MFB HUNGARIAN DEVELOPMENT BANK PRIVATE LIMITED COMPANY ANNUAL REPORT 2009

Transcription

1 MFB HUNGARIAN DEVELOPMENT BANK PRIVATE LIMITED COMPANY ANNUAL REPORT 2009 ANNUAL REPORT 2009

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3 CONTENTS Introduction 5 Economic environment of MFB Hungarian Development Bank Private Limited Company in Results of MFB. 13 Independent Auditor s Report. 15 Balance sheet (assets and equity/liabilities) and off-balance sheet items. 16 Income statement. 17 Unconsolidated Statement of financial position according to International Financial Reporting Standards 18 Unconsolidated Statement of comprehensive income according to International Financial Reporting Standards 19 Reconciliation of Owner s equity differences between Hungarian accounting regulations and IFRS MFB Hungarian Development Bank Private Limited Company Developments in business activities Key objectives of the 2009 business plan and their fulfilment Lending activities 24 Total lending portfolio 25 Programme loans. 28 Development loan programmes. 28 Enterprise development 30 Municipal infrastructure development 32 Agricultural development 34 Household energy saving 35 Working capital loans and bank guarantees 36 Direct loans Funding activities MFB Banking Group Activities supporting the core tasks of the Bank MFB-Indicator, Appendices Board of Directors of MFB Hungarian Development Bank Private Limited Company 53 Supervisory Board of MFB Hungarian Development Bank Private Limited Company 54 Management of MFB Hungarian Development Bank Private Limited Company. 55 ANNUAL REPORT

4 György Zdeborsky Dr. János Erős Sándor Czirják 4

5 INTRODUCTION In 2009 the global economic crisis, which restructured the business environment for all market players, materially affected the Bank s operating conditions and business opportunities. The macroeconomic analyses earlier prepared by the Bank left no doubt that the crisis would not stop at short-term cyclical fluctuations but would lead to the permanent rearrangement of economic conditions, setting a new course of development both for emerging countries and the world s most developed market economies. The recession of 2009 took the shape of a structural and also an institutional crisis, which could still cause uncertainty in domestic and international business processes in the next two to three years. As a result of all the above, funding strategies need to be reconsidered and the adaptation of the economic policy tools must be accelerated. In 2009 the international and Hungarian effects of the crisis had a major impact on MFB s activities. The global financial market processes and changes in confidence in the Hungarian economy all impeded the model whereby the Bank financed its development and lending activities primarily through funding received from the international financial markets. The narrowing supply of funds and the higher costs, as well as the increased spread between central bank and financial market interest rates adversely influenced the Bank s funding options. Simultaneously Hungarian business processes triggered a higher demand for MFB products, and at the same time also modified the structure of such demand. In this new environment the Bank continued its operation in accordance with its former strategy, and facilitated a quick and efficient adaptation to the changed conditions in the fields of both its funding activity and its loan programmes. The timely conclusion of the required EU notification procedures proved that the Bank s strategy was sufficiently flexible to react to the new challenges even under changing economic circumstances. Even in times of economic hardship, the Bank was able to provide companies with loan products needed for their financing, and launched a new notified working capital loan programme. As a result of changed operating conditions, the financing need of domestic enterprises was restructured: in addition to long-term loans, demand increased for short-term working capital loans, which help sustain financial stability and operability. MFB had to adapt to all the above changes. We could conclude that the Bank s strategy that had been developed back in was now tested to see how the institution could meet the shifting conditions and fast modifying requirements. We are proud to announce that this strategy has passed the test of the crisis, and the Bank has been able to perform its role of a traditional development bank despite the difficulties. ANNUAL REPORT

6 Based on the figures, the Hungarian Development Bank was one of the key crisis management institutions in Hungary in MFB increased its lending activity in nominal terms, as well as its weight in the field of SME and investment financing. While the loan portfolio provided to non-financial enterprises dropped by 7,4% at commercial banks in 2009, at MFB this portfolio was extended by 17%. The volume of new loans disbursed by the Bank in 2009 was approximately HUF 190 billion: the so called programme loans, i.e. new loans mainly provided to SMEs and municipalities, exceeded the previous year volume by 45%, within which the proportion of corporate loans grew by two thirds. Despite the extreme funding conditions at the beginning of 2009, the Bank could extend its share in the domestic corporate and municipality loan market. At the end of the year, the proportion of MFB s loan portfolio on that market grew to 10,5% from 8,6% in the previous year. With the improvement of the international financial market conditions, in the second half of the year the funding environment also recovered, although less favourably than in the pre-crisis period. Nevertheless, it poses a risk that the long-term stability of the international economic environment may still not be taken for granted. The atmosphere may easily turn to the negative again after the shock suffered by the international markets, which calls for caution. This means that the intensive demand for loan products must still be managed by MFB under circumstances of high risk and uncertainty. In 2010, in the new economic and business environment, MFB endeavours to continue responding to the changes of demand and market conditions as well as changes in economic policy priorities in harmony with the Bank s business philosophy, and at the same time to continue its operations in an efficient and prudent manner. The expertise that accumulated in the Bank during the past years, the flexible strategy that is suitable for crisis management and the constant and comparable evaluation of domestic and global economic tendencies in the background of professional and business decisions may serve as a very good basis for the achievement of the above goal. Budapest, 31 December 2009 György Zdeborsky Chairman of the Board Dr. János Erős CEO 6

7 ECONOMIC ENVIRONMENT OF MFB HUNGARIAN DEVELOPMENT BANK PRIVATE LIMITED COMPANY IN 2009 The global economic crisis, which directly or indirectly affected all players of the economy, profoundly influenced the Bank s operating environment both in terms of funding and the demand for its loan products. Even though the dominant international business processes took a turn toward stability in the second half of the year, and the global crisis reached its bottom, the signs of upturn were not yet generally evident, and the differentiation between the development options of individual regions became more marked. The crisis that unfolded in 2008 affected the different business processes and the individual players of global economy in various ways and to various extents: the effects were most strongly felt in the financial and global financial processes as well as in international trade. This brought open economies that heavily depended on external financing sources and those meeting their fiscal limits in weak positions. MFB, as a prominent figure of Hungarian crisis management, found itself in a new operating environment from several perspectives. From the perspective of funding, the major international funding sources contracted, costs soared and the volatility of exchange rates clearly increased. From the perspective of assets, the drop in demand due to global depression required the modification of domestic investment activity and related incentives. Furthermore, as a major factor influencing the Bank, the domestic pressure for macroeconomic stability prevailed along with the international recession in The impacts of the global economic crisis, which were increasing the costs of external funding and decreasing global demand, as well as the macroeconomic need for stability, jointly brought about a dramatic restructuring in the demand for products offered by the development bank. In 2009, for the whole of the year, world economy was facing recession with the global GDP declining by 1,1%. The most developed economies shrank by 3,2% while the economic growth of emerging and developing countries reached 2,1%. In the second half of the year, the signs of improvement in global economic processes strengthened, and economies started to reanimate. International trade, which was increasingly becoming a growth factor in the age of globalisation, and which is of key importance for Hungary, also fell into recession in 2009 after long decades of boost: global trading in goods and services dropped by 11,9%, and corporate investments stagnated or only slightly improved. Household consumption was nearly stagnating with unemployment rates steadily increasing in several major countries and regions of the world (2009: USA: 9,3%; Eurozone: 9,4; Japan: 5,1%). GDP growth (%) World economic growth (%) World trade growth (%) ,6 5,5 World economy USA Eurozone Emerging, developing countries Central and Eastern Europe Hungary 3,0 0,4 0,7 6,1 3,0 0,6-1,1-2,7-4,2 2,1-5,0-6, ,9 4,5 5,1 5,2 3,0-1,1 10,7 7,8 9,1 7,3 3,0-11,9 ANNUAL REPORT 2009 Source: IMF World Economic Outlook Source: IMF World Economic Outlook 7

8 In 2009 primarily government expenditures and net export sales could contribute to the increase of gross domestic product in the foremost countries of the world. Of the major economies, investments only grew considerably in China. Based on OECD data, in Q4 of 2009 gross capital accumulation decreased by 10,5% and 8,7% in the USA and the eurozone respectively from the same period of the previous year. Growth and investment in the USA and the Eurozone (to the same period in the previous year, %) 5% 0% -5% -10% -15% -20% 2009 Q Q Q Q4 investment - USA investment - eurozone growth - USA growth - eurozone Source: Based on Eurostat data In relation to the growth processes and the monetary policy measures, funding costs markedly changed during Major central banks (FED, European Central Bank, Bank of England, and the national banks of Switzerland and Japan) started to cut interest rates and extensively adopted non-traditional, alternative monetary tools (quantitative easing) in the autumn of 2008 and in As a result, interbank rates soon dropped in 2009, which was followed by the quick contraction of the spread between the reference interest rates and money market interest rates. However, the interest rates of corporate loans remained on a higher level and drove the gap between interbank interest rates and corporate loan interest rates to widen drastically, which proved to persist during the year, though to various extents. Consequently, a lack of funding dominated the world economy for the whole of the year, and its impact was especially strongly felt in Central and Eastern Europe, mainly in countries that - like Hungary - heavily depended on external resources. 8

9 Base interests and interbank interest rates (3-month) (%) 10% 8% 6% 4% 2% 0% January February March April May June July August September October November December MNB prime interest rate FED prime interest rate ECB prime interest rate USD LIBOR EURIBOR BUBOR Source: based on MNB (National Bank of Hungary), ECB, FED, data Interbank interests rates (3-month) and corporate (minimum 5 years) loan interests (%) 15% 12% 9% 6% 3% 0% January February March April May June July BUBOR HUF loan - Hungary EURIBOR EUR loan - eurozone Source: based on MNB, ECB, data August September October November December ANNUAL REPORT

10 The accelerating effects of intensive interest rate cuts and alternative monetary incentives could not be felt on inflation rates by the end of 2009 due to the severe depression; therefore the inflation rates remained low throughout the year (eurozone: 0,3%; USA: 0,4%), but deflation, one of the most negative effects of the crisis, was not becoming universal. The inflation rate, which was still rapidly dropping at the end of 2008, reached its lowest level in the summer and September of 2009 due to the base effects of the previous year. At that time consumer prices decreased in annual terms, which was followed by an accelerated price increase until the end of the year was characterised by the high volatility of exchange rates. The euro strengthened from 1,39 to 1,44 to the dollar, but during the dramatic exchange rate movements throughout the year it exceeded the lower and upper limits of 1,30 and 1,50 respectively. Even though recession in the Hungarian economy qualifies as average among Central and Eastern European countries, there had not been a fall of this rate since the transformation crisis of the 1990 s. Hungarian GDP fell by 6,3% during 2009: in Q1 it fell by 5,6%, in Q2 by 6,8%, in Q3 by 7,9%, and in Q4 by 5,3% from the same periods of the previous year. The index compared to the previous quarter (adjusted seasonally and for calendar effects) declined by 2,3%, 1,4%, 1,2% and 0,4% for the periods January-March, April-June, July-September and October-December respectively. In 2009 the total value of investments in national economy further decreased. Enterprises still had limited access to funding, and the government austerity measures further decreased the domestic government and household consumption and investment demand. As a result, in 2009 investments decreased by 8,6%. Except for agriculture (7%), education (13,3%), transport and warehousing (8,3%) as well as electricity supply (8,1%), investments fell back in every industry. The rate of household savings, even though still low, started to rise in 2009 due to the narrowing loan market and the growing uncertainty: the net financial savings rate in proportion to GDP rose from 1,1% as average in 2008 to 3,2%. Partly due to the above, the external financing need of the Hungarian economy that was 6,2% in 2008 turned to a 1,8% external financing capacity in Growth and investment in the Hungarian economy (compared to the same period in the previous year, %) 4% 2% 0% -2% -4% -6% -8% -10% -12% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q GDP investment Source: based on KSH data (Hungarian Central Statistical Office) 10

11 Western European economic slow-down also exerted a profound impact on the output capacity of the Hungarian economy through the narrowing of export demand. In annual terms, industrial production fell by 17,7% in 2009 compared to The decline reached its worst in the second and third quarters of 2009 when industrial production was 20-30% lower than in the same period of the previous year. The slow-down came to a halt at the end of in December industrial production grew by 1,0% on the same period in the previous year. Inflation movements were relatively favourable despite the fact that considerable inflation risks arose temporarily during the year in response to the tax measures introduced. However, the effects of the VAT increase were basically fully set off by the price decreasing effect of lowered demand; sellers could apply higher prices only in very limited areas. The 12-month consumer price index was 5,6% in December Significant changes characterised both foreign and Hungarian funding costs during the year. Even though the Hungarian central bank prime rate was lowered to 6,25% by the end of December from 10,00% at the beginning of 2009, in a regional comparison it was still regarded high. The series of small scale interest rate cuts started in July. The three-month BUBOR closely followed the process and went down from 10% to 6,18% in 2009, which is partly explained by the fact that commercial banks placed significant and ever growing amounts during the year in two-week central bank bonds. The portfolio of two-week MNB bonds totalled HUF 1,586 billion at the beginning of the year, and by the end of December it reached HUF 3,131 billion. The risk margin effective for Hungary - a key factor for MFB s funding activity - further increased in the spring of 2009 due to the temporary deterioration of the global business environment: the five-year Hungarian CDS spread widened to 523 basis points from 419 basis points in the first quarter of the year. As a result of the improvement of international economic prospects and the investment climate, as well as government measures, the country s evaluation greatly improved for the rest of the year. The CDS spread stabilised around 200 basis points in September, which was still high compared to both the regional and the pre-crisis level (29 basis points in 2007 on average). Corporate loan interests (minimum 5 years, %) and interest margins (percentage points) in the Hungarian economy 15% 12% 9% 6% 3% 0% -3% January February March April May June July August September October EUR loan HUF loan interest margin (3 month BUBOR - MNB prime interest rate) November December ANNUAL REPORT 2009 Source: based on MNB data 11

12 MFB s planning in the field of equity and liabilities was adversely affected by the high volatility of the exchange rate of the forint. While in July 2008 the forint strengthened below a 230 EUR/HUF rate, after a gradual devaluation process that started from the beginning of 2009, by March 2009 the forint weakened to the euro to a record value of 316 HUF/EUR. In the second half of the year, the consolidation of the world economy and the stability packages aimed at improving equilibrium brought a change, and the HUF rate started to strengthen gradually. As a result of the above, at the end of the year one euro was worth 270 forints, but the volatility of the forint rate returned with the deteriorating business environment. Regarding corporate financing demand and the foreign currency structure of loans, the gap between the corporate interest rates of loans extended in HUF and EUR remained wide in 2009 too. For corporate loans with a maturity of 1-5 years, the 7-percentage point advantage of EUR loans reached 10 percentage points by the middle of the year, and the difference was near 7 percentage points in December 2009 despite the interest rate cuts effected by MNB and the improvement of the international investment climate. The interest rate of EUR loans was more favourable than that of HUF loans for corporate loans of at least 5 years, too. By mid-2009 the interest spread widened (from approximately 6,6 percentage points at the beginning of the year to 8,6 percentage points), then it narrowed down to nearly 6 percentage points in the second half of the year. The loans provided by the Hungarian banking system to companies and municipalities dropped by 4,7% in 2009 from the previous year, while in 2008 there was still a growth of 9,2%. As a result of the depression and the macroeconomic stability packages, the 10,8% increase of the corporate loan portfolio in 2008 was followed by a decline of 5,5% in 2009, while loans granted to municipalities increased by 7,6% after the decrease of 10,5% in According to MFB s surveys, the financing need of companies in 2009 remained high but with a modified structure in the second half of the year: working capital financing was overtaken by development financing needs. In the Hungarian loan market, companies were facing with narrow financing options and high interest rates. In 2009 MFB was conducting an active crisis management policy in accordance with the Bank s strategy and role as a development bank. Consequently MFB increased its share in the Hungarian corporate and municipality loan market. At the end of 2008 the Bank s loan portfolio in these two segments accounted for 8,6% of all loans, and by the end of 2009 this rate reached 10,5% primarily due to the extended lending activity to small and medium sized enterprises. While the loan portfolio of commercial banks granted to non-financial enterprises shrank by 7,4% in 2009, the same loans were extended by 17% in the case of MFB. 12

13 RESULTS OF MFB In light of its development bank activity, MFB is a financial institution that is not primarily profit-oriented. The basic aim of MFB is to act as an intermediary to provide preferential funds to economic segments favoured by economic policy primarily small and mediumsized enterprises and municipalities respectively to finance individual projects of significant size. The Bank fulfils these aims partly through its own activity and partly through its subsidiaries within MFB Banking Group. The Bank did not draw dividends from its subsidiary companies, focusing rather on increasing their capital strength and their ability to bear risks. The Bank s profitability had been stable for many years. In 2009 the Bank realised a pre-tax profit of HUF 2,5 billion (IFRS), which exceeded forecasts despite the adverse implications of the economic crisis on the financial services industry Equity (IFRS)* million HUF * Subscribed capital million HUF * According to the International Financial Reporting Standards, dividend paid for 2009 was recognised in equity in The Bank fulfilled its basic objectives in 2009, when external conditions took a turn for the worse. The Bank contributed to the achievement of economic policy targets by stimulating investment activity in the corporate sector mainly SMEs and in the municipality sector, by financing related demands for working capital and by financing the MFB Banking Group. The utilisation of the two major - Enterprise Development and Municipality Infrastructure Development - loan programmes increased to such an extent that the Bank was preparing for the extension of these credit lines in In 2009 MFB substantially increased its loan portfolio with the volume of extended loans exceeding HUF 195 billion overall. The Bank disbursed more than HUF 92 billion under the loan programmes, while new loans that were not disbursed under loan programmes exceeded HUF 103 billion. The total amount of outstanding loans increased from HUF 710 billion at the end of 2008 to HUF 825 billion by the end of ANNUAL REPORT

14 In response to the prolonged financial and economic crisis, the Bank introduced new loan programmes. It is through working capital financing in particular that the Bank aimed to meet the demands arising due to the scaled back lending activity of commercial banks. In addition to the above, the Bank introduced bank guarantees to facilitate eligibility for market loans in the SME sector and helped reduce risks. In 2009 the sets of conditions for almost all the operating loan programmes changed with a view to extending the range of eligible customers. The Bank s liquidity position was solid, with sufficient reserves needed for fulfilling its commitments. MFB s activity on the basis of the MFB law and prudent lending practice ensured that by means of its lending activity, the Bank s operations were profitable and its capital adequacy and reserves remained sufficient despite the increased level of risks evoked by the crisis. MFB s exchange rate guarantee scheme protected the Hungarian municipality and corporate sectors from severe losses arising from the weakening of the forint and its high volatility. The state exchange rate guarantee ensured that it was not the beneficiary enterprise that bore the exchange rate risks but the risk was assumed by the central budget through the MFB guarantee scheme offered up to a threshold amount approved annually. MFB operated in a prudent manner, allocating the necessary levels of impairment and provisions during the regular rating reviews. The Bank s activity was reviewed by Moody s in 2009 and rated in accordance with the modified rating of the Hungarian State. The Bank continued its economical approach to costs in The Bank met the budgeted amount: operating costs in 2009 were below HUF 9 billion under the Hungarian Accounting Standards, which was lower than the 2008 level also in nominal terms, while the IFRS cost level showed a 1% increase, below the inflation. 14

15 ANNUAL REPORT 2009 INDEPENDENT AUDITOR S REPORT 15

16 MFB HUNGARIAN DEVELOPMENT BANK PRIVATE LIMITED COMPANY Balance sheet and off-balance sheet items in accordance with Hungarian Accounting Standards ASSETS Liquid assets Treasury bills and similar securities Loans and advances to credit institutions Loans and advances to customers Debt securities, including fixed-income securities Shares and other variable-yield securities Shares and participations in corporations held as financial fixed assets 8. Shares and participating interests in affiliated companies Data in million HUF Intangible assets Tangible assets Own shares Other assets Prepayments and accrued income TOTAL ASSETS LIABILITIES Amounts owed to credit institutions Amounts owed to customers Debts evidenced by certificates Other liabilities Accruals and deferred income Provisions for liabilities and charges Subordinated liabilities Subscribed capital Subscribed capital called but unpaid (-) Capital reserve General reserve Profit reserve (±) Tied-up reserves Revaluation reserve Profit or loss for the financial year (±) TOTAL LIABILITIES OFF-BALANCE SHEET ITEMS Contingent liabilities Future liabilities Off-balance sheet claims

17 MFB HUNGARIAN DEVELOPMENT BANK PRIVATE LIMITED COMPANY Income statement in accordance with Hungarian Accounting Standards Data in million HUF INCOME STATEMENT Interest received and similar income Interest paid and similar charges BALANCE (1-2) Income from securities Commissions and fees received or due Commissions and fees paid or payable Net profit or net loss on financial operations Other operating income General administrative expenses Depreciation Other operating charges Value adjustments in respect of loans and advances and risk provisions for contingent liabilities and for (future) commitments 12. Value readjustments in respect of loans and advances and risk provisions for contingent liabilities and for (future) commitments 12./A Difference between formation and utilization of general risk provisions 13. Value adjustments in respect of transferable debt securities held as financial fixed assets, shares and participations in affiliated companies and in other companies linked by virtue of participating interests 14. Value readjustments in respect of transferable debt securities held as financial fixed assets, shares and participations in affiliated companies and in other companies linked by virtue of participating interests Profit on ordinary activities Extraordinary income Extraordinary charges Extraordinary profit or loss (16-17) Profit before tax (±15±18) Taxes on income Profit after tax (±19-20) General reserve (±) Profit reserves used for dividends and profit-sharing Dividend and profit-sharing payable PROFIT FOR THE FINANCIAL YEAR (+21± ) ANNUAL REPORT

18 MFB HUNGARIAN DEVELOPMENT BANK PRIVATE LIMITED COMPANY Unconsolidated statement of financial position prepared in accordance with International Financial Reporting Standards Statement of financial position Cash and balances with the National Bank of Hungary Placements with other banks Loans and advances to customers, net of allowance for impairment losses Data in million HUF Available for sale securities Held-to-maturity securities Investments Financial assets at fair value through profit or loss Property, plant and equipment Intangible assets Current tax assets Deferred tax assets Other assets Total assets Placements and loans from other banks Deposits from customers, loans from Hungarian State Issued securities Derivative liabilities held for risk management Financial liabilities at fair value through profit or loss Provisions Other liabilities Total liabilities Share capital Capital reserve Statutory reserves Retained earnings Valuation reserve (215) (226) Total shareholder s equity Total liabilities and shareholder's equity Commitments and contingencies

19 MFB HUNGARIAN DEVELOPMENT BANK PRIVATE LIMITED COMPANY Unconsolidated statement of comprehensive income prepared in accordance with International Financial Reporting Standards Data in million HUF Statement of comprehensive income Interest and similar income Interest expense and similar charges (36 817) (31 601) Net interest income Allowance for impairment losses of loans and advances (445) (5 846) Fee and commission income Fee and commission expenses (2 042) (1 708) Net fee and commission expenses (1 791) (1 164) Gains on sale of investments Allowance for impairment losses of investments (234) (572) Net loss from financial instruments at fair value through profit or loss 0 (1 019) Dividend income Net gain on foreign currency transactions Other income Other operating income General and administrative expenses (9 881) (9 953) Net loss on foreign currency transactions (663) 0 Other provision charges (143) (2 769) Other expenses (946) (792) Other operating expenses (11 633) (13 514) Profit before tax Taxation (1 370) (499) Net profit for the year Other comprehensive income Revaluation of available for sale financial assets Net other comprehensive income Total comprehensive income ANNUAL REPORT

20 RECONCILIATION OF OWNER S EQUITY DIFFERENCES BETWEEN HUNGARIAN ACCOUNTING REGULATIONS AND IFRS Data in million HUF Equity Net profit for the year 2009 Statutory reserves Retained earnings Valuation reserve Equity Hungarian financial statements (10 210) Reclassification of general risk reserve General risk reserve (2 427) 0 0 General reserve (200) 0 0 Revaluation of financial instruments 112 (432) (116) Dividend in advance* * Deferred tax International financial statements (2 627) * Under International Financial Reporting Standards, dividend payable for 2009 is recognised in equity in

21 1. MFB HUNGARIAN DEVELOPMENT BANK PRIVATE LIMITED COMPANY 1.1. Company name: MFB Hungarian Development Bank Private Limited Company (MFB Zrt.) Registered office: 1051 Budapest, Nádor u. 31. Date of foundation: 1 December 1991 Type of company: Registered company limited by shares Owner: Hungarian State (100%) Shareholders rights: Exercised by Minister for National Development and Economy Chief Executive Officer: Dr. János Erős Number/nominal value of shares: Value of registered ordinary shares: HUF 87,570,000,000 comprising, 87,570 ordinary shares each with a nominal value of HUF 1,000,000 Scope of activity: TEÁOR Other monetary activity TEÁOR Financial leasing TEÁOR Other financial activities not classified elsewhere Registration number: Banking Supervisory licence: 32/1993. Money and Capital Market Supervisory Authority licence: 973/1997/F Website: Legal status The MFB Hungarian Development Bank Private Limited Company (hereinafter referred to as: MFB or the Bank) is a specialised credit institution, a private limited company. The legal status, tasks and activities of the Bank are currently governed by Act XX of 2001 as amended on the Hungarian Development Bank (MFB Act), the provisions of the Deed of Foundation and the strategy approved by the Hungarian government and the owner Statutory and legal background The Budget Act of 2009 provided for an absolute direct suretyship of HUF 400 billion for the fulfilment of payment obligations undertaken in favour of third parties by MFB in 2009; the threshold amount of statutory repayment guarantees in respect of loans taken and bonds issued by MFB for funding purposes was set at HUF 1,200 billion, and the exchange rate guarantee line was raised to HUF 1,400 billion, while the amount allocated for interest subsidies was set at HUF 500 million. During the year the Bank complied with all the budgetary limits. Act XVIII of 2009 supplemented the Bank s tasks based on an individual government decision by bank guarantees assumed for long-term working capital loans extended in the frame of loan programmes or individual transactions. A government decree modified the procedural rules of state guarantee that can be assumed with a view to the stability of the financial system. The provisions of the amended decree are applicable to the loan taken by MFB from the Hungarian State. ANNUAL REPORT

22 Correspondent banks of MFB abroad JP Morgan Chase New York, USA Commerzbank AG Frankfurt, Germany JP Morgan AG Frankfurt, Germany Mizuho Corporate Bank Ltd. Tokyo, Japan Royal Bank of Scotland Plc. London, United Kingdom Zürcher Kantonalbank Zurich, Switzerland Bank Austria AG Vienna, Austria Bank Polska Kasa Warsaw, Poland Opieki SA-Bank Pekao SA MFB international relations, memberships - European Association of Public Banks (EAPB) Member of the Association of EU banks in public ownership since November 2002; Club of the Institutions in the European Union Specialising in Long-Term Credit (ISLTC) Associate member from April 2003, full member since EU accession on 1 May 2004; European Investment Fund (EIF) Since 9 July 2003 MFB has held 5 shares as a member organisation; Network of European Financial Institutions for Small and Medium Sized Enterprises (NEFI) Observer from June 2003, full member since EU accession on 1 May 2004; International Capital Market Association (ICMA) The International Securities Market Association (ISMA) has been known as the ICMA since Full member since 28 August 2003; International Chamber of Commerce (ICC) Member since 2003; Loan Market Association (LMA) Member since 2008; Institute of International Finance (IIF) Member since 2009; Information System Audit and Control Association (ISACA) Member since 2009; MFB membership in local organisations Rural Credit Guarantee Foundation (AVHA) Hungarian Association of Internal Auditors Budapest Chamber of Trade and Industry Confederation of Hungarian Employers and Industrialists Federation of Management and Scientific Associations Garantiqa Hitelgarancia Zrt. Hungarian Banking Association Hungarian Forex Association National Deposit Insurance Fund (OBA) Hungarian SEPA Association

23 1.6. Credit rating MFB has had credit ratings assigned by Moody s Investors Service international ratings agency since 19 May As of 8 April 2009 and 19 May 2009 Moody s Investors Service assigned foreign currency denominated long-term bank deposit rating respectively foreign currency denominated senior, unsecured debt rating of Baa1 (both with negative outlook) to MFB. According to the summary rating rationale of Moody s, the Bank s rating was based on the combination of the Baseline Credit Assessment (BCA) of 11, and the Bank s dependence on the Hungarian State and - if required - the high probability of state support. According to Moody s, currently MFB s credit rating is closely linked to the rating of the state (and the outlooks); upgrading may only be effected through the improvement of the state s credit rating. MFB s foreign currency denominated short-term bank deposit rating of P-2 did not change in ANNUAL REPORT

24 DEVELOPMENTS IN BUSINESS ACTIVITIES Key objectives of the 2009 business plan and their fulfilment The Bank s main business objectives may can be summarised as follows: Restructuring. of equity financing activity, switch to indirect financing through equity.funds, being in majority private ownership; Supervision and profitable operation of MFB Banking Group; Cost-efficient operation, keeping operating costs steady in real terms; Adopting new Basel II capital adequacy directive in practice. Activities of the Bank in 2009: Under the loan programmes the Bank extended loans exceeding HUF 92 billion, of which HUF 84 billion was disbursed through commercial banks and savings..cooperatives. The..billion. Due. A disbursement of loans outside the programmes amounted to nearly HUF 104 to changes partly in the legal background and partly in the economic and market conditions, as well as to mitigate the adverse effects of the economic crisis, the Bank.modified the terms and conditions for certain loan programmes. loan programme, named MFB New Hungary Working Capital Loan Programme. was launched, under which working capital loans are available for the agricultural.sector, industrial and service enterprises. The Bank launched the MFB Food Industry Bank Guarantee Programme and the. MFB Economic Recovery Bank Guarantee. Under these programmes guarantees can.be applied for in relation to the long-term working capital loans of enterprises. In the new system of the new development purpose equity financing activity, investments were carried out by an equity fund owned jointly by MFB Invest - Investment and Asset Management Private Limited Company and a Japanese investor. (The fund was in majority in private ownership.) The necessary capital funds were partly provided in The Bank transferred part of its development purpose equity investments to external.investors and placed the remainder to the MFB Development Capital Fund (MFB FTA). In replacement of the funding opportunities that seriously narrowed due to the crisis in the financial markets, MFB played a significant role in satisfying the long-term funding needs of Eximbank Zrt. thus maintaining Eximbank s export promotional lending activity. Lending In 2009 the Bank introduced new product lines that had not been applied previously. The aim of these programmes was to mitigate the effects of the economic crisis, extend the narrowing short- and long-term financing sources available in the commercial banking sector, as well as to provide for bank guarantee options. Based on its statutory authorisation, MFB launched working capital loan programmes to mitigate the short-term financing difficulties of the agricultural industry; then the Bank made the preferential working capital loans available for all sectors with the involvement of EU and MFB funds. The introduction of bank guarantee programmes was aimed at the extension of short-term financing sources, first in the food industry followed by the key industries of national economy. Under these programmes enterprises received assistance in securing working capital loans extended by commercial banks. 24

25 The network of agents was broadened - 57 agents and 253 sales points promoted the access of micro and small enterprises to development loans up to HUF 50 million within 30 days by means of a simplified procedure all through the country. The purpose of the changes made to the Bank s product structure and lending practices in 2009 was to mitigate the effects of the economic crisis in the field of corporate, municipal and household energy saving financing by The business strategy was drawn up accordingly. Total lending portfolio According to national figures, corporate investment appetite and the working capital loan demand were waning in the wake of the economic crisis, and yet, MFB s activity increased both in the field of investment and working capital loans. The aggregate value of approved contracts doubled under the programmes compared to the previous year. The Bank ensured the liquidity needed for the new contracts through institutional loans. For individual loans, the Bank adjusted the approval of requests to the available resources. In addition to financing projects, MFB also provided funds for the Banking Group. The Bank - with a partial absolute guarantee from the Hungarian State - participated in the project financing of several state priority projects. Breakdown of MFB loan portfolio by loan programmes and own loans as of 31 December 2008 as of 31 December % 7% 55% 8% 5% 57% 29% 30% Project financing (55%) Active loan programmes (29%) Closed loan programmes (9%) Other loans (family, other intermediated) (7%) Project financing (57%) Active loan programmes (30%) Closed loan programmes (8%) Other loans (family, other intermediated) (5%) While in absolute value - both for active programmes and for direct loans that were not disbursed under any of the programmes - the increase was considerable, the proportion of project loans also increased compared to the end of the previous year due to the financing of several major projects. ANNUAL REPORT

26 Sectoral breakdown of total loans placed as of 31 December ,5% 2,3% 5,0% 5,1% 35,1% 5,8% 10,9% 16,0% 15,3% Property development, economic services (35.1%) Industry (16,0%) Municipalities (15.3%) Agriculture (10.9%) Construction (5.1%) Other services (5.0%) Transport, storage, post, telecoms (4.5%) Accommodation, catering (2.3%) Trade (5.8%) Of all the different sectors, the proportion of companies operating in the service sector (real estate development, business services) is the highest. The proportion of the production industry shows a two-percentage point increase. To a smaller extent though, but the volume of transport, storage, post, telecommunications as well as accommodation and catering services also grew compared to the previous year. In spite of the rise in the number of working capital loans in agriculture, due to the lower amounts the sector s proportion dropped by nearly two percentage points in aggregate value. 26

27 Regional breakdown of total loans placed as of 31 December % 35% 36,7% 30% 25% 20% 15% 10% 5% 0% 19,5% 4,0% Budapest Central Hungary Northern Hungary 9,0% 7,2% 7,8% Northern Great Plain Southern Great Plain 11,2% 4,6% Western Transdanubia Central Transdanubia Southern Transdanubia The proportion of loans disbursed to companies registered in Budapest decreased from 38,7% to 36,7% in terms of all placements, while the rate for Central Hungary increased by 2,4 percentage points. The concentration can be explained by the larger amounts of loans extended to businesses registered in Budapest. (Note: Budapest is stated separately in all the regional figures.) There was substantial decrease in the regions of Western Transdanubia and Northern Hungary, while an increase of 1 percentage point characterised the Southern Great Plain. Breakdown of total loans placed as of 31 December 2009 according to target groups 4% 15% 43% SME sector (43%) Large corporations (38%) Municipalities (15%) Other (4%) 38% Many of the ultimate beneficiaries of loans extended to financial intermediaries (classified as large companies) fall into the SME sector, and therefore the ratio of development loans financing the SME is in reality much higher. The shift between the SME sector and large companies may clearly be explained by the effects of the recession; within the SME sector borrowing became more difficult for micro- and small enterprises in ANNUAL REPORT

28 Programme loans Development loan programmes In 2009 MFB again played a prominent role in the provision of development loans. In line with the objectives set forth in the business strategy, long-term loan programmes were available which offered funding under preferential interest conditions to support the financing requirements of corporate, municipal and residential developments that are considered as priorities from the perspective of investment in the national economy. The MFB loan programmes are available to practically every single participant in the economy. Forint denominated loans under preferential interest conditions were available for municipalities, corporate clients and in case of household energy saving investment for private individuals as well. Programmes/types Applications received Applications approved Loan amount per client pc million HUF pc million HUF million HUF Active loan programmes total New Hungary Enterprise Development Loan Programme of which: Micro-Credit Plus of which: Small Business Loan Programme - of which: Small and Medium Business Loan Programme For a Successful Hungary Municipality Infrastructure Development Loan Programme of which: Panel Plus MFB Cereals Working Capital Loan Programme Phase II New Hungary Producers Sales Organisation Working Capital Loan Programme New Hungary Agriculture Development Loan Programme New Hungary Agricultural Working Capital Loan Programme Phase II MFB New Hungary Working Capital Loan Programme For a Successful Hungary Household Energy Saving Loan Programme For a Successful Hungary Social Housing Loan Programme Career Change Loan Programme The loans are primarily offered under refinancing schemes, but the two loan products available for micro and small businesses through agents make MFB products available to an even wider section of the economy.

29 Sectoral breakdown of loans placed under active programmes as of 31 December ,1% 3,0% 3,8% 4,6% 5,0% 45,8% 6,7% 11,9% 16,1% Municipalities (45.8%) Trade (16.1%) Industry (11.9%) Agriculture (6.7%) Property development, economic services (4.6%) Other services (3.8%) Transport, storage, post, telecoms (3.1%) Construction (3,0%) Accommodation, catering (5,0%) Out of the loans placed under active loan programmes, the proportion of agriculture, real estate as well as business and other services increased. Industry and trade showed the greatest downturn. The Bank had refinancing agreements with roughly 40 credit institutions, including more than 20 savings cooperatives. The 56 micro and small enterprise agents which not only included savings cooperatives and credit cooperatives, but also the Hungarian Post, Regional Development Holding and related companies as well as Hungarian Trade Investment and Trade Development Agency (ITD Hungary) and representative offices enabled the products of the Bank to be available not just in regional centres but around the entire country to a wide range of potential beneficiaries. ANNUAL REPORT

30 Regional breakdown of loans placed under active programmes as of 31 December % 15% 15,1% 15,7% 10% 11,7% 9,6% 12,9% 11,7% 11,7% 11,6% 5% 0% Budapest Central Hungary Northern Hungary Northern Great Plain Southern Great Plain Western Transdanubia Central Transdanubia Southern Transdanubia With the exception of Southern Great Plain where the increase was 1,3 percent, the volume of placed loans diminished. The highest rate of decrease 1,4 percent was registered for Central Hungary. New Hungary Enterprise Development Loan Programme The development loan options provided for the enterprise sector cover every single segment of the Hungarian economy, with a separate loan programme supporting the development needs of the agricultural sector. The New Hungary Enterprise Development Loan Programme is available for all enterprises without any limitation regarding company size or ownership structure. The set of objectives behind the loan scheme did not change in 2009, but the terms and conditions were modified with to the objective of mitigating the adverse effects of the global economic crisis. Within the HUF 310 billion earmarked for the loan programme, the volume of approved loans rose by approximately 22% in The increase is exceptional since this rate was 12% and 14% in 2007 and 2008 respectively. Such acceleration is explained by the fact that due to the crisis -the investment loans of credit institutions were almost fully financed by funds available in the frame of loan programmes having a state aid element, and that the base interest rate of the programme, the 3-month EURIBOR hit a historical low. 50% of approved loans were below HUF 25 million, 23% were between HUF million and the remaining 27% consisted of loan amounts above HUF 50 million. Even though enterprises may draw the loan without any restriction on their size, the sector targeted by MFB and most intensely financed was the SME sector, which is a priority area in economic policy. 30