up.date Capital and money market activities: 2006 in review and outlook for Socially responsible investment. News for investors. January 2007.

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2 up.date News for investors. January Capital and money market activities: 2006 in review and outlook for Socially responsible investment.

3 e.ditorial Dear Readers 2006 saw changes on the Board of Managing Directors at KfW Bankengruppe. As a new member of the Board, I assumed responsibility for capital markets on 1 October. I took over from Hans W Reich, who left KfW after 40 successful years, handing the chair of the Board on to Ingrid Matthäus-Maier. I am enjoying the challenge of my new function and can assure you that a considerable degree of continuity will be preserved even if the people have changed. In the field of funding, KfW will continue to pursue its extremely successful capital market strategy. As a leading European capital market issuer, we will still rely on our three tried and tested funding pillars, benchmark bonds, public bonds and private placements. In this edition of up.date, we maintain the tradition of looking back on KfW s capital market activities in the past year. We also explain our funding plans by taking a glance at the outlook for A further article trains the spotlight on a group of investors that is becoming particularly important for KfW socially responsible investors (SRIs). These investors essentially take account of sustainability issues when investing their money. KfW bonds are of particular interest to this investor group as KfW pursues a socially responsible approach and is invariably given excellent ratings by agencies which evaluate the sustainability of business methods. The up.date ends with recent newsticker reports from other areas of KfW. I trust that you will find this up.date informative and useful reading. Dr Günther Bräunig Member of the Board of Managing Directors of KfW Bankengruppe 2006 in review. In 2006 KfW raised EUR 54.2 billion in funding through more than 500 capital market transactions, thus keeping right on track in terms of its announced target of EUR billion. Its capital market activities are still based on three pillars. The first comprises large-volume and hence highly liquid benchmark bonds in the Euro Benchmark Programme and the USD Programme. This represented a 40% (EUR 21.8 billion) share in KfW s funding volume in The second pillar consists of public bonds outside the two benchmark programmes. With EUR 23.4 billion and 43%, these securities constituted the largest share of the overall volume. Overall, 17% EUR 9.0 billion was raised through private placements and loans, the third funding pillar. Turning to currencies, the euro, which accounted for EUR 22.5 billion and 42%, is still KfW s main funding currency. As early as in January KfW stimulated considerable investor demand by issuing its first 15-year Euro Benchmark Bond. The bond, which was issued with a volume of EUR 5 billion, was twice oversubscribed and was an outstanding start to the 2006 Euro Benchmark Programme, which was rounded off with a three-year bond issue in June and a fiveyear bond issue in September. The good performance of the Bund over the year had a positive effect for investors and thus also from KfW s perspective. As a Bund surrogate, KfW benchmark bonds also experienced this increase in the spread over the swap curve and gave investors a yield mark-up on the Bund as well as relative price gains. There was a very positive growth in funds raised in US dollars, KfW s second most important funding currency. At USD 19.7 billion and a share of 29% in the total volume, the previous year s figure (USD15 billion) was clearly exceeded. This success is connected with the growing demand from European investors, too, for KfW s liquid benchmark bonds in that currency. KfW also further improved its market position among US American investors. This was bolstered by the medium-term note programme that was set up at the start of the year especially for US investors. This puts KfW in the position of being able to offer investors domiciled in the USA, which were previously only able to purchase SEC registered global bonds, structured bonds that are specially tailored to their investment needs. Similarly, KfW can look back on a good year in the British capital market. It expanded its offer of bonds outstanding and issued bonds for a total volume of GBP 4.2 billion. In terms of volume, KfW is thus one of the top three issuers in this market. In 2006 KfW added two successful bonds, one with a maturity of five years and the other with a maturity of seven years, to its curve of GBP bonds outstanding. Numerous other bonds denominated in pounds sterling have also been increased to a substantial volume of more than GBP 1 billion. KfW has observed growing interest among investors which are not domiciled in the United Kingdom but use the

4 pound sterling as an investment or reserve currency and have a lively interest in KfW securities as a Bund surrogate. Similarly, there has been an increase in demand for bonds denominated in the Australian (AUD) and Canadian dollar (CAD) from investors outside Australia and Canada which are seeking currency diversification. As the budget situation has led to a decline in government bond issues in both countries in recent years, surrogates for government bonds, such as KfW bonds, are very much in demand. KfW responded to this demand by issuing several global bonds denominated in the Canadian dollar and a number of bonds denominated in the Australian dollar in its Kangaroo Programme and thus further increased its yield curve in these two currencies. In the Japanese capital market KfW offers products that are tailored to the needs of various groups of investors. It has had some very successful years in the market for highly structured private placements, which are attractive to institutional investors, and again issued more than 200 bonds in The economic recovery and the associated rise in interest rates compared with the previous year established a favourable scenario for the market for large-volume public bonds to open up again for KfW for the first time in years. This enabled it to reach investors from North America, Europe and Asia with its issue of three global bonds in Japanese yen (JPY). KfW is continuing to make regular issues of Uridashi bonds especially designed for Japanese private investors. These bonds are not usually denominated in JPY and are floated by non- Japanese issuers. In 2006 KfW issued 11 Uridashi bonds in six currencies with a total volume of EUR 656 million. Overall, KfW can report a broadly diversified investor base particularly in the Japanese market. In 2006 KfW also issued bonds in 17 other currencies, including new currencies such as the Botswanian pula, the Egyptian pound and the Romanian leu. Bonds in these currencies are often purchased by investors which need to invest in those currencies or anticipate opportunities in those markets but want to avoid the risk of issuer default. KfW s flexibility and top credit quality enable it to meet the wishes of these investors. In May 2006 the first bond in Malaysian ringgit was issued; it was geared to local investors. Through this issue KfW contributed to the development of the local capital market and can now look forward to establishing a sustainable investor base for itself in this growing market. In relation to the overall volume of funds raised, the bond still plays a minor role. However, KfW is pursuing a long-term strategy and expects to be able to increase the volume of its placements in the Malaysian and similar markets. Long-term funding 2006 by instrument. Total EUR 54.2 billion Benchmark bonds 40% Public transactions 43% Private placements 17% (including loans & CLN) Long-term funding 2006 by currency. Total EUR 54.2 billion EUR 42% USD 29% GBP 11% JPY 6% Other 12%

5 Outlook for In 2007 KfW will continue to base its funding activities on the mix of instruments in its threepillar strategy. For 2007 as a whole, we expect to raise around EUR 55 billion in funds in the international capital markets. Representing 40-45% of the planned funding volume, the two benchmark programmes will still constitute the basis of the funding. A further 40-45% is to be raised through other public bonds, while 10-20% is to be generated through the third pillar, private placements and loans. In the two benchmark programmes, KfW will keep to its established issuing policy. The issues under these programmes will thus have a minimum volume of EUR 3 billion, USD 2 billion for maturities of up to five years and USD 1 billion for longer maturities. The issuing process will also be transparent and precisely geared to market conditions in order to ensure that the bonds perform well after issue. In other important currencies such as the pound sterling, the Swiss franc and the Canadian and Australian dollars, KfW will aim to expand its bond offer further and to secure its market position as an issuer of government bond surrogates. Furthermore, it will endeavour to maintain its presence in the emerging markets and to tap further markets through bond issues in the domestic currency and for local investors. However, KfW Bankengruppe will continue to carry out most of its funding activities in its two main currencies, the euro and the US dollar. Money market. KfW can look back on another successful year of money market activities and follow up on the high level of achievement in previous years. It raised a total of EUR billion close to the previous year s level through its two commercial paper programmes. Although, with a total issue volume of EUR 28.3 billion, the Multicurrency Commercial Paper Programme, KfW Bankengruppe s most important short-term source of funding, was down on the previous year s volume of EUR 50.5 billion, there was a clear extension of the maturities in the individ- ual transactions. KfW offers paper in all common currencies and has a well-diversified investor base. It has maintained its position as one of the largest global issuers in this market segment for a number of years. The USD Commercial Paper Programme conducted by KfW International Finance gained further ground in the US market. In the course of 2006 paper worth a total of USD 91.1 billion was issued. This was a 36% increase on the previous year. Because the demand from US investors has been growing for some years, the programme volume has been increased several times, the most recent increase at the start of 2005 taking it from USD 6 billion to USD 10 billion. Both programmes are also key components of KfW Bankengruppe s liquidity management. Socially responsible investment. Socially responsible investors have recently been increasing their prominence in the capital market. Independent rating agencies have been commissioned by these investors to assess enterprises according to socially responsible investment (SRI) standards. KfW Bankengruppe is regularly evaluated by several national and international rating agencies with regard to its socially responsible approach. The ratings always give KfW a place among the leading bond issuers appraised. KfW can therefore offer extremely safe as well as sustainable investment opportunities. This is even more so because, in evaluating the exclusion criteria, the rating agencies regularly confirm that KfW is not involved or at the most, only marginally in sectors that are particularly environmentally and socially sensitive. At present, the market for sustainable investment in Germany is still relatively small but will become considerably more important in the future. This is particularly evident from the situation in Scandinavian countries, the Netherlands and the United Kingdom, where far more attention is being paid to SRI. Owing to KfW s specific statutory mission, its business model and its outstanding ratings, KfW bonds are predestined for purchase by this group of investors. Against that background, KfW will also be focusing more on this investor group in the years ahead. Evidence of the increasing importance of socially responsible investment is also given by the initiative of the United Nations Secretary- General Kofi Annan on Principles for Responsible Investment (PRI). Institutional investors agreed on six principles which deal with how to take account of environmental and social concerns and matters of corporate management and control in their investment activities (referred to as ESG issues environmental, social and corporate governance). As KfW is also an investor and purchases securities for the purposes of liquidity management and earnings stabilisation, in 2006 it joined the initiative and will apply socially responsible trading principles to its future investments.

6 STICKER FROM THE NEWSTICKER FROM THE NEWSTICKER FRO KFW STUDENT LOAN GETS OFF TO A SPLENDID START. The KfW Student Loan, which was launched in April 2006, has made an outstanding start. By the end of September it was providing support for more than 10,000 students and had a financing volume of EUR million. FURTHER PROGRESS IN THE PRIVAT- ISATION OF DEUTSCHE TELEKOM AG AND DEUTSCHE POST AG. In 2006 KfW took the privatisation of Deutsche Post and Deutsche Telekom a stage further with two successful transactions. In April 2006 KfW sold around 4.5% of the Telekom shares to the US financial investor Blackstone for EUR 2.68 billion. This was the first time that a private equity investor was directly linked to KfW s privatisation activities. A second privatisation transaction followed in July with the sale of Deutsche Post shares to institutional investors. The transaction involved 73.1 million shares with a volume of around EUR 1.5 billion and was the equivalent of a share of 6.1% in the equity capital of Deutsche Post. At the end of the business year, KfW held a share of around 16.9% in Deutsche Telekom (735.7 million shares) and 35.4% in Deutsche Post (424.0 million shares). MOST DEVELOPMENT COOPERATION PROJECTS ARE SUCCESSFUL. In early November KfW Entwicklungsbank published its Ninth Evaluation Report. The report contains a cross-sectional evaluation of all 177 projects and programmes which are supported by KfW Entwicklungsbank on behalf of the German Federal Ministry for Economic Cooperation and Development (BMZ) in 57 developing countries. According to the report, 71% of the projects supported measured in terms of the volume of funds supplied, as many as 76% of them can be said to be developmentally successful. However, despite positive effects, 17% of the projects are slightly insufficient and a further 12% are insufficient. By international comparison, too, the result is very pleasing. CO2 BUILDING REHABILITATION PROGRAMME IN THE PROMOTIONAL INITIATIVE HOUSING, ENVIRONMENT, GROWTH. On 1 January 2007 additional promotional incentives to save energy in residential and municipal property will be launched as part of the CO2 Building Rehabilitation Programme. The CO2 Building Rehabilitation Programme is part of the promotional initiative Housing, Environment, Growth, which was launched by the German government and KfW Förderbank in February Under the initiative, KfW Förderbank has approved more than 170,000 loans representing a volume of some EUR 9 billion through the CO2 Building Rehabilitation, Housing Modernisation and Ecological Construction programmes since February This includes some 41,000 loans amounting to EUR 3.3 billion in the CO2 Building Rehabilitation Programme alone. KFW IPEX-BANK DOING WELL ONE YEAR BEFORE INDEPENDENCE. In 2006 KfW IPEX-Bank achieved a very positive business result. At the end of November the volume of commitments attained EUR 12.2 billion with a risk-adjusted return on capital of around 20%. At the same time the preparations for the spin-off into a legally independent subsidiary are progressing according to schedule. KfW IPEX-Bank has applied to the German Federal Financial Supervisory Authority (BaFin) for a bank licence and, in parallel, has applied for approval as an advanced IRB bank. These applications will be reviewed in the first half of 2007 and talks with the rating agencies are scheduled for the second half of the year. The Bank is confident that the aspired rating of A plus to AA minus will be obtained. SUSTAINABILITY REPORT LIVING AND PROMOTING GLOBAL RESPONSIBILITY. In 2006 KfW Bankengruppe published its first Sustainability Report, as a more extensive replacement for the Environmental Reports of previous years. This emphasises the importance that KfW Bankengruppe attributes to the concept of sustainability as well as to the subjects of transparency and communication. The report paints an extensive portrait of the Bank s responsibility in society and shows how ecological and social aspects are taken into consideration when loans are granted. An important element of in-house enviromental protection is, for example, the neutralisation of carbon dioxide emissions. In 2006 KfW began offsetting its operational CO2 emissions, thus assuming a pioneering role in Germany. Further detailed information on the subject of sustainability and the Sustainability Report 2006 can be found under the following link: CKER FROM THE NEWSTICKER FROM THE NEWSTICKER FROM TH

7 M THE KfW Bankengruppe Palmengartenstraße 5-9, Frankfurt am Main Telephone , Fax Investor Relations Dr. Axel Breitbach Telephone , Telefax Press Office Capital Markets: KfW Bankengruppe Nathalie Drücke Palmengartenstrasse Telephone , 5-9, Frankfurt Telefax +49 am 69 Main, Germany Tel , Fax Investor Relations Dr Axel Breitbach Tel , Fax Quality Press Office Capital Markets WHAT OUR BONDS STAND FOR. Nathalie Drücke Tel , Fax Transparency Performance Disclaimer This document is provided for information purposes only. This document may not be reproduced either in full or in part, nor may it be passed on to another party. It constitutes neither an offer nor an invitation to subscribe or to purchase securities, nor is this document or the information contained herein meant to serve as a basis for any kind of obligation, contractual or otherwise. In all legal systems this document may only be distributed in compliance with the respective applicable law, and persons obtaining possession of this document should familiarise themselves with and adhere to the relevant applicable legal provisions. A breach of these restrictions may constitute a violation of US securities law regulations or of the law applicable in other legal systems. The information contained in this document is historical and speaks only as of its date. KfW disclaims any intention or obligation to update or revise the Liquidity information contained in this document. E