure’s characteristics, among which its rating, for a given credit risk class). These figures show 95% of eligible collaterals apply to exposures arising from debtors who cannot be assigned to a particular CQS, which is mainly explained by the Lombard loan activity of the Bank.

EUR million

Eligible

Financial

Collateral (after haircut)

Eligible

Residential

Mortgage

Eligible

Commercial

Mortgage

Other

Eligible

Collateral

Eligible

Third Party

Guarantees

Collective Investment Undertakings - - -

Corporate 236.6 26.5 5.5

Covered Bonds - - -

Equity - - -

High Risk - - -

Institutions - - -

Multilateral Development Banks - - -

Other Exposures 67.0 22.6 0.0

Exposures in Default 0.3 - -

Public Sector Entities 8.4 - -

Retail 276.9 - -

Regional Gov. & Local Authorities - - -

Secured on Real Estate 68.3 624.9 177.8 - -

Short-Term (Rating) Exposures 3.0 - -

Central Gov. & Central Banks - - -

International Organisations - - -

Total 660.5 624.9 177.8 49.1 5.6

31

Market Risk

First Line of Defence: the Dealing Room

The Dealing Room is the first line of defence in the control process of the trading activities of the Group, and is devoted to the permanent monitoring of trading positions and to proposals of strategies with the aim of optimizing the risk/return ratio of the Bank. Trading limits are prudently monitored. Each limit breach leads to an investigation carried out by the related risk owner in order to identify the precise circumstances and causes, and define the necessary corresponding corrective measures. Limit breaches, as well as 'Early Warnings', are also reported immediately to the Risk Control Function and to the relevant corporate governance committee members (Board of Directors, Board Risk Committee, EXCO or ‘Structured Products & OTC Derivatives Approval Committee’) depending on their severity.

Second Line of Defence: the Risk Control/Middle Office

This second level control is performed by the Market Risk Department which is part of the Risk Control Function and is then independent from the business and support units it monitors and controls. The entity performs independent critical financial controls on the Dealing Room activities as imposed by the regulator, Internal and External Auditors as well as by relevant corporate governance committees (Board of Directors, Board Risk Committee, EXCO, ‘Structured Products & OTC Derivatives Approval Committee’). Market Risk Control reports on a regular basis the Group’s exposures to the Dealing Room (daily), to the EXCO (weekly), to the ALCO (monthly) and to the Board Risk Committee (quarterly).

EUR million

Credit Quality Step / Rating

Translation (S&P's)Exposures before

CRM

Exposures after

CRM

Credit Quality Step #1 From AAA to AA- 3,357.5 3,318.4

Credit Quality Step #2 From A+ to A- 1,291.8 1,291.8

Credit Quality Step #3 From BBB+ to BBB- 709.8 714.7

Credit Quality Step #4 From BB+ to BB- 12.9 12.9

Credit Quality Step #5 From B+ to B- 1.7 1.7

Credit Quality Step #6 Below B- 8.2 7.9

No Credit Quality Step Non Applicable 6,432.5 5,806.5

Total 11,814.4 11,153.9

32

Group Trading Risk Meeting

The Group Trading Risk Meeting (GTRM) ensures a close monitoring of all trading activities within authorised limits. This meeting is held on a weekly basis and includes the following participants:

৹ The Head of Global Markets; ৹ The Head of Market Risk Control; ৹ The Head of Business Management and Financial Institutions (Global Markets)

During the meeting, the evolution of the various exposures compared to their respective limits, in addition to the results and highlights of each activity are analysed. Although members attending the meeting do not constitute a decision authority, their advices are important in the EXCO decision process.

The Control of Hedges and Other Risk Mitigation Techniques

The main mission of the Dealing Room is to support the development of both Wealth Management and Global Investors Services (GIS). Besides, positions taken for trading purposes rely on a conservative philosophy and are carried out on an accessory basis. They are subject to strict rules in terms of limits and of previously approved products. The EXCO has approved a set of primary limits in terms of nominal amount and basis point value (BPV) as well as a set of secondary limits expressed in terms of concentration limits, credit risk limits, P&L triggers which refine and complement the primary limits. A set of delegation authorities has also been approved in terms of percentage of the limit. Dealing Room activities are concentrated in Luxembourg; no trading activity is allowed in the subsidiaries. The ownership of the definitions and methodologies used for the group wide measurement of trading market risk lies with the Group Risk Control Function. New methodologies or changes in existing methodologies and/or amount are decided at the level of the Group EXCO. The Market Risk Control Department is in charge of identifying limit breaches. Global Markets Back Office (Operations Function), also independent from the Dealing Room, is in charge of computing and reporting the Profit & Loss, and ensuring that all products are correctly reflected in the Front Office and in the accounting systems of the Bank.

33

Risk Weighted Assets and Own Funds Requirements for Market Risk – 2014

Operational Risk

Capital Requirements for Operational Risk

Capital requirements for operational risk are calculated under the regulatory standardised approach as the 3 year average of a percentage of the gross income that depends on the business lines that have generated this gross income.

Governance of Operational Risk Management

The line management of each of the Group's entity is expected to observe and implement the operational risk management framework and all decisions related thereto to the extent that such decisions are consistent with their own local obligations. Key principles have been defined and are applicable within the Group. The key principle is that Operational Risk Management remains the responsibility of the business. Line management is supported in its task to manage operational risk by Local Operational Risk Managers (LORMs) and Central Operational Risk Management (CORM). The Operational risk management structure can be summarized as follows:

EUR millionRWA

Own Funds

requirements

Credit Valuation Adjsutment 12.3 1.0

Settlement Risk 0.4 0.0

Market Risk 216.9 17.4

Interest Rate Risk 196.3 15.7

Equity Risk 13.1 1.0

Foreign Exchange Risk 7.6 0.6

Total Market Risk and CVA 229.6 18.4

Market Risk and CVA

Board Risk Committee

CORMValue and Risk Management Directorate

Strategy - Tools - Reporting - Monitoring

Business UnitsLine management + LORMs

Local Implementation, monitoring and reporting

+ other risks related to duties and responsibilities

Internal

Audit

Local management is responsible for risk management

34

Central Operational Risk Management (CORM)

In each of the Group's entity, a CORM is appointed to undertake the implementation of the operational risk methodology subject to the approval of the local Risk Committee. The CORM has to enhance line management awareness about operational risks, to rapidly achieve appropriate risk response for key risks and meet CRD IV requirements. At the level of Luxembourg, the CORM activity is performed by the Group Operational Risk Control with regards to:

৹ implementing the decisions of the Board Risk Committee in Luxembourg and roll out these decisions in the whole Group;

৹ providing training and coaching to the Local Operational Risk Managers; ৹ monitoring progress of implementation and the proper functioning of the operational

risk framework; ৹ monitoring the quality control.

Local Operational Risk Management (LORM)

Local Operational Risk Managers (LORMs) are appointed in the various entities of the Group (Head Office, subsidiaries and branches). They are responsible, either full-time or along with other duties, for co-ordinating all efforts in the field of operational risk management within their entity and report to the Central Operational Risk Management.

Entities in Charge of Operational Risk

First Level Controls

Business/line managers are the 'risk owners' in charge/accountable for the operational risk management of their own activities. This involves the day-to-day risk management at the operational level, in accordance with the operational risk framework of the Bank and its risk appetite.

Second Level Controls

This second level of control is generally performed by the Risk Controller, but it could also be performed by another independent unit of the first line management such as Compliance, ITS Governance, Risk and Security, Legal, etc.

Operational Risk Mitigation Techniques

At KBL epb, operational risk mitigation techniques consist in:

৹ Operational Incident database Any operational incident/event discovered or identified (with actual or potential profit and loss impact) is declared and registered in the “Operational Incident Database”. It is then analysed in order to challenge the first line management on the actual reasons of the operational incident occurrence and on the adequacy of the action plan implemented in order to mitigate this kind of risk.

In

te

rn

al

au

dit

35

৹ Risk Control Self Assessments (RCSA)

The purpose of the RCSA is to detect the major plausible operational risks that could threaten the achievement of an entity’s objectives, and the activities and processes affected by the different risks identified. The RCSA methodology mainly consists in: - identification and assessment of key risks and key controls; - assessment of residual risks (vs. inherent risks) according to a classical

impact/likelihood approach; - Set-up of mitigating actions when deemed relevant. First line management and Local Operational Risks Managers are in charge of creating and maintaining their own risk control self assessment (RCSA) matrix. This process aims at reducing the operational losses and at raising the awareness of line management about operational risks. Group Operational Risk Control, in its role of second line of defence, monitors and validates the RCSA matrix.

৹ Scenario analysis In order to test the resilience/vulnerability of the bank's entities, the Group Operational Risk Control regularly proposes to simulate some major operational events, derived from the real life (experiment within other financial institutions or some group entities), and analyses the expected reaction of the Bank.

৹ Common Operational Risk Rules System

The Common Operational Risk Rules System (CORRS) consists in gathering all relevant operational risk principles/rules and centralizing them in a common repository. The CORRS is clearly the corner stone of the operational risk management within the Group and focuses on core activities.

Risk Weighted Assets and Own Funds Requirements for Operational Risk – 2014

EUR millionRWA

Own Funds

Requirements

Operational Risk 791.6 63.3

Total Operational Risk 791.6 63.3

Operational Risk

36

Equity Holdings In order to diversify its global risk position, the portfolio of KBL epb includes various direct equity positions. As at 31/12/2014, the total fair value of listed equity holdings amounted to EUR 34.7 million distributed across several sectors (see chart below).

In addition, at the same reference date, the bank held EUR 21.0 million of listed but illiquid or non-listed stocks. Non-consolidated subsidiaries accounted for 14% of this amount. Key assumptions and practices affecting the valuation of such assets are developed in the Annual Report of the Bank.

The realized and unrealized profits attributable to equity positions were respectively EUR 24.84 million and EUR 13.02 million for the year 2014.

ALM Risk At KBL epb, ALM risks are defined as the market risks that are induced by all the non-trading activities, either on- or off-balance sheet. Those market risks are segregated according to the following internal conventions: ৹ Interest Rate Risk is the risk of adverse movement of interest rates resulting in a

deterioration of the economic value or profit of the Bank. At KBL epb, the interest rate risk focuses on risk-free rates, Credit Spread risk being assessed separately.

This risk is mainly induced by the investment bond portfolio and the loan book.

EUR Million Fair Value

Basic Materials 4.2

Communications 4.8

Consumer, Cyclical 1.3

Consumer, Non-cyclical 12.1

Diversified 0.9

Financial 0.3

Industrial 1.5

Technology 3.9

Utilities 5.6

Total 34.7

Equity Holdings

37

The majority of Loans & Receivables to customers is granted on a floating basis, which considerably reduces the Interest Rate Risk. We also consider that the Credit Spread Risk is minimal on loans given high collateral standards in place. Regarding the investment bond portfolio, as at the end of 2014, 33% is hedged either with floating-rate notes or swaps, reaching a total value of EUR 3.7 Billion (including swap values) with an overall duration of 1.28 years. These bonds are the reinvestment of the Bank’s free capital and available stable deposits from customers of the various group entities. Around 70% of the straight (non swapped) bonds are maturing over the next three years. Cyclical strategies implemented (called Ladder approach) also aim at smoothing the impact of interest rate movements. A parallel shift of the curve by 1% is estimated to have a negative impact on the value of the bond portfolio of 41.5 million. Although credit risk is outside of the scope of this ALM section, it is worth noting that the Weighted Average Rating Factor of the investment bond portfolio is single A flat.

৹ Credit Spread Risk is the risk that the premium to the risk-free rate paid by issuers

would increase due to a deterioration (of the perception) of the quality of those issuers, such deterioration resulting in a deterioration of the economic value or P&L of the Bank.

৹ Foreign Exchange Risk is the risk of unfavourable change of currency exchange

rates (including commodity & precious metals) compared to the reference currency, resulting in a negative impact on the economic value or profit of the Bank. The ALM policy, in line with the Risk Appetite statement, is to have no active Foreign Exchange Risk. All assets are funded in matched currencies.

৹ Equity Price Risk is the risk of adverse movement of equity (including investment

funds) market prices resulting in a negative impact on the economic value or profit of the Bank.

The equity exposure is an opportunistic exposure decided by the ALCO based on an analysis from the Group Asset Allocation Committee that equities are expected to bring added value in terms of profits and diversification (contra-cyclical feature of equity vs. interest rate). As opposed to the bond investment portfolio which will always be present, the equity portfolio may be fully divested if the analysis concludes that risks outweigh possible advantages. Exposures are allowed on the main markets (US, Europe and less developed markets) with a sizable European bias. A strict investment policy including constraints in terms of diversification, liquidity and stop-loss is implemented.

৹ Liquidity Risk is the risk that the bank would not have enough resources to fund its

assets. In general, this risk is split between the short-term (or operational) risk managed by the Treasury department on a day-to-day basis and the medium or long-term (structural) risk managed by the ALM department.

Eligibility targets for the investment bond portfolio are as follows: European Central Bank collateral eligibility 80% (before haircut, 75% after haircut) and Basel III liquidity eligibility 60% after haircut. As at 31/12/2014, the proportions were respectively 79%

38

and 65%. ALM portfolios strategies are built in order to ensure regular liquidity inflows. The equity portfolio is not considered as it may be divested.

ALM Governance

Based on the Global Risk Appetite Statement issued by the Board, the Group ALCO monitors and decides the ALM strategy of the group in terms of risk, balance sheet gaps, solvency and liquidity upon recommendation from the ALM department. Group ALCO meetings are held monthly.

The ALM department is in charge of ৹ presenting/recommending ALM strategies and actions to the ALCO in terms of risk,

balance sheet gaps, solvency and liquidity; ৹ the day-to-day implementation of the Group ALCO decisions including the

management of investments in the ALM books throughout the Group, via functional responsibility vis-à-vis local ALM departments on the balance sheet management activities of the subsidiaries and taking part in local ALCO/ALM meetings;

৹ the reporting to the ALCO of actions which have been undertaken (e.g. investments and divestments in portfolios);

৹ the necessary alert to the ALCO and ALCO members if urgent action is required outside of monthly ALCO meetings;

৹ defining Fund Transfer Pricing policy and updating FTP curve used by liquidity providers and users;

KBL epb Global Financial Markets/Treasury department (GFM) is in charge of ৹ the operational liquidity management; ৹ advising on all ALM subjects including (but not limited to) the execution of all

transactions decided by the ALCO or Group ALM.

Asset Management departments of the Group are in charge of ৹ providing advice or managing part of the banking books along precise guidelines and

SLA defined by the ALCO; ৹ advising on all ALM subjects including (but not limited to) the global market trends and

their possible impacts on the Group.

KBL epb Group Risk Control is in charge of ৹ transforming the overall principles included in the Risk Appetite Statement into detailed

risk limits (to be approved by the ALCO); ৹ the control of the correct implementation of the Group ALCO’s decisions by the ALM

department; ৹ monitoring the correct use of available limits and reporting on a monthly basis to the

ALCO; ৹ defining and implementing the models of risk measurement and stress tests; ৹ gathering all needed information regarding risk exposures in group members from their

risk counterparts and report accordingly to the ALCO; ৹ ensuring conformity with the regulatory constraints; ৹ advising on all ALM subjects including (but not limited to) the implementation of the risk

policy;

39

৹ Risk Control hierarchically reports to the CFRO who is an EXCO member.

Underlying Objectives of the ALM at KBL epb

The ALM department aims first at providing a positive and stable contribution to the profit of the Bank by optimizing the management of its balance sheet, within the limits of risks as they have been decided by the relevant governing bodies.

Stable contribution to the P&L means that the ALM decisions are made with the objective to avoid as much as possible that ALM investments cause any significant unwanted volatility in the P&L of the Bank, by adopting adequate strategies – including hedging, portfolio profiling techniques and stop-loss strategies.

The overall policy is to match assets and funding maturities where possible and to hold sizeable liquid assets. Consequently, ECB eligible and Basel III eligible assets are to be vastly predominant.

A strategic objective of the Bank is to diversify its asset composition by deploying a portion of its resources into various markets, sectors and instruments with distinctive risk return characteristics, which are not usually available in loans and advances and short-term money markets. In the fixed income instruments, issuers with various types and levels of risks will be used within the overall limits as decided by the ALCO. Equity investments can be decided by the ALCO when it is considered that they can bring an added value.

Measures and Methodologies

Interest Rate Risk

To assess the impact of the interest rate risk on the Economic Value of the Bank, the net present value of assets and liabilities is computed before and after a ‘shock’:

৹ a parallel rise of the interest rates (normalised sensitivity indicator called basis point value) or,

৹ a Value at Risk (Monte Carlo based) measure Furthermore, the impact of interest rate risk on the Net Interest Margin is estimated on a one-year period, before and after an interest rate movement (market). The net impact on the Bank’s interest rate margin of a positive 1% parallel shift of the interest rate risk curve was estimated at EUR -13.0 million as at the end of 2014, that is broken down as follows per currency :

EUR CHF GBP USD Other

Financial Assets -36.1 -0.3 -1.5 -3.7 -0.3 -42.0

Financial Liabilities 24.6 0.3 0.6 3.2 0.3 29.0

Net Impact -11.5 0.0 -1.0 -0.6 0.0 -13.0

EUR million Total

Impact

Sensitivity 100bpv Shift

40

Foreign Exchange Risk

The structural FX risk is calculated on a consolidated basis by mean of VaR measure based on a Monte Carlo methodology.

Equity Risk

The structural equity risk measurement used at KBL epb is based on a VaR measure according to a Monte Carlo methodology.

Global ALM Risk

As VaR is a common indicator to assess equity, FX and interest rate risks, ALM Risk is globally assessed by mean of Value-at-Risk model, especially for the calculation of the Economic Capital (in the context of the Internal Capital Adequacy Assessment Process), after application of an inter-risks diversification matrix.

Encumbered Assets According to the EBA, an asset should be treated as encumbered if it has been pledged or if it is subject to any form of arrangement to secure, collateralise or credit-enhance any on-balance sheet or off-balance sheet transaction from which it cannot be freely withdrawn (for instance, to be pledged for funding purposes). Assets pledged that are subject to any restrictions in withdrawal, such as assets that require prior approval before withdrawal or replacement by other assets, should be considered encumbered.

Throughout 2014, KBL epb was involved in such transactions that it required the pledge of assets to be considered as encumbered. These transactions generating encumbered assets were:

৹ Repurchase agreements ৹ Securities lending transactions ৹ OTC derivative transactions

As at 31/12/2014, the Bank’s own assets encumbrance figures arising from such financial transactions are summarised as follows.

EUR million

Carrying

Amount of

Encumbered

AssetsCorresponding

Fair Value

Carrying

Amount of

Unencumbered

AssetsCorresponding

Fair Value

Assets of the Bank 766.2 11,679.9

Equity Instruments* - - 2,172.8 2,172.6

Debt Instruments 560.4 560.4 3,789.9 3,724.9

Other Assets 894.6 * Of which EUR 1,942.9 million not giving rise to any risk faced by the Bank (Unit Linked Insurance

Liabilities)

41

Furthermore, figures related to the encumbrance and availability for encumbrance of assets received by the Bank as collateral which are in turn used in such transactions are presented hereunder.

From a balance sheet point of view (i.e. excluding securities lending transactions), as at 31/12/2014 a total of EUR 705.1 million of assets were encumbered (either own assets or re-use of assets in the form of collateral received) in relation with liabilities of EUR 698.0 million. Two main reasons have explained such over-collateralisation practices, first, the application of haircuts on the value of securities exchanged in transactions whose levels of perceived risks do not necessarily match, and second, a layer of additional collateral is sometimes provided with the goal to avoid prices variation computation mismatches.

Definition

Liquidity risk is induced by the natural activity of the Bank : collection of deposits (funding) and reinvestment of these deposits in assets such as loans and bonds portfolios. The Group’s core business (Private banking, and Global Investor Services in Luxembourg) is a natural cash provider and leaves most entities in the Group with a comfortable liquidity cushion. As a consequence, the overall funding gap, which is nonetheless constantly monitored, is structurally and globally positive. The Bank distinguishes between :

৹ Operational (short-term) liquidity, i.e. the risk that the Bank does not have a

liquidity buffer able to absorb the net effects of day-to-day transactions and

changes in liquidity in the short-term.

৹ Structural (long term) liquidity, i.e. the risk that the Bank’s structural, long-term

assets cannot be funded adequately.

৹ Contingent liquidity i.e. the risk that the Bank is unable to attract additional

funds, replace maturing liabilities or generate sufficient liquidity by mobilizing its

EUR million

Fair value of

encumbered collateral

received or own debt

securities issued

Fair value of collateral

received or own debt

securities issued available

for encumbrance

Collateral received by the Bank 824.3 1,231.5

Equity instruments - 0.4

Debt Instruments 824.3 1,231.0

Other collateral received - - Ow n debt securities issued other than

ow n covered bonds or ABSs- -

42

liquid assets in stressed market conditions (while operational & structural

liquidity is incurred in the normal course of business).

Governance

In the Liquidity Risk management process :

৹ Treasury and Group ALM are in charge of the first line of defence through the

responsibility of operational liquidity management (Treasury) and of the structural liquidity management (ALM)

৹ Risk Control is in charge of the second line of defence. In this role, it identifies, measures, monitors, mitigates and reports Liquidity Risks inherent to the consolidated and solo balance sheets of the Bank.

The following bodies also play an important role in the liquidity management process :

৹ The Board Risk Committee is informed of the evolution of Liquidity Risk, through the measure of risk appetite indicators compared to their limits, in addition to complementary recurrent or punctual analyses on liquidity matters.

৹ The ALCO is responsible for the (strategic) management of (financial) risks among which Liquidity Risks. It is responsible for establishing the ALM / Liquidity policy in accordance with the Risk Appetite Statement. It makes all strategic ALM / Liquidity decisions, except those that are formally delegated to ALM Function or Global Markets - Treasury.

Liquidity policy

The policy applied by the Bank in terms of operational liquidity management is to centralise liquidity surpluses at the Head Office level (within the limits of local regulatory constraints) and to limit maturities’ transformations at local levels. Therefore, short term/operational liquidity risk is not considered as significant in the subsidiaries and is managed daily by the local Treasurer who adapts the excess liquidity to be upstreamed to KBL Luxembourg according to the local needs & regulatory constraints. He relies on the Group Treasurer if necessary for short term money market transactions. In terms of structural liquidity management, stable deposits are firstly used to support core business growth (e.g. loan book), then are reinvested in ALM portfolios having strict liquidity constraints (ECB and Basel III eligibility). Non stable deposits are invested with central bank or through short term Money Market transactions (mostly secured).

Contingent liquidity risk

The event of a liquidity crisis is managed through the Liquidity Contingency Plan and the conduct of liquidity stress tests.

43

Liquidity Contingency Plan (LCP) The procedure defines qualitative indicators (reputation issue, …) and quantitative

indicators (based on both market and KBL specific metrics : evolution of cash curves,

clients deposits, …) alerting to a potential liquidity crisis. They are daily monitored. In

case of breach, the procedure foresees an escalation process : from Risk Control (for

analysis) to the Head of Global Financial Markets or in case of major crisis, the ALCO

Committee. The LCP is tested yearly.

Stress tests Stress tests analyse the capacity of the Bank to resist a potential liquidity crisis. Therefore, the impact of a combination of a market and of a specific stressed scenario on the liquidity buffer is assessed. The results reflect among others, the need for additional funding or the free available buffer for a further extension of the loan book or investments in less liquid assets.

Risk Measurement and Methodologies

Operational Liquidity Risk is not considered significant in subsidiaries and is daily managed by local Treasurers. Therefore, Group Risk Control focuses its monitoring of the operational liquidity risk on KBL Luxembourg - which centralises the whole liquidity excess of the Group -, through the following indicators:

- the operating liquidity gaps that are escalated daily to the Central Bank of

Luxembourg;

- the weekly evolution of total deposits (monthly basis for subsidiaries) ;

- the daily collateral inventory (stock of securities, from KBL portfolios or from the

reverse repo/securities lending activity, that are available for mobilization in the

event of liquidity needs).

- daily indicators of the Liquidity Contingency Plan

- a daily assessment of the Liquidity Coverage Ratio for KBL Luxembourg

(according to the EU CRR regulation, binding as from end of 2015).

On the contrary, Structural Liquidity Risk in the subsidiaries needs more attention and is monthly reported through standardised indicators in the ad-hoc local and Group Committees :

- Private Banking customers loan-to-deposit ratio - Funding concentration (share of the top 20 private depositors)

- An assessment of the Basel III Net Stable Funding Ratio (not binding before

2018) Finally, an ’Internal Liquidity Coverage Ratio’ is computed quarterly, deriving from the liquidity stress tests exercise. It measures how far the available liquid assets can offset the net cash outflows in a liquidity crisis.

44

Other risks not reflected in previous sections are managed through a set of sound procedures by dedicated entities. The Board has expressed its Risk Appetite for risks described hereafter (Appendix 2) through limits applied to appropriate indicators. The measure of these indicators is monthly reported to the ALCO and quarterly to the BRC :

- Reputation risk results from the loss of confidence or negative perception by stakeholders (such as customers, counterparties, shareholders, investors, debt-holders, market analysts, regulators, …) that can adversely affect the Bank in its business/client relationships and its access to sources of funding.

The various aspects of reputation risk are managed by different entities :

the image of the Group in the media is managed by the Communication Department

the Compliance Function is in charge of a.o. Investor’s protection, Anti-Money Laundering and Ethics

the Legal Department follows issues relating to lawsuits and legal judgements. Main corresponding risk appetite indicators are :

Negative press mentions through major national media with expected impact on clients, regulators or the shareholder

Number of negative legal judgements with expected reputational impact over last 3 months

New lawsuits over last 3 months

- Regulatory risk is the risk of non compliance with existing regulation, rule or law. Regulatory issues and correspondences with the authorities (local and Group) are monitored centrally by the Group Corporate Centre. Corresponding risk appetite indicators are :

- Number of regulatory breaches flagged by the regulator over last 3 months -

KBL epb Group - Number of unanswered written inquiries from regulatory bodies past the

deadline over last 3 months - KBL epb Group

- Client risk is the risk of client’s dissatisfaction, while the Bank is failing to meet his expectations. It is generally the consequence of the occurrence of another specific risk type : suitability or misselling risk, poor level of service offered, inadequacies in the

45

end-to-end design, development and commercialisation of a product or service (including design, pricing, marketing), …

Corresponding risk appetite indicators are :

- percentage of discretionary AuM in suitability breach for longer than 3 months - Gross AuM outflows over last 3 months - New complaints over last 3 months - KBL epb Group - Unanswered complaints (over 1 month past receipt) - KBL epb Group - Client accounts in breach of maximum accepted loss threshold - KBL epb

Group - In-house funds/recommended third party funds underperforming significantly

their Peer Group/benchmark - Business risk represents the volatility of revenues and costs due to the impact of

changes in the market environment and/or strategic decisions.

Business risk is monitored by the Financial Control department, in charge of the budgetary exercise and of its follow-up The corresponding risk appetite indicator is the ratio ‘year-to-date gross income/budget gross income’, computed per business line and for the Group.

46

Context and Principles

Compensation schemes are designed to take account of competences required, evaluations, skills and performance. These schemes aim at aligning the long-term shareholder's interests and the long-term group-wide profitability while taking account of the Bank's Solvency ratios. Moreover, the compatibility between the relevant stakeholders' interests, the Bank's Corporate Social Responsibility Policy and compensations should be satisfied.

The Board of Directors and the Executive Committee

The remuneration policy related to the Board and to the EXCO members is based on the prevailing legislation, the Corporate Governance Code and market data. This policy is monitored and regularly reviewed by the Board Remuneration & Nomination Committee with the assistance of specialist members of the staff in order to ensure its continuous compliance with the law, the aforementioned code, and the prevailing market practices and trends. The Chairman of the Remuneration & Nomination Committee informs the Board of the Committee’s activities and submits any changes to be made to the Group Remuneration Policy and its practical implementation. The Board may also make its own proposal to the Remuneration & Nomination Committee in order to examine potential changes to the Group Remuneration Policy and advise it accordingly.

Material Risk Takers

The allocation mechanism and the acquisition rule of the variable remuneration of the so-called Material Risk Takers (risk taking employees, control functions and members of executive bodies) are determined in accordance with the CSSF Circular 06/273 (modified by CSSF Circulars 10/496 and 11/501), the Luxembourg draft law n°6660 (transposing CRD IV provisions) or the prevailing local regulation. Where the variable compensation of these employees can exceed EUR 100,000 in gross terms1 (proportionality principle), the same is at least composed by 50% of shares or equivalent instruments, is partly deferred over a minimum of 3 years; the subsequent vesting of remuneration being thereafter subject to performance conditions.

The Board Remuneration & Nomination Committee

The mission of the Board Remuneration & Nomination Committee is to define, implement and maintain a remuneration policy in accordance with the guidelines outlined in the circular CSSF 06/273 (as amended) and the Luxembourg draft law n°6660. This Committee has decision-making authority regarding notably the remuneration of the

1 Or any lower threshold if applicable according to local regulation.

47

members of the Executive Committee (Group-wide), particularly with regard to the structure of the remuneration and the individual remuneration. The Board Remuneration & Nomination Committee is authorised to undertake any activity within its terms of reference, and provide any additional advice or support within the Group that is required in the scope of its duties. The Board Remuneration & Nomination Committee shall carry out the duties for the parent company, subsidiary undertakings and the Group as a whole, as appropriate. The Board Remuneration & Nomination Committee may however delegate some duties to Local Remuneration & Nomination Committees. Composition of the Board Remuneration & Nomination Committee as at 31/12/2014:

Name Responsibility

George NASRA Chairman

Ernst-Wilhelm CONTZEN Member

Jan Maarten de JONG Member

Alan MORGAN Member

The shareholder’s deputy CEO as well as the Group CEO, the Group Head of Human Resources department and the General Secretary of KBL epb are invited as permanent guests to the meetings of the Board Remuneration & Nomination Committee.

Role and responsibilities

The role and responsibilities of the Board Remuneration & Nomination Committee are defined by the regulations approved by the Board. The tasks of the Board Remuneration & Nomination Committee are the following ones (non-exhaustive list). Remuneration Responsibilities:

৹ Propose a Group-wide remuneration policy to the Board that is aligned with the Bank’s long-term business strategy, its business objectives, its risk appetite and values, whilst recognising the interests of relevant stakeholders.

৹ Advise the Board on any material exemption or change to the principles of the Group Remuneration Policy.

৹ Approve bonus pools (Group-wide). ৹ Advise and approve remuneration of the Board of Director members, the CEOs, the

EXCO members (Group-wide) and Material Risk Takers.

৹ Advise the Board on retention/incentive bonuses in exceptional circumstances. Monitor the application of the authority on remuneration issues delegated to the Group EXCO and Local Remuneration & Nomination Committees to ensure that policies and principles are being consistently and effectively applied, seeking support and input from Control Functions (especially Group Human Resources and Group Risk as appropriate).

48

৹ Liaise as required with the other Board Specialised Committees and with the Group Risk function in relation to risk-adjusted performance measure.

৹ Ensure that all provisions regarding disclosure of remuneration are fulfilled and approve the contents of the annual Remuneration Policy Statement for Pillar III external disclosure.

৹ Review major changes in Labour Law when deemed necessary. ৹ Approve all pension plans of the Bank and any change in the terms and conditions

of any current pension plan, including any winding up in whole or in part. Nomination Responsibilities:

৹ Define the specific profile to be met by candidate to be (i) a member of the Board of Directors, (ii) Chairman of each Board Specialised Committee and (iii) a member of the EXCO (Group-wide), included the CEOs.

৹ Define and review as necessary, subject to approval by the Board of Directors, the criteria which shall be used in selecting new Board of Directors members.

৹ Draw up and review as necessary, subject to approval by the Board of Directors, the succession plan for members of the Board of Directors and the EXCO members (Group-wide).

৹ Draw up and review, as necessary, subject to approval by the Board of Directors, the evaluation process of the Board of Directors members.

৹ Draw up and review as necessary the training program for newly appointed members of the Board of Directors and the training sessions for current members.

Other Responsibilities:

৹ Review the Terms of References of the Board Remuneration & Nomination Committee as necessary and recommend any amendments, as appropriate, to the Board of Directors for approval.

৹ Recommend any amendments to the Board Remuneration & Nomination Committee’s membership to the Board of Directors for approval.

৹ Perform annual self assessment on the effectiveness and efficiency of the Bank’s Board Remuneration & Nomination Committee.

In the course of 2014, the Board Remuneration & Nomination Committee met seven times (o/w three conference calls) and the attendance rate of members stood at 92%. The Chairman of the Remuneration & Nomination Committee reported to the Board on the work of the Committee after each meeting and presented his proposals on matters subject to a decision of the Council. The main topics handled by the Board Remuneration & Nomination Committee during the year 2014 were the following:

৹ Review of fixed remuneration and bonuses paid to the members of the EXCO (Group-wide), to the MRTs and key performers in 2014;

৹ Evaluation of the activities and Key Performance Indicators (KPI) of the EXCO members (Group-wide) and MRTs throughout 2013 (based on which bonus have been allocated in 2014);

৹ Amendments to the Group Remuneration Policy following CRD IV new provisions; ৹ Revision of the Material Risk Takers’ list within the Group according to the new

MRT definition criteria;

49

৹ Material Risk Takers recruitment and exit packages (2014); ৹ Review of the bonus process for 2015 and pre-approval of the related bonus pools

per location; ৹ Ratification of the Board Suitability Policy; ৹ Global pension schemes action plan.

Information on the Management Body

In the selection of the Management Body members, the Bank seeks a balance in age, nationality, gender, seniority and active or retired background. In addition, the Bank seeks a balance in experience and affinity with the nature and the culture of the different businesses of the Bank. When assessing the relevance of a Management Body member’s candidature (recruitment or appointment), the following criteria are assessed: reputation criteria, experience criteria, managerial criteria, governance criteria, independence criteria. Assessing the initial and ongoing suitability of the members of the Management Body is the ultimate responsibility of the Bank.

Identification of the Material Risk Takers

In accordance with the CSSF Circular 06/273 (as amended), the population of Material Risk Takers has been determined based on a Bank's Risk Management self-assessment. The Material Risk Takers’ list has been revised and updated in 2014 based on the new definition criteria set by the EU delegated Regulation n°604/2014. The following staff members (non-exhaustive list) are considered to be Material Risk Takers based on qualitative criteria; therefore, their remunerations are subject to a supplementary set of rules:

- Members of the Boards and of the (Group/Local) EXCOs, including CEOs; - Heads of (extended) control functions (i.e. Risk Management, Audit, Compliance,

Finance and Human Resources); - Heads of function responsible for Legal Affairs, IT, Remuneration Policy and

Economic Analysis; - Business Units Head members (Luxembourg and foreign locations) and General

Management based in Luxembourg (“Group Head” / “Head of Luxembourg”); - Some staff members of credit and trading departments;

Staff members who were presumed as Material Risk Takers based only on their remuneration level (quantitative criteria) have been excluded from the final Material Risk Takers’ list given their limited impact on the Bank’s risk profile.

50

A thorough risk analysis by the Risk Control and Compliance departments of the Bank led to the following figures:

Material Risk Taker category Number of employees

Total number of identified Material Risk Takers based on qualitative criteria (Group-wide):

158*

o/w Group EXCO and General Management** 27

* excluding non-executive Board members ** “Group Head” / “Head of Luxembourg”

The Remuneration Process

An overall remuneration governance process is in place to cover all remuneration practices within the Group. The approach, principles and objectives of compensation schemes are disclosed to the relevant stakeholders, regulators and to the public, if requested and based upon the governance rules and codes in force.

Compensation of the Board Members

The compensation of the Board members is ruled by a system of fixed remuneration and attendance fees ('jetons de présence'). The fixed part of the remuneration as well as attendance fees are both charged as expenses. Finally, the Bank is allowed to grant loans or guarantees to Board members.

Compensation of the Members of the Executive Committee

The Board determines the remuneration of the members of the EXCO on the basis of advice obtained from the Board of Remuneration & Nomination Committee. In accordance with the Group Remuneration Policy, the total individual remuneration paid to the members of the EXCO comprises a fixed and, if any, a variable component.

Fixed compensation

Decisions related to the fixed compensation of the members of the EXCO are taken by the Board based on a proposal made by the Board Remuneration & Nomination Committee. This proposal is itself based on analyses related to market practices and compensations observed for similar functions in the same type of companies.

51

Variable compensation

The principles determining the annual variable compensation of the members of the EXCO are based on the achievement of objectives that are set by the Board at the beginning of the year on the basis of the advice provided by the Board Remuneration & Nomination Committee. Those pre-agreed objectives are balanced between economic and financial objectives (Financial Key Performance Indicators) on the one hand and non-economic objectives (Non-Financial Key Performance Indicators) on the other hand. Those elements are based on the combination of ”Financial”, ”People”, “Quality/Risk” and “Customer” criteria, e.g.:

৹ adjusted net profit-based measures (assessed at Group and entity levels); ৹ risk measures: CET 1 ratio, total capital ratio; ৹ the Assets under Management (AuM) fluctuations; ৹ individual performance-based measures such as: the compliance with applicable

rules and risk standards, managerial behaviours/skills, ethical behaviour, management of incidents, internal audit results follow-up, planning and organisation.

Currently, a proportion of 40% of the annual variable compensation is deferred over a period of 3 years, is not acquired faster than proportionally and is subject to risk adjustments. A portion of minimum 50% of the annual variable compensation is awarded in Phantom Shares (or/and any other equity-like instruments where appropriate) whose vesting is delayed gradually over three years and subject to the achievement of a performance objective.

Control Functions Compensation

In order to prevent conflicts of interests, the variable compensation devoted to (extended) Control Functions is not based on the specific financial results of the underlying businesses being controlled. When profit-based variable compensation is being considered for Control Functions, the level of such compensation is based on the results of the Group, or on the results of an entity, which is at least one organisational level higher than the level of the control function entity. The remuneration of the senior staff responsible for managing the Control Functions is not solely left to direct superiors; instead, it is directly overseen by the Board Remuneration & Nomination Committee.

Compensation of Other Material Risk Takers

The total compensation follows the same principles as the ones followed for the EXCO members' compensation; however, economic, financial and non-economic objectives only reflect their scope of responsibilities.

52

Remuneration, Performance and Risk Appetite

The variable compensation, linked to economic and financial objectives, is determined by a quantitative risk adaptation mechanism such that selected parameters must be met before any variable compensation linked to results may be granted. The total amount available for granting variable compensations is determined on the basis of a ‘bonus pool’, which is capped to represent a reasonable portion (i.e. it should not prevent the Bank to strengthen its capital base) of the entity’s reported profit of the ongoing period. The bonus pool calculation depends on the Adjusted Net Profit of the current year and the CET1 and total capital ratios over the last business/risk cycle (i.e. 3 years). The global bonus pool to be distributed for all entities of KBL epb Group is reviewed and validated at the level of the Board Remuneration & Nomination Committee. Once the amount of the global bonus pool has been defined at the level of the Board Remuneration & Nomination Committee, envelopes are allocated to business lines that, in turn, allocate them to departments, sub-departments, etc. until the individual level is reached. Over a year, if the performance assessed at the level of the Group or at the entity level or both, is more than 20% lower than the budgeted performance, then the Group EXCO will adjust the bonus accordingly. In any case, the Group EXCO may decide that the bonuses will be adjusted to zero for either the Group as a whole, or for a specific entity, according to the financial health and sustainability of the Group (or a specific entity), the economic situation or any external event.

The variable compensation related to non-economic objectives is based on the evaluation of a number of agreed criteria including “modifier”. For 2014, these criteria were notably: compliance with applicable rules and risk standards, managerial behaviours/skills, ethical behaviour, management of incidents, internal audit results follow-up, planning & organisation, communication & transparency, quality of reporting and proactivity & initiative. In the case of mediocre individual performance based on non-financial criteria (less than rating 3), the Group EXCO may decide that bonuses (at all levels) will be adjusted to zero.

53

Level of Remuneration

For the members of the EXCO, the General Management (“Group Head” / “Head of Luxembourg”) of the Bank, other Material Risk Takers (MRT) and the staff as a whole, the variable compensation is capped at a certain level of the fixed remuneration, depending on the nature of the function:

Function Maximum variable-to-fixed

remuneration ratio

EXCO, General Management, other Material Risk Takers (excluding Control Function)

100%* (up to 200% upon specific shareholder’s approval)

Control Functions 100%*

(50% for MRT)

All other roles 200%*

* or maximum ratio allowed under the prevailing local regulation

Risk-Adjusted Remuneration, Malus and Clawback Provisions

The profit-based variable compensation paid out to Material Risk Takers is subject to ex-ante and to ex-post risk adjustment measures. Ex-ante risk adjustments measures are based on two main criteria:

৹ Quantitative: CET1 and total capital ratios over the last business/risk cycle (i.e. 3 years).

৹ Qualitative: compliance and internal control risk assessment. Ex-post risk adjustments can be operated either by reducing deferred (but not yet vested) amounts of compensation (malus) or by re-claiming ownership of upfront amounts or deferred amounts already vested (clawback). A malus will be applied:

৹ in case of evidence of misbehaviour or serious error by the staff member (e.g. breach of code of conduct and other internal rules, especially concerning risks);

৹ if KBL epb or an underlying entity suffers a significant downturn in its financial performance;

৹ if KBL epb or an underlying entity suffers a significant failure of risk management; ৹ in case of significant changes in the Bank's economic or regulatory capital base.

54

For each individual, a clawback will be applied in case of:

৹ established and proven fraud; ৹ (the use of) misleading information; ৹ remuneration received while breaching the CSSF Circular 06/273 (as amended),

the Luxembourg draft law n°6660 (transposing CRD IV provisions), the Markets in Financial Instruments Directive (MiFID) or/and the European Banking Authority Guidelines;

৹ situations where the individual participated to actions that caused substantial losses for the Bank or did not comply with applicable rules in terms of reputability and competences.

Remuneration figures – 2014

Over the year 2014, a total of EUR 0.5 million were spent in relation with eight employees as a result of recruitment of EXCO members (Group-wide) and Material Risk Takers. On the other hand, a total amount of EUR 4.9 million were spent in relation with seven individuals in the framework of employment termination of EXCO members (Group-wide) and Material Risk Takers (of which EUR 3.0 million spent in relation to one individual).

In addition, six employees were granted a total remuneration exceeding EUR 1 million.

The remuneration structure of identified Material Risk Takers2 was as follows in 2014:

Members of the Group EXCO and General Management* (in EUR million)

Fixed Remuneration: Base salary Other (pension, car, allowance etc..)

8.96 7.25 1.71

Variable Remuneration: Cash Equity-related instruments (Phantom Shares) Other

7.35 3.53 1.70 2.12

Non-deferred Deferred

3.58 3.77

Phantom shares awarded in 2014 – schedule vesting: Vesting in 2015 Vesting in 2016 Vesting in 2017

0.22 0.22 0.22

* « Group Head » / « Head of Luxembourg »

2 Figures reported in the tables refer to the Material Risk Takers as defined based on the new qualitative criteria (EU

delegated Regulation n°604/2014). Because variable remuneration granted in 2014 referred to 2013 performance, vesting rules as well as conversion in equity-related instruments did not apply to new Material Risk Takers. The same will be effective for new Material Risk Takers as from 2014 variable remuneration granted in 2015.

55

Other Material Risk Takers (in EUR million)

Fixed Remuneration: Base salary Other (pension, car, allowance etc..)

23.62 19.66 3.96

Variable Remuneration: Cash Equity-related instruments (Phantom Shares) Other

5.96 4.93 1.03

0

Non-deferred Deferred

5.24 0.72

Phantom shares awarded in 2014 – schedule vesting: Vesting in 2015 Vesting in 2016 Vesting in 2017

0.14 0.14 0.14

56

Group KBL Board of Directors ensures that the risk management arrangements of Group

KBL are adequate with regard to the Bank’s profile and strategy, these arrangements

being already implemented or making part of an action plan with the aim to reach this

objective.

This declaration is based on the reliability of the risk-related information communicated to

the Board through the dedicated channels foreseen by the governance. In particular, the

Board Risk Committee - a sub-committee of the Board- is the forum where the risk

exposures are compared to the Board’s risk appetite, and where significant risk events and

issues are reported and discussed.

57

In its ‘Risk Appetite Statement’, the Board of Directors (BoD) has defined the type and amount of risk it is able and willing to accept in pursuit of its business objectives. These risks arise from the main business areas making part of the overall strategy of the Group : Private Banking, Global Investor Services (GIS), Global Markets (GM) and Asset and Liability Management (ALM).

In terms of capital management, the Group aims to meet regulatory and business requirements, while actively optimizing the use of its capital and then avoiding overcapitalisation. The Board has set limits on both regulatory (Common Equity Tier 1 or CET1 ratio) and internal (ICAAP) approaches, that both were respected as at 31/12/2014 : 13.7% CET1 ratio for a limit of 11%, and 161.4% ICAAP ratio for a limit of 110%.

Considering liquidity risk as a key risk, the Bank intends to ensure that each legal entity of the Group is self-sufficient in its own currency from a liquidity funding perspective under business as usual circumstances. When deemed necessary, committed credit lines are in place to cover subsidiaries funding needs in times of stress.

The Liquidity Coverage Ratio – that will be binding end 2015 under EU CRR regulation - amounted to 114.3% as at 31/12/2014, for a regulatory limit of 60%. Net deposits outflows over last 3 months were positive (6% vs limit of -10%)

The BoD has expressed a zero tolerance for reputation risk. Indeed, the reputation of the Group is considered as its main strength for the forthcoming deployment of its business strategy, namely with the ambition to be perceived as a trusted investor, a trusted advisor and a trusted employer. Therefore negative press mentions are closely monitored, analysed and reported to the Board Risk Committee.

KBL aims to, at all times, comply with the regulatory requirements in the jurisdictions in which it operates (regulatory risk). It seeks to handle regulatory requirements and dialogue in a complete and transparent manner. Therefore, the Board is informed of regulatory breaches flagged by the regulator.

On the other hand, the quality of the relationship with Private Banking clients forms one of the cornerstones of KBL’s business model (client risk). Attention is paid to the suitability breaches in the client portfolio, with a priority given to discretionary management (1% of AUM were in breach for longer than 3 months as at 31/12/2014, for a limit of 5%). Gross AUM outflows for both domestic and international markets are also closely monitored (both were under their respective limit as at 31/12/2014).

Like any bank, KBL is unavoidably exposed to operational risk in the course of its day to day business. This risk is monitored through a strong Operational Risk Management Framework encompassing appropriate processes and procedures and through risk appetite indicators. The ratio YtD (operational losses and provision / gross income) was slightly breaching the limit in 2014 (1.3% vs a limit of 1%) further to incidents that were addressed through appropriate analyses and action plans.

KBL’s strategic loan growth includes a development of its loan book. As such, the Bank is exposed to credit risk from customers. KBL manages this risk through a range of credit risk management processes and limits defined in the Credit Policy validated by the Board.

58

As at 31/12/2014, none of the credit risk appetite indicators were exceeding their limit. Among others, the gross specific loan and bond impairment charges (annualized) respectively amounted to 0.05 % and 0.002% for a limit of 0.15% and 0.10%.

The Bank aims to optimise the management of its balance sheet, through the Asset and Liabilities activity (ALM). A positive and stable contribution to the Profit & Loss and to the Economic Value of the Bank is targeted within acceptable and controllable levels of ALM risks (interest rate risk, liquidity risk, credit spread risk and equity risk). Risk appetite indicators for ALM risk are expressed by Value at Risk measures (99% - 1 year). All of them were within limits at the end of 2014 : VaR equity price risk : EUR 67 million vs a limit of EUR 150 million; VaR Interest Rate risk : EUR 45 million vs EUR 150 million; VaR credit spread risk: EUR 73 million vs EUR 200 million).

KBL epb group being mainly Private Banking oriented, its trading activity aims to support the core business activities. The trading positions reflect the necessary intermediation of the Dealing Room, supporting client flows in terms of debt instruments, equity instruments, structured products, forex and deposits. Therefore, the trading risk is closely monitored and managed accordingly, within tight limits. The trading Value at Risk 99% - 10 days amounted to EUR 1.5 million as at 31/12/2014 for a limit of EUR 10 million.

Finally, the Bank aims to generate stable gross income in line with budget to fulfil shareholders expectations and diminish any concentration risk arising from single lines of business. The business risk is monitored through realised vs budgeted gross income, and ‘earnings mix’ indicators. As at 31/12/2014, the former amounted to 101.1 %.

59

European Commission Implementing Regulation (EU) No 1423/2013, Annex VI.

31 DEC 2014

EUR mln

(B)

REGULATION (EU) No 575/2013

ARTICLE REFERENCE

(C)

AMOUNTS SUBJECT TO

PRE-REGULATION (EU)

No 575/2013

TREATMENT OR

PRESCRIBED RESIDUAL

AMOUNT OF

REGULATION (EU)

575/2013

1 Capital instruments and the related share premium accounts 508.4 26 (1), 27, 28, 29, EBA list 26 (3) N/A

of w hich: shares of a public limited liability company 508.4 EBA list 26 (3) N/A

2 Retained earnings 325.9 26 (1) (c) N/A

3Accumulated other comprehensive income (and other reserves, to include unrealised gains and losses under the applicable accounting

standards)45.8 26 (1) N/A

3a Funds for general banking risk - 26 (1) (f) N/A

4 Amount of qualifying items referred to in Article 484 (3) and the related share premium accounts subject to phase out from CET1 - 486 (2) N/A

Public sector capital injections grandfathered until 1 January 2018 - 483 (2) N/A

5 Minority interests (amount allow ed in consolidated CET1) - 84, 479, 480 N/A

5a Independently review ed interim profits net of any foreseeable charge or dividend - 26 (2) N/A

6 Common Equity Tier 1 (CET1) capital before regulatory adjustments 880.1 N/A

7 Additional value adjustments (negative amount) - 34, 105 N/A

8 Intangible assets (net of related tax liability) (negative amount) -230.7 36 (1) (b), 37, 472 (4) N/A

9 Empty set in the EU N/A

10Deferred tax assets that rely on future profitability excluding those arising from temporary difference (net of related tax liability w here the

conditions in Article 38 (3) are met) (negative amount)-1.9 36 (1) (c), 38, 472 (5) N/A

11 Fair value reserves related to gains or losses on cash f low hedges - 33 (a) N/A

12 Negative amounts resulting from the calculation of expected loss amounts - 36 (1) (d), 40, 159, 472 (6) N/A

13 Any increase in equity that results from securitised assets (negative amount) - 32 (1) N/A

14 Gains or losses on liabilities valued at fair value resulting from changes in ow n credit standing - 33 (1) (b) (c) N/A

15 Defined-benefit pension fund assets (negative amount) -0.0 36 (1) (e), 41, 472 (7) N/A

16 Direct and indirect holdings by an institution of ow n CET1 instruments (negative amount) -0.1 36 (1) (f), 42, 472 (8) N/A

17Direct, indirect and synthetic holdings of the CET1 instruments of f inancial sector entities w here those entities have reciprocal cross holdings

w ith the institution designed to inflate artif icially the ow n funds of the institution (negative amount)- 36 (1) (g), 44, 472 (9) N/A

18Direct, indirect and synthetic holdings of the CET1 instruments of f inancial sector entities w here the institution does not have a signif icant

investment in those entities (amount above 10% threshold and net of eligible short positions) (negative amount) -

36 (1) (h), 43, 45, 46, 49 (2) (3),

79, 472 (10)N/A

19Direct, indirect and synthetic holdings of the CET1 instruments of f inancial sector entities w here the institution has a signif icant investment in

those entities (amount above 10% threshold and net of eligible short positions) (negative amount) -

36 (1) (i), 43, 45, 47, 48 (1) (b), 49

(1) to (3), 79, 470, 472 (11)N/A

20 Empty set in the EU - N/A

20a Exposure amount of the follow ing items w hich qualify for a RW of 1250%, w here the institution opts for the deduction alternative - 36 (1) (k) N/A

20b of w hich: qualifying holdings outside the f inancial sector (negative amount) - 36 (1) (k) (i), 89 to 91 N/A

20c of w hich: securitisation positions (negative amount) -

36 (1) (k) (ii)

243 (1) (b)

244 (1) (b)

258

N/A

20d of w hich: free deliveries (negative amount) - 36 (1) (k) (iii), 379 (3) N/A

21Deferred tax assets arising from temporary difference (amount above 10 % threshold , net of related tax liability w here the conditions in

Article 38 (3) are met) (negative amount)-

36 (1) (c), 38, 48 (1) (a), 470, 472

(5)N/A

22 Amount exceeding the 17,65% threshold (negative amount) - 48 N/A

23of w hich: direct, indirect and synthetic holdings by the institution of the CET1 instruments of f inancial sector entities w here the institution has a

signif icant investment in those entities- 36 (1) (i), 48 (1) (b), 470, 472 (11) N/A


25 of w hich: deferred tax assets arising from temporary difference - 36 (1) (c), 38, 48 (1) (a), 470, 472

(5)N/A

25a Losses for the current f inancial year (negative amount) - 36 (1) (a), 472 (3) N/A

25b Foreseeable tax charges relating to CET1 items (negative amount) - 36 (1) (l) N/A

26 Regulatory adjustments applied to Common Equity Tier 1 in respect of amounts subject to pre-CRR treatment -2.0 N/A

26a Regulatory adjustments relating to unrealised gains and losses pursuant to Articles 467 and 468 -86.1 N/A

Of w hich unrealised gains and losses on exposures to central governments classif ied in the IAS 39 'Available for Sale' category (including

related cash-flow hedge reserve if applicable)

(current applicable f ilter : 100% of unrealized results to be ignored)

-32.5 467

Of w hich net unrealized gains on exposures to AFS debt instruments (other than AFS exposures to central governments and including related

cash-flow hedge reserve if applicable)

(current applicable f ilter : 100% of net gains to be ignored)

-29.2 468

Of w hich net unrealized gains on exposures to AFS equity instruments (including related cash-flow hedge reserve if applicable)

(current applicable f ilter : 100% of net gains to be ignored) -24.4 468

Of w hich net unrealized losses on exposures to AFS debt instruments (other than AFS exposures to central governments and including

related cash-flow hedge reserve if applicable)

(current applicable f ilter : 80% of net losses to be ignored)

- 467

Of w hich net unrealized losses on exposures to AFS equity instruments (including related cash-flow hedge reserve if applicable)

(current applicable f ilter : 80% of net losses to be ignored) - 467

26b Amount to be deducted from or added to Common Equity Tier 1 capital w ith regard to additional f ilters and deductions required pre CRR - 481 N/A

Of w hich ./. - 481

27 Qualifying AT1 deductions that exceed the AT1 capital of the institution (negative amount) - 36 (1) (j) N/A

28 Total regulatory adjustments to Common Equity Tier 1 (CET1) -320.9 N/A

29 Common Equity Tier 1 (CET1) capital 559.2 N/A

Common Equity Tier 1 capital: instruments and reserves (1)

Common Equity Tier 1 (CET1) capital: regulatory adjustments

60

30 Capital instruments and the related share premium accounts - 51, 52 N/A

31 of w hich: classif ied as equity under applicable accounting standards - N/A

32 of w hich: classif ied as liabilities under applicable accounting standards - N/A

33 Amount of qualifying items referred to in Article 484 (4) and the related share premium accounts subject to phase out from AT1 - 486 (3) N/A


34Qualifying Tier 1 capital included in consolidated AT1 capital (including minority interest not included in row 5) issued by subsidiaries and held

by third parties - 85, 86, 480 N/A

35 of w hich: instruments issued by subsidiaries subject to phase-out - 486 (3) N/A

36 Additional Tier 1 (AT1) capital before regulatory adjustments - N/A

37 Direct, indirect and synthetic holdings by an institution of ow n AT1 instruments (negative amount) - 52 (1) (b), 56 (a), 57, 475 (2) N/A

38Direct, indirect and synthetic holdings of the AT1 instruments of f inancial sector entities w here those entities have reciprocal cross holdings

w ith the institution designed to inflate artif icially the ow n funds of the institution (negative amount)- 56 (b), 58, 475 (3) N/A

39Direct, indirect and synthetic holdings of the AT1 instruments of f inancial sector entities w here the institution does not have a signif icant

investment in those entities (amount above 10% threshold and net of eligible short positions) (negative amount) - 56 (c), 59, 60, 79, 475 (4) N/A

40Direct, indirect and synthetic holdings of the AT1 instruments of f inancial sector entities w here the institution has a signif icant investment in

those entities (net of eligible short positions) (negative amount) - 56 (d), 59, 79, 475 (4) N/A

41Regulatory adjustments applied to Additional Tier 1 capital in respect of amounts subject to pre-CRR treatment and transitional treatments

subject to phase-out as prescribed in Regulation (EU) No 575/2013 (ie. CRR residual amounts)- N/A

41aResidual amounts deducted from Additional Tier 1 capital w ith regard to deduction from Common Equity Tier 1 capital during the transitional

period pursuant to article 472 of Regulation (EU) No 575/2013-

472, 473(3)(a), 472 (4), 472 (6),

472 (8) (a), 472 (9), 472 (10) (a),

472 (11) (a)

N/A

Of w hich items to be detailed line by line, e.g. material net interim losses, intangibles, shortfall of provisions to expected losses, etc

41bResidual amounts deducted from Additional Tier 1 capital w ith regard to deduction from Tier 2 capital during the transitional period pursuant to

article 475 of Regulation (EU) No 575/2013- 477, 477 (3), 477 (4) (a) N/A

Of w hich items to be detailed line by line, e.g. reciprocal cross holdings in Tier 2 instruments, direct holdings of non-signif icant investments in

the capital of other f inancial sector entities, etc

41c Amounts to be deducted from added to Additional Tier 1 capital w ith regard to additional f ilters and deductions required pre- CRR - 467, 468, 481 N/A

Of w hich: ./. 467, 468, 481

42 Qualifying T2 deductions that exceed the T2 capital of the institution (negative amount) - 56 (e) N/A

43 Total regulatory adjustments to Additional Tier 1 (AT1) capital - N/A

44 Additional Tier 1 (AT1) capital - N/A

45 Tier 1 capital (T1 = CET1 + AT1) 559.2 N/A

46 Capital instruments and the related share premium accounts 48.3 62, 63 N/A

47 Amount of qualifying items referred to in Article 484 (5) and the related share premium accounts subject to phase out from T2 - 486 (4) N/A


48Qualifying ow n funds instruments included in consolidated T2 capital (including minority interest and AT1 instruments not included in row s 5 or

34) issued by subsidiaries and held by third party- 87, 88, 480 N/A

49 of w hich: instruments issued by subsidiaries subject to phase-out - 486 (4) N/A

50 Credit risk adjustments - 62 (c) & (d) N/A

51 Tier 2 (T2) capital before regulatory adjustment 48.3 N/A

52 Direct, indirect and synthetic holdings by an institution of ow n T2 instruments and subordinated loans (negative amount) -3.4 63 (b) (i), 66 (a), 67, 477 (2) N/A

53Direct, indirect and synthetic holdings of the T2 instruments and subordinated loans of f inancial sector entities w here those entities have

reciprocal cross holdings w ith the institutions designed to inflate artif icially the ow n funds of the institution (negative amount)- 66 (b), 68, 477 (3) N/A

54Direct, indirect and synthetic holdings of the T2 instruments and subordinated loans of f inancial sector entities w here the institution does not

have a signif icant investment in those entities (amount above 10 % threshold and net of eligible short positions) (negative amount)- 66 (c), 69, 70, 79, 477 (4) N/A

54a Of w hich new holdings not subject to transitional arrangements N/A

54b Of w hich holdings existing before 1 January 2013 and subject to transitional arrangements N/A

55Direct, indirect and synthetic holdings of the T2 instruments and subordinated loans of f inancial sector entities w here the institution has a

signif icant investment in those entities (net of eligible short positions) (negative amounts)- 66 (d), 69, 79, 477 (4) N/A

56Regulatory adjustments applied to tier 2 in respect of amounts subject to pre-CRR treatment and transitional treatments subject to phase out as

prescribed in Regulation (EU) No 575/2013 (i.e. CRR residual amounts)- N/A

56aResidual amounts deducted from Tier 2 capital w ith regard to deduction from Common Equity Tier 1 capital during the transitional period

pursuant to article 472 of Regulation (EU) No 575/2013-

472, 472(3)(a), 472 (4), 472 (6),

472 (8), 472 (9), 472 (10) (a), 472

(11) (a)

N/A

Of w hich items to be detailed line by line, e.g. material net interim losses, intangibles, shortfall of provisions to expected losses, etc

56bResidual amounts deducted from Tier 2 capital w ith regard to deduction from Additional Tier 1 capital during the transitional period pursuant to

article 475 of Regulation (EU) No 575/2013-

475, 475 (2) (a), 475 (3), 475 (4)

(a)N/A

Of w hich items to be detailed line by line, e.g. reciprocal cross holdings in AT1 instruments, direct holdings of non-signif icant investments in

the capital of other f inancial sector entities, etc

56c Amounts to be deducted from or added to Tier 2 capital w ith regard to additional f ilters and deductions required pre- CRR - 467, 468, 481 N/A

Of w hich: … possible f ilter for unrealised losses 467, 468, 481

57 Total regulatory adjustments to Tier 2 (T2) capital -3.4 N/A

58 Tier 2 (T2) capital 44.9 N/A

59 Total capital (TC = T1 + T2) 604.2 N/A

Tier 2 (T2) capital: regulatory adjustments

Tier 2 (T2) capital: instruments and provisions

Additional Tier 1 (AT1) capital: instruments

Additional Tier 1 (AT1) capital: regulatory adjustments

61

59aRisk w eighted assets in respect of amounts subject to pre-CRR treatment and transitional treatments subject to phase out as prescribed in

Regulation (EU) No 575/2013 (i.e. CRR residual amounts)- N/A

Of w hich:… items not deducted from CET1 (Regulation (EU) No 575/2013 residual amounts) (items to be detailed line by line, e.g. Deferred tax

assets that rely on future profitability net of related tax liability, indirect holdings of ow n CET1, etc)-

472, 472 (5), 472 (8) (b), 472 (10)

(b), 472 (11) (b)N/A

Of w hich:…items not deducted from AT1 items (Regulation (EU) No 575/2013 residual amounts) (items to be detailed line by line, e.g.

Reciprocal cross holdings in T2 instruments, direct holdings of non-signif icant investments in the capital of other f inancial sector entities, etc)-

475, 475 (2) (b), 475 (2) (c), 475

(4) (b)N/A

Of w hich: ... items not deducted from T2 items (Regulation (EU) No 575/2013 residual amounts) (items to be detailed line by line, e.g. Indirect

holdings of ow n T2 instruments, indirect holdings of non-signif icant investments in the capital of other f inancial sector entities, etc)-

477, 477 (2) (b), 477 (2) (c), 477

(4) (b)N/A

60 Total risk-weighted assets 4,096.8 N/A

61 Common Equity Tier 1 (as a percentage of risk exposure amount) 13.65% 92 (2) (a), 465 N/A

62 Tier 1 (as a percentage of risk exposure amount) 13.65% 92 (2) (b), 465 N/A

63 Total capital (as a percentage of risk exposure amount 14.75% 92 (2) (c) N/A

64

Institution specif ic buffer requirement (CET1 requirement in accordance w ith article 92 (1) (a) plus capital conservation and countercyclical

buffer requirements plus systemic risk buffer, plus systemically important institution buffer (G-SII or O-SII buffer) expressed as a percentage

of risk exposure amount)

7.000% CRD 128, 129, 140 N/A

65 of w hich: capital conservation buffer requirement 2.500% N/A

66 of w hich: countercyclical buffer requirement not yet implemented N/A

67 of w hich: systemic risk buffer requirement no current requirement N/A

67a of w hich: Global Systemically Important Institution (G-SII) or Other Systemically Important Institution (O-SII) buffer not yet implemented CRD 131 N/A

68 Common Equity Tier 1 available to meet buffers (as a percentage of risk exposure amount) 6.75% CRD 128 N/A

69 [non-relevant in EU regulation] N/A N/A



72Direct, indirect and synthetic holdings of the capital of f inancial sector entities w here the institution does not have a signif icant investment in

those entities (amount below 10% threshold and net of eligible short positions)46.9

36 (1) (h), 45, 46, 472 (10)

56 (c), 59, 60, 475 (4),

66 (c), 69, 70, 477 (4)

N/A

73Direct, indirect and synthetic holdings of the CET1 instruments of f inancial sector entities w here the institution has a signif icant investment in

those entities (amount below 10% threshold and net of eligible short positions)0.6 36 (1) (i), 45, 48, 470, 472 (11) N/A


75Deferred tax assets arising from temporary difference (amount below 10 % threshold , net of related tax liability w here the conditions in

Article 38 (3) are met)- 36 (1) (c), 38, 48, 470, 472 (5) N/A

76 Credit risk adjustments included in T2 in respect of exposures subject to standardised approach (prior to the application of the cap) - 62 N/A

77 Cap on inclusion of credit risk adjustments in T2 under standardised approach - 62 N/A

78 Credit risk adjustments included in T2 in respect of exposures subject to internal rating-based approach (prior to the application of the cap) - 62 N/A

79 Cap for inclusion of credit risk adjustments in T2 under internal ratings-based approach - 62 N/A

80 - Current cap on CET1 instruments subject to phase-out arrangements N/A 484 (3), 486 (2) & (5) N/A

81 - Amount excluded from CET1 due to cap (excess over cap after redemptions and maturities) N/A 484 (3), 486 (2) & (5) N/A

82 - Current cap on AT1 instruments subject to phase-out arrangements N/A 484 (4), 486 (3) & (5) N/A

83 - Amount excluded from AT1 due to cap (excess over cap after redemptions and maturities) N/A 484 (4), 486 (3) & (5) N/A

84 - Current cap on T2 instruments subject to phase-out arrangements N/A 484 (5), 486 (4) & (5) N/A

85 - Amount excluded from T2 due to cap (excess over cap after redemptions and maturities) N/A 484 (5), 486 (4) & (5) N/A

Capital ratios and buffers

Amounts below the thresholds for deduction (before risk-weighting)

Applicable caps on the inclusion of provisions in Tier 2

(1) 'N/A' inserted if the question is not applicable

Capital instruments subject to phase-out arrangements (only applicable between 1 Jan 2014 and 1 Jan 2022)

62

Balance Sheet Reconciliation Methodology CONSOLIDATED BALANCE SHEET, as of December 31st, 2014Disclosure according to Article 2 in Commission implementing regulation (EU) No 1423/2013

(references in square brackets correspond to lines in the 'transitional own funds disclosure template)

€ mln

ofw. Non-significant

investments in

Financial sector

entities

ofw. Significant

investments in

Financial sector

entities

ofw. Defined benefit

pension fund assets

ofw. Deferred tax

assets deducted

from CET1

Cash & balances with central banks 1,003.0

Financial assets 10,868.4 40.3 0.6 (**)

Reinsurers' share in technical provisions, insurance 0.5

Tax assets 10.9

Current tax assets 6.4

Deferred tax assets 4.5 4.5

Investments in associates 11.8

Investments properties 23.0

Property & Equipment 150.3

Goodwill & Other intangible assets 230.7 [8]

Other assets 147.5 0.0

TOTAL ASSETS 12,446,071,147 12,446.1

Financial liabilities 10,915.5 0.1 (*) -

Gross technical provisions, insurance 161.0

Tax liabilities 12.2

Current tax liabilities 2.3

Deferred tax liabilities 9.9 0.0 (***) 2.5

Provisions 45.0

Other liabilities 365.3

TOTAL LIABILITIES 11,499.0

Ordinary shares issued (including share premium) 508.4 [1]

Preference shares issued (including share premium) 0.1 - -

Retained earnings 325.9 [2]

ofw. Reserves excluded from own funds 2.0 [26]

Net result of the year 66.9

Treasury shares -0.1 [16]

Non-controlling interests 0.1

Accumulated other comprehensive income 45.8 [3]

Currency translation reserve 0.6

AFS revaluation reserve and related cash flow hedge reserve 86.1 [26a]

ofw. Exposures on central governments 32.5 [26a]

ofw, Exposures on other debt instruments 29.2 [26a]

ofw. Exposures on equity instruments 24.4 [26a]

Defined benefit pension plans reserve -40.8

TOTAL EQUITY 947.1

TOTAL EQUITY AND LIABILITIES 12,446.1

Additional information

Indirect holdings in capital instruments issued by financial sector entities

Defined benefit pension plan assets 6.7

Total 46.9 0.6 0.0 1.9

(*) Short positions to be net with long positions [72] [73] ofw. Amounts issued 48.3 [46] [15] [10]

(**) Own T2 instruments held ofw. Own issues held -3.4 [52]

(***) Deferred tax liabilities which relate to DB assets

ofw. Group T2 issues /

subordinated debts(after

amortization / CRR Art.64)

44.9

0.1

48.2

3.4

76

Commission Implementing Regulation (EU) No 1423/2013.

Capital instruments main feature templateOrdinary shares Preference shares Subordinated bond Subordinated certificates

1 Issuer KBL epb S.A. KBL epb S.A. KBL epb S.A. KBL epb S.A.

2 Unique identifier LU0092281103 LU0092281442 XS0123488602 different for each certificate

3 Governing law(s) of the instrument Luxembourg Luxembourg Luxembourg Luxembourg

Regulatory treatment4 Transitional CRR rules CET1 T2 T2 T2

5 Post-transitional CRR rules CET1 T2 T2 T2

6 Eligible at solo/(sub)-consolidated/ solo & (sub-consolidated) Solo & sub-consolidated Solo & sub-consolidated Solo & sub-consolidated Solo & sub-consolidated

7 Instrument typeShares of a public limited

liability companyPreference shares Subordinated debt Subordinated debt

8Amount recognized in regulatory capital

(currency in mln, as of most recent reporting date)EUR 508.4 mln EUR 0,1 mln EUR 42.5 mln EUR 2.3 mln

9 Nominal amount of instrument n/a n/a EUR 200 mln EUR 7.3 mln

9a Issue price n/a n/a 101.75% 100%

9b Redemption price n/a n/a 100% 100%

10 Accounting classification Shareholder's equity Shareholder's equity Liability - amortized cost Liability - amortized cost

11 Original date of issuance from 1949 from 1986 2001 from 2005 to 2010

12 Perpetual or dated Perpetual Perpetual Dated Dated

13 Original maturity date No maturity No maturity 23 feb 2016 Up to 03 Mar 2020

14 Issuer call subject to prior supervisaory approval n/a n/a Yes (Tax Status) n/a

15 Optional call date, contingent call dates and redemption amount n/a n/a No n/a

16 Subsequent call dates if applicable n/a n/a No n/a

Coupons / dividends

17 Fixed or floating dividend / coupon n/aInitial preference dividend

(fixed)Fixed Fixed

18 Coupon rate and any related index n/a EUR 0.248 per share 6.375% from 1.65% to 5.30%

19 Existence of a dividend stopper

Profit allocation rules

contained in the companies

articles of association

profit allocation rules

contained in the companies

articles of association

No No

20a Fully discretionary, partially discretionary or mandatory (in terms of timing) Fully discretionary Fully discretionary Mandatory Mandatory

20b Fully discretionary, partially discretionary or mandatory (in terms of amount) Fully discretionary

Partially discretionary (fully

discretionary beyond the initial

preference dividend)

Mandatory Mandatory

21 Existence of a step up or other incentive to redeem No No No No

22 Non-cumulative or cumulative Non-cumulative Cumulative n/a n/a

23 Convertible or non-convertible Non-convertible Non-convertible Non-convertible Non-convertible

24 If convertible, conversion trigger(s) n/a n/a n/a n/a

25 If convertible, fully or partially n/a n/a n/a n/a

26 If convertible, conversion rate n/a n/a n/a n/a

27 If convertible, mandatory or optional conversion n/a n/a n/a n/a

28 If convertible, specify instrument type convertible into n/a n/a n/a n/a

29 If convertible, specify issuer of instrument it converts into n/a n/a n/a n/a

30 Write-down features No No No No

31 If write-down, write-down trigger(s) n/a n/a n/a n/a

32 If write-down, full or partial n/a n/a n/a n/a

33 If write-down, permanent or temporary n/a n/a n/a n/a

34 If temporary write-down, description of write-up mechanism n/a n/a n/a n/a

35Position in subordination hierarchy in liquidation

(specify instrument type immediately senior to instrument)preference shares subordinated debt senior unsubordinated senior unsubordinated

36 Non-compliant transitioned features No No No No

37 If yes, specifiy non-compliant features n/a n/a n/a n/a

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