News for Investors.

up.dateJanuary 2006.

Long-term funding – Retrospect on 2005Outlook for 2006

e.ditorial

Dear Readers,

For KfW the year 2005 was marked by suc-cess, both for its overall banking activitiesand also for its capital market activities. Themarket environment was at times difficult,yet our long-term funding benefited fromgratifyingly continuous demand. This appliedto our proven benchmark bonds as well as toother bonds we issued in altogether 16 differ-ent currencies. In past years KfW has constantly raised long-term funds of approx. EUR 50 billion p.a.,making it one of Europe's largest issuers. In2005 there were a few particularities andhighlights among our standard products andalso our new products. For instance, thevolumes of our E-benchmark bonds weremore flexible than in previous years. The fol-lowing article explains how and why. To us, the most important trend in the pastyear was even stronger portfolio diversifica-tion by investors. We noticed that this trans-lated into greater demand for structuredproducts and new currencies. This opened upopportunities for KfW to give its funding aneven broader base. Our retrospect on theyear 2005 describes how we used theseopportunities. The experiences we gainedwith this and other trends form the basis ofour plans for the year 2006.As is the custom, the news ticker rounds outthis information by describing KfW's issueplans in Asia and offering facts and figuresfrom KfW's other business units.

Yours faithfully,

Dr. Frank CzichowskiTreasurer

KEY FIGURES FOR KFW BANKENGRUPPE.

Key Figures for KfW Bankengruppe (in EUR billion)

I. KfW Mittelstandsbank (KfW SME bank) 13.8 14.0 15.5

Loan financing 9.0 9.3 10.7of which: Unternehmerkredit (Entrepreneur Loan) 4.7 5.7 4.8

Global loans to commercial enterprises 3.2 2.8 5.4Mezzanine financing 1.0 0.6 0.6Equity financing 0.3 0.3 0.3Securitisations 3.5 3.7 4.0

II. KfW Förderbank (KfW promotional bank) 44.9 34.5 38.7

Housing investments 15.4 11.9 10.9of which: Global loans to the housing industry 3.7 2.9 2.0

Education 0.8 0.8 0.9Municipal infrastructure 4.7 4.2 2.8Environmental investments 4.0 2.2 4.2Global credit lines for special credit institutions

of the states 1.5 3.9 3.6Securitisations 18.4 11.4 16.3

III. KfW IPEX-Bank 11.5 11.9 12.1

Industry, telecommunications 3.7 5.2 4.9Energy, environmental technology 1.9 1.2 1.2Transport, transport infrastructure 5.8 5.2 5.6Other (AKA export loans, grants) 0.1 0.3 0.4

IV. KfW Entwicklungsbank (KfW development bank) 1.6 1.9 1.9

V. DEG 0.5 0.6 0.7

Total financing volume 72.2 62.9 68.9

Environmental and climate protection1 7.4 6.5 7.0

Funds raised 50.7 52.1 50.6

Consolidated balance sheet total 314 329 3412

2003 2004 2005

Differences in the totals are due to rounding.1 Contained in the total financing volume as cross-cutting promotion of KfW Mittelstandsbank

and KfW Förderbank.2 Preliminary balance-sheet total before certification by the auditor.

Investment finance in Germany and Europe 58.6 48.4 54.2

In a record number of 638 individual transactionsin altogether 16 different currencies, during theyear 2005 KfW raised EUR 50.6 billion in fundsin the capital market. As in past years, KfW'scapital market activities in 2005 were carried bythree strong supporting pillars (see chart three):namely, its E-Benchmark Programme and itsUSD Global Programme (which together formthe first pillar), public bonds that are not issuedunder these two global programmes, in a totalof 16 different currencies (second pillar) and itsprivate placements (third pillar).

Within the first pillar of funding KfW issuedsix bonds - three in Euro and three in US dollars- totalling the equivalent of EUR 18.6 billion.Under its E-Benchmark Programme, during theissue process KfW adapted the volume of eachbond to demand. The nominal volume of thebonds issued in January and June was EUR 4billion each. This amount, which until then hadbeen rather unusual for a benchmark bond, waswell received by both investors and traders andboosted the bonds' performance. We believe thisconfirms that the markets are becoming increas-ingly flexible.

KfW's issues under its USD Global Pro-gramme had terms of 3 and 5 years and vol-umes of USD 2 and 3 billion.

Whereas KfW's EUR bonds were placed pri-marily in Western Europe (to approx. 75%), alarge portion of the demand for the large bondsissued under the USD Programme came fromAsia. Asian investors purchased up to 60% ofthe three USD bonds issued during the course of2005. KfW's main investor group in this regionis the central banks, which invest most of theirforeign exchange reserves in US dollars.

Compared to previous years, the placementof the bonds under this first pillar had a broaderinvestor base, although the average order sizedeclined slightly, particularly among majorinvestors.

The bonds that KfW combines in its secondfunding pillar - public bonds issued outside bothbenchmark programmes - especially reflectedthe low interest level in the two currencies EURand USD in 2005.

Whereas demand for structured productsoutside the benchmark programmes was strongerin these two currencies, last year KfW was ableto attain a leading position in other currenciesas well. One currency worth highlighting is theNew Zealand dollar (NZD), in which KfW issued

tured bonds that are developed for individualin-stitutional investors upon their request.

The demand for new currencies, which usedto play only a minor role in the internationalcapital market, seems to have increased in2005. This confirms the trend towards strongerportfolio diversification that is mentioned atthe beginning. In 2005 KfW offered bonds infour new currencies: Brazilian real, Icelandkrona, Mexican pesos and Turkish lira. KfWavoided possible currency risks in connection

Long-term funding - Retrospect on 2005NZD 3.8 billion in 2005 (approx. EUR 2.1 bil-lion), making it globally the largest issuer in thiscurrency.

KfW also achieved a good position in thesesegments with bonds in Australian and Cana-dian dollars. KfW offers various products inthese three currencies. They may be purchasedby local investors, or by investors from othercountries. For Japanese yen KfW has for quite awhile been following the strategy of offeringproducts that suit the needs of different targetgroups. In yen its spectrum ranges from largeso-called 'Uridashi' bonds for Japanese retailinvestors to relatively small but highly struc-

with these fundraising activities by carrying outcorresponding hedging transactions with first-class partners.

As regards the third funding pillar - prima-rily private placements in various currencies -KfW conducted over 300 individual transactionsin Japanese yen, more than doubling the num-ber of its issues over the prior year. The volumeof funds raised with these private placementsalso grew substantially, reaching approx. JPY330 billion.

Funding 2005 by currencies.Total EUR 50.6 bn

EUR 47%

USD 24%

GBP 13%

JPY 5%

NZD 4%

AUD 2%

BRL, CAD, CHF, HKD, HUF, ISK,MXN, NOK, TRY, ZAR 5%

Funding 2005 by currencies.Total EUR 50.6 bn

Benchmark Programmes 37%

Other Public Transactions 44%

Private Placements 14%

Loans 5%

Chart 1

Chart 2

Money market activities remain successfulKfW ended the year 2005 very successfully inthe money market as well.

Issues under its Multicurrency CommercialPaper Programme totalled EUR 50.7 billion,exceeding the prior year's volume (2004: EUR45.9 billion).

In this segment KfW is among the leadingissuers. The share of issues denominated in Eurohas grown continuously over the past few yearsand now accounts for over half of the program-

Outlook for 2006KfW Bankengruppe expects its funding require-ments to remain in the range of EUR 50 to 55billion in 2006. It will carry on with both of itsbenchmark programmes, which will continue toserve as the basis for its global funding. KfW'starget for Euro bonds starts at EUR 3 billionsize. For USD bonds, KfW will strive for a mini-mum volume of EUR 2 billion for maturities ofup to five years and, for longer maturities, aminimum volume of EUR 1 billion. The main focusof KfW's benchmark issue strategy is on bondperformance.

From 2006 KfW is offering a USD MTN Pro-gramme in order to tap further investor poten-tial in the USA. In response to strong demandfrom Italy, in the fourth quarter of 2005 KfWissued its first bond under Italian law with alisting on the Milan Stock Exchange. KfW plansto issue more bonds in this format during thecourse of 2006.

In terms of currencies, in 2006 KfW expectsthe interest in bonds issued in currencies otherthan the core currencies of EUR and USD to re-main high and will strive to bring attractiveoffers onto the market. Nevertheless, KfWBankengruppe will continue to carry out mostof its funding activities in its two main curren-cies, the Euro and the US dollar.

me volume. KfW also offers commercial paperin every other common currency. The pro-gramme's great flexibility coupled with the creditquality of the Federal Republic of Germanymakes this instrument so attractive. It is ourmain source of short-term funding.

In addition, in 2005 KfW was able tostrengthen its position in the US market.

The USD Commercial Paper Programme ofKfW International Finance was increased at the

beginning of the year 2005 from USD 6 billionto USD 10 billion. The programme attained anissue volume of USD 66.8 billion last year andthus posted an increase of 76% year-on-year(2004: USD 38.0 billion).

KfW´s Funding: Three-Pillar Strategy

Chart 3

Benchmark Programme Public Transactions Private Placements

Large volume globalbonds (EUR and USD)

Benchmark maturities

Targeted issues (each):

- Min. EUR 3 billion- Min. USD 2 billion

for maturities 5Y- Min. USD 1 billion

for maturities > 5Y

Large volume, callablebonds (EUR and USD)

Large volume bondsin non-benchmarkmaturities

Supply of liquid securitiesin strategic markets (GBP)

Kangaroo programme(AUD)

Large liquid bonds innon-core markets

Public transactions withinKfW Note-Programme

Customized productsfor investor needs

Flexible in currency,structure, maturity andredemption profile

Transaction withinKfW Note Programme

Listing optional

Target 2006:EUR 50-55 billion

40% - 45% 40% - 45% 10% - 20 %

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KFW IPEX-BANK DOING WELL HALFWAYTHROUGH THE START-UP PHASE.

In 2005, KfW IPEX-Bank, which will be spun offon January 1, 2008 to become a legally independ-ent subsidiary of KfW Bankengruppe, could postnew loan commitments totalling approx. EUR 12billion, thus defying the difficult market situationto outperform its target corridor of EUR 8-10 bil-lion. The business units of basic industries,manufacturing and services, shipping, rail androad transport contributed considerably to thisexcellent result. Now that its reorganisation isnearly complete, in 2006 KfW IPEX-Bank willfocus on its spin-off by preparing its applicationfor a banking licence and beginning talks withrating agencies.

CONTINUED STRONG DEMANDFOR PROMISE

SECURITISATION PLATFORM.On December 15, 2005, IKB Deutsche Industrie-bank and KfW Bankengruppe launched the thirdjoint securitisation transaction of the year 2005in the market, which had a volume of EUR 1.8billion. “PROMISE-I Mobility 2005-2“ covers thesecuritisation of loans to small and medium-sized enterprises.

In its role of an intermediary under its secu-ritisation platforms KfW makes available ABS-securities to investors, whose repayment mainlydepends on the development of SME risks pooledin the securitised loan portfolio. Since the end ofthe year 2000 altogether 16 PROMISE transac-tions have been launched.

ISSUE PLANS IN ASIA.China, Malaysia and Thailand are among thoseAsian countries that have been intent on openingtheir markets to foreign issuers for quite sometime. Setting the framework conditions couldincrease the currently low market volume andcreate a long-term, efficient balance betweencapital supply and demand. KfW can play a rolein this process with its offers of first-class bonds.In these three countries, during 2005 KfW initia-ted the process of obtaining approval to issuebonds in the respective local currency. Thesemarket segments would enable KfW to add to itsrange of products, give its funding activities aneven broader base and, against the backdrop ofhigh growth rates in the region, to become anincreasingly important player there in the future.

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KFW ENTWICKLUNGSBANK INVESTSIN AIDS PREVENTION PROJECTS.

In the face of a continually rising HIV infectionrate throughout the world, KfW Entwicklungs-bank is going new ways to prevent AIDS. Since2003 it has been funding voucher systems inAfrica with a total of EUR 13.7 million. In addi-tion, since 2002 the bank has also spent EUR24.3 million to support other regional projects inAfrica, the Caribbean and South America. InChina it has provided EUR 72 million since 2001for diagnostics and therapy.

Since 1997 KfW has invested around EUR314 million in reproductive health/family plan-ning and AIDS prevention projects.

IMPRESSIVE START INTO 2006.KfW started the second week of the year withtwo new benchmark issues. First, KfW launcheda 15-year bond under its E-Benchmark Pro-gramme with a volume of EUR 5 billion. Laterthat week, KfW issued a 3 billion 5-year globalbond under its programme in US dollar. Pleasefind detailed information on these bonds as wellas on our current funding activities on our web-page at www.kfw.de/investor-relations.

THE

ROM THE

KfW BankengruppePalmengartenstraße 5-9, 60325 Frankfurt am Main, Germany

Telephone +49 69 7431-0, Fax +49 69 7431-2944

infocenter@kfw.de, www.kfw.de

Investor RelationsDr. Axel Breitbach

Telephone +49 69 7431-2222, Telefax +49 69 7431-2193

investor.relations@kfw.de

Press Office Capital Markets:Nathalie Drücke

Telephone +49 69 7431-2098, Telefax +49 69 7431-3266

nathalie.druecke@kfw.de

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