ANNUAL REPORT 2011
TABLE OF CONTENTS Greetings 3 The operating environment of MFB Hungarian Development Bank Private Limited Company in 2011 5 The results of MFB Hungarian Development Bank Private Limited Company 15 Independent Auditor s Report 19 Balance sheet (assets and liabilities) and off-balance sheet items 20 Income Statement 21 Unconsolidated Balance Sheet according to International Financial Reporting Standards 22 Unconsolidated Income Statement according to International Financial Reporting Standards 23 Difference between owner s equity under Hungarian accounting standards and IRFS 24 1. MFB Hungarian Development Bank Private Limited Company 27 2. Development of business operations 31 3. Lending operations 33 4. Loan programmes 34 Facilities for enterprises 34 New Hungary Enterprise Development Loan Programme 34 New Hungary Development Loan Programme for Small and Medium Sized Enterprises 34 Intermediated facilities 34 MFB Public Transport Development Loan Programme 36 Facilities for municipalities 37 Municipal Infrastructure Development Loan Programme For a Successful Hungary 37 Social Housing Loan Programme For a Successful Hungary 38 Retail and Municipal Development Loan Programmes for Energy Saving 38 Agricultural facilities 38 New Hungary Agricultural Development Loan Programme 38 Working capital loans 38 Working Capital Loan Programme for Producer Organisations 38 New Hungary Agricultural Working Capital Loan Programme 38 MFB Vis Maior Agricultural Working Capital Loan Programme 39 MFB Agricultural Working Capital Loan Programme 39 MFB Frost Damage 2011 Working Capital Loan Programme 40 Bank guarantee programmes 40 5. funding 41 6. MFB Banking Group 43 7. Communication, customer service, sponsorships, scholarships 44 8. MFB INDICATOR 47 9. THE Board of Directors and THE Supervisory Board 56 MFB ANNUAL REPORT 2011 1
GREETINGS All of the associates of MFB Hungarian Development Bank Private Limited Company worked extremely hard during 2011. Broadened through changes in 2010, our responsibilities were exposed to storm and stress in each segment. The grievances of the international economy and the financial sector did not spare the overall national economy and our broader environment, the European Union. The hardships rippled through the sectors where the companies controlled by the Bank operate. MFB performed well in 2011 despite the severe circumstances: we added HUF 68 billion to our loan portfolio and have increased our nationwide share in corporate lending from 11.5 to 12.2 percent. The Founder increased capital by HUF 130 billion bringing the owner s equity of MFB above HUF 212.7 billion. Bank activity and cost effectiveness have improved considerably along with major cuts in operating costs. Measures taken by the new management of the Bank after taking office on 17 June 2010 up to 31 December 2011 resulted in savings worth HUF 2.3 billion, including HUF 1.6 billion saved on wage related expenditure. In 2011, operating costs were down 8 percent from 2009 despite the need to take thirty new employees on board to tend to a multitude of new responsibilities. MFB s profits before impairments, provisioning and the bank levy surpassed HUF 7.7 billion in 2011. The result for the year as per the balance sheet shows a huge loss: HUF 38.6 million in the red. The reason lies in degree of risk burdening the legacy portfolio inherited from the period up to 2010, which demanded setting aside additional amounts in 2011 despite efforts at managing receivables with care and a view to ensuring payback, the impairments charged and the amounts provisioned last year. The additional impairments and changes in amounts provisioned due to quality downgrades of the business portfolio weighed down the result by HUF 43.1 billion. We have managed to overcome this burdensome legacy and will manage to respond to new challenges as well. MFB re-entered the international money market with a successful bond issue in 2011 after four years of absence, which offers unquestionable justification of the appropriateness of the path we have chosen and a signal of trust from international banking....offers unquestionable justification of the appropriateness of the path we have chosen and is a signal of trust from international banking. László Baranyay Chairman-CEO MFB ANNUAL REPORT 2011 3
THE OPERATING ENVIRONMENT OF MFB HUNGARIAN DEVELOPMENT BANK PRIVATE LIMITED COMPANY IN 2011 Recovery from the global economic crisis halted after a promising start in early 2011. Employment and government indebtedness lurked at stubbornly high levels in the second half of the year. Additional rounds of monetary stimulus raised queries and the banking system was marred with lack of confidence. The outlook of the Eurozone, which carries fairly high priority for the Hungarian economy, worsened considerably with diverging processes questioning the foundations of integration with much greater vehemence than ever before. The internal drivers of growth failed to start in the Hungarian economy in 2011. Corporations tended to move into something like hibernation or operating in restraint mode, which could become an impediment to sustained growth and also reduced the predictability of debt management. The extreme volatility of exchange rate movements, the overall weakening of the national currency and the steady rise of the country s risk premium spelt hardships for external funding for both the Hungarian economy and MFB. Global economic processes Providing the broader backdrop to the operations of MFB Hungarian Development Bank, the global economy took a promising start in 2011 as recovery from the crisis accelerated transitionally during Q1. However, maintaining the rate of growth failed and Q1 performance was fundamentally driven by unique factors. Starting the second quarter of 2011, the rate of economic growth faltered visibly both in developed and emerging regions and helped the annual growth of international trade subside to a single digit. Beside the sovereign crisis, the economic consequences of the political havoc engulfing Northern Africa and the Arab Peninsula coupled with Japan s nuclear disaster to contribute to the slowdown of global growth. SOURCES: EUROStat, NatiONal BUREaU Of StatiStiCS Of ChiNa After mid-2011, global economic processes sent repeated crisis signals as growth subsided noticeably with the most of the ills focused in the old continent (and especially the Euro Area): by the end of the year most indices of economic sentiment were approximating levels seen during the crisis two years ago, revealing the bare real economic impact of the sovereign crisis hitting the member states. In the early part of 2011, growth of Europe s single currency economies was driven by capital expenditure and construction projects delayed from late 2010 due to bad weather and by making up for lost production, but the upswing of Q1 (2.4% yoy) was followed by gradual deceleration (Q2: 1.6%, Q3: 1.3%, MFB ANNUAL REPORT 2011 5
THE OPERATING ENVIRONMENT OF MFB HUNGARIAN DEVELOPMENT BANK PRIVATE LIMITED COMPANY IN 2011 n n n n n n n n *GDP GROWTH (2007=100%) SOURCE: EUROSTaT Q4: 0.7%) in the Eurozone with the period between October and December showing contraction (-0.3%) for the first time after nine quarters as compared to the previous three months. The Eurozone member states continued to diverge in 2011. The pronounced divergence in reflected by a comparison of 2011 and pre-crisis output levels showing that the performance of the group of countries referred to as PIIGS countries (Portugal, Italy, Ireland, Greece and Spain) and especially Greece and Ireland fell way short of that in 2007, while Germany surpassed that level in the second half of 2010. The fact that the Eurozone as a whole managed to return to the level recorded in 2007 only in the second quarter of 2011 demonstrates how slow and fragile recovery has been in the region. The divergence of member states and prolonged management of debt related problems punctured gaping holes in the political unity of the European Union and raised questions about continuing the operation of certain levels of integration (e.g. monetary union) in their current form. The differing views of member states, lack of unity and consensus have increasingly turned into barriers hindering economic recovery. In addition to the US economy being sick-listed, the reasons of slower than expected US growth in the first half of 2011 include first of all supply chains faltering in the wake of the earthquake in Japan, recession fears triggered by the Eurozone sovereign debt crisis and rising commodity (particularly oil) prices. At 2.2% (yoy) in the first quarter, the rate of GDP growth decelerated modestly during the remainder of the year (to 1.6% in Q2, 1.5% in Q3 and 1.6% in Q4), as neither community nor household level spending showed true recovery due to tight fiscal headroom, indebted governments and retail spending curbed by persistently high unemployment. The fundamental difference of opinion between the two political sides 6 MFB ANNUAL REPORT 2011
AZ MFB ZRT. MÛKÖDÉSI KÖRNYEZETE 2011- BEN about solving the mounting government debt and budget deficit, which has become of focal point of political clashes in the run-up to the presidential elections, has not helped the performance of the US economy in 2011. That was also one of the factors motivating Standard & Poor s to take a thus far unprecedented step in summer 2011 when it graded US government debt one notch down. Calculated year on year, Chinese economic growth slid from 9.7% in the first quarter below 9% by the end of the year (9.5% in Q2, 9.1% in Q3 and 8.9% in Q4) as a result of the weak position of major foreign trading partners (especially the Eurozone) and a number of domestic factors. The staggering growth of earlier years was driven by property investments fuelled by an unlimited pool of cheap lending. However, non-performing corporate loans coupled with a highly indebted municipal sector kept increasing the pressure on the system of financial mediation, which tightened corporate lending conditions and hence held back capital expenditure projects visibly. Despite appreciating gradually the Chinese renminbi remained undervalued based on fundamentals, which triggered unending resentment from trading partners (particularly the USA). The appreciation of the currency is a longer term threat for the competitiveness of formerly successful industries; hence certain manufacturing processes have started to migrate to other countries. However, with wages and the world market price of commodities rising rapidly, the managed slow-down of currency appreciation has in the short run contributed to a high and sustained level of inflationary pressure in China. The (monetary) tools unleashed to mitigate the pressure in turn curbed economic growth as well. Global inflationary pressures have been attenuated as the price rally of commodity prices, particularly soaring oil prices, which started in the second half of 2010, began to moderate in response to declining global demand and as speculation premium vanished. (Mounting geopolitical pressures associated first of all with the sanctions on Iran triggered a minor jump in oil prices late in the year.) As a result, Chinese CPI fell from 6.5% in the summer to 4.2% by the end of the year. The rate of US inflation started to submerge slowly from 4% mid-year, while the same evened out at 3.0% in the Eurozone in the autumn months. In the first half of 2011, global money and capital markets were driven by moderate optimism, which was, however, replaced from mid-summer onwards by worsening growth outlook, the phasing out of the Fed s stimulus package and Europe s sovereign debt crisis, which sent investors flying from risk assets, strengthened liquidity tensions in interbank markets and the poor performance of European assets. The US policy rate has remained at record low levels (0-0.25%) since late 2008, but as the scheduled termination of the second quantitative easing (QE2) for the end of June of 2011 and the failure to launch a new stimulus package strengthened investor fears, the Fed responded by committing itself in the autumn to maintain interest rates up to mid-2013 or the end of 2014 the latest in an attempt to relieve labour market tensions. Facing increased inflationary pressures, the European Central Bank (ECB) decided to raise the basic rate from 1.00% at the beginning of the year by 25 basis points each in April and July, and embarked on monetary easing at equal proportions in November and December when growth related risks ramped up, which in effect returned the policy rate to 1.00% again by the end of the year. To mark the change of direction in monetary policy, the ECB provided EUR 500 billion of liquidity to Eurozone banks under a three-year tender, which is the MFB ANNUAL REPORT 2011 7
THE OPERATING ENVIRONMENT OF MFB HUNGARIAN DEVELOPMENT BANK PRIVATE LIMITED COMPANY IN 2011 n n n n n n SOURCES: NBH, ECB, FED, REUTERS single largest liquidity injection measure the ECB has applied to date. The Bank of Japan (0.10%) and the Bank of England (0.50%) left the policy rate unchanged in 2011, but their Swiss peer cut the target band from 0 0.75% to 0 0.25% to fend off any extreme appreciation of the Swiss Franc. Seeking to ease global liquidity problems, the world s leading central banks (Fed, ECB, Bank of England, the Swiss, the Canadian and the Japanese national banks) announced joint action in late November. The decision requires participating central banks to cut the cost of their exiting USD swap facilities by 50 basis points and leave the modification in place until February 2013 and to conclude USD swap transactions even on a bilateral basis if necessary. Interbank rates have remained low throughout the year compared to pre-crisis levels. The phasing out of the Fed s liquidity programme and stronger demand from European financial institutions propelled USD rates after the summer as expressed by the rise of 3 month USD LIBOR from 0,30% at the beginning of the year to 0.58 twelve months later. Tensions gathered strength in the European interbank market in the summer and calmed only slowly as the year progressed. Starting the year at 1.00%, 3 month EURIBOR peaked at 1,62% at the end of July only to return to 1.36% by late December. The Eurozone saw corporate lending rates rise with the rate on loans extended for at least 5 years climbing from 3.42% to 3.72% as the year ended. Corporate lending started to pick up gradually in the Eurozone in 2011, but the rate of growth remained rather subdued at 0.2% in January and 1.1% in December year on year. Key foreign exchange rates reflected the changes in international investor sentiment and several currency pairs saw the reversal of trends in the summer. The USD/EUR rate kept bouncing between 1.30-1.50 USD/EUR most of the year with the single currency strengthening against the dollar during the first six months only 8 MFB ANNUAL REPORT 2011
AZ MFB ZRT. MÛKÖDÉSI KÖRNYEZETE 2011- BEN n n n n SOURCES: NBH, ECB, REUTERS to weaken again as risk appetite was lost. The CHF rose to almost parity with the EUR on the back of ample liquidity and the substantial rise in the price of gold during the summer, when the launch of a peg at 1.20 CHF/EUR by the Swiss National Bank, correction and the worsening growth prospects sent the CHF weakening. Economic processes in Hungary After a promising start at 2.5% in the first quarter, the rate of Hungarian GDP growth slowed down to 1.5% and 1.4% in Q2 and Q3, respectively year on year. Beating expectations, the slow-down of the GDP growth rate did not continue in the fourth quarter (1.4%). The unending stagnation of household consumption coupled with the limited ability of Hungary s foreign trading sector to compensate for the effect of declining investments are the main reasons for the eroding dynamism of the economy compared to the beginning of the year, although reduced economic activity held the rate of import growth back as well. Consequently, net exports continued to show a sizeable surplus in the second half of the year. Consequently, net exports continued to show a sizeable surplus in the second half of the year. (Imports and exports grew by 6.3% and 8.4%, respectively, in 2011). As a result, the net capability of the Hungarian economy to fund itself kept improving to hit a new record in Q4 2011 (at 3.8% of GDP). Export oriented as it is, the manufacturing sector proved to be the single prime mover behind the economy in the first six months of 2011 with some reliance on related sectors, such as transportation and warehousing, on the good performance of catering due to the EU presidency and on ICT services. The expansion of manufacturing, which is also oriented mostly towards exports, started to lose steam in tandem with the reduction of external demand (and performance grew only by 3.5% yoy in Q4 as compared to 10.7% in Q1). Farming managed to compensate for the downturn somewhat (with the value MFB ANNUAL REPORT 2011 9
THE OPERATING ENVIRONMENT OF MFB HUNGARIAN DEVELOPMENT BANK PRIVATE LIMITED COMPANY IN 2011 n n n n SOURCE: HCSO add of agriculture up 27.2% in 2011) owing to the good harvest. Limited internal demand continued to bog down the performance of the tertiary sector (0.7%) Time kept slowly chiselling away the rate of unemployment (which stood at 10.7% between October and November) with the number of job holders up 46.3 thousand year on year and the number of unemployed down 3.1 thousand in Q4 2011. The manufacturing sector and to a lesser degree agriculture drove the growth of employment, but labour market statistics also owes the improvement to the revamped public work programme. In a ranking of European Union member states by the rate of unemployment, Hungary (10.7%) occupied a position at the bottom of the top third of countries in the end of 2011. The Baltic countries were the only member states in the EU that managed to drive down unemployment substantially in 2011. In 2011, the Hungarian economy continued to deleverage, which is an advantage given how hard pressed the international money market is for liquidity. However, by the decrease of external demand, the improvement of net financing capacity was fuelled mostly by transfers from the European Union picking up after mid-year, as the surplus of the foreign trade of goods and services started to decline in the second half of the year. However, the price paid for is heavy, as it fundamentally derives from the stagnation of the Hungarian economy: the new records of the current account surplus are also due to subdued demand (for imports) among households and corporations, which is also reflected by the lasting net savings position of non-financial companies that have postponed capital expenditure projects. The limited willingness of banks to lend also strengthens the savings position of businesses. General government deficit increased slightly in Q1 2011 compared to late 2010 and then reduced substantially in the period between April and June (calculated with the Maastricht methodology, Hungarian government debt stood at 82.7% of GDP in Q1 and dropped 10 MFB ANNUAL REPORT 2011
AZ MFB ZRT. MÛKÖDÉSI KÖRNYEZETE 2011- BEN n n SOURCE: EUROSTAT to 77.4% in Q2). There have been only two occasions since 1995 that the size of reduction in government debt matched that measured in Q2 (-5.3 percentage points): gross public finance deficit (expressed as a percentage of GDP) fell by 5.8% in Q2 1995 and the records show a reduction of 6.2% between April and June 2009 compared to the previous quarter. However, a considerable weakening of the HUF stopped the downward trend in the second quarter and drove public debt as high as 80.6% of GDP as the year ended. Disinflationary forces started to play more powerfully in the Hungarian economy starting mid-2011 (weak internal demand, declining energy and food prices), bringing annual consumer price inflation down to about 3.0%. However, the trend was countered by a modification of excise taxes (on fuels, alcohol and tobacco products) in the final months of the year and by the weak HUF rate rippling through consumer prices. All in all, consumer prices rose by 3.9% in Hungary in 2011. Viewed from the perspective of the cost of domestic and foreign funds, 2011 was characterised by significant and generally unfavourable trends. Hungarian central bank prime rate rose by 25 basis points again in January 2011 as the ultimate move in a cycle of rate hikes of equal proportion in November and December 2010 to stay at 6.00% up to the next tightening move in November: the final two months of the year saw two hikes at 50 basis points each in response to worsening money market conditions, bringing the central bank policy rate to 7.00% by the end of 2011, which is still high in regional comparison. Saw two hikes at 50 basis points each in response to worsening money market conditions, bringing the central bank policy rate to 7.00% by the end of 2011, which is still high in regional comparison. As regards money market rates, 3 month BUBOR rose from 5.58% to 7.24% in twelve months. Hungary s risk premium, which also features heavily among the factors influencing the fund raising of MFB, was adversely hit by the MFB ANNUAL REPORT 2011 11
THE OPERATING ENVIRONMENT OF MFB HUNGARIAN DEVELOPMENT BANK PRIVATE LIMITED COMPANY IN 2011 n n n n SOURCES: NBH, REUTERS uncertainty related to the budget and Hungary s credit rating as well as the Greek sovereign crisis in 2011. With the global environment relatively favourable and the positive market response to the Széll Kálmán Plan, the 10 year CDS spread dropped from 407 bp at the beginning of the year to 263 points by April, but as investor sentiment soured and Hungary s growth horizon blackened (including the loss of investment grade of Hungarian government securities late in the year) the spread jumped to 642 points in November and closed the year at 616 points, which is extremely high compared to the region. The substantial volatility of the HUF exchange rate renders it even more burdensome for the MFB to plan the liabilities side of its balance sheet. The HUF/EUR rate moved in tandem with the EUR rate of regional currencies and the impressions regarding country risk in 2011, but the HUF/EUR rate got detached from regional trends and underperformed its regional peers during the final months of the year. The Hungarian legal tender started the year at 278.4 HUF to the EUR and closed twelve months later at 314.6 after losing 13%, which in effect is the poorest performance regionally (with the Polish zloty losing 12.6% against the EUR, compared to the Czech crown and the Romanian leu depreciating by 2.8 and 1.2 percent, respectively). The HUF to EUR rate moved in a wide band (of 263-316 HUF/EUR) in the course of the year. While the local currency was the best performer compared to other emerging economies, the HUF was clearly the ultimate loser among global currencies in the final two quarters. The Hungarian currency lost 16.3% and 17.2% against the USD and the CHF, respectively, through changes in cross rates and closed quotations at the all time low of 263.6 HUF against the latter on 11 August. The gap between HUF and EUR denominated corporate loans remained considerable and continued to widen in 2011. Corporate borrowing rates on HUF loans rose by about 1 percentage point year on year (with loans quoted at 10.10% on average for 1-5 years and 12 MFB ANNUAL REPORT 2011
AZ MFB ZRT. MÛKÖDÉSI KÖRNYEZETE 2011- BEN n n n SOURCE: ECB at 9.45% for longer term credit in December), compared to a rise of around 50 basis points on loans denominated in EUR (with 1-5 five year loans costing 4.33% and 3.97% charged for credit maturing in at least 5 years in December 2011). The cost of corporate funding is still considered high in the region: Loans maturing over 5 years cost 4.04% in Slovakia, 4.11% in the Czech Republic, 6.71% in Poland and 10.84% in Romania in December. The portfolio of loans outstanding to corporations and local governments in the Hungarian banking system rose and dropped, respectively, by 1.8% and 0.8% in 2011. Non-financial enterprises occupied net debt repayment positions in 2011 both in terms of HUF and FX loans, with the volume of loans outstanding down by HUF 19.9 billion and HUF 271.1 billion, respectively, in the two categories based on transaction volume, but, recorded in HUF, the value of outstanding loans was up 1.8% due to the depreciation of the domestic currency in 2011 and to the high ratio of FX loans. The corporate surveys conducted by MFB (MFB INDICATOR) showed signs of hibernation in the corporate sector, which is due to the chronic shortage of funds becoming and may postpone the launch of investments and thereby economic recovery in Hungary. The ratio of companies seeking external funding to finance current expenditure doubling among both small businesses and medium to large enterprises between spring and autumn 2011 shows that shortage of funding is becoming generally chronic, and yet only one out of five companies planned to raise funds definitely in the autumn with the second line of one out of five planning the same within a year after the survey, which is tantamount to a reversal of the trend compared to the earlier rise in demand for resources. MFB ANNUAL REPORT 2011 13
THE RESULTS OF MFB HUNGARIAN DEVELOPMENT BANK PRIVATE LIMITED COMPANY The 2011 operations of MFB were geared to implementing the key priorities approved as part of the new medium term strategy in May 2011. MFB s profits before impairments, provisioning and the bank levy surpassed HUF 7.7 billion in 2011. However, the degree of risk burdening the legacy portfolio inherited from the period up to 2010 was such that it demanded setting aside additional amounts in 2011 despite efforts at managing receivables carefully with a view to ensuring payback and the impairments charged/amounts provisioned last year. The additional impairments and changes in amounts provisioned due to quality downgrades of the business portfolio weighed down the result by HUF 43.1 billion. As a result of provisioning and the liability to pay bank levy the Bank incurred a loss with profit before taxation at minus HUF 38.6 billion. in 2011, it also developed and announced as required under Government Decision 1252/2011. (VII.21.) its MFB Frost Damage 2011 Working Capital Loan Programme and participated in the elaboration of a Combined Credit Guarantee Programme developed jointly by MV Zrt. and the National Development Agency, which the Bank also joined as a credit institution. To respond to customer requirements, the Bank initiated several modifications of the terms and conditions of loan programmes in 2011. A project to restructure loan programmes started after the adoption of the medium term strategy. The Bank developed the terms and conditions of its new and revised programmes (MFB Enterprise Financing Programme, MFB Small Business Loan Programme and MFB Municipal Infrastructure Development Programme), which were in turn approved by Government Decisions 1422/2011. (XII. 6.) and 1424/2011. (XII. 6.). The Founder imposed the requirement to launch the programmes in Decisions 1/2012. (I. 18.) and 2/2012. (I. 20.), which were put into effect by The Founder increased the capital of the Bank by HUF 10 billion under resolution 22/2011 (VI.28.) and by a total of HUF 120 billion paid up in two tranches under resolutions 37/2011. (XII. 22.), 41/2011. (XII. 29.) and 42/2011. (XII. 29.). MFB s portfolio of outstanding loans grew much faster than that of the whole banking sector. The weight of MFB inside the banking system increased in terms of both its balance sheet total and owner s equity, with the former propelling the weight of the Bank to almost 4.3 % (+0.4 %) and to 7.9% (+4%) in terms of owner s equity 1, hence MFB is ranked 9 th and 2 nd respectively among Hungarian banks. 6 February 2012. The Bank participated in developing significant projects, which were in part initiated by the Government, by investing its own funds. The Bank re-entered the bond market successfully after an interval of 4 years with foreign investors oversubscribing the issue and MFB finally accepting an offer for EUR 500 million. To broaden operations and to replace maturing resources, the Founder set for MFB a new framework for fund raising at EUR 1,300 million in 2011. Total draw-down amounted to EUR 860 million, not including short term bridging loans for the government. The Bank Most of the 2011 lending operations of the Bank related to existing and newly introduced loan programmes. The Bank launched its MFB Agricultural Working Capital Loan Programme 1 Banking system data are preliminary unaudited data pertaining to 31 December 2011. Source: Interbank Information System MFB ANNUAL REPORT 2011 15
THE RESULTS OF MFB HUNGARIAN DEVELOPMENT BANK PRIVATE LIMITED COMPANY maintained compliance with legislation in 2011 and observed the limits of prudential operation and those set by internal policies. Moreover, the Bank has suitable liquidity reserves maintained to manage extraordinary situations. The Bank is renewing the liabilities side of its balance sheet in line with the provisions of its medium term strategy and continues to provide liquidity on an ongoing basis. The liquidity position of the Bank also improved through several rounds of capital contribution in 2011. All in all HUF 130 billion of capital was injected in three stages during the year, which increased the Bank s solvency margin and its capacity to accept risk substantially. The present level of the Bank s solvency margin should be sufficient to ensure the efficient implementation of the Bank s business development responsibilities. The Bank continued to manage its costs with a view to savings in 2011. It completed a review and renewal of service level agreements under a cost rationalisation programme designed to establish what type of services were actually needed and to procure them at least cost. The Bank broadened the duty to save costs to cover the whole strategic MFG group and embarked on common procurement to mitigate the cost of necessary goods and services. The organisation of the Bank was restructured in January 2012 with a view to promote the implementation of the medium term strategy and to improve the efficiency of business processes. The Bank gives priority to cost savings, transparency and accountability in corporate governance with special emphasis on observing, and giving full effect to, the guidelines of EU grant schemes. 16 MFB ANNUAL REPORT 2011
INDEPENDENT AUDITOR S REPORT MFB ANNUAL REPORT 2011 19
Balance sheet (assets and liabilities) and off-balance sheet items MFB HUNGARIAN DEVELOPMENT BANK PRIVATE LIMITED COMPANY BALANCE SHEET AND OFF-BALANCE SHEET ITEMS ACCORDING TO HUNGARIAN ACCOUNTING STANDARDS ASSETS DATA in HUF million 31.12.2010 Adjustment of previous years 31.12.2011 1. Liquid assets 22 948 0 64 201 2. Treasury bill and similar securities 177 465 0 200 013 3. Loans and advances to credit institutions 468 256 0 493 957 4. Loans and advances to customers 325 690 0 339 123 5. Debt securities, including fixed-income securities 35 000 0 35 000 6. Shares and other variable yield securities 0 0 45 7. Shares and participations in corporations held as financial fixed assets 1 007 0 1 046 8. Shares and participating interests in affiliated companies 61 151 0 59 982 9. Intangible assets 2 649 9 2 094 10. Tangible assets 3 612 3 3 424 11. Own shares 0 0 0 12. Other assets 68 736-17 147 875 13. Prepayments and accrued income 22 703 0 25 443 TOTAL ASSETS 1 189 217-5 1 372 203 LIABILITIES DATA in HUF million 31.12.2010 Adjustment of previous years 31.12.2011 1. Amounts owed to credit institutions 477 932 0 592 730 2. Amounts owed to customers 11 868 0 10 100 3. Debts evidenced by certificates 390 250 0 435 582 4. Other liabilities 165 967 20 95 852 5. Accruals and deferred income 14 420-334 14 553 6. Provisions for liabilities and charges 7 732 0 10 650 7. Subordinated liabilities 0 0 0 8. Subscribed capital 100 000 0 114 500 9. Subscribed capital called but unpaid (-) 0 0 0 10. Capital reserve 23 826 0 139 326 11. General reserve 0 0 0 12. Profit reserve (±) 16 796 0-2 469 13. Tied-up reserve 0 0 0 14. Revaluation reserve 0 0 0 15. Profit or loss for the financial year (±) -19 574 309-38 621 TOTAL LIABILITIES 1 189 217-5 1 372 203 OFF-BALANCE SHEET ITEMS DATA in HUF million 31.12.2010 Adjustment of previous years 31.12.2011 Contingent liabilities 210 880 0 181 572 Future liabilities 138 553 0 92 789 Off-balance sheet claims 207 850 0 183 872 20 MFB ANNUAL REPORT 2011
Income Statement MFB HUNGARIAN DEVELOPMENT BANK PRIVATE LIMITED COMPANY INCOME STATEMENT ACCORDING TO HUNGARIAN ACCOUNTING STANDARDS INCOME STATEMENT DATA in HUF million 31.12.2010 Adjustment of previous years 31.12.2011 1. Interests received and similar income 53 273 0 58 061 2. Interest paid and similar charges 32 906 0 37 524 BALANCE(1-2) 20 367 0 20 537 3. Income from securities 15 0 15 4. Commissions and fees received or due 820-4 818 5. Commissions and fees paid or payable 1 425 0 962 6. Net profit or net loss on financial operations 658-1 -4 835 7. Other operating income 1 248 0 1 778 8. General administrative expenses 7 602-322 6 683 9. Depreciation 980-3 976 10. Other operating charges 5 812 9 5 345 11. Value adjustments in respect of loans and advances and risk provisions for contingent liabilities and for future commitments 38 359 0 43 296 12. Value readjustments in respect of loans and advances and risk provisions for contingent liabilities and for future commitments 8 511 0 8 960 12/A Difference between formation and utilisation of general risk provision 637 0-7 019 13. Value adjustments in respect of transferable debt securities held as financial fixed assets, shares and participations in affiliated companies and in other companies linked by virtue of participating interests 4 115 0 1 559 14. Value readjustments in respect of transferable debt securities held as financial fixed assets, shares and participations in affiliated companies and in other companies linked by virtue of participating interests 538 0 280 15. Profit or loss on ordinary activities -25 499 311-38 287 16. Extraordinary income 65 0 0 17. Extraordinary charges 400 0 334 18. Extraordinary profit or loss (16-17) -335 0-334 19. Profit or loss before tax (±15±18) -25 834 311-38 621 20. Taxes on income -10 2 0 21. Profit or loss after tax(±19-20) -25 824 309-38 621 22. General reserve (±) 6 250 0 0 23. Profit reserves used for dividends and profit sharing 0 0 0 24. Dividends and profit sharing payable 0 0 0 PROFIT 0R L0SS FOR THE FINANCIAL YEAR (±21±22+23-24) -19 574 309-38 621 MFB ANNUAL REPORT 2011 21
Unconsolidated Balance Sheet according to International Financial Reporting Standards MFB HUNGARIAN DEVELOPMENT BANK PRIVATE LIMITED COMPANY UNCONSOLIDATED STATEMENT OF FINANCIAL POSITION ACCORDING TO INTERNATIONAL FINANCIAL REPORTING STANDARDS STATEMENT OF FINANCIAL POSITION DATA in HUF million 31.12.2010 31.12.2011 Cash and balances with the National Bank of Hungary 23 064 64 829 Placements with other banks 468 140 493 329 Loans and advances to customers, net of allowance for impairment losses 326 740 339 866 Available for sale securities 213 032 231 140 Investments 62 158 61 073 Derivative assets held for risk management 0 5 Financial assets at fair value through profit or loss 9 609 6 885 Property, plant and equipment 3 615 3 424 Intangible assets 2 658 2 094 Current tax assets 638 0 Other assets 79 614 164 130 TOTAL ASSETS 1 189 268 1 366 775 Placements and loans from other banks 477 932 592 730 Deposits from customers, loans from Hungarian State 68 677 41 804 Issued securities 390 208 435 202 Derivative liabilities held for risk management 85 0 Financial liabilities at fair value through profit or loss 109 448 62 495 Provisions 5 540 1 439 Current tax liabilities 0 130 Deferred tax liabilities 154 58 Other liabilities 13 584 15 475 TOTAL LIABILITIES 1 065 628 1 149 333 Share capital 100 000 114 500 Capital reserve 25 652 141 152 Statutory reserves 2 192 9 211 Retained earnings (4 462) (43 548) Valuation reserve 258 (3 873) TOTAL SHAREHOLDER S EQUITY 123 640 217 442 TOTAL LIABILITIES AND SHAREHOLDER S EQUITY 1 189 268 1 366 775 COMMITMENTS AND CONTINGENCIES 213 782 184 459 22 MFB ANNUAL REPORT 2011
Unconsolidated Income Statement according to International Financial Reporting Standards MFB HUNGARIAN DEVELOPMENT BANK PRIVATE LIMITED COMPANY UNCONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME ACCORDING TO INTERNATIONAL FINANCIAL REPORTING STANDARDS. STATEMENT OF COMPREHENSIVE INCOME DATA in HUF million 31.12.2010 31.12.2011 Interest and similar income 53 064 57 754 Interest expenses and similar charges (32 964) (38 231) NET INTEREST INCOME 20 100 19 523 Allowance for impairment losses of loans and advances (25 495) (37 165) Fee and commission income 815 818 Fee and commission expenses (1 425) (962) NET FEE AND COMMISSION EXPENSES (610) (144) Allowance for impairment losses of investment (3 577) (1 284) Net income/(loss) from financial instruments at fair value through profit or loss 398 383 Dividend income 15 15 Other provision release 0 2 407 Other income 1 052 1 773 OTHER OPERATING INCOME 1 067 4 195 General and administrative expenses (12 454) (11 924) Net loss on foreign currency transactions and revaluation (499) (4 860) Other provision charges (4 359) 0 Other expenses (968) (773) OTHER OPERATING EXPENSES (18 280) (17 557) PROFIT BEFORE TAX (26 397) (32 049) Taxation (141) (18) NET PROFIT/(LOSS) FOR THE YEAR (26 538) (32 067) OTHER COMPREHENSIVE INCOME/(EXPENSES) Revaluation of available for sale financial assets 484 (4 131) NET OTHER COMPREHENSIVE INCOME/(EXPENSES) 484 (4 131) TOTAL COMPREHENSIVE INCOME/(EXPENSES) (26 054) (36 198) MFB ANNUAL REPORT 2011 23
Difference between owner s equity under Hungarian accounting standards and IRFS DIFFERENCE BETWEEN OWNER S EQUITY UNDER HUNGARIAN ACCOUNTING STANDARDS AND IFRS DATA in HUF million EQUITY net profit CAPITAL STATUTORY RETAINED VALUATION EQUITY 31.12.2010 for the year INCREASE RESERVES EARNINGS RESERVE 31.12.2011 2011 HUNGARIAN FINANCIAL STATEMENTS 121 357 (38 621) 130 000 0 0 0 212 736 Reclassification of general risk reserve 2 192 0 0 7 019 0 0 9 211 General risk reserve 0 7 019 0 0 (7 019) 0 0 Revaluation of financial instruments 245 (447) 0 0 0 (4 245) (4 447) Deferred tax (154) (18) 0 0 0 114 (58) INTERNATIONAL FINANCIAL STATEMENTS 123 640 (32 067) 130 000 7 019 (7 019) (4 131) 217 442 24 MFB ANNUAL REPORT 2011
1. MFB HUNGARIAN DEVELOPMENT BANK PRIVATE LIMITED COMPANY Company name: MFB Hungarian Development Bank Private Limited Company (MFB Zrt.) Registered office: Nádor utca 31. Budapest H-1051 Date of foundation: 1 December 1991 Type of Company: private company limited by shares Owner: Hungarian State (100%) Shareholder s rights: Exercised by the Minister of National Development Chief executive officer: László Baranyay Subscribed capital: HUF 114.5 million Number/nominal value of shares: 114,500 registered ordinary physical shares each with a nominal value of HUF 1,000,000 at the total value of HUF 114,500,000,000 Scope of activities: TEÁOR 08 6419 Other monetary intermediation (ordinary activity) TEÁOR 08 6491 Financial leasing TEÁOR 08 6499 Other financial intermediation n.c.e. Registration number: 01-10-041712 Banking supervisory licence: 32/1993. No. of HFSA licence: 973/1997/F WEBSITE: www.mfb.hu MFB ANNUAL REPORT 2011 27
1. MFB Hungarian Development Bank Private Limited Company LEGAL STATUS MFB Magyar Fejlesztési Bank Zártkörûen Mûködô Részvénytársaság (short name: MFB Zrt. or the Bank) is a specialised credit institution and a single-member private limited company. The legal status, responsibilities and scope of business of the Bank are governed by Act XX of 2001 on the Hungarian Development Bank (the MFB Act), as amended, the provisions of its Charter and the strategy approved by the Government and the shareholder. STATUTORY AND LEGAL BACKGROUND Section 47 of Act CLXIX of 2010 on the Budget of the Republic of Hungary for 2011 provided that the consolidated portfolio of credits and loans taken out and bonds issued by MFB for funding purposes in 2011, each maturing over a year, could not surpass HUF 1,400,000.0 million; also the relevant Government Decision provided that the total portfolio of liabilities arising from credit financing, first payment guarantees and bank guarantees accepted by MFB in favour of third parties in 2011 could not surpass HUF 600,000.0 million and the HUF equivalent of the consolidated portfolio of funds covered by exchange rate hedging agreements the Government may enter into in respect of EUR denominated credits and loans taken out and bonds issued by MFB for funding purposes, each maturing over a year, could not surpass HUF 1,600,000.0 million in 2011, provided that the actual value of portfolios could not surpass the aforesaid limits on any calendar day. During the year the Bank complied with all the budgetary limits. MFB Zrt., as an entity acting as a shareholder on behalf of the State of Hungary had to apply Act CXCVI of 2011 as soon as it was published. Section 30(1) of the Act clarified the stipulations of Section 3(5) of Act XX of 2001 on the Hungarian Development Bank. MFB Zrt. acts as shareholder on behalf of the State of Hungary in respect of the state-owned participation in the economic organisation specified in Annex 1 to the MFB Act. Unless otherwise provided in the Act on National Assets and the MFB Act, the provisions of the Company Act and the Civil Code govern the exercise of shareholder s rights, provided that MFB Zrt. may neither sell its title to nor grant a call option or the right first refusal in respect of the participations subject to exercising such shareholder s rights. Furthermore, MFB may neither offer such participations as collateral, encumber them in any other way nor wind up those economic organisations by voluntary dissolution. Annex 2 to the Act on National Assets identifies the 100% stake of the State of Hungary in MFB Zrt. as a national asset of high priority and certain participations in economic organisations subject to the exercise of shareholder rights by MFB Zrt. FOREIGN CORRESPONDENT BANKS OF MFB Bank Polska Kasa Warsaw, Poland Opieki SA-Bank Pekao SA Commerzbank AG Frankfurt, Germany JP Morgan AG Frankfurt, Germany JP Morgan Chase Bank New York, USA Mizuho Corporate Bank Ltd. Tokio, Japan The Royal Bank of Scotland Plc. London, United Kingdom The Royal Bank of Scotland New York, USA Zürcher Kantonalbank Zürich, Switzerland 28 MFB ANNUAL REPORT 2011
1. MFB Magyar Fejlesztési Bank Zártkörûen Mûködô Részvénytársaság MFB INTERNATIONAL RELATIONS, MEMBERSHIPS Banking Association for Central and Eastern Europe (BACEE) member since January 2010 Club of the Institutions in the European Union Specialising in Long-Term Credit (ISLTC) associate member from April 2003, full member since EU accession on 1 May 2004 European Association of Public Banks (EAPB) member of the association of financial institutions in public ownership in the EU since November 2002 European Investment Fund (EIF) has held 5 shares as a member of the organisation since 9 July 2003 Information Systems Audit and Control Association (ISACA) member since 2009 Institute of International Finance (IIF) member since 2009 International Chamber of Commerce (ICC) member since 2003 Network of European Financial Institutions for Small and Medium Sized Enterprises (NEFI) observer from June 2003, full member since EU accession on 1 May 2004 MFB MEMBERSHIP IN DOMESTIC ORGANISATIONS Rural Credit Guarantee Foundation (AVHA) Institute of Internal Auditors (IIA) Budapest Chamber of Commerce and Industry Garantiqa Creditguarantee Private Limited Company. Federation of Management and Scientific Associations Hungarian Banking Association Hungarian Forex Association Hungarian Facility Management Cooperative Hungarian SEPA Association National Deposit Insurance Fund (OBA) CREDIT RATING MFB has been rated by the international ratings agency Moody s Investors Service since 19 May 2003. On 25 November 2011, following the downgrading of the Hungarian State, Moody s Investors Service modified MFB s long-term foreign currency bank deposits rating to Ba2 (with negative outlook) and the senior unsecured foreign currency debt rating to Ba1. The rating of short-term foreign-currency bank deposits was changed to Not-Prime. MFB ANNUAL REPORT 2011 29
2. DEVELOPMENT OF BUSINESS OPERATIONS MFB Hungarian Development Bank Private Limited Company drafted and the Founder approved in its Decision 21/2011 (V.16.) the medium term strategy of the Bank, which identified the deadlines for implementing certain key responsibilities. MFB conducted most of its 2011 operations to implement the responsibilities set in the Founder s Decision. Calculated as the balance between HUF 158 billion worth of disbursements and repayments, the overall loan portfolio of the bank rose by 7.7% to reach HUF 941.6 billion on 31 December 2011, including HUF 340 billion of refinancing loans and HUF 601.6 billion in loans placed directly. Loans placed within the framework of loan programmes (mostly refinancing loans) amounted to HUF 370 billion, while those placed outside programmes and other loans amounted to HUF 571.6 billion. A project to restructure loan programmes started after the adoption of the medium term strategy. The Bank developed the terms and conditions of its new and revised programmes (MFB Enterprise Financing Programme, MFB Small Business Loan Programme and MFB Municipal Infrastructure Development Programme), which were approved by the Government and were launched as of 6 February 2012. A modification of the strategic group involved any equity increase by the Bank to the tune of HUF 100 million in Southern Stream Hungary Zrt. Following the amendment of the MFB Act, the Bank has control over the companies subject to the exercise of shareholder rights and has extended several loans to finance operations and developments. MFB drew down and allocated to the companies the funds approved in the chapter of the budget on assets (including capital contribution and support) after preparing the necessary decisions. A strategic project to restructure and rationalise the group is in progress, the concept of optimising the system of companies and the framework of operations and organisation has been completed and integrated into the approved medium term strategy and the adopted business plan for 2012, with certain components implemented already in 2011. The equity increase received in 2011 provides sufficient coverage for the commercial bank acquisition envisaged in the medium term strategy and expected in 2012. Funding from the market remained the typical form of financing the Bank used in 2011. The Bank concluded agreements for raising altogether EUR 805 million in new funds and drew down EUR 640 million of the facility. The amount drawn down under previous agreements amounted to EUR 220 million; hence in total the Bank drew down EUR 860 million (disregarding short term bridging loans for the government). MFB ANNUAL REPORT 2011 31
3. LENDING OPERATIONS By method, MFB lending operations can be classified into refinancing loans placed through commercial banks and loans extended directly, while by loan type they can be grouped as loan programmes and placements outside loan programmes. The table below presents the annual changes of lending operations in 2011 by method of lending: In 2011, the portfolio of Bank loans grew by HUF 68 billion or about 7.7%. While extraordinary repayments reaching a considerable amount at about HUF 30 billion coupled with portfolio sales to mitigate growth, the depreciation of the domestic currency propelled it. The two opposing effects were of equal size and offset each other. MFB ANNUAL REPORT 2011 33
4. LOAN PROGRAMMES The Bank continued to place the majority of its loans under loan programmes in 2011. Loan programmes are renewed from time to time in response to economic requirements. Loan programme directions remain unchanged yet: MFB extends loans to businesses and agricultural enterprises in line with EU regulations, and to retail and municipal clients for developments in accordance with governmental goals associated with saving energy. The Bank accepted and evaluated loan applications under a total of 14 loan programmes in 2011. There was a slight shift towards Budapest and Central Hungary in the loans placed under loan programmes in 2011 with lending to other regions declining simultaneously, more markedly in Central and Western Transdanubia. FACILITIES FOR ENTERPRISES In line with its new medium term business strategy, the Bank embarked on redesigning the structure of loans earmarked for enterprise development and used the New Hungary Enterprise Development Loan Programme as a basis for putting together the MFB Enterprise Financing Programme and made preparations for announcing the arrangement in 2012. New Hungary Enterprise Development Loan Programme This loan programme seeks to support investments into the development of infrastructure and technology so as to improve the competitiveness of the Hungarian economy. The amount of loans approved under the total budget of HUF 360 billion allocated to this loan programme grew by 8.5% to reach HUF 327 billion by the end of the year. As envisaged in its medium term strategy, MFB renewed the New Hungary Enterprise Development Loan Programme (ELP) in line with the goals set therein. In spring 2011, the development of the MFB Enterprise Financing Programme started on the basis of the ELP but with lending objectives matching the break-out points identified in the New Széchenyi Plan and a set of modified terms. The Programme received Government approval with a total budget of HUF 450 billion at the end of 2011. A key objective of the modified programme calls for extending loans at favourable rates and leasing products to improve the role of small and medium sized companies in employment, to strengthen their capacity to innovate and to act as suppliers and to support their environmental, regional development and health related investments. Moreover it also intends to provide supplementary funds for tenders invited for development and investment, particularly in relation to the New Széchenyi Plan. New Hungary Loan Programme for Small and Medium Sized Enterprises The Bank approved a total of 220 loan applications amounting to HUF 4.4 billion in this loan programme during 2011, which brought the rate of utilisation to 17.6%. In order to improve the efficiency of utilising the funds allocated to this loan programme, the Bank reassigned the facility to the ELP and sought government approval for terminating the loan programme. Intermediated facilities The bank suspended its New Hungary Small Business Loan and the Micro-Credit Plus Programme in April 2011 as transitionally companies could not take out the first payment guarantee required as a collateral for extending loans to finance investments. As the institutional first payment guarantee became available 34 MFB ANNUAL REPORT 2011
4. hitelprogramok NEW HUNGARY ENTERPRISE 6 035 450 674 5 214 326 939 62,7 DEVELOPMENT LOAN PROGRAMME INCL. LOAN PROGRAMME FOR SMALL AND MEDIUM SIZED ENTERPRISES 242 4 795 220 4 379 19,9 MICRO-CREDIT PLUS PROGRAMME 573 5 626 436 4 246 9,7 SMALL BUSINESS LOAN PROGRAMME 357 7 955 241 5 385 22,3 MFB PUBLIC TRANSPORT DEVELOPMENT LOAN PROGRAMME 24 35 950 17 13 148 773,4 MUNICIPAL INFRASTRUCTURE DEVELOPMENT 3 101 302 037 2 967 273 508 92,2 LOAN PROGRAMME FOR A SUCCESSFUL HUNGARY INCL. PANEL PLUS LOAN PROGRAMME 624 31 149 605 30 268 50,0 FOR A SUCCESSFUL HUNGARY HOUSEHOLD ENERGY SAVING LOAN PROGRAMME 936 1 396 903 1 347 1,5 FOR A SUCCESSFUL HUNGARY SOCIAL HOUSING LOAN PROGRAMME 23 2 222 22 1 962 89,2 FOR A SUCCESSFUL HUNGARY NEW HUNGARY AGRICULTURAL DEVELOPMENT 389 19 611 340 15 209 44,7 LOAN PROGRAMME WORKING CAPITAL LOAN PROGRAMME 43 6 534 32 5 196 162,4 FOR PRODUCER ORGANISATIONS NEW HUNGARY AGRICULTURAL 80 4 194 78 3 944 50,6 WORKING CAPITAL LOAN PROGRAMME MFB AGRICULTURAL VIS MAIOR WORKING 749 9 922 738 9 836 13,3 CAPITAL LOAN PROGRAMME MFB AGRICULTURAL WORKING CAPITAL 33 1 086 31 1 011 32,6 LOAN PROGRAMME again for micro, small and medium sized companies starting 20 June 2011, the Bank modified the documentation and opened the Small Business Loan facility again. The New Hungary Small Business Loan facility was made available via 46 intermediaries at 203 points of sale in 2011. The arrangement provided funds at HUF 5.4 billion to a total of 241 businesses. The average loan size came to HUF 20 million in 2011. Altogether 357 loan applications for a total of HUF 7.9 billion have been approved since the startup of the Loan Programme. 74.4% of the borrowers are micro businesses while 25.6% are classified as small enterprises. Applications for the Micro Credit Plus Programme were accepted by 8 agents intermediaries at 9 points of sale operated by MFB ANNUAL REPORT 2011 35
4. Loan programmes cooperating agencies owned by Budapest based and local business development centres. In 2011, 7 new applications were accepted for a total of HUF 52.1 million worth of credit, meaning that altogether HUF 4.2 billion has been disbursed to 436 micro businesses since the programme started. The suspension of the programme remained in effect until it was closed on 31 January 2012 as it was effectively replaced by the New Hungary Small Business Loan Programme. announcement were closed successfully and loan agreements were concluded in 2011. 2011 year end figures suggest that over HUF 13.1 billion worth of credit had been approved. In line with its new medium term strategy, the Bank recommended at the end of the year that the loan programme should be expanded and restructured so that it can meet the significant demand for financing the loan programme faces and so that it may promote the Government s development policy goals. MFB Public Transport Development Loan Programme The Bank announced the above programme in 2010 and thereby allowed transportation companies to borrow development funds at favourable terms. The loan programme is open for companies active in passenger road or rail transport (TEÁOR 08 4910, 4931 and 4939) having valid public services contracts for the year when the loan is extended and disbursed. Loans may be used for purchasing new or used vehicles used in road and rail community transport and with homologation documents. The utilisation rate of the loan programme increased considerably as the public procurement procedures launched after the FACILITIES FOR MUNICIPALITIES Major variances had developed in the utilisation rates of municipal loan programmes by late 2011, as the efficiency of certain arrangements failed to live up to expectations, therefore the Bank regrouped the resources available for funding municipalities in April and started to restructure its portfolio of municipal products in line with its new medium term business strategy in the second half of the year. By 31 December 2011, the Bank approved 2719 applications and HUF 270 billion worth of credit under For a Successful Hungary Municipality. 36 MFB ANNUAL REPORT 2011
4. hitelprogramok n n n n n n n n n Municipal Infrastructure Development Loan Programme For a Successful Hungary The Bank approved 22 transactions and HUF 1.962 billion in loans by 31 December 2011, which corresponds to an increase of the loan portfolio by 4%. The Bank reallocated HUF 30 billion of the funds to Municipal Infrastructure Development Loan Programme For a Successful Hungary due to the low utilisation rate. As the objectives of the MFB Municipal Infrastructure Development Programme also covers financing the development of new social housing in municipalities, the Government decided to terminate Social Housing Loan Programme For a Successful Hungary upon a recommendation of the Bank made with a view to eliminating overlaps and the low level of utilisation. Social Housing Loan Programme For a Successful Hungary The Bank approved 22 transactions and HUF 1.962 billion in loans by 31 December 2011, which corresponds to an increase of the loan portfolio by 4%. The Bank reallocated HUF 30 billion of the funds to Municipal Infrastructure Development Loan Programme For a Successful Hungary due to the low utilisation rate. As the objectives of the MFB Municipal Infrastructure Development Programme also covers financing the development of new social housing in municipalities, the Government decided to terminate Social Housing Loan Programme For a Successful Hungary upon a recommendation of the Bank made with a view to eliminating overlaps and the low level of utilisation. Retail and Municipal Development Loan Programmes for Energy Saving The Bank operated its former programmes of financing municipal and retail sector energy saving developments in 2011. Municipalities and residential communities can apply to the Panel Plus Loan Programme For a Successful Hungary for loans to finance energy savings by refurbishing residential buildings constructed using industrialised technologies while natural persons and residential communities can apply to the Household Energy Saving Loan Programme For a Successful Hungary for loans to finance energy savings by refurbishing MFB ANNUAL REPORT 2011 37
4. Loan programmes residential buildings constructed using traditional technologies. Both programmes seek to provide additional resources to complement non-refundable support allocated in application programs. The Bank approved the disbursement of HUF 28.8 billion in loans under the Panel Plus Loan Programme, which corresponded to 96% utilisation up to 31 December 2010. To continue financing energy savings by refurbishing residential buildings constructed using industrialised technologies, the Bank raised the facility by reallocating HUF 10 billion of the resources of the Social Housing Loan Programme due to the lower level of utilisation. The amount approved in loans stood at HUF 30.3 billion on 31 December 2011, which the Bank had used for financing HUF 71 billion worth of retail sector investments designed to generate energy savings. The Bank had accepted 903 applications and approved HUF 1347 million in loans under the Household Energy Saving Loan Programme by December 2011, which corresponded to a year on year increase by 7% of the loans disbursed in conjunction with grants awarded in a related applications arrangement. The loan programme was closed at the end of the year. AGRICULTURAL FACILITIES New Hungary Agricultural Development Loan Programme Operated since 2005, the first and second stages of the New Hungary Agricultural Development Loan Programme provided close to HUF 30 billion in development loans to 650 farming enterprises which implemented HUF 65 billion worth of investments using the loans. Agricultural enterprises embarking on capital expenditure related to primary agricultural production may apply for loans between HUF 1 million and 1 billion with maturity up to 15 years. In order to achieve the highest efficiency in utilising application funds, the rules of support related financing were simplified in 2009 and large corporations were also added to the scope of potential borrowers. As a result, 200 clients applied for HUF 9.5 billion worth of credit to supplement awarded grants by 31 December 2011. Working Capital Loans Working Capital Loan Programme for Producer Organisations MFB launched its Working Capital Loan Programme for Producer Organisations in December 2008 to make available preferential working capital loans to producer organisations recognised with final force and vegetable and fruit producer organisations with preliminary recognition. MFB also extends loans via refinancing the credit institutions that join the programme and via direct financing arrangements. The Hungarian State extends guarantees to cover 80% of the funds placed by MFB up to HUF 4 billion. Altogether HUF 5.2 billion worth of credit had been approved in 32 transactions up to 31 December 2011. The average size of approved deals reaches HUF 160 million with more than half of the companies receiving loans above HUF 150 million. Loan applications were received mostly from regions with a tradition in producing fruit and vegetables (Southern Great Plain and Northern Great Plain). New Hungary Agricultural Working Capital Loan Programme Announced in March 2008, the New Hungary Agricultural Working Capital Loan Programme disbursed close to HUF 38 MFB ANNUAL REPORT 2011
4. hitelprogramok 16 billion in Stages I and II. At present, the Programme offers working capital loans of a maximum of HUF 200 million maturing in no more than 5 years to agricultural producers at market terms (3 month BUBOR + max. 4% p.a.). Enterprises can apply for loans at participating credit institutions or directly with MFB since April 2010, provided the amount requested is below HUF 50 million. MFB Agricultural Vis Maior Working Capital Loan Programme MFB continued to expand its set of instruments designed to finance agricultural enterprises by creating a preferential working capital loan option maturing over a year to bridge the liquidity problems of farmers hit by unfavourable weather phenomena in 2010. MFB announced its MFB Agricultural Vis Maior Working Capital Loan Programme with an allocation of HUF 6 billion and with 26 November 2010 as the effective date. To acknowledge the high level of utilisation, the Bank increased the allocation to HUF 11 billion as of 26 April 2011. Farmers may apply for loans based on the size of the farming land that sustained damage and the (number, type, age and sex of the) animals that died off. The loan amount is limited to HUF 200 thousand per hectare of plough field and pasture land per client, to HUF 500 thousand per hectare of plantation and to HUF 200 thousand per animal. The loan amount may vary between HUF 1-50 million. Loans may be backed by on-demand first payment guarantees provided by the Rural Credit Guarantee Foundation. The total loan amount approved in the loan programme in 2011 reached HUF 9.8 billion, bringing the level of utilisation to 90% by year end. MFB Agricultural Working Capital Loan Programme To cater for farming companies, the Bank announced its MFB Agricultural Working Capital Loan Programme on 3 May 2011 particularly in an attempt to improve the competitiveness of agricultural production, animal husbandry and the production of high quality produce by financing the working capital requirement of farming operations. Companies pursuing animal husbandry and crop production and producers active in the poultry and pig sectors holding reference letters from a nationwide advocacy organ or a public body and a production agreement may apply to the Programme for a working capital loan. Applicants may request loans denominated in HUF earning interest on a EURIBOR basis for a term of 3 years with 1 year grace. Altogether 31 applications were approved under this loan arrangement to the tune of HUF 1 billion by the end of 2011. MFB Frost Damage 2011 Working Capital Loan Programme Based on a Government decision, the Bank announced its MFB Frost Damage 2011 Working Capital Loan Programme with an allocation of HUF 8 billion in January 2012 to provide preferential working capital loans with terms supported by the Government. Loans are available under the Programme for businesses acting as primary producers of agricultural products to mitigate the losses of enterprises that sustained frost damage in spring 2011 by supporting production and current operations with working capital. MFB effects advance payment of the nominal interest, service charges and any other cost related to extending and maintaining the loans under the Programme, and the Hungarian State shall bear all such costs. Borrowing enterprises receive 100% government support in respect of such interest, service charges and procedural costs from funds provided by the Minister of Rural Development. Furthermore, in case the individual reference rate applicable to the business is higher than the nominal interest rate, the business also qualifies for preferential interest supported MFB ANNUAL REPORT 2011 39
4. Loan programmes by MFB. The scope of parties eligible for government support under the programme is regulated in Ministerial Decree 133/2011. (XII. 22.) VM on the loans available for agricultural producers that sustained frost damage in May 2011. Loans are extended and financed directly by MFB. Bank Guarantee Programmes In the framework of the MFB Food Industry Bank Guarantee Programme MFB provides guarantees for 80% of the principal borrowed by food sector enterprises backed by the absolute direct suretyship of the central budget for 90% of the sum at stake. Enterprises borrowing working capital for a up to 5 years and up to HUF 2.5 billion from any of the participating commercial banks may apply directly to MFB for a bank guarantee under this programme. The terms and conditions of the MFB Economic Recovery Bank Guarantee Programme are similar to those of the Food Industry Bank Guarantee Programme, but the loan amount covered by this guarantee may not exceed HUF 5 billion. The total of HUF 80 billion available in the two programmes was sufficient to cover HUF 100 billion worth of working capital loans considering that guarantee exposure was limited to 80%. The application period of both programmes ended on 31 December 2011. By 31 December 2011, the Bank had approved 17 applications for HUF 12.2 billion under the Food Industry Bank Guarantee Programme and accepted 4 applications for HUF 7.2 billion in the Economic Recovery Bank Guarantee Programme. 40 MFB ANNUAL REPORT 2011
5. FUNDING The State secures the payment obligations of MFB arising from its fund raising operations by way of assuming ondemand absolute direct suretyship in accordance with Article 5(1)(a) of Act XX of 2001 on MFB Rt. Article 47(1) of Act CLXIX of 2010 on the state budget of the Republic of Hungary for 2011 set the overall limit for this repayment guarantee relating to funds with original maturities in excess of one year at HUF 1400 billion for 2011. In 2011 the Bank raised funds under volatile market circumstances due to the global crisis of money and capital markets, which had begun in 2008. Despite the crisis, MFB managed to realise its strategic funding goals, i.e.: covering the financing need required for its asset side activities and to repay its maturing debt as well as to secure the longterm financing needs of the Hungarian Export-Import Bank Private Limited Company; returning to the international bond market as issuer; strengthening the strategic financing relations with international and national development institutions. MFB raised a total of EUR 860 million from the international money and capital markets in 2011. A quarterly breakdown of funds raised shows the following: n n n n MFB ANNUAL REPORT 2011 41
5. FUNDING With BNP Paribas, ING Bank N.V. and Société Générale acting as lead managers, MFB concluded a EUR 500 million 5 year international public bond issue with value date on 31 May 2011. The annual interest rate of the bond is 5.875%, while its primary yield was 3.2% higher than the midswap rate for the relevant maturity. MFB returned to the international money market as an issuer after a break of almost 4 years. In order to match the interest rates on the asset and the liability side the Bank partially swapped the funds from fixed into floating rate. MFB raised EUR 180 million via bilateral loan agreements and Schuldscheins in 2011. In 2011, the Bank drew down completely the EUR 100 million Global Loan facility concluded with European Investment Bank (EIB), Luxembourg on 7 October 2010. MFB used most of the funds for partially financing its loan programmes supporting municipal infrastructure development projects and investment projects of small- and medium-sized enterprises. On 20 October 2011, MFB signed another EUR 100 million Global Loan agreement with European Investment Bank (EIB), Luxembourg. MFB may use the facility to partially refinance small and medium sized projects and small and medium sized enterprises. The Bank did not make any draw down from the facility in 2011. MFB signed a EUR 125 million framework loan agreement with the Council of Europe Development Bank (CEB), Paris on 6 May 2011. The Bank may use the facility to partially refinance its loan programmes supporting the development of small and medium sized enterprises, the development of municipal infrastructure and the refurbishment of residential buildings to achieve energy savings. MFB drew down EUR 80 million from the facility in 2011. n n n n n n n n n n 42 MFB ANNUAL REPORT 2011
6. MFB BANKING GROUP Agrarian Group Bábolna National Stud Farm Limited Liability Company Bakonyerdô Forestry and Wood Processing Private Limited Company DALERD Southern Great Plain Forestry Private Limited Company EGERERDÔ Private Limited Company ÉSZAKERDÔ Private Limited Company Gemenc Forest and Game Management Private Limited Company Gyulaj Forestry and Hunting Private Limited Company HM Budapest Forest Management Private Limited Company HM Kaszó Forest Private Limited Company HM VERGA Veszprém Forest Private Limited Company Hungarian Horserace Betting Organisation Limited Liability Company IPOLY FOREST Private Limited Company KEFAG Kiskunság Forestry and Wood Processing Private Limited Company Kisalföld Forest Management Private Limited Company Mecsek Forestry Private Limited Company Mezôhegyes State Stud Farm Limited Liability Company NEFAG Nagykunság Forestry and Wood Processing Private Limited Company National Horseracing Limited Liability Company NYÍRERDÔ Private Limited Company Pilis Forest Park Private Limited Company SEFAG Forestry and Wood Processing Private Limited Company Szombathely Forestry Private Limited Company TAEG Vocational Forest Management Private Limited Company VADEX Mezôföld Forest and Game Management Private Limited Company Vértes Forestry and Wood Processing Private Limited Company Zalaerdô Forestry Private Limited Company Asset Management Group Corvinus Subsidies and Investment Private Limited Company Hungarian Tourism Private Limited Company Hungarofest Nonprofit Ltd. for the Organisation of Central Events ITD Hungary Nonprofit Public Benefit Private Limited Company MFB Invest Investment and Asset Management Private Limited Company MKK Hungarian Claim Work-out Private Limited Company Regional Development Holding Private Limited Company Small Business Development Company Ltd. Supplier Invest Private Limited Company Infrastructure Group Hungarian Public Road nfp Private Limited Company National Infrastructure Development Private Limited Company State Motorway Management Private Limited Company Financial Group Garantiqa Credit Guarantee Private Limited Company Hungarian Export Credit Insurance Private Limited Company Hungarian Export-Import Bank Private Limited Company MAG Hungarian Economic Development Centre Private Limited Company South Stream Private Limited Company Student Loan Centre Private Limited Company MFB ANNUAL REPORT 2011 43
7. COMMUNICATIONS, CUSTOMER SERVICE, SPONSORSHIP, SCHOLARSHIPS Communications strategy In 2011, the product portfolio of the MFB group was renewed to ensure compatibility with, and the greatest possible support for, the New Széchenyi Plan. Management intended to increase the efficiency of product sales in each strategic segment. In that light, MFB s key communications task involved product communication aimed at raising awareness of the Bank s loan programmes and at reaching the appropriate target groups at the highest level of efficiency. Also, the strategic goal of maintaining and strengthening the positive image of the Bank had to be kept in focus. Press communications about the social responsibility of the Bank served to achieve that goal. The Bank s representation in Brussels also engaged intensively in communications. The arsenal of communication tools was multifarious. In addition to traditional means of advertising, brochures also appeared in print and the Bank also mobilised its customary PR tool. Web based communications used the website www.mfb.hu, which is also the major channel of maintaining contact between the Bank and its partner institutions. CUSTOMER SERVICE In 2011, the Customer Service Office of MFB Hungarian Development Bank received 2384 in-merit communications about its activities, announced loan programmes, governmental plans and communications, loan applications pending and closed loan cases. The number of contacts was by 7% more than in the previous year. The share of personal visits was about 4%, compared to 9% in 2010. The monthly distribution of contacts was uneven: the lowest turnover was recorded in October with no more than 149 contacts as opposed to 265 inquiries received in January. Most of the turnover in January was generated by inquiries about the MFB Agricultural Working Capital Force Majeure Loan Programme, which had been announced in December 2010. SPONSORSHIP Sponsorship is a prominent part of the Bank s corporate social responsibility. In 2011 a total of 229 applications were submitted for sponsoring, of which 70 were positively assessed by the Sponsorship Committee. In the framework of its sponsorship strategy and in the course of related activities, MFB strives to achieve that the widest possible scope of applicants can profit of its donations. Several smaller one-off projects were implemented with the support provided by the Bank, while there are several objectives, foundations and institutions among recipients that the Bank commits to year after year. In 2011, cultural goals once again received special attention among sponsored targets, and the Bank also donated significant amounts to health care and medical purposes, as well as to scholarship and training programmes for students. Supporting cultural goals was quite emphatic in the sponsorship area during the first quarter, when the Bank donated a considerable amount to fostering remarkable musical talents. Supporting the Mohács Busójárás, a six-day masquerade, which features in UNESCO s representative World Heritage List, has become a traditional form of sponsorship. Another key area of support involves an agreement with Hungary s Special Olympics Association, which provides backing for the sport activities of people with mental handicaps. In June, MFB organised a press conference at it Cupola Room for the team leaving for the Olympics. 44 MFB ANNUAL REPORT 2011
7. K O M M U N I K Á C I Ó, Ü G Y F É L S Z O L G Á L AT, S Z P O N Z O R Á C I Ó, Ö S Z T Ö N D Í J n n n n n n n n n n The Hungarian team reaped several successes at the Olympics and won a total of 108 medals at the international event in Athens. The Banks helpful contribution was instrumental in organising several conferences and issuing several professional publications in the first quarter. Supporting health related goals was more pronounced during the second quarter and included the donation of a considerable amount to the Faculty of Medicine at Semmelweis University for modernising the Department of Haematology. MFB also supported the renewal of instrumentation at several hospital departments. The Bank sponsored the research activities of Századvég Political School Foundation by donating HUF 15 million, and supporting children in need in their school efforts continues feature among the sponsorship goals of the Bank. The highlights among the events sponsored during the second quarter included a conference held in Eger with the title Cultural Diversity and Dialogue in Merit Building Bridges between Europe and the Arab World and an exhibition organised at the Hungarian Cultural Institute in Brussels with the patronage of the Hungarian Chamber of Engineers with the title Creative Hungary Engineering Knowledge, Future - Present - Past. This exhibition was one of the closing events of Hungary s EU Presidency by rotation. The Bank supported Weiner-Szász Chamber Symphonic Orchestra during the first quarter of the year. The outcome of the cooperation was the publication of a CD with classical music to celebrate the bicentennial anniversary of the birthday of Franz Liszt in May 2011. The Foundation Without Borders for Hungarian Press received by far the most important support during the third quarter in an attempt to provide both moral and financial assistance to media and journalists using the Hungarian language in press outside the borders of the Hungary. This donation of extraordinary size (HUF 100 million) demonstrates MFB ANNUAL REPORT 2011 45
7. Communication, sponsorships, scholarships the commitment of MFB Hungarian Development Bank to nurturing Hungarian language and culture. The Bank provided financial assistance to the organisation of several events of classical music also during the third quarter. Mozart s The Magic Flute was staged with great success at the Savaria Historical Carnival in Szombathely. The European concert tour of a children s philharmonic choir from Szentegyháza Transylvania also qualified for support just as the noble cause formulated by the Foundation For Opera at Pécs. The foundation intends to raise awareness of and to get people to appreciate opera as one of the most complex and wonderful branches of art. Their introductory theatrical programs designated for the schoolchildren and the young in the 2011/12 season received the Bank s support. Health related targets played a leading role during the fourth quarter. The Sponsorship Committee awarded the most important donation to the Action for the Defenceless Foundation, which spent HUF 16,268,750 on purchasing a unique, fully digital ultrasound equipment with multiple heads and complex screening functions. Its most advantageous feature is its portability, hence it can be used to diagnose people with physical disabilities and the elderly in their homes. The National Institute of Oncology and IMS International Therapeutic Service Kft. received HUF 10 million each for procuding special medical instruments. The Buda Hospital of the St. John of God order and the Foundation For Saint John Hospital also received donations for renewing their equipment. The Foundation for Children with Leukemia received funds for improving the level of equipment in the new wing of the building housing the Paediatric Institute of the University of Debrecen. The Bank organised the awards ceremony of the Junior Prima Prize for the fifth occasion at the Club of the National Academy of Sciences in November 2011. As in previous years, EUR 80,000 was provided in support to prize winners and the Prima Primissima Prize. MENTOR INTERNSHIP AND SCHOLARSHIP PROGRAMME Based on the positive experience of previous years, MFB announced its Mentor scholarship programme once again in October 2011, covering two areas. Practicum is a scholarship targeted at university undergraduates with outstanding skills who would like to complement the theoretical training received at an economic faculty with practical experience and familiarity with the operations of the Bank. Selected young applicants can work as trainees. After interviewing 17 young applicants for the Practicum scholarship, the Bank offered trainee positions to 15. Based on the experience of previous years, the Bank developed Habilitas, a system for supporting talented undergraduates in arts and sciences. The support scheme motivates university students to engage in new research, implement experiments and to achieve in the field of creative art. After interviewing 31 young candidates personally, the Bank selected 25 for regular monthly financial support. Here s a non-exhaustive list of disciplines where the supported students are active: medical science, music, IT, industrial art, theology, psychology, natural sciences and history. 46 MFB ANNUAL REPORT 2011
8. MFB INDICATOR The MFB INDICATOR corporate survey In line with its strategy, a principal task of MFB Hungarian Development Bank is to provide preferential development loans to Hungarian enterprises. A proper understanding of macro- and micro-economic processes and the position and expectations of the corporate sector is absolutely important precursor to designing a selection of preferential loans that are best suited to the requirements. To this end, MFB Hungarian Development Bank has been conducting regular, semi-annual corporate surveys (MFB INDICATOR) since the summer of 2009 and in doing so applies methods and approaches that are different from but serve to back and supplement the results of the Bank s macro-economic analyses. In spring and autumn 2011, MFB Hungarian Development Bank repeated its half-yearly survey for the fourth and fifth time and received responses to questionnaires sent to companies from 794 and 790 enterprises, respectively. In addition to providing a detailed and comprehensive picture of the actual situation and the needs, future plans and expectations of the Hungarian entrepreneurial sector, the results of the MFB INDICATOR survey provided a suitable basis for comparison with the former surveys to help map the changes and trends of the preceding year and evaluate the dynamics of the economy. The questionnaire consists of two fundamental parts focussing on five main areas: the first part examines the general (structural) figures of enterprises as well as their valuation and expectations of domestic macro-economic processes and their own position in the (domestic and international) market. Part two comprises questions on the enterprises experiences and plans regarding to external funding and investment. The principle of designing the questionnaire required that is should be suitable for the calculation of an economic indicator similar to a prosperity index but with much wider scope in addition to allowing deeper and more detailed analysis. MFB INDICATOR differs from traditional prosperity and business sentiment indices in that it lays great emphasis on both the external environment and on evaluating processes that are relatively loosely interrelated with macro-economic factors, such as the evaluation of the status AUTUMN 2011 44,7 40,4 45,4 46,9 56,4 48,4 44,7 SUMMER 2011 55,2 48,6 54,1 54,2 61,8 63,4 55,0 SUMMER 2010 47,1 41,4 43,7 43,9 46,6 53,9 49,1 WINTER 2009 43,9 31,8 40,3 43,5 45,5 53,9 49,8 SUMMER 2009 37,3 20,7 35,7 39,2 39,7 42,1 50,6 N.B.: ThE METhodology of calculating ThE MfB INdIcAToR changed IN AUTUMN 2011. To RENdER changes comparable, ThE RESUlTS of EARlIER SURvEyS ARE REpoRTEd AccoRdINg To ThE NEW METhodology. MFB ANNUAL REPORT 2011 47
8. MFB indicator n n and the perspectives of the internal corporate environment and the analysis of variances in size, sector and regional structure. The MFB INDICATOR is an aggregate of four component indices: the Macroeconomic Index, the Market Index, the Financing Index and the Investment Index. For the purposes of calculating the MFB INDICATOR, each component index is adjusted in accordance with the structural properties of enterprises and are weighted equally at 25%. THE RESULT OF THE SPRING 2011 SURVEY The fact that the indicator has surpassed the 50 point limit (55.2 points) in spring 2011 signals that Hungarian companies share more positive views about both the present situation of the economy and future trends for the first time since the survey started. Most of the increase of the MFB INDICATOR since the previous Summer 2010 survey can be attributed to external circumstances (the improvement of macroeconomic and market opportunities), which was coupled with a beneficial, yet somewhat more reserved turnaround of internal corporate processes (funding position and plans of new investments). The Macroeconomic Index showed a continuous upturn although at a receding rate up to spring 2011. At close to 50 points, the result indicated that companies did not see the macroeconomic environment in Hungary as an obstacle to corporate operations any longer (but it was not seen as supportive yet). Companies expected domestic GDP to grow by 2.3% and the consumer price index to increase by 5.1% in the period between spring 2011 and spring 2012. The spring 2011 survey was the first where the ratio of companies evaluating macroeconomic processes as worsening dropped below 50%, although those sensing improvements also failed increase since the Summer 2010 survey results. However, despite the significant downturn, the ratio of companies evaluating their operating environment as unfavourable stayed at 75%. Spring 2011 was the first time that the value of the Market Index also surpassed the 50 point limit, indicating that the market position and opportunities of Hungarian enterprises followed suit 48 MFB ANNUAL REPORT 2011
8. AZ MFB- INDIKÁTOR of the marked positive change observed in the operating (macroeconomic) environment since the summer of 2009. The difference between Macroeconomic and Market Index values, which had been contracting since the first survey, were slightly up this time, meaning that the improvement of macroeconomic processes had matured and companies had overcome the worst of the crisis and certain segments showed increasing results, expanding volumes and rising prices. The companies participating in the survey have improved their position in both domestic and foreign markets, but the slightly wider gap between the values of the two component indices marks the dominance of foreign markets. The Spring 2011 survey was the first in the history of the MFB INDICATOR to show an improvement of corporate earnings (before tax) during the previous 12 months, as the ratio of companies that reported growing earnings increased to 40% from only one out of five. Corporate prospects were also optimistic: 43% of the businesses expected improved earnings, and 17% thought earnings would be up by more than 5% in the 12 months between spring 2011 and 2012). There was no significant difference between the development of corporate profits across sectors, which signalled that the recovery from the crisis rippled across the economy as a whole. Crop farming operations excelled in agriculture while the industrial segment showed improving results for energy firms and the producers of chemicals, whilst construction companies continued to run the gauntlet. When 2011 started, the services sector gave account of improving results in the past 12 months for transportation, warehousing (due to exports), info-communication services (ICT) and financial service providers. The value of the Foreign sub-index component surpassing the Domestic score in each sector demonstrated the driving force of foreign markets in spring 2011. The secondary sector revealed the most striking differences between sector related expectations as industrial firms typically managed to improve their position in foreign markets during the 12 months before the survey: close to fifty percent reported favourable market processes. As opposed to domestic market processes, foreign sales continued to remain hunting grounds for larger companies, as mostly large operations could profit of the improvement of foreign market conditions. Based on Spring 2011 results, the value of the Investment Index was up again, signalling a turnaround in domestic corporate investments and developments (since the value of the index had dropped between the first survey in summer 2009 and the third one in summer 2010). Moreover, the ratio of companies with excess capacity continued to shrink and the role of capacity utilisation in influencing investments strengthened again. The spring 2011 survey showed major turnaround in the propensity of businesses to invest as 67% of the companies reported development projects scheduled (definitely 45% and potentially 22%) for the next 12 months, which marked a rise of 11 percentage points compared to the results measured in summer 2010. The influence of capacity utilisation rates on investment plans has strengthened again. In contrast, the preceding three MFB INDICATOR surveys showed that the progression of the crisis forced companies to face capacity surpluses and the ratio of businesses definitely planning to invest fell, but the Spring 2011 showed that the trend had reversed: the ratio of firms with definite plans to invest rose by 23 percentage points among those facing intermittent excesses of capacity and by 17 pp among firms with continuous capacity surpluses. Passive drivers (such as intensive market competition, postponement of earlier projects) dominated among the reasons for investment; markets picking up was definitely not the first motif. Although internal and external funding conditions (such as MFB ANNUAL REPORT 2011 49
8. MFB indicator n n n lack of leverage, access to funds and business income trends) continued to act as the biggest constraint, these were the very factors that recorded the largest improvement after the Summer 2010 Survey. The major improvement of the Financing Index in spring 2011 was due first of all to a major stride forward in demand for external funding, which was counterbalanced by worsening borrowing costs and conditions. Companies upper their demand for external funding seriously in early 2011: it was the first time that the ratio of businesses planning to raise funds externally in the upcoming year surpassed 50%. Nevertheless, the perception of how the terms and conditions of borrowing changed in the past year worsened moderately after the previous (summer 2010) survey: the previous unbrokenly improving trend of the perception of the (interest and other) costs of external funding faltered and the perception of the competitiveness of HUF denominated loans versus FX loans (on interest terms) also worsened. However, several of the conditions continued the improvement started in summer 2009: the businesses perceived the ratio of own funds, the level of the collateral and term to maturity and the grace period dictated by banks less stringent than earlier. The improving trend of the length of time required to take a loan decision also continued. At the same time, other than the change of FX rates, the supply of funding and the propensity of financial institutions to lend were seen as factors that had worsened the most in the preceding year after (this question was introduced for the first time in the Spring 2011 survey). THE RESULT OF THE AUTUMN 2011 SURVEY After the Spring 2011 survey, which was favourable in general, the one in the autumn signalled drastic worsening of both the status of the Hungarian economy and economic outlook. The value (44.7) of the MFB INDICATOR in autumn 2011 fell by 10.5 points or by more than 20% from the level recorded six months earlier, reflecting that corporate expectations had soured up radically. By dropping below 50 points yet again, the value of the MFB INDICATOR indicated that businesses tended towards a more negative view of both the current status and the future trends of the Hungarian economy. 50 MFB ANNUAL REPORT 2011
8. AZ MFB- INDIKÁTOR n n n n n n n n n n n n n n n n n n n n The reduction of the MFB INDICATOR since the previous survey was attributable to the corporate impression of the funding environment and a remarkable worsening of both the funding plans and status of companies, which was tightly connected to the sharply narrowing scope of corporate investment plans. Moreover, respondent companies entertained more negative views of the macroeconomic environment of corporate operations and related expectations were also poorer. That had shifted (particularly domestic) market opportunities in a more negative direction even before the survey and put tangible restraints on future performance in the year to come. Unbroken since summer 2009, the rise of the Macroeconomic Index halted abruptly to sink below 50 points in autumn 2011, indicating that the macroeconomic environment was becoming less beneficial so much so that it became a growing obstacle gaping at corporate operations. Companies expected domestic GDP to grow by 1.6% and the consumer price index to increase by 5.4% in the period between autumn 2011 and 2012. (The Spring 2011 Survey had still shown GDP and inflations expectations at 2.3% and 5.1%, respectively.) The continuous but slow rise of the Macroeconomic Index since the first survey (in spring 2009) was due each time to both the improving impression of the period leading to the survey and the outlook becoming more optimistic. The Autumn 2011 survey showed that both factors had changed: the worsening judgement of the macroeconomic environment in the preceding 12 months coupled with more negative expectations of the year following the survey. In the second half of 2011, 87% of the respondent companies had negative impressions of the macroeconomic environment (which actually corresponded to the results of summer 2010), and no more than 2% of companies thought it was favourable. The evaluation of annual expectations prior to the survey also showed a major turnaround: while Spring 2011 was the first time in the history of the MFB INDICATOR that the ratio of companies reporting more adverse macroeconomic conditions fell below 50%, the same had rushed to a much higher level by Autumn 2011 as more than 3 out of four companies (77%) experienced worsening, while no more than 7% indicated a sense of improvement in conditions (the lowest ratio since Summer 2009). MFB ANNUAL REPORT 2011 51
8. MFB indicator The Autumn 2011 value of the Market Index fell almost to where it was in Summer 2010 and sank below the threshold of 50 points, meaning that market conditions and opportunities tipped towards the adverse end of the scale in Autumn 2011. The gap between the value of the Macroeconomic and the Market Index closed somewhat, which indicated that the negative turn of the macroeconomic environment had a powerful impact on the market position of domestic companies. The divergence of internal and external processes (the widening of the gap between the Foreign and Domestic subindex components) continued despite the fact that both domestic and foreign market conditions were seen as becoming more adverse in the preceding six months. Nevertheless, the deceleration of domestic markets proved to be more pronounced, while the Foreign sub-index component still managed to stay above 50 points signalling (the more subdued) driving force of foreign markets in the second half of 2011. Expectations of corporate results were overshadowed by dark pessimism in autumn 2011, and (judging from the responses of respondent companies) the decline of several sectors could be of a degree that increased the risk of such operations markedly and may block their alleys to sources of external funding. The positive turnaround (a jump from 20% to 40% in six months in the group of companies reporting increasing profits) measured in spring 2011 in the impressions of companies of corporate results during the preceding 12 months came to a halt and less than a third (31%) of the firms claimed improving net profits in autumn 2011, while more than half (51%) reported declining profits after taxation for the 12 months preceding the survey. Corporate expectations also showed a major shift compared to spring 2011 showing dark pessimism comparable to that reported at the end of 2009: only 25% of the companies reckoned with improving results in the period up to autumn 2012 and 46% reported expected downturns. (Symbolically, only 15% had expected a major reduction of earnings by over 5% in spring, with the same pessimistic outlook typical of 26% of the respondents in the autumn.) Back in spring 2011, the majority of players in four sectors (crop production, food processing, tourism and ICT services) had expected growing results, whilst the automotive manufacturing was the only sector where more than half of the participants remained 52 MFB ANNUAL REPORT 2011
8. AZ MFB- indikátor n n n n n n n n n n n n optimistic in autumn 2011. Only companies with a diversified profile reported promising perspectives in agriculture (with 40% expecting growing profits in the second half of 2011). Earnings growth was expected by 28% of the companies active in the secondary sector with the outlook of several branches (food processing, wood processing, textile sector, construction, energy) becoming extremely adverse. The survey demonstrated that service sector companies had become trapped by low internal demand, and as a result all of the related branches continue to fight for survival in 2012. The degree of reduction of value of the Investment Index compared to the previous survey also shows a major turnaround in the development intentions of domestic enterprises, which may block robustly the ramping up of investments in the national economy in the twelve month period after the survey (between autumn 2011 and 2012). Symbolically, this component index plummeted to its all time low in autumn 2011 during the history of the MFB INDICATOR survey. The autumn of 2011 is unprecedented as the number of companies planning to invest (53%) had never been so low, and the number of those not envisaging investments (34%) had not been so high since summer 2009. The decline of the willingness to invest was especially significant considering that the propensity to develop (55-58%) more or less stagnated between summer 2009 and summer 2010 and the results of the spring 2011 survey moved in a positive direction in this area (more than 2 out of 3 companies were planning to invest then). Investments in the national economy may remain permanently subdued for a year after the survey (up to autumn 2012), which is also supported by the unprecedentedly high ratio of companies definitely not planning to invest: (Summer 2009: 19%; Winter 2009: 18%; Summer 2010: 17%; Spring 2011: 14%; Autumn 2011: 23%). A new jump (to 49%) in the ratio of companies fighting capacity surpluses, as demonstrated by the autumn 2011 survey, is one of the most serious obstacles blocking investment plans and couple with market processes (external and internal demand) and the availability and price of funding instruments to bear down on corporate investment activity. The diminishing perceived importance of all (but two) investment drivers also moved companies towards abandoning MFB ANNUAL REPORT 2011 53
8. MFB indicator investment plans. As funding terms continued to act as the heaviest drag on developments in autumn 2011, the role of internal funding resources (revenues) appreciated. Additionally, the importance of various (e.g. environmental) regulations increased since the spring 2011 survey. Expectations of growing internal demand proved to be the investment driver that weakened the most, followed by the motivation to develop generated by the technological advancement of a specific sector. Influences from foreign markets still have the capacity to add dynamism to investments in certain (manufacturing) sectors, but the overall perceived importance of this driver also fell from the level noted six months earlier. The value of the Financing Index produced a so far unprecedented dive compared to the level reached in spring 2011. The loss of 15 points emanated from the erosion of demand for external funds among companies. That was in part due to the low level of inspiration to invest, which derives also from the motivation to borrow in an attempt to manage worsening corporate liquidity positions rather than to invest (use of working capital loans and overdrafts) and also to a clear move in several business segments to operations without external funding. The ratio of companies planning to raise funds during the 12 months after the autumn 2011 survey, dropped from 60% in spring 2011 to 42%, i.e. a level close to that recorded in summer 2009 with 44% of the respondents abandoning any plans for raising external funds for a year after the survey, which is the longest period in the history of the MFB INDICATOR. The ratio of companies with definite fund raising plans ebbed to from 35% (in spring 2011) to 21%, while the ratio of those definitely not planning to raise any funds almost doubled (from 14% to 27%) in autumn 2011. (Among fund raising objectives, financing developments plummeted to about a third, as companies were more interested in taking out working capital loans and overdrafts.) The financing position of respondent companies also revealed a pronounced change: while the ratio of companies having to resort to external funding to finance the running costs of standard operations kept decreasing after summer 2009 (to 17% in spring 2011), the same rocketed to twice that level (30%) according to the autumn 2011 survey. However, the responses revealed that 27% of the companies needed no external funding at all during the second half of 2011, that is to say some kind of a split had started to develop in the corporate sector based on financing position: a group of companies had settled for operations without external funding, whilst the lack or inaccessibility of funding seems to kill off lines of business in other companies. The perception of borrowing terms and conditions continued to worsen compared to the previous survey. Respondent companies selected the change of FX rates in the year preceding the autumn 2011 survey as the most adverse factor due to the high ratio of foreign currency loans and the severe depreciation of the HUF exchange rate. The propensity of banks and other financial intermediaries to lend also deteriorated substantially along with interest rates charged (although the latter was the single factor where the worsening perceived by companies was less pronounced than in the spring survey. Companies face increasingly severe collateral requirements set by financial institutions, and banks tend to refrain from offering or offer shorter periods of grace for repayment. 54 MFB ANNUAL REPORT 2011
9. THE BOARD OF DIRECTORS AND THE SUPPERVISORY BOARD THE BOARD OF DIRECTORS OF MFB HUNGARIAN DEVELOPMENT BANK PRIVATE LIMITED COMPANY IN 2011 THE SUPERVISORY BOARD OF MFB HUNGARIAN DEVELOPMENT BANK PRIVATE LIMITED COMPANYIN 2011 Up to 20 March 2011: László Baranyay, Chairman Dr. Ferenc Gerhardt, executive member Zoltán Urbán, executive member György Várady, executive member Ferenc Orosz, non-executive member Dr. Vilmos Kálmán Szentpétery, non-executive member From 21 March 2011 to 22 December 2011: László Baranyay, Chairman Ms. Lászlóné Németh, executive member Zoltán Urbán, executive member György Várady, executive member Ferenc Orosz, non-executive member Dr. Vilmos Kálmán Szentpétery, non-executive member From 23 December 2011 to 31 December 2011: László Baranyay, Chairman Zoltán Urbán, executive member György Várady, executive member Ferenc Orosz, non-executive member Dr. Vilmos Kálmán Szentpétery, non-executive member Up to 28 April 2011: Dr. Péter Szalay, Chairman Dr. Ilona Bizderi, member Dr. Krisztián Németh, member delegated by employees Ervin Gönczy, member delegated by employees From 29 April 2011 to 31 August 2011: Dr. Péter Szalay, Chairman Dr. Ilona Bizderi, member Judit Gondos, member Dr. Krisztián Németh, member delegated by employees Ervin Gönczy, member delegated by employees From 1 September 2011 to 25 September 2011: Dr. Ilona Bizderi, member Judit Gondos, member Dr. Krisztián Németh, member delegated by employees Ervin Gönczy, member delegated by employees From 26 December 2011 to 31 December 2011: Dr. Tibor Halasi, Chairman* Dr. Ilona Bizderi, member Judit Gondos, member Dr. Krisztián Németh, member delegated by employees Ervin Gönczy, member delegated by employees * Appointed in 26 September 2011, dr. Tibor Halasi started to exercise the rights and obligations arising from his chairmanship of the Supervisory Board of MFB Hungarian Development Bank Private Limited Company on 7 November 2011. 56 MFB ANNUAL REPORT 2011
MFB Igazgatóság és Felügyelô Bizottság THE MANAGEMENT OF MFB HUNGARIAN DEVELOPMENT BANK PRIVATE LIMITED COMPANY IN 2011 Up to 20 March 2011: László Baranyay, Chairman-CEO Dr. Ferenc Gerhardt, Deputy CEO Ms. Lászlóné Németh, Deputy CEO Zoltán Urbán, Deputy CEO From 21 March 2011 to 22 December 2011: László Baranyay, Chairman-CEO Ms. Lászlóné Németh, Deputy CEO Zoltán Urbán, Deputy CEO From 23 December 2011 to 31 December 2011: László Baranyay, Chairman-CEO Zoltán Urbán, Deputy CEO MFB ANNUAL REPORT 2011 57
MFB MAGYAR FEJLESZTÉSI BANK ZÁRTKÖRÛEN MÛKÖDÔ RÉSZVÉNYTÁRSASÁG MFB Hungarian Development Bank Private Limited Company Nádor utca 31. Budapest H-1051 Mailing address: 1365 Budapest, P.O. Box 678 Hungary Telephone: +36-1-428-1400, +36-1-428-1500 Fax: +36-1-428-1490 Toll free local number: 06-40-555-555 Customer service: Nádor utca 31. Budapest H-1051 Telephone: +36-1-428-1574, +36-1-428-1306 E-mail: ugyfelszolgalat@mfb.hu, kabinetiroda@mfb.hu Website: www.mfb.hu Reuters: MBFB S.W.I.F.T. Code : HBID HUHB MFB ANNUAL REPORT 2011 59