Letter of Axel Miller, CEO of Dexia

The Chief Executive Officer

In 2005, Dexia achieved very solid growth in originations, revenues and net income-Group share. This good performance comes after the record year of 2004, and furthermore, the symbolic threshold of EUR 2 billion net income has been exceeded in the ninth year of existence of Dexia as a Group, remembering that the combined net income of its two constituents was EUR 481 million in 1996.

Net income-Group share stood at EUR 2,038 million in the year 2005, up 11.9% above 2004, and earnings per share amounted to 1.87 EUR, up 14.5%. This double digit growth was achieved in a very challenging environment which has prevailed throughout the year in all the areas and markets where Dexia operates, and despite the expenditure on development projects which are expected to bear fruit in the mid term.

An excellent year in Public/Project Finance

It was clear as from the beginning of 2005 that competition would toughen and that it would bear on origination margins. This has certainly happened, but it did not prevent Dexia from seizing considerable amounts of business opportunities offering a risk-reward profile which responds to Group¿s requirements. Overall, long-term credit commitments went up by a strong 25.0%, bringing the total book to EUR 241.3 billion at year end. All the countries where Dexia holds - or is the process of increasing ¿ market share, contributed to this good performance. In the historic markets of France and Belgium, growth of the outstanding commitments was respectively +5.1% and +7.0%; these are substantial growth percentages in view of the mature portfolios in those countries. In the newer markets, the progressions were very strong (Italy: +19.6%; Spain: +30.5%; UK: +46.6%; USA: +58.7%). This was particularly the case in Eastern and Central and Eastern Europe where the book now exceeds EUR 3 billion of assets, only a few months after starting. Particular success was experienced in the area of Corporate /Project Finance, where outstanding commitments went up 57.4% in one year to EUR 23.7 billion. Dexia ranks today among the leading names worldwide in project finance, and is number one in the fast growing field of Public Private Partnerships (PPP) financing. At FSA, originations exceeded the USD 1 billion threshold in 2005, going up 9.4% on 2004, whilst total net par outstanding insured reached USD 351 billion, 7.9% above the level at year end 2004.

The financial performance of the business line followed these very robust commercial trends: underlying net income-Group share went up 14% in the year ¿ following four consecutive years of double digit earnings growth -,  a progression which contrasts with the frequently encountered idea of a business where growth is modest. Return on economic equity stood at a record high 22.7%.

Personal Financial Services: another year of robust growth 

Customer assets went up 7.9% to reach EUR 123.2 billion at year end 2005. Not only were the flows of new business very good, but also the mix of products has shifted in the right direction, with the off-balance-sheet products progressing at the rate of 16.0% in one year, by contrast to the balance sheet products. On the lending side, outstanding volumes amounted to EUR 28.6 billion, up 11.4% in one year, with a particularly good performance of mortgages (+ 14.6% to EUR 17.1 billion).

Here again, the financial performance of the business line was very robust: underlying net income-Group share was up 13.3%, a very good performance indeed when one remembers that the business line achieved a strong double digit growth in the two previous years. Of particular note is the fact that underlying costs were contained, with a +1.8% growth in the year, whilst the underlying revenues were up 3.2% during the same period ¿ despite technical factors that mitigated the revenue growth rate.

Investment Management and Insurance Services (IMIS): underlying results up 28.6%

Commercial activity was strong at Dexia in 2005, owing to two main factors: a greater appetite on the part of the clients for off-balance-sheet products, and a good equity market environment. Dexia Asset Management had a total book of EUR 90.6 billion at year end, up 26.8% in twelve months, which was strongly increased both on account of new business flows (+17.0%) and market performance (+9.8%). The fund administration business did very well too: total assets under custody amounted to EUR 409.0 billion at year end (+17.5%), setting the scene nicely for RBC Dexia Investor Services, which started operating in January 2006. Last, the insurance activities performed strongly, with EUR 3,684 million of gross premiums written, up 22.7% above 2004.

The financial performance of IMIS has been excellent, with underlying net income-Group share standing at EUR 230 million, up 28.6% on the previous year.

Treasury and Financial Markets (TFM): growing activity and results

Group funding activities have again been very buoyant this year, with EUR 29.7 billion new long-term notes issued, making of Dexia one of the largest private issuers worldwide. Similarly, the Credit Spread portfolio ¿ which contributes nearly half of TFM¿s revenues - was increased to EUR 54.9 billion at year end with high credit quality investments. The large volumes of investments made during the year (EUR 24.3 billion), make Dexia one of the main buyers on the market. The other desks supplying expert knowledge and market access to Dexia business lines had, for most of them a very good year, particularly the Financial Engineering/Derivatives and Securitisation desks, where high added value products are conceived and packaged.

Overall, the business line produced EUR 267 million underlying net income-Group share, up 15.4% above 2004, and the return on economic equity stood high, this year again, at 26.9%

Group overall financial performance was excellent in 2005, as witnessed by the progression of most of the key indicators which are monitored in relation to the mid term objectives:

The cost-income ratio stood at 54.0% in 2005, down from its level of 2004 (54.4%). More importantly, the underlying cost-income ratio (i.e without non-operating items) also improved, from 56.1% in 2004 to 55.8% in 2005.

The Return on Equity stood at 20.0% in 2005 (compared to 17.2% in 2004), way above the Dexia¿s term objective of 16.5%. This was of course enhanced by relatively large amounts of non-operating income in the two years, but it also reflects the disciplined capital management of the Group.

The Tier 1 ratio went up from 10.0% at the beginning of the year to 10.3% at year end, despite the high growth momentum of risk-weighted assets (+11.3% in one year).

All of this combined into good shareholder value, whether looked at through the increase of earnings per share growth (+14.5%, as discussed above), or net comprehensive asset value per share (+18.7% in one year).

In view of this good performance, the Management Board has put to the Board of Directors a proposal for a gross dividend of EUR 0.71 per share, up 14.5% on 2004.

Looking ahead

We are optimistic about the future of Dexia, not only for the coming few years but also on a longer time horizon. While current market conditions continue to put pressure on margins, the capacity of Dexia to act swiftly and to identify profitable business opportunities gives it a strong edge on the market.

We also feel that a large number of markets will open up for Dexia, which our current strategic review is in the process of identifying and measuring.

This gives a lot of prospects for Dexia, and management is eager to transform these opportunities into more value.

Axel Miller
Chief Executive Officer
Chairman of the Management Board