CONTENTS OPERATING ENVIRONMENT OF MFB ZRT. IN MFB HUNGARIAN DEVELOPMENT BANK PRIVATE LIMITED COMPANY...15 RESULTS OF MFB ZRT...

Transcription

1 ANNUAL REPORT 2016

2 CONTENTS OPERATING ENVIRONMENT OF MFB ZRT. IN MFB HUNGARIAN DEVELOPMENT BANK PRIVATE LIMITED COMPANY...15 RESULTS OF MFB ZRT...19 INDEPENDENT AUDITOR S RIPORT...21 BALANCE SHEET (ASSETS AND LIABILITIES) AND OFF-BALANCE-SHEET ITEMS...34 PROFIT AND LOSS ACCOUNT...36 UNCONSOLIDATED STATEMENT OF FINANCIAL POSITION ACCORDING TO INTERNATIONAL FINANCIAL REPORTING STANDARDS...37 UNCONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME ACCORDING TO INTERNATIONAL FINANCIAL REPORTING STANDARDS...38 RECONCILIATION OF OWNERS EQUITY DIFFERENCES BETWEEN HUNGARIAN ACCOUNTING STANDARDS AND IFRS...39 DEVELOPMENTS IN BUSINESS ACTIVITIES...40 LENDING OPERATIONS...41 ESTABLISHING OF MFB POINTS...43 EXPANSION OF THE MFB POINT SALES NETWORK...43 CUSTOMER SERVICE...44 LENDING FROM MFB OWN FUNDS...45 EUROPEAN UNION GINOP AND VEKOP PROGRAMMES...48 FUNDING...49 COMPLIANCE...50 COMMUNICATION, SPONSORSHIP AND SCHOLARSHIPS...50 THE MFB GROUP...52 MFB ZRT. S BOARD OF DIRECTORS...55 MFB ZRT. S SUPERVISORY BOARD

3 COMPANY OPERATING ENVIRONMENT OF MFB ZRT. IN 2016

4 The growth rate of global economy decreased further in In these slowdown developments indicating the moderating dynamics of world trade and the strengthening of protectionism played a decisive role. In developed economies the rate of growth decreased in spite of the low interest rate environment and inflation, as well as the liquidity abundance, while the group of emerging economies grew at an essentially unchanged rate, with even the rate of conjuncture slowing down in China. The newer year-end tightening of the American monetary policy was implemented after an appropriate communication preparation, thus it did not cause any turbulence, and the increasing intensity of purchase of assets by the European Central Bank played an ever increasing role in maintaining the liquidity abundance. In Hungary, the economic growth continued, however, its rate slowed down compared to As regards the components of growth, on the expenditure side household consumption remained emphasized, while on the production side the services sector gained a dominant weight. In the international interest rate environment and in the low-inflation environment the stimulation by the central bank gained new momentum. The exchange rate of Hungarian Forint against the Euro remained relatively stable, while the main index of the Budapest Stock Exchange increased, and the yields on government bonds further declined in Developments in the global real economy In 2016, the growth of the global economy slowed down to 3.1% compared to 3.2% of the past year, being the lowest rate since The reason for the slowdown of growth is the fact that the accumulated GDP growth rate of developed economies dropped from 2.1% to 1.6%, and the average growth rate calculated for the emerging and developing economies remained 4.1%. In 2016, the growth rate of global trade decreased from 2.7% to 1.9%, being a seven-year low point. In a global economy turning towards protectionism, with the declining growth of global trade, one of the important growth driving factors of previous years, further exploiting of comparative and competitive advantages also declined, which had a slowing effect on the growth of global economy as well. GDP growth (year-on-year, %) USA China Eurozone Germany Czech Republic Poland Romania Slovakia Hungary Source: IMF, BEA, Eurostat 4

5 In 2016, inflationary pressure temporarily remained moderate in the world economy and promoted consumption. Consumer prices increased by 2.9% on average, and this rate exceeded that of the previous year by 0.1 percentage point. The increase of the prices was slowed by the fact that oil prices further fell in yearly average (in 2016, the daily price of Brent crude oil on the world market was 43.8 USD/barrel on average, this being 16.4% lower than one year before). However, during the year the general trend of decreasing crude oil prices observed in the past few years stopped, the price of 55.2 USD/barrel at year-end 2016 was 51.6% above that of the beginning of the year. The stabilisation of oil prices also contributed to the increase in the prices of industrial raw materials and agricultural raw materials during the year (+12.9% and +1.1%, respectively). The eurozone being of key importance for the Hungarian economy in 2016 showed a growth of 1.7% after the growth of 2.0 in In most of the Member States the gross domestic product (GDP) was up, only Greece had a stagnating economy. On the production side the services sector was the engine of growth, contributing to the economic growth with 1.2 percentage points. The dynamics of the industry contributed to the sectorial growth rate only with 0.3 percentage points, while the agrarian sector and the construction industry did not influence the growth substantially. On the expenditure side the gross fixed capital formation growing by 2.6% on an annual level and the consumption growing by 1.9% played an outstanding role, the latter had had a dynamics faster than this ten years earlier, in The dynamics of foreign trade declined considerably: the merchandise and services export grew only by 2.9% and the import by 3.5%. Foreign trade was also hindered by the fact that in June the population of Great Britain decided to leave the EU, and that the European American free trade negotiations stopped without any results. In the euro area, to the economic growth of 2016, consumption contributed with 1.5 percentage points, gross fixed capital formation by 0.5 percentage points, while the net exports limited GDP growth by 0.1 percentage points. As a result of the economic growth, unemployment rate in the eurozone declined from 10.9% to 10.0%, however, in Greece the proportion of the unemployed remained above 20%. Consumer prices were characterised by stability, the annual inflation rate increased from the 0.0% of 2015 to 0.2% in The gross public debt expressed as a percentage of GDP decreased, its rate fell during one year from 92.6% to 91.5%, after the state budget deficit expressed as a percentage of GDP declined from 2.1% to 1.7% in the eurozone countries. Considered to be the most significant economy within the eurozone, Germany showed a maintained momentum of growth, what is more, the rate of 1.7% of 2015 was followed by a growth of 1.9% in The industry grew by 1.6% similarly to the previous year, and the construction industry showed a growth of 2.8% after the decline of 0.2% in Also in the case of the German economy the importance of internal drivers increased: consumption and gross fixed capital formation were up by 2.5% and 2.3%, respectively (exceeding the level of the previous year by 0.3 and 0.6 percentage points, respectively), while merchandise and services export grew only by 2.6% after the dynamic growth of 5.2% in In the United States GDP increased only by 1.6%, being 1.0 percentage point less than in the previous year. The main cause of the slowing down is that the rate of household consumption declined from 3.2% to 2.7%, and residential investment was 1.6% down after the growth of 5.0% in the previous year. The economy of the USA seems to be more and more over the period of recovery from the crisis: on the one hand, the unemployment rate fell from 5.3% to 4.9% in one year, and, on the other hand, the annual average inflation rate increased to 1.3% from 0.1% of the previous year. The consolidation of the budget imbalances due to the crisis slowed down: the budget deficit expressed as a percentage of the GDP increased from 3.5% to 4.1% between 2015 and 2016, and thus the gross public debt expressed as a percentage of GDP reached 108.2% within one year, with an increase of 3.1 percentage points. 5

6 In 2016, the growth rate of the Chinese economy continued to decrease, the transitioning from the investment-driven growth to the consumption-driven growth caused the slowdown of GDP growth. After the economic growth of 6.9% in 2015, in 2016 the growth was 6.7%, being the lowest rate since In the economy that has become a decisive factor in the global economy the volume of merchandise and services export increased by 1.9%, being a progress after the same rate of decrease in the previous year, however, this is only a fragment of the annual average growth between 2000 and 2015, being 15.5%. Developments on the international financial market In 2016, money and capital market trends were shaped by the expectation regarding the persistence of the global economic boom, the political developments influencing the growth of the global economy, and the monetary policy measures influencing global liquidity. The climate and liquidity position on the international markets essentially remained favourable in 2016, which drove asset prices upward. In the USA and in the eurozone the directions of the monetary policies remained different as a whole. The Fed (acting as the central bank of the USA) according to its former indications and in line with market expectations announced in December the rise of the policy rate from % to %, being an increase of 25 base points. However, the European Central Bank (ECB) decided to implement further stimulating measures. In March, it decreased the deposit interest rates by 10 base points to -0.40%, the base rate by 5 base points to 0.00%; as of April, it increased the monthly asset purchase budget from EUR 60 billion to EUR 80 billion, including EUR-denominated investment grade corporate bonds as well; and effective as from June, it announced four targeted long-term financing operations (LTRO) for commercial banks. In December, the ECB extended its asset purchase programme by nine months, until the end of 2017, however, the limitation of the volume of monthly asset purchases to EUR 60 billion effective as from April 2017 can be considered as the first step towards the tapering. On 23 June, a referendum took place in Great Britain, and the majority of the voters opted for leaving the European Union. Based on this and following the slowdown of the economy of the country, in August, the Bank of England reduced the base rate to a record low level, by 0.25 base points, to 0.25% and increased its bond purchase programme of GBP 375 billion to GBP 435 billion. The Swiss Central Bank did not change the monetary conditions in 2016, thus the target range (-1.25% to -0.25%) for the three-month interbank rate remained unchanged. Central bank rates and interbank rates (3-month) Interbank rates (3-month) and interest rates on corporate loans (minimum 5-year) 1.50% 4% 1.00% 3% 0.50% 2% 0.00% 1% -0.50% 0% Fed base rate USD LIBOR ECB base rate EURIBOR MNB base rate BUBOR -1% BUBOR EURIBOR EUR credit Eurozone HUF credit Hungary Sources: NBH, ECB, Fed, Reuters Sources: NBH, ECB, Reuters 6

7 From the interbank interest rates the 3-month dollar LIBOR during the first half of the year floated between 0.61 and 0.69% with a relatively low volatility, then in the second half of the year, due the rising expectations of a monetary tightening and with the increase of the policy rate of Fed in December it increased to 1.00%, a record level in a seven and a half year period. On the European interbank market as a result of the monetary stimulating measures, the 3-month EURIBOR by the end of 2016 gradually decreased to -0.32% from -0.13% at the beginning of the year. In the eurozone, corporate credit interest rates continued to decrease; the average interest rates on loans with at least 5-year maturities decreased from 2.69% of the end of 2015 to 2.39% by December In the euro area, following the decrease in the previous years, the corporate credits were stable; at the end of 2016, corporate loans were 0.6% higher than the level in the previous year. The exchange rates of key foreign currencies were continued to be influenced mainly by the relatively favourable investment appetites, liquidity abundance and monetary policy developments. The exchange rate of euro vis-à-vis USD was continuously strengthening until the middle of 2016, although with a significant volatility. This tendency stopped in May, and after the shock caused by Brexit the dollar was definitely strengthening vis-à-vis euro as a whole until the end of the year, with smaller and larger fluctuations. In 2016, as a whole, the common European currency lost 2.9% of its value vis-à-vis USD, and closed the year at the level of 1.05 USD/EUR. The exchange rate of the Swiss currency vis-à-vis euro mostly followed the changes in the USD/EUR course in 2016, i.e. in the first half of the year, the common European currency became stronger, than the second part of the year was characterised by the appreciation of the Swiss currency considered as a safe haven. The currency rate at the end of 2016 (1.07 CHF/EUR) meant as a whole an appreciation of the Swiss currency against the euro by 1.4%. Real economic developments in Hungary The growth of the Hungarian economy restarted in 2013 continued also in 2016, however, the rate shows a gradual slowdown since In 2014 and in 2015, the gross domestic product grew at a rate of 4.0 and 3.1%, respectively, then in 2016, the growth was 2.0%. Data adjusted for seasonal and calendar effects suggest that, in the first two quarters of 2016, the economy grew at an annual level by 1.3% and 2.3%, respectively, then in the following quarters, the rate of growth fell back to 2.0% and 1.5%, respectively. The slowdown of the dynamics was confirmed also by the responses of the enterprises in Hungary in the corporate survey performed in the autumn of 2015, named MFB INDICATOR and including questions also about the future. The GDP figure of 2016 is in a medium position concerning the Member States, however, considering the countries of the region it qualifies as being low (Czech Republic: +2.4%, Poland: +2.8%, Slovakia: +3.3%, Romania: +4.8%). Considering the production side of GDP, the output of agrarian sector increased by 16.8% due to the low base of the previous year, and the output of the construction industry fell by 17.9%. Industry showed a growth of 0.8%, and the services sector a growth of 3.0%. The dynamics of the secondary sector slowed significantly (-7.4 percentage points), however, the services sector grew 1.3 percentage point faster than in the previous year, mainly due to the strengthening of domestic demand. As for year 2016, on the whole, the agrarian sector, the industry and the services sector contributed to economic growth by 0.6, 0.2, and 1.6 percentage points, respectively, and the construction sector slowed it by 0.6 percentage points. 7

8 Contribution to Hungarian GDP growth (year-on-year) (production side) 5.0 6% 2.5 3% percentage points % -3% -6% % After a 3.1% increase in the preceding year, actual household consumption increased by 4.2% in The growth of consumption was helped by several factors, among others the increase of real wages, fuel prices starting to increase after a low level only at the end of the year, the increasing employment, and the continued relatively strong consumer confidence. For the time being, lending does not provide an additional momentum for the growth of consumption: loans provided to households further decreased within one year from HUF 5,886.3 billion to HUF 5,736.5 billion (-2.5%). The engine of the growth of the Hungarian economy from the expenditure side were the household consumption and the net exports, contributing to the economic growth by 2.5 and 0.6 percentage points, respectively. The role of community consumption was neutral, and the gross fixed capital formation held back the annual GDP growth by 3.3 percentage points. Contribution to Hungarian GDP growth (year-on-year) (expenditure side) % % % Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Agriculture Manufacturing Service provision sector Building industry GDP growth (RHS) Sources: HCSO, MFB percentage points % -2.5% -5.0% -7.5% % % % Final consumption in total Net export Gross capital formation GDP growth (RHS) Sources: HCSO, MFB 8

9 The Hungarian foreign trade sector remains to be a key driver of the Hungarian economy. Merchandise and services export grew by 5.8%, and the import by 5.7% on an annual level. The dynamics of export were in line with the average of the region, and as regard the EU, as a whole belonged to the upper third segment. The balance of trade closed the year with a record high (HUF 3,094.3 billion) surplus. The developments of trade balance in Hungary HUF billion Sources: HCSO, MFB During the quarters, the annual level dynamics of gross fixed capital formation were characterised by a decrease, and the decline in 2016 reached a total of 15.5% compared to the previous year. The rate of gross fixed capital formation expressed as a percentage of GDP decreased from 22.8% of the previous year to 18.9% being under the average of the region. The volume of Hungarian investments was 20.0% lower than in the previous year. Corporate investments were slowed down due to the transitional period between the end of the development funds of the EU financial period and the funds provided in the period, the corporate developments brought forward in view of the Funding for Growth Scheme, the high base level of 2015, and the decreasing investment appetite observed during the corporate surveys conducted by MFB Zrt. in 2015 (MFB INDICATOR). In the enterprise sector, the level of investments decreased by 8.9% and in the public sector by 62.7%, compared to the previous year. Broken down by sectors, the volume of investments decreased in the agrarian sector, in the construction industry and in the majority of the branches of the services sector compared to 2015, while in the manufacturing there was an increase. Construction investments were below the level of machinery procurement investments in 2016, and the former decreased by 31.7%, and the latter by 6.6% compared to the previous year. The increasing uncertainty having been experienced in the investment plans in the autumn of 2014 then further aggravated by the autumn of 2015 stopped by the end of 2016, and the investment appetite increased, and it is expected to have an impact on investment figures as from According to the responses given by the enterprises, the increasing appetite for development and expansion was partly due to the broadening of the market sales opportunities as well as the lowering of various investment limits. 9

10 Volume of Hungarian investments (y/y) and the development of the Investment index* 80 30% 70 20% expected growth rate -10% 0% -10% -20% 20-30% * on a scale from 0 to 100, where a score of 50 means no change, while a lower score indicates a deteriorating economic situation and a higher score suggests improving economic situation and expectations The unemployment rate in the age group in 2016 was 5.1%, being a 1.7 percentage points decrease compared to During one year the activity rate increased by 1.2 percentage points to 61.1%, and the employment rate increased by 2.1 percentage points to 58.0%. In 2016 the number of employees grew by 2.9%: the headcount increased by 3.4% in the private sector and by 0.5% at the budgetary institutions. The strengthening demand for workforce is indicated by the fact that between January and December 2016, employers reported 3.6% more new non-subsidised jobs than a year before, whilst the number of new subsidised jobs decreased by 8.7%. The number of publicly employed people increased: in 2016, in a monthly average thousand publicly employed people were employed on the labour market, this figure being 5.5% higher than in the previous year. In 2016, gross and net average wages increased by 6.1 and 7.8%, respectively, thus the real value of net wages increased by 7.4% due to the moderate increase of consumer prices, after the increase of 4.3% in the previous year. Development of the activity, employment and unemployment rate (in the age group) 14% 13% 12% 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 61% 60% 59% 58% 57% 56% 55% 54% 53% 52% 51% 50% 49% 48% 47% points Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Investment (y/y, RHS) Sources: HCSO, MFB INDICATOR corporate surveys Investment index (shifted 2 quarters to the right, LHS) Unemployment rate (LHS) Employment rate (RHS) Activity rate (RHS) Sources: HCSO, MFB 10

11 In 2016, the process of deleveraging continued in the Hungarian economy. Based on the balance of payments data, the net financing capacity of the Hungarian economy was 5.5% of the GDP in the average of the last four quarters, as a result of the foreign trade surplus and the capital account showing a surplus due to the arrival of EU transfers. The financing capacity expressed as a percentage of GDP deteriorated by 2.6 percentage points, since as the new EU budgeting period started, the volume of EU funds temporarily slowed down. The general government balance expressed as a percentage of GDP was around 2.0% in Gross public debt, according to the preliminary data, amounted to 74.1% of the GDP at the end of 2016, which represents a 0.6 percentage point decrease in comparison with the preceding year. In 2016, consumer prices in Hungary increased by 0.4% on average. The price of market goods grew by an average of 0.4%, whilst products with controlled prices, representing nearly one-fifth of the basket of consumer goods, became 0.2% more expensive on average. The international development of oil prices further reduced the fuel prices: in 2016, there was a price reduction of 7.0% in this product group. The 12-month consumer price index fluctuated during the year: the consumer prices that were increasing in January at an annual level of 0.9% fell by 0.3% in July, then in December increased by 1.8% year-onyear. The movements of the price index during the year resulted from the fluctuation of fuel prices to a considerable extent. Annual and monthly changes in consumer prices in Hungary 10% 8% 6% 4% 2% 0% -2% -4% 2.5% 2.0% 1.5% 1.0% 0.5% 0% -0.5% -1% Sources: HCSO Year/year (LHS) Month/month (RHS) Developments of the Hungarian financial market The year 2016 was characterised by positive trends from the perspective of both foreign and domestic financing costs. The Monetary Council of the National Bank of Hungary exploiting the favourable international interest rate environment continued the monetary easing cycle to mitigate deflationary risks and stimulate growth. The base rate was reduced to a new record level from 1.35% to 0.90% in 15 base point steps between March and May. As far as financial market interest rates are concerned, the 3-month BUBOR rate fell from 1.35% at the beginning of the year to a year-end 0.37%. 11

12 In 2016, the yields of Hungarian government securities decreased, the yield curve shifted downwards and became steeper. The yield of 3-, 6- and 12-month discount treasury bills decreased by about base points during the year, the reference yield of 5- and 10-year government bonds decreased by 88 and 17 base points, respectively, and at the end of 2016, the yield was 1.67% and 3.16 %, respectively. The main index of the Budapest Stock Exchange in 2016 showed an increase of 33.8%, being similar to that of 2015 being 43.8%, thus maintained at a regional level its position as the stock exchange producing the most dynamic growth. The 10-year risk premiums for the Hungarian state being determinant also for the financing by the MFB Hungarian Development Bank from the 207 base points at the beginning of the year to the beginning of June gradually decreased to 182 base points, then as a result of the tension caused by Brexit, it temporarily jumped to 229 base points, and finally closed the year at 167 base points after further reduction. The international credit rating agencies classified the Hungarian government bonds into the investment-grade class, with stable outlooks. In 2016, Fitch was the first to improve the rating in May, followed by Standard & Poor s in September and by Moody's in November as regards the rating of the Hungarian sovereign FX-debt. Interbank rate (3-month BUBOR), interest rate on corporate loans (minimum 5-year) and country risk premium (10-year CDS spread) 5% 240 4% 220 3% 2% base points 1% 160 0% BUBOR (LHS) HUF credit (LHS) Sources: MNB, Reuters EUR credit (LHS) CDS 10-years (RHS) The central bank s interest rate cuts and the falling yield premium on Hungarian assets contributed to the weakening of the Forint, however, the relatively favourable global investment climate, the liquidity abundance, the surplus of the current account, the maintenance of fiscal discipline and the more favourable rating of the country helped to contain it. The exchange rate of the Forint against the Euro during the year moved in the range of HUF/EUR. Overall, the Forint strengthened by 1.9% against the Euro in 2016, and closed the year at an exchange rate of HUF/EUR. In 2016, after the changes in cross-currency rates, the Forint weakened by 1.3% compared to the US dollar and strengthened by 1.1% compared to the Swiss franc. The end-of-year exchange rates were at HUF/USD and HUF/CHF. 12

13 Exchange rate of the Hungarian forint against the US dollar, the Swiss franc and the Euro HUF/USD (LHS) HUF/CHF (LHS) HUF/EUR (RHS) Sources: ECB The gap between interest rates on Forint and Euro-denominated corporate loans narrowed further in The average interest rate on 1-5-year Forint loans was 2.92% on average, whereas that on loans with longer maturities was 3.15% in December, representing a decrease of 40 and 43 basis points on a year-on-year basis, respectively, while the average interest rate on 1-5-year Euro loans fell by 24 basis points and that on Euro loans with longer maturities by 35 basis points. (In December 2016, the average interest rates on Euro loans with maturities of 1-5 years and those with at least 5 years were 1.82% and 2.08%, respectively). In the region, the costs of corporate funds further decreased with a difference between them becoming more and more reduced. The Hungarian interest rate level decreased below the regional average: interest rates on loans in the national currency with maturities of more than 5 years were 2.51% in Slovakia, 2.66% in the Czech Republic, 3.96% in Poland and 4.29% in Romania in December The decrease of credit portfolio of non-financial companies reached a milestone in 2016: the corporate loan portfolio of the Hungarian banking system, increased by HUF billion as a result of transactions, and taking the change in the exchange rate into account, it decreased as little as by 0.2% (HUF 12.4 billion) in The portfolio of loans lent to local governments following the debt assumption by the State increased by 21.2% (HUF 6.6 billion) from the low base level. Based on the MFB INDICATOR corporate survey, the financial situation of Hungarian companies improved in 2016, and the demand for resources slightly increased. The improved willingness to raise funds was also due to the increased investment appetite, and the expectations regarding the broadening of the credit portfolio indicated by the responses. However, the more dynamic credit use was hindered by the fact that the companies experienced a slight strengthening in the credit application limits based on the feedback received in In the autumn of 2016, similarly to the situation of 12 months earlier, the amount of collaterals required by the banks was the main limit for the credit use by companies, followed by the type of collaterals and the interest rate level. 13

14 Hungarian businesses' fund raising plans for the upcoming 12 months (distribution of businesses) Winter 2009 Summer Spring Autumn Spring Autumn 2012 Spring Autumn Spring Autumn Autumn Autumn % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Definitely will not plan to raise funds Will wait with raising funds Plans to raise funds, definitely Not likely to plan to raise funds plan to raise funds, likely Sources: MFB INDICATOR corporate surveys In the autumn of 2016, MFB Zrt. conducted the thirteenth MFB INDICATOR, a corporate survey launched in the summer The aim of the survey is to provide, through the analysis of responses, a comprehensive picture of the key macroeconomic and market trends affecting Hungarian businesses, as well as their financing and investment needs, and their experiences, future plans and limitations in this field. The companies participating in the survey are representative of the Hungarian corporate structure in terms of size, regional location and sectoral distribution, thus enabling conclusions to be drawn from these perspectives as well. The MFB INDICATOR conjuncture index is based on the responses by the companies. The indicator comprises four indices (Macroeconomic Index, Market Index, Financing Index and Investment Index) and two sub-indices (Domestic Sub-index and Foreign Subindex) calculated from the average of the businesses individual indices, weighted by the respective contributions of the economic sectors (agriculture, industry and services) to the GDP. The value of the MFB INDICATOR is the arithmetical average of the four indices. The indicator, the indices and the sub-indices have been developed so as to reflect the participating businesses assessment of the current situation and their expectations regarding the future (the upcoming 12 months). The survey has a time horizon of +/- 12 months, which means that it includes questions about the changes that occurred in the past year and the trends expected in the upcoming year. The values of the indices are expressed on a scale from 0 to 100, where a score of 50 means no change, while a lower score indicates a deteriorating economic situation and a higher score suggests improving economic situation and expectations. Plan data figuring in the Annual Report may differ from actual ones. 14

15 MFB HUNGARIAN DEVELOPMENT BANK PRIVATE LIMITED COMPANY

16 NAME OF THE COMPANY MFB HUNGARIAN DEVELOPMENT BANK PRIVATE LIMITED COMPANY (short name: MFB Zrt.) REGISTERED SEAT H-1051 Budapest, Nádor u. 31. DATE OF ESTABLISHMENT 1. DECEMBER 1991 LEGAL FORM PRIVATE LIMITED COMPANY OWNER Hungarian State (100%) SHAREHOLDER S RIGHTS ARE EXERCISED BY MINISTER RESPONSIBLE FOR HARMONISING GOVERNMENTAL ACTIVITIES (EXERCISING THE RIGHTS OF FOUNDER/OWNER) Chairman and CEO TAMÁS BERNÁTH SUBSCRIBED CAPITAL HUF billion NUMBER AND NOMINAL VALUE OF SHARES 114,500 REGISTERED ORDINARY SHARES IN CERTIFIED FORM, EACH WITH A NOMINAL VALUE OF HUF 1,000,000, TOTALLING HUF 114,500,000,000 SCOPE OF ACTIVITIES TEAOR OTHER MONETARY INTERMEDIATION TEAOR FINANCIAL LEASING TEAOR OTHER FINANCIAL INTERMEDIATION N.E.C. COMPANY REGISTRATION NUMBER (COMPANY COURT OF THE BUDAPEST-CAPITAL REGIONAL COURT) CENTRAL BANKING SUPERVISION LICENSE NUMBER 32/1993. NATIONAL FINANCIAL AND CAPITAL MARKET SUPERVISION LICENSE NUMBER 973/1997/F WEBSITE 16

17 STATUS MFB Hungarian Development Bank Private Limited Company (hereinafter MFB Zrt. or Bank ) is a sole-member private limited company with the legal status of specialised credit institution. The legal status, responsibilities and scope of activities of the Bank are determined by Act XX of 2001 on the Hungarian Development Bank Limited Company (the MFB Act ) as amended several times, the provisions of the Bank s Articles of Association, and the strategy approved by the Government and the owner. STATUTORY AND LEGAL PROVISIONS MFB Zrt. is a sole-owner limited company where the exclusive, 100% owner of the shares that embody the company is the Hungarian State pursuant to Act CXCVI of 2011 on National Assets, and point I of Annex 2 to the Act, which is a list of national assets of priority importance to the national economy that must be kept in state ownership. Any sale or use as security of the shares embodying the company is null and void. The shares of the company may not be transferred. The task of MFB Zrt. is to act within the scope of activities defined in Article 3 of the MFB Act and provide or assist in the provision of the development funds necessary for achieving the economic development objectives set out in the Government s medium and long-term economic strategy, while also adhering to the requirements of transparency, rationality, economy, efficiency and prudence. The objectives of the Hungarian State and the Government are either laid down in laws, or are communicated to MFB Zrt. via government decrees. As from 30 July 2016, the shareholder s (owner s) rights of the Hungarian State on the basis of 109/A a)-b) of Government Decree 152/2014 (VI. 6) on the Responsibilities and Powers of Members of the Government are exercised by the National Development Minister (hereinafter referred to as the person exercising the rights of owner) as the minister responsible for harmonising governmental activities. Pursuant to Points 2c. and 3a. of Government Resolution No. 1342/2016 (VII. 5.) on the appointment and tasks of the commissioner responsible for postal services and national financial services, instead of and acting on behalf of the person exercising the rights of owner the Founder's Decision can be issued by the commissioner responsible for postal services and national financial services. Within the frames of this, the decision is made on the election, appointment and remuneration of the members and chair of the Board of Directors and the Supervisory Board, and the Chief Executive Officer. MFB Zrt. is a publicly owned company, and is considered a company of priority importance to the national economy for the purposes of Act CXXII of 2009 on Increased Economy in the Operation of Publicly Owned Companies ( Public Companies Act ). The Public Companies Act regulates the following for the company: disclosure obligations, the number of members of the Board of Directors and Supervisory Board and the method of their election, the framework of the remuneration of senior officers, and the framework conditions of employees basic salaries, remuneration, performance requirements, period of notice and applicable severance payments. Act XXV of 2016 amending Act XX of 2001 on the Hungarian Development Bank Limited Company (the MFB Act ) as of 20 April 2016 deleted the Hungarofest National Event Management Non-profit Limited Liability Company from Annex I of MFB Act. With Act LXXXVI of 2016 amending Act XX of 2001 on the Hungarian Development Bank Limited Company the sphere of activities according to 2 of MFB Act was modified. Accordingly, MFB Zrt. can participate in directing, coordinating and con- 17

18 trolling the operation and management of the business associations directly or indirectly owned by them, and the business associations listed in Annex 1, as well as the business associations directly or indirectly owned by them, and can provide services to such business associations. In connection with that the new 3 (1a) of MFB Act determines the scope of services that can be provided by MFB Zrt. As regards investment units created during the implementation of the capital programmes named in Priority 8 of the Economic Development and Innovation Operational Programme (GINOP) and in MND Decree No. 64/2016 (XII. 28.) on the appointment of the entity exercising owner's rights above stateowned temporary investment units and investment units of venture capital funds to be established within the frames of venture capital programmes financed by the Economic Development and Innovation Operational Programme (GINOP), and in MND Decree No. 8/2016 (IV. 19.) on the appointment of the entity exercising owner's rights within the frames of the New Széchenyi Venture Capital Programmes, and becoming the property of the State, MFB Zrt. will be appointed as the entity exercising owner's rights. MFB Zrt. exercises owner's rights in enterprises listed in Annex 1 of MFB Act, and based on the authorization set forth in Act CVI of 2007 on State Property. FOREIGN CORRESPONDENT BANKS OF MFB ZRT. Bank Polska Kasa Opieki SA Citibank National Association Citibank National Association Commerzbank AG Mizuho Corporate Bank Ltd. Zürcher Kantonalbank Warsaw, Poland London, United Kingdom New York, United States of America Frankfurt, Germany Tokyo, Japan Zurich, Switzerland MFB ZRT. S MEMBERSHIPS IN INTERNATIONAL ORGANISATIONS Banking Association for Central and Eastern Europe (BACEE) European Association of Public Banks (EAPB) European Investment Fund (EIF) Network of European Financial Institutions for Small and Medium Sized Enterprises (NEFI) European Venture Fund Investors Network (EVFIN) European Long-Term Investors Association (ELTI) International Capital Market Association (ICMA) European Investment Advisory Hub (EIAH) MFB ZRT. S MEMBERSHIPS IN HUNGARIAN ORGANISATIONS Rural Credit Guarantee Foundation Budapest Chamber of Commerce and Industry Garantiqa Creditguarantee Co. Ltd. Federation of Management and Scientific Associations Hungarian Banking Association Hungarian Forex Association Hungarian Facility Management Society 18

19 RESULTS OF MFB ZRT. 19

20 An economic policy role in transition In 2016 the Bank started to develop its new mid-term strategy, set the strategic goals to achieve and determined the financial, economic and personal conditions required for that. The objective is to establish a group that serves the government development policy guidelines effectively and operates within a cost-efficient, transparent organisational structure. Mediation of European Union resources In the distribution of European Union resources, the Bank performs the tasks of a fund of funds implementing organisation. In accordance with the Government decree on the establishment of the MFB Zrt. sales network, beginning from the end of clients can apply for the financial instruments of the programming period through 442 MFB points. By the end of 2016, MFB published the announcements of 10 loan programmes and 1 venture capital programme, and started to receive loan applications. Streamlining the portfolios Following the intense portfolio-streamlining process closed in 2015, the selling of bad debts continued in 2016 as well, and as a result the amount of non-performing loans was further reduced. Interest rate environment The effectiveness of MFB Zrt. was influenced by the low interest rate environment, the value of net interest income was around the same level as last year, as regards the order of magnitude. Positive result Despite difficult external conditions, the Bank closed the year of 2016 with a positive result (profit). While maintaining the same level of net interest difference and bank costs, the dividend income after the shares increased significantly. 20

21 INDEPENDENT AUDITOR S RIPORT 21

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34 BALANCE SHEET (ASSETS AND LIABILITIES) AND OFF-BALANCE-SHEET ITEMS 34

35 Mfb hungarian development bank private limited company balance sheet and off-balance-sheet items prepared in accordance with hungarian accounting standard BALANCE SHEET Assets Base year 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 Shares and participating interests in affiliated companies Intangible assets Tangible assets Own shares Other assets Prepayments and accrued income in million HUF Year under review TOTAL ASSETS BALANCE SHEET Liabilities Base year 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 of which: repurchased stakes at par value Subscribed capital called but unpaid (-) Capital reserve General reserve Profit reserve (±) Tied-up reserves Revaluation reserve Profit or loss for the financial year (±) in million HUF Year under review TOTAL LIABILITIES OFF-BALANCE SHEET ITEMS Base year Contingent liabilities Commitments in million HUF Year under review Off-balance sheet commitments Off-balance sheet claims

36 PROFIT AND LOSS ACCOUNT PROFIT AND LOSS STATEMENT Base year 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 Value readjustments in respect of loans and advances and risk provisions for contingent liabilities and for (future) commitments /A Difference between formation and utilisation of general risk provisions 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 15. Profit or loss on ordinary activities Extraordinary income Extraordinary charges Extraordinary profit or loss (16-17) Profit or loss before tax (+15+18) Taxes on income Profit or loss after tax (+19-20) General reserve (±) PROFIT OR LOSS FOR THE FINANCIAL YEAR (21-22) in million HUF Year under review

37 UNCONSOLIDATED STATEMENT OF FINANCIAL POSITION ACCORDING TO INTERNATIONAL FINANCIAL REPORTING STANDARDS 31 December 2016 Cash and balances with the National Bank of Hungary Loans and advances to banks Loans and advances to customers Available-for-sale securities Held to maturity securities Investments Non-current asset held for sale Financial assets at fair value through profit or loss Derivative assets held for risk management Property, plant and equipment Intangible assets Current tax assets Other assets December 2015 TOTAL ASSETS Deposits from banks Deposits from customers Issued securities Financial liabilities at fair value through profit or loss Derivative liabilities held for risk management Provisions Current tax liabilities Deferred tax liabilities Other liabilities Total liabilities Share capital Share premium Statutory reserves Retained earnings Valuation reserve Total shareholder's equity Total liabilities and shareholder's equity Commitments and contingencies

38 UNCONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME ACCORDING TO INTERNATIONAL FINANCIAL REPORTING STANDARDS 1 January 31 December 2016 Interest and similar income Interest expenses and similar charges (30 783) (33 294) Net interest income Fee and commission income Fee and commission expenses (324) (585) Net fee and commission income / (expenses) (21) 2 Allowance for impairment losses of loans and advances (5 165) (5 075) Allowance for impairment losses of investments (71) (2 158) Gain / (loss) on sale/derecognition of investments - 14 Net income / (loss) from financial instruments at fair value through profit or loss (94) 238 Dividend income Net gain on foreign currency transactions and revaluation Other provision release, utilization Other income Other operating income General and administrative expenses (10 535) (11 395) Net loss on foreign currency transactions and revaluation (91) - Other expenses (812) (2 245) 1 January 31 December 2015 Other operating expenses (11 438) (13 640) Profit / (loss) before tax 229 (604) Income tax Net profit / (loss) for the year 836 (532) Other comprehensive income Items that are or may be reclassified to profit or loss Revaluation of available-for-sale financial assets (519) Deferred tax related to the revaluation of available for sale financial assets (126) 100 Net other comprehensive income (419) Total comprehensive income (951) 38

39 RECONCILIATION OF OWNERS EQUITY DIFFERENCES BETWEEN HUNGARIAN ACCOUNTING STANDARDS AND IFRS Equity 31 December 2015 Net profit for 2016 Statutory reserves Retained earnings Valuation reserve Equity 31 December 2016 Hungarian financial statements General reserve (36) - - General risk reserve (29) General risk reserve charged - (29) Revaluation of financial instruments 627 (102) Deferred tax (1 177) (570) Separate financial statements (6)

40 DEVELOPMENTS IN BUSINESS ACTIVITIES 40

41 LENDING OPERATIONS Lending operations of the Bank consist of: loans offered within the frames of the loan programmes, individual disbursements and guarantees. In 2016, the Bank approved loan applications totalling over HUF 148 billion, and the value of disbursements exceeded HUF 145 billion portfolio changes are shown in the table below 1 : Figures are in million HUF Opening portfolios Disbursement Repayment/ Sales Impact of foreign currency exchange rate Available budget Contracted budget not yet disbursed Loan programmes Individual loans, bonds Total Of which refinanced loans Of which direct loans In the table we include the loans disbursed to financial enterprises among the refinancing loans (Loans and advances to credit institutions), however, in the accounting balance sheets they are included in the category Loans and advances to customers. Furthermore, the table also includes the transferable debt securities. Loan Programmes At the end of 2016, the Bank is offering borrowing opportunities for three target groups: small and medium sized enterprises, local governments, agricultural businesses. The most important objective of the product development activities of the Bank in 2016 was to ensure that the loan products created from EU financial instruments and from own resources complement each other as much as possible and jointly cover the financing needs related to economy policy priorities. Own source loan products Following the announcement of the MFB-NHP Land Purchase Loan Programme in the autumn of 2015, the Bank implemented the programme successfully in 2016 (the programme is expected to be closed in March 2017). In order to ensure the success of the programme, a new, simplified credit assessment system and information technology system have been established, and the smooth sales and bank operative administration of the products with a significantly larger number of transactions compared to the previous business practice had to be ensured. Partly in accordance with the owner's expectations, and partly due to the changes in the business environment of the programme, the conditions of the product were amended several times during the year. The success of the loan programme is indicated by the fact that by 31 December 2016 the Bank accepted 4,479 credit applications in a total amount of HUF 118 billion. From this by the end of the year HUF 83 billion was already paid, and we expect the total amount of loans to exceed HUF 110 billion at the time of closing the programmes. 41