MERKANTIL BANK ZRT. CONSOLIDATED FINANCIAL STATEMENTS IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS ADOPTED BY THE EUROPEAN UNION

Transcription

1 CONSOLIDATED FINANCIAL STATEMENTS IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS ADOPTED BY THE EUROPEAN UNION FOR THE YEAR ENDED DECEMBER 31, 2006

2 CONTENTS Page Independent Auditors' Report 1 Consolidated Financial Statements prepared in accordance with International Financial Reporting Standards adopted by the European Union Consolidated Balance Sheet as at December 31, Consolidated Statement of Operations for the year ended December 31, Consolidated Statement of Cash Flows for the year ended December 31, Consolidated Statement of Changes in Shareholders Equity for the year ended December 31, Notes to Consolidated Financial Statements 731

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5 CONSOLIDATED BALANCE SHEET AS AT DECEMBER 31, 2006 Cash, due from banks and balances with the National Bank of Hungary 4 10,009 7,579 Interbank receivables 750 2,817 Loan and lease receivables, net of allowance for loan losses 5 319, ,281 Financial assets at fair value through profit and loss 4, Accrued interest receivable 2,722 2,212 Equity investments Securities heldtomaturity 7 1,403 2,853 Premises, equipment and intangible assets, net 8 9,367 6,369 Other assets 9 6,514 5,624 TOTAL ASSETS 355, ,169 Due to banks and deposits from banks , ,562 Deposits from customers 11 4,841 4,189 Issued securities 12 30,892 35,016 Accrued interest payable 2,914 3,093 Other liabilities 13 5,684 4,498 Subordinated loan TOTAL LIABILITIES 322, ,658 Share capital 15 2,000 2,000 Retained earnings and reserves 16 30,503 24,511 TOTAL SHAREHOLDERS EQUITY 32,503 26,511 TOTAL LIABILITIES AND SHAREHOLDERS EQUITY 355, ,169 The accompanying notes to consolidated financial statements on pages 7 to 32 form an integral part of these consolidated financial statements 3

6 CONSOLIDATED STATEMENT OF OPERATIONS Interest income: Loans and lease receivables 29,071 24,622 Swap deals 6,056 Interbank receivables 302 1,152 Due from banks and balances with the National Bank of Hungary Held to maturity investments Total 35,986 26,158 Interest expense: Due to banks and deposits from banks 8,911 4,501 Deposits from customers Issued securities 1,348 1,884 Subordinated loan Total 10,496 6,691 NET INTEREST INCOME 25,490 19,467 Provision for loan losses 2,352 4,986 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 23,138 14,481 Noninterest income: Fees and commissions 2,105 1,202 Foreign exchange gains, net 345 Other income 17 3,781 1,335 Total 5,886 2,882 Noninterest expenses: Fees and commissions 5,953 5,160 Foreign exchange losses, net 3,627 Personnel expenses 2,689 2,438 Depreciation and amortization Other expenses 18 6,894 4,040 Total 19,907 11,951 INCOME BEFORE INCOME TAXATION 9,117 5,412 Income taxation 19 1,985 1,349 NET INCOME 7,132 4,063 Consolidated earnings per share (in Th) Basic and diluted 3,566 2,032 The accompanying notes to consolidated financial statements on pages 7 to 32 form an integral part of these consolidated financial statements 4

7 CONSOLIDATED STATEMENT OF CASH FLOWS OPERATING ACTIVITIES Net income 7,132 4,063 Adjustments to reconcile net income after income taxation to net cash provided by operating activities Depreciation and amortization Provision for loan losses 2,352 4,986 Provision for losses on offbalance sheet commitments, contingent liabilities and financial instruments 306 Provision/ (credit) for losses on other assets 150 Fair value adjustment of derivative financial instruments (4,406) (427) Net loss on disposals of premises, equipment and intangible assets (11) Deferred taxation (895) (945) Changes in operating assets and liabilities Decrease in accrued interest receivable (510) (1,057) Decrease /(Increase) in other assets, excluding deferred taxes 2,363 (1,348) (Decrease) /Increase in accrued interest payable (179) 118 Decrease in other liabilities, excluding deferred taxes (547) (439) Net cash provided by operating activities 6,054 5,709 INVESTING ACTIVITIES Increase in loans, before provision for loan losses (57,427) (75,756) Decrease in heldtomaturity 1,450 Decrease in equity investments 235 Additions to premises, equipment and intangible assets, net (3,742) (1,678) Net cash used in investing activities (59,719) (77,199) FINANCING ACTIVITIES Paid dividend (1,400) Permanent money transfer (1,140) Increase in due to banks and deposits from banks 60,707 72,827 Increase /(Decrease) in deposits from customers 652 (595) Decrease in liabilities from issued securities (4,124) (56) Decrease of compulsory reserve established by National Bank of Hungary 56 1,732 Net cash provided by financing activities 56,151 72,508 Net increase in cash and cash equivalents 2,486 1,018 Cash and cash equivalents at the beginning of the year 7,336 6,318 Cash and cash equivalents at the end of the year 9,822 7,336 Cash, due from banks 7,579 8,293 Complusory reserve established by the National Bank of Hungary (243) (1,975) Cash and cash equivalents as at January 1 7,336 6,318 Cash, due from banks 10,009 7,579 Complusory reserve established by the National Bank of Hungary (187) (243) Cash and cash equivalents as at end of period 9,822 7,336 The accompanying notes to consolidated financial statements on pages 7 to 32 form an integral part of these consolidated financial statements 5

8 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY FOR THE YEAR DECEMBER 31, 2006 Share Capital Retained Earnings and Reserves Total Balance as at January 1, ,000 21,848 23,848 Net income 4,063 4,063 Paid dividend (1,400) (1,400) Balance as at December 31, ,000 24,511 26,511 Balance as at January 1, ,000 24,511 26,511 Net income 7,132 7,132 Permanent money transfer to OTP Bank* (1,140) (1,140) Balance as of December 31, ,000 30,503 32,503 *: There were 1,140 million permanent money transfer provided to OTP Bank during These payments were not dividend, but do not meet the definition of expense under IFRS, therefore the transactions were considered to be payments to the shareholder and are recorded directly through retained earnings and reserves. The accompanying notes to consolidated financial statements on pages 7 to 32 form an integral part of these consolidated financial statements 6

9 NOTE 1: ORGANIZATION AND BASIS OF CONSOLIDATED FINANCIAL STATEMENTS 1.1 General Merkantil Bank Zrt. (the "Bank" or "Merkantil") was formed in 1988 and since autumn 1996 is a wholly owned subsidiary of OTP Bank Plc. ("OTP"). Merkantil got the permission from the Hungarian Financial Supervisory Authority (the PSZÁF ) as at December 19, 2002 to function as a bank according to Law on Banks and Financial Institutions CXII/1996. Prior that it functioned as a specialised financial institution. Merkantil is operating mainly in financing of car purchases, loans and lease, and also provides financing to the large car dealers in Hungary. The Bank s registered office address is 8 József Attila street, Budapest The Bank and its subsidiaries (together the Group ) provide a full range of leasing services, and have operations in Hungary, Bulgaria, Slovakia and Croatia. As at December 31, 2006, the number of employees at the Group was 399. The average number of employees for the one year period ended December 31, 2006 was Accounting The Group maintains its accounting records and prepares its statutory accounts in accordance with the accounting, commercial, banking and fiscal regulations prevailing in Hungary and in case of foreign subsidiaries in accordance with the local commercial, banking and fiscal regulations. The Group s functional is the Hungarian Forint (""). Some of the accounting principles prescribed for statutory purposes are different from those generally recognized in international financial markets. Certain adjustments have been made to the Bank s Hungarian statutory accounts, in order to present the consolidated financial position and result of operations of the Bank in accordance with all standards and interpretations approved by the International Accounting Standards Board (IASB), which are referred to as International Financial Reporting Standards (IFRS). The consolidated financial statements have been prepared in accordance with IFRS as adopted by the European Union (the EU ). IFRS as adopted by the EU do not currently differ from IFRS as issued by the International Accounting Standards Board (IASB), except for portfolio hedge accounting under IAS 39 which has not been approved by the EU. As the Group does not apply portfolio hedge accounting under IAS 39, there is no impact on these consolidated financial statements, had it been approved by the EU at the balance sheet date. The official financial statement of OTP Bank parent company of Merkantil Bank is the consolidated financial statement prepared in accordance with IFRS. Though, Merkantil Group is consolidated in these financial statements, and these are issued separately. According to hungarian regulations, Merkantil Bank is a mother company which is not required to prepare separate consolidated financial statements. 7

10 1.2.1 The effect of adopting revised International Financial Reporting Standards effective from January 1, 2006 on the 2006 financial statements Effective from January 1, 2006 the Group has adopted all of the new and revised Standards 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 January 1, 2006, especially: Amendments to IAS 39. Financial Instruments: Recognition and Measurement in respect of cash flow hedge accounting and fair value option (effective January 1, 2006); Amendments to IAS 39. Financial Instruments: Recognition and Measurement and IFRS 4 Insurance Contracts for financial guarantee contracts (effective January 1, 2006); Amendments to IAS 1 Presentation of Financial Statements on capital disclosures (effective January 1, 2007). The adoption of the above amendments had no significant impact on the 2006 consolidated financial statements. Revisions to a number of other IFRS also took effect in the consolidated financial statements of the Bank, but those revisions concerned matters of detailed application which have no significant effect on amounts reported Changes in Accounting Policies arining from Adopting of New IFRSs and amendments to IASs effective January 1, 2007 At the date of authorisation of these financial statements, the following standards were in issue but not effective yet: IFRS 7. Financial Instruments: Disclosures (effective January 1, 2007); the introduction of new disclosures regarding capital in IAS 1 (effective January 1, 2007); new interpretations (IFRIC 7, 8, 9 and 10). The adoption of these standards and interpretations in the future periods is not expected to have a significant impact on the consolidated profit or equity. 8

11 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Significant accounting policies applied in the preparation of the accompanying consolidated financial statements are summarized below: 2.1. Basis of Presentation These consolidated financial statements have been prepared under the historical cost convention with the exception of certain financial instruments, which are recorded at fair value. Revenues and expenses are recorded in the period which they are earned or incurred. The presentation of consolidated financial statements in conformity with IFRS requires management of the Bank to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and their reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Future changes in economic conditions, business strategies, regulatory requirements, accounting rules and other factors could result in a change in estimates that could have a material impact on future financial statements Foreign Currency Translation Assets and liabilities denominated in foreign currencies are translated into at exchange rates quoted by the National Bank of Hungary ( NBH ), or if there is no official rate, at exchange rate quoted by OTP Bank as of the date of the consolidated financial statements. Income and expenses arising in foreign currencies are converted at the rate of exchange on the transaction date. Resulting foreign exchange gains or losses are recorded in the Consolidated Statement of Operations. Net differences resulting from translating foreign financial statements of consolidated subsidiaries are presented as an element of retained earnings and reserves in the Consolidated Balance Sheet Principles of Consolidation Included in the consolidated financial statements are the Bank s subsidiaries in which the Bank has control. The list of the fully consolidated subsidiaries and the percentage of the issued capital owned by the Bank is provided in Note 6. Significant intercompany transactions during the year and balances at the year end are eliminated on consolidation Accounting for acquisitions Upon acquisition, subsuduaries are accounted for under the purchase method of accounting. The Group, according to IFRS 3 Business Combinations, any goodwill or negative goodwill arising on acquisition is recognized in the consolidated balance sheet. Goodwill, which represents the residual cost of the acquisition after recognizing the acquirer s interest in the fair value of the identifiable assets, liabilities and contingent liabilities acquired, is held as an intangible asset and recorded at cost less any accumulated impairement losses in the Consolidated Financial Statements. Goodwill acquired in a business combination is tested for impairement annually or more frequently if events or changes in circumstances indicate that it might be impaired. 9

12 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.5. Leases Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classifies as operating leases. The Group as a lessor Amounts due from lessees under finance leases are recorded as receivables at the amount of the Group s net investment in the lease. Finance lease income is allocated to accounting periods so as to reflect a constant rate of return on the Group s net investment outstanding in respect of the leases. Direct costs such as commissions are included in the initial measurement of the finance lease receivables. Rental income from operating leases is recognized on a straightline basis over the term of the relevant lease Factoring receivables The Bank purchases the receivables of car dealers and other domestic companies with recourse and collects the receivables from the original debtors. Factoring fees are recorded as income over the life of the related receivables Loans and allowance for loan losses Loans are stated at the principal amounts outstanding, net of allowance for loan losses. Interest is accrued and credited to income based on the principal amount outstanding. When a borrower is unable to meet payments as they become due or, in the opinion of the management, there is an indication that a borrower may be unable to meet payments as they come due, all accrued interest is reversed. The amount of provision is the difference between the carrying amount and the recoverable amount, being the present value of the expected cash flows, inclusing amounts recoverable from guarantees and collateral, discounted at the original effective interest rate. Provision for losses on loans represent management assessment for potential losses in relation to these activities. The level of allowances for loan losses is maintained to cover losses that have been specifically identified and for potential losses which may be present based on portfolio performance. Writeoffs are generally recorded after all reasonable restructuring or collection activities have taken place and the possibility of further recovery is considered to be remote. The loan is written off against the related account Provisions for loan losses in the Statement of Operations. If the reason for provisioning is no longer deemed appropriate, the redundant provisioning charge is released to income Securities heldtomaturity Investments in securities are accounted on a settlement date basis and are initially measured at fair value. At subsequent reporting dates, securities that the Group has the expressed intention and ability to hold to maturity (heldtomaturity securities) are measured at amortized cost, less any impairment losses recognised to reflect irrecoverable amounts. The annual amortisation of any discount or premium on the acquisition of a heldtomaturity security is aggregated with other investment income receivable over the term of the investment so that the revenue recognised in each period represents a constant yield on the investment. Securities heldtomaturity comprise mainly securities issued by the Hungarian Government. 10

13 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.9. Premises, equipment and intangible assets Premises, equipment and intangible assets are stated at cost, less accumulated depreciation and amortization and impairment, if any. The depreciable amount (book value less residual value) of the noncurrent assets must be allocated over their useful life. Depreciation and amortization are computed using the straightline method or number of years method over the estimated useful lives of the assets based on the following annual percentages: Buildings 16% Machinery and equipment 950% Vehicles % Leased assets % Software % Property rights % Depreciation and amortization on premises, equipment and intangible assets commences on the day such assets are placed into service. At each balance sheet date, the Group reviews the carrying value of its tangible and intangible assets to determine if there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated to determine the extent (if any) of the impairment loss. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cashgenerating unit to which the asset belongs. Where the carrying value of premises, equipment and other tangible fixed assets is greater than the estimated recoverable amount, it is written down immediately to the estimated recoverable amount Interest income and interest expense Interest income and expense are recognised in the Consolidated Statement of Operations on an accrual basis. Revenue is recognised as the interest accrues using the effective interest method that is the rate that exactly discounts the estimated future cash receipts through the expected life of the financial instrument to the net carrying amount on the financial assets Fees and commissions Fees and commissions are recognised in the Consolidated Statement of Operations on an accrual basis Income taxes The annual taxation charge is based on the tax payable under fiscal regulations prevailing in the country where the company is incorporated, adjusted for deferred taxation. Deferred taxation is accounted for using the balance sheet liability method in respect of temporary differences between the tax bases of assets and liabilities and their carrying value for financial reporting purposes, measured at the tax rates that apply to the future period when the asset is expected to be realised or the liability is settled. 11

14 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] Offbalance sheet commitments, contingent liabilities and financial instruments In the ordinary course of its business, the Group has entered into offbalance sheet commitments such as guarantees, commitments to extend credit and letters of credit and transactions with financial instruments. The provision for losses on commitments and contingent liabilities is maintained at a level adequate to absorb probable future losses. Management determines the adequacy of the allowance based upon reviews of individual items, recent loss experience, current economic conditions, the risk characteristics of the various categories of transactions and other pertinent factors. The Group recognises an allowance when it has a present obligation as a result of a past event; it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and a reliable estimate can be made of the obligation Derivative financial instruments In the normal course of business, the Group is a party to contract for derivative financial instruments, which represent a very low initial investment compared to the notional value of the contract. The derivative financial instruments used include interest rate forward or swap agreements and forward and swap agreements. These financial intruments are used by the Group to hedge interest rate risk and exposures associated with its transactions in the financial markets. Derivative financial instruments are initially measured at fair value and at subsequent reporting dates at fair value. Fair values are obtained from quoted market prices, discounted cash flow models and options pricing models as appropriate. Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognised in profit/loss and included in the Consolidated Statement of Operations for the period. All derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative Consolidated Statement of Cash Flows For the purposes of reporting consolidated cash flows, cash and cash equivalents include cash, due from banks and balances with the National Bank of Hungary, excluding compulsory reserve established by the National Bank of Hungary Segment reporting According to IAS 14: Segment reporting, segment information is required for enterprises, whose equity or debt securities are publicly traded and by enterprises that are in the process of issuing equity or debt securities on public securities markets. The Group is outside of the scope of segment reporting. 12

15 NOTE 3: SIGNIFICANT ACCOUNTING ESTIMATES AND DECISIONS IN THE APPLICATION OF ACCOUNTING POLICIES The presentation of financial statements in conformity with IFRS requires the management of the Group to make judgement about estimates and assumptions that effect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as at the date of the financial statements and their reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. Significant areas of subjective judgement include: 3.1. Impairment of Loans and Advances The Group regularly assesses its loan portfolio and given advances for possible impairment. Management determines the adequacy of the allowances based upon reviews of individual loans and placements, recent loss experience, current economic conditions, the risk characteristics of the various categories of loans and other pertinent factors. Provisioning involves many uncertainties about the outcome of those risks and requires the management of the Group to make many subjective judgements in estimating the loss amounts Provisions The Group is involved in a number of ongoing legal disputes. Based upon historical experience and expert reports, the Group assesses the developments in these cases, and the likelyhood and the amount of potential financial losses which are appropriately provided for. NOTE 4: CASH, DUE FROM OTHER BANKS AND BALANCES WITH THE NATIONAL BANK OF HUNGARY Cash In Due from other banks and balances with the National Bank of Hungary, due within one year In 7,674 4,666 2,226 2,755 10,009 7,579 Based on the requirements for compulsory reserves set by the National Bank of Hungary, the average balance of compulsory reserves maintained by the Bank amounted to 187 million and 243 million for December 2006 and 2005, respectively. 13

16 NOTE 5: LOAN AND LEASE RECEIVABLES, NET OF ALLOWANCE FOR LOAN LOSSES Loans 336, ,302 Allowance for loan losses (18,981) (16,629) Accrued commission paid to dealers 4,173 4,425 Accrual of received fees (1,535) (1,817) 319, ,281 The maturity of gross loans receivable is as follows: Within one year In 50,178 41,637 53,570 45, ,748 87,032 Over one year In 39,434 34, , , , ,270 Summary (loans within one year and over one year) 336, ,302 The Bank has had loan receivables denominated in foreign since April of The average interest rate on these loans was between 3.8% and 19.6% for the years ended December 31, 2006 and An analysis of the loan portfolio by type is as follows: 2006 % 2005 % Commercial loans 103,376 31% 133,381 48% Retail loans 232,765 69% 143,921 52% 336, % 277, % An analysis of the change in the allowance for loan losses is as follows: Balance as of January 1 16,629 11,874 Provision for loan losses 16,574 4,986 Write offs (14,222) (231) Balance as of December 31 18,981 16,629 14

17 NOTE 6: EQUITY INVESTMENTS Consolidated subsidiaries and other consolidated companies where the Bank has significant control are listed below. The companies in the Bank s interest are incorporated in Hungary, except for OTP Leasing a.s. (Slovakia), DSK Leasing a.d., DSK Auto Leasing EOOD (Bulgaria) and OTP Leasing d.d. (Croatia). Share (direct and Share (direct and indirect) indirect) Merkantil Car Zrt. 100 % 100 % Merkantil Bérlet Kft. 100 % 100 % Merkantil Ingatlan Lízing Zrt. 100 % 100 % SPLC Vagyonkezelő Kft. 100 % 100 % SPLCE Kft. 100 % 100 % Nimo 2002 Kft. 100 % 100 % SPLCBérlet Kft. N/a* 100 % SPLCB Kft. 100 % 100 % SPLCT1 Kft. 100 % 100 % SPLCN Kft. 100 % 100 % SPLCS Kft. 100 % 100 % SPLCP Kft. 100 % 100 % Suzuki Pénzügyi Szolg. Zrt. 50 % 50 % OTP Leasing a.s. 81 % 50 % DSK Leasing a.d. 50 % 50 % DSK Auto Leasing EOOD 100% OTP Leasing d.d. 100% * SPLC Bérlet Kft. has merged with Merkantil Bérlet Kft. in

18 NOTE 7: HELDTOMATURITY INVESTMENTS Government securities 1,403 2,853 Interest conditions of held to maturity investments can be analysed as follows: Within five years with 1,450 Over five years with 1,403 1,403 Total 1,403 2,853 Government securities include loan consolidation bonds ( 1,403 million as of December 31, 2006 and 2005, respectively). Loan consolidation bonds are issued by the Hungarian State, mature in 2013 and 2014 and are repriced semiannually to an interest rate equivalent to the 90day treasury bill yield for the preceding six months. 100% of the portfolio was denominated in as at December 31, 2006 and The interest rate of the over five years government securities were between 6.7% and 11.4%, average interest was 8.9% in the year ended at December 31, The interest rate of the over five years government securities were between 6.5% and 11.4%, average interest was 8.1% in the year ended at December 31, The interest rate of the within five years government securities were between 6.4% and 11.4%, average interest was 8.1% in the year ended at December 31, These Government securities were matured in

19 NOTE 8: PREMISES, EQUIPMENT AND INTANGIBLE ASSETS, NET Movement table of premises, equipment and intangible assets Gross Value January 1, 2006 Additions Disposals December 31, 2006 Intangible assets Buildings 5, ,211 Fixtures and fittings 1,217 4, ,561 Construction in progress, net 68 4,850 4, Total 6,907 9,655 6,085 10,477 Depreciation and amortization January 1, 2006 Additions Disposals December 31, 2006 Intangible assets Buildings Fixtures and fittings Construction in progress, net Total ,110 Net Value January 1, 2006 December 31, 2006 Intangible assets Buildings 5,019 5,100 Fixtures and fittings 911 3,803 Construction in progress, net Total 6,369 9,367 17

20 NOTE 9: OTHER ASSETS Trade receivables and other advances 2,935 2,085 Deferred tax asset 1,862 1,051 Taxation receivable 848 1,325 Inventory 591 1,376 Other 1, ,551 5,929 Allowance for losses on other assets (1,037) (305) 6,514 5,624 An analysis of the change in the allowance for losses on other assets is as follows: Balance as of January Provision for losses on other assets Balance as of December 31 1, NOTE 10: DUE TO BANKS AND DEPOSITS FROM BANKS Maturity of liabilities due to banks Within one year in 229 2,109 in foreign 50, ,570 50, ,679 Over one year in 1,868 8,020 in foreign 225,993 96, , ,883 Total 278, ,562 Of the balance due to banks, 89.9% and 97.1% was due to OTP as of December 31, 2006 and 2005, respectively. The interest rate payable on interbank market was between 1.3% and 5.9% for the year ended December 31, 2006 and between 3.2% and 14.7% for the year ended December 31, NOTE 11: DEPOSITS FROM CUSTOMERS Maturity of deposits from customers Within one year 3,097 4,189 Over one year 1,744 4,841 4,189 18

21 NOTE 11: DEPOSITS FROM CUSTOMERS [continued] The interest paid on deposits from customers was between 1.0 % and 8.0% during the year ended December 31, 2006, and between 1.5% and 6.0% for the year ended December 31, An analysis of the deposit portfolio by type is as follows: 2006 % 2005 % Commercial deposit 2,095 43% 1,348 32% Retail deposit 2,746 57% 2,841 68% 4, % 4, % NOTE 12: ISSUED SECURITIES Mobil Deposit 30,498 34,760 Stabil Deposit ,892 35,016 Liabilities from issued securities are denominated in. The interest paid on Mobil Pénztárjegy was between 3.5% and 5.1% and between 4.0% and 7.1% for the years ended December 31, 2006 and 2005, respectively. The interest paid on Stabil Értékjegy was between 2.1% and 5.0% and between 2.0% and 5.0% for the years ended December 31, 2006 and 2005, respectively. Mobil and Stabil are issued in order to finance the Bank s lending activities. Such securities are certificated deposits and have floating interest rates. NOTE 13: OTHER LIABILITIES Payables to suppliers 2,687 1,102 Provisions for losses on offbalance sheet commitments, contingent liabilities and financial instruments Salaries and social security payable Tax payable Deferred tax liabilities KHB and OTP Mobil commission Other 1,154 1,129 5,684 4,498 NOTE 14: SUBORDINATED LOAN OTP provided a subordinated loan of 300 million in July, The original maturity has been extended to July 29, The interest rate is determined and payable quarterly based on 3 months BUBOR + 1.5%. During the year ended December 31, 2006 the average interest rate paid on the subordinated loan was approximately 8.4%. 19

22 NOTE 15: SHARE CAPITAL Share capital consists of 2,000 ordinary shares, authorized, issued and fully paid with a par value of 1,000,000 per share as of December 31, 2006 and NOTE 16: RETAINED EARNINGS AND RESERVES Balance as of January 1 24,511 21,848 Paid dividend (1,400) Permanent money transfer (1,140) Net income 7,132 4,063 Closing balance as of December 31 30,503 24,511 The Bank s unconsolidated retained earnings and reserves under Hungarian Accounting Standards were 11,326 million and 9,622 million as of December 31, 2006 and 2005, respectively. Of these amounts, legal reserves represent 187 million and 1,569 million, respectively. The legal reserves are not available for distribution. NOTE 17: OTHER INCOME Income from fixed assets transaction Income from operating lease Income from sold receivables 332 Income from agent activity Income from other financial services Other 1, ,781 1,335 NOTE 18: OTHER EXPENSES Provision for losses on other assets Provision for losses on offbalance sheet commitments, contingent liabilities and financial instruments Writeoffs 2,147 Material type costs Post and telephone costs Rental fees Advertising costs Taxes 1, Services Other 1, ,894 4,040 20

23 NOTE 19: INCOME TAXATION A reconciliation of the income tax charge is as follows: Current charge 2,881 2,294 Deferred taxation (896) (945) Total income tax charge 1,985 1,349 A reconciliation of the deferred tax asset/ (liability) is as follows: Allowance for loan losses 1,700 1,004 Tax loss carryforward Other 69 7 Deferred tax assets 1,862 1,051 Commission paid to dealers (471) (648) Unrealised fxgains (46) (100) Fixed assets (262) (107) Derivative financial instruments (43) Other (63) (28) Deferred tax liabilities (842) (926) Net deferred tax assets/ (liability) 1, A reconciliation of the income tax charge is as follows: Income before income taxes 9,117 5,412 Tax with statutory income tax rate 1, Banking tax Special tax 143 Permanent differences in income tax adjustments are as follows: Deferred tax effect of changing of income tax rate (+4%) 217 Local withholding tax (119) (256) Other permanent differences (410) 123 Income tax 1,985 1,349 Effective tax rate 21.77% 24.93% The Group is presently liable for income tax at rates of 15%, 16%, 19% of taxable income. The 15% rate relates to the Bank s subsidiary incorporated in Bulgaria. The 19% rate relates to the Bank s subsidiary incorporated in Slovakia. 21

24 NOTE 20: FINANCIAL INSTRUMENTS Financial instrument is any contract that gives right to receive cash or another financial asset from another party (financial asset) or the obligation to deliver cash or another financial asset to another party (financial liability). Financial instruments may result in certain risks to the Group. The more significant risks the Group faces include: Credit risk The Group takes on exposure to credit risk which is the risk that a counterparty will be unable to pay amounts in full when due. The Group structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or Banks of borrowers, and to geographical and industry segments. Such risks are monitored on a revolving basis and subject to an annual or more frequent review. The exposure to any one borrower including banks and brokers is further restricted by sublimits covering on and offbalance sheet exposures and daily delivery risk limits in relation to trading items such as forward foreign exchange contracts. Actual exposures against limits are monitored daily. Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing these lending limits where appropriate. Exposure to credit risk is also managed in part by obtaining collateral and corporate and personal guarantees. Market risk The Group takes on exposure to market risks. Market risks arise from open positions in interest rate, and equity products, all of which are exposed to general and specific market movements. The Group applies a value at risk methodology to estimate the market risk of positions held and the maximum losses expected, based upon a number of assumptions for various changes in market conditions. The Management Board of the Group sets limits on the value of risk that may be accepted, which is monitored on a daily basis. Liquidity risk See Note 24. Foreign risk See Note 25. Interest rate risk See Note

25 NOTE 21: COMMITMENTS AND CONTINGENT LIABILITIES In the normal course of business, the Group becomes a party to various financial transactions that are not reflected on the balance sheet and are referred to as offbalance sheet financial instruments. The following represent notional amounts of these offbalance sheet financial instruments, unless stated otherwise. A, Contingent liabilities Commitments to issue credit 25,527 49,734 Guarantees issued and outstanding 4, Contingent liabilities 29,670 49,921 Commitments from guarantees and letters of credit The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees, which represent irrevocable assurances that the Group will make payments in the event that a customer cannot meet its obligations to third parties, carry the same credit risk as loans. Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Group is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments since most commitments to extend credit are contingent upon customers maintaining specific credit standards. Guarantees and undrawn loan commitments are subject to similar credit risk monitoring and credit policies as utilised in the extension of loans. The management of the Group believes the market risk associated with guarantees, irrevocable letters of credit and undrawn loans commitments to be minimal. An analysis of the change in the allowance for losses on offbalance sheet commitments, contingent liabilities and financial instruments is as follows: Balance as of January Provision/(credit) for losses (395) (306) Balance as of December B, Derivative transactions (nominal amount, unless otherwise stated) Foreign exchange swaps and interest rate swaps Assets 149,060 74,808 Liabilities (138,790) (74,374) Net 10, Net fair value 4, The Group enters into foreign exchange swap and interest rate swap transactions. Interest rate swaps obligate two parties to exchange one or more payments calculated with reference to fixed or periodically reset rates of interest applied to a specific notional principal amount. Notional principal is the amount upon which interest rates are applied to determine the payment streams under interest swap deals. 23

26 NOTE 21: COMMITMENTS AND CONTINGENT LIABILITIES [continued] Legal disputes At the balance sheet date the Group was involved in various claims and legal proceedings of a nature considered normal to its business. The level of these claims and legal proceedings correspond to the level of claims and legal proceedings in previous years. The Group believes that the various asserted claims and litigations in which it is involved will not materially affect its financial position, future operating results or cash flows, although no assurance can be given with respect to the ultimate outcome of any such claim or litigation. NOTE 22: RELATED PARTY TRANSACTIONS OTP is financing the Bank in several ways. As mentioned in Note 10, 89.9% and 97.1% of the liabilities due to banks are from OTP as of December 31, 2006 and 2005, respectively. As mentioned in Note 14, OTP provided a subordinated loan of 300 million as of December 31, 2006 and 2005, respectively. The Bank has concluded financial lease agreeements with OTP Bank. The outstanding receivables from OTP Bank are 26,640 million and 11,810 million as of December 31, 2006 and 2005, respectively. The Bank contracts derivative financial insturments only with OTP Bank. The derivative financial instruments used include interest rate forward or swap agreements and forward and swap agreements. The financial assets at fair value through profit and loss were 4,833 million and 427 million as of December 31, 2006 and 2005, respectively. Foreign exchange swaps and interest rate swaps contracted with OTP Bank Assets 149,060 74,808 Liabilities (138,790) (74,374) Net 10,270 1,434 Net fair value 4, The recognised interest income from these lease agreements are 1,499 million and 649 million for the year ended December 31, 2006 and 2005, respectively. In the normal course of the business the Bank enters into other transactions with the entities within the OTP Group, the amounts and volumes of which are not significant to these financial statements taken as a whole. NOTE 23: CONCENTRATION OF ASSETS AND LIABILITIES The Bank, based on the licence received from PSZAF is a bank but it is operating like a financial institution that is focused on the financing and leasing of car purchases and also on the finance of major car dealers in Hungary. Approximately 74.3% and 91.2% of the Bank s total consolidated assets related to automotive financing as of December 31, 2006 and 2005, respectively. Individual small value deposits in the form of certificates of deposit (Mobil, Stabil, Pénztárjegy) and hire purchase bonds represented approximately 17.6% and 18.4% of total consolidated liabilities as of December 31, 2006 and 2005, respectively. 24

27 NOTE 24: MATURITY ANALYSIS OF ASSETS AND LIABILITIES AND LIQUIDITY RISK ANALYSIS Liquidity risk is a measure of the extent to which the Group may be required to raise funds to meet its commitments associated with financial instruments. The Bank maintains its liquidity profiles in accordance with regulations laid down by the National Bank of Hungary. The following tables provide an analysis of assets, liabilities and shareholders equity into relevant maturity groupings based on the remaining period from the balance sheet date to the contractual maturity date. It is presented under most prudent consideration of maturity dates where options or repayment schedules allow for early repayment possibilities. December 31, 2006 Within 3 month 3 month 1 year 1 5 years Over 5 years Total Cash, due from banks and balances with the National Bank of Hungary 10,009 10,009 Interbank receivables Loan and lease receivables, net of allowance for loan losses 31,684 53, ,518 55, ,798 Financial assets at fair value through profit and loss 4,833 4,833 Accrued interest receivable 2, ,722 Equity investments 7 7 Securities heldtomaturity 1,403 1,403 Premises, equipment and intangible assets, net ,792 4,180 9,367 Other assets 5,284 1,230 6,514 TOTAL ASSETS 49,577 58, ,956 61, ,403 Due to banks and deposits from the National Bank of Hungary and other 3,816 46, ,765 97, ,269 Deposits from customers 2, ,744 4,841 Liabilities from issued securities 2,490 3,782 24, ,892 Accrued interest payable 1, , ,914 Other liabilities 4,408 1,276 5,684 Subordinated loan TOTAL LIABILITIES 9,819 55, ,589 97, ,900 Share capital 2,000 2,000 Retained earnings and reserves ,103 30,503 TOTAL SHAREHOLDERS EQUITY ,103 32,503 TOTAL LIABILITIES AND SHAREHOLDERS EQUITY 9,819 56, , , ,403 LIQUIDITY EXCESS/(DEFICIENCY) 39,758 2,379 26,367 (68,504) 25

28 NOTE 24: MATURITY ANALYSIS OF ASSETS AND LIABILITIES AND LIQUIDITY RISK ANALYSIS (continued) December 31, 2005 Within 3 month 3 month 1 year 1 5 years Over 5 years Total Cash, due from banks and balances with the National Bank of Hungary 7,579 7,579 Interbank receivables 2,817 2,817 Loan and lease receivables, net of allowance for loan losses 31,953 44, ,347 27, ,281 Financial assets at fair value through profit and loss Accrued interest receivable 1, ,212 Equity investments 7 7 Securities heldtomaturity ,403 2,853 Premises, equipment and intangible assets, net ,859 6,369 Other assets 4, ,624 TOTAL ASSETS 50,163 45, ,464 34, ,169 Due to banks and deposits from the National Bank of Hungary and other 3, ,562 88,197 16, ,562 Deposits from customers 4, ,189 Liabilities from issued securities 2,244 5,791 26,981 35,016 Accrued interest payable ,310 3,093 Other liabilities 3, ,498 Subordinated loan TOTAL LIABILITIES 14, , ,389 16, ,658 Share capital 2,000 2,000 Retained earnings and reserves 24,511 24,511 TOTAL SHAREHOLDERS EQUITY 26,511 26,511 TOTAL LIABILITIES AND SHAREHOLDERS EQUITY 14, , ,389 43, ,169 LIQUIDITY EXCESS/(DEFICIENCY) 36,050 (69,340) 42,075 (8,785) 26

29 NOTE 25: NET FOREIGN CURRENCY POSITION AND FOREIGN CURRENCY RISK USD EUR CHF Others As at December 31, 2006 Foreign based asset 2,020 28, ,923 Foreign based liability (1,832) (165,967) (53,197) Off balance sheet 140,443 (130,172) Net position 188 2,914 (5,446) As at December 31, 2005 Foreign based asset ,323 73,501 70,264 Foreign based liability (786) (116,021) (442) (69,683) Off balance sheet 75,034 (74,631) Net position (160) 1,336 (1,572) 581 NOTE 26: INTEREST RATE RISK MANAGEMENT Interest rate risk is the risk that the value of financial instrument will fluctuate due to changes in market interest rates. The length of time for which the rate of interest is fixed on a financial instrument, therefore, indicates to what extent it is exposed to interest rate risk. The majority of the Bank's interest bearing assets and liabilities are structured to match either short term assets and short term liabilities, or long term assets and liabilities with repricing opportunities within one year, or long term assets and corresponding liabilities where repricing is performed simultaneously. Interest rate risk mismatch is limited to a very shortterm portion of the Bank's consolidated balance sheet. In addition, the significant spread existing between the different types of interest bearing assets and liabilities enables the Bank to benefit from a high level of flexibility in adjusting for its interest rate matching and interest rate risk exposure. The following table presents the interest repricing dates of the Group. Variable yield assets and liabilities have been reported according to their next repricing date. Fixed income assets and liabilities have been reported according to their maturity. 27

30 NOTE 26: INTEREST RATE RISK MANAGEMENT (in mn) [continued] within 1 month within 3 months over 1 month within 1 year over 3 months within 2 years over 1 year 7, , , , , ,777 20,080 3,354 10,417 9,590 84,986 9,936 6,514 6,405 2,499 6,516 7, ,084 17, ,777 13, ,901 2,093 84,163 2, ,833 4,833 over 2 years 3,677 17, ,954 3,556 9,282 Noninterest bearing Total 7,897 2,112 6, , , ,893 20,379 25, , ,859 1,403 1,403 4,833 4,833 Total 10,009 6,957 2, ,798 45, ,385 1,403 1,403 4,833 4,833 28

31 NOTE 26: INTEREST RATE RISK MANAGEMENT (in mn) [continued] within 1 month within 3 months over 1 month within 1 year over 3 months within 2 years over 1 year 1,228 65,038 71, ,265 9,268 1,005 1, ,228 64,033 70, ,236 9,236 1, , ,744 1, ,508 21, ,492 21, over 2 years 26,682 16, ,682 15,209 Noninterest bearing Total 28, ,969 3,099 28, ,870 4,841 2,362 1, , , Total 278,269 3, ,170 4,841 2,362 1, , , As at December 31, 2006 ASSETS Cash due from banks and balances with the National Bank of Hungary fixed interest noninterestbearing Interbank receivables fixed interest Loans and lease receivables, net of allowance for loan losses fixed interest noninterestbearing Securities heldtomaturity fixed interest noninterestbearing Financial assets at fair value through profit and loss fixed interest 29

32 NOTE 26: INTEREST RATE RISK MANAGEMENT (in mn) [continued] within 1 month within 3 months over 1 month within 1 year over 3 months within 2 years over 1 year 4,802 1, , ,515 1,000 1,817 1,000 1,817 25,187 4, , ,317 12, ,599 4,599 3,619 2,724 1,882 1,882 2,727 1,938 20, ,460 7, , , over 2 years 5,462 1,171 14,276 4,970 4,291 9,306 Noninterest bearing 4,552 4,552 Total 5,515 2,064 4, ,515 1,000 1,817 1,000 1,817 61,999 25, ,282 10,521 32, ,761 4,552 2,853 2, Total 7,579 4,468 1,223 1,888 2,817 2, ,281 35, ,968 4,552 2,853 2, As at December 31, 2006 LIABILITIES Due to banks fixed interest Deposit from customers fixed interest noninterestbearing Liabilities from issued securities fixed interest noninterestbearing Subordinated loan 30

33 NOTE 25: INTEREST RATE RISK MANAGEMENT (in mn) [continued] within 1 month within 3 months over 1 month within 1 year over 3 months within 2 years over 1 year ,991 3, ,325 2,102 3,874 2, ,426 1,341 1,936 3,677 2, ,565 3, , ,382 1, ,051 1, ,331 12,779 22, ,699 22, over 2 years 7,862 10,101 7,862 4,862 5,239 Noninterest bearing Total 14, ,810 10,538 13,718 4, ,092 4,189 2,349 1, , , Total 217,562 24, ,306 4,189 2,349 1, , , As at December 31, 2005 ASSETS Cash due from banks and balances with the National Bank of Hungary fixed interest noninterestbearing Interbank receivables fixed interest Loans and lease receivables, net of allowance for loan losses fixed interest noninterestbearing Securities heldtomaturity fixed interest noninterestbearing Financial assets at fair value through profit and loss fixed interest noninterestbearing 31

34 As at December 31, 2005 LIABILITIES Due to banks fixed interest Deposit from customers fixed interest noninterestbearing Liabilities from issued securities fixed interest noninterestbearing Subordinated loan 32