Table of contents Independent Auditor s Report... 1 Separate Financial Statements Separate Statement of Financial Position... 3 Separate Statement of

Table of contents Independent Auditor s Report... 1 Separate Financial Statements Separate Statement of Financial Position... 3 Separate Statement of Comprehensive Income... 4 Separate Statement of Changes in Shareholder s equity... 5 Separate Statement of Cash Flows... 6 Notes to the Separate Financial Statements: 1. Principal activities... 7 2. Basis of preparation... 8 3. Significant accounting policies... 9 4. Financial risk management... 19 A. Credit risk... 19 B. Liquidity risk... 26 C. Market risks... 27 D. Capital management... 32 5. Cash and balances with the national bank of Hungary... 34 6. Loans and advances to banks... 34 7. Loans and advances to customers... 35 8. Securities... 35 9. Investments... 36 10. Financial assets at fair value through profit or loss... 37 11. Derivative assets held for risk management... 37 12. Property, plant and equipment... 38 13. Intangible assets... 38 14. Other assets... 39 15. Deposits from banks... 39 16. Deposits from customers... 40 17. Issued securities... 40 18. Financial liabilities at fair value through profit or loss... 41 19. Derivative liabilities held for risk management... 42 20. Provisions... 42 21. Other liabilities... 42 22. Share capital and share premium... 42 23. Statutory reserves... 42 24. Commitments and contingencies... 43 25. Net interest income... 43 26. Net fee and commission income / expenses... 43 27. Impairment... 44 28. Provision... 45 29. General and administrative expenses... 45 30. Other income/expenses... 46 31. Taxation... 47 32. Related parties... 48 33. Fair value... 49 34. Reconciliation of Owner s equity differencies between hungarian accounting regulations and IFRS... 52 35. Exercising of Owners rights... 52 36. Events after the reporting period... 53 37. New standards and interpretations not yet adopted... 53

1. PRINCIPAL ACTIVITIES (the Bank or HDB ) is registered as a single, stock company under Hungarian law and is licensed to conduct specialized banking activities. The legal status and the activities of the Bank are regulated by Act XX of 2001 ( HDB Law ) which came into force on 15 June 2001. The Bank s role is to participate independently or together with other domestic or international organizations in a) the sourcing and mediation of medium and long term domestic and foreign funding and subsidies to achieve economic development aims; b) loan and capital financing of investments in connection with from a national economic aspect preferential cases, and other state or local government developments and investments, and other developments and investments in connection or for the enlargements of these; c) financing loans and capital for companies resident in Hungary primarily small and medium enterprises sector, holding funds established by law, agricultural businesses and farmers, d) the financial execution of state and local government developments and investments related to EU membership, and according to the method regulated in separate law the Bank participates in tasks related to the drawing of European Community funds (including mediation of subsidies and sourcing and mediation of resources from international economic or financial institutions); e) attend in tasks related to state, communal and international development disbursements (especially management of mediation and use of development disbursements and subsidies, attend in relating contributory tasks, settlement and valuation of used disbursements); f) the mediation of EU funds and in connection with this, loan and equity financing, providing guarantee and surety; g) the exercising of owners rights in the name of the Hungarian State, and in case of State owned companies determined by the law participate in the realization of significant developments, investments, expansion, increasing of effectiveness and improvement of competitiveness (see Note 35) and other roles defined in HDB Law to ensure sufficient development funding to achieve the economic development aims determined by the Government s medium and long term economic strategy. The Bank s registered office is located at 31 Nádor Street, Budapest, Hungary. The Bank is 100% owned by the Hungarian State. The rights of ownership were exercised by the Minister responsible for the harmonisation of government activities in 2015. 7

2. BASIS OF PREPARATION Statement of compliance These separate financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) issued by the International Accounting Standards Board ( IASB ) as adopted by the EU and interpretations issued by the International Financial Reporting Interpretations Committee ( IFRIC) as adopted by the EU. Under IAS 27, the Bank is required to prepare consolidated financial statements. Consolidated financial statements were approved by the Board of Directors on 21 st April 2016. These separate financial statements have been prepared for information purposes, and are not intended to be used for statutory filing purposes. These Separate Financial Statements were approved by the Board of Directors on 21 st April 2016. Basis of measurement These separate financial statements have been prepared on historical cost basis except for those, which are measured at fair value. The Bank measures the following assets and liabilities at their fair value: - derivative financial instruments, - other financial assets or liabilities at fair value through profit or loss, and - available for sale financial assets (except for unquoted equity instrument that are not carried at fair value because their fair value cannot be measured reliably). The effect of valuation differences between the separate IFRS financial statements and Hungarian statutory financial statements are detailed in Note 34 in respect of net income/loss for the year and shareholders' equity. These separate financial statements are presented in Hungarian Forints rounded to the nearest million ( HUF million ). Functional currency Items included in the separate financial statements are measured using Hungarian Forint, the currency of the primary economic environment in which the Bank operates ( the functional currency ). Foreign exchange rates used in these separate financial statements were the following: 31 December 2015 31 December 2014 (HUF) (HUF) EUR 313.12 314.89 USD 286.63 259.13 JPY 2.3812 2.1686 GBP 424.96 403.75 PLN 73.46 73.88 CHF 289.38 261.85 Reporting period These separate financial statements are prepared for the reporting period between 1 January 2015 and 31 December 2015. The end of the reporting period is the reporting date. 8

2. BASIS OF PREPARATION (CONTINUED) Use of estimates and judgements The Bank makes judgments, estimates and assumptions that may affect the application of accounting policies and the reported amounts of assets, liabilities, income, expenses and the fair value of collateral and other security enhancements. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Bank reviews its loan portfolios to assess impairment losses, if objective evidence exists that an impairment loss has been incurred and according to the legal regulations on a quarterly basis. In determining whether an impairment loss should be recognised in the statement of comprehensive income, the Bank makes judgements as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. The Bank uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between estimated and actual loss. The amount of provision is the best estimate of the expenditure required to settle the present obligation and it is reviewed quarterly. In case of exposures in relation to loans or investments the basis of the calculation is the evaluation prepared quarterly. When the Bank brings an action against debtors, the amount of the provision or impairment is determined considering the amount of the receivables and the chances of winning the case. In presenting deferred tax assets an estimation uncertainty exists from the future existence of the taxable income, from which the accrued tax losses can be used up. The Bank recognizes deferred tax asset in accordance with the future income presented in the approved middle- and long-term business plan (see Note 31). 3. SIGNIFICANT ACCOUNTING POLICIES a) Foreign currency transactions Foreign currency transactions are translated into the functional currency using the exchange rates of the National Bank of Hungary (NBH) prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of comprehensive income, except cash flow hedges and net investment hedges which are recognised in the equity. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to HUF at the foreign exchange rates quoted by the National Bank of Hungary at that date. 9

3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) b) Financial assets and liabilities Classification Financial assets or financial liabilities at fair value through profit or loss are financial assets and financial liabilities that are classified as held for trading mainly for the purpose of profittaking, are derivative instruments that are not designated and not effective hedging instruments or upon initial recognition are designated as at fair value through profit or loss. Financial assets or liabilities at fair value through profit or loss contain derivative instruments that are not designated as hedging instruments. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables contain cash and balance with the National Bank of Hungary, loans and advances to banks and to customers. Those loans to customers where the interest rate risk is hedged by an interest rate swap are items measured at amortised cost with fair value adjustment. Held-to-maturity assets are non-derivative assets with fixed or determinable payments and fixed maturity that the Bank has the positive intent and ability to hold to maturity and that do not meet the definition of loans and receivables. Held-to-maturity financial assets contain government bonds and other securities. Available for sale financial assets are non-derivative instruments that are designated as available for sale or are not classified as another category of financial assets. Available for sale financial assets contain investments, government bonds and other securities. Other liabilities contain all financial liabilities that were not classified as at fair value through profit or loss. Other liabilities contain deposits from banks and from customers and issued securities if the interest rate risk is not hedged with swap deals. The classification and fair value of financial instruments is detailed in Note 33. Recognition Financial assets and liabilities are entered into the Bank s books on the settlement day, except for derivative assets, which are entered on the trade day. Financial assets or financial liabilities are initially measured at fair value plus (for an item not subsequently measured at fair value through profit or loss) transaction costs that are directly attributable to its acquisition or issue. Derecognition Financial assets are derecognised when the rights to receive cash flows from the financial assets expire or the Bank transfers substantially all risks and rewards of ownership of the financial asset. Reclassification For presentation purposes certain items previously reported in the prior years financial statements are reclassified to provide consistency if necessary. In the current year there were no reclassifications. 10

3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Measurement A gain or loss on a financial asset or financial liability classified as at fair value through profit or loss shall be recognised in profit or loss. A gain or loss on an available-for-sale financial asset shall be recognised in other comprehensive income, through the statement of changes in equity, except for impairment losses and foreign exchange gains and losses which are recognized in profit or loss, until the financial asset is derecognised, at which time the cumulative gain or loss previously recognised in other comprehensive income shall be reclassified to profit or loss. For financial assets and financial liabilities carried at amortised cost, a gain or loss is recognised in profit or loss when the financial asset or financial liability is derecognised or impaired, and through the amortisation process. Fair value measurement The Bank measures fair value using the following fair value hierarchy: Level 1: The fair value of financial instruments is based on their quoted market price in active markets for identical instruments that are available for the Bank at the reporting date. Level 2: The fair value of financial instruments is based on directly or indirectly observable data other than the quoted market price. The followings can be used for the valuation: quoted market prices in active markets for similar instruments, quoted prices for identical or similar instruments in markets that are considered less than active, or other valuation techniques in which all significant inputs are directly or indirectly observable from market data. Where discounted cash flow techniques are used, estimated future cash flows are based on the Bank s economic estimates and the discount rate is a market related rate at the reporting date for an instrument with similar terms and conditions. Where valuation models are used, inputs are based on market related measures at the reporting date. Level 3: The fair value of financial instruments is based on inputs other than observable market data. The valuation is based on quoted prices for similar instruments for which significant unobservable adjustments or assumptions are required to reflect differences between the instruments. Amortised cost measurement The amortised cost of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured at initial recognition minus principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between that initial amount and the maturity amount, and minus any reduction for impairment or uncollectibility. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Bank shall estimate cash flows considering all contractual terms of the financial instrument but shall not consider future credit losses. 11

3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Impairment of financial assets If there is objective evidence that an impairment loss on loans and receivables or held-to-maturity investments carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows discounted at the financial asset s original effective interest rate. The amount of the loss shall be recognised in profit or loss. Objective evidence that financial assets are impaired can include default or delinquency by a borrower, restructuring of a loan or advance by the Bank on terms that the Bank would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in the group, or economic conditions that correlate with defaults in the group. In addition, for an investment in an equity instrument, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment losses shall be reversed through profit or loss. When a decline in the fair value of an available-for-sale financial asset has been recognised directly in other comprehensive income and there is objective evidence that the asset is impaired, the cumulative loss that had been recognised directly in equity shall be removed from equity and recognised in profit or loss even though the financial asset has not been derecognised. The amount of the cumulative loss that is removed from equity and recognised in profit or loss shall be the difference between the acquisition cost and current fair value, less any impairment losses on that financial asset previously recognised in profit or loss. Impairment losses recognised in profit or loss for an investment in an equity instrument classified as available for sale shall not be reversed through profit or loss. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss shall be reversed, with the amount of the reversal recognised in profit or loss. Financial assets are assessed individually or collectively. All individually significant financial assets are assessed for specific impairment. Assets that are not individually significant and loans relating to loan programs settled in the Bank s internal policy are then collectively assessed for impairment by grouping together financial assets (carried at amortised cost) with similar risk characteristics. Impairment of non-financial assets If there is any indication that the carrying amount of a non-financial asset (within the scope of IAS 36) exceeds its recoverable amount, the Bank makes estimates for the recoverable amount of the asset. The Bank considers external and internal information in assessing the amount of impairment. Impairment losses are recognised or reversed according to the individual rating of the asset. If the carrying amount/cost of the non-financial asset exceeds its recoverable amount/realisable value, a write-down shall be recognised, if not, write-down shall be reversed to increase the carrying amount of the asset. The carrying amount of the asset after reversal can not exceed the original net carrying amount. 12

3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) c) Cash and cash equivalents Cash and cash equivalents include notes and coins in hand, unrestricted balances held with central bank and highly liquid financial assets with original maturities of less than three months, placements with other banks payable on demand, including nostro and other accounts in HUF and foreign exchange with domestic banks, foreign central banks and institutions registered abroad as bank. These items are subject to insignificant risk of changes in their fair value, and are used by the Bank in the management of its short-term commitments. Cash and cash equivalents are carried at amortised cost in the statement of financial position. d) Loans and advances to banks and to customers The Bank s credit activities can be grouped by method (indirectly through commercial banks in the form of refinancing loans and directly) and by type (program and non-program loans). In 2015 program loans were granted to three types of clients: small and medium sized entities, local governments, agricultural entities. A significant part of the balance of loans and advances to banks is refinancing program loans granted through commercial banks. The balance also contains the interbank placements used in the course of liquidity management. Loans and advances to customers contain receivables against solely legal entities. Agricultural loans with mainly fixed interest rate are also recognized as loans and advances to customers. The Bank takes part in the NBH s Funding of Growth Scheme, where the NBH grants refinancing loans to the banks attended. Banks can refinance these loans to small and medium size entities as loan or financial lease. Loans and advances to banks and to customers are carried at amortised cost in the statement of financial position. e) Securities Securities contain government bonds, treasury bills, other debt securities, interest bearing or discounted treasury bills, debt securities, including fixed-income securities interest bearing or discounted bills - that are entered on stock exchange, or traded on approved, controlled market (controlled by regulation or by stock exchange), and other debt securities regardless its name, including debt securities took over in return for receivables to minimize loss. Securities classified as financial assets at fair value through profit or loss are measured at fair value through profit or loss. Securities classified as available for sale are measured at fair value through other comprehensive income. The basis of measurement is the average of best bid and ask prices published on the website of Government Debt Management Agency Ltd. on the reporting date. Securities classified as held to maturity are measured at amortised cost, calculated using effective interest rate method. The changed initial cost of the financial assets reclassified to held-to-maturity assets is taken into consideration when applying the effective interest rate method (see Note 8). 13

3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The encumbrance of the Banks repo eligible assets is mainly for the purpose of ensuring the continuous liquidity management including giro turnover or borrowings from NBH - and ensuring the collateral for NHP funds. The encumbered assets have two types: government securities and mortgage bonds. There is no need for a separate collateral agreement for this type of encumbrance. The debt securities that are collateral for loans or repos are not encumbered. To avoid frequent block and cancel the Bank determines the amount of encumbered assets regarding the loans granted and unused credit facilities in NHP construction, and the past experiences and the expected giro turnover. A certain extent of overcollateralization is necessary. The collateral value of repo eligible securities is refreshed by the NBH on a daily basis, the Bank follows this value in case of blocked securities to ensure the appropriate amount of collateral. The amount of encumbered assets calculated according to NBH recommendation was HUF 45,788 million as at 31 December 2015 and HUF 38,010 million as at 31 December 2014. f) Investments Equity investments classified as controlling interest comprise those investments where the Bank is exposed to, or has rights to, variable returns from the involvement with the investee and has the ability to affect those returns through its power over the investee. Equity investments classified as significant interest comprise those investments where the Bank through its direct ownership interest has the power to participate in the financial and operating policies of the investee, but not to control those activities. Other equity investments comprise other share holdings, which do not meet the preceding criteria. The investment portfolio includes investments that the Bank intends to hold long term. The HDB Law determines the companies in which the Bank can obtain controlling interest. The Bank does not hold equity investments for trading purposes. In these separate financial statements, investments in subsidiaries and associates are accounted for at cost less impairment in accordance with IAS 27. Impairments are charged and released through profit or loss. Other equity investments are accounted for in accordance with IAS 39 at fair value, unless there is no quoted market price in an active market and fair value cannot be reliably measured, when other equity investments are measured at cost less impairment. As at 30 June 2015 the assets, liabilities and the capital of MV Zrt. was merged into the Bank s assets, liabilities and capital, the profit realised until the date of merger was presented in retained earnings and the balances between the Bank and MV Zrt. were eliminated. g) Derivative financial instruments The Bank uses derivative financial instruments, interest rate swaps, foreign exchange swaps and forward exchange contracts to manage its exposure to foreign exchange and interest rate risks arising from business activities. The recognition of income/expenses relating to derivative transactions is on a mark-to-market basis. Fair value changes are immediately recognised in the statement of comprehensive income. 14

3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) According to HDB Law the Bank is exempted from the application of rules in connection with trading book positions, risk-taking, FX risk and the capital requirements of large exposures and the detailed rules of keeping a trading book. The Bank does not undertake exposure for trading purposes, the Treasury department enters into transactions with the purpose of risk hedging, liquidity management and limit management. The purpose of market instruments is solely the hedging of risks derive from the portfolio, the bank does not enter into transaction with speculative purposes. To reduce the interest rate risk the Bank replaces the financial instruments with fixed interest rate to changing interest rate in the course of interest swap deals. The interest swap deals are accounted for as fair value hedges. The realized fair value changes on the hedging instruments are presented as Derivative assets or liabilities held for risk management (see Note 11 and 19). Foreign exchange swap deals are the replacement of different foreign exchanges on a predetermined exchange rate. Foreign exchange swaps deals are concluded with liquidity and risk management purposes, and presented as Derivative assets or liabilities held for risk management (see Note 11 and 19). Cross currency interest rate swap deals (CCIRS) are interest swap and foreign exchange swap deal made in a single transaction. The CCIRS deals are classified as at fair value through profit or loss upon initial recognition. These deals are covered by the FX Agreement (see 4.C. a)), therefore the revaluation difference has no effect on the profit or loss (see Note 10). In 2014 the Bank took part in the Pillar III Construction of the NBH s Funding of Growth Scheme, under which the NBH provided EUR liquidity by currency interest rate swap deals against HUF. These deals were designated as at fair value through profit or loss upon initial recognition. These deals were not covered by the FX Agreement (see Note 18). h) Property, plant and equipment Property, plant and equipment contains investments, capitalized or material assets in normal use that serves directly or indirectly the financial activities or banking, and rights of property connected to real estate that serves the business activities permanently for more than one year. Items of Property, plant and equipment are stated at historical cost less accumulated depreciation and accumulated impairment losses. Depreciation is charged to the statement of comprehensive income on a straight-line basis over the estimated useful lives of items of property, plant and equipment. Freehold lands, works of art, asset under construction are not depreciated. Property and equipment Estimated useful life (years) Property 50 Property tenancy 2 100 Investment on leased property 10 17 Machinery 2 7 Other equipment 5 7 Mobiles 2 Vehicles 3 4 Computer equipment 2 6 15

3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) i) Intangible assets Intangible assets contain rights and intellectual properties (software and other intellectual properties). There are no intangible assets with indefinite useful life. Intangible assets are carried at historical cost less accumulated amortization. Intangible assets are reviewed periodically and items which are considered to have no further value are amortised in full. Intangible asset Estimated useful life (years) Concessions and similar rights 6 Software 3 8 Other intangible assets 3 6 j) Bonds issued Bonds issued contain the obligations arising from HUF, EUR and USD issued bonds. Issued bonds are measured at amortised cost. That part of the issued EUR bonds of which interest rate risk is hedged using interest rate swaps are measured at amortised cost with fair value adjustment. k) Provisions A provision is recognised, when the Bank has a present obligation (legal or constructive) 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 amount of the obligation. Provisions are reviewed quarterly and adjusted to reflect the best estimate of the expenditure required to settle the present obligation. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision is reversed. A provision should be used only for expenditures for which the provision was originally recognised. l) Statutory reserves General reserve In accordance with Section 83 of Act No. CCXXXVII of 2013, a general reserve equal to ten percent of the net profit after tax is required to be made in the Hungarian statutory accounts. The general reserve, as calculated under Hungarian Accounting and Banking Rules, is treated as appropriations against retained earnings and therefore it has no effect on the profit or loss of the current year. 16

3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) General risk reserve The Bank could make general risk reserve (as an appropriation of retained earnings) to cover risks arising from unforeseeable and undeterminable possible loan losses until 2013. The general risk reserve made in accordance with Hungarian laws in the previous years can be utilized only for future loan losses. The utilization affects the retained earnings and therefore it has no effect on the profit or loss of the current year. m) Netting of financial assets and liabilities The Bank entered into CSA agreements with international banks on the basis of ISDA frame agreement. The two criterions of IAS 32. 42 are satisfied therefore the balances from mark-tomarket valuation of these agreements and in 2014. the Pillar III Construction of the NBH s Funding of Growth Scheme are presented on a net basis among Loans and advances to banks, Deposits from banks or Cash and balances with NBH considering the minimum transfer amounts and threshold. According to these transactions the Bank provides and receives solely cash collateral. n) Commitments and contingencies Commitments and contingencies are a probable obligation that derives from a past event, and its existence will be confirmed by the occurrence or non-occurrence of one or more uncertain future events that are not entirely controlled by the Bank, or a present obligation that derives from a past event, but is not recognised because it is not likely that an outflow of resources embodying economic benefits will be required to settle the obligation or the amount of the obligation can not be reliably estimated. o) Interest income and expense Interest income and expense include: - interest income or expense for financial assets and liabilities at amortised cost (including interest received or paid to banks or customers, interest received or paid on securities), - interest income or expense on financial assets and liabilities at fair value (including interest received or paid on securities). p) Fee and commission income and expense Fee and commission income and expense include amounts derive from financial activities of the Bank, not included in interest income and expense, or in determining the initial cost of assets and liabilities, for example transaction and bank account fees, postal fees, guarantee fees, loan examination fees and other financial service fees, received or paid default interest. q) Transaction costs Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or financial liability. r) Dividend income Dividend income is recognised when the amount of dividend has been determined and approved. 17

3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) s) Income tax and other taxes The amount of income tax payable is based on the tax obligations determined in accordance with Hungarian laws and it is adjusted by the deferred tax. Income tax and deferred tax are recognised in the statement of comprehensive income, except to the extent that deferred tax relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the reporting date. The base of the income tax is the profit before tax adjusted by the tax base modifying items, the rate was 10% up to HUF 500 million tax base and 19 % above that in 2015 and 2014. Tax payable is modified by the released deferred tax of the previous year and the charged deferred tax of the current year. Deferred tax is calculated using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The Bank recognizes deferred tax if it is probable that the temporary differences will reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the reporting date, which was 19% for 2015 (2014: 19%). Deferred tax is presented on a net basis. The special tax of financial institutions is presented among other expenses. The tax is in effect from 2010. The base of the special tax is the adjusted balance sheet total of 2009, the rate was 0.15% under HUF 50 billion, and 0.53% above HUF 50 billion in 2015 (2014: 0.15% and 0.53% respectively). t) Statement of cash flows Information about the cash flows of the Bank is useful in providing users of financial statements with a basis to assess the ability of the Bank to generate cash and cash equivalents and the needs of the Bank to utilise those cash flows. For the purposes of reporting cash flows, cash and cash equivalents include cash, balances and placements with the National Bank of Hungary except those with more than three months maturity. u) Events after the reporting period Events after the reporting period are those events, favourable and unfavourable, that occur between the reporting date and the date when the financial statements are authorised for issue. These events are adjusting and non-adjusting events. All adjusting events after reporting date have been taken into account in the preparation of the separate financial statements of the Bank. The material non-adjusting events after the reporting date are presented in Note 36. 18

4. FINANCIAL RISK MANAGEMENT The most significant risks arising from financial instruments to which the Bank is exposed are credit, interest rate, liquidity and foreign exchange risks. Risk management policies are set by the Board of Directors of the Bank within the rules established by the regulations in force, the National Bank of Hungary. The application and observation of these policies is supervised by the Board. The Bank has established reporting systems, which permit the monitoring of risk exposures. A. CREDIT RISK a) Management of credit risk Credit risk is the risk of financial loss to the Bank if the client fails to meet its contractual obligations. Credit risk arises principally from the Bank s loans and advances to customers and other banks, investments and other activities. The Bank reviews its loan and investment portfolio if objective evidence exists that impairment losses should be recognised and due to statutory regulations - on a quarterly basis. To implement its strategy the Bank prepared and applies internal policies approved by the Board of Directors. These policies are intended to ensure the established and transparent risk exposure, the control of assessment and decrease of risks. The risk management policies prepared to ensure safe management and prudent operation of the Bank are based on the international and domestic professional practice, the concerning legal regulations and the former directions of supervisory authority. Evaluation of client Qualification of clients must be completed during the preparation of decision for every client against who the Bank undertakes risk. Beyond that, the Bank reviews its clients at least once per year and performs extra reviews where appropriate. Clients are classified into categories according to the scores attained considering objective and subjective factors. The applied qualification methods are differs in case of - project companies, - businesses already in operation, - local government, - simplified evaluation by objective and subjective criterions (under HUF 50 million, not for new businesses or project companies), - simplified evaluation by subjective criterions (for new businesses, or for businesses not obliged to prepare financial statement or simplified financial statement). 19

4. FINANCIAL RISK MANAGEMENT (CONTINUED) Evaluation of collateral The main types of collaterals accepted by the Bank are: - surety (surety of State, surety of guarantee institutions) - guarantee, - collateral (cash, security) - mortgage on chattel and property, - mortgage on rights and receivables. According to the Bank s strategy the amount of collateral in case of loans to customers is generally 100% of capital plus annual interest at the moment of the approval, regardless of the evaluation category of the client, the risk exposure and the type of business. In case of collateral types, where collateral risk does not exist for example state guarantee -, the expected collateral is 100% of capital plus semi-annual interest. The market value of the collateral is adjusted by the cover ratio. This ratio expresses the probable amount of recovery from the collateral, and besides it is the amount of collateral that is considered in the collateral registry and during the evaluation of assets. The Bank performs the examination and if appropriate the remeasurement of collaterals during the evaluation of assets on a quarterly basis. The remeasured collaterals are recognised in the collateral registry. Limit of client/group of clients, limit of sector The Bank determines risk limits for all clients, which are the maximum amounts of the undertaken risk. An upper limit for each client and group of clients is also determined. The limit amount depends on the results of the evaluation procedure, the audited amount of shareholders equity and net income, the amount of interest bearing liabilities, and the financial position of the client s sector. The Bank classifies the sectors into eight risk groups by their financial position, and determines limits for these groups. The limit of sector is the upper limit of undertaken risk against clients classified into a risk group. 20

4. FINANCIAL RISK MANAGEMENT (CONTINUED) Evaluation of transaction If there is objective evidence that an impairment loss or provision shall be recognised on loans and receivables at amortised cost, on investments held to maturity or on off-balance sheet liabilities, the amount of impairment or provision is calculated as the difference between the carrying amount and the present value of estimated future cash flows using the original effective interest rate. For reporting purposes, the Bank groups its receivables and off-balance-sheet liabilities into categories according to the calculated impairment loss or provision: Problem-free 0 % Special mention 1 10 % Below average 11 30 % Doubtful 31 70 % Bad 71 100 % b) Exposure to credit risk The exposure to credit risk of the loan portfolio evaluated in accordance with risk management policies, grouped by categories is shown below: 2015 2014 Balance % Balance % Problem-free 426,114 85.07% 277,549 69.60% Special mention 12,336 2.46% 17,191 4.31% Below average 11,075 2.21% 6,090 1.53% Doubtful 18,182 3.63% 45,004 11.28% Bad 33,208 6.63% 52,964 13.28% Total 500,915 100.00% 398,798 100.00% 21

4. FINANCIAL RISK MANAGEMENT (CONTINUED) b) Exposure to credit risk (continued) The content of the groups presented in the table of exposure to credit risk is the following: Impaired loans Impaired loans are loans for which the Bank determines that it is probable that it will be unable to collect all principal and interest due according to the contractual terms of the loan agreement. Past due but not impaired Loans where contractual interest or principal payments are past due, but the Bank did not charge impairment, because amounts recoverable from the available collateral of the total exposure cover the total expected loss. Loans with renegotiated terms Loans with renegotiated terms are loans that have been restructured due to deterioration in the borrower s financial position and where the Bank has made concessions that it would not otherwise consider. Once a loan is restructured it remains in this category, until the contract is cancelled. Exposure to credit risk and collaterals banks Loans and advances to banks 31 December 2015 31 December 2014 Exposure Collateral Exposure Collateral Book value 311,022 42,236 167,262 34,900 Individually impaired Bad - - 94 - Gross carrying amount - - 94 - Impairment (94) - Net carrying amount - - - - Past due but not impaired Net carrying amount 311,022 42,236 167,262 34,900 Total gross carrying amount 311,022 42,236 167,356 34,900 Total impairment - - (94) - Total net carrying amount 311,022 42,236 167,262 34,900 22

4. FINANCIAL RISK MANAGEMENT (CONTINUED) Exposure to credit risk and collaterals customers Loans and advances to customers 31 December 2015 31 December 2014 Exposure Collateral Exposure Collateral Book value 459,061 358,741 325,195 199,092 Individually impaired Special mention 9,100 3,854 9,632 2,978 Below average 7,820 6,223 290 184 Doubtful 3,096 1,204 29,828 13,202 Bad 23,879 2,725 22,994 3,282 Gross carrying amount 43,895 14,006 62,744 19,646 Impairment (24,783) - (38,657) - Net carrying amount 19,112 14,006 24,087 19,646 Collectively impaired Problem-free 3,776 3,733 4,474 4,415 Special mention 1,481 1,467 1,893 1,868 Below average 1,398 1,359 1,887 1,846 Doubtful - - 6 6 Bad 222 172 586 512 Gross carrying amount 6,877 6,731 8,846 8,647 Impairment (584) - (1,085) - Net carrying amount 6,293 6,731 7,761 8,647 Past due but not impaired Net carrying amount 2-672 581 Past due days: 1-9 - - 32-16 - 30 2-424 - 31-60 - - 12-91 - 180 - - 48-180 + - - 156 - Neither past due nor impaired Net carrying amount 422,065 326,004 272,273 150,677 Loans with renegotiated terms Problem-free 266 267 216 130 Special mention 1,740 1,681 5,580 5,098 Below average 1,659 1,012 3,955 2,777 Doubtful 15,304 6,985 15,334 6,844 Bad 9,107 2,055 29,178 4,692 Gross carrying amount 28,076 12,000 54,263 19,541 Impairment (16,487) - (33,861) - Net carrying amount 11,589 12,000 20,402 19,541 Total gross carrying amount 500,915 358,741 398,798 199,092 Total impairement (41,854) - (73,603) - Total net carrying amount 459,061 358,741 325,195 199,092 23

4. FINANCIAL RISK MANAGEMENT (CONTINUED) Exposure to credit risk and collaterals off-balance sheet items Off balance sheet exposures 31 December 2015 31 December 2014 Exposure Collateral Exposure Collateral Book value 123,140 6,152 124,285 35,071 Individually impaired Special mention - - 800 736 Doubtful - - 360 118 Gross carrying amount - - 1,160 854 Impairment - - (320) - Net carrying amount - - 840 854 Collectively impaired Gross carrying amount - - 36 35 Impairment - - - Net carrying amount - - 36 35 Neither past due nor impaired Net carrying amount 123,140 6,152 123,409 34,182 Total gross carrying amount 123,140 6,152 124,605 35,071 Total impairement - - (320) - Total net carrying amount 123,140 6,152 124,285 35,071 c) Collateral and other security enhancements An estimate of the fair value of collateral and other security enhancements (up to the amount of receivables) is shown in the table below. In case of project loans the main part of the collateral is materialized during the project in line with the loan disbursement, the collateral is taken into consideration after the realization or capitalization of the project. Collateral against loans and advances to banks Collateral against loans and advances to customers 2015 2014 2015 2014 Property - - 29,538 43,716 Debt securities 1,217 3,411 - - Surety of State and State owned companies 41,019 31,489 281,154 91,434 Cash collateral - - 2,513 3,532 Bank guarantee - - 146 1,026 Other - - 45,390 59,384 42,236 34,900 358,741 199,092 24

4. FINANCIAL RISK MANAGEMENT (CONTINUED) c) Collateral and other security enhancements (continued) Off-balance-sheet receivables from collateral on the Bank s total exposure including on and offbalance sheet items - were HUF 455,535 million as at 31 December 2015 (31 December 2014: HUF 429,619 million). After the Bank s asset side exposure to credit risk and liability side obligations the central budget determined a state guarantee frame. The amount and utilization of the state guarantee frame and the related collaterals were the following: 2015 2014 Asset side state guarantee frame 750,000 600,000 Utilization 248,288 56,740 Collaterals 322,447 137,216 Liability side state guarantee frame 1,800,000 1,800,000 Utilization 1,006,493 772,922 Collaterals 995,768 768,873 d) Restructured loans Gross Impairment Net Opening balance (31 December 2013) 31,771 (12,630) 19,141 New restructured transactions 26,882 (19,515) 7,367 Derecognised (4,449) 333 (4,116) Recovered (1,342) 197 (1,145) Change in evaluation of transaction - (1,523) (1,523) FX change 1,401 (723) 678 Closing balance (31 December 2014) 54,263 (33,861) 20,402 New restructured transactions 797 (153) 644 Derecognised (25,721) 18,636 (7,085) Recovered (1,133) 216 (917) Change in evaluation of transaction - (1,402) (1,402) FX change (130) 77 (53) Closing balance (31 December 2015) 28,076 (16,487) 11,589 25

4. FINANCIAL RISK MANAGEMENT (CONTINUED) e) Concentration of credit risk Loans and advances to customers 2015 2014 Financial services 289,398 76,179 Property development 26,825 41,519 Other services (local governments, health-care, other serivces) 16,565 58,854 Construction (including motorway financing) 45,412 49,370 Industry 21,735 24,094 Agriculture 9,101 10,447 Transport, storage, post, telecoms 46,085 58,038 Trade 3,076 4,629 Accommodation, catering 864 2,065 Total: 459,061 325,195 Loans and advances to banks contains refinancing loans and money market deals in the amount of HUF 311,022 million as at 31 December 2015 (31 December 2014: HUF 167,262 million) (see Note 6). B. LIQUIDITY RISK a) Management of liquidity risk The Bank s principal objective is to carry out secure and established course of business, and the prevention of liquidity situations which could threaten the Bank to meet its obligations. The management of liquidity is determined by the characteristics of the business, the strategy, the yearly business plan, the legal regulations and the regulatory activities of National Bank of Hungary. Liquidity means the availability of funds in amount and in time needed to meet the obligations. Liquidity demand arises when the obligations become due. Liquidity risk is the gap between in and outflows in different amount and time. The Bank must have the required regulatory capital regarding the risks of financial services carried out by the Bank - to maintain the solvency and to meet the obligations, and has to maintain continuously at least 8% capital adequacy ratio. The Bank possesses an adequate amount of liquidity reserves in government securities and disposable credit lines providing high liquidity on money market, therefore the asset side funds of future outflows are continuously provided. Liquidity risk is managed in a preventive manner to minimize the maturity, principal repayment and interest payment mismatch of loans provided in the course of loan programs and other financing. Similar to other market participants, the Bank s potential to raise funds has decreased significantly due to the financial crisis, but this situation started to improve, the fund raising potential has been expanded, although the cost of funds is still above the previous level. Cash flow statements are prepared at least on a monthly basis which contain all cash flow items from the Bank s book and predicted cash flow transactions considering different scenarios. Weekly liquidity reports are prepared for the continuous management of liquidity. 26