GENERAL SHAREHOLDER S MEETING

Transcription

1 GENERAL SHAREHOLDER S MEETING BUDAPEST 28 April 2009, 10 a.m.

2 INVITATION TO GENERAL SHAREHOLDER S MEETING FHB Mortgage Bank Plc (registered seat: 1132 Budapest, Váci út 20., hereinafter referred to as Company) hereby, in accordance with its legal obligation, informs the shareholders and the investors of the Company, that the Board of Directors of the Company passed the resolution on its meeting of 26 March 2009 on calling the Annual Regular General Shareholder s Meeting (hereinafter referred to as General Meeting) of the Company. Date and time of the General Meeting: 28 April 2009 (Tuesday), 10 a.m. Venue of the Meeting: Danubius Health Spa Resort Helia Conference Hotel (H-1134 Budapest, Kárpát utca ) Agenda of the Meeting: 1. Report of the Board of Directors about the business activities, financial position, business policy and management of the Company in the year Report of the Supervisory Board on the business (HAS) and IFRS (consolidated) annual reports of the Company on the year Report of the Auditor on the business (HAS) and IFRS (consolidated) financial reports of the Company on the year Acceptance of the business reports and financial account (balance sheet report, profit and loss account, additional notes) prescribed by the Hungarian Accounting Law for the year 2008, decision on the utilization of the after tax profit, furthermore, acceptance of the consolidated reports and financial account according to the International Financial Reporting Standards for the year Report of the Supervisory Board on the fulfilment of conditions of the Share Compensation Programme in Presentation on the business plan of the Company for the year 2009 (verbal) 7. Amendment of the Statutes of the Company [Articles 8, 9, 10, 12, 14] 8. Decision on the conditional amendment of the articles of the Statutes relating to the increase of the share capital [Articles 7, 8, 9, 10, 12] and on the increase of the share capital 9. Authorization of the Board of Directors to acquire treasury shares (in Hungarian: saját részvény ) 10. Election and decision on the remuneration of the auditor 11. Approval of the Guidelines on Remuneration 12. Revocation of members of the Board of Directors, election of new members (verbal) 13. Revocation of members of the Supervisory Board, election of new members (verbal) 14. Decision on the remuneration of members of the Board of Directors and Supervisory Board 15. Acceptance of the Report on Corporate Governance 16. Approval of the amendment of the Rules of Procedure of the Supervisory Board

3 Way of holding the General Meeting The General Meeting will be held with the direct participation of the shareholders. Requirements for excercising voting rights A Pursuant to Article of the Statues of the Company, each share with a face value of HUF 100, i.e. One-hundred Hungarian Forints, entitles its shareholder to have one vote on the General Meeting. B Shareholders can exercise their rights attached to the respective shares on the General Meeting only in case they are owner of the shares on the effective date of the identification procedure (in Hungarian: Tulajdonosi megfeleltetés ), as specified in Act CXX of 2001 on Capital Markets (hereinafter referred to as Capital Markets Act), in the Rules of the Stock Exchange of Budapest and of the Central Clearing House and Depository (Budapest) Ltd. (hereinafter referred to as KELER Zrt.), and whose name is registered at the time of the closure of the register of shareholders on the effective date of the identification procedure in the register of shareholders. C The Company requests KELER Zrt. to conduct identification procedure as specified in the Capital Markets Act on the date of the General Meeting as corporate event. The effective date of the identification procedure is is 23 April Rules on the identification procedure are set forth in the effective by-law of KELER Zrt. D The Company deletes all effective data being registered in the register of shareholders on the date of the identification procedure, and simultaneously registers the data into the register of the shareholders according to the result of the identification procedure, than the Company closes the register of the shareholders on the effective date of the identification procedure. After the closure of the register of the shareholders, data affecting the ownership rights of a shareholder can be registered into the register of shareholders only on the successive working day of the closure of the General Meeting, at the earliest. E Pursuant to the Statues of the Company, the closure of the register of shareholders shall not limit the right of the shareholders entered therein to transfer their shares after such closure. Alienation of shares before the day of opening of the General Meeting does not exclude the right of the respective shareholder registered in the register of the shareholders to participate in the General Meeting and to exercise his/her rights attached to his/her shares. F Pursuant to Section 12.1 of the Statues of the Company a shareholder or a group of shareholders (that is, a group of persons whose acquisition of influence, pursuant to the Capital Markets Act, shall be summed up) may not exercise a higher voting right than 10 per cent of the voting rights attached to the shares representing all voting rights issued by the Company. That provision is applicable on the General Meeting, since the decrease of the interest held by the Hungarian State below fifty per cent had been entered into the Company s register of shareholders on 5 September G The shareholder registered in the Company s register of shareholder on the effective day of the identification procedure may exercise the rights attached to his/her shares on the General Meeting in person, trough a proxy (representative), or a person (nominee) authorized by the shareholder, as laid down in the Capital Markets Act. Members of the Board of Directors and the Supervisory

4 Board, the Company s senior employee, the Auditor and the Coverage Supervisor may not be authorized representatives. The authorization for representation shall be valid for one General Meeting, or for a definite term not exceeding 12 months. The authorization for representation will remain valid for the continued General Meeting in case of suspension and for a General Meeting called repeatedly due to a lack of quorum. The authorization shall be submitted to the Company in the form of notarial deed or private deed with full probative effect. The shareholder may appoint a proxy to represent him/her at the General Meeting by returning the form as contained by Annex 1 or Annex 2 of the Statutes of the Company and sent in case of expressed request of the shareholder thereon - by the Company electronically or by mail. The form shall be returned as a private deed with full probative effect not later than the end of the working day preceding the day of the General Meeting. In case the the authorization is made in abroad, the form of the authorization is to be complied with legal regulations on certification or re-certification of documents made in abroad. H If the requirements of participation on the General Meeting and excercising of voting rights are met, the shareholder or his/her authorized representative may request the electronic or other device for casting of votes on the venue of the General Meeting, after proving his/her identity and signing the attendance sheet. Quorum, Venue and Date of the Repeated General Meeting in case of inquorate Pursuant to article 11.6 of the Statutes, the General Meeting shall have a quorum if the attended shareholders represent more than half of the votes of the voting shares. If the General Meeting has not a quorum, the Company will hold the repeated general meeting in the venue of the original General Meeting on 28 April 2009 at 11 a.m. The repeated general meeting shall have a quorum in respect of the items of the agenda of the original General Meeting, regardless of the number of attendees. Disclosure of written materials and proposals for resolutions for the General Meeting In accordance with Section 11.2 of the Statutes of the Company, the Board of Directors of the Company will publish the material data of the reports and documents prepared according to the Accounting Law and written presentation relating to the respective items of the agenda of the General Meeting at least fifteen days prior to the date of the General Meeting. The disclosure will be made both in Hungarian and in English - in line with the provisions of the Statutes of the Company regarding the publication of announcements - on the official homepage of the Company ( on the web-based publication forum operated by the Hungarian Financial Supervisory Authority ( furthermore on the official home page of Budapest Stock Exchange ( After the publication, the written materials relating to the items of the agenda of the General Meeting will be available at the head office of the Company, and at the central customer service office of KELER Zrt. (1075 Budapest, Asbóth utca 9-11.). The Company s Board of Directors, based on articles 7.5 and 12.9 of the Statutes, with respect to the item No. 8 of the Agenda, hereby call on the Shareholders, that the affected Shareholders should express their opinion according to article 12.9 within 14 days from the disclosure of the written presentation on the approval of the planned amendment. FHB Mortgage Bank Co Plc

5 FHB PLC GENERAL SHAREHOLDER S MEETING No 1 Report of the Board of Directors about the business activities, financial position, business policy and management of the Company in the year 2008 Budapest, 28 April 2009, 10 a.m.

6 FHB MORTGAGE BANK PUBLIC LIMITED COMPANY ANNUAL REPORT FOR 2008

7 ANNUAL REPORT FOR 2008 OF FHB MORTGAGE BANK PLC. Table of contents 1 THE MACROECONOMIC ENVIRONMENT IN MORTGAGE LENDING CRISIS, GLOBAL RECESSION INTERNATIONAL OVERVIEW THE HUNGARIAN ECONOMY IN THE BANKING SECTOR IN RETAIL LENDING IN OWNERSHIP STRUCTURE OF FHB PLC FHB BANK GROUP REPORT ON THE 2008 BUSINESS ACTIVITY MAJOR FINANCIAL INDICATORS PRODUCTS Lending Refinancing SALES CHANNELS Branch network AGENTS ACTIVITY SYNDICATED LOANS PORTFOLIO ANALYSIS, IMPAIRMENT AND PROVISIONS COLLATERAL VALUATION MORTGAGE BOND ISSUE, MORTGAGE BOND COVER MORTGAGE BOND ISSUE THE MORTGAGE BOND MARKET MORTGAGE BOND COVER LIQUIDITY MANAGEMENT RISK MANAGEMENT PRINCIPLES RISK MANAGEMENT POLICY LENDING RISK Interest rate risk EXCHANGE RATE RISK LIQUIDITY RISK RISK MANAGEMENT INTERNAL BANKING REGULATION RESTRUCTURING AND STAFF FIGURES THE CONSOLIDATED FINANCIAL ACCOUNTS BALANCE SHEET STRUCTURE P/L STRUCTURE MAJOR EVENTS DURING THE ACCOUNTING PERIOD OTHER INFORMATION SHAREHOLDERS RIGHT BY THE STATUTES

8 ANNUAL REPORT FOR 2008 OF FHB MORTGAGE BANK PLC 7.2 ADDITIONAL RIGHTS RELATED TO B TYPE SHARES SHAREHOLDERS RESPONSIBILITY SHARE TRANSFER CRITERIA DELIMITATION OF VOTING RIGHTS ELECTION AND ESTABLISHMENT OF THE MANAGEMENT, AMENDMENT OF THE STATUTES THE COMPETENCE OF THE BOARD OF DIRECTORS MANAGEMENT AUDITORS ACTIVITY

9 ANNUAL REPORT FOR 2008 OF FHB MORTGAGE BANK PLC 1 The macroeconomic environment in Mortgage lending crisis, global recession In 2008 the macroeconomy was characterized by a crisis that first emerged in the mortgage market of the United States. The American subprime mortgage crisis grew to become a global economic crisis where the scale of losses and the speed of economic downturn was beyond expectations. After the industrially developed countries the problems rapidly spread to emerging countries. International portfolio reallocation and reinvesting funds into more secure instruments caused an exchange rate crisis in addition to a financial crisis. Concurrently, the economic output of developed countries has declined, thus emerging economies have been struggling in the double bind of rising costs of funds and a falling demand in external markets. Driven by a fear partly of loss of personal assets and partly of a recurrence of the total collapse of the Great Depression in the 1930s, people in developed economies have drastically cut spending and have postponed purchases until the economy rebounds. As a result, economic output and employment have plunged worldwide, which has exacerbated fears, which in turn leads to further cuts in spending. The world s leading economies devised massive bailout schemes to rescue the financial system. The federal government of the United States bailed out a total of 400 banks faced with a liquidity crisis in the hope that a direct capital injection into financial institutions would stabilize the financial system and allow banks to continue lending to corporate customers and consumers despite the current recession. In the autumn of 2008 a series of states announced their steps to curb the financial crisis, which also included substantial state guarantees to back interbank lending. The packages applied in the various countries differed in terms of their value and format but the overarching intent everywhere was to restore trust in the financial system. To this end governments offered differing extents of guarantees to support interbank and consumer deposits and took decisions to inject capital in, or possibly nationalize, financial institutions. The economic stimulus packages launched by governments amount in total to 1.5% of the GDP of the euro zone. In addition to guarantees and other actions by governments to support the banking sector and their populations national banks have also taken major steps to ease the crisis and enhance liquidity. Several national banks lowered the base rate in a coordinated action. 1.2 International overview The economy of the United States has been in recession since late After a modest 2% growth in 2006, the past year followed with barely a 1% increase in the GDP. In 2008 approximately 2.6 million jobs were lost, a figure unprecedented since World War II. Unemployment beat a 16-year-old record and reached 7.2%. Because of massive outstanding loans people try to save their shrinking income instead of indulging in consumption, a process reinforced by the outlook of falling inflation. 4

10 ANNUAL REPORT FOR 2008 OF FHB MORTGAGE BANK PLC Deflation is one of the major problems in addition to the downturn of the economy. In the summer of 2008 the American market was concerned about steep inflation coupled with an oil price around 150 dollars a barrel. By early 2009 the price of oil dropped by more than 70% and deflation set in. The FED adjusted its monetary policy to the economic downturn and falling inflation throughout 2008 and reduced the base rate from 4.25% to as low as 0.25%. The 2008 economic performance of the euro zone equalled to recession as the GDP fell (0.2%) in both Q3 and Q4 and as a result, the euro zone s growth in 2008 was approximately 1% as opposed to the 2.6% achieved in While the economic processes that characterize the United States are also valid for the European common currency zone, they tend to arise later and generally in an attenuated form. Inflation also followed the overseas trend: in the summer of 2008 European consumers were faced with the highest-ever (4%) price increase since the establishment of the euro zone as a result of the oil price boom. By the end of the year, however, the ECB s price stability criterion aiming to maintain inflation rates below, but close to, 2% in the medium term was achieved. Pursuing a conservative policy, in mid-2008 the ECB tried to curb inflationary expectations by increasing the key rate by 25 basis points. By the end of the year, however, it responded to inflation and the economic slowdown by reducing the key rate by 175 basis points (from 4.25% to 2.5%). 1.3 The Hungarian economy in 2008 Conspicuous by its extremely poor performance even before the financial crisis, the Hungarian economy hit rock bottom as a result of the global recession in the second half of Statistics in Q4 indicated a sharp slump and a double-digit decline in both exports and industrial production. Indicators GDP increase(%) 3,9 1,3 2,2 Industrial production growth (%) 10,1 8,1 6,2 Consumer prices (%) 3,9 8 6,3 Balance of Current Account (billion EUR) 5,8 5,1 5,3 Unemployment rate (%) 7,5 7,7 8 Budget deficit (billion HUF) Building, construction activity growth (%) 98,4 85,9 94 But 2008 was not only about a deepening economic crisis. The government securities market came to a crashing halt, the key interest rate was upped by 300 basis points as an extraordinary measure (on 22 October 2008), and the 20 billion euros stand-by loan by the IMF were events that occurred under the effect of the global financial crisis but were strongly influenced by the current state of the Hungarian economy. In the fall of 2008, after the collapse of the economy in Iceland, the Hungarian economy was pointed out by the international media and numerous 5

11 ANNUAL REPORT FOR 2008 OF FHB MORTGAGE BANK PLC investors as the next potential victim. The IMF rescue package saved the country from insolvency and a currency crisis. The Government submitted a bill on financial relief (commonly known as the bank bailout bill) to Parliament in November establishing a 300 billion forints guarantee fund and a 300 billion forints capital support fund available for certain financial institutions. The aim of the 300 billion forints guarantee fund is to enable Hungarian banks to involve new funds at lower costs. The bill also includes proposals to review regulatory provisions regarding investment funds and to expand the scope of powers of the Hungarian Financial Supervisory Authority. 1.4 The banking sector in 2008 The fourth quarter of 2008 brought losses to the banking business and the 381 billion forints after-tax profit credit institutions realized in Q1 to Q3 shrank by 78 billion forints to 303 billion forints by the end of 2008, according to the preliminary figures of the HFSA. According to the preliminary figures, the after-tax profit of the banking sector for 2008 is expected to be only 6.6%, or 21.7 billion forints, less than the billion forints achieved in However, not considering a net billion forints as part of OTP Bank s profit due to the sale of OTP-Garancia Insurance Ltd. last year, the banking sector only achieved billion forints in after-tax profits, 56% of the previous year s figure. The aggregate balance sheet total of the banking sector was 29,222 billion forints as of 31 December 2008, the year-on-year growth was 19.9%. The financial institutions continue to have solid capitals, the 2008 average capital adequacy ratio was 11.1 %, similar to the reference year figure (11.0%). The gross loan portfolio expanded by 21.2% to reach 20,229 billion forints while deposits increased only by 13.6% to 12,211 billion forints. Entrepreneurial loans grew by 9.2% to 7,168 billion forints, and loans to households by 33% to 7,252 billion forints over the respective yearend 2007 figures. There was a significant, 61%, or 925 billion forints, increase in loans extended to external borrowers. The item contributed 12% to the loans portfolio and was probably explained by the expansion abroad of two major Hungarian banks, OTP and MKB. FX-based loans continued to dominate lending to retail customers: while HUF loan disbursements shrank by 3.2%, FX-based loans extended to this segment increased by 58%, and their contribution to retail loans was up from 59% to 70.2%. The contribution of FX facilities within the banking system increased from 49.4% at the end of 2007 to 58.8% at the end of Three-quarters of the 11.8%, or 944 billion forints, growth in domestic HUF deposits was generated by households increasing willingness to save: boosted by special deposit schemes offered in Q4 of 2008, HUF savings of households increased by 16.7%, or 712 billion forints. Domestic FX deposits rose by 7.6%, or 160 billion forints. Retail customers contributed 137 billion 6

12 ANNUAL REPORT FOR 2008 OF FHB MORTGAGE BANK PLC forints to the growth. Corporate deposits increased by 2.1% to achieve 3,446 billion forints compared to In 2008 external funds increased by 43%, or 2,695 billion forints, to 8,944 billion forints and contributed 30.6% to the funds available in the banking system at the end of 2008 compared to 25.6% in The majority, 8,689 billion forints, was direct external funds, and the remaining 255 billion forints were mortgage bonds launched domestically and sold to foreign holders. Consequently, exposure of the Hungarian banking system to movements in the international money and capital markets in terms of involvement of funds has further increased. The banks portfolio deteriorated: the rate of subprime loans rose from 7.9% in 2007 to 10.1% in As regards income items, income from interest were 32% up and expenditure on interest were 52% up year-on-year, and resulted in a one percent increase in net income from interest, achieving billion forints in 2008 according to preliminary data. Income from sources other than interest dropped by 8.5% to billion forints, and operating costs increased by eight percent to billion forints. Extraordinary items added 16.4 billion forints to banks income across the board as opposed to 2007, when they deteriorated it by 2.8 billion forints. Earnings before taxes of the banking sector was billion forints in 2008, 11% less than in Foreign direct holdings in the banking sector increased from 82.0% to 86.4 year-on-year, and domestic direct holdings were up from 12.3% to 12.4%. The rate of preference, repurchased and non-identified shares dropped from 5.8% to 1.2%. 1.5 Retail lending in 2008 The banking sector s mortgage lending to retail customers was most affected by global financial processes. In the wake of mounting problems in the capital and money markets banks tightened their lending policies and suspended or discontinued some of their loan products (a large number of banks stopped CHF-denominated mortgage lending). As a result, there was a slump in mortgage lending in Q4 of As of 31 December 2008 mortgage loans to retail customers amounted to an aggregate 5,958.6 billion forints according to NBH data. Due to the impact of exchange rates this amount was billion forints (14.6%) above the Q3 of 2008 figure and 1,594.6 billion forints (36.5%) higher compared to the previous year s figure. The year-on-year expansion in the portfolio is considerably more dynamic in terms of its size and contribution than the billion forints, or 26.7%, growth recorded in 2007 compared to 31 December Excluding the impact of exchange rates, retail mortgage loans (calculated at the 31 December 2008 rate) increased by 1,164 billion forints, or 24.3%, year-on-year and by 207 billion forints (or 3.6%) over Q3 of The growth of the portfolio continues to be the driven by the dynamics of FX-denominated loans, which were 1,735.6 billion forints higher than the 2,644.3 billion forints achieved as of 31 December At the same time FX-denominated loans increased by billion forints 7

13 ANNUAL REPORT FOR 2008 OF FHB MORTGAGE BANK PLC compared to 30 September 2008 due to the volatility of exchange rates. HUF-denominated loans continued to shrink compared to the reference year and to Q3 of 2008, by 141 billion forints and 26 billion forints respectively. In Q4 of 2008 FX-denominated mortgage loans amounted to 4,380 billion forints and contributed 73.5% to the aggregate retail mortgage loans portfolio as opposed to 1,578.7 billion forints steadily shrinking HUF-denominated loans. The intensity of growth is marked by the fact that in 2007 the contribution of FX-based loans was only 60.6%. Retail mortgage loans (billion HUF, source: NBH) Q Q2 Housing loans 2007 Q Q Q Q Q Q4 General purpose mortgage loans Year-on-year growth in home loans extended to households was 24.9% or 782 billion forints. The annual growth was considerably above the 2007 figure of billion forints. The average growth per month was 65 billion forints with a large spread. The Q4 of 2008 growth was 416 billion forints over the Q3 figure. Excluding the impact of exchange rates, the home loans portfolio achieved a growth of 120 billion forints in Q4 of The increase in FX-based loans was greatly contributed to by soaring general-purpose mortgage loans. Compared to 1,189 billion forints contributing 45.0% to the overall retail loan portfolio as of 31 December 2007, the contribution of general purpose loans to retail lending grew to reach 45.8% by the end of the period of reporting due to general purpose loans 47.0% contribution to the growth of the loan portfolio over the past year. In Q1 of 2008 the growth in the portfolio of general-purpose loans to retail customers was 21.7% followed by a 0.7% drop in Q2, a 14.5% increase in Q3 and a 20.1% increase in Q4, and resulting in a 66.2% year-on-year growth. In 2008 the average monthly growth was 67.7 billion forints. Of the total amount of general-purpose loans 98.4% was disbursed in foreign exchange; the total portfolio value was nearly 2,006 billion forints as of 31 December General-purpose mortgage loans contributed 66.3% to total consumer loans as of 31 December 2008 as opposed to 58.2% in the reference year. This indicates a significant restructuring within the consumer loans product: the growth of consumer and personal loans is less and less dynamic and the growth of general-purpose loans continues to be strong. The main reason for the trend is the need for households to supplement their shrinking real income from cheap mortgage loans in order to maintain their level of consumption. 8

14 ANNUAL REPORT FOR 2008 OF FHB MORTGAGE BANK PLC 2 Ownership structure of FHB Plc. After the privatisation in 2007, the share of Hungarian State in the Bank dropped to 4.11%. Shares in circulation are owned by several professional and financial investors, with both domestic and foreign institutions among them. The significant investors (owning over 5% of total shares) as at 31 December, 2008 are (share % in brackets): Citibank Nominee (13.34%), RZB Austria (12.50%), VCP Finanz Holding Kft. (11.21%), A64 Vagyonkezelő Kft. (11.10%), Silvermist Estate SA (10.87%), HSBC Bank Plc (10.81%), Clearstream Nominee (10.72%). The ratios above are calculated on the listed ( A ordinary) series. Shareholders Series A ordinary shares Ownership share in the share Number of shares (pcs) capital Nemzeti Vagyonkezelő Zrt % 0.00% Domestic institutional investors / companies 32,425,272 28,492, % 43.17% Foreign institutional investors / companies 24,979,670 27,184, % 41.19% Private individuals 501, , % 1.44% FHB employees 84, , % 0.15% FHB Plc. 8,829 1,270, % 1.93% Series A total 58,000,010 58,000, % 87.88% Series B voting preference shares Nemzeti Vagyonkezelő Zrt. 2,714,300 2,714, % 4.11% Institutional investors 5,285,700 5,285, % 8.01% Series B total 8,000,000 8,000, % 12.12% Shares total 66,000,010 66,000, % % On 17th December 2007, VCP entered into a conditional share purchase agreement whom with VCP will conditionally be able to indirectly acquire in addition to the above a maximum number of 6,270,000 shares representing 9.5% indirect voting right in the Bank. By the date of this report, the Bank has not received any information that VCP purchased the shares nor the contract has been ceased. 9

15 ANNUAL REPORT FOR 2008 OF FHB MORTGAGE BANK PLC 3 FHB Bank Group Commenced in 2006, development of the Bank Group was essentially completed in 2007 and the Group companies were highly active in their respective areas of business in As parent company the Mortgage Bank exercises owner s supervision over the Group companies. The shareholder structure of FHB Bank group as at 31 December, 2008: Shareholder ratio in FHB Bank members Shareholders Commercial Bank Service Annuity Real Estate Mortgage Bank 90.0% 100.0% 95.3% 95.0% Service 10.0% 0.0% 4.7% 5.0% Total 100.0% 100.0% 100.0% 100.0% FHB Commercial Bank Ltd. FHB Commercial Bank Ltd. was established with an initial capital of 5,996 million forints including 3,996 million forints capital reserve and 2,000 million forints subscribed capital. In 2008 the shareholders increased the Commercial Bank s subscribed capital by 100 million forints and the capital reserve by 2,000 million forints. The court of registration registered the capital increase on 9 October Once the license of operation was issued the Commercial Bank started its business as a lending bank on 5 December 2006 at its Budapest head office. In the course of 2007, the existing and newly opened branches were gradually integrated into the expanding organizational network of the Commercial Bank. The Commercial Bank became increasingly active month after month: it stepped up its involvement in the sales of retail and corporate loan products; and on the other hand, it has expanded its product range on the liabilities side to include a variety of account and card related services. FHB Service Ltd. FHB Services Ltd. is entirely owned by FHB Mortgage Bank Plc. As of 31 December 2007 FHB Services subscribed capital was 1.5 billion forints and its capital reserve was 505 million forints. As a result of a capital increase registered in May 2008 the subscribed capital was increased to 1.6 billion forints and the capital reserve to 1.4 billion forints. The main object of FHB Services is to optimize the operation of the Group by providing the necessary infrastructure, back-office and IT services including book-keeping, data provision, payroll accounting and procurement. Besides, the Company manages the problem loans of FHB Mortgage Bank Plc. and FHB Commercial Bank Ltd. as an A type agent. FHB Services is a minority shareholder in the Commercial Bank and other Group companies. 10

16 ANNUAL REPORT FOR 2008 OF FHB MORTGAGE BANK PLC FHB Real Estate Ltd. FHB Real Estate was established on 7 February 2006 with 100 million forints subscribed capital. The shareholders increased the Service Company s capital increase in both 2007 and As a result, as of 31 December 2008 the subscribed capital was 120 million forints and its capital reserve was 120 million forints. In December 2008 the shareholders resolved to decrease the subscribed capital by 70 million forints against retained earnings. The relevant registration took place on 12 February The main business of FHB Real Estate Ltd. is three-fold: valuation for Group members and external partners, real estate agency activities, and real estate development. FHB Annuity Ltd. FHB Annuity Ltd. was established on 9 June 2006 with 100 million forints subscribed capital and commenced its business on 6 November In 2007 the shareholders increased the subscribed capital by 50 million forints and the capital reserve by 300 million forints as a result of which FHB Annuity had 150 million forints subscribed capital and 350 million forints capital reserve as of 31 December The Annuity Ltd. sells two products: an annuity product and, as an agent of FHB Mortgage Bank Plc., a reverse mortgage product. 11

17 ANNUAL REPORT FOR 2008 OF FHB MORTGAGE BANK PLC 4 Report on the 2008 business activity 4.1 Major financial indicators The balance sheet total calculated on the basis of the Hungarian Accounting Act was 14.0% or 87.7 billion forints higher than the previous year s figure. The increase in the balance sheet total was mainly due to an expansion in receivables from refinanced banks, which generated 58.8 billion forints year-on-year growth. The 2008 balance sheet total exceeded 714 billion forints. Earnings before tax was 9.3 billion forints with a 3.7 billion forints year-on-year growth. The growth was mainly generated by decreasing fees paid in the wake of falling mortgage banking disbursements, a substantial profit on financial transactions, and lower operating costs. Share capital (based on earnings before dividend payment) increased by 7.6 billion forints yearon-year, or 23.3%, over a year from profit from operations. Major financial indicators FHB Morgtgage Bank Plc. 31 Dec Dec Dec / 31. Dec Balance sheet total (million HUF) 626, , % Book value of mortgage loans (million HUF) 537, , % Book value of mortgage bonds (million HUF) 477, , % Book value of bonds (million HUF) 47,000 62, % Shareholders equity (million HUF) 1 32,401 39, % Regulatory capital (million HUF) 1 28,625 32, % Capital adequacy % 15.13% 12.1% Earnings before tax (million HUF) 5,625 9, % After tax profit (million HUF) 4,560 7, % CIR (operating costs / gross operating profit) 49.60% 38.70% -22.0% EPS (HUF) % ROAA (return on average assets) 0.80% 1.20% 50.0% ROAE (return on average equity) % 22.20% 52.1% 1 Including profit of the year (before dividend paid) 12

18 ANNUAL REPORT FOR 2008 OF FHB MORTGAGE BANK PLC 4.2 Products Lending With the creation of FHB Group the Mortgage Bank s role gradually changed in The Bank s loans were increasingly sold through FHB Commercial Bank Ltd., and FHB Mortgage Bank Plc. s main focus became refinancing the loans extended by FHB Commercial Bank Ltd. and other partner banks, project lending and to raise funds in the capital market primarily through mortgage bond issues. FHB Commercial Bank Ltd. is a Type A agent of FHB Mortgage Bank Plc., i.e. it sells retail and corporate loan products for and on behalf of the Mortgage Bank, which are reported in the balance sheet of the Mortgage Bank. In accordance with the strategic goals the Mortgage Bank has limited its lending activity to subsidized housing loans, land development loans and reverse mortgage loans, and given the size of its adjusted capital, to large commercial mortgage loans and housing project loans. The Commercial Bank is primarily involved in selling non-subsidized retail loans extended on a market basis. As a result of the global financial crisis in Q4 of 2008 FHB Group tightened its exposure terms (for instance scoring and loan-to-collateral ratio), risk management processes (for instance central decision-making), and collection procedures (for instance involvement of branch staff in the early stage of collection, preventive sales for the purpose of loan repayment). In this context the interest of both retail and corporate loans was substantially increased (by 170 and 400 basis points respectively). Priority was shifted from the lending side to efficient collection that helps to maintain the quality of the portfolio, to raising funds from retail customers, and to liabilities side activities that generate income from fees and commission. The Bank has changed its lending forecast accordingly. More stringent lending terms resulted in a significant drop in new loans compared to plans, which is, however, in line with the revised forecast adjusted to the new terms and conditions. Over the past year up to 31 December 2008 the gross amount of loans sold by the Bank dropped by 2.9 billion forints, or 1.3% as a result of the joint impact of the growth of the Commercial Bank s business as well as scheduled and non-scheduled repayments. Disbursements amounted to 17.4 billion forints in 2008, 59.9% less than the 43.3 billion forints achieved in the preceding year, in accordance with Group-level restructuring of the lending business. FX-based loans contributed 49.8% to disbursements in 2008 compared to 66.3% in the reference year, due partly to a dominance of subsidized HUF loans and partly to the financial market events the result of which was more keenly felt in the second half of the reported year. 13

19 ANNUAL REPORT FOR 2008 OF FHB MORTGAGE BANK PLC Loan disbursements (billion HUF) HUF FX Housing loans continue to be the most popular loan product sold by the Mortgage Bank, the reason being that the Bank s mandate to extend subsidized loans continued in Subsidized housing loans contributed 43.8% in 2008 (as opposed to 45.6% in 2007) with total disbursements amounting to 7.6 billion forints in 2008 as opposed to 19.8 billion forints in The shrinking was caused primarily by loans extended for the purchase of existing homes, which plunged from 7.4 billion forints in 2007 to 0.9 billion forints in the reported year. New home purchase loans amounted to 1.8 billion forints (3.0 billion forints in the reference year), home building loans were 4.3 billion forints (7.5 billion forints in 2007) and contributed the most to housing loans. The housing loan portfolio amounted to billion forints as of 31 December 2008, 5.4% short of the year-end 2007 figure. General-purpose mortgage loans contributed 3.3% to the 2008 disbursements and amounted to 0.6 billion forints, denominated predominantly in foreign exchange, HUF based loans contributing only 3.7%. In 2008, disbursement of this product fell 94.2% short of the 10.0 billion forints achieved in 2007 due to the increasing activity of FHB Commercial Bank in the same field. At year-end the portfolio was 41.4 billion forints, 3.6% above the 31 December 2007 figure. Corporate lending lagged 35.3% behind the previous year s achievement. Of the 7.1 billion forints disbursed in this category, 5.5 billion forints were contributed by commercial real estate financing loans (with a 38.5% year-on-year decrease), while housing project financing loans achieved 1.7 billion forints disbursed, 22.5% less than the 2.2 billion forints achieved in Due to the fall in retail lending corporate loans contributed 41.1% to total disbursements in 2008 as opposed to 25.5% in the reference year. The year-end portfolio amounted to 19.3 billion forints with an annual growth of almost 45%. 14

20 ANNUAL REPORT FOR 2008 OF FHB MORTGAGE BANK PLC Disbursement by products in ,4% 9,7% 5,2% 3,3% 6,6% 43,8% home equity loans project loans reverse mortgage loans commercial real estate financing land development housing loans Land development loans achieved 0.9 billion forints in 2008, 48.8% below the 1.8 billion forints achieved in This product contributed 5.2% to the Mortgage Bank s 2008 disbursements. The land development portfolio amounted to 3.7 billion forints at the end of 2008, 23.0% above the previous year s figure. Launched in 2007, mortgage loans to senior citizens increased dynamically and achieved 1.1 billion forints in the year of reporting, exceeding the reference year s achievement of 0.7 billion forints by 61.4%. The market share of the Mortgage Bank was steadily shrinking throughout 2008 as the Commercial Bank was gradually taking over selling loan products from the Mortgage Bank. As a result, based on the retail loans portfolio, the Mortgage Bank s share was 3.43% in 2008 as opposed to 4.89% in The Mortgage Bank s share in general purpose loans was lower (2.2% at year-end of 2008 as opposed to 3.8% in 2007) due to the fact that the Commercial Bank focused its sales efforts on this product in Refinancing At the beginning of 2008 the Bank had effective cooperation agreements with nine partners in the business of refinancing through purchasing independent mortgage liens. However, the Mortgage Bank s biggest external refinancing partner suspended the refinancing of FX loans from April 2008 due to mounting costs of funds and the need to provide funds for its parent bank. As of 31 December 2008 the portfolio of refinanced loans showed a 19.1%, or 58.8 billion forints year-on-year increase and amounted to billion forints. Newly refinanced mortgage 15

21 ANNUAL REPORT FOR 2008 OF FHB MORTGAGE BANK PLC loans amounted to 88.0 billion forints in Newly financed mortgage loans exceeded the 2007 disbursements amounting to 83.2 billion forints by 5.8%. Refinancing extended to external banks amounted to 23.2 billion forints. In the refinancing business the Mortgage Bank transacted independent lien purchases in accordance with the cooperation agreement with FHB Commercial Bank Ltd. in the amount of 64.8 billion forints, over four times the 14.1 billion forints achieved in Refinanced loan disbursements (billion HUF) ,2 84,9 24,8 37,9 20,1 9,9 6,0 3, HUF FX Within the refinancing portfolio the proportion of FX-based loans continued their steady increase: after 2007, when already 92.8% of refinancing was denominated in foreign exchange, FX loan disbursements further increased in the reported year to reach 96.4%. The bulk of new disbursements were predominantly denominated in Swiss francs, amounting to 84.8 billion forints. The contribution of refinancing to total disbursements in 2008 was 83.5%. The same rate was 46.8% in 2005, 43.7% in 2006 and 65.7% in 2007; thus over the pas two years this product moved on a steep upward curve due partly to the volume of refinancing, which exceeded projections, and partly to the decline in the Mortgage Bank s own loan disbursements, in accordance with the Bank s strategy. Similarly to the previous year, clients early repayment intent was strong also in 2008: throughout the year prepayments amounted to 55.2 billion forints, which included 35.7 billion forints early repayment of refinanced loans. 4.3 Sales channels Branch network In accordance with the Group strategy, in 2007 the Mortgage Bank s regional branches were integrated into the organizational structure of the Commercial Bank. Consequently, the Mortgage 16

22 ANNUAL REPORT FOR 2008 OF FHB MORTGAGE BANK PLC Bank no longer has a network of branches and mortgage products are sold through the Commercial Bank in the context of a Type A agency agreement. After the network development clients are offered the Group s products and services through 19 branches in addition to the Budapest head office (Békéscsaba, Budapest Békásmegyer, Debrecen, Eger, Győr, Kaposvár, Kecskemét, Miskolc, Nyíregyháza, Pécs, Salgótarján, Szeged, Székesfehérvár, Szekszárd, Szolnok, Szombathely, Tatabánya, Veszprém, Zalaegerszeg). There was a 66.3%, or 7.0 billion forints, drop in year-on-year lending through the network of branches due to a large extent to more stringent lending terms and conditions in the wake of the financial crisis. The contribution of the network of branches to the Bank s own lending was 34.5% in 2008, higher than in the reference year (32.5%) Agents activity After 20.1 billion forints total disbursement of transactions in 2007, the network of agents only contributed 6.2 billion forints in 2008, almost 70.0% less than in the reference year, as planned. Together with the expansion of the Bank s network of branches, shrinking agency activity resulted in a drop in agents contribution to disbursements within the Bank s own lending activity, from 62.1% in 2007 to 60.6% in the year of reporting. A large portion, 4.6 billion forints, was disbursed in HUF, which is not more than half of the 2007 performance by agents (8.5 billion forints). As of 31 December 2008 the number of contracted partners was 1,724, and the number of agents selling the Bank s loan products was several thousand Syndicated loans The total amount of syndicated loans outstanding not yet due was 7.8 billion forints as of 31 December 2008, of which 3.2 billion forints (41.3%) of which was contributed by savings coops, 2.5 billion forints (28.6%) by financial enterprises, and 2.1 billion forints (27.1%) by commercial banks as partners. Analysis of the aggregate data for 2008 reveals that the total amount of syndicated disbursed or purchased HUF and FX loans was 0.5 billion forints. The contribution of syndicated loans to own lending dropped from 5.4% in 2007 to 4.9% in 2008 as a result of structural changes. Out of the disbursements resulting from syndicate agreements concluded in 2008, 95.4% was contributed by joint transactions from a financial enterprise as a syndicate partner. Considering the changed market situation and the portion of syndicated loans within the total portfolio of FHB Group, the Bank decided to discontinue this activity as of Syndicated agreements were terminated and the syndicated business ceased with effect from 1 February

23 ANNUAL REPORT FOR 2008 OF FHB MORTGAGE BANK PLC 4.4 Portfolio analysis, impairment and provisions As of 31 December 2008 the Bank s rated assets amounted to billion forints, pending commitments amounted to 5.8 billion forints, and future commitments (from swap transactions), to billion forints. CLASSIFICATION Figures in million HUF Breakdown of portfolio by classification, loss in value and provisions Total accounts receivable 31 December December 2007 Loss in value and provisions Ratio Total accounts receivable Loss in value and provisions Ratio Problem-free 1,005, % 833, % Watch 12, % 8, % Substandard 3, % 1, % Doubtful % 5,603 1, % Bad % % TOTAL 1,022,154 1, % 849,010 1, % Receivables from customers amounted to billion forints (33.8% of the loan portfolio) in addition to 5.8 billion forints disbursement commitment based on valid loan agreements (0.9%). Of these receivables 16.5 billion forints attached to 4,385 contracts and 0.1 billion forints commitments were classified in the categories watch to bad, with 1.49 billion forints total impairment and provisions. The refinancing loans portfolio amounted to billion forints (54.9%) classified as prime (problem-free). The Bank had term or at-sight deposits with 21 commercial banks amounting to 58.4 billion forints (8.7%). The Bank holds stakes in four companies: FHB Commercial Bank Ltd., FHB Services Ltd., FHB Real Estate Ltd, and FHB Annuity Ltd. The total amount of investment is 11.5 billion forints (1.7%), classified as problem-free. Future commitments amounting to billion at the balance sheet are classified as problemfree. As of 31 December 2008, 97.51% of the classified portfolio (excluding swaps) was problem-free (compared to 98.18% as of 31 December 2007). The combined rate of substandard, doubtful and bad debts was 0.66% (0.86% as of 31 December 2007), the rate of transactions on the watch list was 1.83% (as opposed to 0.96% as of 31 December 2007). 18

24 ANNUAL REPORT FOR 2008 OF FHB MORTGAGE BANK PLC The proportion of problem-free loans in the loan portfolio was 92.83% (as opposed to 93.76% as of 31 December 2007), the combined rate of substandard, doubtful and bad debts was 1.91% (as opposed to 3.06% as of 31 December 2007), and the rate of loans on the watch list was 5.26% (as opposed to 3.18% as of 31 December 2007). Average impairment stayed at the same rate (0.22%) in the entire portfolio excluding swaps and slightly increased since the previous year in the loan portfolio (0.64%). 4.5 Collateral valuation Compared to 34.7 thousand collateral valuations and reassessments conducted by 31 December 2007, the number of valuations as of 31 December 2008 was 33.0 thousand and included 30 thousand valuations and 3.0 thousand reassessments. The number of valuations in conjunction with the Bank s own lending was 17 thousand and the number of valuations by partner banks was approximately 16 thousand. The Bank generated million forints income from collateral valuation and reassessment fees in 2008 including million forints invoiced to the Commercial Bank. Valuation fees paid to FHB Real Estate Ltd. amounted to 1,184.7 million forints. Costs were 24.9% less than in the previous year. 4.6 Mortgage bond issue, mortgage bond cover Mortgage bond issue In 2008 the Bank involved funds in amount of approximately 164 billion forints, 44 billion forints more than in In terms of breakdown, mortgage bonds contributed billion forints to the funds involved, bonds contributed 15.4 billion forints, and the remaining 7.1 billion forints were other long-term liabilities. Mortgage bond repayments amounted to 73.9 billion forints (at NBH rate as at the day of repayment); the 2008 redemption value was 51.3 billion forints (at NBH rate as at the day of redemption); thus the net funds involved in 2008 amounted to 38.5 billion forints. In the first quarter of 2008 capital involvement was done exclusively through mortgage bond issues in the domestic market. The Mortgage Bank involved 31.1 billion forints gross, almost five billion forints more than in Q1 of Net funds involved in Q1 of 2008 amounted to 11.9 billion forints as 13.9 billion forints mortgage bonds matured and 5.3 billion forints of the Schuldschein loan were repaid. In the first quarter of 2008 the Bank s Issues Programme for 2007 and 2008 was authorized with a maximum total face value of 200 billion forints. The first series under the new Programme were launched in February and March. In Q2 of 2008 the Mortgage Bank involved funds amounting to 33.8 billion forints gross (including 13.7 billion forints in the form of bond issues). 19

25 ANNUAL REPORT FOR 2008 OF FHB MORTGAGE BANK PLC An event of major importance for the Bank was the definitive Aa rating of FHB s mortgage bonds by Moody s as of 1 April The FHB mortgage bonds were put on the negative watch only because of the possible implications of the privatization in August The mortgage bonds were downgraded from Aa2 to Aa3. FHB Mortgage Bank Plc. has undertaken more stringent cover and liquidity terms and conditions for its outstanding mortgage bonds than provided for by law. In Q3 of 2008 the Mortgage Bank involved funds amounting to 82.1 billion forints gross (including 1.7 billion forints in the form of bond issues), 75.1 billion forints more than in the reference quarter of The two-year Schuldschein loan of 50 million EUR nominal value taken out by the Bank in August of 2006 matured on 4 August The Bank renewed the facility for another two years as of 6 August 2008 in the value of 30 million EUR. In Q4 of 2008 a total of 19.4 billion forints mortgage bonds matured. The combined nominal EUR and HUF redemption value amounted to approximately 3.5 billion forints calculated at the official exchange rate on the day of transactions with the result that repayments exceeded the amount of funds raised during the quarter. In Q4 of 2008 there were no issues in the context of FHB Mortgage Bank Plc. s EMTN Programme. Face value of securities issued in 2008 (billion HUF) 15,4 13,7 47,0 141,5 61,9 66,5 62, Mortgage bonds Bonds The mortgage bond market The aggregate amount of outstanding mortgage bonds issued by the three Hungarian mortgage banks was 1,311.9 billion forints as of 31 December FHB s share of the mortgage bond market slightly dropped, from 31.5% in 2007 to 26.8% in the year of reporting. 20