HUNGARIAN DEVELOPMENT BANK LTD. Unconsolidated Financial Statements and Independent Auditor s Report

Transcription

1 HUNGARIAN DEVELOPMENT BANK LTD. Unconsolidated Financial Statements and Independent Auditor s Report

2 Contents Page Independent Auditor s Report 1 Unconsolidated Financial Statements Unconsolidated Balance Sheet as at 31 December Unconsolidated Income Statement for the year ended 31 December Unconsolidated Statement of Changes in Shareholder s equity for the year ended 31 December Unconsolidated Cash Flow Statement for the year ended 31 December Notes to the Unconsolidated Financial Statements 6 38

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4 Unconsolidated Balance Sheet as at 31 December 2005 (in millions of HUF) Note 31 December 31 December Cash and balances with the National Bank of Hungary 5 7,964 2,346 Placements with other banks 6 152, ,336 Loans and advances to customers, net of allowance for impairment losses 7 456, ,251 Available for sale securities 8 78, ,009 Investments in subsidiaries and associates 9 53,382 44,730 Other assets 10 28,127 9,719 Fixed assets 11 5,714 5,884 TOTAL ASSETS 782, ,275 Deposits from other banks and other borrowed funds , ,683 Deposits from customers 13 62,257 21,058 Issued securities , ,461 Financial liabilities at fair value through profit and loss Other liabilities 16 17,403 20,232 Total liabilities 655, ,310 Subordinated debt 17 9,500 9,500 Share capital 18 87,570 87,570 Share premium 18-52,036 Capital reserve 18 18, ,011 Statutory reserves 19 4,310 1,812 Retained earnings 7,198 (139,964) Total shareholder's equity 117, ,465 TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY 782, ,275 Commitments and contingencies , ,175 The accompanying notes to unconsolidated financial statements on pages 6 to 38 form an integral part of these unconsolidated financial statements. 2

5 Unconsolidated Income Statement for the year ended 31 December 2005 (in millions of HUF) Note Interest and similar income 38,670 42,267 Interest expense and similar charges (20,244) (19,133) Net interest income 22 18,426 23,134 Allowance release/(charge) for impairment losses 21 4,633 (8,167) Fee and commission income 956 1,047 Fee and commission expenses (860) (949) Net fee and commission income Gain from sale of investments Allowance for impairment losses of investments in subsidiaries and associates 21 (4,608) (3,916) Dividend income Net gains on foreign currency - 70 Other provision (charges)/releases 21 (2,265) 1,099 Other operating income 23 15,363 12,933 Other operating income 13,411 14,117 General and administrative expenses 24 (10,362) (9,365) Net loss on foreign currency (510) - Other operating expenses 23 (868) (1,667) Other operating expenses (11,740) (11,032) Profit before income tax 20,930 14,351 Income tax 25 (6,047) (1,564) Dividend paid - - Net profit for the year 14,883 12,787 The accompanying notes to unconsolidated financial statements on pages 6 to 38 form an integral part of these unconsolidated financial statements 3

6 Statement of changes in Shareholder s equity (in millions of HUF) Share Capital Share Premium Capital Reserve Statutory Reserves Retained Earnings Total Note Balance at 1 January ,570 52, , (145,617) 100,678 General Reserve ,134 (1,134) - Dividend (6,000) (6,000) Net profit for the year ,787 12,787 Balance at 1 January ,570 52, ,011 1,812 (139,964) 107,465 Reclassification of the equity - (52,036) (87,928) - 139,964 0 Revaluation of financial instruments ,812 5,812 Dividend (11,000) (11,000) Statutory reserves ,498 (2,498) - Net profit for the year ,883 14,883 Balance at 31 December , ,082 4,310 7, ,160 The accompanying notes to unconsolidated financial statements on pages 6 to 38 form an integral part of these unconsolidated financial statements. 4

7 Unconsolidated Cash Flow Statement for the year ended 31 December 2005 (in millions of HUF) Note Cash flows from operating activities Net profit/(loss) for the year before taxes 20,930 14,351 Adjustments to reconcile net profit/(loss) to cash provided by operating activities Depreciation and amortization 1, Allowance for impairment losses of loans 21 (6,117) (3,426) Allowance (release)/charge for impairment losses of investments in subsidiaries and associates 21 (1,017) 3,858 Allowance (release)/charge for impairment losses of other 21 assets (232) 13 (Release) in other risk provision 21 (11,243) (10,136) (Loss) / Profit on sale of fixed assets (24) 411 Changes in operating assets and liabilities Increase in placements with other banks 124,352 87,752 (Decrease) in deposits from other banks and borrowed funds (16,719) (97,148) (Increase)/decrease in loans and advances to customers, before allowances (175,329) 21,273 Increase/(decrease) in deposits from customers 41,199 (1,934) (Increase) in accrued interest receivable and other accruals (8,230) (1,116) Decrease/(increase) in accrued interest payable and other accruals 721 (584) (Increase)/decrease in other assets, before allowances (9,945) 25,488 Increase in other liabilities 7, Income tax paid and deferred tax 25 (6,047) (1,564) (Decrease) in financial instruments held for hedging (778) (1,605) Net cash provided by/(used in) operating activities (39,636) 36,728 Cash flows from investing activities Decrease in securities 54,916 12,146 Increase in investments in subsidiaries and associates, before allowance (7,635) (36,414) Proceeds from sale of fixed assets Acquisition of fixed assets (1,033) (1,662) Net cash provided by/(used in) investing activities 46,328 (25,769) Cash flows from financing activities Proceeds from bond issue 4,114 (5,713) Revaluation of financial instruments 5,812 - Dividend not paid during the year (8,000) - Dividend paid during the year (3,000) (6,000) Net cash provided by/(used in) financing activities (1,074) (11,713) Net increase/(decrease) in cash and cash equivalents 5,618 (754) Cash and cash equivalents as at 1 January 5 2,346 3,100 Cash and cash equivalents as at 31 December 5 7,964 2,346 The accompanying notes to unconsolidated financial statements on pages 6 to 38 form an integral part of these unconsolidated financial statements. 5

8 1. PRINCIPAL ACTIVITIES The Hungarian Development Bank Ltd. (the Bank or HDB ) is registered as a joint-stock company under Hungarian law and is licensed to conduct commercial banking activities in Hungarian Forint and in foreign currency. The Bank is primarily engaged in long-term lending and investment management activities. The legal status and the activities of the Bank are regulated by Act XX of 2001 which came into force on 15 June The Bank s registered office is located at Nádor u. 31, Budapest, Hungary. The Bank is 100% owned by the Hungarian State. In 2005, the rights of ownership were exercised by the Ministry of Economy and Transport. The average number of employees was 355 in 2005 (2004: 314). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies adopted by the Bank in preparation of these unconsolidated financial statements are as follows: (a) Basis of presentation These unconsolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) adopted by the International Financial Reporting Interpretations Committee ( IFRIC ) and interpretations issued by the Standing Interpretations Committee, except for IAS 27, Consolidated Financial Statements and Accounting for Investments in Subsidiaries. Under IAS 27, the Bank is required to prepare consolidated financial statements. Consolidated financial statements are in the process of being prepared and will be published in September These unconsolidated financial statements have been prepared for information purposes. The Bank maintains its accounting records and prepares its statutory financial statements in accordance with the relevant accounting, banking and fiscal regulations prevailing in Hungary. In order to present these unconsolidated financial statements in accordance with IFRS, certain adjustments have been made to the Hungarian statutory financial statements. The effect of these adjustments on net income for the year and shareholders' equity is detailed in Note 32. Foreign exchange rates were as follows as at 31 December 2005: HUF/USD and HUF/EUR. These unconsolidated financial statements are presented in Hungarian Forints ( HUF ), rounded to the nearest million ( MHUF ). 6

9 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (b) Adoption of new and revised International Financial Reporting Standards In the current period, the Bank has adopted all of the new and revised IFRS and Interpretations issued by the International Accounting Standards Board (the IASB) and the International Financial Reporting Interpretations Committee (IFRIC) of the IASB that are relevant to its operations and effective for accounting periods beginning on 1 January (c) Foreign currency translation Transactions in foreign currencies are translated to HUF at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to HUF at the foreign exchange rates quoted by the National Bank of Hungary at that date. Foreign exchange differences arising on translation are recognised in the income statement. (d) Derivative financial instruments The Bank uses derivative financial instruments, interest rate swaps and forward exchange contracts to manage its exposure to foreign exchange and interest rate risks arising from business activities. The Bank does not hold or issue derivative financial instruments for trading purposes. The recognition of income/expenses relating to derivative transactions is on a markto-market basis. Value changes are immediately recognised in the income statement. (e) Financial assets and liabilities i. Classification Financial asset or liability at fair value through profit and loss are those that the Bank principally holds for the purpose of short term profit taking. These include investments, bonds, certain purchased loans, fair value hedges and derivative contracts that are not designated and effective hedging instruments, and liabilities from short sales of financial transactions. Originated loans and receivables are loans and receivables created by the Bank other than those created with the intention of short term profit taking. Originated loans and receivables comprise loans and advances to banks and customers, and advances except purchased loans. Held to maturity assets are financial assets with fixed or determinable payments and fixed maturity that the Bank has the intent and ability to hold to maturity. 7

10 Available for sale assets are financial assets that are not held for trading purposes, originated by the bank or held to maturity. Available for sale instruments include money market placements and certain debt and equity investments. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ii. Recognition Financial assets and liabilities are entered into the Bank s books on the trade day, except for derivative assets, which are entered on the settlement day. Financial instruments are measured initially at cost, including transaction costs. iii. Measurement Subsequent to initial recognition, all fair value through profit and loss instruments and all available for sale assets are measured at fair value. When no quoted market price exists in an active market and fair value cannot be reliably measured, these instruments and assets are stated at cost including transaction costs. The effect of the valuation of the profit and loss instruments is recognised directly in the income statement and the effect of the valuation of the available of the sale assets is recognised in the equity. All held to maturity financial instruments and originated loans and receivables are measured at amortised cost less impairment. Premiums and discounts, including initial transaction costs, are included in the carrying amount of the related instrument and amortised based on the effective interest rate of the instrument. iv. Fair value measurement principles The fair value of financial instruments is based on their quoted market price at the balance sheet date without any deduction for transaction costs. If a quoted market price is not available, the fair value of the instrument is estimated using pricing models or discounted cash-flow techniques. Where discounted cash-flow techniques are used, estimated future cash-flows are based on the management s best estimates and the discount rate is a market related rate at the balance sheet date for an instrument with similar terms and conditions. Where pricing models are used, inputs are based on market related measures at the balance sheet date. The fair value of derivatives that are not exchange-traded are estimated at the amount that the Bank would receive upon normal business conditions to terminate the contract at the balance sheet date taking into account current market conditions and the current creditworthiness of the counterparties. 8

11 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (f) Investments in subsidiaries and associates Equity investments classified as controlling interest comprise those investments where the Bank through direct ownership interest, has the power to govern the financial and operating policies of the investee. Equity investments classified as significant interest comprise those investments where the Bank through direct ownership interest, has the power to participate in the financial and operating policies of the investee, but not to control those activities. Other equity investments comprise other share holdings, which do not meet the preceding criteria. The investment portfolio includes investments that the Bank has the intent to hold long term in its portfolio. Long term investments are determined as follows: 1. Act XX of 2001 determines the allowable fully controlled equity investments. 2. The Bank classifies investments in associates held in its portfolio from equity-debt conversions as long term investments. 3. The investment portfolio includes investments managed under the Equity Investment Program. Based on this Program the ownership in these investments cannot exceed 49% and the Bank is obliged to disinvest at the end of the 5 th -12 th year after making the investment. All investments are shown at cost less impairment. (g) Fixed assets Fixed assets are stated at cost less accumulated depreciation. Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of items of property, plant and equipment. Freehold land, works of art, asset under construction, tangibles out of operating are not depreciated. The depreciation rates based on the estimated useful lives are as follows: Property and plant 2-6% Rights on property 1-50% Investment on rented property 17 % Office and other machinery and equipment % Mobiles 50% Motor vehicles 20% Computer equipment 17-33% Software % Other intangible assets 17-33% 9

12 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (h) Impairment of financial assets The Bank reviews its loan portfolios to assess impairment on a quarterly basis. Impairment losses are charged against the carrying amount of loans and advances that are identified as being impaired based on these reviews of outstanding balances and reduce these loans and advances to their recoverable amounts calculated on the basis of discounted future cash flows. Impairment losses are charged against income for the period. If in a subsequent period, the amount of impairment loss decreases, changes in recoverable amounts are recognised through the income statement. (i) Issued securities The issued bonds are stated in the books at purchase price, modified by the amortisation of the issuance cost and premium or discount. (j) Statutory reserves i. General reserve In accordance with Section 75 of Hungarian Act No. CXII of 1996, a general reserve equal to 10% of the net post tax income is required to be made in the Hungarian statutory accounts. The general reserve, as calculated under Hungarian Accounting and Banking Rules in the International Financial Statements, is treated as appropriations against retained earnings, and is not charged against income. ii. General risk reserve Under Section 87 of Hungarian Act No. CXII of 1996, a general risk reserve of 1.25% of the risk weighted assets may be made. The general risk reserve, as calculated under Hungarian Accounting and Banking Rules in the International Financial Statements, is treated as appropriations against retained earnings, and is not charged against income. (k) Interest and fee income and expense Interest is accrued and credited to income based on the principal amount outstanding. The accrual of interest on loans is discontinued when, in the opinion of management, there is an indication that a borrower may be unable to meet payments as they come due. In these unconsolidated financial statements, all unpaid interest is reversed upon such discontinuance and maintained in an off-balance sheet suspense account. 10

13 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (l) Dividend income Dividends are recognised in the current income statement, if the dividends are declared before the balance sheet preparation date. (m) Transactions in foreign currency The accounting records of the Bank are maintained in Hungarian Forints (HUF). Transactions denominated in other currencies are translated at exchange rates ruling at the date of the transaction. Assets and liabilities denominated in other currencies are translated at rates ruling at the balance sheet date. Gains and losses on exchange are recognised in the statement of income for the year. (n) Income taxes Income tax on the profit or loss for the year is comprised of current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Income taxes contain the extra tax for financial instutions, which was introduced from The base of the tax is the profit before taxation and the rate of the extra tax is 8 %. Deferred tax is calculated using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the balance sheet date. Under Hungarian tax legislation, banks cannot carry forward tax losses. (o) (p) Statement of cash flows For the purposes of reporting cash flows, cash and cash equivalents include cash, balances and placements with the National Bank of Hungary except those with more than three months maturity. Reclassification 11

14 Certain items previously reported in the prior year financial statements have been reclassified to conform with the current year presentation. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (q) Segment reporting A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment that are subject to risks and returns that are different from those of segments operating in other economic environments. The Bank does not identify any business or geographic segments, therefore no segment reporting is prepared on the non-consolidated level. 3. SUMMARY OF SIGNIFICANT RISK MANAGEMENT POLICIES The most significant business risks to which the Bank is exposed are credit, interest rate, liquidity and foreign exchange risks. Risk management policies are set by the Board of Directors of the Bank within the rules established by the National Bank of Hungary and the Hungarian Financial Institutions Supervision. The Board implements these policies. The Bank has established reporting systems, which permit monitoring of risk exposures. The Bank contracts transactions in the ordinary course of business in various currencies and uses the various financial instruments at its disposal. On and offbalance sheet financial assets and liabilities are denominated in these various currencies and, unless otherwise stated, are stated at year end FX rates, unless accounted for as a hedge. Banking transactions, unless otherwise stated, are effected at market rate. (a) Credit risk Credit risk is the risk that a customer or counterparty of the Bank will be unable or unwilling to meet a commitment that it has entered into with the Bank. It arises from lending, investment and other activities undertaken by the Bank. Credit risk is managed by the Board of Directors which establishes credit regulations including the approval process, discretionary credit limits, portfolio concentration guidelines, standards for the measurement of credit exposures, risk ratings of clients and assessments of management quality and financial performances. Each outstanding loan and investment is reviewed quarterly. Loans are classified based on a point rating system, which incorporates qualitative and quantitative factors. 12

15 (b) Interest rate risk Interest rate risk is measured by the extent to which changes in market interest rates impact on margins and net interest income. Gaps in the value of assets, liabilities and off-balance sheet instruments that mature or reprice during a given period generate 3. SUMMARY OF SIGNIFICANT RISK MANAGEMENT POLICIES (CONTINUED) interest rate risk. The Bank reduces this risk by matching the repricing of assets and liabilities using pricing/maturity techniques, including the use of derivative products. Interest rate risk is managed by the Board of Directors through the mandate given to the Asset-Liability Committee, which establishes and delegates position limits, and monitors such limits to restrict the effect of movements in interest rates on current earnings and on the value of interest sensitive assets and liabilities. (c) Liquidity risk The Bank's policy is to manage the structure of its assets and liabilities and commitments in ways which create opportunities to maximize income while ensuring that funds will be available to honour all cash outflow obligations as these become due. Expected cash flows and daily liquidity reports are provided to management to enable timely liquidity monitoring. (d) Foreign exchange risk The Bank has assets and liabilities, both on and off-balance sheet, denominated in various foreign currencies. Foreign exchange risk arises when the actual or forecasted assets in a foreign currency are either greater or less than the liabilities in that currency. The Bank manages the currency structure of assets and liabilities on and off-balance sheet, utilising forward foreign exchange transactions and other hedging instruments. It is the policy of the Bank that it should not speculate in currencies and should only take currency positions within strict limits. The Board of Directors establishes and monitors specific regulations based on statutory and internal limits, and approves the overall strategy. Adherence to these limits, including intra day limits, is monitored continuously. The Foreign Exchange Guarantee Agreement between the Bank and the Hungarian Ministry of Finance was signed on 27 January 2004 with retroactive effect. This agreement manages foreign exchange risks of the Bank s foreign currency borrowings (Euro). Based on this agreement, State compensates any foreign exchange loss of the Bank arising from the placements denominated in other than Euro. However, the Bank is required to pay to the State the amount of realised foreign exchange gains on these transactions at the final maturity of the borrowings or upon introduction of the Euro as the official currency of Hungary. 13

16 The state guarantee maximum underlying amount is declared by law and was HUF 900 billion in (2004.: HUF 530 billion) 14

17 4. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES The Bank makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Bank reviews its loan portfolios to assess impairment at least on a quarterly basis. In determining whether an impairment loss should be recorded in the income statement, the Bank makes judgements as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. 15

18 5. CASH AND BALANCES WITH THE NATIONAL BANK OF HUNGARY Cash Balances with the National Bank of Hungary: Obligatory reserve in HUF 2, Other 4,859 1,914 7,964 2,346 According to the National Bank s regulation, the Bank is required to place 5 % of certain customer deposit as a statutory reserve. The rate of this reserve in 2004 was 5%. 6. PLACEMENTS WITH OTHER BANKS Maturity within one year 47,880 69,523 Maturity between one and five years 70,023 48,747 Maturity over five years 34,151 17, , ,336 Placements with maturity over one year include placements with the National Bank of Hungary totaling MHUF 330 (2004: MHUF 962). Placements with other banks as at 31 December 2005 and 2004 can be broken down by weighted average rates as follows: Placements in HUF 3.55 % 4.72 % Placements in foreign currency 2.15 % 2.24% The main part of the placements with other banks in 2005 belongs to the long term refinancing loans which is the source of the customer loans of commercial banks. 16

19 7. LOANS AND ADVANCES TO CUSTOMERS, NET OF ALLOWANCE FOR IMPAIRMENT LOSSES Maturity within one year 298,156 85,099 Maturity between one and five years 107, ,409 Maturity over five years 99,014 86, , ,194 Allowance for impairment losses (see Note 21) (47,824) (53,943) 456, ,251 Loans as at 31 December 2005 and 2004 can be broken down by weighted average rates as follows: Loans in HUF 8.19 % % Loans in foreign currency 3.71 % 2.99 % 8. AVAILABLE FOR SALE SECURITIES 31 December December 2004 Purchase price Unrecognized Gain/(Loss) Book Value Purchase price Unrecognized Gain/(Loss) Book Value Government Bonds 69,706 2,800 72, ,271 1, ,692 Other Bonds 3, ,440 3, ,440 MNB Bonds 2, ,147 1, ,877 Total 75,275 2,818 78, ,508 1, ,009 17

20 8. AVAILABLE FOR SALE SECURITIES (CONTINUED) During 2004, the Bank reclassified its held to maturity financial assets to available for sale assets. Accordingly, all held to maturity assets must be classified as available for sale asset for the next financial year. Investments in debt securities as at 31 December 2005 and 2004 can be broken down by currency and actual interest rates as follows: Hungarian Government within one year in HUF 6.5% % Hungarian Government between one and five years in HUF % % Other banks between one and five years in HUF 7.9% 12% Hungarian Government between one and five years in Foreign Currency 6.5% 6.5% Corporate bonds between one and five years in HUF % % 9. INVESTMENTS IN SUBSIDIARIES AND ASSOCIATES Controlling interest 45,873 39,543 Significant interest 15,977 14,092 Other 982 1,562 62,832 55,197 Allowance for impairment (see Note 21) (9,450) (10,467) 53,382 44,730 The Bank's controlling interest as at 31 December 2005 and 2004 were as follows: Controlling interest Name of the company HDB Direct Ownership 2005 HDB Direct Ownership 2004 Corvinus Nemzetközi Befektetési zrt. 100 % % Defend Security Kft. V.a. 60% 60% Magyar Exporthitel Biztosító zrt % 74.95% Magyar Export-Import Bank zrt % 74.95% Magyar Követeléskezelő zrt. 100% 100% Magyar Közmű zrt. 100 % 100% MFB Üzemeltetési Kft % Nemzeti Ingatlanfejlesztő és Lakásberuházó zrt. 100 % 100 % Tőketárs Kft. V.a % Vécsei 2005 Kft. 100% - 18

21 9. INVESTMENTS IN SUBSIDIARIES AND ASSOCIATES (CONTINUED) The Bank's significant interest as at 31 December 2005 and 2004 were as follows: Significant interest HDB Direct Ownership 2005 HDB Direct Ownership 2004 Aranykapu zrt % 49 % Budai Egészségközpont Kft. 49% 49% Civil Biztonsági Szolgálat zrt % 48.72% Csépány és Társai Kft % - Debreceni Hús Rt. 49% 48.99% Ganz Transelektro Villamossági zrt 41.98% 41.98% Grafika Press Rt % - Intergas Hungária zrt % 48.78% Kenguru Gold Kft % - Kenguru Kid Kft % - Kiskunhalasi Baromfifeldolgozó Rt % 47.85% Lamba Rt. F.A % 48.84% Laurel Kft % - Monofix zrt % - Organica zrt % - Pólus Palace zrt % 48.99% Print-X Nyomdaipari zrt % 47.99% Skublics és Társai Kft % - Stúdió 96. zrt. 49% - Szalók Holding zrt % 48.93% Viktória Gem Kft % 48.78% All of the above investee companies are incorporated in Hungary. 10. OTHER ASSETS Accrued interest receivables and other accruals 13,997 5,767 Receivables from the State (exchange rate risk guarantee) 11,038 1,421 Advances Other 2,502 2,346 Trade receivables Taxation recoverable ,146 9,970 Allowance for other assets (see Note 21) (19) (251) 28,127 9,719 19

22 11. FIXED ASSETS Intangible assets Land and buildings Equipment Assets under construction Total Gross value At the beginning of the year 3,177 2,638 2, ,623 Additions ,986 Disposals ,196 At the end of the year 3,787 2,716 2, ,413 Depreciation At the beginning of the year 1, ,238-2,739 Additions ,151 Disposals At the end of the year 1, ,537-3,699 Net book value At December ,047 2,267 1, ,884 At December ,046 2, , DEPOSITS FROM OTHER BANKS AND OTHER BORROWED FUNDS Payable within one year: National Bank of Hungary in HUF 606 1,291 Other banks in HUF 26,002 39,693 Other banks in foreign currency 10,608 3,593 Payable over one year: National Bank of Hungary in HUF Other banks in HUF 18,737 18,737 Other banks in foreign currency 387, , , ,683 20

23 12. DEPOSITS FROM OTHER BANKS AND OTHER BORROWED FUNDS (CONTINUED) Deposits from the National Bank of Hungary and other banks as at 31 December 2005 and 2004 can be broken down by weigthted average interest rates as follows: Deposit from other banks and other borrowed funds in HUF 7.5 % % Deposit from other banks and other borrowed funds in foreign currency 3.69 % 2.17 % 13. DEPOSITS FROM CUSTOMERS Payable within one year: HUF 55,351 14,893 Payable over one year: HUF foreign currency 6,575 5,999 62,257 21,058 Deposits from customers as at 31 December 2005 and 2004 can be broken down by weighted average interest rates as follows: Deposit from customers in HUF 7.5 % % Deposit from customers in foreign currency 2.39 % 2.37 % 21

24 14. ISSUED SECURITIES Issued securities include the following bonds: a) EURO Bond The Bank issued bonds with a nominal value of EUR 450 million on 12 June The purpose of the issuance was to provide a general source of funds for the Bank s activities. The bonds were issued with a maturity date of 12 June 2006, and a fixed interest rate of 5.25%. The issuance was made at a % quotation rate. The Bonds were initially recognised at issuance price but were subsequently adjusted by the amortisation of the discount and issuance costs. b) HUF Bond In the framework of its HUF 100,000 million bond issuance program, the Bank issued bonds in the amount of HUF 12,000 million with a value date of 25 November The amount of the same series of bonds was increased by HUF 6,422 million by an issue made with a value date of 7 March The bonds were issued with a maturity date of 25 November 2007, and a fixed interest rate of 6.25%. The Bank swapped the fixed rate for a variable rate (see Note 15). 15. FINANCIAL INSTRUMENTS FOR HEDGING a) Foreign currency IRS deals The Bank concluded SWAP deals for the purpose of hedging the interest risk of foreign currency fixed interest rate bonds issued by the Hungarian National Bank. The amount at MHUF 10 included in the balance sheet reflects these deals positive market value (2004: -119 MHUF). b) HUF IRS deals The financial instrument for hedging balance also includes the negative market value of the SWAP deals concluded to hedge the interest risk of issued HUF bonds by the Bank of MHUF 108 (2004: MHUF). 22

25 16. OTHER LIABILITIES Accrued interest payable and other accruals 6,353 5,632 Other reserves (see Note 21) 2,167 13,410 Dividend payable liabilities 8,000 - Tax settlement Payables Amounts payable to subsidiaries 18 8 Other ,403 20, SUBORDINATED DEBT In May 1998, the State Lottery and Gambling Plc. (Szerencsejáték Rt.), a company wholly owned by the Hungarian State, purchased subordinated bonds from the Bank for MHUF 9,500. The bonds mature after 10 years and bear 0% interest. According to an agreement on 29 December 1998, the Ministry of Finance became the owner of the bonds. The maturity date of the bonds is 30 April SHARE CAPITAL, SHARE PREMIUM AND CAPITAL RESERVES 100% of the shares are owned by the Hungarian State. The rights of ownership are exercised by the Minister of Economy and Transport. a) Subscribed capital 87,570 ordinary shares with a nominal value of HUF 1 million each 87,570 87,570 b) Share premium Share premium 0 52,036 c) Capital reserves In 2005 the Bank reclassified its negative retainded earnings into the share premium and capital reserve. 23

26 19. STATUTORY RESERVES General reserve 3,710 1,812 General risk reserve 600-4,310 1, COMMITMENTS AND CONTINGENT LIABILITIES Commitments to extend credit 124,616 85,716 Guarantees 14,647 36,552 Law cases 1,729 1,527 Capital increase liability 3, Other commitments 1,349 7, , , ALLOWANCE FOR IMPAIRMENT AND PROVISIONS Net movement in the risk-reserves are as follows in 2005: a) Changes in the allowance for impairment of originated loans, investments and other assets : Loans Other assets Investment Total Closing balance at 31 December , ,467 64,661 New impairment charges 16,967-4,608 21,575 Release of impairment (21,368) (232) (2,818) (24,418) Write off during year (15,225) - (2,807) (18,032) Reclassification from provision 13, ,509 Closing balance at 31 December , ,450 57,295 Net movement (6,117) (232) (1,017) (7,366) Write off during year (15,225) - (2,807) (18,032) Charged to income statement (4,401) (232) 4,608 (25) 24

27 21. ALLOWANCE FOR IMPAIRMENT AND PROVISIONS (CONTINUED) b) Changes in other provisions: Off-balance sheet items Closing balance at 31 December ,410 New provision charges 3,445 Release of provision (1,179) Reclassification (13,509) Closing balance at 31 December ,167 Net movement (11,243) Charged to income statement 2,265 Net movement in the risk-reserves are as follows in 2004: c) Changes in the allowance for impairment of originated loans, investments and other assets: Loans Other assets Investment Total Opening balance at 31 December , ,608 64,215 Transfers 7,100-1,937 9,037 New impairment charges 8, ,207 13,306 Release of impairment (712) (220) (291) (1,223) Write off during year (18,679) (1) (1,994) (16,684) Closing balance at 31 December , ,467 64,661 Net movement (3,426) 13 3, Write off during year (18,679) (1) (1,994) (16,684) Charged to income statement 8, ,916 12,083 25

28 21. ALLOWANCE FOR IMPAIRMENT AND PROVISIONS (CONTINUED) d) Changes in other provisions : Off-balance sheet items Opening balance at 31 December ,546 Transfers (9,037) New provision charges 5,164 Release of provision (6,263) Write off during year - Closing balance at 31 December ,410 Net movement (10,136) Write off during year - Charged to income statement (1,099) 26

29 22. NET INTEREST INCOME Interest and similar income Customers 26,893 27,581 National Bank of Hungary Other banks 3,410 2,788 Securities 8,118 11,391 Others ,670 42,267 Interest expense and similar charges Customers (2,172) (730) National Bank of Hungary (111) (408) Other banks (10,813) (9,411) Securities (7,148) (6,934) Others - (1,650) (20,244) (19,133) Net interest income 18,426 23,134 27

30 23. OTHER OPERATING INCOME/EXPENSES Other operating income Recovered amounts of doubtful receivables, net 15,243 7,701 Gain on sale of receivables, net 32 4,660 Profit on sale of fixed assets, net Other income ,363 12,933 Other operating expenses Unrealised FX losses from trading and available for sale securities, net Amortization of the issued bonds Charitable donations Loss on sale of fixed assets, net 27 - Other expenses relating to loans Other , GENERAL AND ADMINISTRATIVE EXPENSES Salaries and employee benefits 5,308 4,681 Depreciation and amortisation 1, Other expense 3,905 3,708 10,362 9,365 The average number of the employees in 2005 was 355 (2004: 314). 28

31 25. INCOME TAXES The tax charge for the year is based on the profit for the year according to the statutory accounts of the Bank as adjusted for the relevant taxation regulation. The tax rate in Hungary for the year ended 31 December 2005 was 16% (2004: 16%). In 2005 and 2006 the Bank is subject to a surcharge of 8 % for financial institutions. Corporate income tax 6,047 1,438 Deferred payment temporary difference: - Revaluation of financial instruments Tax liability in the income statement 6,047 1,564 Balance of deferred tax liability - Revaluation of financial instruments Effective tax rate Income/(loss) before income taxes 20,930 14,351 Taxes by law 16.0 % 3, % 2,296 Surcharge 8.0 % 1,674 Non deductable expenses 0.2 % % (607) General risk reserve % (144) - - Effect of the release of impairment on investments 3.23 % Valuation of financial instruments 2.15 % % (251) Deferred tax effect Revaluation of financial instruments % 126 Effective tax liability % 6, % 1,564 29

32 26. RELATED PARTIES Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial and operating decisions. The list of related parties of the Bank (subsidiaries and associates) can be found in Note 9. Other related parties represent the state and other state-controlled entities. The balances arising from transactions with related parties were as follows in 2004 : Subsidiaries and associates Other related parties Assets Cash and balances with the National Bank of Hungary - 2,041 Loans and advances to customers, net of allowance for impairment losses 3, ,292 Securities - 129,569 Investments in subsidiaries and associates 43, Other assets 14 7,735 Liabilities Deposit from other banks and other borrowed funds - 2,202 Deposit from customers 2,302 5,999 Other liabilities Income Statement Interest and similar income ,725 Interest expense and similar charges

33 26. RELATED PARTIES (CONTINUED) The balances arising from transactions with related parties were as follows in 2005 : Subsidiaries and associates Other related parties Assets Cash and balances with the National Bank of Hungary - 7,765 Loans and advances to customers, net of allowance for impairment losses 3, ,025 Securities - 74,653 Investments in subsidiaries and associates 52, Other assets 34 25,899 Liabilities Deposit from other banks and other borrowed funds 1, Deposit from customers 10,057 6,252 Other liabilities 105 7,465 Income Statement Interest and similar income ,800 Interest expense and similar charges KEY MANAGEMENT PERSONNEL COMPENSATION The key management personnel compensation in 2005 were as follows : Members of the Board of Directors 33.7 Members of the Supervisory Board 22.0 CEO-s and deputy CEO-s Total :

34 28. FOREIGN CURRENCY BALANCE SHEET AND CURRENCY RISK ANALYSIS The foreign currency balance sheet was as follows as at 31 December 2005 : HUF EURO Other foreign currency Total Assets Cash and balances with the National Bank of Hungary 7, ,964 Placements with other banks 125,859 26, ,054 Loans and advances to customers, net of allowance for impairment losses 355,395 97,911 3, ,696 Securities 75,947-2,146 78,093 Investments in subsidiaries and associaties 53, ,382 Other assets 27, ,127 Fixed assets 5, ,714 Total assets (1) 650, ,772 5, ,030 Liabilities Deposits from other banks and other borrowed funds 45, ,173 7, ,036 Deposits from customers 55,681 6, ,257 Issued securities 17, , ,576 Financial instruments for hedging Other liabilities 11,892 5, ,403 Total liabilities 131, ,951 7, ,370 Subordinated liabilities 9, ,500 Shareholder's equity 117, ,160 Total liabilities and shareholder's equity (2) 257, ,951 7, ,030 Net Exposure (1) (2) 392,959 (391,179) (1,780) - Commitments and Contingent Liabilities 127,147 18, ,886 Net foreign currency position at 31 December ,106 (372,440) (1,780) - The main lines of foreign currency balance sheet was as follows as at 31 December 2004 : HUF EURO Other foreign currency Total Total assets (1) 510,090 88,281 7, ,275 Total liabilities and shareholder's equity (2) 219, ,057 1, ,275 Net Exposure (1) (2) 290,193 (296,776) 6,583 - Commitments and Contingent Liabilities 115,005 17, ,175 Net foreign currency position at 31 December ,198 (279,606) 6,583 - Foreign exchange rates applied in the above table were as follows as at 31 December 2005: HUF/USD (2004: HUF/USD) and HUF/EUR (2004: HUF/EUR). 32

35 29. MATURITY STRUCTURE OF ASSETS AND LIABILITIES The maturity structure of assets and liabilities were as follows as at 31 December 2005 : Up to 1 Month 1 to 3 Months 3 Months to 1 Year 1 to 5 Years Over 5 Years Without maturity Assets Cash and balances with the National Bank of Hungary 3, ,875 7,964 Placements with other banks 28,888 3,666 15,575 67,439 36, ,054 Loans and advances to customers, net of allowance for impairment losses 21,436 70, ,852 87,505 81, ,696 Securities ,090 44,247 19,256-78,093 Investments in subsidiaries and associaties ,382 53,382 Other assets , ,127 Fixed assets ,714 5,714 Total assets (1) 53,413 74, , , ,244 63, ,030 Liabilities Deposits from other banks and - other borrowed funds 21,224 12,656 3, ,135 95, ,036 Deposits from customers 25,567 13,863 15,921 6, ,257 Issued securities ,729 17, ,576 Financial instruments for hedging Other liabilities , ,403 Total liabilities 46,791 26, , ,398 96, ,370 Subordinated liabilities , ,500 Shareholder's equity , ,160 Total liabilities and shareholder's equity (2) 46,791 26, , ,898 96, , ,030 MISMATCH (1) - (2) 6,622 48, ,247 (145,707) 40,979 (53,189) - Total The maturity structure of assets and liabilities were as follows as at 31 December 2004 : Up to 1 Month 1 to 3 Months 3 Months to 1 Year 1 to 5 Years Over 5 Years Without maturity Total assets (1) 63,930 42,838 61, , ,286 50, ,275 Total liabilities and shareholder's equity (2) 54,545 1,566 23, ,274 48, , ,275 MISMATCH (1) - (2) 9,385 41,272 37,923 (93,345) 61,615 (56,850) - Total 33

36 30. INTEREST RISK REPRICING ANALYSIS The repricing of assets and liabilities were as follows as at 31 December 2005 : Up to 1 Month 1 to 3 Months 3 Months to 1 Year 1 to 5 Years Over 5 Years Not interest bearing Assets Cash and balances with the National Bank of Hungary 7, ,964 Placements with other banks 146,652 1, , ,054 Loans and advances to customers, net of allowance for impairment losses 24, , ,230 46,995 21, ,696 Securities ,090 44,247 19,256-78,093 Investments in subsidiaries and associaties ,382 53,382 Other assets , ,127 Fixed assets ,714 5,714 Total assets (1) 179, , ,487 95,385 41,156 59, ,030 Liabilities Deposits from other banks and other borrowed funds 199, ,071 18,777 1, ,036 Deposits from customers 26,029 14,073 15,930 6, ,257 Issued securities ,729 17, ,576 Financial instruments for hedging Other liabilities , ,403 Total liabilities 225, , ,839 25, ,370 Subordinated liabilities , ,500 Shareholder's equity , ,1605 Total liabilities and shareholder's equity (2) 225, , ,839 35, , ,030 MISMATCH (1) - (2) (46,811) (59,256) 62,648 60,327 41,156 (58,064) - Total The repricing of assets and liabilities were as follows as at 31 December 2004 : Up to 1 Month 1 to 3 Months 3 Months to 1 Year 1 to 5 Years Over 5 Years Not interest bearing Total assets (1) 137, ,829 77, ,180 44,455 50, ,275 Total liabilities and shareholder's equity (2) 170, ,615 21, ,167 10, , ,275 MISMATCH (1) - (2) (33,404) 21,214 56,635 (1,987) 34,081 (56,851) - Total 34

37 31. TABLE OF FAIR VALUE Carrying amount Fair value Assets Cash and balances with the National Bank of Hungary 7,964 7,964 Placements with other banks 152, ,054 Loans and advances to customers, net of allowance for impairment losses 456, ,918 Securities 78,093 78,093 Investments in subsidiaries and associates 53,382 53,382 Other assets 28,127 28,127 Fixed assets 5,714 5,714 Total assets (1) 782, ,252 Liabilities Deposits from other banks and other borrowed funds 444, ,036 Deposits from customers 62,257 62,257 Issued securities 131, ,576 Financial instruments for hedging Other liabilities 17,403 17,403 Total liabilities 655, ,370 Subordinated liabilities 9,500 8,290 Shareholder's equity 117, ,592 Total liabilities and shareholder's equity (2) 782, , RECONCILIATION OF OWNERS EQUITY DIFFERENCES BETWEEN HUNGARIAN ACCOUNTING REGULATIONS AND IFRS Equity 31 December 2004 Net income for 2005 Statutory Reserves Retained earnings Equity 31 December 2005 Hungarian financial statements ( HFS ) 105,492 6,077 1, ,467 Reclassification of general risk reserve General risk reserve (600) - General reserve - 1,898 - (1,898) - Valuation of financial instruments 1,973 (4,692) - 5,812 3,093 Dividend for the year ,000 - (11,000) - Deferred tax International financial statements 107,465 14,883 2,498 (7,686) 117,160 35

38 33. RECONCILIATION OF THE OWNERS EQUITY AND PROFIT BEFORE TAXATION IN THE HUNGARIAN AND IFRS FINANCIAL STATEMENTS Profit Equity before tax Hungarian financial statement Reclassification and charge of general risk reserve into equity Reclassification of the releases of impairment on investments into equity Reclassification of the releases of impairment on available for sale securities into equity Reclassification of the amortization of available for sale securities Opening balance of the revaluation of available for sale securities from Adjustment on available for sale securities revaluation in Effect of the revaluation of the Hungarian National Bank bonds and the related interest rate swap Adjustment on other financial instruments International financial statements The main part of the difference of the equity and the profit before tax between the Hungarian and the International Financial Statements is explained with the fact, that certain items mentioned in the above table shall be accounted in the financial statements prepared in accordance with IFRS directly to the equity and these do not appear in the Profit and Loss Statement. 34. EVENTS AFTER THE REPORTING DATE Decision on expanding the tasks of the Hungarian Development Bank In collaboration with the Hungarian Government, the Bank elaborated its concept for the further centralization of state-owned aid intermediation organisations, under which the goal is to create a "one-stop shop" framework for businesses on a regional level. The aim of this centralization is for EU funding to be received and channelled on through one institution. The operation of Hitelgarancia Rt., an institution which represents one of the main elements of the guarantee system stimulating financing and reducing risks, will be integrated more into the MFB Group. One of the objectives of the programme is to combine the individual public institutions that deal with investments in order to create a more transparent and cost-efficient organisation. Agreement on bond issue There are some major tasks to be completed within the framework of the Bank's funding activity in The Bank has to raise the highest level of funding in its 36