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RNS Number:7034J Magyar Fejlesztesi Bank 29 September 2006 Hungarian Development Bank Ltd. Consolidated Financial Statements and Independent Auditor's Report For the year ended 31 December 2005 Page ------ Independent Auditor's Report 1 Consolidated Financial Statements Consolidated Balance Sheet as at 31 December 2005 2 Consolidated Income Statement for the year ended 31 December 2005 3 Consolidated Cash Flow Statement for the year ended 31 December 2005 4 Consolidated Statement of Changes in Shareholders equity 5 Notes to Consolidated Financial Statements 6 - 45 Independent Auditor's Report To the Shareholder of Hungarian Development Bank Ltd. a) We have audited the accompanying consolidated balance sheet of Hungarian Development Bank Ltd. and subsidiaries (the "Group") as at 31 December 2005 and the related consolidated statements of income, shareholders' equity and cash flows for the year then ended (the "consolidated financial statements"). The consolidated financial statements are the responsibility of management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as at 31 December 2005 and the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards. 22 May 2006 KPMG Hungaria Kft. Istvan Henye Partner Hungarian Development Bank Ltd. Consolidated Balance Sheet as at 31 December 2005 (in million HUF) Note December 31 December 31 2005 2004 Cash and balance with the National Bank of Hungary 5 8 604 6 193 Placements with other banks 6 260 307 261 714 Loans and advances to customers, net of allowance for impairment losses 7 481 929 309 296 Financial assets at fair value through profit and loss 8 23 186 25 393 Securities 9 79 211 135 919 Investments in unconsolidated subsidiaries and associates 10 27 864 20 571 Other assets 11 32 265 15 300 Fixed and intangible assets 12 7 791 8 119 --------- -------- TOTAL ASSETS 921 157 782 505 ========= ======== Placements and loans from other banks 13 572 089 477 848 Deposits from customers 14 57 254 20 679 Issued securities 15 131 579 127 463 Financial instruments for hedging 16 98 876 Other liabilities 17 22 645 26 644 --------- -------- Total liabilities 783 665 653 510 --------- -------- Subordinated debt 18 9 500 9 500 --------- -------- Share capital 19 87 570 87 570 Share premium 19 - 52 036 Capital reserve 19 18 082 106 011 Statutory reserves 20 4 342 1 812 Retained earnings 13 177 (132 652) Minority interest 4 821 4 718 --------- -------- Total shareholder's equity 127 992 119 495 --------- -------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY 921 157 782 505 ========= ======== Commitments and contingencies 21 206 347 178 594 The accompanying notes to consolidated financial statements on pages 6 to 48 form an integral part of these consolidated financial statements. Hungarian Development Bank Ltd. Consolidated Income Statement for the year ended 31 December 2005 (in million HUF) Note 2005 2004 Interest and similar income 47 433 43 182 Interest expense and similar charges (23 833) (18 916) -------- -------- Net interest income 23 600 24 266 Release / (charge) for impairment losses of loans and 22 19 479 (7 750) advances -------- -------- Fee and commission income 1 589 1 043 Fee and commission expenses (902) (934) -------- -------- Net fee and commission income 687 109 Profit / (loss) from sale and cease of investments 23 756 (219) Allowance for impairment losses of investments in subsidiaries and associates 22 (4 572) (2 179) Allowance for impairment losses of goodwill 22 (38) (637) Dividend income 145 15 Net result on foreign currency transactions (246) 481 Other provision release / (charge) 22 (4 017) 8 106 Other income 24 4 836 7 343 -------- -------- Other operating income 718 15 945 General and administrative expenses 25 (13 704) (11 959) Other expenses 24 (4 659) (2 568) -------- -------- Other operating expenses (18 363) (14 527) Profit before income tax 22 267 15 008 -------- -------- Taxation 26 (6 224) (1 591) Profit after income tax 16 043 13 417 -------- -------- Minority interest (123) (63) Net profit for the year 15 920 13 354 ======== ======== The accompanying notes to consolidated financial statements on pages 6 to 48 form an integral part of these consolidated financial statements. Hungarian Development Bank Ltd. Consolidated Cash Flow Statement for the year ended 31 December 2005 (in million HUF) Note 2005 2004 Cash flows from operating activities Net profit for the year before taxes 22 144 14 945 Adjustments to reconcile net profit to cash provided by operating activities Depreciation and amortization 1 351 1 282 Allowance (release) / charge for possible loan 22 (19 857) 15 662 losses Allowance (release) / charge for impairment losses of 22 4 572 2 179 investments in subsidiaries and associates Allowance (release) / charge for impairment losses of 22 378 (211) other assets Other provision (release) / charge 22 4 017 (8 106) Allowance (release) / charge for impairment of 22 38 637 goodwill Profit/(loss) on sale of fixed assets 24 (67) 704 (Increase)/decrease in operating assets (Increase)/decrease in placements with other 1 407 (223 523) banks (Increase)/decrease in loans, before impairment for (152 776) (27 868) possible loan losses (Increase)/decrease in financial instruments for 2 207 (21 005) trading (Increase)/decrease in other assets, before (9 559) 25 531 impairment (Increase)/decrease in accrued interest (7 784) (2 777) receivable Increase/(decrease) in operating liabilities Increase / (decrease) in deposits from customers 36 575 (2 658) Increase / (decrease) in placements and loans from other 94 241 246 693 banks Increase / (decrease) in financial instruments for (778) (1 604) hedging Increase / (decrease) in other liabilities (7 672) 1 803 Increase / (decrease) in accrued interest payable (344) 1 284 Income tax paid and deferred tax 26 (6 224) (1 591) -------- -------- Net cash used by operating activities (38 131) 21 377 Cash flows from investing activities (Increase) / decrease in investments in 56 708 9 541 securities (Increase)/decrease in equity investments and associates, (11 865) (17 190) before allowance Net movement in goodwill, before impairment - (789) losses Net movement in negative goodwill - (182) Proceeds from sale of fixed assets 727 309 Proceeds from changes of Group 6 - Acquisition of fixed assets (1 681) (2 196) -------- -------- Net cash provided by investing activities 43 895 (10 507) Cash flows from financing activities Dividend paid during the year (3 000) (6 000) Dividend not paid during the year (8 000) - Increase / (decrease) in bond issue 4 116 (5 712) Valuation of financial instruments 3 428 - Movement of minority interest 103 2 152 -------- -------- Net cash provided by financing activities (3 353) (9 560) Net increase in cash and cash equivalents 2 411 1 310 Cash and cash equivalents as at January 1 6 193 4 883 Cash and cash equivalents as at December 31 8 604 6 193 The accompanying notes to consolidated financial statements on pages 6 to 48 form an integral part of these consolidated financial statements. Hungarian Development Bank Ltd. Statement of changes in Shareholder's equity for the year ended 31 December 2005 (in million HUF) Share Capital Share Capital Statutory Retained Minority Total Premium Reserve Reserves Earnings interest Note 19 19 19 20 Balance at 1 January 2004 87 570 52 036 106 011 678 (138 871) 4 603 112 027 ------- ------------ ------ ------------- -------- ---------- ------------ Capital - increase General reserve 1 134 (1 134) - Net profit for the year 13 354 13 354 Changes in minority interest 115 115 Dividend (6 000) (6 000) Balance at 1 January 2005 87 570 52 036 106 011 1 812 (132 652) 4 718 119 495 ------- ------- ------- ------ -------- ------ -------- Reclassification (52 036) (87 929) 139 965 - General reserve 2 530 (2 530) - Valuation of financial instruments 3 474 3 474 Net profit for the year 15 920 15 920 Changes in minority interest 103 103 Dividend (11 000) (11 000) Balance at 31 December 2005 87 570 - 18 082 4 342 13 177 4 821 127 992 The accompanying notes to consolidated financial statements on pages 6 to 48 form an integral part of these consolidated financial statements. Hungarian Development Bank Ltd. Notes to Consolidated Financial Statements for the year ended 31December 2005 (in million HUF) 1. PRINCIPAL ACTIVITIES The Hungarian Development Bank Ltd. (the "Bank" or "HDB") is registered as a joint-stock company under Hungarian law and is licensed to conduct commercial banking activities in Hungarian Forint and in foreign currency. The Bank is primarily engaged in long-term lending and investment management activities. The legal status and the activities of the Bank are regulated by Act XX of 2001 which came into force on 15 June 2001. The Bank's registered office is located at Nador u. 31, Budapest, Hungary. The Bank is 100% owned by the Hungarian State. In 2005, the rights of ownership were exercised by the Ministry of Economy and Transport. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies adopted by the Bank in preparation of these consolidated financial statements are as follows: a) Basis of presentation These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") adopted by the International Accounting Standards Board ("IASB") and interpretations issued by International Financial Reporting Interpretations Committee ("IFRIC"). The Group maintains its accounting records and prepares its statutory financial statements in accordance with the relevant accounting, banking and fiscal regulations prevailing in Hungary. In order to present these consolidated financial statements in accordance with IFRS, certain adjustments have been made to the Hungarian statutory financial statements. The effect of these adjustments on net income for the year and shareholders' equity is detailed in Note 32. Foreign exchange rates used in the Notes to Consolidated Financial Statements were as follows as at 31 December 2005: 213.58 HUF/USD and 252.73 HUF/EUR (2004: 180.29 HUF/USD and 245.93 HUF/EUR, respectively) These consolidated financial statements are presented in million Hungarian Forints ("MHUF"). Hungarian Development Bank Ltd. Notes to Consolidated Financial Statements for the year ended 31December 2005 (in million HUF) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) b) Adoption of new and revised International Financial Reporting Standards In the current period, the Bank has adopted all of the new and revised IFRS and Interpretations issued by the International Accounting Standards Board (the IASB) and the International Financial Reporting Interpretations Committee (IFRIC) of the IASB that are relevant to its operations and effective for accounting periods beginning on 1 January 2005. c) Foreign currency translation Transactions in foreign currencies are translated to HUF at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to HUF at the foreign exchange rates quoted by the National Bank of Hungary at that date. Foreign exchange differences arising on translation are recognised in the income statement. d) Basis of consolidation Subsidiaries Subsidiaries are those enterprises controlled by the Bank. Control exists when the Bank has the power, directly or indirectly, to govern the financial and operating policies of an enterprise. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control effectively commences until that control effectively ceases. Certain subsidiaries in which the Bank owns a controlling interest have not been consolidated because: - It was management's intention at the date of acquisition, that the shares will be disposed of in the near future, - The owners' right based on shares are restrained by legal regulations. Unconsolidated subsidiaries are included in the consolidated financial statement using the equity method of accounting. Associates Associates are those enterprises in which the Group has significant influence, but not control, over the financial and operating policies. Investments in associated companies are accounted for under the equity method, whereby the investment is initially recorded at cost and adjusted thereafter for the post acquisition change in the Group's share of the net assets of the investee. The income statement reflects the Group's share of the result of operations of the investee and any goodwill impairment losses. Hungarian Development Bank Ltd. Notes to Consolidated Financial Statements for the year ended 31December 2005 (in million HUF) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Jointly controlled entities Jointly controlled entities are those enterprises over whose activities the Group has joint control, established by contractual agreement. The consolidated financial statements include the Group's proportionate share of the enterprises' assets, liabilities, revenue and expenses with items of a similar nature on a line by line basis, from that joint control effectively commences until that joint control effectively ceases. Transactions eliminated during consolidation Intercompany balances and transactions, and any unrealized gains arising from intercompany transactions, are eliminated in preparing the consolidated financial statements. Goodwill Goodwill arising in a business combination is measured initially as the excess of the cost of the business combination over the acquirer's interest in the net fair value of the acquired identifiable assets, liabilities and contingent liabilities recognized. Following the requirements of IFRS 3 no amortization has been charged after 1 January 2004, but goodwill is subject to an annual impairment test. Negative goodwill Negative goodwill arising in a business combination is measured initially as the excess of the net fair value of the acquired identifiable assets, liabilities and contingent liabilities recognized over the cost of the business combination. Negative goodwill arose during 2005 has been credited to the income statement. e) Derivative financial instruments The Group uses derivative financial instruments, interest rate swaps and forward exchange contracts to manage its exposure to foreign exchange and interest rate risks arising from business activities. The Group does not hold or issue derivative financial instruments for trading purposes. The recognition of income/expenses relating to derivative transactions is on a mark-to-market basis. Value changes are immediately recognised in the income statement. Hungarian Development Bank Ltd. Notes to Consolidated Financial Statements for the year ended 31December 2005 (in million HUF) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) f) Financial assets and liabilities i) Classification Financial assets and liabilities at fair value through profit and loss are those that the Group principally holds for the purpose of short term profit taking. These include investments, bonds, certain purchased loans, fair value hedges and derivative contracts that are not designated and effective hedging instruments, and liabilities from short sales of financial transactions. Originated loans and receivables are loans and receivables created by the Group other than those created with the intention of short term profit taking. Originated loans and receivables comprise loans and advances to banks and customers, and advances except purchased loans. Held to maturity assets are financial assets with fixed or determinable payments and fixed maturity that the Group has the intent and ability to hold to maturity. During 2004, the Group reclassified its' held to maturity financial assets to available for sale assets. Accordingly, all held to maturity assets must be classified as available for sale asset or financial asset at fair value through profit and loss in the following two financial years (2005 and 2006). Available for sale assets are financial assets that are not held for trading purposes, originated by the Group or held to maturity. Available for sale instruments include money market placements and certain debt and equity investments. ii) Recognition Financial assets and liabilities are entered into the Group's books on the trade day, except for derivative assets, which are entered on the settlement day. Financial instruments are measured initially at cost, including transaction costs. iii) Measurement Subsequent to initial recognition, all fair value through profit and loss instruments and all available for sale assets are valued at fair value. When no quoted market price exists in an active market and fair value cannot be reliably measured, these instruments and assets are stated at cost including transaction costs. The effect of the valuation of the profit and loss instruments is recognised directly in the income statement and the effect of the measurement of the available of the sale assets is recognised in the equity. All held to maturity financial instruments and originated loans and receivables are measured at amortised cost less impairment. Premiums and discounts, including initial transaction costs, are included in the carrying amount of the related instrument and amortised based on the effective interest rate of the instrument. Hungarian Development Bank Ltd. Notes to Consolidated Financial Statements for the year ended 31December 2005 (in million HUF) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) iv) Fair value measurement principles The fair value of financial instruments is based on their quoted market price at the balance sheet date without any deduction for transaction costs. If a quoted market price is not available, the fair value of the instrument is estimated using pricing models or discounted cash-flow techniques. Where discounted cash-flow techniques are used, estimated future cash-flows are based on the management's best estimates and the discount rate is a market related rate at the balance sheet date for an instrument with similar terms and conditions. Where pricing models are used, inputs are based on market related measures at the balance sheet date. The fair value of derivatives that are not exchange-traded are estimated at the amount that the Group would receive upon normal business conditions to terminate the contract at the balance sheet date taking into account current market conditions and the current creditworthiness of the counterparties. g) Investments in subsidiaries and associates Equity investments classified as controlling interest comprise those investments where the Bank through direct ownership interest, has the power to govern the financial and operating policies of the investee. Equity investments classified as significant interest comprise those investments where the Bank through direct ownership interest, has the power to participate in the financial and operating policies of the investee, but not to control those activities. Other equity investments comprise other share holdings, which do not meet the preceding criteria. The investment portfolio includes investments that the Bank has the intent to hold long term in its portfolio. Long term investments are determined as follows: 1. Act XX of 2001 determines the allowable fully controlled equity investments. 2. The Bank classifies investments in associates held in its portfolio from debt-equity conversions as long term investments. 3. The investment portfolio includes investments managed under the Equity Investment Program. Based on this Program the ownership in these investments cannot exceed 49% and the Bank is obliged to disinvest at the end of the 5th-12 th year after making the investment. The Group does not hold investments for trading purposes. Hungarian Development Bank Ltd. Notes to Consolidated Financial Statements for the year ended 31December 2005 (in million HUF) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) h) Fixed assets and intangible assets Fixed assets are stated at cost less accumulated depreciation. Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of items of property, plant and equipment. Freehold land, works of art, asset under construction, tangibles out of operating are not depreciated. The depreciation rates based on the estimated useful lives are as follows: Property and plant 2 - 6% Rights and property 1 - 50% Investment on rented property 17% Office and other machinery and equipment 14.5 - 20% Mobiles 50% Motor vehicles 20% Computer equipments 17 - 33% Software 12.5 - 33% Other intangible assets 17 - 33% i) Allowance for impairment loan losses The Group reviews its loan portfolios to assess impairment on a quarterly basis. Impairment losses are charged against the carrying amount of loans and advances that are identified as being impaired based on these reviews of outstanding balances and reduce these loans and advances to their recoverable amounts calculated on the basis of discounted future cash flows. Impairment losses are charged against income for the period. If in a subsequent period, the amount of impairment loss decreases, changes in recoverable amounts are recognised through the income statement. j) Bonds issued Bond issued are stated at issue price, modified by the amortisation of the issuance premium or discount. k) Statutory reserves i) General reserve In accordance with Section 75 of Hungarian Act No. CXII of 1996, a general reserve equal to 10% of the net post tax income is required to be made in the Hungarian statutory accounts. The general reserve, as calculated under Hungarian Accounting and Banking Rules in the International Financial Statements, is treated as appropriations against retained earnings, and is not charged against income. Hungarian Development Bank Ltd. Notes to Consolidated Financial Statements for the year ended 31December 2005 (in million HUF) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ii) General risk reserve Under Section 87 of Hungarian Act No. CXII of 1996, a general risk reserve of maximum 1.25% of the risk weighted assets may be made. The general risk reserve is treated as appropriations against retained earnings, and is not charged against income. l) Interest and fee income and expense Interest is accrued and credited to income based on the principal amount outstanding. The accrual of interest on loans is discontinued when, in the opinion of management, there is an indication that a borrower may be unable to meet payments as they come due. In these consolidated financial statements, all unpaid interest belonging to classified clients is reversed upon such discontinuance and maintained in an off-balance sheet suspense account. m) Dividend income Dividends are recognised in the current income statement, if the dividends are declared before the date of these financial statements. n) Transactions in foreign currency The accounting records of the Group are maintained in Hungarian Forints (HUF). Transactions denominated in other currencies are translated at exchange rates ruling at the date of the transaction. Assets and liabilities denominated in other currencies are translated at rates ruling at the balance sheet date. Gains and losses on exchange are recognised in the statement of income for the year. o) Income taxes Income tax on the profit or loss for the year is comprised of current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Income taxes contain the surcharge for financial instutions, which was introduced from 2005. The base of the tax is the profit before taxation and the rate of the surcharge is 8 %. Hungarian Development Bank Ltd. Notes to Consolidated Financial Statements for the year ended 31December 2005 (in million HUF) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Deferred tax is calculated using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the balance sheet date. Under Hungarian tax legislation, banks cannot carry forward tax losses. p) Statement of cash flows For the purposes of reporting cash flows, cash and cash equivalents include cash, balances and placements with the National Bank of Hungary except those with more than three months maturity. q) Reclassification Certain items previously reported in the prior years' financial statements have been reclassified to conform with the current year presentation. Accordingly, in the consolidated income statement the previous year's dividend was reclassified into the retained earnings, because of the modification of IAS 32, which is in force from January 2005. From 2005, the minority interest must be presented as a part of the shareholder's equity. Therefore, the previous year's minority interest was also reclassified into the shareholder's equity. In the income statement the coming above book value was included in the other income in 2004.This amount was reclassified into provision, to meet the applied settlements in 2005. r) Segment reporting A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment that are subject to risks and returns that are different from those of segments operating in other economic environments. Hungarian Development Bank Ltd. Notes to Consolidated Financial Statements for the year ended 31 December 2005 (in million HUF) 3. SUMMARY OF SIGNIFICANT RISK MANAGEMENT POLICIES The most significant business risks to which the Bank is exposed are credit, interest rate, liquidity and foreign exchange risks. Risk management policies are set by the Board of Directors of the Bank within the rules established by the National Bank of Hungary and the Hungarian Financial Institutions Supervision. The Board implements these policies. The Bank has established reporting systems, which permit monitoring of risk exposures. The Bank contracts transactions in the ordinary course of business in various currencies and uses the various financial instruments at its disposal. On and off-balance sheet financial assets and liabilities are denominated in these various currencies and, unless otherwise stated, are stated at year end FX rates, unless accounted for as a hedge. Banking transactions, unless otherwise stated, are effected at market rate. a) Credit risk Credit risk is the risk that a customer or counterparty of the Bank will be unable or unwilling to meet a commitment that it has entered into with the Bank. It arises from lending, investment and other activities undertaken by the Bank. Credit risk is managed by the Board of Directors which establishes credit regulations including the approval process, discretionary credit limits, portfolio concentration guidelines, standards for the measurement of credit exposures, risk ratings of clients and assessments of management quality and financial performances. Each outstanding loan and investment is reviewed quarterly. Loans are classified based on a point rating system, which incorporates qualitative and quantitative factors. The asset side state guarantee frame, declared by the law for the group was HUF 480 billion in 2005 (2004: HUF 280 billion). The liability side state guarantee frame for the Group was HUF 1,220 billion (2004: HUF 1,020 billion) b) Interest rate risk Interest rate risk is measured by the extent to which changes in market interest rates impact on margins and net interest income. Gaps in the value of assets, liabilities and off-balance sheet instruments that mature or reprice during a given period generate interest rate risk. The Bank reduces this risk by matching the repricing of assets and liabilities using pricing/maturity techniques, including the use of derivative products. (CONTINUED) Interest rate risk is managed by the Board of Directors through the mandate given to the Asset-Liability Committee, which establishes and delegates position limits, and monitors such limits to restrict the effect of movements in interest rates on current earnings and on the value of interest sensitive assets and liabilities. c) Liquidity risk The Bank's policy is to manage the structure of its assets and liabilities and commitments in ways which create opportunities to maximize income while ensuring that funds will be available to honour all cash outflow obligations as these become due. Expected cash flows and daily liquidity reports are provided to management to enable timely liquidity monitoring. d) Foreign exchange risk The Bank has assets and liabilities, both on and off-balance sheet, denominated in various foreign currencies. Foreign exchange risk arises when the actual or forecasted assets in a foreign currency are either greater or less than the liabilities in that currency. The Bank manages the currency structure of assets and liabilities on and off-balance sheet, utilising forward foreign exchange transactions and other hedging instruments. It is the policy of the Bank that it should not speculate in currencies and should only take currency positions within strict limits. The Board of Directors establishes and monitors specific regulations based on statutory and internal limits, and approves the overall strategy. Adherence to these limits, including intra day limits, is monitored continuously. The Foreign Exchange Guarantee Agreement between the Bank and the Hungarian Ministry of Finance was signed on 27 January 2004 with retroactive effect. This agreement manages foreign exchange risks of the Bank's foreign currency borrowings (Euro). Based on this agreement, State compensates any foreign exchange loss of the Bank arising from the placements denominated in other than Euro. However, the Bank is required to pay to the State the amount of realised foreign exchange gains on these transactions at the final maturity of the borrowings or upon introduction of the Euro as the official currency of Hungary. The FX guarantee frame for the Group was HUF 900 billion in 2005 (2004: HUF 530 billion). Hungarian Development Bank Ltd. Notes to Consolidated Financial Statements for the year ended 31 December 2005 (in million HUF) 4. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES The Bank makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Bank reviews its loan portfolios to assess impairment at least on a quarterly basis. In determining whether an impairment loss should be recorded in the income statement, the Bank makes judgements as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. 5. CASH AND BALANCES WITH THE NATIONAL BANK OF HUNGARY 2005 2004 ------ ------ Cash 6 6 Due from banks 809 4 125 Balances with National Bank of Hungary (NBH): Obligatory reserve in HUF 2 930 147 Other 4 859 1 915 ------- ------- 8 604 6 193 According to the regulation of the National Bank of Hungary, financial institutions are required to place 5 % of certain customer deposit as a statutory reserve in 2005. The rate of this reserve in 2004 was 5%. 6. PLACEMENTS WITH OTHER BANKS 2005 2004 ------ ------ Maturity within one year 132 216 132 747 Maturity over one year 128 128 129 028 -------- -------- 260 344 261 775 Allowance for impairment losses (37) (61) -------- -------- (See Note 22. - part of impairment loan losses) 260 307 261 714 Placements with banks as at 31 December 2005 and 2004 can be broken down by weighted average interest rates as follows: 2005 2004 ------ ------ Placements with other banks in HUF 3,55% 4,72% Placements with other banks in foreign currency 4,06% 3,80% Hungarian Development Bank Ltd. Notes to Consolidated Financial Statements for the year ended 31 December 2005 (in million HUF) 7. LOANS AND ADVANCES TO CUSTOMERS, NET OF ALLOWANCE FOR IMPAIRMENT LOSSES 2005 2004 ------ ------ Maturity within one year 318 942 111 984 Maturity over one year 218 392 257 383 -------- -------- 537 334 369 367 Allowance for impairment losses (55 405) (60 071) -------- -------- (See Note 22. - part of impairment loan losses) 481 929 309 296 The cause of the increase of loans to customers with a maturity within one year is a loan with a maturity of 31 March 2006, which was prolonged till the end of 2007 in the second half of 2006. Loans as at 31 December 2005 and 2004, can be broken down by weighted average interest rates as follows: 2005 2004 ------ ------ Loans in HUF 8,15% 10,70% Loans in foreign currency 4,03% 3,36% 8. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT AND LOSS 31 December 2005 31 December 2004 ------------------ --- ------------------ Cost Unrealised gain/(loss) Book value Cost Unrealised gain/(loss) Book value ------ -------------- ------------ --- ------ ----------------- ------------ Securities Government bonds 18 931 130 19 061 22 379 (95) 22 284 Discount treasury 1 799 - 1 799 - - - bills Other securities 2 317 9 2 326 3 109 - 3 109 ------- -------- ------- ------- --------- ------- Total 23 047 139 23 186 25 488 (95) 25 393 Hungarian Development Bank Ltd. Notes to Consolidated Financial Statements for the year ended 31 December 2005 (in million HUF) 9. SECURITIES 31 December 2005 31 December 2004 ------------------ --- ------------------ Cost Unrealised gain/(loss) Book value Cost Unrealised gain/(loss) Book value ------ -------------- ------------ --- ------ ----------------- ------------ Available for sale assets Government Bonds 70 033 3 274 73 307 131 041 (1 146) 129 895 FCY 2 128 18 2 146 1 797 80 1 877 Bonds NBH 16 - 16 16 - 16 Bonds Discount treasury 310 (8) 302 - - - bills Other 3 440 - 3 440 4 131 - 4 131 Bonds ------- -------- ------- ------- ---------- ------- Total 75 927 3 284 79 211 136 985 (1 066) 135 919 Investments in debt securities as at 31 December 2005 and 2004 can be broken down by currency and interest rates as follows: 2005 2004 ------ ------ Hungarian Government bonds within one year in HUF 6.50% - 7.00% 5.21% - 11.09% Hungarian Government bonds between one and five 6.25% - 9.25% 6.25% - 11.37% years in HUF Hungarian Government bonds between one and five years in foreign currency 6,50% 6,50% Hungarian Government bonts over five years in HUF 5.50% - 7.50% - Other bank bonds between one and five years in HUF 7,90% 12% NBH bonds over one year in HUF 6,43% 11,32% Corporate bonds between one and five years in HUF 8.74% - 9.80% 8.74 - 9.80% Hungarian Development Bank Ltd. Notes to Consolidated Financial Statements for the year ended 31 December 2005 (in million HUF) 10. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES AND ASSOCIATES 2005 2004 ------ ------ Investment in unconsolidated subsidiaries 384 1 998 Investment in associates 32 113 17 327 Other investments 3 253 4 079 -------- -------- 35 750 23 404 Allowance for impairment (See Note 22) (7 886) (2 833) -------- -------- 27 864 20 571 The Group's investments as at 31 December 2005 and as at 31 December 2004 were as follows: Name of the company Industry Direct and indirect Direct and indirect proprietary ratio in 2005 proprietary ratio in 2004 --------------------- ---------- ------------------- ------------------- Consolidated subsidiaries ---------------------------- Corvinus Nemzetkozi Befektetesi Equity 100,00% 94,44% ZRt. management Magyar Kozmu ZRt. Infrastructure 100,00% 100,00% Magyar Export-Import Bank ZRt. Export 74,95% 74,95% financing Magyar Exporthitel Biztosito ZRt. Export credit 74,94% 74,94% insurance Magyar Koveteleskezelo ZRt. Factoring 100,00% 100,00% Nemzeti Lakasberuhazo es Ingatlanfejles zto ZRt. Property 100,00% 100,00% management Unconsolidated subsidiaries ----------------------------- CW-Abwicklungs AG. I.a. Financial 100,00% 100,00% services Defend Security Kft. V.a Services 60,00% 60,00% D-Park Kft. V.a. Property 100,00% 100,00% management Lacto-Csik S.A.* Agricultural 50,71% 50,71% Melcom-Ing Kft. V.a. Property 100,00% 100,00% management MFB Uzemeltetesi, Fenntartasi es Szolgaltatasi Kft. V.a. Services - 100,00% Motor-Force Impex Srl.* Commercial 57,80% 57,80% REGLAMA Szolgaltato Kft. V.a. Property - 100,00% management Techno Ingatlanforgal- mazasi Kft. V.a. Equity - 100,00% management Toketars Kft. V.a. Equity - 100,00% management Trewin Rt. V.a. Advisory 100,00% 100,00% services Vecsei 2005 Ingatlanforgal mazasi Kft. Property 100,00% - services Hungarian Development Bank Ltd. Notes to Consolidated Financial Statements for the year ended 31 December 2005 (in million HUF) INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES AND ASSOCIATES (CONTINUED) Name of the company Industry Direct and indirect Direct and indirect proprietary ratio in 2005 proprietary ratio in 2004 Associates ------------ Albertfalva Uzletkozpont Kft. Property 49,00% 49,00% management Aranykapu ZRt. Agricultural 48,94% 48,93% Beszallitoi Befekteto ZRt. Capital 49,00% - investments Budai Egeszsegkozpont Kft. Healthcare 49,00% 49,00% Bukkszeki Sport- es Gyogyhotel Kft. Hydro-hotel 48,98% - operation Civil Biztonsagi Szolgalat ZRt. Services 48,72% 48,72% Construktor Kft. Property 48,87% 48,87% management Csepany es Tarsai Kft. Food industry 48,62% - Csepeli Lakasfejleszto Kft. Ingatlanfejlesztes 49,00% - Debreceni Hus Rt. Agricultural 49,00% 48,99% Dioszeghy Udvar Kft. Property 49,00% - investments Egressy Ingatlanberuha zo Rt. Property 48,91% 49,09% management Firebird-Furedi Kapu Kft. Property 48,95% 48,95% management Ganz Transelektro Villamossagi ZRt. Heavy industry 41,98% 41,98% Grafika Press Rt. Printing 48,98% - Hotel Egerszalok ZRt. Hotel services 20,00% - Hunguest Hotels Montenegro Hotel services 44,50% - Immo-Invest 21 Kft. Property 49,00% - construction Intergass Hungaria ZRt. Energy source 48,78% 48,78% wholesaler Kereszturi Ingatlanfejles zto Rt. Property 48,98% 48,98% management Kiskunhalasi Baromfifeldolg ozo Rt. Food industry 47,85% 47,85% Megatrend Romania Srl. Advisory services 39,39% 39,39% Organica ZRt. Sewage 48,97% - Polus Palace ZRt. Tourism 48,99% 48,99% Salina Invest S.A Equity management 43,51% 43,51% Studio '96 ZRt. Printing 49,00% - Szalok Holding ZRt. Tourism 48,93% 48,93% Telepes Projekt Kft. Property 48,78% 48,78% management Viktoria Gem Kft. Commercial 48,78% 48,78% * These investments were consolidated using the equity method, because of insignificant size of the subsidiaries' equity. The Group's share of the equity of these subsidiaries does not exceed 50 MHUF. Unconsolidated subsidiaries which are not signed are under liquidation. Hungarian Development Bank Ltd. Notes to Consolidated Financial Statements for the year ended 31 December 2005 (in million HUF) 11. OTHER ASSETS 2005 2004 ------ ------ Accrued interest receivables and other accruals 15 366 7 582 Receivables from the State (exchange rate risk guarantee) 11 038 1 421 Receivables from APV Rt. - 225 Receivables from credit insurance 138 1 063 Trade receivables 22 941 Other receivables 2 686 1 467 Property held for re-sale 2 323 2 323 Advances 152 61 Taxation recoverable 1 051 450 Other assets 160 102 ------- ------- 32 936 15 635 Allowance for impairment losses (671) (335) ------- ------- (See Note 22. - impairment of other receivables and other asets) 32 265 15 300 The increase of receivables from State in connection with exchange rate risk guarantee is mainly explained by the rising exchange rate and the increase of the guarantee frame. Hungarian Development Bank Ltd. Notes to Consolidated Financial Statements for the year ended 31 December 2005 (in million HUF) 12. FIXED ASSETS AND INTANGIBLE ASSETS Movement of fixed and intangible assets in 2005: Intangible assets Land and buildings Equipment Work in Progress Goodwill Total Cost Opening balance 4,440 3,541 4,389 206 931 13,507 Derecognition in accordance with IFRS 3 - - - - -740 -740 Movement from purchase or sale of subsidiaries - - - - -6 -6 Additions 848 127 619 1677 153 3,424 Disposals -214 -501 -522 -1,594 - -2,831 ------- -------- ------- ------ ------ ----- Closing balance 5,074 3,167 4,486 289 338 13,354 ------- -------- ------- ------ ------ ----- Amortization Opening balance 2,005 822 1,924 - - 4,751 Additions 729 86 691 - - 1,506 Disposals -38 -311 -383 - - -732 ------- -------- ------- ------ ------ ----- Closing balance 2,696 597 2,232 - 0 5,525 ------- -------- ------- ------ ------ ----- Impairment of goodwill in 2004 - - - - -637 -637 Impairment of goodwill in 2005 - - - - -38 -38 (see Note 22) Net book value 31 December 2004 2,435 2,719 2,465 206 294 8,119 ======= ======== ======= ====== ====== ===== 31 December 2005 2,378 2,570 2,254 289 300 7,791 ======= ======== ======= ====== ====== ===== Movement of fixed and intangible assets in 2004: Intangible assets Land Equipment Work in progress Goodwill Negative Total and buildings goodwill Cost Closing balance 4 440 3 541 4 389 206 931 - 13 507 Amortization Closing balance 2 005 822 1 924 - - - 4 751 Impairment of goodwill (see Note 22) - - - - (637) - (637) Net book value 31 December 2003 2 064 3 435 1 412 948 208 (182) 7 885 31 December 2004 2 435 2 719 2 465 206 294 - 8 119 Hungarian Development Bank Ltd. Notes to Consolidated Financial Statements for the year ended 31 December 2005 (in million HUF) 13. PLACEMENTS AND LOANS FROM OTHER BANKS 2005 2004 ------ ------ Payable within one year: National Bank of Hungary in HUF 606 1 290 Other banks in HUF 28 808 51 897 Other banks in foreign currency 115 353 80 807 Payable over one year: National Bank of Hungary in HUF 303 909 Other banks in HUF 18 737 18 738 Other banks in foreign currency 408 282 324 207 ------- ------- 572 089 477 848 Deposits from the National Bank of Hungary and deposits and loans from other banks as at 31 December 2005 and 2004 can be broken down by weighted average interest rates as follows: 2005 2004 ------ ------ NBH and other banks in HUF 7,42% 11,09% NBH and other banks in foreign currency 3,57% 2,26% 14. DEPOSITS FROM CUSTOMERS 2005 2004 ------ ------ Payable within one year: HUF 50 347 14 514 Foreign currency - - Payable over one year: HUF 331 166 Foreign currency 6 576 5 999 ------- ------- 57 254 20 679 Deposits from customers as at 31 December 2005 and 2004 can be broken down by weighted average interest rates as follows: 2005 2004 ------ ------ Deposits from customers in HUF 7,50% 11,58% Deposits from customers in foreign currency 2,39% 2,37% Hungarian Development Bank Ltd. Notes to Consolidated Financial Statements for the year ended 31 December 2005 (in million HUF) 15. ISSUED SECURITIES Issued securities include the following bonds: a) EURO Bond The Bank issued bonds with a nominal value of EUR 450 million on 12 June 2001. The purpose of the issuance was to provide a general source of funds for the Bank's activities. The State granted an exchange rate risk guarantee frame for the sources of loan scheme financing. The bonds were issued with a maturity date of 12 June 2006, and a fixed interest rate of 5.25%. The issuance was made at a 99.375% quotation rate. b) HUF Bond In the framework of its HUF 100,000 million Bond Issuance Program, the Bank issued bonds in the amount of HUF 12,000 million with a value date of 25 November 2002. The amount of the same series of bonds was increased by HUF 6,422 million by an issue made with a value date of 7 March 2003. The bonds were issued with a maturity date of 25 November 2007, and a fixed interest rate of 6.25%. The Bank swapped the fixed rate to a variable rate (see Note 16). 16. FINANCIAL INSTRUMENTS FOR HEDGING a) Foreign currency IRS deals The Bank concluded SWAP deals for the purpose of hedging the interest risk of foreign currency fixed interest rate bonds issued by the Hungarian National Bank. The amount of MHUF 10 included in the balance sheet reflects these deals' positive market value (2004: MHUF 119 liability). b) HUF IRS deals The financial instrument for hedging balance includes the market value of the SWAP deals to hedge the interest risk of issued HUF bonds by the Bank. The amount as at 31 December 2005 was MHUF 108 liability. (2004: MHUF 757 liability). Hungarian Development Bank Ltd. Notes to Consolidated Financial Statements for the year ended 31 December 2005 (in million HUF) 17. OTHER LIABILITIES 2005 2004 ------ ------ Accrued interest payable and other accruals 7 416 7 760 Trade creditors 366 1 838 Tax liability 783 726 Provisions (see Note 22) 5 206 15 680 Dividend payable 8 000 - Other 874 640 ------- ------- 22 645 26 644 18. SUBORDINATED DEBT In May 1998, the State Lottery and Gambling Plc. (Szerencsejatek Rt.), a company wholly owned by the Hungarian Government, purchased subordinated bonds from the Bank for MHUF 9,500. The maturity of the bonds is 10 years, and bear 0% interest. The Ministry of Finance became the owner of the bonds, according to a agreement dated 29 December 1998. The maturity date of the bonds is 30 April 2008. 19. SHARE CAPITAL, SHARE PREMIUM AND CAPITAL RESERVES 100% of the shares are owned by the Hungarian State. The rights of the ownership belong to the Minister of Ministry of Economy and Transport. a) Subscribed capital 2005 2004 ------ ------ 87,570 ordinary shares with a nominal value of HUF 1 million each 87 570 87 570 Hungarian Development Bank Ltd. Notes to Consolidated Financial Statements for the year ended 31 December 2005 (in million HUF) SHARE CAPITAL, SHARE PREMIUM AND CAPITAL RESERVES (CONTINUED) b) Share premium 2005 2004 ------ ------ Share premium - 52 036 c) Capital reserve In 2005 the Bank transferred its negative retainded earnings into the share premium and capital reserve according to the decision of the management. 20. STATUTORY RESERVES 2005 2004 ------ ------ General reserve 3 742 1 812 General risk reserve 600 - ------- ------- 4 342 1 812 21. COMMITMENTS AND CONTINGENT LIABILITIES 2005 2004 ------ ------ Unused credit facility 123 609 89 696 Guarantees 62 610 73 954 Law cases 6 797 1 527 Capital increase commitment 3 614 620 European Investment Found subscription commitment 6 557 6 181 Other commitments and contingent liabilities 3 160 6 616 ------- ------- 206 347 178 594 Hungarian Development Bank Ltd. Notes to Consolidated Financial Statements for the year ended 31 December 2005 (in million HUF) 22. ALLOWANCE FOR IMPAIRMENT LOSSES AND PROVISIONS Net movement in the impairments and provisions were as follows in 2005: a) Changes in the allowance of impairment for loan losses, investments, other receivables, other assets and goodwill: Loans Other receivables Other assets Total Opening balance at 1 January 2005 60 132 233 102 60 467 Charge 18 356 511 106 18 973 Release (22 722) (239) - (22 961) Utilization and FX 675 6 (48) 633 changes Release because of repayment (15 491) - - (15 491) Reclassification 14 491 - - 14 491 --------- --------- --------- -------- Closing balance at 31 December 2005 55 441 511 160 56 112 Net movement in (4 691) 278 58 (4 355) impairment Utilization (675) (6) 48 (633) --------- --------- --------- -------- Charged to income (19 857) 272 106 (19 479) statement Goodwill Investments Total --- --- --- Opening balance at 1 January 2005 637 2 833 3 470 Reclassification (634) 634 - Net movement due to sale or purchase of subsidiaries (3) - (3) Charge 38 4 572 4 610 Release - - - Utilization - (153) (153) --------- --------- -------- Closing balance at 31 December 2005 38 7 886 7 924 Net movement in impairment 38 4 419 4 457 Utilization - 153 153 --------- --------- -------- Charged to income statement 38 4 572 4 610 Hungarian Development Bank Ltd. Notes to Consolidated Financial Statements for the year ended 31 December 2005 (in million HUF) ALLOWANCE FOR IMPAIRMENT LOSSES AND PROVISIONS (CONTINUED) b) Net changes in provisions: Other provision Provision for off balance sheet items Total Opening balance at 1 January 2005 2 245 13 435 15 680 Charge 1 201 2 816 4 017 Release - - - Reclassificati on (988) (13 503) (14 491) ---------- ---------- --------- Closing balance at 31 December 2005 2 458 2 748 5 206 Charged to income statement 1 201 2 816 4 017 Net movement in the impairments and provisions were as follows in 2004: c) Changes in the allowance of impairment for loan losses, investments, other receivables, other assets and goodwill: Loans Other receivables Other assets Total Opening balance at 1 January 2004 59 178 1 308 207 60 693 Reclassification 643 (643) - - Net movement due to sale or purchase of subsidiaries 3 695 4 - 3 699 Charge 17 016 68 75 17 159 Release (1 354) (335) (19) (1 708) Release because of repayment (7 701) - - (7 701) Utilization (11 345) (169) (161) (11 675) --------- --------- --------- --------- Closing balance at 31 December 2004 60 132 233 102 60 467 Net movement in impairment (3 384) (436) (105) (3 925) Utilization 11 345 169 161 11 675 --------- --------- --------- --------- Charged to income statement 15 662 (267) 56 15 451 Hungarian Development Bank Ltd. Notes to Consolidated Financial Statements for the year ended 31 December 2005 (in million HUF) ALLOWANCE FOR IMPAIRMENT LOSSES AND PROVISIONS (CONTINUED) Goodwill Investments Total Opening balance at 1 January 2004 - 730 730 Charge 637 2 187 2 824 Release - (8) (8) Utilization - (76) (76) ---------- ---------- --------- Closing balance at 31 December 2004 637 2 833 3 470 Net movement in impairment 637 2 103 2 740 Utilization - 76 76 ---------- ---------- --------- Charged to income statement 637 2 179 2 816 d) Net changes in provisions: Other provision Provision for off balance sheet items Total Opening balance at 1 January 2004 181 21 286 21 467 Reclassificati on (8) 8 - Net movement due to sale or purchase of subsidiaries 2 223 96 2 319 Charge 22 5 192 5 214 Release (168) (6 263) (6 431) Utilization (5) (6 884) (6 889) ---------- ------------- -------- Closing balance at 31 December 2004 2 245 13 435 15 680 Charged to income statement (151) (7 955) (8 106) 23. PROFIT / (LOSS) FROM SALES AND CEASE OF INVESTMENTS The Group's result on the sale of investments was MHUF 756 in 2005. The loss on the sale of investments was MHUF 219 in 2004. Hungarian Development Bank Ltd. Notes to Consolidated Financial Statements for the year ended 31 December 2005 (in million HUF) 24. OTHER OPERATING INCOME/EXPENSES Other operating income 2005 2004 ------ ------ Income from non-financial activities 1 174 1 392 Profit on sale of fixed assets - 704 Unrealised gain on financial instruments 140 - Gain on sale of receivables 1 063 3 234 Derecognition of negative goodwill 1 171 1 335 Fee income from insurance 558 - Other income 730 678 -------- ------- 4 836 7 343 Other operating expenses 2005 2004 ------ ------ Loss on the sale of available for sale securities 578 537 Other expenses related to loans 7 14 Charitable donations 367 595 Loss on sale of fixed assets 67 - Material costs 624 741 Remitted receivables 719 - Fees 1 488 - Other operating expenses 809 681 -------- ------- 4 659 2 568 25. GENERAL AND ADMINISTRATIVE EXPENSES 2005 2004 ------ ------ Salaries and employee benefits 8 147 6 201 Depreciation and amortization 1 351 1 137 Other expenses 4 206 4 621 ------- ------- 13 704 11 959 The average number of the employees in the Group was 623 in 2005 (2004: 409). The number of employees of two subsidiaries - Magyar Export-Import Bank ZRt. and Magyar Exporthitel Biztosito ZRt. - appears first time in 2005. These subsidiaries have been controlled by the Bank since the end of 2004. Hungarian Development Bank Ltd. Notes to Consolidated Financial Statements for the year ended 31 December 2005 (in million HUF) 26. INCOME TAXES The tax charge for the year is based on the profit for the year according to the statutory accounts of the Group as adjusted for the relevant taxation regulation. The tax rate in Hungary for the year ended 31 December 2005 was 16% (2004: 16%). In 2005 and 2006 banks are subject of a surcharge of 8 % for financial institutions. 2005 2004 Corporation tax 6,224 1,465 Deferred payment - temporal difference: - Revaluation of financial instruments - 126 -------- ---------- - 126 Tax payable in the Income Statement 6,224 1,591 Effective tax rate 2005 2005 2004 2004 ------ ------ ------ ------ Profit before income taxes 22 144 14 945 Taxes by law 16,00% 3 543 16,00% 2 391 Surcharge 8,00% 1 772 - - Tax base correction 0,61% 134 -1,75% (262) Self revision - - -0,16% (23) Effects of consolidation entries 1,73% 383 -1,05% (157) Effect of IFRS 3 - - -1,38% (207) Valuation of financial instruments 2,22% 491 -1,86% (277) Result on the involvement of associated companies 0,16% 36 General risk reserve -0,61% (135) - - Revaluation of financial instruments - - 0,84% 126 Effective tax liability 28,11% 6 224 10,65% 1 591 Hungarian Development Bank Ltd. Notes to Consolidated Financial Statements for the year ended 31 December 2005 (in million HUF) 27. FOREIGN CURRENCY BALANCE SHEET AND CURRENCY RISK ANALYSIS The foreign currency balance sheet was as follows as at 31 December 2005: HUF EUR Other foreign currencies Total ------- ------- --------- ------- Assets Cash and cash 7 942 662 - 8 604 equivalents Placements with other 125 365 108 726 26 216 260 307 banks Loans, net of allowance for 363 015 104 941 13 973 481 929 impairment losses Financial assets at fair value 23 097 89 - 23 186 through profit and loss Securities 75 963 610 2 638 79 211 Equity investments 25 240 1 367 1 257 27 864 Other assets 30 660 1 302 303 32 265 Fixed and intangible 7 791 - - 7 791 assets ------- ------- --------- ------- Total assets (1) 659 073 217 697 44 387 921 157 ------- ------- --------- ------- Liabilities Placements and loans from other 47 507 481 483 43 099 572 089 banks Deposits from 50 678 6 571 5 57 254 customers Issued securities 17 850 113 729 - 131 579 Financial instruments for - - 98 98 hedging Other liabilities 16 441 5 825 379 22 645 ------- ------- --------- ------- Total liabilities 132 476 607 608 43 581 783 665 ------- ------- --------- ------- Subordinated debt 9 500 - - 9 500 ------- ------- --------- ------- Shareholder's equity 127 992 - - 127 992 ------- ------- --------- ------- Total liabilities and shareholder's equity 269 968 607 608 43 581 921 157 (2) ------- ------- --------- ------- Net Exposure (1) - 389 105 (389 911) 806 - (2) Commitments and Contingent 187 360 18 892 95 206 347 Liabilities ------- ------- --------- ------- Net foreign currency position 576 465 (371 019) 901 206 347 at 31 December 2005 ------- ------- --------- ------- The foreign currency balance sheet was as follows as at 31 December 2004: HUF EUR Other foreign currency Total ------- -------- ---------- ------- Total assets (1) 536 997 199 426 46 082 782 505 Total liabilities and Shareholder's 254 726 490 083 37 696 782 505 equity (2) Net exposure (1) - (2) 282 271 (290 657) 8 386 - Commitments and Contingencies 161 423 17 171 - 178 594 Net foreign currency position at 31 December 2004 443 694 (273 486) 8 386 178 594 Hungarian Development Bank Ltd. Notes to Consolidated Financial Statements for the year ended 31 December 2005 (in million HUF) 28. MATURITY STRUCTURE OF ASSETS AND LIABILITIES The maturity structure of assets and liabilities were as follows as at 31 December 2005: Up to 1 month 1 to 3 3 months to 1 to 5 Over 5 years Without maturity Total months 1 year years Assets Cash and cash equivalents 3 729 - - - - 4 875 8 604 Placements with other banks 58 006 22 699 51 373 89 420 38 809 - 260 307 Loans, net of allowance for impairment losses 23 887 73 144 205 115 96 105 83 678 - 481 929 Financial assets at fair value through profit and 797 1 060 8 868 5 269 7 192 - 23 186 loss Securities - 810 14 898 44 247 19 256 - 79 211 Equity investments * - 419 1 541 6 339 2 691 16 874 27 864 Other 1 481 10 18 975 11 590 209 - 32 265 assets Fixed and intangible assets - - - - - 7 791 7 791 Total assets (1) 87 900 98 142 300 770 252 970 151 835 29 540 921 157 Liabilities Placements and loans from 32 659 35 065 77 047 331 639 95 679 - 572 089 other banks Deposits from customers 21 325 13 408 15 645 6 318 558 - 57 254 Issued securities - - 113 730 17 849 - - 131 579 Financial instruments for hedging - - - 98 - - 98 Other liabilities 2 109 296 18 504 1 038 698 - 22 645 Total liabilities 56 093 48 769 224 926 356 942 96 935 - 783 665 Subordinated debt - - - 9 500 - - 9 500 Shareholder's equity - - - - - 127 992 127 992 Total liabilities and shareholder's equity (2) 56 093 48 769 224 926 366 442 96 935 127 992 921 157 MISMATCH (1)-(2) 31 807 49 373 75 844 (113 472) 54 900 (98 452) - The maturity structure of assets and liabilities were as follows as at 31 December 2004: Up to 1 month 1 to 3 months 3 months to 1 year 1 to 5 years Over 5 years Without Total maturity ------ ------ ------ ------- ------- ------- ------- Total assets (1) 78 377 64 361 133 815 355 289 121 967 28 696 782 505 Total liabilities and Shareholder's equity (2) 89 054 17 355 53 224 439 026 48 671 135 175 782 505 ------ ------ ------ ------- ------- ------- -------- MISMATCH (1)-(2) (10 677) 47 006 80 591 (83 737) 73 296 (106 479) - * Investments connected to development equtiy investments have maturity. Hungarian Development Bank Ltd. Notes to Consolidated Financial Statements for the year ended 31 December 2005 (in million HUF) 29. INTEREST RISK - REPRICING ANALYSIS The repricing of assets and liabilities were as follows as at 31 December 2005: Up to 1 month 1 to 3 months 3 months to 1 year 1 to 5 years Over 5 years Without Total interest ------ ------- ------ ------- ------ ------- ------ Assets Cash and cash equivalents 8 604 - - - - - 8 604 Placements with other banks 252 182 3 105 411 4 498 111 - 260 307 Loans, net of allowance for impairment losses 42 017 185 802 185 878 46 770 21 462 - 481 929 Financial assets at fair value through profit and 797 1 059 8 868 5 270 7 192 - 23 186 loss Securities - 810 14 898 44 247 19 256 - 79 211 Equity investments - 419 1 541 6 339 2 691 16 874 27 864 Other 1 481 10 18 975 11 590 209 - 32 265 assets Fixed and intangible assets - - - - - 7 791 7 791 ------ ------- ------ ------- ------ ------- ------ Total assets (1) 305 081 191 205 230 571 118 714 50 921 24 665 921 157 ------ ------- ------ ------- ------ ------- ------ Liabilities Placements and loans from 237 395 254 000 79 306 1 388 - - 572 089 other banks Deposits from customers 21 787 13 618 15 654 6 225 (30) - 57 254 Issued securities - - 113 730 17 849 - - 131 579 Financial instruments for hedging - - - 98 - - 98 Other liabilities 2 109 296 18 504 1 038 698 - 22 645 ------ ------- ------ ------- ------ ------- ------ Total liabilities 261 291 267 914 227 194 26 598 668 - 783 665 ------ ------- ------ ------- ------ ------- ------ Subordinated debt - - - - - 9 500 9 500 ------ ------- ------ ------- ------ ------- ------ Shareholder's equity - - - - - 127 992 127 992 ------ ------- ------ ------- ------ ------- ------ Total liabilities and shareholder's equity (2) 261 291 267 914 227 194 26 598 668 137 492 921 157 ------ ------- ------ ------- ------ ------- ------ MISMATCH (1)-(2) 43 790 (76 709) 3 377 92 116 50 253 (112 827) - The repricing of assets and liabilities were as follows as at 31 December 2004: Up to 1 month 1 to 3 months 3 months to 1 year 1 to 5 years Over 5 years Without Total interest ------ ------ ------- ------ ------ ------- ------ Total assets (1) 290 775 165 324 104 293 144 480 48 810 28 823 782 505 Total liabilities and Shareholder's equity (2) 219 981 170 201 105 605 131 669 10 374 144 675 782 505 ------ ------ ------- ------ ------ ------- ------ MISMATCH (1)-(2) 70 794 (4 877) (1 312) 12 811 38 436 (115 852) - Hungarian Development Bank Ltd. Notes to Consolidated Financial Statements for the year ended 31 December 2005 (in million HUF) 30. SEGMENT INFORMATION The segment information for the year 2005: Segment ------------------------- Bank Other financial institutions Insurance Corporates Cons. adjustment Total ======= ========= ======= ======== ======== ======= Cash and balances with National Bank of Hungary 7 964 24 15 4 576 (3 975) 8 604 Placements with other banks 152 054 109 990 450 - (2 187) 260 307 Loans, net of allowance for impairment losses 456 696 26 187 50 430 (1 434) 481 929 Other 28 127 1 332 414 2 460 (68) 32 265 assets Financial assets at fair value through profit and - 8 676 7 651 6 859 - 23 186 loss Securities 78 093 1 118 - - - 79 211 Equity investments 53 382 298 - 13 755 (39 571) 27 864 Fixed and intangible assets 5 714 412 125 1 324 216 7 791 ------- --------- ------- -------- -------- ------- Total 782 030 148 037 8 705 29 404 (47 019) 921 157 Assets ======= ========= ======= ======== ======== ======= Placements and loans from 444 036 130 177 1 582 (2 707) 572 089 other banks Deposits from customers 62 257 80 - - (5 083) 57 254 Other liabilities 17 403 2 468 2 322 1 000 (548) 22 645 Issued securities 131 576 - - - 3 131 579 Financial instruments for hedging 98 - - - - 98 ------- --------- ------- -------- -------- ------- Total liabilities 655 370 132 725 2 323 1 582 (8 335) 783 665 ------- --------- ------- -------- -------- ------- Subordinated debt 9 500 - - - - 9 500 ------- --------- ------- -------- -------- ------- Total shareholder's equity 117 160 15 312 6 382 27 822 (38 684) 127 992 ------- --------- ------- -------- -------- ------- Total Liabilities and Shareholder's Equity 782 030 148 037 8 705 29 404 (47 019) 921 157 ======= ========= ======= ======== ======== ======= Interest and similar 38 670 7 587 531 975 (330) 47 433 income Interest expense and similar charges (20 244) (3 870) - (63) 344 (23 833) ------- --------- ------- -------- -------- ------- Net interest income 18 426 3 717 531 912 14 23 600 ------- --------- ------- -------- -------- ------- Income/(loss) before income taxes 21 070 969 59 (677) 723 22 144 ======= ========= ======= ======== ======== ======= Hungarian Development Bank Ltd. Notes to Consolidated Financial Statements for the year ended 31 December 2005 (in million HUF) SEGMENT INFORMATION (CONTINUED) The segment information for the year 2004: Bank Other financial institutions Insurance Corporates Cons. Adjustment Total ======= ========= ======== ========= ======== ======= Total 606 275 176 867 9 555 22 867 (33 059) 782 505 assets Total liablities 489 310 161 973 3 220 1 215 (2 208) 653 510 Subordinated debt 9 500 9 500 Total shareholder's equity 107 465 14 894 6 335 21 652 (30 851) 119 495 ------- --------- -------- --------- -------- ------- Total liablities and Shareholder's 606 275 176 867 9 555 22 867 (33 059) 782 505 equtiy Net interest income 23 134 238 - 894 - 24 266 Income / (loss) before income taxes 14 351 (2 136) - 203 2 527 14 945 31. TABLE OF FAIR VALUE Table of fair values for the year 2005: Net book value Fair value ---------- -------- Assets Cash and cash equivalents 8 604 8 604 Placements with other banks 260 307 260 307 Loans, net of allowances for impairment losses 481 929 482 151 Financial assets at fair value through profit and loss 23 186 23 186 Securities 79 211 79 211 Equity investments 27 864 27 864 Other assets 32 265 32 265 Fixed and intangible assets 7 791 7 791 ---------- -------- Total assets 921 157 921 379 ---------- -------- Liabilities Placements and loans from other banks 572 089 572 089 Deposits from customers 57 254 57 254 Issued securities 131 579 131 579 Financial instruments for hedging 98 98 Other liabilities 22 645 22 645 ---------- -------- Total liabilities 783 665 783 665 ---------- -------- Subordinated debt 9 500 8 290 Shareholder's equity 127 992 129 424 ---------- -------- Total liabilities and shareholder's equity 921 157 921 379 ---------- -------- Hungarian Development Bank Ltd. Notes to Consolidated Financial Statements for the year ended 31 December 2005 (in million HUF) TABLE OF FAIR VALUE (CONTINUED) Table of fair values for the year 2004: Net Book Value Fair Value ---------- --------- Assets Cash and cash equivalents 6 193 6 193 Placements with other banks 261 714 261 714 Loans, net of allowances for impairment losses 309 296 309 831 Financial assets at fair value through profit and loss 25 393 25 393 Securities 135 919 135 919 Equity investments 20 571 20 571 Other assets 15 300 15 300 Fixed and intangible assets 8 119 8 119 ---------- --------- Total assets 782 505 783 040 ========== ========= Liabilities Placements and loans from other banks 477 848 477 848 Deposits from customers 20 679 20 679 Issued securities 127 463 127 463 Financial instruments for hedging 876 876 Other liabilities 26 644 26 644 ---------- --------- Total liabilities 653 510 653 510 ---------- --------- Subordinated debt 9 500 7 015 ---------- --------- Shareholder's equity 119 495 122 515 ---------- --------- ---------- --------- Total liabilities and shareholder's equity 782 505 783 040 ========== ========= Hungarian Development Bank Ltd. Notes to Consolidated Financial Statements for the year ended 31 December 2005 (in million HUF) 32. RECONCILIATION OF THE SHAREHOLDERS' EQUITY AND PROFIT BEFORE TAXATION IN THE HUNGARIAN AND IFRS FINANCIAL STATEMENTS Reconciliation for the year 2005: Net income Shareholders' equity 2005 31 December 2005 Hungarian financial statements ("HFS") 4 625 121 924 General reserve and general risk reserves 2 491 561 Difference on the equity method (1 321) - Derecognition of negative goodwill based on IFRS 3 1 171 2 028 Effects of applying of IAS 39 (2 046) 3 376 Minority interests - 103 Divedend 11 000 - ----------- ----------- IFRS financial statements 15 920 127 992 ----------- ----------- Reconciliation for the year 2004: Net income Shareholders' Equity 2004 31 December 2004 Hungarian financial statements ("HFS") 3 179 110 657 Self revision of a subsidiary 145 - General reserve 1 134 - Difference on the equity method (46) (46) Derecognition of negative goodwill based on IFRS 3 1 335 2 028 Effects of applying of IAS 39 1 733 2 142 Revaluation reserve - (4) Deferred tax (126) - Minority interest (See chapter 2. q) - 4 718 Dividend payed (See chapter 2. q) 6 000 - ---------- ----------- IFRS financial statements 13 354 119 495 ========== =========== Hungarian Development Bank Ltd. Notes to Consolidated Financial Statements for the year ended 31 December 2005 (in million HUF) 33. KEY MANAGEMENT PERSONNEL COMPENSATION The compensation of the key management personnel at the Bank was the following: 2005 2004 ------ ------ Members of the Board of Directors 33,7 35,8 Members of the Supervisory Board 22,0 17,3 CEOs and deputy CEOs 344,5 314,9 ----------------- ------- ------- Total: 400,2 368,0 34. RELATED PARTIES Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial and operating decisions. The related parties also include other State owned companies. The list of related parties of the Bank (subsidiaries and associates) can be found in Note 10. The balances arising from transactions with related parties were as follows in 2005: Subsidiaries and associates Other State owned companies Assets Cash and balances with the National Bank of Hungary - 7 789 Loans and advances to customers, net of allowance for impairment losses 2 985 326 410 Financial asset or liability at fair value through profit and loss 1 625 21 561 Securities - 75 771 Investments in subsidiaries and associates 26 690 510 Other assets - 27 256 Liabilities Deposit from other banks and other borrowed funds 5 2 199 Deposit from customers 4 974 6 252 Other liabilities 152 7 465 Income Statement Interest and similar income 275 28 218 Interest expense and similar charges 54 158 Hungarian Development Bank Ltd. Notes to Consolidated Financial Statements for the year ended 31 December 2005 (in million HUF) RELATED PARTIES (CONTINUED) The balances arising from transactions with related parties were as follows in 2004: Subsidiaries and associates Other State owned companies Assets Cash and balances with the National Bank of Hungary - 2 061 Financial asset or liability at fair value through profit and loss 2 887 22 056 Securities - 132 479 Investments in subsidiaries and associates 19 028 510 Other assets 568 9 677 Liabilities Deposit from other banks and other borrowed funds - 2 202 Deposit from customers 1 552 5 999 Other liabilities 278 323 Income Statement Interest and similar income 100 34 030 Interest expense and similar charges 147 495 Hungarian Development Bank Ltd. Notes to Consolidated Financial Statements for the year ended 31 December 2005 (in million HUF) 35. SIGNIFICANT EVENTS AFTER THE REPORTING DATE Decision on expanding the operation of the Hungarian Development Bank In collaboration with the Hungarian Government, the Bank elaborated its concept for the further centralization of state-owned grant intermediation organisations, under which the goal is to create a "one-stop shop" framework for businesses on a regional level. The aim of this centralization is for EU funding to be received and channelled on through one institution. The operation of Hitelgarancia Rt., an institution which represents one of the main elements of the guarantee system stimulating financing and reducing risks, will be integrated more into the HDB Group. One of the objectives of the programme is to combine the individual public institutions that deal with investments in order to create a more transparent and cost-efficient organisation. Agreement on bond issue There are some major tasks to be completed within the framework of the Bank's funding activity in 2006. The Bank has to raise the highest level of funding in its history, totalling EUR 1.6 billion. To replace the foreign currency bond issued in 2001 with a nominal value of EUR 450 million and which matured this year on 12 June, the Bank issued new bond with a nominal value of EUR 500 million. Merger of subsidiaries The Bank, as the owner, decided that two of its subsidiaries were to be merged into other companies. The Vecsei 2005 Ingatlanforgalmazasi Kft. was merged into the Bank on 30 June 2006. Magyar Kozmu Rt. was merged into NIL Rt. as of 30 April 2006. 36. EFFECTS OF NEW IFRS PRONOUNCEMENTS Certain new standards, amendments and interpretations to existing standards have been published that are mandatory for the Group's accounting periods beginning on or after 1 January 2006 or later periods, but which the Group has not early adopted, as follows: Hungarian Development Bank Ltd. Notes to Consolidated Financial Statements for the year ended 31 December 2005 (in million HUF) EFFECTS OF NEW IFRS PRONOUNCEMENTS (CONTINUED) a) IAS 19 (Amendment), Employee Benefits (effective from 1 January 2006) As the Group does not have any defined benefit plans, this amendment is not relevant to the Group's operations. b) IAS 39 (Amendment), Cash Flow Hedge Accounting of Forecast Intragroup Transactions (effective from 1 January 2006) This amendment is not relevant to the Group's operations, as the Bank does not have any intragroup transactions that would qualify as a hedged item in the non-consolidated financial statements as of 31 December 2005 and 2004. c) IAS 39 (Amendment), The Fair Value Option (effective from 1 January 2006) This amendment changes the definition of financial instruments classified at fair value through profit or loss and restricts the ability to designate financial instruments as part of this category. The Group believes that this amendment should not have a significant impact on the classification of financial instruments, as the Group should be able to comply with the amended criteria for the designation of financial instruments at fair value through profit and loss. d) IAS 39 and IFRS 4 (Amendment), Financial Guarantee Contracts (effective from 1 January 2006) This amendment requires issued financial guarantees, other than those previously asserted by the entity to be insurance contracts, to be initially recognised at their fair value and subsequently measured at the higher of: (a) the unamortised balance of the related fees received and deferred, and (b) the expenditure required to settle the commitment at the balance sheet date. Management is currently assessing the impact of this amendment on the Group's operations. e) IFRS 1(Amendment), First-time Adoption of International Financial Reporting Standards and IFRS 6 (Amendment), Exploration for and Evaluation of Mineral Resources (effective from 1 January 2006) These amendments are not relevant to the Group's operations as the Group is not a first-time adopter of IFRS and does not carry out exploration for and evaluation of mineral resources. f) IFRS 6, Exploration for and Evaluation of Mineral Resources (effective from 1 January 2006) IFRS 6 is not relevant to the Group's operations. Hungarian Development Bank Ltd. Notes to Consolidated Financial Statements for the year ended 31 December 2005 (in million HUF) EFFECTS OF NEW IFRS PRONOUNCEMENTS (CONTINUED) g) IFRS 7, Financial Instruments: Disclosures, and a complementary amendment to IAS 1, Presentation of Financial Statements - Capital Disclosures (effective from 1 January 2007) IFRS 7 introduces new disclosures to improve the information about financial instruments. It requires the disclosure of qualitative and quantitative information about exposure to risks arising from financial instruments, including specified minimum disclosures about credit risk, liquidity risk and market risk, including sensitivity analysis to market risk. It replaces IAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions, and disclosure requirements in IAS 32, Financial Instruments: Disclosure and Presentation. It is applicable to all entities that report under IFRS. The amendment to IAS 1 introduces disclosures about the level of an entity's capital and how it manages capital. Management is currently assessing the impact of this amendment on the Group's operations and the disclosures of financial statements. h) IFRIC 4, Determining whether an Arrangement contains a Lease (effective from 1 January 2006) IFRIC 4 requires the determination of whether an arrangement is or contains a lease to be based on the substance of the arrangement. It requires an assessment of whether: (a) fulfilment of the arrangement is dependent on the use of a specific asset or assets (the asset); and (b) the arrangement conveys a right to use the asset. Management is currently assessing the impact of IFRIC 4 on the Group's operations. i) IFRIC 5, Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds (effective from 1 January 2006) IFRIC 5 is not relevant to the Group's operations. j) Amendment to IAS 21 The Effects of Changes in Foreign Exchange Rates - Net Investment in a Foreign Operation (effective from 1 January 2006) The Group currently has no items comprising net investments in foreign operations that will be affected by the amendment. k) IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies. (effective from 1 March 2006) IFRIC 7 is not relevant to the Group's operations. Hungarian Development Bank Ltd. Notes to Consolidated Financial Statements for the year ended 31 December 2005 (in million HUF) EFFECTS OF NEW IFRS PRONOUNCEMENTS (CONTINUED) l) IFRIC 8 Scope of IFRS 2 (effective from 1 May 2006) IFRIC 8 is not relevant to the Group's operations. m) IFRIC 9 Reassessment of Embedded Derivatives (effective from 1 June 2006) The Group has not yet completed its analysis of the impact of the new Interpretation. This information is provided by RNS The company news service from the London Stock Exchange END FR SEUFFUSMSEEU
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