NOTE 1               GENERAL INFORMATION

 

Hungarian Export-Import Bank Private Limited Company ("Eximbank", "the Bank") was established on 26 May 1994 as one of the legal successors upon the dissolution of the Export Guarantee Corporation. The scope of Eximbank's activities and the specific provisions applicable to it are laid down in Act XLII of 1994, in force in Hungary (hereinafter: "Exim Act").

 

Eximbank's primary business goal is to promote Hungarian exports by granting loans and guarantees.

 

The Bank is a private limited company with its registered office in Hungary. The Bank's registered office: Nagymező u. 46-48., 1065 Budapest, Hungary.

 

The Minister for Economic Development (as of 1 January 2024, the Minister for the National Economy) exercises shareholder rights on behalf of the Hungarian State.

Eximbank is a specialised credit institution, wholly owned by the Hungarian State.

Under the Exim Act, Eximbank's mission is to finance the export of Hungarian goods and services and to finance investments in Hungary and investments related to Hungarian exports, thereby financing Hungarian enterprises, mainly small and medium-sized enterprises but also large corporations, in order to maximise export opportunities, contributing to the preservation and creation of jobs in Hungary and promoting the development of the national economy by improving the competitiveness of Hungarian exports in foreign markets.

In accordance with Eximbank's mission, it provides financing, guarantee and capital investment services to its customers and financial institution partners in order to fulfil its export-promotion duties. Within its scope of duties, it provides loans at favourable interest rates to export buyers in relation to sales of Hungarian exporters abroad, subject to OECD rules. The state's export credit agency functions are shared between Eximbank and Magyar Exporthitel Biztosító Zrt. (Hungarian Export Credit Insurance Ltd., "MEHIB."). While Eximbank is engaged in the provision of export and export-related financing - directly through lending or indirectly through venture capital and/or private equity funds - and offers export guarantees, MEHIB provides export credit insurance to exporters or their banks, including Eximbank's borrowers as well.

The Bank's subsidiary:

 

The purpose of Exim Invest is to enforce the provisions of Government Decree 1512/2022 (X.24.) by establishing a equity fund structure in which, in the case of the vast majority of state-owned equity funds, the creation and termination of the equity fund and the exercise of investor rights in respect of directly or indirectly state-owned investment units are carried out under one single strategic management.

 

Exim Invest Zrt issued 5,000,000 shares, each with a nominal value of HUF 1 and an issue value of HUF 3. The shares included 4,999,999 A-series ordinary shares owned by Eximbank and 1 B-series preference share, which is now owned by Nemzeti Tőke Holding Zrt. (NTH). The volume/ratio of the Bank's shareholding and voting right is 99.99%.

Exim Invest began its actual operations in 2023, and therefore became subject to the obligation to prepare consolidated financial statements.

 

Exim Invest contributed HUF 32 million to the Bank's and the subsidiary's after-tax profit, while the value of the services provided to the Bank was HUF 372 million, which was eliminated in accordance with the consolidation settlements detailed in accounting methods described under section 3.17. Exim Invest did not pay any dividends in 2023.

 

The cash flow between the Bank and its subsidiary is the amount paid by the Bank as an advance payment for services of HUF 592 million.

 

Registered office of Exim Invest Zrt.: Kapás u. 6-12., 1065 Budapest, Hungary.

-     Eximbank website: https://exim.hu

 

 

NOTE 2               PRINCIPLES OF COMPILATION

 

2.1    IFRS compliance

 

These consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards ("IFRS") adopted by the EU.

IFRSs comprise accounting standards issued by the IASB and its predecessor body and interpretations issued by the International Financial Reporting Interpretations Committee ("IFRIC") and its predecessor body, as adopted by the EU.

The Bank has prepared separate financial statements in accordance with IFRS since 2019.

 

Eximbank, as a parent company, is required to prepare consolidated financial statement from the 2023 business year onwards, due to its share in Exim Invest Zrt. and that Eximbank has control over its relevant activities.

 

The comparative data of the consolidated financial statements contain the data shown in the Bank's separate financial statements of the previous year. In the consolidated financial statements, the assets and liabilities were valued at the carrying amount at which they were recorded in the Bank's separate financial statements.

These consolidated financial statements have not been prepared in accordance with the provisions of Act C of 2000 on Accounting, in force in Hungary, applicable to entities preparing their annual consolidated financial statements in accordance with IFRS, therefore not intended for statutory filing purposes. The statutory consolidated financial statements are available: https://exim.hu.

 

The Bank is obliged to publish its consolidated financial statements, as a consequence of  a 2023 bond issue on the London Exchange Stock

 

2.2    Valuation principles

 

The consolidated financial statements have been prepared on a historical cost basis except for the following:

 

·    Derivative financial instruments are measured at fair value,

·    Non-derivative financial instruments measured at fair value through profit or loss are measured at fair value,

·    Investments in equity instruments of entities over which the Bank has joint control or significant influence are measured using the equity method.

 

The preparation of financial statements requires the management to make certain judgements, estimates and assumptions that affect the reported amounts of assets, liabilities, income, expenses and disclosure of contingent assets and liabilities. Actual results may differ from these estimates.

 

Estimates and underlying assumptions must be reviewed on an ongoing basis. Revisions to accounting estimates are to be recognised in the period in which the estimate is revised and, if necessary, in any future periods affected by the revision.

 

In particular, information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amount recognised in the financial statements are presented in Note 33.

 

2.3    Functional and presentation currency

 

The items in the consolidated financial statements are measured in Hungarian forint (functional currency), being the currency of the primary economic environment. Except as otherwise indicated, in the consolidated financial statements all financial information is presented in Hungarian forint (presentation currency), rounded to the nearest million.

 

 

NOTE 3               SIGNIFICANT ACCOUNTING POLICIES

 

 

Accounting policies are the set of principles, conventions, rules and practices applied by the Bank and its subsidiary in the preparation and presentation of the consolidated financial statements of the Bank. The accounting policies set out below have been applied consistently to all periods presented in the consolidated financial statements.

 

The statement of financial position was prepared in liquidity order. A statement of assets and liabilities recovered or settled within twelve months following the date of presentation of the financial statements and during a period longer than the twelve months is included in Note 27.

 

3.1    Financial instruments

 

A financial asset or a financial liability is recognised in the statement of financial position when, and only when, under the contract the Bank or its subsidiary become a subject of the contractual provisions of the instrument.

 

The Bank and its subsidiary initially recognise their financial instruments on the settlement date, except for derivative financial instruments, which are recognised on the trade date.

 

The financial assets and liabilities of Exim Invest are measured consistently at amortised cost.

 

Financial instruments at fair value through profit or loss are initially recognised at their fair values. On initial recognition, the Bank measures other financial assets and financial liabilities at fair value adjusted for directly related transaction costs. The fair value of a financial instrument at initial recognition is usually the transaction price.

 

On initial recognition, financial assets are classified into one of the following measurement categories:

·    financial assets measured at amortised cost,

·    financial assets measured at fair value through other comprehensive income (FVOCI)

·    financial assets measured at fair value through profit or loss (FVTPL).

A financial asset is measured at amortised cost if it meets all of the following criteria and is not designated as measured at fair value through profit or loss:

·    the asset is held in a business model whose objective is to collect contractual cash flows, and

·    the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest (SPPI).

 

A financial asset is measured at fair value through other comprehensive income if it meets all of the following criteria and is not designated as measured at fair value through profit or loss:

·    the asset is held in a business model whose objective is both to collect contractual cash flows and to sell financial assets, and

·    the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest (SPPI).

 

The following table shows the result of the SPPI test:

Financial asset type	Result of SPPI test
Loans eligible for interest equalisation	SPPI-type cash-flow characteristics
NHP loans	SPPI-type cash-flow characteristics
Aid credits	SPPI-type cash-flow characteristics
Loans to employees	SPPI-type cash-flow characteristics
Other (market rate) loans	SPPI-type cash-flow characteristics
Government securities	SPPI-type cash-flow characteristics

 

In the course of the analysis it was established that Eximbank has contractual rights to collect the unpaid amounts of the outstanding principal and its interests. There are no restrictions on contractual cash flows that are incompatible with the SPPI criteria. The cash flow, or a part of it, is not linked to the performance of the debtor or of any other related factor. Payments are not deferred regardless of interest accrual. There is no pre-defined condition in the contract that allows the non-repayment of any amount.

Overall, the financial assets managed by the Bank are designed to manage the Bank's liquidity so that the Bank can meet the required liquidity ratios. Past experience shows that these assets typically are not resold, with the primary objective of each purchase being to collect interest and principal over the term.

The Exim Act expressly prohibits security transactions for trading purposes.

The Business department of the Bank deals with lending and guarantees. The purpose of lending is in all cases to collect the interest and principal during the term. The Bank will not originate any transactions where the original intention is to transfer the asset to another party at a later date, nor has it any previous experience of selling. If a receivable becomes irrecoverable, a dedicated area of the Bank will take over and collect the outstanding debt; only in exceptional cases may the receivable be sold.

 

The assessment of the performance of the employees and their compensation are not linked to the return on securities (either to the fair value of the securities or to the contractual cash flows collected).

 

Upon the initial recognition of an investment in an equity instrument not held for trading, the Bank may irrevocably elect to recognise changes in fair value in other comprehensive income. There is an option to make this election per instrument.

 

All other financial assets and financial liabilities are measured at fair value through profit or loss.

 

At initial recognition, the Bank classifies financial liabilities into the following measurement categories:

·    financial liabilities measured at amortised cost

·    financial liabilities measured at fair value through profit or loss (FVTPL).

At initial recognition, the Bank also recognises financial guarantee contracts and loan commitments (credit lines) below the market interest rate at fair value, with respect to the settlement date.

 

Derivatives are measured at fair value in the statement of financial position.

 

In cases when there is a reporting date between the date of the transaction and the settlement date, the Bank recognises the fair value difference between the transaction and reporting date in the case of financial instruments measured at fair value under Other assets or Other liabilities.

 

The Bank derecognises a financial asset when

·    the contractual rights to the cash flows from the financial asset expire, or

·    the Bank transfers the contractual rights to receive the cash flows of the financial asset, or the Bank retains the contractual rights to receive the cash flows of the financial asset, but assumes a contractual obligation to transfer the cash flows to one or more recipients in an arrangement that meets certain conditions, in a transaction in which

o  the Bank transfers substantially all risks and rewards from the ownership of the asset, or

o  the Bank does not transfer or retain substantially all the risks and rewards of ownership, and the Bank does not retain control of the financial asset.

 

Modification of contractual terms of financial assets and liabilities

 

In the case of modification of the contractual terms of financial assets or liabilities, the Bank assesses whether the modification is significant. If the modification is significant, the financial asset or liability is derecognised.

 

In the case of a substantial modification resulting in the derecognition of a financial asset or liability, the financial asset or liability ceases to exist, and a new financial asset or liability is recognised at fair value. Any difference between the derecognised carrying amount of the original financial asset or liability and the new financial asset or liability, recognised at fair value, is recognised in profit or loss.

Eligible transaction costs related to the new financial asset increase the fair value of the related financial asset. Income from fees related to modifications are presented as gain or loss on derecognition, except for fees that adjust the fair value of the new financial asset and fees that compensate transaction costs, which are taken into account at the initial recognition of the new financial asset.

If the modification is not deemed significant, the Bank recalculates the gross carrying amount of the financial asset or the amortised cost of the financial liability with the net present value of the modified future contractual cash flows discounted by the original effective interest rate (or, for financial assets purchased or originated with impaired credit quality, the effective interest rate adjusted for credit risk) and recognises the resulting gain or loss in profit or loss. In the case of instruments with variable interest rate, the original effective interest rate used to calculate the gain or loss is adjusted to reflect current market conditions prevailing at the date of the modification.

The costs or fees incurred, after accounting for the above difference, adjust the carrying amount of the financial asset or liability - gross value in the case of a financial asset - and are amortised over the remaining life of the instrument by recalculating the effective interest rate.

 

In order to determine whether a contract modification is significant, the Bank performs

-     a quantitative, and

-     a qualitative test.

 

A contract modification is substantial if it can be regarded as significant according to either of the above tests.

 

A contract modification is considered to be significant on the basis of the quantitative test, if the present value of the contractual cash flows to be modified, discounted at the original effective interest rate, differs by at least 10% at the date of the modification compared to the gross carrying amount before the modification.

 

If, in the event of financial difficulty of the debtor, the Bank plans to modify the financial instrument in such a way that it would result in a remission of cash flows, it first considers whether a part of the instrument should be written off before the modification. This has an impact on the quantitative test, as it may result in the conditions for derecognition not being met.

 

A contract modification is considered to be significant on the basis of the qualitative test if the Bank concludes that the risks of the modified financial asset or liability are substantially different from those of the original financial asset or liability.

 

In particular, a contract modification is considered significant in the following cases:

-      change in currency

-      fundamental change in the nature (type) of the asset or liability

-      change if interest rate from fixed to variable (or from variable to fixed) the change results in the modified cash flows not meeting the SPPI test

 

The Bank and its subsidiary derecognise a financial liability (or a part of it) in the financial statements when it is extinguished - i.e. when the obligation set out in the contract is discharged or cancelled or it expires.

 

Financial assets and financial liabilities recognised in the statement of financial position are offset and the net amount is shown when the Bank or its subsidiary has a legally enforceable right to offset the amounts and it intends either to settle them on a net basis or to realise the asset and settle the liability simultaneously.

 

3.2    Financial instruments measured at fair value (derivatives)

 

The Bank measures its derivative financial assets and liabilities at fair value through profit or loss.

 

For economic hedging purposes, the Bank may enter into contracts for derivative financial instruments (swaps, IRS, CCIRS), and in doing so it may, of business reasons, choose to apply hedge accounting under IFRS 9. All derivative financial instruments are carried at fair value, and all gains and losses realised on these instruments are recognised under "Gains and losses from trading and investment activities" in the profit and loss account. The details regarding hedge accounting can be found in Note 8.

 

3.3    Investments measured t fair value, and investments accounted for using the equity method

 

A part of the Bank's capital investments consists of investments in investment funds, which are designed to generate yields and also to leverage banking relationships. The majority of capital investments is in the form of interest in investment funds.

Investments in equity instruments of associates and joint ventures where the Bank has joint control or a significant influence are accounted for using the equity method (see Note 3.17).

Since these investments do not meet the criteria of the SPPI (see Note 3.1), all other investments are measured at fair value through profit or loss.

 

Dividend income (except where the dividend is clearly intended to recover the cost of an investment) at the date of approval and other gains/losses on investment fund shares are recorded under "Gains or losses from trading and investment activities" at the time of the decision.

 

3.4    Financial instruments measured at amortised cost

Interest income on financial assets measured at amortised cost is calculated using the effective interest method.

 

When calculating the effective interest rate, the Bank estimates future cash flows considering all contractual terms of the financial instrument but - with the exception of financial assets purchased or originated with impaired credit quality - does not take into account expected credit losses (ECL). For financial assets purchased or originated with impaired credit quality, the effective interest rate adjusted for credit risk is calculated using estimated future cash flows that include expected credit losses.

The calculation includes all amounts paid or received that are an integral part of the effective interest rate, including transaction costs, fees, premiums and discounts. Transaction costs include additional costs that are directly attributable to the acquisition or issue of a financial asset or liability.

 

After initial recognition financial liabilities are measured at amortised cost, except for derivative financial liabilities.

 

3.4.1    Cash and cash equivalents

 

Cash and cash equivalents include banknotes and coins, balances held with central banks and highly liquid financial assets with a maturity of less than three months, which are subject to insignificant risk of changes in their fair value, and are held by the Bank in order to settle short-term commitments. After initial recognition the Bank and its subsidiary measure these instruments at amortised cost in the statement of financial position.

 

3.4.2    Securities measured at amortised cost (government securities and corporate bonds)

 

The Bank measures debt securities that meet the SPPI criteria and are held in order to collect principal and interest cash flows at amortised cost in the statement of financial position, following initial recognition.

 

3.4.3    Loans and advances to credit institutions and insurance companies and Loans and advances to other customers

 

The Bank measures loans to banks, insurance companies and other customers, which meet the SPPI criteria and are granted in order to collect principal and interest cash flows, at amortised cost in the statement of financial position, following initial recognition.

 

3.4.4    Loans and deposits from credit institutions and insurance companies, and Deposits from other customers

 

Loans and deposits from banks and insurance companies, loans and advances to other customers and debt securities issued are carried after the initial recognition at amortised cost.

 

3.5    Financial guarantees and loan commitments (credit lines)

 

A financial guarantee is a contract that requires the Bank to make specified payments to reimburse the holder for losses it incurs because a specified debtor has failed to make payment when due in accordance with the terms of the debt instrument.

A loan commitment is a firm commitment to provide a loan on pre-determined terms.

 

In the normal course of business, the Bank issues financial guarantees, which consist of letters of credit and loan guarantees. Financial guarantees and commitments to provide loans at market interest rates are measured at fair value on initial recognition and are presented in the statement of financial position under "Other liabilities". The fair value of financial guarantees is the fee for the guarantee received. In the subsequent valuation, the Bank as the issuer of the guarantee will value it at the higher of:

(i)      the amount of the loss allowance determined in accordance with IFRS 9, or

(ii)     the amount initially recognised less the amount of deferred income recognised in accordance with the principles of IFRS 15.  

The premium received is recognised on a straight-line basis over the life of the guarantee in the profit and loss account under "Fee and commission income".

The provision for losses on financial guarantees and loan commitments is presented in the statement of financial position under "Provisions" while in the statement of comprehensive income it is recognised under in "Impairment losses on financial instruments and (creation)/reversal of provisions".

 

3.6    Determination of fair values

 

Several provisions of the Bank's accounting policies and their annexes require the determination of fair value for financial assets and liabilities. Fair values are determined for measurement and/or disclosure purposes based on the following methods.

 

Fair value is the price that would be received for selling an asset or transferring a liability in an arm's length transaction between market participants at the measurement date under current conditions in the primary market for the asset or liability or, in the absence of such, in the most favourable market. The fair value of a liability reflects the Bank's non-performance risk.

 

All financial instruments are recognised initially at fair value. In the normal course of business, the cost of a financial instrument at initial recognition is the transaction price (that is, the fair value of the consideration given or received). In case the initial fair value differs from the transaction price, the Bank recognises the initial (first-day) fair value difference between the fair value and the transaction price as follows. If the fair value measurement is supported by a price quoted in an active market for the same asset or liability or is based on a measurement method using only observable market prices, the Bank recognises the difference in profit or loss. Otherwise the Bank adjusts the carrying amount of the financial instrument to defer the recognition of the difference and recognises it in profit or loss to the extent that it arises from changes in the factors that market participants consider in pricing the instrument.

The fair value of financial instruments quoted in active markets is measured at the (unadjusted) prices quoted in active markets, on the basis of bid prices for assets and ask prices for liabilities (level 1).

If no directly or indirectly observable prices quoted in an active market are available, fair value is determined using valuation techniques that use inputs other than observable market prices. These include the use of quoted prices of similar instruments in active markets, quoted prices of identical or similar instruments in markets that are not active, or the use of other valuation techniques in which all significant inputs are observable directly or indirectly from market data. (Level 2).

In all other cases, financial instruments are measured using valuation techniques that use unobservable inputs, and these have a significant effect on the valuation of the instrument (level 3). This includes valuations based on quoted prices for similar instruments that require significant unobservable adjustments or assumptions in order to reflect differences between the instruments. See Note 34 for further details of fair value determination.

 

3.7    Impairment on financial assets

 

The Bank recognises a loss allowance for expected credit losses on the following financial instruments:

 

·    financial instruments classified as debt instruments;

·    lease receivables;

·    financial guarantee contracts issued;

·    loan commitments (credit lines).

 

Investments in equity instruments measured at fair value through profit or loss or other comprehensive income are not impaired in accordance with IFRS 9.

 

The Bank measures the loss allowance at an amount equal to the expected credit loss over the lifetime of the loan, except for the following, for which measurement is at the amount of the 12-month expected credit loss:

 

·    debt securities that, as determined by the Bank, have a low credit risk at the reporting date;

·    other financial instruments (except for lease receivables), for which credit risk has not increased significantly since initial recognition.

 

In the case of lease receivables, loss allowance is always measured at an amount equal to the expected credit loss over the lifetime of the lease.

 

The 12-month expected credit loss is the portion of the credit loss expected over the lifetime of the instrument that embodies the expected credit loss that may be incurred during the 12 months after the reporting date as a result of a default event concerning the financial instrument.

 

The lifetime expected credit loss is the expected credit loss arising from all possible events of default during the expected life of the financial instrument.

 

The expected credit loss is the probability-weighted average of credit losses.

At each valuation date, the Bank classifies the financial instruments into Stages, and determines the expected credit loss to calculate loss allowance, as described above. In accordance with the above, financial instruments are classified into three categories:

 

·    Stage 1 classification is applied to financial instruments at initial recognition, except for POCI (purchased or originated credit impaired) receivables. Financial instruments remain in Stage 1 until a significant deterioration of credit risk compared to initial recognition occurs. This Stage also includes financial instruments that the Bank considers to be low credit risk at the reporting date. For Stage 1 instruments, the Bank calculates a 12-month expected loss using lifetime PD (probability of default) models and LGD (loss given default) values, elaborated by segment; in the case of off-balance sheet items, it uses CCFs (credit conversion factors), reflecting the probability of inclusion in the balance sheet.

 

·    Stage 2 classification is applied to financial instruments where a significant increase of credit risk can be observed since initial recognition, however, the criteria for non-performing (default)/credit impaired exposure are not met. Lifetime expected losses are calculated for instruments included in Stage 2 using future exposures derived from contractual cash flows, the corresponding lifetime PD models, LGDs, as well as CCFs for off-balance sheet exposures.

 

·    Stage 3 classification is applied to default / credit impaired financial instruments. The Bank uses the NPL (non-performing loan) definition of the MNB (National Bank of Hungary), and also applies the concept of "default" in accordance with Article 178 of Regulation (EU) No 575/2013 of the European Parliament and of the Council on prudential requirements for credit institutions and investment firms (CRR) with the same content. The Bank evaluates all Stage 3 financial instruments individually, using probability-weighted cash flow scenarios discounted by the effective interest rate.

 

The Bank applies different credit risk models and parameters for each portfolio segment. The evaluation of Stage 1 and Stage 2 financial instruments are underpinned by PD models and LGD parameters developed for the following portfolio segments:

 

·    Corporate;

·    Sovereign/sub-sovereign;

·    Domestic financial institutions;

·    Foreign financial institutions.

 

The Bank has developed its lifetime expected probability of default (lifetime PD) models by analysing and forecasting historical empirical default rate timelines from external sources, as a function of time from initial recognition (vintage approach), using default rates published by Standard&Poor's and Weibull curves. All lifetime PD curves of all segments, developed along international ratings, have been mapped to the Bank's internal 7-grade rating classes. In 2022, the Bank switched from the previously used marginal PDs to the use of conditional PDs. The impact of the change in methodology did not have a material impact on the size of the expected loss on financial instruments.

 

The Bank performs PD correction on the corporate lifetime PD model by applying the forward-looking ARMAX (auto regressive moving average eXogeneous, autoregressive moving average with external explanatory variables) macroeconomic model in accordance with MNB regulations. The model design represents an ARMA (1,1) model incorporating external explanatory variables. The autoregressive term (AR) expresses the own previous value of the time series, whereas moving average (MA) stands for the estimation error measured in the previous period. The source of historical actual data series of explanatory variables was the database of Central Statistical Office (KSH). To make default rate forecast, the Bank used the most up-to-data available macroeconomic forecasts disclosed in the MNB Inflation Report. The R-squared ratio showing model fit was 67.8%. All parameters and the whole model were significant. The stationarity of model variables met all statistical application assumptions. This modelling methodology was not changed since the transformation to IFRS, however, within the framework of the comprehensive model review in 2022, the earlier applied unemployment rate and inflation rate were replaced by the investment volume index and the unemployment rate, due to the availability of longer data series and for economic and statistical reasons. This macro model was applied again in 2023. In order to estimate the macro multiplier, which is brought up to date quarterly, the Bank continuously updated the available factual data.

 

When estimating corporate PDs in a forward-looking manner, the Bank uses the macroeconomic forecasts published in the MNB Inflation Report and the corporate default rate time series published in the MNB Stability Report. The Bank constructed the macro model used for the PD adjustment by taking into account the autoregressive term expressing the previous value of the time series, the moving average expressing the model's prior-period error, the six-quarter lag of the investment rate in the MNB Inflation Report and the one- and two-quarter forward-looking values of the change in the unemployment rate in the MNB Inflation Report. In view of the fact that IFRS 9 requires the Bank to take into account its expectations of the macroeconomic environment in an unbiased manner in the expected loss calculation, and given that the relationship between macroeconomic indicators and the development of expected loss is not linear in practice (a certain amount of macroeconomic shock may have a larger impact on loss than an equal positive shock), the Bank has based its unbiased estimate used as a basis for forward-looking expectations on a probability-weighted average of three scenarios. The weights of the scenarios have been developed by the Bank in accordance with the MNB's Executive Circular on the use of macroeconomic information and factors indicating a significant increase in credit risk for the purposes of IFRS 9. The baseline scenario was included in the estimate with a weight of 60% (70% in 2022), the optimistic scenario 10% (20% in 2022), and the pessimistic scenario 30% (10% in 2022).

 

In Q4 2023, updated with the most recent macroeconomic forecasts, the Bank projected the corporate default rate for two years using the macro model, with a quarterly frequency. For the eight-quarter forecast, the Bank used the facts and forecasts set out in the MNB Inflation Report. Since the corporate default rate data series is two quarters behind the reporting date, the Bank also used the latest financial report issued by the European Central Bank to interpolate the interim period.

 

Investment volume index is defined by KSH as the annual index of gross accumulation of fixed assets. With regard to the indicator, using the values published in the annex to the latest MNB IFRS-9 Executive Circular, the Bank assumed that, based on the latest factual data, which were extremely unfavourable in 2023, and applying linear interpolation, it would result in 3.0% in the baseline scenario and -8.0% in the pessimistic scenario, while in the optimistic scenario it would improve to 10.5%.

 

The unemployment rate is defined by KSH as the ratio of unemployed people to the economically active population as at a given date. With regard to the unemployment rate, the Bank assumed, using the values published in the annex to the latest MNB IFRS 9 Executive Circular, that based on the latest facts and applying linear interpolation, it would reach 3.6% in the baseline scenario and 5.0% in the pessimistic scenario, while in the optimistic scenario it would improve to 2.8%.

 

In the corporate segment, the Bank uses LGD modelled on internal data using the collection LGD methodology in a vintage approach to determine expected loss. In the sovereign/sub-sovereign segment the Bank applies a (Moody's) benchmark LGD backed by an external study, whereas in the case of financial institutions, the Bank applies a discounted return-based LGD, supported by data collected by Global Credit Data covering a wide range of non-performing banks. The external benchmark study looked at the non-performing transactions of 1,483 financial institutions around the world. The results showed an overall recovery rate of 72% using the workout LGD method, as a result of which a 28% LGD was applied for the Bank. The change in methodology was applied by the Bank at the rating date of 30 September 2023, which, based on the impact assessment, resulted in an additional impairment charge of HUF 181 million compared to the previously applied LGD.

 

Given that the very low number of items in terms of historical data does not allow for CCF modelling on internal data, the Bank applies CCFs in line with the supervisory parameters published in the CRR.

 

In 2023, the Bank continuously applied management overlay impairment, which is a lump sum expected loss determined by the Bank on the basis of risk factors that are not or are not fully covered by the risk models it uses, making the impact of these risks not adequately quantifiable by running the models on a bottom-up basis. The Bank applies a top-down model with a management overlay adjustment differentiated by sector groups to determine the expected loss for the corporate segment. The Bank does not consider the level of management overlay to be significant with respect to the reporting date.

 

The in-depth disclosure of formulae used to determine expected losses can be found in Note 30.

 

For all instruments, the Bank considers the following indicators to be significant deterioration in credit risk and accordingly classifies the transactions concerned as Stage 2:

 

·    30+ days past due, unless the delay is proven to be due to a technical error.

·    A significant deterioration of the rating compared to the initial rating class. On its 7-point customer rating scale, the Bank considers a deterioration of 2 categories for rating categories 1 to 3 and 1 category for rating categories 4, 5 and 6 to be significant. Based on the option provided for in Section 5.5.10 of IFRS 9, the Bank makes use of the low credit risk rating option in the investment-grade sovereign and financial institution segment, according to which a deterioration from initial category 1 to category 3 does not entail a Stage 2 reclassification.

·    Loans placed in performing, restructured status, including restructured status due to a moratorium period of more than 9 months.

·    Transactions of a customer subject to liquidation.

 

 

The Bank applies low credit risk (LCR) limits for exposures with a BBB- or better investment grade rating for the sovereign and banking segments, but does not use LCR limits for corporate exposures. At the same time, the Bank sets stricter criteria for significant credit deterioration in certain lower-rated categories. Accordingly, in its internal rating system the Bank considers even a downgrade of 1 grade regarding transactions of customers with an initial rating of 4 or lower to be a significant deterioration in credit risk.

 

In addition, the Bank also uses the following EWIs (Early Warning Indicators) for domestic direct corporate exposures to determine significant credit risk deterioration:

 

·    Based on a Central Credit Information System (KHR) query, the following may be determined in the case of loans at other credit providers:

-      taking out a new loan, if the new commitment threatens the operation of the company,

-      taking out a new loan, if it jeopardises the repayment of the loan(s) provided by the Bank, i.e. the debt service of the existing loan,

-      default status of an existing loan (date, amount, whether it is settled or not),

-      debt service details of an existing loan.

·    Changes that have occurred in the debtor's data, especially for changes where the customer is required to notify and hand over related documents:

-      there is a new owner (inspection and knowledge of the new owner is expected; in the case of an unfavourable change, the transaction must be classified as Stage 2),

-      change of registered office (the check must cover whether the change is of a technical nature. If it indicates transfer and/or expected liquidation, the transaction must be classified as Stage 2),

-      change of company registration number (the check must cover whether the change is of a technical nature. If it indicates transfer and/or expected liquidation, the transaction must be classified as Stage 2),

-      change of tax number (the check must also cover whether the change is of a technical nature. If it indicates transfer and/or expected liquidation, the transaction must be classified as Stage 2).

·    Unfavourable decline of account turnover and/or customer base negatively affecting debt service. If significant, the transaction must be classified as Stage 2.

·    A change in the company's main scope of activity and the cash flow resulting from this are not sufficient to service the debt.

·    A significant decline in the debtor company's equity. Reclassification to Stage 2 should be considered if the equity decreases by at least 25%, or the capital adequacy (equity/total assets) decreases by at least 10% compared to the data in the audited annual report at the end of the previous year.

·    A significant change, i.e. decline in the number of the debtor company's employees. It is necessary to check what is causing this process. If a transfer to another company is indicated, the transaction must be classified as Stage 2.

·    Enforcement is initiated against the company (e.g. National Tax and Customs Administration (NAV) or independent court bailiff). The transaction must be classified as Stage 2 if the enforcement is classed as significant.

The enforcement is significant if

-     enforcement has been initiated more than 3 times in the last 12 months or

-     in the last 12 months, an enforcement was in process that had not been settled within 30 days

(That is, if at the time of the investigation there is an unsettled enforcement in process that was launched within the last 30 days, this does not yet mean an enforcement of significant scale.)

·    In the case of a non-real estate financing project loan, the project is not or is not fully realised and/or cannot generate the debt servicing requirement.

·    Non-payment of insurance premium (30+ days past due or contract becomes inactive).

·    A negative change in coverage level, which refers to a significant, unfavourable change in the economic entity's solvency (significant depreciation in the value of productive assets) or in its willingness to pay (withdrawal of coverage).A reduction of at least 15 percentage points in the coverage ratio compared to the last decision is classed as significant.

·    A breach of contractual commitments and covenants, as a result of which the profitability of the given transaction may be in jeopardy.

·    Deterioration of data provision discipline - a delay in customer, transaction and collateral-related data provision by the customer. In the case of regular delays, the transaction must be classified as Stage 2.

·    A change in legislation that negatively affects the business of the customer, which threatens the financial stability of the customer.

·    Significant negative information affecting the customer, the customer group, its partners or industry.

·    A significant adverse change in the sectoral outlook that threatens the financial stability of the customer.

·    A negative change in the majority of financial indicators calculated during regular rating. The indicators to be examined are set out in detail in the Bank's Monitoring regulations.

 

In addition, the Bank also uses the following EWIs for real estate project loans to determine significant credit risk deterioration:

 

·    LTV rises above 1 (except: construction phase).

·    The DSCR or projected debt service coverage ratio (PDSCR) calculated on the basis of the periodic (annual) generated and non-cumulative cash flow falls below 1.05.

·    The construction phase is delayed by more than 1 year compared to the original plans.

·    There is a modification in the terms of the project financing transaction (either through modification of the original contract or refinancing), which results in an overall increase in risk for the Bank in the assessment of the transaction.

·    The original budget of the project set in the loan agreement increases to a level that cannot be matched by the rate of increase in market value, and the cost increase is accompanied by an increase in the project's/debtor's financing needs, and the risk parameters of the increased loan (including LTV, DSCR, interest coverage, balloon/bullet rate, full repayment period) indicate an increased level of risk compared to the original approval.

 

A reclassification from Stage 2 to Stage 1 may be made if none of the criteria for a significant deterioration of credit risk can be observed at the assessment date. See Note 30 for the quantitative disclosure of Stage 2 items and impairment that have the characteristics of significant credit risk deterioration.

 

Pursuant to Article 178 of the CRR, the provisions of MNB Decree 39/2016 and the MNB Recommendation 9/2022, transactions are considered non-performing (default) or of impaired creditworthiness, and are classified in Stage 3, where:

 

·    The duration of the delay shall be a continuous delay of at least 90 consecutive days, if the delayed portion is significant. This condition cannot be disregarded even on the basis of an expert assessment. The Bank has set the materiality threshold at EUR 500.

·    Based on an assessment of the debtor's financial situation, it can be assumed that without recourse to the collateral, the debtor will not be able to repay the full amount of its obligations (regardless of whether the claim is past due).

 

Risk-of-default factors:

-     there are well-founded concerns regarding the debtor's ability to generate stable and satisfactory cash flows in the future, 

-     in the case of working capital loans, it is unable to pay the interest from its EBITDA,

-     in the case of investment loans, the customer is unable to pay even the annual principal and interest repayments from its EBITDA less the amount of the estimated tax,

-     the debtor no longer has regular sources of income to meet its repayments, 

-     the debtor's overall leverage has increased significantly, or there are reasonable grounds to believe that such a change in leverage will occur, 

-     the debtor has breached its contractual obligations,

-     fraud committed in connection with the contract,

-     the Bank has drawn on any of the collateral, including exercising a guarantee,

-     in the case of exposures to a private individual: the non-performance of a company 100% owned by a single individual, where that individual has given a personal guarantee to the Bank in respect of all the obligations of the company,

-     a crisis affecting the sector in which the debtor operates, combined with a weak position on the part of the debtor in that sector,

-     the disappearance of an active market for a financial instrument due to the financial difficulties of the customer,

-     the Bank has information that a third party - especially another institution - has initiated the liquidation of the debtor or a similar measure (e.g. enforcement, compulsory strike-off, order for the criminal attachment of the debtor's assets).

·    Exposures for which an individual loss allowance has been recognised, excluding the loss allowance recognised collectively for transactions classified as Stage 1 and Stage 2 under IFRS 9.

·    All exposures against a customer, if an individual loss allowance has been recognised for any of the customer's transactions, excluding the loss allowance recognised collectively for transactions classified as Stage 1 and Stage 2 under IFRS 9.

·    The Bank has initiated a liquidation or distraint procedure to collect the customer's debt.

·    The customer has initiated a liquidation or bankruptcy proceedings against itself in order to avoid or postpone the discharge of its obligations to the Bank.

·    The customer has initiated a reorganisation procedure.

·    The bank guarantee issued by the Bank has been drawn down or is expected to be drawn down.

·    An off-balance sheet liability that is likely to be drawn on, and whose drawing or other use will result in an exposure that is at risk of not being fully recovered without the enforcement of collateral.

·    The loan agreement has been terminated.

·    Deals that have gone under Workout handling or become subject to legal proceedings (liquidation, bankruptcy, distraint initiated by the Bank).

·    Restructuring that results in a significant reduction of financial liabilities for the customer.

 

The Bank does not examine the significant deterioration of credit risk in the case of POCI receivables. In each case, POCI receivables are classified in Stage 3 and assessed individually.

 

The accounting policy for financial guarantees and loan commitments is set out in chapter 3.5 and the policy (formulae) for the calculation of loss allowance is set out in Note 30.

Reversal of loss allowance

 

If the loss allowance is reversed in the next period, it is recognised through profit or loss.

 

Write-off of loans and advances

 

Uncollectible receivables are written off against the related loss allowance if the reasons for assigning them to uncollectible status as specified in the Workout policy apply, or if there is no reasonable expectation of recovery. The Bank recognises any subsequent recoveries of receivables previously classified as uncollectible in profit or loss. The Bank may also write off part of the receivable if the full recovery cannot be reasonably expected, but the Bank still intends to fully recover the partially written-off receivables. Partial or full write-off of the receivables is possible at least three years after the occurrence of the default event, if an individual assessment shows that any repayment of the debt from future cashflows of the debtor is unlikely, and if an appropriate asset-distribution pan is available from the liquidator.

 

Restructured loans

 

The Bank first attempts to restructure loans in cooperation with the debtors, rather than taking legal action to recover the debt. This may include extending the term, changing the payment schedule or revising the terms of the loan. In the event of restructuring, the Bank examines whether the contract amendment is significant in accordance with Note 3.1 and, as a result, shall determine a restructured rating of "performing" or "non-performing" and shall apply the 10% rule to determine the derecognition criterion. Following a restructuring, the Bank determines the impairment using the original EIR as it was the case before the terms were modified, regardless of the fact that the loan is no longer past due. Management monitors the fulfilment of the conditions of restructured loans on an ongoing basis to ensure that the required criteria are met, that future payments are made and that the criteria for derecognition are fulfilled. The Bank classifies non-performing restructured loans in all cases into Stage 3, and calculates the impairment by discounting the cash flows by the original EIR.

 

3.8    General reserve

 

The provisions of the Act CCXXXVII of 2013 on Credit Institutions and Financial Enterprises ("Credit Institutions Act") require the Bank to establish a general reserve of 10% of its profit after tax for the year to cover future losses. Based on the decision of the management and the approval of the Owner, the Bank transfers the after-tax profit for the given period (after the establishment of the mandatory 10% reserve) from retained earnings to the general reserve. As this decision relating to the given financial year is made by the Owner in the following financial year, the after-tax profit for that period is reallocated in the year of the decision.

 

Based on the owner's decision, the Bank places 100% of its annual after-tax profit in retained earnings, after which the amount placed in retained earnings is placed in the general reserve. In the case of a loss, based on the Owner's decision the amount of the accumulated general reserve will be used.

 

3.9    Foreign currency translation

 

The functional currency of the Bank and its subsidiary is the Hungarian forint. Revenues and expenses arising in foreign currency are translated into the functional currency at the exchange rates valid on the date of the transaction.

Monetary assets and liabilities denominated in foreign currencies are revalued at rates quoted by the National Bank of Hungary ("MNB") at the reporting date, with resulting revaluation differences being recognised in profit or loss.

 

Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated to the functional currency at the exchange rate at the date when the fair value was determined.  Non-monetary items denominated in foreign currency that are measured at historical cost are retranslated to the functional currency at the exchange rate valid on the date of the transaction. Foreign exchange differences arising upon revaluation are recognised in profit or loss under "Gains or losses from trading and investment activities".

 

In the case of investments in foreign currency accounted for using the equity method, the exchange rate difference between the presentation currency of the foreign holding and the functional currency of the Bank is recognised by the Bank in other comprehensive income.

 

3.10  Intangible and tangible assets

 

Intangible assets, property, as well as plant and equipment are measured at cost less accumulated depreciation and accumulated impairment.

 

Cost includes expenditures that are directly attributable to the acquisition of the asset. In the case of property, plant and equipment, the cost of maintenance and repair is recognised in profit or loss. Major refurbishments of property, plant and equipment and the cost of replacing a part of an asset are recognised in the carrying amount of the item concerned when it is probable that future economic benefits associated with the asset will be received by the Bank or its subsidiary and such can be measured reliably.  The value of the replaced components is derecognised.

 

Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets, using the following rates, which may vary based on specific information

Renovation carried out on a leased property                     based on the duration of the lease

Software                                                                                                            3 years

Furniture, fixtures and office equipment                                                        3-7 years

Depreciation methods, useful lives and residual values are reviewed at the end of each financial year and adjusted if appropriate.

 

Intangible assets, property, plant and equipment are subject to an impairment review if an event or change occurs that indicates that the carrying amount is above the recoverable amount of the asset.

The gain or loss on the derecognition of intangible assets, property, plant and equipment is determined as the difference between the proceeds from the sale and the carrying amount of the assets and is recognised in profit or loss under "Other operating expenses" or "Other operating income".

 

3.11  Leases

 

The lessee recognises a right to use the asset concerning the related asset and a lease liability for the obligations related to the lease. The lessor distinguishes between operating and finance leases.

 

The Bank monitors all its lease contracts in which it is a lessee on an ongoing basis and identifies those that contain a lease transaction under IFRS 16. In this regard, it recognises a right-of-use asset and a lease liability in respect of the leasing transactions. The initial recognition of the right-of-use asset is at cost while lease liabilities which were classified as operating leases according to IAS 17 are recognised at the present value of the outstanding lease payments. Items taken into consideration when calculating the cost of an asset:

-     the initial value of the liability

-     use premiums paid at the start of the term (or before)

-     any initial direct costs incurred by the Bank

-     lease incentives received as cost decreasing elements

-     estimated costs for dismantling, removing and restoring the asset

 

The initial value of the lease liability is the present value of the unpaid lease fees at the start of the lease term. For discounting purposes, the Bank uses an implicit interest rate at the time of the first application, with this discount the present value of the lease payments and the unguaranteed residual value being equal to the sum of the fair value of the leased asset and the lessor's initial direct costs.

The Bank primarily classifies operating leases of office space under IFRS 16.

 

The Bank applies the following practical expedients:

- It applies a single discount rate to a portfolio of leases with similar characteristics.

 

The Bank applies practical expedients for leases with a short term (less than 12 months) and for leases with a low asset value (less than HUF 1 million) - for these constructions the Bank does not recognise any lease liabilities or related right-of-use assets. These types of lease payments are recognised as costs using the straight-line method during the term of the lease agreement.

 

3.12  Income taxes

 

Income tax includes both actual and deferred taxes. Income taxes are recognised in the profit and loss account, except to the extent that they relate to items recognised directly in equity or in other comprehensive income, in which case they are recognised in equity or in other comprehensive income. Current income taxes include corporate income tax, local business tax and innovation contribution.

 

The actual tax is the tax payable or recoverable on taxable profits for the financial year, plus an adjustment for the relevant tax payable or recoverable carried forward from previous years. The Bank and its subsidiary consider the income tax to be the tax that is calculated on the current year's tax base. The amount of the actual tax payable or receivable is the best estimate of the amount of tax payable or receivable, reflecting the uncertainty associated with income taxes. The amount of the actual tax is determined using tax rates enacted or substantively enacted at the balance sheet date.

 

Deferred tax is recognised for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes.

 

Temporary differences are not recognised in the initial recognition of such assets or liabilities as do not affect either accounting or pre-tax profit and that are not a business combination.

 

A deferred tax asset is recognised for unrecognised deferred tax bases, unused tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be offset. Tax receivables are reviewed at each reporting date and reduced to the extent that it is no longer probable that the related tax benefit will be realised. Unrecognised tax receivables are reviewed at each reporting date and are recognised to the extent that it is probable that future taxable profits will be available against which they can be offset.

The amount of deferred tax reflects the tax consequences of the expected manner of recovery or settlement of the carrying amount of assets and liabilities at the reporting date. The amount of deferred tax is determined using tax rates that have been enacted or substantively enacted by the reporting date, reflecting any uncertainty relating to income taxes.

 

3.13  Interest income and interest expense

 

Interest income and expense on financial instruments are recognised in profit or loss under "Interest income" and "Interest expense" using the effective interest method (see Note 3.4). Interest income is classified as "Interest income recognised using the effective interest method" and "Other interest income" and is recognised in profit or loss. "Interest income recognised using the effective interest method" includes interest on financial assets measured at amortised cost, while "Other interest income" includes the interest income from interest rate swaps. Interest expense is classified as "interest expense recognised using the effective interest method" and "Other interest expense" and is recognised in profit or loss. "Interest expense recognised using the effective interest method" includes interest on financial liability measured at amortised cost, while "Other interest expense" includes the leasing commitments and the interest expense from interest rate swaps.

The effective interest method is used to calculate the amortised cost of a financial asset or a financial liability (or groups of financial assets or financial liabilities) and of allocating the interest income or interest expense over the relevant period.

The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts throughout the life of a financial instrument to one of the following:

 

·    the gross carrying amount of the financial asset (if not credit impaired), or

·    the amortised cost of the financial asset (if credit impaired), or

·    the amortised cost of the financial liability.

 

The amortised cost of a financial asset or a financial liability is the amount at which the financial asset or financial liability is measured at initial recognition minus the principal repayments, plus or minus the cumulative amortisation of any difference between that initial amount and the amount at maturity calculated using the effective interest method and, for financial assets, adjusted for any expected loss allowances. The gross carrying amount of a financial asset is the amortised cost of the financial asset before any adjustment for expected loss allowances.

 

When calculating the effective interest rate for financial assets other than purchased or originated credit-impaired financial assets, the Bank estimates future cash flows considering all contractual terms of the financial instrument but excluding future credit losses.

 

The effective interest rate used to calculate interest income or interest expense is applied to the gross carrying amount of the financial asset (when the asset is not credit-impaired) or the amortised cost of the financial liability. The effective interest rate is revised as a result of the periodic re-estimation of the cash flows of variable interest rate instruments to reflect changes in market interest rates.

In the case of purchased or originated credit-impaired (POCI) financial assets, when calculating interest income, the Bank applies the effective interest rate adjusted to the credit risk to the amortised cost of the financial assets, from the initial recognition of the asset until its disposal.

For financial assets that are not purchased or originated credit-impaired (POCI) but have become credit-impaired subsequently (Stage 3), when calculating interest income, the Bank applies the effective interest rate to the amortised cost of the financial asset. If the asset is no longer credit-impaired, the calculation of interest income reverts to the gross basis.

 

In accordance with the rules and conditions of Government Decree 85/1998 (V.6.) on the interest equalisation system and of Government Decree 232/2003 (XII.16.) on tied-aid credits the Bank receives interest compensation, and in relation to aid credit, an interest subsidy, from the Hungarian State for the financing facilities specified in the statutory regulations mentioned above. The Bank's interest equalisation mechanism determines the amount of interest compensation provided by the Hungarian State on the basis of the difference between the interest rate paid by the borrower and the Bank's funding cost operating cost and the amount of the relevant risk premium (collectively "the base cost"), in accordance with the provisions of Decree 16/1998 (V.20.) of the Ministry of Finance. For each transaction, the Bank determines the interest due pro rata in the quarter concerned, as well as the amount for the same period calculated by applying the approved base cost. If the amount calculated by applying the base cost is higher than the interest due pro rata, the Hungarian State reimburses the Bank for the difference by way of interest equalisation. If the amount calculated by applying the base cost is lower than the interest due pro rata, the Bank makes a payment to the Hungarian State equal to the difference.

The Bank submits its claim for interest equalisation to the Hungarian State within 15 days of the end of the calendar quarter. The quarterly payment is made to the Bank by the 20^th day following the end of the calendar quarter.

Interest equalisation and interest subsidies for aid credit are intended to provide stability and sustainability to Bank, thereby contributing to risk management. The level of interest equalisation and interest subsidy provided by the Hungarian State is determined in such a way that the Bank's profit reaches a level close to zero, with the State compensating the Bank for the difference between the level of interest rates provided at a rate lower than the market rate and the actual market rate. Through this mechanism, the Bank serves as an instrument of economic policy of the Hungarian State rather than as a traditional profit-oriented bank.

The Bank receives an interest subsidy in relation to tied-aid credits (where the Bank performs the role of lender in the tied-aid agreements), which differs from the above interest equalisation system in that the Hungarian State does not offset the Bank's operating costs and risk premiums, but only reimburses the costs of its funding. The tied-aid credit facilities are in all cases covered by MEHIB insurance, the premiums for which are passed on to the borrower and waived in the form of a donation element, with the Hungarian State reimbursing this to the Bank.

Interest compensation and interest subsidies received from the Hungarian State are not considered government support by the Bank, as they constitute a form of government support to the debtor.

The interest compensation and interest subsidies received from the Hungarian State are considered to be an integral part of the Bank's loans, so these cash flows are also taken into account in the calculation of the effective interest rate.

All other loans provided by Eximbank (i.e. loans that are not covered by the interest equalisation and interest subsidy programmes) are variable-rate and are priced taking into account the CME Term SOFR / EURIBOR / BUBOR reference rates and Eximbank's cost of funds.

 

3.14  Fee and commission income and expense

 

The Bank earns fees and commissions income from a diverse range of services it provides to its customers and also pays fees and commissions related to these services.

Fee and commission income and expense that are integral to the effective interest on a financial asset or financial liability are included in the effective interest rate.

If a loan commitment is not expected to be drawn down, the related loan commitment fee is recognised on a pro rata temporis basis over the commitment period.

Other fee and commission income is recognised when the related services are performed.

Other fee and commission expenses typically relate to transaction and service fees that become expenses when the services are received by the Bank.

 

For more detailed information see Note 23.

 

3.15  Provisions and contingent liabilities (IAS 37)

 

A provision is recognised if, as a result of a past event, the Bank and its subsidiary have a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation.

Provisions under IFRS 9 are determined by discounting the expected future cash flows at a pre-tax rate that reflects the time value of money and, where appropriate, also takes into account the risk characteristics specific to the liability.

Contingent liabilities are not recognised in the financial statements. Contingent liabilities are disclosed in the financial statements unless the possibility of an outflow of economic resources is remote.

 

Provision for possible losses is recognised only if at the reporting date the Bank and its subsidiary consider that it is more likely than not that an obligation exists. The management of the Bank and its subsidiary determines the adequacy of provisioning based on a review of individual cases, experience with recent loss events, economic conditions, transaction risk characteristics, and other pertinent factors.

 

 

Special taxes payable by the Bank which cannot be considered as income taxes are recognised when the condition for the payment of the tax is met. This includes the special tax imposed on financial institutions ("bank tax") under Act LIX of 2006, calculated on the basis of the balance sheet total of the second tax year preceding the tax year concerned, and "extra-profit tax" under Govt. Decree 197/2022 (VI.4), calculated on the basis of the net sales revenue of the tax year preceding the tax year concerned, as per Act C of 1990. The Bank recognises the obligation to pay the bank tax among other operating expenses on the first day of the business year in which it becomes due.

 

3.16  Segments

 

Based on the management's assessment of the organisational, management and internal reporting structure of the Bank, the management identified only one operating segment. As a result the Bank and its subsidiary do not disclose operating segments in the financial statements. The Bank and its subsidiary disclose their assets, liabilities and revenues broken down by geographical region (see Note 31).

 

3.17  Investments in subsidiaries, associates and joint ventures

 

Subsidiaries are entities controlled by the Bank. An entity is controlled by the Bank if the Bank is subject to, or has rights to, variable yields from its participation in the entity and is able to influence those yields through its power over the entity. The financial statements of the subsidiaries are consolidated in the consolidated financial statements from the time the Bank acquires control until the time the Bank no longer has control over the subsidiary.

 

An associate is an entity over which the Bank has significant influence, but not control or joint control, over the financial and operating policies of the entity.

 

A joint venture is an arrangement in which the Bank has joint control, whereby the Bank has rights over the net assets of the arrangement, rather than rights over its assets and obligations concerning its liabilities.

 

The Bank's investments in its associates and joint ventures are accounted for using the equity method.

Under the equity method, an investment in an associate or joint venture (the investee) is initially recognised by the Bank at cost, which includes transaction costs. The carrying amount of the investment is adjusted after initial recognition to reflect changes in the net asset value of the investee since the acquisition date.

 

The statement of comprehensive income reflects the share of the investee's profit or loss that is due to the Bank based on its share in the investee. Any change in other comprehensive income of those investees is presented as part of the Bank's other comprehensive income. In addition, when there has been a change recognised directly in the equity of the investee, the Bank recognises its share of the change in its own statement of changes in equity if necessary. Unrealised gains and losses resulting from transactions between the Bank and the investee are eliminated to the extent of the interest in the investee; however, unrealised losses are eliminated only to the extent that there is no evidence of impairment.

 

The Bank recognises its share of the after-tax profit or loss of the investee - a joint venture or associate - in the statement of comprehensive income as follows: It presents it in the "Share of profit/(loss) of investments accounted for using the equity method" and "Exchange differences arising on the translation of foreign currency transactions" lines.

 

The financial statements of the investee used for the application of the equity method are prepared for the same reporting period as the Bank's financial statements, and are in line with the Bank's accounting policy.

Following the application of the equity method, the Bank determines whether it is necessary to recognise impairment on its investment in the investee. The Bank assesses at each reporting date whether there is objective evidence that an investment in an investee is impaired. The Bank calculates the amount of impairment as the difference between the recoverable value and the carrying amount of the investment in the investee. The impairment or reversal thereof is then recognised by the Bank as "Impairment or reversal of impairment on non-financial assets" in the statement of comprehensive income.

For investments accounted for under the equity method, the determination of whether a venture capital or private equity fund that has subsidiaries meets the definition of an investment entity can have a significant effect on the carrying amount of the investment.

IFRS 10 defines the concept of an investment entity and requires parent companies that are classed as an investment entity to measure their subsidiaries at fair value through profit or loss in accordance with IFRS 9. Whether the definition of an investment entity applies must be considered in respect of every fund.

An investment entity is an entity that:

a)   collects funds from one or more investors for the purpose of providing investment management services to such investor(s);

b)   agrees, vis-a-vis the investor(s), that its business objective in investing the funds shall solely be to obtain a return from capital appreciation, investment income or both; and

c)   measures and analyses the performance of substantially all of its investments at fair value.

In practice, based on the above, the following characteristics of investment entities should be considered:

d)   whether they have more than one investment,

e)   whether they have more than one investor,

f)   whether their investors are not related parties of the entity, and

g)   whether their ownership interests are in equity instruments or similar interests.

 

The Bank applies the equity method to the financial statements of funds in which the underlying investments in subsidiaries are measured by the fund at fair value (if the fund is an investment entity) or are consolidated (if the fund is not an investment entity).

 

3.17.1  Consolidation accounting methods

 

When compiling the consolidated financial statements, the receivables, liabilities, yields, expenses and costs from transactions between the Bank and its subsidiary, as well as the intercompany profits or losses, are eliminated.

 

3.18  Hedge accounting

 

The Bank may, for business reasons, choose to apply hedge accounting. The hedge accounting requirements of IFRS 9 are applied to all micro-hedging relationships.

If a hedge relationship exists between a hedging instrument and a hedged item, the Bank accounts for these items in accordance with hedge accounting rules. Hedge accounting recognises the offsetting effects on profit or loss of changes in the fair value of the hedging instrument and the hedged item.

The hedged item may be a recognised asset or liability, an unrecognised firm commitment, a forecast transaction or a net investment in a foreign operation. A hedged item may be:

a)   a single item; or

b)   a group of items (if the conditions in the following paragraph are met)

c)   a component of a single item or group of items.

 

For hedge accounting purposes, only assets, liabilities, firm commitments or highly probable forecast transactions with a party external to the Bank can be designated as hedged items.

The Bank may designate and account for a hedge relationship under the hedge accounting requirements of IFRS 9 if the following conditions (hedge designation criteria) are met:

a)   the hedge relationship contains only eligible hedging and hedged items

b)   at the inception of the hedging relationship, the Bank formally documents the relationship (i.e. identifies the hedged item, the hedging instrument, the hedged risk and how it will assess whether the effectiveness requirements are met) and the hedging strategy underlying the hedge.

c)   all of the following 3 requirements (effectiveness requirements) are met:

i.          there is an economic relationship between the hedged item and the hedging instrument

ii.         the credit risk does not dominate changes in the value of the hedged item and/or the hedging instrument

iii.        the hedge ratio is the ratio of the volume of items actually hedged to the volume of items actually used as hedging instruments.

The Bank applies the layer component approach to its hedge relationships, taking into account, where significant, the following factors: amortisation of loan principal, commitments to extend loans from undrawn credit lines, expected prepayments and expected credit losses.

 

The Bank measures hedge effectiveness using a hypothetical derivative methodology. The Bank assesses its hedging relationships from inception and on an ongoing basis, in terms of whether the hedging relationship meets the hedge effectiveness requirements. This assessment is performed by the Bank on a monthly basis, but no later than the reporting date of financial statements or whenever there is a significant change in circumstances that affect the hedge effectiveness requirements. The assessment is focused on the expectations related to hedge effectiveness, whereby the Bank examines the causes of the hedge ineffectiveness that is expected to affect the hedge relationship over its lifetime (taking into account the rebalancing of the hedge relationship). Any adjustment to the hedge ratio allows the Bank to react to changes in the hedge relationship between the hedging instrument and the hedged item due to underlying or risk variables.

If the hedge relationship no longer meets the criteria for hedge designation, or the hedged item or the hedge instrument is sold or terminated by the Bank, or expires, the application of hedge accounting must be discontinued prospectively.

 

Cash flow hedge relationships

If the Bank designates a derivative as a hedging instrument in a cash flow hedge relationship, the effective portion of the change in fair value will be recognised in a separate component of equity, in Hedging reserves, through other comprehensive income. The cumulative effective change in fair value of the hedging instrument from the inception of the hedge relationship is limited to the cumulative change in fair value of the hedged item from the inception of the hedge relationship. The Bank recognises the ineffective portion of the change in fair value of the hedging instrument immediately in profit or loss.

The Bank recognises fair-value changes accumulated in the Hedge reserve as a reclassification adjustment in profit or loss in the period in which the hedged item also affects profit or loss. Recognition as reclassification adjustment means that the Bank states an opposite change in other comprehensive income instead of recognising it in profit or loss.

 

In respect of each hedge relationship, the Bank decides, and also records in a hedge documentation, whether it designates the spot or forward element of its hedge derivatives as the hedging instruments. Changes in the fair value of all other elements (e.g. foreign currency basis spread or, if a spot element has been designated, then the forward components - the latter representing interest rate swaps for CCIRS designated as hedging instruments) other than the designated hedged element are recognised as hedging costs in a separate component of capital in the hedging costs reserve for the changes in value described in this paragraph. The Bank presents in the Hedge cost reserve the changes in the fair value of costs being outside the scope of the hedge relations but that are accounted for as hedging costs. The costs - outside the scope of the hedge relations but representing a hedging cost - arising at the beginning of the hedging period, becomes amortised from the Hedge reserve in linear proportions during the period of the hedge, as reclassification.

 

The Bank recognises in profit or loss (as a reclassification adjustment) the amounts accumulated in the Hedge reserve for terminated cash flow hedge relationships during the period in which the cash flows of the hedged item affect profit or loss. If the occurrence of the hedged cash flows is no longer probable, the Bank immediately reclassifies the amounts accumulated in Hedge reserves to profit or loss (as a reclassification adjustment).

 

Fair value hedge relationships

Fair value hedge transaction: a hedge of an exposure to changes in the fair value of a recognised asset or liability or an unrecognised firm commitment or a component of such items, attributable to a particular risk and that may affect profit or loss.

If a fair value hedge relationship meets the qualification criteria, the Bank accounts for it as follows:

a) the gain or loss on the hedging instrument is recognised in profit or loss;

b) the carrying amount of the hedged item is adjusted for the hedging gain or loss on the hedged item, and the amount of the adjustment is accounted for in profit or loss.

 

Sometimes the Bank may designate fair value hedge relationships at some point after initial recognition of the hedged item. In these cases, the Bank takes into account the guidance in IFRS 9 that allows the designation of a risk component as a hedged item that is equal to the current market (benchmark) interest rate and higher than the contractual interest rate paid on the asset. The only condition for this is that the underlying market interest rate must be still lower than the theoretical effective interest rate on the asset, which is calculated as if the asset had been created on the date of designation as a hedged item.

 

If a fair value hedging relationship is terminated, the Bank applies the following accounting treatment, depending on whether the hedged instrument is on the books:

 

If the hedged items remain on the books:

The adjustment to the carrying amount of the hedged financial instrument measured at amortised cost resulting from fair value hedge accounting must be amortised to profit or loss, and such amortisation must begin no later than the date on which the hedged item is no longer adjusted through the hedging gain or loss (i.e. the hedge relationship has been terminated). Amortisation must be recognised using the recalculated effective interest rate valid at the commencement date.

The fair value hedge adjustment that forms part of the carrying amount of the hedged item is derecognised using the EIR method until maturity of the instrument as described above.

 

If all or part of the hedged items are derecognised:

The fair value hedge adjustment that forms part of the carrying amount is derecognised from the books in proportion to the derecognised principal amount of the hedged asset against the profit and loss account.

If the hedged instrument is derecognised in full, the fair value hedge adjustment must also be derecognised in full.

If the hedged instruments have been derecognised only in part, the fair value hedge adjustment remaining on the equity side of the balance sheet is amortised using the EIR method only if the hedge relationship designation is removed.

 

3.19  Changes in accounting policies

 

There was no change in accounting policy in 2023. 

 

 

3.20  New IFRS standards, amendments and new interpretations effective from 1 January 2023 onward

 

3.20.1  New and revised standards and interpretations issued by the IASB and adopted by the EU but not yet effective

 

At the date of approval of these financial statements, there are no new or revised standards or new interpretations issued by the IASB and adopted by the EU that are expected to have a material impact on the Bank's financial statements in the period of initial application:

 

-     Classification of Liabilities as Current or Non-Current- Amendment to standard IAS 1 effective for annual reporting periods beginning on or after 1 January 2024, earlier application is permitted.

-     Lease Liability in  a Sale and Leaseback - Amendment to standard IFRS 16 effective for annual reporting periods beginning on or after 1 January 2024, earlier application is permitted.

 

The Bank will apply these standards and amendments from their effective date.

 

3.20.2  Standards, interpretations and revisions issued by the IASB but not yet adopted by the EU

 

The following new and amended standards and interpretations have not yet been adopted by the EU at the date these financial statements were authorised for disclosure. The Bank does not expect these standards and interpretations to have a material impact on the Bank's consolidated financial statements:

-     Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28)

-     Supplier Finance Arrangements  - Amendment to standards IAS 7 and IFRS 7

-     Lack of Exchangeability - Amendments to standard IAS 21

 

 

     NOTE 4               CASH AND CASH EQUIVALENTS

 

Description	31.12.2023	31.12.2022
Deposit and settlement accounts with the National Bank of Hungary	955 950	35 668
Interbank placements in HUF	10 221	149 575
Nostro accounts in HUF	24	3
Nostro accounts in foreign currency	2 531	1 121
Petty cash in foreign currency	3	2
Other	1	1
Impairment	(3 139)	(64)
Total	965 591	186 306

 

 

Based on the requirements for compulsory reserves set by the National Bank of Hungary, the amount of compulsory reserves maintained by the Bank and included in the balance above amounted to HUF 955 950 million as at 31 December 2023, and HUF 35 668 million as at 31 December 2022 (reserve requirement: the maintenance of an average balance corresponding to the reserve requirement on a settlement account with the central bank over a reserve period of 1 month). Eximbank's reserve-requirement funds and the reserve ratio also increased, which increased the required balance of the account kept at the MNB. Compared with the end of 2022, the HUF balance of nostro accounts increased significantly, while the HUF balance of interbank placements decreased. This is because, although Eximbank's year-end liquidity was, as in the past, mostly placed with the MNB, the form of this was changed by the MNB as a part of its monetary policy toolkit. Unlike previously, starting from October 2023, no deposit transactions are concluded, and instead, the MNB pays interest directly to the current accounts kept with it.

 

 

NOTE 5                 GOVERNMENT SECURITIES MEASURED AT AMORTISED COST

 

 

The Bank includes Hungarian government and corporate bonds on its balance sheet at amortised cost, but it adjusts corporate bonds for the impact of changes in fair value due to hedged risk. The balance sheet values of Hungarian government bonds and corporate bonds as at 31 December 2023 and 31 December 2022 are detailed in the following table:

 

HUF million	31.12.2023	31.12.2022
Gross value of government bonds	97 737	113 214
Expected loss	(290)	(158)
Sub-total	97 447	113 056
Gross value of corporate bonds	51 971	-
Expected loss	(273)	-
Sub-total	51 698	-
Total	149 145	113 056

 

The breakdown of Hungarian government and corporate bonds by maturity as at 31 December 2023 and 31 December 2022 is detailed in the table below:

 

HUF million	31.12.2023	31.12.2022
3 months to 1 year	9 383	24 128
1 to 5 years	80 456	89 086
Over 5 years	59 869	-
Total	149 708	113 214

 

During 2023, the Bank purchased government securities with a nominal value of HUF 57,539 million at a cost of HUF 54,038 million and corporate bonds with a nominal value of HUF 48,623 million (in 2022, government securities with a nominal value of HUF 10,000 million at a cost of HUF 8,623 million).

 

 

NOTE 6                 LOANS AND ADVANCES TO CREDIT INSTITUTIONS AND INSURANCE COMPANIES

 

 

HUF million	31.12.2023	31.12.2022
Short-term maturity (up to 1 year)
- foreign currency	81 427	143 248
- HUF	77 904	118 440
Sub-total	159 331	261 688
Long-term maturity (over 1 year)
- foreign currency	580 733	538 556
- HUF	793 986	399 608
Sub-total	1 374 719	938 164
Total	1 534 050	1 199 852
Impairment	(5 742)	(4 369)
Total	1 528 308	1 195 483

 

As at 31 December 2023, 98.06% of loans and advances to credit institutions and insurance companies qualified for interest compensation from the Hungarian State (as at 31 December 2022: 96.28%). For details about the interest equalisation programme, please refer to Note 3.13.

 

The table below shows the value of loans and advances to credit institutions and insurance companies by contractual maturity (i.e. a transaction is only included in a particular range based on the maturity date under the contract) as at 31 December 2023 and 31 December 2022.

 

 

HUF million	31.12.2023	31.12.2022
Foreign currency	Gross value	Gross value
Up to 1 month	2 255	13 123
1 to 3 months	7 922	11 593
3 months to 1 year	45 506	118 531
1 to 5 years	447 890	374 183
Over 5 years	158 587	164 374
Sub-total	662 160	681 804
HUF	Gross value	Gross value
Up to 1 month	2 034	6 685
1 to 3 months	10 184	2 592
3 months to 1 year	84 244	109 163
1 to 5 years	612 745	247 677
Over 5 years	162 683	151 931
Sub-total	871 890	518 048
Total	1 534 050	1 199 852

 

97.18% of loans and advances to other credit institutions and insurance companies were refinancing loans (as at 31 December 2022: 95.02%). 99.98% of refinanced loans is eligible for interest compensation. For details about the interest equalisation programme, please refer to Note 3.13.

 

With the signing of the mortgage agreement between Eximbank and the MNB on 30 April 2020, a mortgage of first rank was established in favour of the MNB on all claims of Eximbank on entities classified as large corporations under the central bank's business conditions and on debtors under refinancing loan agreements for sub-lending purposes that meet the criteria of the central bank's business conditions, provided that they are not subject to the legislation specified in Section 39 of the Act on the National Bank of Hungary, are headquartered in Hungary, and meet the criteria for large corporate claims as defined in the mortgage agreement and the central bank's business conditions, and for which the underlying loan agreement is submitted by Eximbank to the MNB through the data reporting method specified in the mortgage agreement and the central bank's business conditions, thereby pledging the loan agreement to the MNB, as defined in the mortgage agreement.

The carrying amount of the transactions covered by the contract is HUF 55 120 million in 2023 (HUF 111 632 million in 2022).

 

 

NOTE 7                 LOANS AND ADVANCES TO OTHER CUSTOMERS

 

 

HUF million	31.12.2023	31.12.2022
Short-term maturity (up to 1 year)
- foreign currency	358 775	29 148
- HUF	57 523	28 341
Sub-total	416 298	57 489
Long-term maturity (over 1 year)
- foreign currency	500 851	416 361
- HUF	10 458	32 639
Sub-total	511 309	449 000
Total	927 607	506 489
Impairment	(66 963)	(59 510)
Total	860 644	446 979

 

At 31 December 2023, 80.49% of loans and advances to other customers were subject to interest compensation from the Hungarian State (31 December 2022: 66.28% (see Note 3.13 for a description of the interest equalisation) and 11.16% of the receivables were aid credits (31 December 2022: 20.25%).

The table below shows the gross value of loans and advances to other customers by contractual maturity, also taking into account the payment moratorium (i.e. a transaction is only included in a particular range based on the maturity date under the contract) as at 31 December 2023 and 31 December 2022.

 

HUF million	31.12.2023	31.12.2022
Foreign currency	Gross value	Gross value
Up to 1 month	22 673	22 255
1 to 3 months	38 615	443
3 months to 1 year	6 373	6 449
1 to 5 years	8 506	9 589
Over 5 years	783 459	406 773
Sub-total	859 626	445 509
HUF	Gross value	Gross value
Up to 1 month	49 214	27 262
1 to 3 months	-	-
3 months to 1 year	1 078	1 079
1 to 5 years	13 831	21 995
Over 5 years	3 858	10 644
Sub-total	67 981	60 980
Total	927 607	506 489

 

 

NOTE 8                 DERIVATIVES

 

 

Eximbank enters into swap, interest swap (IRS), cross-currency interest rate swap (CCIRS) transactions intended to mitigate foreign currency risks, but does not enter the market for speculative purposes.

 

The balances of financial assets and liabilities resulting from derivative transactions as at 31 December 2023 and 31 December 2022 are presented in the table below:

 

Description	31.12.2023		31.12.2022
	Asset	Liability	Asset	Liability
Foreign exchange swaps, for hedging purposes, but not involved in hedge accounting	900	-	9 746	-
Interest rate swaps (IRS) for hedging purposes	-	10 684	-	-
Cross-currency interest rate swaps (CCIRS) for hedging purposes	3 523	10 483	-	32 180
Total	4 423	21 167	9 746	32 180

 

The gain achieved on derivatives traded for hedging purposes however are not involved in hedge accounting amounted to HUF 21,507 million at 31 December 2023, an increase of HUF 9,915 million compared to a gain of HUF 11,592 million at 31 December 2022, which was recognised in "Gains or losses from trading and investment activities".

 

The breakdown by maturity of foreign exchange swaps, as well as undiscounted cash flows as at 31 December 2023 are presented in the following table:

 

Remaining maturity	Due amount in foreign currency	Foreign currency	Due amount in HUF million*	Payable amount in foreign currency	Foreign currency	Payable amount in HUF million*
Up to 1 month	413 000 000	EUR	158 088	157 544 685 000	HUF	157 545
Up to 1 month	20 000 000	EUR	7 656	21 955 833	USD	7 606
1 to 3 months	10 000 000	EUR	3 828	3 840 490 000	HUF	3 841
Total			169 572			168 992

 

*The HUF amount was determined on the basis of the exchange rate set by the Hungarian National Bank on 31 December 2023.

 

The breakdown by maturity of foreign exchange swaps, as well as undiscounted cash flows as at 31 December 2022 are presented in the following table:

 

Remaining maturity	Due amount in foreign currency	Foreign currency	Due amount in HUF million*	Payable amount in foreign currency	Foreign currency	Payable amount in HUF million*
Up to 1 month	36 612 961 000	HUF	36 613	90 000 000	EUR	36 023
Up to 1 month	11 831 531 000	HUF	11 832	31 300 000	USD	11 759
3 to 12 months	137 418 940 000	HUF	137 419	297 000 000	EUR	118 874
Total			185 864			166 656

 

*The HUF amount was determined on the basis of the exchange rate set by the Hungarian National Bank on 31 December 2022.

 

Fair value and cash flow hedges

Derivatives for hedging purposes are derivative transactions that the Bank included in hedge accounting (transactions other than FX swaps) and that were, accordingly, designated as hedge transactions. The accounting method for these derivatives is detailed in the paragraph on hedge accounting in the accounting policy, as well as below.

 

Hedging relationships

The items relating to the balance sheet value of Derivatives held for hedging purposes and to the recognition of the hedge relationship are presented in the tables below. The year of the contract is indicated in brackets.