DECLARATION Here we provide you the consolidated annual report of MFB Hungarian Development Bank Private Limited Company (hereinafter: “Bank” or “MFB Zrt.”) and its subsidiaries (hereinafter: “the Group”) for the year 2022. MFB Zrt. fulfils its obligation to prepare consolidated annual financial statements pursuant to Article 10 paragraph (2) of Act C of 2000 on Accounting by preparing consolidated financial statements in accordance with the International Financial Reporting Standards (IFRS) published in the form of a regulation in the Official Journal of the European Union. On behalf of MFB Zrt., we hereby declare that the consolidated annual financial statements for the year 2022, prepared in accordance with IFRS as adopted by the EU contain true data and statements, and do not fail to disclose any fact that may be of relevance for assessing the financial position of the Group. The consolidated financial statements for the year 2022 prepared in accordance with the applicable accounting standards and to our best knowledge, give a true and fair view of the assets, liabilities, financial position and profit of the Group, and the consolidated management report gives a fair view of the position, development and performance of the Group, together with a description of the principal risks and uncertainties that they face. The Bank has prepared its consolidated financial statements in the format prescribed by the COMMISSION DELEGATED REGULATION (EU) 2019/815 of 17 December 2018 on supplementing Directive 2004/109/EC of the European Parliament and of the Council with regard to regulatory technical standards on the specification of a single electronic reporting format(hereinafter: “ESEF”). The digitally signed version of the consolidated financial statements available for inspection at the Bank's registered office (H-1051 Budapest, Nádor utca 31., Hungary), and can be downloaded from the official website of MFB Zrt. at the following link: https://www.mfb.hu/en/reports-s2012 Budapest, 25 April 2023 dr. Levente Sipos - Tompa Zsolt Leskó Chairman and Chief Executive Officer Chief Financial Officer
MFB HUNGARIAN DEVELOPMENT BANK PRIVATE LIMITED COMPANY AND ITS SUBSIDIARIES Consolidated Financial Statements in accordance with International Financial Reporting Standards as adopted by the EU 31 December 2022
Table of contents Consolidated Financial Statements Consolidated Statement of Financial Position....................................................................... 1 Consolidated Income Statements .......................................................................................... 3 Consolidated Statement of Other Comprehensive Income ................................................... 4 Consolidated Statement of Changes in Shareholder’s equity................................................ 5 Consolidated Statement of Cash Flows ................................................................................. 6 Notes to the Consolidated Financial Statements: 1. Principal activities of the group............................................................................................. 8 2. Basis of preparation ............................................................................................................. 12 3. Significant accounting policies............................................................................................ 15 a) Basis of consolidation ................................................................................................ 15 b) Foreign currency transactions ................................................................................... 15 c) Financial assets and liabilities ................................................................................... 16 i. Recognition................................................................................................................. 16 ii. Derecognition ............................................................................................................. 18 iii. Measurement .............................................................................................................. 20 iv. Classification .............................................................................................................. 20 v. Amortized cost measurement ...................................................................................... 21 vi. Impairment of financial assets ................................................................................... 22 vii. Collateral valuation ................................................................................................... 26 viii. Write-offs .................................................................................................................... 26 ix. Forborne and modified loans ..................................................................................... 27 d) Leasing ....................................................................................................................... 28 e) Impairment of non-financial assets ............................................................................ 29 f) Cash and cash equivalents ......................................................................................... 30 g) Loans and advances to banks and to customers ......................................................... 30 h) Securities .................................................................................................................... 30 i) Encumbered assets ..................................................................................................... 31 j) Repurchase and reverse repurchase agreements ....................................................... 31 k) Investments ................................................................................................................. 32 l) Derivative financial instruments ................................................................................ 32 m) Hedge accounting ....................................................................................................... 33 n) Property, plant and equipment and Intangible assets ................................................ 33 o) Investment property .................................................................................................... 34 p) Bonds issued ............................................................................................................... 34 q) Provisions ................................................................................................................... 35 r) Offsetting .................................................................................................................... 35 s) Commitments and contingencies ................................................................................ 35 t) Interest income and expense....................................................................................... 35 u) Fee and commission income and expense .................................................................. 36 v) Dividend income ......................................................................................................... 36 w) Current and other taxes .............................................................................................. 37 x) Statement of cash flows .............................................................................................. 38 y) Events after the reporting period ............................................................................... 38 z) Reclassification of previously presented balances ..................................................... 38 aa) New standards and interpretations ............................................................................ 39 4. Cash, cash balances at the central Banks and other demand deposit................................... 40 5. Non-trading financial assets mandatorily at fair value through profit or loss ..................... 40 5.1 Debt securities ................................................................................................................... 40 5.2 Loans ................................................................................................................................. 41 6. Financial assets at fair value through other comprehensive income ................................... 42
7. Financial assets at amortized cost........................................................................................ 43 7.1 Loans ................................................................................................................................. 44 7.1.1 Information on the rules of the payment moratorium introduced in the context of COVID-19 ............................................................................................................................... 46 7.2 Debt securities ................................................................................................................... 55 7.3 Deposits at central and other banks ................................................................................... 57 7.4 Other financial assets......................................................................................................... 57 8. Investments in associates..................................................................................................... 58 9. Derivatives........................................................................................................................... 64 10. Hedge accounting .............................................................................................................. 65 11. Property, plant and equipment ........................................................................................... 68 11.1 Investment Properties ...................................................................................................... 70 12. Intangible assets ................................................................................................................ 71 13. Other assets........................................................................................................................ 72 14. Receivables on the State due to currency-hedging agreement .......................................... 73 15. Financial liabilities measured at amortized cost ................................................................ 75 15.1. Debt securities issued ..................................................................................................... 76 16. Provisions .......................................................................................................................... 78 17. Other liabilities .................................................................................................................. 79 18. Share capital and share premium ....................................................................................... 79 19. Other reserves .................................................................................................................... 79 20. Non controlling interest ..................................................................................................... 80 21. Contingent liabilities, Commitments ................................................................................. 80 22. Net interest income ............................................................................................................ 81 23. Dividend income ............................................................................................................... 81 24. Net fee and commission income / expenses ...................................................................... 82 25. Gains or (-) losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss, net ............................................................................................... 82 26. Gains or (-) losses on derecognition OF non financial assets, net ..................................... 82 27. Other operating income/expenses...................................................................................... 83 28. General and administrative expenses ................................................................................ 84 29. Provisions or (-) reversal of provisions ............................................................................. 85 30. Impairment (-) or reversal of impairment of financial instruments ................................... 86 31. Impairment or (-) reversal of impairment of investments in exempted associates ............ 93 32. Impairment (-) or reversal of impairment of non-financial instruments............................ 93 33. Taxation ............................................................................................................................. 94 34. Related parties ................................................................................................................... 96 35. Segment reporting ............................................................................................................. 98 36. Financial risk management .............................................................................................. 103 A. Credit risk ................................................................................................................. 106 B. Liquidity risk............................................................................................................. 133 C. Market risks .............................................................................................................. 137 D. Operational risk ....................................................................................................... 141 E. Capital management................................................................................................. 142 F. Fair value ................................................................................................................. 145 37. Offsettings ....................................................................................................................... 153 38. Maturity table .................................................................................................................. 155 39. Exercising Owner’s rights ............................................................................................... 156 40. Events after the reporting period ..................................................................................... 158
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Consolidated Statement of Financial Position (amounts presented in million HUF) The accompanying notes to financial statements on pages 8 to 158 form an integral part of these consolidated financial statements 1 ASSETS Notes 2022 2021 Cash, cash balances at central banks and other demand deposits 4 99 001 169 525 Financial assets held for trading 9 2 454 783 Derivatives 2 454 783 Non-trading financial assets mandatorily at fair value through profit or loss 5 407 465 97 219 Debt securities 369 647 60 513 Loans 37 818 36 706 Loans to customers 6 459 7 109 Loans to banks 31 359 29 597 Financial assets at fair value through other comprehensive income 6 92 026 46 603 Of which assets encumbered 729 6 547 Equity instruments 31 489 14 066 Debt securities 60 537 32 537 Financial assets at amortized cost 7 1 849 096 1 641 435 Of which assets encumbered 319 668 331 836 Debt securities 439 103 385 538 Loans 1 378 824 1 213 151 Loans to customers 1 298 497 1 155 547 Loans to banks 80 327 57 604 Other financial assets 4 322 357 Deposits at central and other banks 26 847 42 389 Derivatives – Hedge accounting 9 15 128 7 849 Investments in associates 8 267 935 169 870 Property, plant and equipment 11 6 579 7 049 Investment property 11.1 33 750 33 567 Intangible assets 12 6 815 5 958 Tax assets 72 56 Current tax assets 0 0 Deferred tax assets 72 56 Other assets 13 31 441 31 046 Receivables from the state due to currency-hedging agreement 14 182 040 162 081 TOTAL ASSETS 2 993 802 2 373 041
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Consolidated Statement of Financial Position (amounts presented in million HUF) The accompanying notes to financial statements on pages 8 to 158 form an integral part of these consolidated financial statements 2 LIABILITIES Notes 2022 2021 Reclassified Financial liabilities held for trading 9 4 062 664 Derivatives 4 062 664 Financial liabilities measured at amortized cost 15 2 257 815 1 836 610 Customer deposits 48 520 141 905 Loan from banks 786 907 598 877 Debt securities issued 15.1 1 402 562 1 085 030 Other financial liabilities 19 826 10 798 Derivatives – Hedge accounting 9 0 0 Provisions 16 4 940 3 547 Tax liabilities 31 4 288 3 989 Current tax liabilities 1 263 574 Deferred tax liabilities 3 025 3 415 Other liabilities 17 33 431 32 136 TOTAL LIABILITIES 2 304 536 1 876 946 Share capital 18 519 900 349 900 Share premium 18 81 870 81 870 Valuation reserve (5 505) (2 342) Retained earnings 91 943 66 228 Other reserves 19 1 058 439 Equity attributable to the owner 689 266 496 095 Non-controlling interest 20 0 0 TOTAL EQUITY 689 266 496 095 TOTAL EQUITY AND LIABILITIES 2 993 802 2 373 041 Budapest, 25 April 2023 dr. Levente Sipos-Tompa Zsolt Leskó Chairman and Chief Executive Officer Chief Financial Officer
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Consolidated Income Statements (amounts presented in million HUF) The accompanying notes to financial statements on pages 8 to 158 form an integral part of these consolidated financial statements 3 Notes 2022 2021 Interest income calculated using the effective interest method 106 569 46 081 Other similar income 10 115 6 250 Interest expenses (71 004) (19 563) Net interest income 22 45 680 32 768 Dividend income 23 5 0 Fee and commission income 6 182 3 371 Fee and commission expenses (1 004) (203) Net Fee and commission income or expenses 24 5 178 3 168 Gains or (-) losses on derecognition of financial assets and liabilities not measured at fair value through profit or loss, net 25 485 1 190 Gains or (-) losses on financial assets and liabilities held for trading, net 9.1 (1 254) 1 Gains or (-) losses on non-trading financial assets mandatorily at fair value through profit or loss, net 10 385 363 Gains or (-) losses from hedge accounting, net 10 652 27 Exchange differences [gain or (-) loss], net 3 781 509 Gains or (-) losses on derecognition of non-financial assets, net 26 480 (234) Other operating revenue and income 27 14 242 10 066 Total operating income 79 634 47 858 Salaries and employee benefits (16 264) (14 855) Other administrative expenses (7 204) (6 336) Administrative expenses 28 (23 468) (21 191) Depreciation (2 475) (2 218) Other operating expenses 27 (16 408) (6 656) Contract modification loss, net 7.1.1 (3 018) (1 045) Impairment (-) or reversal of impairment of financial instruments 30 (17 561) (5 198) Impairment (-) or reversal of impairment of investments in exempted associates 31 (2 163) (817) Impairment (-) or reversal of impairment of non-financial instruments 32 (7) 0 Profit or (-) loss from associates 14 884 (684) Profit before tax 29 418 10 049 Tax expense related to profit or loss of continuing operation 33 (2 571) (2 240) Profit after tax 26 847 7 809 Profit for the year 26 847 7 809 Profit attributable to non-controlling interest 20 0 0 Profit attributable to the owner 26 847 7 809
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Consolidated Other Comprehensive Income Statements (amounts presented in million HUF) The accompanying notes to financial statements on pages 8 to 158 form an integral part of these consolidated financial statements 4 Notes 2022 2021 Profit for the year 26 847 7 809 Other comprehensive income (3 163) (2 433) Items that will not be reclassified to profit or loss 375 467 Change in far value of equity instruments at fair value through other comprehensive income 411 513 Tax impact of items that will not be reclassified to profit and loss (36) (46) Items that may be reclassified to profit or loss (3 538) (2 900) Debt instruments at fair value through other comprehensive income (3 538) (2 900) Fair value change 6 (3 538) (2 945) Profit recognized in the income statements 0 0 Tax impact of items that will be reclassified to profit and loss 0 45 Total comprehensive income for the year 23 684 5 376 Comprehensive income, (-) expense attributable to non-controlling interest 0 0 Comprehensive income, (-) expense attributable to the owner 23 684 5 376
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Consolidated Statement of Changes in Shareholder’s Equity (amounts presented in million HUF) The accompanying notes to financial statements on pages 8 to 158 form an integral part of these consolidated financial statements 5 Share Capital Share premium Other Reserves Retained earnings Valuation reserve Non- controlling interest Total Notes 18 19 19 6 20 Balance at 1 January 2021 265 900 81 870 0 61 331 91 2 529 411 721 Profit for the year 7 809 7 809 Other comprehensive income (2 433) (2 433) Total comprehensive income 7 809 (2 433) 5 376 General reserve allocation 19 439 (439) 0 Capital increase 18 84 000 84 000 Changes in ownership (1 921) (2 529) (4 450) Sale of FVOCI investments (552) (552) Balance at 31 December 2021 –Reclassified 349 900 81 870 439 66 228 (2 342) 0 496 095 Profit for the year 26 847 26 847 Other comprehensive income (3 163) (3 163) Total comprehensive income 26 847 (3 163) 23 684 General reserve allocation 19 619 (619) 0 Capital increase 18 170 000 170 000 Changes in ownership (208) (208) Sale of FVOCI investments (305) (305) Balance at 31 December 2022 519 900 81 870 1 058 91 943 (5 505) 0 689 266
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Consolidated Statement of Cash Flows (amounts presented in million HUF) The accompanying notes to financial statements on pages 8 to 158 form an integral part of these consolidated financial statements 6 Notes 2022 2021 Operating cash flow Profit/(loss) before tax 29 418 10 049 Adjustments to profit before tax Depreciation and amortization 2 475 2 218 Fair valuation impact (9 783) (1 066) Impact of equity method applied for associates (14 884) 684 Net profit/loss on sale of non-financial instruments (480) 234 Net interest income 22 (45 680) (32 768) Dividend income 23 (5) 0 Change in provisions 819 1 408 Change in impairment 18 912 (4 839) Operating cash flow (19 208) (24 080) Decrease/(increase)) in operating assets Non-trading financial assets mandatorily at fair value through profit or loss (231 132) (48 986) Financial assets at fair value through other comprehensive income (49 842) (1 822) Financial assets at amortized cost, except debt securities (158 894) 129 142 Other assets (3 130) (11 831) Receivables from the State due to currency-hedging agreement (19 959) (5 072) Increase/(decrease) in operating liabilities Financial liabilities measured at amortized cost, except issued bonds 96 720 (16 449) Other liabilities 41 907 29 532 Actual cash flow movements Interest received 98 396 34 812 Dividend received 23 5 0 Interest paid (44 939) (17 380) Income tax paid (2 095) (1 489) Net cash provided by/ (used in) operating activities (292 171) 66 377
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Consolidated Statement of Cash Flows (amounts presented in million HUF) The accompanying notes to financial statements on pages 8 to 158 form an integral part of these consolidated financial statements 7 Notes 2022 2021 Cash flow from investing activities Payments for debt securities held at amortized cost 7.2 (90 478) (355 414) Proceeds from debt securities held at amortized cost 7.2 37 676 89 190 Investments in associates (150 557) (120 368) Proceeds from sale of investments in subsidiaries and associates 565 18 Payments for property, plant and equipment and intangible assets and investment properties (3 045) (4 203) Proceeds from sale of property, plant and equipment 29 29 Net cash (used in) / provided by investing activities (205 810) (390 748) Cash flow from financing activities Capital increase 170 000 84 000 Proceeds from bond issuance 15.1 382 821 533 779 Repayments for issued bond at maturity 15.1 (124 673) (200 383) Finance lease liability payments (707) (842) Net cash provided by financing activities 427 441 416 554 Gross change in cash and cash equivalents (70 540) 92 183 Cash and cash equivalents as at 1 January 4 169 551 77 368 Cash and cash equivalents as at 31 December 4 99 011 169 551
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 8 1. PRINCIPAL ACTIVITIES OF THE GROUP MFB Hungarian Development Bank Private Limited Company (the “Bank” or “HDB”) is registered as a single, stock company under Hungarian law and is licensed to conduct specialized banking activities. The Bank and its subsidiaries represent the MFB Group (hereinafter referred to “the Group”). The legal status, the role, and the activities of the Bank are regulated by Act XX of 2001 on Hungarian Development Bank Ltd., Act CCXXXVII of 2013 on Credit Institutions and Financial Enterprises, and the Articles of Association. MFB Zrt. is responsible for providing the necessary development resources to achieve the economic development objectives set out in the Government's medium- and long-term economic strategy, partly independently and partly in cooperation with other domestic and international organizations in the following activities: a) the sourcing and mediation of medium and long term domestic and foreign funding and subsidies to achieve economic development aims; b) loan and capital financing of investments in connection with – from a national economic aspect – preferential cases, and other state or local government developments and investments, and other developments and investments in connection or for the enlargements of these; c) financing loans and capital for companies resident in Hungary – primarily small and medium enterprises sector –, holding funds established by law, agricultural businesses and farmers, d) the financial execution of state and local government developments and investments related to EU membership, and the Bank participates in tasks related to the drawing of European Community funds (including mediation of subsidies and sourcing and mediation of resources from international economic or financial institutions); e) attend in tasks related to state, communal and international development disbursements (especially management of mediation and use of development disbursements and subsidies, attend in relating contributory tasks, settlement and valuation of used disbursements); f) the mediation of EU funds and in connection with this, loan and equity financing, providing guarantee and surety; g) the exercising of owners’ rights in the name of the Hungarian State, and in case of State owned companies– participate in the realization of significant developments, investments, expansion, increasing of effectiveness and improvement of competitiveness and other roles defined in the HDB Law (see Note 40) to ensure sufficient development funding to achieve the economic development aims determined by the Government’s medium and long term economic strategy. The Bank’s registered office is located at Nádor street 31, 1051 Budapest, Hungary. The Bank operates in Hungary. The Bank’s website address is www.mfb.hu The Hungarian State has a 100% ownership share in the Bank. As of the State, as a shareholder, is represented by the minister responsible for economic development.
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 9 The Bank is obliged to have its consolidated financial statements audited. The details of the auditor are as follows: István Henye registered auditor Registration number: 005674 KPMG Hungary Ltd. 31. Váci Street, Budapest, 1134 Firm registration number: 000202 The person in charge to direct and manage the related accounting services Krisztina Sulyok director Chartered accountant registration number:006660 Those entitled to sign the consolidated financial statements dr. Levente Sipos-Tompa Chairman and Chief Executive Officer (15/A Táltos Street Budapest, 1123) and Zsolt Leskó Chief Financial Officer (6 Pákász Street, Budapest, 1031) A. Members of the Group (subsidiaries) Name of the subsidiary Activity Owner Voting power 2022 2021 MFB-Ingatlanfejlesztő Zrt. Real estate portfolio management MFB 100% 100% MKK Magyar Követeléskezelő Zrt. Workout/Factoring MFB 100% 100% MFB Növekedési Tőkealap (“NTA”) Venture capital fund MFB 100% 100% MFB Vállalati Beruházási és Tranzakciós Magántőkealap (volt MFB KKV Tőkealap) Venture capital fund MFB 100% 100% MFB Invest Befektetési és Vagyonkezelő Zrt. Investment portfolio management MFB 99.99% 100% Hiventures Kockázati tőkealap-kezelő Zrt. Venture capital fund management Invest 99.99% 100% FOCUS VENTURES Tőkealap-kezelő Zrt. Private equity fund management Invest 99.99% 100% Divat&Design Tőkealap Venture capital fund Invest 99.99% 100% Debrecen Városi Tőkealap Venture capital fund Invest 99.99% 100% Székesfehérvár Városi Tőkealap Venture capital fund Invest 99.99% 100% Veszprém Városi Tőkealap Venture capital fund Invest 99.99% 100% Kaposvár Városi Tőkealap Venture capital fund Invest 99.99% 100% Nyíregyháza Városi Tőkealap Venture capital fund Invest 99.99% 100% Pécs Városi Tőkealap Venture capital fund Invest 99.99% 100% Vidékfejlesztési Tőkealap Venture capital fund Invest 99.99% All the above companies are incorporated in Hungary.
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 10 MFB-Ingatlanfejlesztő Zrt. (MFB-Property Development Private Company Limited by Shares) The company’s main activity is still the real estate management and utilization of the real estate portfolio transferred from other MFB Group members. Its activity includes the record-keeping of real estates and the monitoring of their legal, technical and real estate market status, utilization or sales. In case of tenants or other potential utilization intention that fit into the Group’s strategy it carries out such value-added developments at its own risk and expense that makes the real estates in all other respects suitable for functions according to the end-user's needs i.e., where necessary performs targeted property development activities or purchases of market property with significant potential for return to increase the profit generation ability. MKK Magyar Követeléskezelő Zrt. (MKK Hungarian Claim Work-out Private Limited Company) Financial enterprise responsible for purchasing of receivables, collection management, factoring activity. The company also acts as the Group’s work out department, but mainly buys claims from other market players. MFB Növekedési Tőkealap (MFB Growth Fund) The purpose of the Fund is to finance such micro and small and medium enterprise (or in some cases large corporates) that are at the very beginning of their development phase. According to the usual venture capital terminology, these are the incubation-sized enterprises in the seed and occasionally growth phases. In particular, it intends to build a portfolio of companies that develop and sell innovative products and services. The fund is managed by Hiventures Zrt. MFB Vállalati Beruházási és Tranzakciós Magántőkealap (MFB Company Investment and Transaction Private Equity Fund) (former MFB KKV Tőkealap (MFB SME Fund)) MFB SME FUND was established in 2019 September and its main goals were to finance the M&A activities of the medium and small enterprises, strengthening and increasing the competitiveness and the productivity of the sector. The share capital of the Fund was HUF 31 billion, out of that 10% has been paid in. The MFB SME Fund was transformed and renamed to MFB Company Investment and Transaction Private Equity Fund in the end of 2020. In parallel the MFB Crises Fund, that was launched earlier with HUF 150 billion share capital because of the crises generated by COVID 19, has been terminated. The new Fund dispose above HUF 75 billion, and its purposes meet the ones of the previous Funds. Accordingly, the following sub-markets can be considered as target groups: (i) the generation change, (ii) focusing M&A transactions (iii) develop economy (iv) restructuring and (v) turnaround. The yields from the investments could be validated only on longer period. The fund is managed by Hiventures Zrt. MFB Invest Befektetési és Vagyonkezelő Zrt. (MFB Investment and Asset Management Private Limited Company) Private Equity firm responsible for financing of medium-sized and larger companies’ development- type projects. It performs investments directly with acquiring shareholdings in enterprises and indirectly with investing to Funds. In accordance with the Government Decree No. 1512/2022. (X.24.) on the prospective scheme of how ownership rights and competences adhering to the State’s direct and indirect investments in collective portfolio investments, NTH National Capital Holding Private Limited Company – obtaining one preference share within the company in December 2022, consequently, became a shareholder. In the new operational model MFB Invest Zrt. has signed a contract, based on which MFB Invest exercise the Bank’s investor’s rights in the funds where MFB participates as an investor, and maintain relationships with the different actors in connection of the state-owned funds from 2023.
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 11 Hiventures Kockázati Tőkealap-kezelő Zrt. (Hiventures Venture Capital Fund Management Company Limited by Shares) Fund management company that primarily focuses on Venture Capital investments. Due to recent business development, it provides equity financing to SMEs and to larger enterprises. It is responsible for the management of funds directly and indirectly financed by MFB and also responsible for the management of EU-financed funds. FOCUS VENTURES Tőkealap-kezelő Zrt. (FOCUS VENTURES Venture Capital Fund Management Company Limited by Shares) Fund management company that primarily focuses on private equity investments. It is responsible for the management of urban development funds. Divat&Design Tőkealap (Fashion & Design Fund) The purpose of the Fund is to finance innovative, high growth, incubation, seed and growth/startup companies in the fashion and design sector. The fund is managed by Hiventures Zrt. Debrecen Városi Tőkealap (Debrecen Urban Fund) The purpose of the Fund is to finance projects primarily in Debrecen and Hajdú-Bihar County, thus providing growth opportunities for businesses in the region. The fund is managed by FOCUS VENTURES. Székesfehérvár Városi Tőkealap (Székesfehérvár Urban Fund) The purpose of the Fund is to finance projects in Székesfehérvár and Fejér County, thus providing growth opportunities for companies in the region. The fund is managed by FOCUS VENTURES. Veszprém Városi Tőkealap (Veszprém Urban Fund) The purpose of the Fund is to finance projects in Veszprém and Veszprém County, thus providing growth opportunities for companies in the region. The fund is managed by FOCUS VENTURES. Kaposvár Városi Tőkealap (Kaposvár Urban Fund) The purpose of the Fund is to finance projects in Kaposvár and Somogy County, thus providing growth opportunities for companies in the region. The fund is managed by FOCUS VENTURES. Nyiregyháza Városi Tőkealap (Nyiregyháza Urban Fund) The purpose of the Fund is to finance projects in Niyregyháza and Szabolcs-Szatmár-Bereg County, thus providing growth opportunities for companies in the region. The fund is managed by FOCUS VENTURES. Pécs Városi Tőkealap (Pécs Urban Fund) The purpose of the Fund is to finance projects in Pécs and Baranya County, thus providing growth opportunities for companies in the region. The fund is managed by FOCUS VENTURES. Vidékfejlesztési Tőkealap (Fund of Rural Development) The purpose of the Fund is to support and pre-finance through investments those companies, - who do not have their own funds fully, to utilize the subsidies that have been already awarded within the Rural Development Program. The fund is managed by FOCUS VENTURES,
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 12 2. BASIS OF PREPARATION Statement of compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”) as adopted by the EU and interpretations issued by the International Financial Reporting Interpretations Committee (“IFRIC) as adopted by the EU and in accordance with the provisions of act C of 2000 on accounting in force in Hungary for companies preparing their annual accounts under IFRS and in accordance with the provisions of act C of 2000 on accounting in force in Hungary for companies preparing their annual accounts under IFRS. Consolidated financial statements were approved by the Board of Directors on 25 April 2023. The Separate Financial Statements were approved by the Board of Directors also on 25 April 2023. The Bank’s consolidated and separate financial statements will be published on the same day. The accounting principles applied in the Bank’s separate financial statements do not differ from those used in the consolidated financial statements. Basis of measurement These consolidated financial statements have been prepared on historical cost or amortized cost basis except for those, which are measured at fair value. The Group measures the following assets and liabilities at their fair value: • derivative financial instruments, • financial assets or liabilities measured at fair value through profit or loss, and • financial assets at fair value through other comprehensive income Functional currency Items included in the consolidated financial statements are measured using Hungarian Forint, the currency of the primary economic environment in which the entities of the Group operate (‘the functional currency’). These consolidated financial statements are presented in Hungarian Forints rounded to the nearest million (“HUF million”). Foreign exchange rates used in these consolidated financial statements were the following: 31 December 2022 31 December 2021 (HUF) (HUF) EUR 400.25 369.00 USD 375.68 325.71 JPY 2.8437 2.8293 GBP 451.98 440.03 PLN 85.35 80.30 CHF 406.93 356.90 CZK 16.58 14.84
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 13 Reporting period These consolidated financial statements are prepared for the reporting period between 1 January 2022 and 31 December 2022. The end of the reporting period is the reporting date. Use of estimates and judgements The preparation of the Group’s financial statements requires management to make judgements, estimates and assumptions that affect the reported amount of income, expenses, assets and liabilities, and the accompanying disclosures, as well as the disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods. In the process of applying the Group’s accounting policies, management has made the following judgements and assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Existing circumstances and assumptions about future developments may change due to circumstances beyond the Group’s control and are reflected in the assumptions if and when they occur. Items with the most significant effect on the amounts recognized in the financial statements with substantial management judgement and/or estimates are summarized below with respect to judgements/estimates involved. Impairment The measurement of impairment losses under IFRS 9 across all categories of financial assets requires judgement, in particular, the estimation of the amount and timing of contractual future cash flows and collateral values when determining impairment losses and the assessment of a significant increase in credit risk. These estimates are driven by several factors, in which changes can result in different levels of allowances. The Group’s expected credit loss calculations (ECL) are outputs of complex models with several underlying assumptions regarding the choice of variable inputs and their interdependencies. Elements of the ECL models that are considered accounting judgements and estimates include: • The Group’s internal credit rating model, which assigns default probability to each rating category • The Group’s criteria for assessing if there has been a significant increase in credit risk and thus allowances for financial assets should be measured on a lifetime expected credit loss basis and the qualitative assessment • Development of ECL models, including different ones: formulas, relationships between macroeconomic scenarios and economic inputs, collateral values; Impact on the probability of defaults, expected exposures at defaults and loss given defaults It has been the Group’s policy to regularly review its models in the context of actual loss experience and adjust when necessary. Further details see in note 3. c) vi) and note 36. The cash flow estimations of the purchased credit impaired receivables are calculated in a model using 24–40-week periods depending on the type of receivables. During the applied recovery process, the receivables run out over 2-10 years on average, the return is concentrated for this period. The amount and timeliness of cash inflows is affected by the current market conditions, regulations in effect, the work of the courts, liquidators and the liquidation and final settlement procedures. The recovery rate is higher at the first period after the purchase (12-36 months) because the transactions of well-performing debtors run out sooner. This is followed by a period with lower recovery rate because of the inherent features of the recovery and the liquidation and final settlement procedures. The management regularly monitors and, if needed, adjusts the cash flow estimations and at the reporting date there is a complete review and update the estimation for the expected future cash flows. During the review all available past information and future expectations, which can affect the recovery of the purchased receivables, are taken into consideration.
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 14 Fair value The fair value of financial instruments is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions (i.e., an exit price) regardless of whether that price is directly observable or estimated using another valuation technique. When the fair values of financial assets and financial liabilities recorded in the statement of financial position cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of valuation models. The inputs to these models are taken from observable markets where possible, but where this is not feasible, estimation is required in establishing fair values. Judgements and estimates include considerations of liquidity and model inputs related to items such as credit risk (both own and counterparty), funding value adjustments, correlation and volatility. For further details about determination of fair value please see Note 36. Legal risk The Group operates in a regulatory and legal environment that, by nature, has a heightened element of litigation risk inherent to its operations. As a result, it is involved in various litigation, arbitration and regulatory investigations and proceedings arising in the ordinary course of the Group’s business. When the Group can reliably measure the outflow of economic benefits in relation to a specific case and considers such outflows to be probable, the Group records a provision against the case. Where the probability of outflow is considered to be remote, or probable, but a reliable estimate cannot be made, a contingent liability is disclosed. Given the subjectivity and uncertainty of determining the probability and amount of losses, the Group considers several factors including legal advice, the stage of the matter and historical evidence from similar incidents. Significant judgement is required to conclude on these estimates. For further details on provisions and other contingencies see Note 16. Exempted associates On materiality basis and the usefulness of the information, the Bank exempts some associated companies from being consolidated by using equity method and presents them as not consolidated associates on their cost less accumulated impairment. The primary reason for the exemption is that these entities are immaterial therefore does not have impact on the financials. These associates are included in these financials with a 100% impairment. Companies in venture capital funds are also exempted from consolidation, as these firms do not have significant capital and their activities are not significant for the whole of the consolidated accounts of the Group. For these exempted companies, the numbers representing the extent of their activities are presented (see Note 8). The effects of Covid-19 and the war emergency The Covid-19 pandemic and the war emergency affected many areas of the economy, in response to which each country has made its own packages and rules to help and restart the economy. The Group assessed the impact on its own activities and on the activities of its clients and took them into account where it considered it necessary. The Group’s management has assessed its ability to sustainably continue the operation of the business and is satisfied that it has the resources necessary to continue business activities for the foreseeable future. Furthermore, management is not aware of any material uncertainties that may cast significant doubt on the Group’s ability to continue as a going concern. Therefore, the financial statements continue to be prepared on the going concern basis. The measures taken due to Covid-19 and the war emergency, and any effects were presented in the appropriate locations of the report, so see notes 7.1.1, 13 and 36 for details.
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 15 3. SIGNIFICANT ACCOUNTING POLICIES a) Basis of consolidation Subsidiaries Subsidiaries are enterprises controlled by the Group. Control exists when the Group has power over the investee, has exposure, or rights, to variable returns from its involvement with the investee, and has the ability to use its power over the investee to affect the amount of the investor’s returns. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control effectively commences until that control effectively ceases. Associates Associates are those enterprises in which the Group has significant influence. Investments in associates are accounted for under the equity method, whereby the investment is initially recognized at cost and adjusted thereafter for the post-acquisition change in the Group’s share of the investee’s net assets. The Group’s profit of loss includes its share of the investee’s profit or loss and the Group’s other comprehensive income includes its share of the investee’s other comprehensive income. Funds are treated as subsidiaries when the Fund manager is owned by the Group as in this case the Group has the control over the Fund manager. When the Fund manager does not belong to the Group the fund is treated as an associate as though the control is not within the Group, but as the foundation of the given fund and therefore the setting of the basic management/investment policies give rise to the significant influence to the Group, and usually it also ensured that the Group get a seat in the Investment Committee. Transactions eliminated during consolidation Intercompany assets, liabilities, income, expenses and costs, and any intercompany gains and losses are eliminated in preparing the consolidated financial statements. b) Foreign currency transactions Foreign currency transactions are translated into the functional currency using the exchange rates of the National Bank of Hungary (NBH) prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year- end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement, except cash flow hedges and net investment hedges which are recognized in other comprehensive income and accumulated in reserves in equity. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to HUF at the foreign exchange rates quoted by the National Bank of Hungary at that date. Non-monetary items that are measured based on historical cost in a foreign currency are translated at the exchange rate at the date of the transaction. Non-monetary assets and liabilities that are measured at fair value in a foreign currency are translated into the functional currency at the exchange rate when the fair value is determined.
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 16 c) Financial assets and liabilities Financial assets and liabilities, except for derivative financial instruments are initially recognized on the settlement date, i.e., the date that the Bank transfers the instrument. This includes regular way trades: purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the marketplace. Derivative instruments are recognized on trade date when the Group becomes a party of the contractual provisions of the instruments. i. Recognition The Group only measures its “financial assets at amortized cost” if both of the following conditions are met: • the financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows • the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest (hereinafter referred to “SPPI”) on the principal amount outstanding. The details of these conditions are outlined below. The Group classifies the following instruments in the FVOCI financial instruments category: • equity instruments that have been marked in this way at initial recognition; • debt instruments for which, as a result of the business model test, it has been established that the business model is intended to collect contractual cash flows related to the debt instrument and at the same time to sell financial instruments, and as a result of the SPPI test, the contractual terms of the financial instrument at specified times result in cash flows that are only payments of principal and interest on outstanding principal amounts. Business model assessment The Group determines its business model at the level that best reflects how it manages groups of financial assets to achieve its business objective. The Group's business model is not assessed on an instrument-by-instrument basis, but at a higher level of aggregated portfolios and is based on observable factors such as: • how the performance of the business model and the financial assets held within that business model are evaluated and reported to the entity's key management personnel • the risks that affect the performance of the business model (and the financial assets held within that business model) and, in particular, the way those risks are managed • how managers of the business are compensated (for example, whether the compensation is based on the fair value of the assets managed or on the contractual cash flows collected) • the expected frequency, value and timing of sales are also important aspects of the Bank’s assessment The business model assessment is based on reasonably expected scenarios without taking 'worst case' or 'stress case’ scenarios into account. If cash flows after initial recognition are realized in a way that is different from the Group’s original expectations, the Group does not change the classification of the remaining financial assets held in that business model but incorporates such information when assessing newly originated or newly purchased financial assets going forward.
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 17 The Group has included its full loan portfolio into the "held to collect" business model, since its primary objective is to collect capital and interest cash flows. Those securities which are held in order to maintain the long-term liquidity, or which has been deposited (pledged) behind credit programs, were classified in the "held to collect" business model, while the securities which used for shorter liquidity purposes were classified into "held to collect and sale" business model. The Group does not have any securities in the “held for sale” category, given its operational specialities, thus this business model category is irrelevant. From 1 January 2018, the Group does not reclassify its financial assets subsequent to their initial recognition, apart from the exceptional circumstances in which the Group changes the business model under which the financial assets are managed. Financial liabilities are never reclassified. SPPI test As a second step of its classification process the Group assesses the contractual terms of its financial assets to identify whether they meet the criteria of the SPPI test. The Group must consider the contractual terms of the financial instruments in order to be able to determine whether the contractual cash flows consist solely of capital and interest payments. This implies an assessment of whether the financial instrument is linked to such a contractual condition based on which the amount of the contractual cash flows or the timing of those may ultimately not pass the SPPI test. The SPPI test is carried out at instrument level (one by one) and, where applicable, at the level of the homogenous products (combined). The most important elements of the interest included in the loan agreement are the time value of money, the costs incurred by the Group and the credit risk. To perform the SPPI assessment, the Group applies judgement and considers relevant factors such as the currency in which the financial asset is denominated, and the period for which the interest rate is set. In contrast, contractual terms that introduce a more than de minimis exposure to risks or volatility in the contractual cash flows that are unrelated to a basic lending agreement - do not give rise to contractual cash flows that are solely payments of principal and interest on the amount outstanding. In such cases, the financial asset is required to be measured at Fair Value through Profit and Loss (hereafter referred to as “FVTPL”). The classification of financial instruments at initial recognition depends on their contractual terms and the business model for managing the instruments. Financial instruments are initially measured at their fair value. Except for financial assets and financial liabilities measured at fair value through profit and loss (FVTPL), transaction costs are added to (in case of financial assets), or subtracted from (in case of financial liabilities), this amount. Trade receivables are measured at the transaction price. When the fair value of financial instruments at initial recognition differs from the transaction price, the Group accounts for the day one profit or loss, as described below. When the transaction price of the instrument differs from the fair value at origination and the fair value is based on models for which some of the inputs are not observable, the difference between the transaction price and the fair value is deferred as a gain or loss only to the extent that it arises from a change in a factor (including time) that market participants would take into account when pricing the asset or liability.
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 18 ii. Derecognition Financial assets A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognized when the rights to receive cash flows from the financial asset have expired. The Group also derecognizes the financial asset if it has both transferred the financial asset and the transfer qualifies for derecognition. The Group has transferred the financial asset if, and only if, either: • the Group has transferred its contractual rights to receive cash flows from the financial asset or • it retains the rights to the cash flows, but has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass–through’ arrangement Pass-through arrangements are transactions whereby the Group retains the contractual rights to receive the cash flows of a financial asset (the 'original asset'), but assumes a contractual obligation to pay those cash flows to one or more entities (the 'eventual recipients'), when all the following three conditions are met: • the Group has no obligation to pay amounts to the eventual recipients unless it has collected equivalent amounts from the original asset, • the Group cannot sell or pledge the original asset other than as security to the eventual recipients, • the Group has to remit any cash flows it collects on behalf of the eventual recipients without material delay. In addition, the Group is not entitled to reinvest such cash flows, except for investments in cash or cash equivalents including interest earned, during the period between the collection date and the date of required remittance to the eventual recipients. A transfer only qualifies for derecognition if either (i) the Group has transferred substantially all the risks and rewards of the asset or (ii) the Group has neither transferred nor retained substantially all the risks and rewards of the asset but has transferred control of the asset. The Group considers control to be transferred if and only if, the transferee has the practical ability to sell the asset in its entirety to an unrelated third party and can exercise that ability unilaterally and without imposing additional restrictions on the transfer. When the Group has neither transferred nor retained substantially all the risks and rewards and has retained control of the asset, the asset continues to be recognized only to the extent of the Group’s continuing involvement, in which case, the Group also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration the Group could be required to pay. Financial liabilities A financial liability is derecognized when the obligation under the liability is discharged, cancelled, or expires. The difference between the carrying value of the original financial liability and the consideration paid (including the newly recognized financial liability) is recognized in profit or loss.
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 19 Modifications subject to derecognition of financial assets and liabilities Debt instruments exchanged to another one under substantially modified terms and conditions is treated as a derecognition of the existing financial asset or liability and a re-recognition of a new financial instrument. Similarly, a substantial modification of the terms of an existing financial asset or financial liability or part thereof (whether or not it has been caused by the counterparty's financial difficulties) is treated as derecognition of the original financial asset or liability and a new financial instrument is recognized. The new financial liability based on the modified terms is recognised at fair value. The new financial asset is recognised at fair value plus any eligible transaction costs. Any fees received as part of the modification are accounted for as follows: • fees that are considered in determining the fair value of the new asset and fees that represent reimbursement of eligible transaction costs are included in the initial measurement of the asset, • other fees are included in profit or loss as part of the gain or loss on derecognition. The basic terms of a financial instrument changes significantly when the main risk factors behind the original instrument are modified. In particular, the Group considers, but not limited to, the following factors when assessing whether the modification is subject to a derecognition and a re- recognition: • the extent of the difference between the modified and the original cash flows, where a change is more than 10% • change of borrower with a new risk profile (only in case of financial assets) • change in SPPI result due to the effect of modified contractual terms • change in currency When comparing the modified and original cash flows, the Group examines the extent of the difference between the discounted present value of the changed cash flows - including paid fees in case of liabilities and in case of assets deducting, the fees paid and including the fees received - under the new conditions and the discounted present value of the remaining original contractual cash flows by using the original effective interest rate in both cases. Fees received include, in case of assets, amounts paid by the borrower to the Group or on its behalf, and in case of liabilities, amounts paid by the lender to or on behalf of the Group. The fees paid include, in the case of assets, amounts paid by the Group to or on behalf of the borrower, and in case of liabilities, amounts paid by the borrower to the Group or on its behalf, whether or not they are described as a fee, as part of the exchange or modification. Fees do not include any payments made by the borrower or lender to its own advisers or agents, or other transaction costs incurred by the borrower or lender. Modifications not subject to derecognition of financial assets and liabilities When the Group renegotiates or amends the contractual cash flows of a financial instrument and the renegotiation or modification does not result in the derecognition of the financial instruments, the Group recalculates the financial instruments gross amortized cost and the difference is recognized in the profit or loss on the line "Contract modification loss, net". The new gross amortized cost is recalculated by the Group as the present value of renegotiated or modified contractual cash flows, using the original effective interest rate of the financial instruments (in case of purchased or originated credit impaired assets the credit-adjusted effective interest rate is used).
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 20 Any modification fee applied is amortized over the remaining life of the financial instruments which is achieved by the recalculation of EIR at modification to reflect the modification fee received. The impact of any additional fees incurred at modification but not directly related to it (e.g., prepayment fees) are recognized directly on "Fee and commission income" when incurred. If the modification of a financial liability is not accounted for as derecognition, then the amortised cost of the liability is recalculated by discounting the modified cash flows at the original effective interest rate and the resulting gain or loss is recognised in profit or loss line „Contract modification loss, net”. Any costs and fees incurred are recognised as an adjustment to the carrying amount of the liability and amortised over the remaining term of the modified financial liability by re-computing the effective interest rate on the instrument. iii. Measurement The Group classifies all its financial assets based on the business model for managing the assets and the asset’s contractual terms (SPPI test) and measured as follows. Profit or loss on a financial instrument mandatorily measured at fair value through profit or loss shall be recognized in income statements in such a way that the Group recognizes interest income on those assets as „Other similar income”, while changes in fair value is recognized as „gains or (-) losses on non-trading financial assets mandatorily at fair value through profit or loss, net” line within income statements. A gain or loss on debt instruments at fair value through other comprehensive income shall be recognized in other comprehensive income, through the statement of changes in equity, except for impairment losses, interest income amortized based on effective interest and foreign exchange gains and losses which are recognized in profit or loss, until the financial asset is derecognized, at which time the cumulative gain or loss previously recognized in other comprehensive income shall be reclassified to profit or loss. All valuation movements for equity instruments at fair value through other comprehensive income are recognized directly in equity (Other Comprehensive Income) and on derecognition, the cumulative amount is only transferred to retained earnings but is not transferred to profit or loss, except the dividend received which is always recorded in the profit and loss. The difference between the fair value at the date of derecognition and the selling price is recognized in profit or loss. For financial assets and financial liabilities carried at amortized cost, a gain or loss is recognized in profit or loss when the financial asset or financial liability is derecognized or impaired, and through the amortization process. iv. Classification Financial assets or liabilities held for trading are derivatives which are not part of a designated hedge relationship. Cash, cash balances at central banks and other demand deposits are cash and bank accounts held with the National Bank of Hungary or with other credit institutions, as well as overnight deposits. Financial assets measured at amortized cost include debt instruments that are included in such business model whose objective is to hold financial assets in order to collect contractual cash flows („held to collect business model”) and have passed the SPPI test. In this category, the Group classifies its refinancing and direct loans that have passed the SPPI test. Also, this category includes those purchased debt securities that the Group has classified as held to collect.
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 21 Non-trading financial assets that are mandatorily measured at fair value through profit or loss includes debt instruments that are included in the held to collect business model but failed the SPPI test. In this category, the Group presents its refinancing and direct loans that failed the SPPI test. It also includes those venture capital investments that do not meet the definition of equity instruments under IAS 32. Financial assets measured at fair value through other comprehensive income include debt instruments that the Group has classified into a business model whose objective is achieved by both collecting contractual cash flows and selling the financial asset („held to collect and sale business model”) and have passed the SPPI test. In this category, the Group shows the portion of its securities that it has classified as a held to collect and sale business model. Equity instruments for which the Group has chosen the fair value through other comprehensive income option at initial recognition are presented in this category. These are other investments that do not qualify as associates. Derivatives - hedge accounting includes derivative transactions designated by the Bank into hedge relationship. Among the financial liabilities measured at amortised cost, the Group presents customer deposits (collaterals behind loans), loans taken, short-term interbank deposits, issued debt securities and other financial liabilities. v. Amortized cost measurement The amortized cost of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured at initial recognition minus principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between that initial amount and the maturity amount, and in case of financial assets minus any reduction for impairment or uncollectibility. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Group shall estimate cash flows considering all contractual terms of the financial instrument but shall not consider future credit losses. The Group recognizes POCI (Purchased or Originated Credit Impaired) financial assets in its books at their initial fair value, which, unless otherwise stated, is equal to the purchase price of the asset or. In calculating the credit-adjusted effective interest rate on POCI assets at initial recognition, the Group considers the initial estimated credit loss in the estimated cash flows (i.e., life expected credit losses are deducted from estimated contractual cash flows).
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 22 vi. Impairment of financial assets The Group is applying a forward-looking expected credit loss (hereinafter ECL) approach for its impairment calculation. From 1 January 2019, the Group has been recording the allowance for expected credit losses for all loans and other debt financial assets not held at FVTPL (but including debt securities at fair value through other comprehensive income), together with loan commitments and financial guarantee contracts, in this section all referred to as ‘financial instruments’. Equity instruments are not subject to impairment under IFRS 9. The ECL impairment/provision is the expected credit loss for 12 months (hereinafter 12mECL) if there has been no significant increase in credit risk since the initial recognition of the asset (liability) or it is considered to be low credit risk at the time of valuation. If there has been a significant increase in credit risk since initial recognition or since the previous valuation, the ECL impairment/provision is the loss calculated over the expected life of the asset. The 12mECL is the portion of lifetime expected credit loss that represent the ECLs that result from default events on a financial instrument possibly within 12 months after the reporting date. ECL impairment is calculated for both 12mECL and lifetime expected credit losses on a group basis or, in exceptional cases, on an individual basis, depending on the nature of the underlying portfolio of financial instruments. The Group has established a policy to perform an assessment, at the end of each reporting period, of whether a financial instrument’s credit risk has increased significantly since initial recognition, by considering the change in the risk of default occurring over the remaining life of the financial instrument. To carry out the evaluation, the Group compares the non-performance risk of the financial instrument at the reporting date and as of the initial recognition, taking into consideration information that is reasonable and justifiable - without undue cost or effort – and indicates significant increase in credit risk since initial recognition. The Group assumes that the credit risk of a financial instrument has not increased significantly since the initial recognition if the financial instrument is considered low credit risk at the reporting date. If the credit risk of a financial instrument has not increased significantly at the reporting date since initial recognition, the Group calculates the impairment of the financial instrument based on the 12- month expected credit loss (hereinafter: Stage 1). At each reporting date, the Group calculates the impairment of the financial instrument based on the lifetime expected credit loss if the credit risk of the financial instrument, whether assessed on an individual or group basis, has increased significantly since initial recognition, considering all reasonable and justifiable information, including forward-looking ones (hereinafter: Stage 2 or Stage 3). Regardless of the above, the Group always calculates the impairment based on the lifetime expected credit losses for receivables where the IFRS 15 Revenues from contracts with customer standard is applicable and the receivables do not include significant financing components. These include other financial assets where the Group uses this simplified approach.
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 23 Based on the above process, the Group classifies its loans into stages, as described below. Stage 1 (performing credit risk category) Performing asset category, if there is no significant increase in credit risk compared to the initial recognition, or the asset is considered by the Group to have a low credit risk at the time of valuation. In this stage 1 category, the Group calculates the expected credit loss based on the 12-month PD (Probability of Default) for all such deals where there was no significant increase in credit risk since initial recognition. This way, the 12-month expected credit loss indicates a lifetime cash flow deficit that occurs as a result of default within a maximum of 12 months after the reporting date, weighted by the probability of default. Deals are reclassified from this stage only when the credit risk increases significantly since origination and the deal is not considered as low risk. The stage categorization is therefore determined by the Group at deal level rather than by a borrower level. Stage 2 (increased credit risk category) Significant increase in credit risk (deals where the Group has become aware of negative information about the exposure but does not yet have objective evidence of impairment). The Group considers a significant increase in credit risk if it becomes aware of negative information about the exposure, but there is no objective and material evidence of impairment yet. Such negative information may include, but is not limited to, the Customer's delay not reaching a significant credit obligation 1 to the Group or any of its Subsidiaries, a significant deterioration in the Customer's rating, or becoming insolvent. Information received by the Group during Customer monitoring that relates to the probable future default of the customer is also considered negative information. Furthermore, restructuring where the transaction was performing at the time of the restructuring is considered negative information. The Group continuously monitors and records the defined criteria for the increase in credit risk. Lifetime credit loss is determined by the Group using specified risk vectors, lifetime PD (Probability of Default), constant loss given default (hereinafter „LGD”) and changing exposure at default (hereinafter „EAD”). When calculating EAD, account shall be taken of the expected change in the exposure of the transaction until maturity. 1 A credit default delay is considered significant if: a) in the case of non-retail exposure: - the amount of the customer's liabilities to the Bank or any of its Subsidiaries overdue for more than 90 days (principal, interest or fee payment) exceeds HUF 150 000 (absolut limit), - the amount of liabilities overdue for more than 90 days exceeds 1% (relative limit) of the amount of the Bank's or any of its Subsidiaries' gross balance sheet receivables from the customer (excluding equity exposures). b) in the case of retail exposure: - the amount of the customer's liabilities to the Bank or any of its Subsidiaries overdue for more than 90 days (principal, interest or fee payment) exceeds HUF 30 000 (absolut limit), - the amount of liabilities overdue for more than 90 days exceeds 1% (relative limit) of the amount of the Bank's or any of its Subsidiaries' gross balance sheet receivables from the customer (excluding equity exposures).
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 24 Stage 3 (impaired credit risk category) Default (non-performing), credit-impaired category. The third stage includes defaulted transactions for which there is either objective evidence of impairment or a probable future default of the debtor. To classify into this category, the Group monitors the various default events (e.g., delay exceeding the threshold for significant credit default, termination, liquidation proceedings ordered by law, bankruptcy proceedings, forced liquidation proceedings, or other proceedings aimed at terminating the activity, reorganization or restructuring proceedings are in progress, as well as forced restructuring, if the transaction was in default at the time of the restructuring, etc.). The Group also classifies significant receivables purchased at a discount of more than 20% (POCI) as well as products that it classifies as impaired (e.g., redeemed guarantees) in the category of impaired credit risk. All these marked events are stored in the banking system and ensure traceability of what events led to the classification. POCI Purchased or originated credit impaired (POCI) assets are financial assets that are credit impaired on initial recognition. POCI assets are recorded at fair value at initial recognition and interest income is subsequently recognized based on a credit adjusted EIR. ECLs are only recognized or released to the extent that there is a subsequent change in the expected credit losses. The Group only recognises the cumulative changes in lifetime ECLs since initial recognition, based on a probability-weighting of the scenarios, discounted by the credit adjusted EIR. For financial assets for which the Group has no reasonable expectations of recovering either the entire outstanding amount, or a proportion thereof, the gross carrying amount of the financial asset is reduced. This is considered a (partial) derecognition (write-off) of the financial asset. Individual and collective impairment The Group applies an individual impairment calculation for exposures classified in Stage 3 exceeding HUF 100 million and for transactions exceeding HUF 1 billion that have been placed under Intensive Management. Exposures in Stage 3 that do not reach HUF 100 million are normally subject to collective valuation. In Stage 1 and Stage 2 categories, transactions are primarily measured on a collective valuation basis, but the Group may choose individual valuation as well if transaction exceeds the material threshold value set by the Group, which also relies on quantitative and qualitative factors. The Group also uses both collective and individual valuation for its debt securities and loans. In all cases, the impairment is recognized against the „Impairment or ( -) reversal of impairment on financial assets not measured at fair value through profit or loss”. The carrying amount of the financial assets is reduced by using an impairment account, and the loss is recognized in the income statement. If, in subsequent years, due to certain events, the estimated amount of impairment increases or decreases, the accumulated impairment loss previously recognized is increased or decreased using the impairment allowance account. If a previously written off amount subsequently recovers, the amount is also recorded within „Impairment or (-) reversal of impairment on financial assets not measured at fair value through profit or loss”
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 25 The calculation of ECLs The Group calculates ECLs based on a minimum of three probability-weighted scenarios in the case of individual valuation to measure the expected cash shortfalls, discounted with the original EIR. A cash shortfall is the difference between the cash flows that are due to an entity in accordance with the contract and the cash flows that the entity expects to receive. When relevant, the assessment of multiple scenarios also incorporates how defaulted loans are expected to be recovered, including the probability that the loans will recover and the value of collateral or the amount that might be received for selling the asset. The mechanics of the ECL calculations are outlined below and the key elements are, as follows: PD The Probability of Default is an estimate of the likelihood of default over a given time horizon. A default may only happen at a certain time over the assessed period, if the facility has not been previously derecognized and is still in the portfolio. EAD The Exposure at Default is an estimate of the exposure at a future default date, considering expected changes in the exposure after the reporting date, including repayments of principal and interest, whether scheduled by contract or otherwise, expected drawdowns on committed facilities, and accrued interest and principals from missed payments. LGD The Loss Given Default is an estimate of the loss arising in the case where a default occurs at a given time. It is based on the difference between the contractual cash flows due and those that the lender would expect to receive, including from the realization of any collateral. It is usually expressed as a percentage of the EAD. Purchased receivables The Group recognizes the amount of the expected recovery –that is based on historical collection statistics - on the purchased receivables above the purchase price by using the effective interest method. The Group reestimates the expected recovery on purchased receivables for each reporting date. The effects resulting from the change in estimates are reflected in the results of the current period. Decrease is achieved by using the impairment account, while in case of increase first the previously created impairment is reversed then the gross book value of the asset is adjusted. Where a significant negative/positive change in the future cash flow estimation is occurring, the carrying amount of the purchased receivables is increased/decreased with the difference between carrying amount of the financial asset and the present value of the future cash flows, discounted at the effective interest rate at the reporting date. Decrease is achieved by using the impairment account, while in case of increase first the previously created impairment is reversed then the gross book value of the asset is adjusted. Loan commitments and letters of credit When estimating the lifetime credit loss for undrawn loan commitments, the Group quantifies the part of the commitment that is expected to be drawn during the maturity period. The ECL is then based on the present value of the expected shortfalls in cash flows if the loan is drawn down, based on a probability-weighting of the scenarios. The expected cash shortfalls are discounted at the EIR that will be applied to the loan resulting from the loan commitments. For credit lines, commitments and letters of credit, the ECL is recognized within “Impairment (-) or reversal of impairment of financial instruments” line in the income statements and “Provisions” line within statements of financial position.
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 26 Financial guarantee contracts The Group’s liability under each guarantee is measured at the higher of initially recognized amount less cumulative amortization recognized in the income statement, and the ECL provision. For this purpose, the Group estimates ECLs based on the present value of the expected payments to reimburse the holder for a credit loss that it incurs. The calculation is made using a probability-weighting of the scenarios. The ECL related to financial guarantee contracts are recognized within “Impairment (-) or reversal of impairment of financial instruments”. vii. Collateral valuation To mitigate its credit risks on financial assets, the Group requires collaterals, where possible. The collateral comes in various forms, such as cash, securities, letters of credit/guarantees, real estate, chattels, receivables, inventories, other non-financial assets and credit enhancements such as netting agreements. Collateral, unless repossessed, is not recorded on the Group’s statement of financial position. However, the fair value of collateral affects the calculation of ECLs. Collaterals are generally assessed at inception and are revalued on a regular basis. However, some collateral, for example, cash or securities relating to margining requirements, are valued daily. To the extent possible, the Group uses active market data for valuing financial assets held as collateral. Other financial assets which do not have readily determinable market values are valued using models. Non- financial collateral, such as real estate, is valued based on data provided by third parties such as independent appraisers or based on housing price indices. Collateral repossessed During the normal course of business, the Group sometimes repossess real estate collaterals. The Group’s policy is to determine whether a repossessed asset can be best used for its internal operations or should be sold. Assets determined to be useful for the internal operations are transferred to their relevant asset category at the lower of their repossessed value or the carrying value of the original secured asset. Assets for which selling is determined to be a better option are transferred to assets held for sale at their fair value (if financial assets) and fair value less cost to sell for non-financial assets at the repossession date in, line with the Group’s policy. If the repossessed asset is utilized until the sale, it is presented as investment property. viii. Write-offs Loans and debt securities are written off (either partially or in full) when there is no reasonable expectation of recovering a financial asset in its entirety or a portion thereof. This is generally the case when the Group, based on reliable information, determines that the borrower does not have assets or sources of income that could generate sufficient cash flows to repay the amounts subject to the write-off. This assessment is carried out at the individual asset level. If the amount to be written off is greater than the accumulated loss allowance, the difference is first treated as an addition to the allowance that is then applied against the gross carrying amount. Any subsequent recoveries are credited to credit loss expense.
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 27 ix. Forborne and modified loans Except for the application of special rules for transactions subject to the payment moratorium, the Group classifies a loan in a restructured category if it makes a concession or makes a contractual change because of the borrower's current or anticipated financial difficulties that it would not have made if the borrower were financially sound. Indicators of financial difficulties include defaults on covenants, or facts and expectations indicating a significant increase in credit risk, which may result in postponement of payment deadlines or taking out a new loan. Once the terms have been renegotiated, any impairment is measured using the original EIR as calculated before the modification of terms, given that no derecognition and re-recognition took place and no transaction cost was related to it. The Group assessed the specific time spent in the moratorium, as well as participation in several moratoriums, as a significant increase in credit risk, and therefore assumed that the obligor has, or is expected to have, financial difficulties in meeting its financial obligations. Therefore, it classified the transactions concerned as restructured, except for documented exceptions supported by evidence. The classification into stages was based on an examination of the unique characteristics of the client and the transaction. The Group considers forced restructuring as a factor indicating the occurrence of a default event if it is likely to result in a significant reduction in the financial liability due to the waiver or deferral of the principal, the interests or the fees. A waiver or deferral is considered to be significant if the decrease in the present value of the financial liability exceeds 1%. The Group continuously monitors its restructured loans to ensure that the current status of the restructured loans is recorded in accordance with applicable regulations. In case the transaction status in the monitoring system changes to the ‘Special’ category, the loan is presented in Stage 2 or Stage 3, depending on whether the transaction was performing at the time of the restructuring and whether the customer complies with the amended payment obligations. All its impaired (Stage 3) exposures are considered as non-performing exposures by the Group. If an asset has been rated as non-performing due to restructuring, it may be considered performing again if all the following conditions are met: • at least 365 days have passed since the date of the restructuring and since the end of the grace period provided for in the restructuring agreement and • there is no delay (principal, interest, commission, fee) at the time of qualification and no concerns arise that would call into question the repayment of the full amount of the claim and • repayment of the claim that was past due (if there was a delay) or that was written off during the restructuring (if there was no delay) through repayments under the restructuring conditions The restructured status of a claim may be terminated if the following conditions are met: • the claim is performing; • a probationary period of at least two years has passed since the restructured claim was recognized as performing; • regular repayments of principal or interest have been made in excess of an insignificant amount for at least half of the probationary period; • at the end of the probationary period there is no delay of more than 30 days in respect of any obligation of the obligor.
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 28 d) Leasing Accounting for leases by the Group as a lessee The Group leases office premises and parking lots. Leases are recognized as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of-use asset is recognized at cost and depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis. Liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments: • fixed payments (including in-substance fixed payments), less any lease incentives receivable • variable lease payment that are based on an index or a rate • amounts expected to be payable by the lessee under residual value guarantees • the exercise price of a purchase option if the lessee is reasonably certain to exercise that option, and • payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be determined, the lessee’s incremental borrowing rate is used, being the rate that the lessee would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions. Right-of-use assets are measured at cost comprising the following: • the amount of the initial measurement of lease liability; • any lease payments made at or before the commencement date less any lease incentives received; • any initial direct costs, and • restoration costs. As an exception to the above, the Group accounts for short-term leases and leases of low-value assets by recognizing the lease payments as an operating expense on a straight-line basis. Short-term leases are leases where the lease term on the starting date is not more than 12 months. The threshold for low-value assets is set by the Group at HUF 1.500.000 In determining the lease term, management of the Group considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Extension options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated). The assessment is reviewed if a significant event or a significant change in circumstances occurs which affects this assessment and that is within the control of the lessee. Accounting for operating leases by the Group as a lessor When assets are leased out under an operating lease, the lease payments receivable are recognized as rental income on a straight-line basis over the lease term.
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 29 e) Impairment of non-financial assets At each reporting date, the Group reviews the carrying amounts of its non-financial assets (other than investment properties and deferred tax assets) to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. Goodwill is tested annually for impairment. The recoverable amount of an asset or CGU (Cash Generating Unit) is the greater of its value in use and its fair value less costs to sell. Value in use is based on the estimated future cash flows, discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. An impairment loss is recognised if the carrying amount of an asset or CGU exceeds its recoverable amount. The objective of the model used is to estimate the recoverable amount from the use of shareholdings based on discounted cash flow ("DCF") from five years long business plans of the subsidiaries adopted by the owner. The main output of the model is an indication of the impairment of the investment held, that is, the cash-generating unit (“CGU”) based on the inputs provided. Further analysis is needed to make the final management decision on impairment, considering the specific situation of CGU and other considerations. The model calculates the amount of free cash flow underlying the DCF valuation until the end of the explicit business plan based on the accepted valid 5–10-year business plan. Based on the business characteristics of each CGU, the model determines the recoverable amount from using either the firm-level free cash flow ("FCFF") method or the owner's free cash flow ("FCFE") method. The discount rate applied depends on the discount factor and the number of years. • The approach used for general purpose companies is the FCFF method. Accordingly, the value of CGU's equity interest equals the present value of the firm-level free cash flows calculated directly from the business plan less the market value of interest-bearing liabilities. The discount rate used in present value calculations is the weighted average cost of capital (“WACC”). • For special purpose investments (receivables management, guarantee issuance / suretyship undertaking) the model uses the FCFE method. This determines the value of the ownership interest by discounting the owner's free cash flows. Both the FCFF and FCFE methods assume that the owner will continuously realize the cash flows available from the CGU. When assessing investments on a plan-fact basis, the primary consideration is the likelihood and magnitude of expected loss that can reasonably be expected from the investment's business and the changes in the legal and market environment. When an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined without impairment loss recognized for the asset in prior years. A reversal of an impairment loss is recognized immediately in profit or loss. Inventories within the scope of IAS 2 are measured at the lower of cost and net realizable value. The Group makes estimates for the realizable amount on a quarterly basis. Impairments are recognized or reversed according to these estimates in profit or loss.
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 30 f) Cash and cash equivalents Cash and cash equivalents include notes and coins in hand, unrestricted balances held with central bank or other financial institutions and overnight deposits. This line includes placements with other banks payable on demand, including nostro and other accounts in HUF and foreign exchange with domestic banks, foreign central banks and institutions registered abroad as bank. These items are subject to insignificant risk of changes in their fair value and are used by the Group in the management of its short-term commitments. Cash and cash equivalents are carried at amortized cost in the statement of financial position. g) Loans and advances to banks and to customers The Group’s lending activities can be grouped by method (indirectly through commercial banks in the form of refinancing loans and direct lending) and by type (program and non-program loans). The balance of loans and advances to banks includes refinancing program loans granted through commercial banks. Loans and advances to customers contain receivables from legal entities, licensed traditional small- scale producers and employees. Agricultural loans with mainly fixed interest rate are also recognized as loans and advances to customers. The balance of Deposits at central and other banks contains the interbank placements used in the course of liquidity management. Loans and advances to banks and to customers are carried either at amortized cost or fair valued through profit and loss in the statement of financial position dependent whether the SPPI test is passed or failed. h) Securities Securities contain government bonds and other debt securities, interest bearing or discount treasury bills, mortgage bonds, debt securities including fixed-income securities that are listed on stock exchange or traded on a regulated market (controlled by regulation or by stock exchange), and other debt securities regardless their name, including debt securities took over in return for receivables to minimize loss. Venture capital investments that cannot be classified as equity instruments under IAS 32 in which the Bank has no significant influence are also presented here. Since these instruments do not meet the SPPI test, the Group presents them within debt instrument, mandatorily fair valued through profit and loss. The related subscribed but not yet paid capital increase of these venture capital investments/notes that is payable as required by the investment plans is recognized among the capital commitments within off balance sheet items if the investment is closer to a loan commitment. Otherwise the not yet paid capital is recognized among the “Other liabilities” and be part of the investments initial cost.
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 31 Securities that were classified into “held to collect and sell” business category are measured at fair value through other comprehensive income. The basis of measurement is the average of best bid and ask prices published on the website of Government Debt Management Agency Ltd. on the reporting date. Securities classified as held to collect are measured at amortized cost, calculated by using the effective interest rate method. The Group applies impairment calculation for all its debt securities (except those fair valued through profit and loss) and the expected credit loss is recognized in profit and loss. i) Encumbered assets The encumbrance of the Bank’s eligible assets is mainly for ensuring the collateral for Funding for growth (“FGS”) program. The encumbered assets can be government securities, mortgage bonds and loans. The Bank does not present as encumbered assets those securities which are to ensure the continuity of liquidity management - including the ensurance of continuous transfers (Giro) and the possibility of a secured loan (repo) transaction with the Hungarian National Bank - as the Bank may also release the blocking of these securities. j) Repurchase and reverse repurchase agreements Securities sold under agreements to repurchase at a specified future date are not derecognized from the statement of financial position as the Group retains substantially all the risks and rewards of ownership. The corresponding cash received is recognized in the statement of financial position as an asset with a corresponding obligation to return it, including accrued interest as a liability within cash collateral on securities lent and repurchase agreements, reflecting the transaction’s economic substance as a loan to the Group. The difference between the sale and repurchase prices is treated as interest expense and is accrued over the life of agreement using the EIR. Conversely, securities purchased under agreements to resell at a specified future date are not recognized in the statement of financial position. The consideration paid, including accrued interest, is recorded in the statement of financial position, within cash collateral on securities borrowed and reverse repurchase agreements, reflecting the transaction’s economic substance as a loan by the Group. The difference between the purchase and resale prices is recorded in net interest income and is accrued over the life of the agreement using the EIR. Repo transactions are classified into the „Held to collect” business model and are measured at amortized cost using the effective interest rate method.
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 32 k) Investments Equity investments classified as controlling interest (subsidiaries) comprise those investments where the Bank is exposed to, or has rights to, variable returns from the involvement with the investee and has the ability to affect those returns through its power over the investee. These investments are fully consolidated in these consolidated financial statements. Equity investments classified as significant influence (associates) comprise those investments where the Bank through its direct ownership interest has the power to participate in the financial and operating policies of the investee, but not to control those activities. These associates are consolidated by using the equity method. Other equity investments comprise other shareholdings, which do not meet the above criteria. Other equity investments are accounted for in accordance with IFRS 9 at fair value through other comprehensive income unless they do not meet the equity instrument conditions set in IAS 32, in which case they are classified as debt instruments mandatorily fair valued through profit and loss. The investment portfolio includes investments that the Group intends to hold long term. The HDB Law determines the companies in which the Group can obtain controlling interest. The Group does not hold equity investments for trading purposes. l) Derivative financial instruments The Group uses derivative financial instruments, interest rate swaps, foreign exchange swaps and forward exchange contracts to manage its exposure to foreign exchange and interest rate risks arising from business activities. The recognition of interest income/expenses relating to derivative transactions are recognized in profit and loss as interest income and expense. Fair value changes are immediately recognized in the statement of comprehensive income on the “Gains or (-) losses on financial assets and liabilities held for trading, net” line. The Group does not undertake exposures for trading purposes, the Treasury department enters into transactions with the purpose of risk hedging, liquidity management and limit management. The purpose of market instruments is solely the hedging of risks deriving from the portfolio, the Group does not enter into transactions with speculative purposes. To reduce the interest rate risk, the Group exchanges the financial instruments with fixed interest rate to floating interest rate in the course of an interest rate swap. The interest rate swap deals are accounted for as fair value hedges. The realized fair value changes on the hedging instruments are presented as “Derivatives – Hedge accounting” (see Note 10). Foreign exchange swap deals are the exchanges of different foreign exchanges on a predetermined exchange rate. Foreign exchange swap deals are concluded with liquidity and risk management purposes and are presented as Derivative assets or liabilities (see Note 9). Cross currency interest rate swap deals (CCIRS) are interest rate swaps and foreign exchange swap deals made in a single transaction. The CCIRS deals are classified as at fair value through profit or loss upon initial recognition as a Derivative asset or liability.
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 33 m) Hedge accounting The Group uses derivative instruments to manage exposures to interest rate risk and partially foreign currency risk. The Group only enters into economic hedging transactions only and, if this hedging relationship is properly documented, the hedge accounting is applied for them. The Group applies IFRS 9 rules for its hedge accounting. Based on IFRS9 rules at inception of a hedge relationship the Group formally documents the relationship between the hedged item and the hedging instrument, including the nature of the risk, the objective and strategy for undertaking the hedge and the method to be used to assess the effectiveness of the hedging relationship. Fair value hedge Fair value hedges are concluded to reduce market risk. For qualifying and designated fair value hedges, the change in fair value of hedging instruments is recognized in the income statement on the line “Gains or (-) losses from hedge accounting, net“. The change in the fair value of the hedged item attributable to the hedged risk is also recognized in the same income statement line and the carrying amount of the hedged item is adjusted in the statement of the financial position. If the hedging instrument expires, is sold, terminated or exercised, the hedge relationship is terminated. In this case, the fair value adjustment of the hedged item shall be amortized to the income statement in the net interest income until maturity of the underlying financial instrument (hedged item). Cash flow hedge Currently the Group is not involved in any cash flow hedge relationship. n) Property, plant and equipment and Intangible assets Property, plant and equipment contains investments and capitalized, materialized assets that serves directly or indirectly the financial activities, that serves the business activities permanently for more than one year. Items of Property, plant and equipment are stated at historical cost less accumulated depreciation and accumulated impairment losses. Depreciation is charged to the income statement on a straight- line basis over the estimated useful lives of items of property, plant and equipment taking into consideration the residual value of the assets. Freehold lands, asset under construction is not depreciated. Intangible assets contain rights, and intellectual properties (software and other intellectual properties). The Group does not have any intangible assets with indefinite useful life. Intangible assets are carried at historical cost less accumulated amortization and accumulated impairment.
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 34 The estimated useful lives of each type of property, plant and equipment and intangible assets are the following: Estimated useful life (years) Property, plant and equipment Real estate 3 – 50 Developments on leased property 5 – 17 Machinery 2 – 7 Other equipment 5 – 7 Mobiles 2 Vehicles 4 Computer equipment 2 – 6 Right of use asset (real estate) 3 – 10 Right of use asset (parking places) 10 Right of use asset (vehicles) 4 - 5 Intangible asset Concessions and similar rights 6 Property rights connected to real estates 2 – 100 Software 1 – 8 Other intangible assets 3 – 6 o) Investment property Investment property is property (land and building or part of a building or both) held for the purpose of earning rental income or for capital appreciation. In the case of a partial own use, the property is an investment property only if the owner-occupied portion is insignificant. Investment property is measured initially at cost, including transaction costs. Subsequent to initial recognition, investment property is measured at cost less accumulated depreciation and impairment. Rental income is recognized in the income statement as other operating income. Depreciation is accounted for by using the straight-line method over the estimated useful life of the asset. The useful life of the asset is identical to those of buildings reported under property and equipment. p) Bonds issued Bonds issued contain the obligations arising from HUF and EUR issued bonds. Issued bonds are measured at amortized cost. That part of the issued EUR bonds of which interest rate risk is hedged using interest rate swaps are measured at amortized cost with fair value adjustment.
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 35 q) Provisions A provision is recognized, when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Provisions are reviewed quarterly and adjusted to reflect the best estimate of the expenditure required to settle the present obligation. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision is reversed. A provision should be used only for expenditures for which the provision was originally recognized. r) Offsetting Financial assets and financial liabilities are offsetted in the statement of financial position when and only when the Group has a legally enforceable right to set off the amounts and intends to settle them either on a net basis or at the same time intend to realise the assets and settle liabilities at the same time. The Group has various netting agreements in place with counterparties to manage the associated credit risks. Such arrangements primarily include repo and reverse repo transactions, securities borrowing and lending arrangements, and over-the-counter and exchange traded derivatives. The ISDA and similar master netting arrangements do not meet the criteria for offsetting in the statement of financial position. This is because they create for the parties to the agreement a right of set-off of recognised amounts that is enforceable only following an event of default, insolvency or bankruptcy of the Group or the counterparties or following other predetermined events. In addition, the Group and its counterparties do not intend to settle on a net basis or to realise the assets and settle the liabilities simultaneously. s) Commitments and contingencies Commitments and contingencies are a probable obligation that derives from a past event, and its existence will be confirmed by the occurrence or non-occurrence of one or more uncertain future events that are not entirely controlled by the Group, or a present obligation that derives from a past event, but is not recognized because it is not likely that an outflow of resources embodying economic benefits will be required to settle the obligation or the amount of the obligation cannot be reliably estimated. t) Interest income and expense In accordance with IFRS 9 interest income and expense are recorded using the effective interest rate (EIR) method for all financial instruments measured at amortized cost. Interest income on interest bearing financial assets measured at FVOCI under IFRS 9 are also recorded by using the EIR method. If expectations regarding the cash flows on the financial asset are revised for reasons other than credit risk the adjustment is booked as a positive or negative adjustment to the carrying amount of the asset in the balance sheet with an increase or reduction in interest income. The adjustment is subsequently amortized through Interest and similar income in the income statement. The Group calculates interest income by applying the EIR to the gross carrying amount of financial assets other than credit-impaired assets. When a financial asset becomes credit-impaired and is, therefore, regarded as ‘Stage 3’, the Group calculates interest income by applying the effective interest rate to the net amortized cost of the financial asset. If the financial assets recover and is no longer credit-impaired, the Group reverts to calculating interest income on a gross basis.
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 36 For purchased or originated credit-impaired (POCI) financial assets the Group calculates interest income by calculating the credit-adjusted EIR and applying that rate to the amortized cost of the asset. The credit adjusted EIR is the interest rate that, at original recognition, discounts the estimated future cash flows (including credit losses) to the amortized cost of the POCI assets. The Group also holds investments in assets with negative interest rates. The Group discloses interest paid on these assets as an interest expense. The Group has decided to include interest received and paid arising from financial instruments classified as FVTPL (including trading instruments) and from derivative instruments designated as hedge among "interest income" and "interest expense", i.e., the so-called "clean price" (net price) presentation method is applied. Interest income and expense include: • interest income or expense for financial assets and liabilities at amortized cost accounted by using effective interest method (including interest received or paid to banks or customers, interest received on purchase securities, interest paid on issued securities and negative interest of financial assets and liabilities), • interest income on financial assets at fair value through other comprehensive income accounted by using the effective interest method (including coupon interest received on securities and their discount/premium amortization), • contractual interest income received on financial assets mandatorily fair valued through profit and loss that are presented among Other similar income, • contractual interest income received on cash balances at central banks and other demand deposits are presented among Other similar income, • interest income from derivative transactions, also presented among Other similar income, while interest expense from derivative transactions are presented among Interest expense. u) Fee and commission income and expense Fee and commission income and expense include amounts from financial activities of the Bank that are not included in interest income and expense, nor are they considered as incremental costs at the initial recognition, for example transaction fees, postal fees, guarantee fees, loan examination fees and other financial service fees. The lending related fee and commission income and expense of those loans which failed the SPPI test is also presented in these lines. v) Dividend income Dividend income is recognized when the amount of dividend has been determined and approved.
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 37 w) Current and other taxes Current tax assets and liabilities for the current year and prior years are measured at the amounts expected to be recovered from or to be paid to the tax authorities. The tax rates and tax laws used to compute the amounts are those that are enacted as of the balance sheet date. Current tax comprises income tax, such as corporate income tax, local business tax and innovation contributions. The amount of corporate tax payable is based on the tax obligations determined in accordance with Hungarian laws and it is adjusted by the deferred tax. Corporate tax and deferred tax are recognized in the income statements, except when tax relates to items recognized directly in equity, in which case it is recognized in the statement of other comprehensive income. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the reporting date. The base of the income tax is the profit before tax adjusted by the tax base modifying items. The corporate tax was unified at a flat rate of 9% both in 2022 and in 2021. The local tax and the innovation contribution established based on the Hungarian tax legislation in force are calculated for the same basis, their applicable rates are different being 2% for the former and 0.3% for the latter. Since their basis is based on net revenue, these were also classified among income taxes. Deferred tax is calculated using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The Group recognizes deferred tax asset if it is probable that the temporary differences will reverse in the foreseeable future. Deferred tax assets are recognised for unused tax losses, 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 used. An exception is where the deferred tax asset is a result of the initial recognition of an asset or liability in such a transaction that is not a business combination and does not affect either accounting profit or taxable profit (negative tax base) at the time of the transaction. Whether future taxable profits available are primarily determined based on the reversal of relevant taxable temporary differences. If the amount of taxable temporary differences is insufficient to recognise a deferred tax asset in full, then future taxable profits, adjusted for reversals of existing temporary differences, are considered, based on business plans for individual subsidiaries in the Group. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised; such reductions are reversed when the probability of future taxable profits improves. The amount of deferred tax provided is based on the expected manner of realization or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the reporting date. Deferred tax assets and liabilities are netted against each other at each consolidated entity level if the company has a legally enforceable right to set off current tax receivable and liabilities and deferred tax receivable and liabilities relate to income taxes levied by the same taxation authority but are not netted among Group entities.
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 38 The special bank tax of financial institutions is presented among other expenses. The tax is in effect since 2010. The base of the special tax is the adjusted balance sheet total of the second preceding year (meaning 2020 for year 2022 and 2019 for year 2021), the rate was 0.15% under HUF 50 billion, and 0.20% above HUF 50 billion both in 2022 and 2021. The Group recognizes the special bank tax of financial institutions when it becomes legally enforceable (i.e., when the obligating event arises) which is on 1 January each year. In order to implement the Economic Protection Action Plan, a special credit institution tax on the epidemiological situation for replenishing the Epidemiological Fund was introduced for banks in 2020. The basis for this special tax equals to the base for the special bank tax of financial institution that exceed the HUF 50 billion and the applicable rate is 0.19%. Under the special tax act, the next 5 years of bank special tax liability will be deducted with this amount in five equal annual instalments therefore was not recognized in the profit and loss of 2020 (see note 13). An extra profit tax was introduced during 2022 that aimed to keep public finances in balance. This extra profit tax is payable in 2022 and in 2023 being 10% in 2022 and 8% in 2023 of the similar tax bases that of the special bank tax for financial institutions. The Group recognizes this extra profit tax when it becomes legally enforceable (i.e., when the obligating event arises). x) Statement of cash flows Statement of cash flows provide useful information to the users of financial statements regarding a basis to assess the ability of the Group to generate cash and cash equivalents and the needs of the Group to utilize those cash flows. For the purposes of reporting cash flows, cash and cash equivalents include cash, balances and placements and the overnight deposits with the National Bank of Hungary or other financial institutions. y) Events after the reporting period Events after the reporting period are those events, favourable and unfavourable, that occur between the reporting date and the date when the financial statements are authorized for issue. These events are adjusting and non-adjusting events. All adjusting events after reporting date have been considered in the preparation of the consolidated financial statements of the Group. The material non-adjusting events after the reporting date are presented in Note 41. z) Reclassification of previously presented balances During 2022 the Group has discovered that the amount of general reserve allocation from the retained earnings to other reserves presented in 2021 financial statements was based on a preliminary amount instead of the final amount as a consequence the balance of retained earnings and other reserved presented as at 31 December 2021 was incorrect. The balances were corrected by reclassifying the prior period data as presented below. 31/12/2021 Reclassified 31/12/2021 Reported previously Impact Retained earnings 439 294 145 Other reserves 66 228 66 373 (145)
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 39 aa) New standards and interpretations Standards and Interpretations effective in the current period Several amendments are effective from 1 January 2022 that do not have a material effect on the Group’s financial statements. • Onerous Contracts – Cost of Fulfilling a Contract (Amendments to IAS 37). • COVID-19-Related Rent Concessions beyond 30 June 2021 (Amendment to IFRS 16). • Annual Improvements to IFRS Standards 2018–2020. • Property, Plant and Equipment: Proceeds before Intended Use (Amendments to IAS 16). • Reference to Conceptual Framework (Amendments to IFRS 3). Standards issued by IASB and adopted by EU but their application date is after 31 December 2022 The following new and amended standards are not expected to have a significant impact on the Group’s consolidated financial statements. • Amendments to IAS 12 Income Taxes: Deferred Tax related to Assets and Liabilities arising from a Single Transaction (issued on 7 May 2021 and effective for annual periods beginning on or after 1 January 2023) • Amendments to IAS 8 Accounting policies, Changes in Accounting Estimates and Errors: Definition of Accounting Estimates (issued on 12 February 2021 and effective for annual periods beginning on or after 1 January 2023) • Amendments to IAS 1 Presentation of Financial Statements and IFRS Practice Statement 2: Disclosure of Accounting policies (issued on 12 February 2021 and effective for annual periods beginning on or after 1 January 2023) • IFRS 17 Insurance Contracts (issued on 18 May 2017); including Amendments to IFRS 17 (issued on 25 June 2020 and effective for annual periods beginning on or after 1 January 2023) Unless otherwise described above, the new standards and interpretations are not expected to significantly affect the Group’s consolidated financial statements. Standards and Interpretations issued by IASB but not yet adopted by the EU: i. Amendments to IAS 1 Presentation of Financial Statements: • Classification of Liabilities as Current or Non-current Date (issued on 23 January 2020); • Classification of Liabilities as Current or Non-current - Deferral of Effective Date (issued on 15 July 2020); and • Non-current Liabilities with Covenants (issued on 31 October 2022) ii. Amendments to IFRS 16 Leases: Lease Liability in a Sale and Leaseback (issued on 22 September 2022) The implementation of these amendments, new standards and interpretations are not expected to affect significantly the annual financial statements of the Group.
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 40 4. CASH, CASH BALANCES AT THE CENTRAL BANKS AND OTHER DEMAND DEPOSIT 2022 2021 Cash 0 6 Cash balances with National Bank of Hungary (NBH) 89 392 162 675 Overnight deposits 57 908 161 019 Statutory reserve 31 484 1 656 Other demand deposits 9 619 6 870 Gross balances 99 011 169 551 Impairment (10) (26) Total 99 001 169 525 The Bank is obliged to keep a minimum reserve at the central bank, which equals 5% of the short term (within a year category) deposits of its domestic and foreign customers and the currency deposits of foreign customers. According to the regulations of the National Bank of Hungary, the required reserve ratio was 1% in 2021 and till 30 September 2022, and 5% from 1 October 2022. As a further provision, the minimum reserve rate has become optional for quarterly periods in the range of 5-10%. In the IVth quarter of 2022, the Bank opted for a reserve obligation of 6% (HUF 30 592 million), which had to be met on a monthly average, while observing the daily minimum. The daily minimum value of the mandatory reserve was HUF 25 493 million in the IVth quarter of 2022 (HUF 956.9 million in December 2021). 5. NON-TRADING FINANCIAL ASSETS MANDATORILY AT FAIR VALUE THROUGH PROFIT OR LOSS 5.1 DEBT SECURITIES 2022 2021 Debt securities Venture capital note – investment type 4 364 3 984 Venture capital note – loan type 365 283 56 529 Total 369 647 60 513 Loan type venture capital note represents such funds where a capital and also a yield guarantee is involved to the Group, therefore these investments have loan features as well. All the other type of venture capital notes belongs to the investment type subheading. At year end 2022 HUF 2 335 million (2021: HUF 2 784 million) from the above balance of “Venture capital note – investment type” representing Central European Fund of Funds is attributable to subscribed but not yet paid capital increase that is payable as required by the investment plans. The unpaid capital increase will be paid in accordance with the drawdowns of fund managers to finance the investments made. The Group’s total exposure to equity funds recognised in the financial statements as associates, equity investments or loans amounts to HUF 839.9 billion. In this portfolio of the Bank, the 3 largest non- group fund managers have a total exposure of HUF 629.8 billion (as associates, equity investments and loans). Based on section 8 (1b) of the MFB Act there is no client group consideration if MFB Zrt. provided a loan to them for the purpose of subscribing or purchasing investment units and which would constitute a single risk factor with regard to the investment fund, the fund manager or their interlinks.
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 41 5.2 LOANS 2022 Stage 1 Stage 2 Stage 3 Total Loans and advances to banks Municipality loan program 22 511 0 0 22 511 Business development loan program 3 384 0 0 3 384 Agricultural development loan program 5 355 14 0 5 369 Retail loan program 95 0 0 95 31 345 14 0 31 359 Loans and advances to customers General governments 484 0 0 484 Other financial corporations 1 386 672 55 2 113 Non-financial corporations 2 584 1 064 99 3 747 Households 98 4 13 115 4 552 1 740 167 6 459 Total 35 897 1 754 167 37 818 2021 Stage 1 Stage 2 Stage 3 Total Loans and advances to banks Municipality loan program 24 167 63 0 24 230 Business development loan program 4 578 0 0 4 578 Agricultural development loan program 595 20 0 615 Retail loan program 174 0 0 174 29 514 83 0 29 597 Loans and advances to customers General governments 555 0 0 555 Other financial corporations 2 350 549 0 2 899 Non-financial corporations 2 648 712 129 3 489 Households 136 12 18 166 5 689 1 273 147 7 109 Total 35 203 1 356 147 36 706 Non trading financial assets mandatorily at fair value through profit or loss includes those financial instruments that were classified as held to collect business model but failed the SPPI test as the interest rate is based on EURIBOR while the loans are denominated in Hungarian forint. Also, the loans with equity features were classified here. Loans and advances to banks are exclusively the refinancing loans to commercial banks that are the sources of the customer loans at those commercial banks.
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 42 6. FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME 2022 2021 Equity instruments Listed on stock exchange 17 694 0 Not listed on stock exchange 13 795 14 066 31 489 14 066 Debt securities Hungarian government bonds 40 694 32 537 Hungarian discount treasury bills 19 843 0 60 537 32 537 from this encumbered assets 729 6 547 Total 92 026 46 603 Debt securities 2022 Gross carrying amount Impairment Fair value adjustment Fair value Hungarian government bonds 46 596 0 (5 902) 40 694 Hungarian discount treasury bills 20 018 0 (175) 19 843 66 614 0 (6 077) 60 537 Equity instruments European Investment Fund 204 596 Other 0 9 949 Kall Ingredients Kft. 1 221 7 004 OTP OJSC (Investberbank) 0 522 Other investments by venture capitals (796) 13 418 629 31 489 Fair value adjustment recognized in valuation reserve (5 448) Valuation reserve after deferred tax adjustment (5 505) Debt securities 2021 Gross carrying amount Impairment Fair value adjustment Fair value Hungarian government bonds 35 077 0 (2 540) 32 537 Treasury bills 0 0 0 0 35 077 0 (2 540) 32 537 Equity instruments European Investment Fund 166 550 Other 0 3 701 Kall Ingredients Kft. 674 6 458 OTP OJSC (Investberbank) 0 522 Venture capital investments (622) 2 835 218 14 066 Fair value adjustment recognized in valuation reserve (2 322) Valuation reserve after deferred tax adjustment (2 342) All debt securities are classified as stage 1 both as at 31 December 2022 and 2021. Equity instruments for which the Group has chosen the fair value through other comprehensive income option at IFRS 9 transition are presented in this category. Other investments that do not qualify as associates are presented here, as the Bank does not have trading intent with them therefore fair valuation through profit and loss was not applied.
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 43 The Venture capital investment line includes investments by Group owned venture capital funds. These entities on the one hand have a few years of business history, or even those that do not have a business history, which does not allow the acquisition of funds from the credit market or traditional capital markets. In addition to the start-up companies, the development-phase companies are also part of this investment portfolio. In addition, small and medium-sized enterprises that have been operating for a long time are also included in the portfolio, where the aim of the investment is to increase the competitiveness and productivity of enterprises. The projected average maturity is 3-7 years, and the ownership share acquired is between 9-50%. 7. FINANCIAL ASSETS AT AMORTIZED COST 2022 2021 Debt securities Hungarian government bonds 42 158 53 494 Corporate bonds 390 765 325 899 Mortgage bonds 6 180 6 145 439 103 385 538 from this encumbered assets 114 211 93 353 Customer loans General governments 53 603 38 554 Other financial corporations 294 608 304 089 Other non-financial corporations 818 040 685 164 Households 132 246 127 740 1 298 497 1 155 547 from this encumbered assets 202 254 238 446 Loans to banks Refinancing loans 346 827 Other loans 79 981 56 777 80 327 57 604 Deposits at central and other banks Central bank deposits 0 19 801 Other bank deposits 26 847 22 588 26 847 42 389 Other financial assets Trade receivables 1 119 320 Margin accounts 3 203 37 4 322 357 from this encumbered assets 3 203 37 Total 1 849 096 1 641 435 from this encumbered assets 319 668 331 836 The encumbered assets among “Debt securities” and “Loans and receivables” include assets offered as collateral for the National Bank of Hungary and these assets were collaterialzed under the Hungarian National Bank Funding for Growths (FGS) program and represent the current net book value of the customer loans disbursed under this scheme. The new FGS scheme, which was launched in 2020, was also collaterialized by the loans disbursed, supplemented with individual corporate loans that was also possible to be collaterialized for this purpose, which the Bank took advantage of. The current net book value of these disbursed loans is presented as encumbered assets within „Customers loans” line. For the other two previous FGS programs, government bonds were offered as collateral. The year end net book value of these government bonds is shown as encumbered asset under „Debt securities” line. From the line “Other financial assets” the margin accounts are shown as encumbered assets. The remaining encumbered assets represent the pledge on the subsidiaries assets being the collateral for their external loans.
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 44 7.1 LOANS 2022 GROSS OUTSTANDING Stage 1 Stage 2 Stage 3 POCI Total Customer loans General governments 53 549 0 0 142 53 691 Other financial corporations 204 499 93 613 10 472 0 308 584 Other non-financial corporations 483 638 351 821 26 617 6 972 869 048 Households 57 893 19 405 11 66 397 143 706 799 579 464 839 37 100 73 511 1 375 029 Loans to banks Refinancing loans 346 0 0 0 346 Other loans 79 986 0 0 0 79 986 80 332 0 0 0 80 332 IMPAIRMENT Customer loans General governments (88) 0 0 0 (88) Other financial corporations (760) (4 785) (8 431) 0 (13 976) Other non-financial corporations (3 309) (31 199) (14 393) (2 107) (51 008) Households (3) (69) (7) (11 381) (11 460) (4 160) (36 053) (22 831) (13 488) (76 532) Loans to banks Refinancing loans 0 0 0 0 0 Other loans (5) 0 0 0 (5) (5) 0 0 0 (5) NET CARRYING AMOUNT Customer loans General governments 53 461 0 0 142 53 603 Other financial corporations 203 739 88 828 2 041 0 294 608 Other non-financial corporations 480 329 320 622 12 224 4 865 818 040 Households 57 890 19 336 4 55 016 132 246 795 419 428 786 14 269 60 023 1 298 497 Loans to banks Refinancing loans 346 0 0 0 346 Other loans 79 981 0 0 0 79 981 80 327 0 0 0 80 327 TOTAL NET CARRYING AMOUNT 875 746 428 786 14 269 60 023 1 378 824 Due to the Bank's role as a development bank, the loan portfolio is concentrated, the 10 largest utilisation represents 47.9% the direct loan portfolio, of which 10.7% of exposure is provided by a state guarantee.
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 45 2021 GROSS OUTSTANDING Stage 1 Stage 2 Stage 3 POCI Total Customer loans General governments 38 672 0 0 18 38 690 Other financial corporations 209 601 96 764 0 142 306 507 Other non-financial corporations 418 897 274 731 21 565 7 403 722 596 Households 61 087 7 676 11 68 853 137 627 728 257 379 171 21 576 76 416 1 205 420 Loans to banks Refinancing loans 827 0 0 0 827 Other loans 56 782 0 0 0 56 782 57 609 0 0 0 57 609 IMPAIRMENT Customer loans General governments (136) 0 0 0 (136) Other financial corporations (348) (2 025) 0 (45) (2 418) Other non-financial corporations (1 704) (21 778) (12 092) (1 858) (37 432) Households (4) (79) (7) (9 797) (9 887) (2 192) (23 882) (12 099) (11 700) (49 873) Loans to banks Refinancing loans 0 0 0 0 0 Other loans (5) 0 0 0 (5) (5) 0 0 0 (5) NET CARRYING AMOUNT Customer loans General governments 38 536 0 0 18 38 554 Other financial corporations 209 253 94 739 0 97 304 089 Other non-financial corporations 417 193 252 953 9 473 5 545 685 164 Households 61 083 7 597 4 59 056 127 740 726 065 355 289 9 477 64 716 1 155 547 Loans to banks Refinancing loans 827 0 0 0 827 Other loans 56 777 0 0 0 56 777 57 604 0 0 0 57 604 TOTAL NET CARRYING AMOUNT 783 669 355 289 9 477 64 716 1 213 151 Information about modifications of loans that have not resulted in derecognition is as follows: 2022 2021 Amortized cost of loans with lifetime ECL immediately before contractual modification that was not a derecognition event 121 640 130 165 from this resulted from the moratorium settlement 25 474 112 498 Gains less losses recognized in profit or loss on modifications of loans with lifetime ECL that did not lead to derecognition (2 284) (796) from this resulted from the moratorium settlement (471) (1 083) from this interest freeze rule impact (1 633) 0 Gross carrying amount of loans that were contractually modified (without derecognition) in the past when measured at lifetime ECL and which were reclassified to Stage 1 (12 months ECL) during the current year 1 601 1 212 The Group does not have any such outstanding contractual amounts of loans and advances to customers written off that are still subject to enforcement activity neither as at 31 December 2022 nor at 31 December 2021.
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 46 7.1.1 INFORMATION ON THE RULES OF THE PAYMENT MORATORIUM INTRODUCED IN THE CONTEXT OF COVID-19 I. Period of the payment moratorium from the 19th of March 2020 until the 31st of December 2020 (Moratorium 1) In order to avert the consequences of the COVID-19 pandemic, causing mass illness endangering life and property, and to protect the health and lives of Hungarian citizens, the Government has declared a state of emergency throughout Hungary by Government Decree 40/2020. (III.11.). According to the legislation, -namely Government Decree 47/2020. (III.18.) on immediate measures necessary to mitigate the impact of the coronavirus pandemic on the national economy, Government Decree 62/2020. (III. 24.) on payment moratorium (altogether called as emergency government decrees) and Act LVIII of 2020 on Transitional Rules and Epidemiological Preparedness Related to the Elimination of the State of Emergency- from the 19th of March 2020 to the 31st of December 2020, the Group granted the debtors a capital moratorium, an interest moratorium and a fee moratorium (Moratorium 1/ Moratorium) with respect to the debtor's obligation to pay capital, interest and/or fees arising from a loan under a loan/credit agreement that has been already contracted, disbursed and not yet terminated at midnight on the 18th of March 2020. Main rules of Moratorium 1 The moratorium on payments may be applied to loans already disbursed by the debtor under its contract by midnight on the 18th of March 2020.The moratorium on payments extends to retail and corporate debtors, excluding the Hungarian state, local governments, and except for financial enterprises, entities2 as defined in paragraph 39 of Act CXXXIX of 2013 on the National Bank of Hungary. However, the Bank extended the payment moratorium to its financial enterprises due to refinanced loans and loans channelled through intermediaries. According to the resolution of the Managing Authorities, the Group also applies the legal moratorium to payment obligations arising from transactions provided by the Bank covered from EU funds. The Bank, as fund-implementing organization, performs these activities and conducts analytics for the disposal of the Managing Authority, thus these items are processed by the Bank, as well, albeit these transactions are excluded from the Group’s balance sheet, thereby excluded from this report, as well. The Group also applied the moratorium on receivables that were already due at midnight on the 18th of March 2020 - in the case of loans in connection with the Growth Loan Program, on the 16th of March 2020- if the contract had not been terminated. Claims arising from a contract terminated for reasons other than late payment, including instalment payment agreements concluded between the Group and the customer, are not covered by the moratorium. These receivables are subjects to being enforced directly by the Group. Moratorium on payment is automatically due to the eligible debtor. The debtor subject to a payment moratorium may, at any time, by implied conduct, decide that it will fulfil its payment obligations in accordance with the original terms of the contract in its entirety or partially only. In case the debtor has availed itself of the payment moratorium, the principal debt may not be increased by the amount of interest or fees not paid during the moratorium, nor during the moratorium, nor after the expiry of the moratorium. Interest or fees accumulated and not duly paid during the moratorium, combined with the instalments due during the remaining term, shall be paid 2 Enterprises supervised by the Hungarian National Bank are, in particular, credit institutions, mortgage credit institutions, housing savings banks, insurance companies and private pension funds.
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 47 in equal annual instalments during its term after the termination of the moratorium. Upon the aforementioned termination of the moratorium, the term itself shall be extended in order that the sum of the instalments due and the interest or fees payable in instalments arising under the moratorium does not exceed the amount of the instalments under the original contract. Due to the moratorium, credit agreements, loan agreements, guarantee agreements and ancillary collateral agreements are getting automatically amended by the force of law, i.e., they had not have to be formally amended and notarized. Moratorium 1 got terminated on the 31st of December 2020. In January 2021 the Bank sent information notice to customers who have participated in the payment moratorium about the possible changes in the term and grace period due to the unpaid interest, fee and principal debts accumulated during the term of the moratorium. II. Period of the payment moratorium from the 1st of January 2021 until the 31st of October 2021 (Moratorium 2) According to the decision of the Government, it has been considered justified to maintain the protection provided by Moratorium 1. With this in mind, from the 1st of January 2021 until the 30th of June 2021, the Group had granted a moratorium on capital, interest and fee (hereinafter referred to as Moratorium 2) arising from a loan under a loan/credit agreement that has been already contracted and disbursed at midnight on the 18th of March 2020 based on the Act CVII of 2020 on transitional measures to stabilize the situation of certain priority social groups and enterprises in financial difficulties, as well as Government Decree 637/2020 (XII. 22.) on the introduction of special emergency rules for loan repayment moratorium, supplementing it, extended it firstly from the 1st of January 2021 until the 30th of September 2021and later on, until the 31st of October 2021 by Government Decrees 317/2021. (VI.9.) and 536/2021. (IX.15.) amending the original Government Decree 637/2020. (XII. 22). Main rules of Moratorium 2 Bearing that in mind that Moratorium 1 has gotten terminated on the 31st of December 2020, Moratorium 2 had been due to eligible debtors availing themselves of the Moratorium previously, with unchanged conditions. A debtor who has been otherwise entitled to use Moratorium 2, nevertheless has not availed itself of the payment deferral during Moratorium 1, had to declare its intention of taking advantage of the moratorium explicitly. Otherwise, Moratorium 2 had been regulated led by the very same rules as set out in point I.
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 48 III. Period of the payment moratorium from the 1st of November 2021 until the 31st of July 2022 (Moratorium 3) Following the expiry of the Moratorium 2, the Government considered it necessary to further ensure a moratorium on payments for certain social groups, consequently, Government Decree 536/2021. (IX.15.) amending Government Decree 637/2020 (XII. 22.) on the introduction of special emergency rules for loan repayment moratorium allows a moratorium on payment to be maintained from the 1st of November 2021 until the 30th of June 2022 for the debtor, on application submitted to the creditor, in case the eligibility conditions are met, who/which has availed itself of the moratorium in the month of September 2021, i.e., has been entitled to avail itself of the moratorium on payment from the 1st of January 2021 and the payment of the principal, interest or fee debt became due during the period of the moratorium until the 31st of October 2021. Government Decree 216/2022. (VI. 17.) on the derogation of Act CVII of 2020 on transitional measures to stabilize the situation of certain priority social groups and enterprises in financial difficulties has prolonged Moratorium 3 until the 31 st of July 2022 with regard to moratorium 4 introduced on the 1 st of August 2022, Main rules of Moratorium 3 Moratorium 3 is being regulated led by the very same rules as set out in point I, except for that the debtor entitled to avail itself of Moratorium 3 had to submit a request to the Group to maintain the payment moratorium by the 31st of October 2021. In the case of natural persons, persons who, at the time of the submission of the application, are pregnant, raising a child, seeking employment, having a public employment legal relationship, or receiving pension are entitled to benefit from the Moratorium 3. A natural person debtor has been entitled to file an application for Moratorium 3 even if the eligibility conditions were met in the case of a close relative living together with it under the Civil Code. A debtor who qualifies as a business is entitled to use Moratorium 3 if its net sales from the activities of the business have decreased by at least 25% in the 18 months prior to the application for availing itself of Moratorium 3 and the company applying for availing itself of Moratorium 3 has not entered into a new agreement to take a soft loan (discounted loan for economic recovery) or another type of loan during the period in between. The debtor had to declare the fulfilment of the conditions of eligibility in the awareness of its criminal liability, and/or it had to declare in statement that it is in possession of any kind of documents of probative value supporting and corroborating the eligibility. The Board of Directors of the Bank approved the continuous application of the decisions of the Board of Directors previously taken in respect of Moratorium 1 and Moratorium 2 with respect to Moratorium 3, as well, by its decision 199/2021 (XI.24). IV. Period of the payment moratorium from the 1st of August 2022 until the 31st of December 2022 (Moratorium 4) The Government has not changed its stance concerning considering it necessary to further ensure a moratorium on payments, in accordance with the provisions of Government Decree 216/2022. (VI. 17.) on the derogation of Act CVII of 2020 on transitional measures to stabilize the situation of certain priority social groups and enterprises in financial difficulties that has allowed to sustain the moratorium from the 1st of August 2022 until the 31st of December 2022, on the basis of an application to the creditor by the debtor who had requested an extension of the moratorium in a declaration and had made use of the moratorium in June 2022.
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 49 Main rules of Moratorium 4 Moratorium 4 is subject to the rules described above in Section I, except that the debtor entitled to benefit from Moratorium 4 had been obliged to send the Group a request for the sustenance of the moratorium on payments until the 31st of July 2022. The Board of Directors of the Bank have approved by its Resolution 126/2022 (VIII.30.) that the Board of Directors' decisions taken in respect of Moratorium 1, Moratorium 2 and Moratorium 3 shall be applied mutatis mutandis by the Group in respect of Moratorium 4. V. The agricultural credit moratorium until the 31st of December 2023 (agricultural credit moratorium) By Government Decree 292/2022. (VIII. 8.) on the introduction of special rules for the moratorium on loan repayments in the event of the state of emergency due to damage to agriculture caused by extreme weather conditions, the Government grants the possibility of a moratorium on payments, on application to the creditor, from the 1st of September 2022 until the 31st of December 2023 for loans disbursed under a loan or credit agreement outstanding on the 31st of August 2022, if a) the debtor's net turnover in 2021 originated from the crop, animal production, hunting and related service activities (TEÁOR: 01 and ÖVTJ: 01), forestry (TEÁOR: 02 and ÖVTJ: 02) and fish farming (TEÁOR: 03 and ÖVTJ: 03) sectors, excluding the purchase value of goods sold, amounts to at least 50% of its net turnover in 2021, or b) the purpose of the credit/loan corresponds to one of the categories referred to in point (a) above. Main rules of Agricultural credit Moratorium The agricultural credit moratorium is available if the eligibility criteria are met, provided that the debtor has submitted an application for the moratorium to the Group by the 15th of September 2022. The agricultural credit moratorium also constitutes a prohibition on the cancellation of the loan at the very same time: the credit and loan contracts cannot be terminated by notice of cancellation for non-payment of principal, interest and charges from the date of entry into force of Government Decree 292/2022. (VIII. 8.) until the 31st of December 2023, which applies to all eligible debtors under the conditions described above. In addition to the above, the prohibition on the cancellation of the loan also applies to a debtor who has not declared that it wishes to be a subject to a moratorium on payments. The Board of Directors of the Bank have approved by its Resolution 126/2022 (VIII.30.) that the Board of Directors' decisions taken in respect of Moratorium 1, Moratorium 2 and Moratorium 3 shall be applied mutatis mutandis by the Group in respect of the agricultural credit moratorium. VI. Impact of the moratoria for the loans presented in these financial statements The table below includes information on loans and advances measured at amortized cost and subject to legislative moratoria and those subject to the Group extension when it was used actually by the customers. The modification loss column contains the loss calculated for all the agricultural moratorium, the moratorium 3 and the moratorium 4 (2021: moratorium 3 and moratorium 2). The presented loan balances also includes the subportfolio for which moratorium was closed and cleared (moratorium 3 for 2022 and moratorium 2 for 2021), while the column "of which" shows the subportfolio still under moratorium as at the end of the year (agricultural moratorium for 2022 and moratorium 3 for 2021).
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 50 GROSS OUTSTANDING 2022 Stage 1 Stage 2 Stage 3 POCI Total from this agricult. moratorium Contract modification loss from this agricult. moratorium Customer loans General government* 0 0 0 0 0 0 Other financial corporations 6 190 6 670 1 657 0 14 517 180 Other non-financial corporations 0 6 822 0 0 6 822 3 563 Households 171 10 258 2 176 10 607 10 132 6 361 23 750 1 659 176 31 946 13 875 Loans to banks Refinancing loans 13 0 0 0 13 0 Other loans 0 0 0 0 0 0 13 0 0 0 13 0 IMPAIRMENT Customer loans General government 0 0 0 0 0 0 Other financial corporations (16) (1 313) (1 280) 0 (2 609) (2) Other non-financial corporations 0 (826) 0 0 (826) (4) Households 0 (2) (1) (80) (83) (3) (16) (2 141) (1 281) (80) (3 518) (9) Loans to banks Refinancing loans 0 0 0 0 0 0 Other loans 0 0 0 0 0 0 0 0 0 0 0 0 NET CARRYING AMOUNT Customer loans General government 0 0 0 0 0 0 0 0 Other financial corporations 6 174 5 357 377 0 11 908 178 (115) (3) Other non-financial corporations 0 5 996 0 0 5 996 3 559 (339) (11) Households 171 10 256 1 96 10 524 10 129 (99) (97) 6 345 21 609 378 96 28 428 13 866 (553) (111) Loans to banks Refinancing loans 13 0 0 0 13 0 0 0 Other loans 0 0 0 0 0 0 0 0 13 0 0 0 13 0 0 0 TOTAL NET CARRYING AMOUNT 6 358 21 609 378 96 28 441 13 866 (553) (111) Other modification losses (226) 0 Interest rate freeze rule impact (Note 7.1.2) (2 239) (394) CONTRACT MODIFICATION LOSS TOTAL (3 018) (505)
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 51 GROSS OUTSTANDING 2021 Stage 1 Stage 2 Stage 3 POCI Total from this moratorium 3 Contract modification loss from this moratorium 3 Customer loans General government* 0 0 0 0 0 0 Other financial corporations 24 175 73 309 0 0 97 484 18 395 Other non-financial corporations 21 161 33 089 5 447 0 59 697 8 821 Households 19 117 2 172 0 229 21 518 2 847 64 453 108 570 5 447 229 178 699 30 063 Loans to banks Refinancing loans 656 0 0 0 656 0 Other loans 0 0 0 0 0 0 656 0 0 0 656 0 IMPAIRMENT Customer loans General government 0 0 0 0 0 0 Other financial corporations (66) (1 553) 0 0 (1 619) (279) Other non-financial corporations (52) (14 184) (3 582) 0 (17 818) (742) Households 0 (3) 0 (69) (72) (69) (118) (15 740) (3 582) (69) (19 509) (1 090) Loans to banks Refinancing loans 0 0 0 0 0 0 Other loans 0 0 0 0 0 0 0 0 0 0 0 0 NET CARRYING AMOUNT Customer loans General government 0 0 0 0 0 0 0 0 Other financial corporations 24 109 71 756 0 0 95 865 18 116 (862) (246) Other non-financial corporations 21 109 18 905 1 865 0 41 879 8 079 (443) (139) Households 19 117 2 169 0 160 21 446 2 778 (27) (9) 64 335 92 830 1 865 160 159 190 28 973 (1 332) (394) Loans to banks Refinancing loans 656 0 0 0 656 0 0 0 Other loans 0 0 0 0 0 0 0 0 656 0 0 0 656 0 0 0 TOTAL NET CARRYING AMOUNT 64 991 92 830 1 865 160 159 846 28 973 (1 332) (394) Other modification gains 287 CONTRACT MODIFICATION LOSS TOTAL (1 045) (394)
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 52 The table below includes information on loans and advances valued at fair value through profit or loss and subject to legislative moratoria and those subject to the Group extension when it was used actually by the customers. 2022 Stage 1 Stage 2 Stage 3 Total from this Agricult. moratorium Loans and advances to banks Municipality loan program 0 0 0 0 0 Business development loan program 813 0 0 813 56 Agricultural development loan program 519 14 0 533 516 Retail loan program 3 0 0 3 0 1 335 14 0 1 349 572 Loans and advances to customers General governments 0 0 0 0 0 Other financial corporations 317 55 0 372 0 Non-financial corporations 0 44 0 44 0 Households 0 1 0 1 1 317 100 0 417 1 Total 1 652 114 0 1 766 573 2021 Stage 1 Stage 2 Stage 3 Total from this Moratorium 3 Loans and advances to banks Municipality loan program 0 0 0 0 0 Business development loan program 4 032 0 0 4 032 939 Agricultural development loan program 269 20 0 289 22 Retail loan program 57 0 0 57 5 4 358 20 0 4 378 966 Loans and advances to customers General governments 0 0 0 0 0 Other financial corporations 2 280 549 0 2 829 2 390 Non-financial corporations 253 64 51 368 360 Households 116 10 8 134 123 2 649 623 59 3 331 2 873 Total 7 007 643 59 7 709 3 839
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 53 7.1.2 INFORMATION ON THE RULES OF THE INTEREST RATE FREEZE MECHANISM I. Period of the interest rate freeze from the 15th of November 2022 until the 30th of June 2023 (Interest rate freeze) The Government, by Government Decree 415/2022. (X. 26.) on the measures necessary to mitigate the negative economic impact on micro, small and medium-sized enterprises due to the state of emergency, has imposed an interest rate freeze on debtors that qualify as SMEs under the Act on small and medium-sized enterprises (SME) and support for their development. The interest rate freeze applies to SME debtors concerning HUF-based loan and credit agreements and financial leasing agreements with variable interest rates not covered by a state aid granted by the creditor on a commercial basis for the period stretching from the 15th of November 2022 until the 30th of June 2023. The interest rate freeze also applies in the case of refinancing granted to a non- group financial undertaking to finance a contract in accordance with Government Decree 415/2022 (X. 26.), i.e., where the contract concluded between the financial undertaking and the debtor falls within the scope of Government Decree 415/2022 (X. 26.). Main rules of Interest Rate Freeze: During the interest rate freeze period a. the interest rate applicable from the contractual reference date following the 15th of November 2022 shall be set at the reference rate that, b. the reference rate of interest from the contractual reference date preceding the 15th of November 2022 shall be set at the reference rate that shall not exceed the amount of reference rate contractually determined that were in force on the 28th of June 2022. The principal and interest due shall not be increased by the amount of interest not paid during the period of the interest rate freeze. II. Impact of the interest rate freeze mechanism for the loans presented in these financial statements The table below includes information on loans and advances measured at amortized cost and subject to interest rate freeze mechanism when it was used actually by the customers. The modification loss column contains the loss calculated for these loans as at 31 December 2022. There was not any impacted loans and advances valued at fair value through profit or loss.
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 54 GROSS OUTSTANDING 2022 Stage 1 Stage 2 Stage 3 Total Contract modification loss Customer loans General government 0 0 0 0 Other financial corporations 15 057 2 296 0 17 353 Other non-financial corporations 1 542 38 308 5 764 45 614 Households 0 37 0 37 16 599 40 641 5 764 63 004 Loans to banks Refinancing loans 0 0 0 0 Other loans 0 0 0 0 0 0 0 0 IMPAIRMENT Customer loans General government 0 0 0 0 Other financial corporations (20) (26) 0 (46) Other non-financial corporations (5) (999) (3 030) (4 034) Households 0 (2) 0 (2) (25) (1 027) (3 030) (4 082) Loans to banks Refinancing loans 0 0 0 0 Other loans 0 0 0 0 0 0 0 0 NET CARRYING AMOUNT Customer loans General government 0 0 0 0 0 Other financial corporations 15 037 2 270 0 17 307 (657) Other non-financial corporations 1 537 37 309 2 734 41 580 (1 578) Households 0 35 0 35 (4) 16 574 39 614 2 734 58 922 (2 239) Loans to banks Refinancing loans 0 0 0 0 0 Other loans 0 0 0 0 0 0 0 0 0 0 TOTAL NET CARRYING AMOUNT / LOSS 16 574 39 614 2 734 58 922 (2 239)
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 55 7.2 DEBT SECURITIES 2022 Debt securities Stage 1 Stage 2 Stage 3 Total GROSS VALUE Hungarian government bonds 42 158 0 0 42 158 Corporate bonds 394 004 482 493 394 979 Mortgage bonds 6 181 0 0 6 181 442 343 482 493 443 318 IMPAIRMENT Hungarian government bonds 0 0 0 0 Corporate bonds (3 625) (96) (493) (4 214) Mortgage bonds (1) 0 0 (1) (3 626) (96) (493) (4 215) NET CARRYING AMOUNT Hungarian government bonds 42 158 0 0 42 158 Corporate bonds 390 379 386 0 390 765 Mortgage bonds 6 180 0 0 6 180 438 717 386 0 439 103 2021 Debt securities Stage 1 Stage 2 Stage 3 Total GROSS VALUE Hungarian government bonds 53 494 0 0 53 494 Corporate bonds 327 490 492 0 327 982 Mortgage bonds 6 148 0 0 6 148 387 132 492 0 387 624 IMPAIRMENT Hungarian government bonds 0 0 0 0 Corporate bonds (1 935) (148) 0 (2 083) Mortgage bonds (3) 0 0 (3) (1 938) (148) 0 (2 086) NET CARRYING AMOUNT Hungarian government bonds 53 494 0 0 53 494 Corporate bonds 325 555 344 0 325 899 Mortgage bonds 6 145 0 0 6 145 385 194 344 0 The 5 largest exposures of corporate bonds represent 92.7% of the total, of which 14.3% are guaranteed by State guarantees, all of which are stage1 rated. 385 538
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 56 Reconciliation of assets arising from investing activities 2021 Proceeds from maturity or sale Discount/ Premium Acquisition cost 2022 Hungarian government bonds 53 494 (18 860) (1 453) 8 977 42 158 Corporate bonds 327 982 (18 816) 4 312 81 501 394 979 Mortgage bonds 6 148 0 33 0 6 181 Total 387 624 (37 676) 2 892 90 478 443 318 2020 Proceeds from maturity or sale Discount/ Premium Acquisition cost 2021 Hungarian government bonds 54 900 0 (1 406) 0 53 494 Corporate bonds 58 189 (85 690) 2 127 353 356 327 982 Mortgage bonds 7 815 (3 500) (225) 2 058 6 148 Total 120 904 (89 190) 496 355 414 387 624 HUF 18 816 million from the total amounts presented in column “Proceeds from maturity or sale” relates to maturity (2021: 3 500 million).
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 57 7.3 DEPOSITS AT CENTRAL AND OTHER BANKS 2022 Deposits at central and other banks Stage 1 Stage 2 Stage 3 Total GROSS VALUE Central bank deposits 0 0 0 0 Other bank deposits 26 853 0 0 26 853 26 853 0 0 26 853 IMPAIRMENT Central bank deposits 0 0 0 0 Other bank deposits (6) 0 0 (6) (6) 0 0 (6) NET CARRYING AMOUNT Central bank deposits 0 0 0 0 Other bank deposits 26 847 0 0 26 847 26 847 0 0 26 847 2021 Deposits at central and other banks Stage 1 Stage 2 Stage 3 Total GROSS VALUE Central bank deposits 19 804 0 0 19 804 Other bank deposits 22 616 0 0 22 616 42 420 0 0 42 420 IMPAIRMENT Central bank deposits (3) 0 0 (3) Other bank deposits (28) 0 0 (28) (31) 0 0 (31) NET CARRYING AMOUNT Central bank deposits 19 801 0 0 19 801 Other bank deposits 22 588 0 0 22 588 42 389 0 0 42 389 7.4 OTHER FINANCIAL ASSETS 2022 Other financial assets Stage 1 Stage 2 Stage 3 Total GROSS VALUE Trade receivables 0 1 120 0 1 120 Margin accounts 3 204 0 0 3 204 3 204 1 120 0 4 324 IMPAIRMENT Trade receivables 0 (1) 0 (1) Margin accounts (1) 0 0 (1) (1) (1) 0 (2) NET CARRYING AMOUNT Trade receivables 0 1 119 0 1 119 Margin accounts 3 203 0 0 3 203 3 203 1 119 0 4 322
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 58 2021 Other financial assets Stage 1 Stage 2 Stage 3 Total GROSS VALUE Trade receivables 0 324 0 324 Margin accounts 37 0 0 37 37 324 0 361 IMPAIRMENT Trade receivables 0 (4) 0 (4) Margin accounts 0 0 0 0 0 (4) 0 (4) NET CARRYING AMOUNT Trade receivables 0 320 0 320 Margin accounts 37 0 0 37 37 320 0 357 8. INVESTMENTS IN ASSOCIATES 2022 gross value impairment net value Associates 248 566 248 566 Exempted associates 28 118 (8 749) 19 369 Total 276 684 (8 749) 267 935 2021 gross value impairment net value Associates 156 608 156 608 Exempted associates 20 200 (6 938) 13 262 Total 176 808 (6 938) 169 870 The table below summarises the movements in the carrying amount of the Group’s investment in associates. 2022 2021 Carrying amount at 1 January 169 870 50 967 Fair value of net assets of associate acquired 71 780 112 165 Share of profit of associates 14 884 (401) Share of capital increase of associates 79 709 8 303 Share of other equity movements of associates (206) (142) Dividends from associates 0 0 FX impact of associates 2 793 178 Impairment of investments in associates (2 163) (817) Reclassification to FVTPL instruments (68 732) (383) Carrying amount at 31 December 267 935 169 870 The voting power column in the table below represents the ownership percentage as the fund is managed by a fund manager where the majority ownership is not within the Group, therefore the equity method was used for these companies consolidation. The actual voting power is limited to the significant influence level between 20-50%.
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 59 The Group’s interest in its associates as at 31 December 2022 and 2021 were as follows. 2022 2021 Name of the company Activities Fund manager Own equity Subscribed capital * Voting power Voting power Enter Tomorrow Kockázati Tőkealap Venture capital fund Lead Ventures Alapkezelő Zrt. 18 072 14 935 49.00% 49.00% Impact Ventures I. Magántőkealap Private equity fund Impact Ventures Kockázati Tőkealap-kezelő Zrt. 2 775 3 360 39.50% 39.50% Impact Ventures II. Magántőkealap Private equity fund Impact Ventures Kockázati Tőkealap-kezelő Zrt. 399 527 29.63% 29.63% Debreceni Iparfejlesztési Alap* Private equity fund XANGA Ventures Magántőkealap-kezelő Zrt. 10 727 11 940 66.67% 66.67% Nyíregyházi Iparfejlesztési Alap Private equity fund XANGA Ventures Magántőkealap-kezelő Zrt. 2 045 2 200 90.90% 90.90% Tranzakciós és Vállalatfejlesztési Alap Private equity fund XANGA Ventures Magántőkealap-kezelő Zrt. 8 646 9 100 90.00% 90.00% Sycamore Buyout Fund I. Magántőkealap Private equity fund XANGA Ventures Magántőkealap-kezelő Zrt. 3 034 3 130 69.93% Chi Fu Hungarian Economic Opportunity Fund Private equity fund Chi Fu Investment Fund Management Zrt. 10 952 16 010 50.00% 50.00% Kék Bolygó Víz Alap Private equity fund KBKB Kék Bolygó Klímavédelmi Befektetési Alapkezelő Zrt 880 2 041 100.00% 99.00% Valor Zöld Alap Private equity fund Valor Capital Kockázati Tőkealap-kezelő Zrt 1 943 2 209 49.00% 49.00% Kecskemét Prémium Ipari Park Magántőkealap Private equity fund Liberty Assets Zrt. 8 505 8 607 80.00% 80.00% Finext HelloParks Alapok Alapja Értékpapír Befektetési Alap Private equity fund FINEXT Befektetési Alapkezelő Zrt. 38 728 29 289 74.57% 75.00% MKB Magántőkealap Private equity fund MKB Befektetési Alapkezelő Zrt. 72 907 71 429 70.00% 70.00% Klasszikus Iparágak Magántőkealap Private equity fund GB & Partners Kockázati Tőkealap-kezelő Zrt. 14 911 14 300 69.93% 69.93% Ramóna Ingatlanforgalmazó és Ingatlanfejlesztő Alap Real estate fund CARION Befektetési Alapkezelő Zrt. 14 644 16 876 65.02% 68.70% Diorit Magántőkealap Private equity fund Diófa Alapkezelő Zrt. 50 427 50 432 90.00% Biggeorge 25. Ingatlanfejlesztő Ingatlanbefektetési Alap Real estate fund Biggeorge Alapkezelő Zrt. 20 665 16 198 74.45% Bonitas Magántőkealap Private equity fund Bonitas Befektetési Alapkezelő Zrt. 1 964 2 000 70.00% Vespucci Deep Tech Kockázati Tőkealap Venture capital fund Vespucci Partners Zrt. 417 463 70.00% DBH Magántőkealap Private equity fund DBH Investment Kockázati Tőkealap-kezelő Zrt. 1 404 1 420 69.72% BBCA Szolnok Biokémiai Zrt. Organic chemical producer 23 966 17 410 48.93% 48.93% Garantiqa Hitelgarancia Zrt Guarantee provider 66 364 9 652 38.04% 38.04% WX-INNOCARGO Kft. Real estate lending 3 878 4 207 47.54% 47.54% Szatmári Konzervgyár Kft. Fruit and vegetable processing 3 733 949 40.00% 40.00% EKO Konzervipari Kft. Fruit and vegetable processing 4 892 1 396 24.99% 24.99% SajóSolar Villamosenergetikai Kft. Electricity generation 5 195 2 658 24.46% 24.46% * Subscribed capital represents the paid in capital in case of Venture capital funds.
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 60 Summarised financial information of each material associate is as follows at 31 December 2022: Garantiqa Direct venture capital funds Other venture capital funds Other individually immaterial associates Total associates Current assets 12 841 76 470 81 339 30 561 201 210 Non-current assets 117 835 46 893 91 743 62 999 319 470 Total Assets 130 676 123 363 173 082 93 560 520 680 Current liabilities 64 312 29 12 370 14 344 91 055 Non-current liabilities 0 0 0 37 552 37 552 Total Liabilities 64 312 29 12 370 51 896 128 607 Own Equity 66 364 123 334 160 712 41 664 392 073 Revenue 44 299 0 196 20 544 65 038 Profit or loss from continuing operations 7 792 1 658 11 794 5 001 26 245 Profit or loss from discontinued operations 0 0 0 0 0 Other comprehensive income 0 Total comprehensive income 7 792 Summarised financial information of each material associate is as follows at 31 December 2021: Garantiqa Krízis és Turisztikai Tőkealapok Other venture capital funds Other individually immaterial associates Total associates Current assets 14 815 21 439 20 360 28 388 85 002 Non-current assets 84 382 84 455 50 836 40 708 260 381 Total Assets 99 197 105 894 71 196 69 096 345 383 Current liabilities 40 624 646 1 141 17 803 60 214 Non-current liabilities 0 0 0 16 813 16 813 Total Liabilities 40 624 646 1 141 34 616 77 027 Own Equity 58 573 105 248 70 055 34 480 268 356 Revenue 28 827 0 0 19 240 48 067 Profit or loss from continuing operations 3 012 (192) (3 381) (173) (734) Profit or loss from discontinued operations 0 0 0 0 0 Other comprehensive income 0 Total comprehensive income 3 012
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 61 Associates exempted from consolidation, therefore are treated at cost less impairment are presented below in descending order of the voting power, indicating the current subscribed capital as at 31 December 2022. 2022 2021 Owner Subscribed capital Voting power Voting power Exempted associates – under liquidation procedure Blogter.com Nemzetközi Információszolgáltató Kft. “kt.a.” NTA 58 48.28% 48.28% Középületépítő Zrt. "f.a." MFB 1 802 47.89% 47.89% Meditcom EMER Kft. "f.a." NTA 500 37.50% 37.50% iWelcome2 Tourniform Kft. “v.a.” NTA 5 28.5% 28.50% IB Math Club Kft. ”v.a.” NTA 3 26.52% 8.15% ClipWareHouse Zrt. ”f.a.” NTA 6 25.01% 25.01% Multipass Solutions Zrt. ”kt.a.” NTA 23 22.21% 22.21% Liber8Tech Hungary Kft. ”f.a” NTA 6 22.12% 22.12% Other exempted associates PanIQ Franchising Inc. NTA és VBTMA 21 49.77% 44.92% Bankmonitor Holding Kft. VBTMA 10 49.00% 49.00% Royalpack Group Holding Kft. VBTMA 6 49.00% 49.00% Monsun Kft. NTA 3 48.08% 48.07% Pannon Green Power VPP Kft. VBTMA 50 48.00% SCOLVO Zrt. NTA 12 45.42% 46.80% FilmFinity Filmgyártó és Forgalmazó Zrt. NTA 9 44.88% 44.88% Zsigmond International Kft. Divat&Design TA 3 44.62% 38.48% Thriveo Central Europe Kft. Divat&Design TA 35 43.88% 43.88% TrustAir Aviation Kft. MFB Invest 194 40.00% 40.00% Pastarte Kft. VBTMA 10 40.00% Concrate Style Kft. Szfhvár VTA 5 40.00% 40.00% MFA Alternatív Energia Műszaki- és Fejlesztési Kft. Debrecen VTA 5 40.00% 40.00% CX-Ray Kft. NTA 20 36.00% 26.00% Pure Sound Media Szolgáltató Kft. NTA 5 35.00% 35.00% Vág-Tech Projekt Kft. VBTMA 5 34.04% 34.04% Harmony Holding Kft. VBTMA 5 34.00% 34.00% DreamJo.bs Zrt. NTA 8 33.87% 21.05% DAIGE Kft. NTA és Divat&Design TA 3 33.34% 33.34% Vajda Real Estate Kft. VBTMA 6 33.33% 33.33% Gravoform Projekt Kft. VBTMA 5 33.33%
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 62 2022 2021 Owner Subscribed capital Voting power Voting power Pinetime International Kft. Divat&Design TA 3 33.00% 20.00% Cakebox Kft. NTA 3 32.73% 9.00% Cargo-Viszed Kft. NTA 3 32.42% 32.42% Koin Europe Kft. NTA 5 32.00% 32.00% SmartFront Kft. NTA 10 31.00% 18.00% Bakering International Kft. Szfvár VTA 4 30.23% CodeBerry School Kft. NTA 12 30.00% 30.00% KU-NA Kft. Debrecen VTA 6 30.00% 30.00% Automizy Marketing-technológiai Zrt. NTA 7 29.55% 25.00% POST FOR RENT International Zrt. NTA 7 29.31% 29.31% MAKERSMARKET.XYZ.Kft. Divat&Design TA 4 28.63% 7.76% StyleHub Eccomerce Kft NTA 5 28.52% 26.12% RiskCover Hungary Zrt. NTA 50 28.00% 28.00% Neticle Zrt. NTA 64 27.38% 27.38% Continest Technologies Zrt. VBTMA és Szfvár VTA 10 27.26% Filipper Kft. NTA 3 27.20% 27.20% Local’s Lore Kft. NTA 3 27,20% 27.20% Flying Birds Entertainment Kft. NTA 13 27.00% 27.00% Duelbox Interaktív Rendezvénytechnika Kft. NTA 5 26.95% 28.53% Chameleon Smart Home Nyrt. NTA 28 26.42% 0.92% SM Fejlesztési Holding Kft. VBTMA 24 25.00% Chatler.ai Informatikai és Szolgáltató Kft. NTA 4 25.00% 25.00% Detka Oktató Kft. VBTMA 207 24.91% 24.91% Parafix Management Kft. VBTMA 4 24.88% Dataxo Group Zrt. (volt SDSYS Zrt.) NTA 460 23.87% 28.54% Bagabags Trade Kft. Divat&Design TA 4 23.86% 23.86% Móra-BookR Kids Gyermek és Ifjúsági Digitális Kiadó Kft. NTA 119 23.60% 23.60% AP Plast Holding Kft. VBTMA 44 23.09% 23.09% Cukovy Europe Kft. Divat&Design TA 3 22.92% 18.00% szereldmagad.hu Kft. NTA 18 22.64% 22.64% PELSO Look Kereskedelmi Kft. Divat&Design TA 3 22.22% 22.22% Rollet Kft. NTA 14 21.73% 21.73% ORIANA International Tanácsadó, Fejlesztő és Szolgáltató Zrt. NTA 18 21.42% 22.00% Flight Refund Kft. NTA 16 21.17% 21.17% Supp.li Kft. NTA 5 20.50%
MFB Hungarian Development Bank Private Limited Company Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 63 2022 2021 Owner Subscribed capital Voting power Voting power ChemPass Kft. NTA 6 20.00% 20.00% 4D Interactive Anatomy Zrt. NTA 6 20.00% 20.00% Kwindoo Magyarország Kft. NTA 4 20.00% 20.00% Realindustry Magyarország Kft. Divat&Design TA 4 20.00% The Bank has no commitment or intention to grant financial or other assistance to any associates and there is no restriction on the ability of these associates to pay dividends or repay loans. Decreases in 2022 indicating the Group’s voting power on the year end before derecognition. Voting power Company name Business activity 2022 2021 Riverland Magántőkealap* Venture capital/private equity fund 69.94% CENTRAL EUROPEAN OPPORTUNITY II Magántőkealap* Venture capital/private equity fund 69.79% Főnix Magántőkealap* Venture capital/private equity fund 69.74% Infinitum Magántőkealap* Venture capital/private equity fund 69.64% Gordiusz Magántőkealap* Venture capital/private equity fund 69.59% Csepeli Lakásfejlesztő Zrt. ”f.a.” Real estate sale 49.00% SVG-Hungary Gépgyár Zrt. Machine manufacturing 35.19% Let Me Inn Kft. ”f.a.” Real estate agent 30.00% Taxnology Innovations Kft. ”v.a.” Research and development 27.00% Gazda Kistermelői Lap és Könyvkiadó Kft. Book sale 24.49% Nowtechnologies Zrt. Electronic component manufacturing 21.12% Activegraf Inc. Computer programing 18.79% 20.11% *: these were reclassified to FVTPL debt instruments
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 64 9. DERIVATIVES The Group enters into derivatives for risk management purposes including hedges that either meet the hedge accounting requirements or are hedges that are economic hedges, but do not meet the hedge accounting requirements. The table below shows the fair values of derivative financial instruments recorded as assets or liabilities together with their notional amounts. The notional amount is a gross amount which is the quantity of the underlying derivative contracts that indicates the volume of transactions outstanding as at the year end and are not indicative of either the market or credit risk. 2022 Assets Liabilities fair value notional fair value notional Derivatives in economic hedge relationship Interest rate swaps 1 502 4 564 (1 367) 4 564 Cross currency interest rate swaps 65 9 016 0 0 Foreign currency swaps 887 42 542 (2 695) 133 493 Total derivatives in economic hedge relationship 2 454 56 122 (4 062) 138 057 Fair value hedge derivatives Interest rate swaps 15 128 39 599 0 0 Total hedge derivatives 15 128 39 599 0 0 2021 Assets Liabilities fair value notional fair value notional Derivatives in economic hedge relationship Interest rate swaps 695 4 654 (513) 4 564 Cross currency interest rate swaps 0 0 0 0 Foreign currency swaps 88 23 883 (151) 61 254 Total derivatives in economic hedge relationship 783 28 447 (664) 65 818 Fair value hedge derivatives Interest rate swaps 7 849 45 851 0 0 Total hedge derivatives 7 849 45 851 0 0 As part of its asset-liability management, the Group enters into derivative transactions in order to cover risks inherent in the interest or maturity inconsistency of the asset and liability portfolio. Whenever possible, these derivative positions are effectively hedged with an existing asset or liability (see hedge accounting section). When it is not possible to implement effective hedge accounting in accordance with IFRS 9, the Group classifies its derivative contracts into the financial assets and liabilities held for trading categories but does not open derivative positions for trading purposes only, all its positions are considered as economic hedging positions. Foreign exchange swaps are concluded for instruments in a different currency other than the source of financing, solely for short term maturity and for the purpose of daily liquidity management.
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 65 10. HEDGE ACCOUNTING Fair value hedges To protect itself against changes in the fair value of financial assets or liabilities due to movements in interest rates, the Bank enters into fair value hedges. The Bank primarily designates the benchmark rate as the hedged risk therefore enters into interest rate swaps whereby the fixed leg represents the economic risk of the hedged item. The Bank has determined individual hedge relationships and started hedge accounting with its interest rate swap deals to cover the interest rate risk on one large loan On 30 June 2022, the Bank terminated the former hedge relationship for the interest rate risk of this loan in accordance with paragraph B6.5.23 of IFRS 9, as it no longer met the risk management objective under which the Bank deemed it suitable for hedge accounting. Following the termination, the Bank established a new hedging relationship in which groups of 11 loan transactions were micro- hedged, all which are characterized by long maturities and fixed interest rates. These transactions carry a significant interest rate risk, as such long-term, fixed-rate funds not available to the Bank in this volume. Hedged items are designated as amounts equal to the current IRS notional value, including the amortization of IRS transactions (using a layer approach), where the amount of interest due on the principal amount that represents the amounts that first become due after the cash flow dates of the hedging IRS transactions ("bottom layer") is indicated. The volume of the remaining capital of the 11 loans involved is more than double the notional amount of the two market swaps previously concluded, so even with the contractual principal repayments, the expected prepayment volume and the amount of credit losses, they are expected to exceed the volume of hedging transactions over the entire term. The Bank accounts these hedge relationships as fair value hedges. Hedge effectiveness is measured by the Bank using the hypothetical derivatives approach under IFRS9, which is a derivative with the same basic characteristics as the covered item. With this, the hypothetical derivative mirrors the hedged items, where the fixed rate on credit transactions is expected to reach or exceed the fixed rate component of IRS transactions (i.e., fixed leg minus fixed spread of the variable leg). The initial fair value of a hypothetical IRS is zero, as opposed to the fair value of IRS transactions for hedging purposes at the time of the designation of the hedging relationship. The ineffectiveness of the hedging relationship is recognized in the income statement on "Gains or (-) losses from hedge accounting net " line and amounted to HUF 652 million (2021: HUF 27 million), from which the amount recognized on cancellation amounted to HUF 723 million profit. The main source of ineffectiveness is the effect of the counterparty and the Bank’s own credit risk on the fair value of the interest rate swap, which is not reflected in the fair value of the hedged item, additional inefectiveness arose from the timeing difference of the swap deal date and the designation date. Due to termination of previous hedge relationship HUF 867 million was recognized as effective interest rate amortization in the profit and loss during 2022.
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 66 In the table below the Bank sets out the accumulated fair value adjustment arising from the continuing hedge relationship. 2022 Hedged item Assets Liabilities Carrying value of hedged item from this accumulated fair value adjustment Carrying value of hedged item from this accumulated fair value adjustment Loan 75 126 (2 632) Debt securities issued 0 0 Total 75 126 (2 632) 0 0 2021 Hedged item Assets Liabilities Carrying value of hedged item from this accumulated fair value adjustment Carrying value of hedged item from this accumulated fair value adjustment Loan 50 359 (7 762) Debt securities issued 0 0 Total 50 359 (7 762) 0 0 2022 2021 Less than 1 year 1-5 year More than 5 years Less than 1 year 1-5 year More than 5 years Hedge of loans Nominal amount (HUF million) 120 560 45 851 Average fixed interest rate 3.37% 3.20%
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 67 Gains or (-) losses from hedge accounting, net 2022 2022 Fair value* 2021 Fair value Change in fair value Change in interest accrual Gains or (-) losses from hedge deal Gains or (-) losses from hedged item Total Fair value used for calculating hedge inefectiveness Ineffectiveness recognised in profit and loss Asset side hedge deal 15 128 7 849 7 279 218 7 061 (6 409) 652 (2 632) (194) Liability side hedge deal 0 0 0 0 0 0 0 0 0 Total hedge interest rate swaps 15 128 7 849 7 279 218 7 061 (6 409) 652 (2 632) (194) *: At the time of establishing the new hedging relationship, the fair value of the hedging instrument was HUF 13 157 million. Gains or (-) losses from hedge accounting, net 2021 2021 Fair value 2020 Fair value Change in fair value Change in interest accrual Gains or (-) losses from hedge deal Gains or (-) losses from hedged item Total Fair value used for calculating hedge inefectiveness Ineffectiveness recognised in profit and loss Asset side hedge deal 7 849 802 7 047 56 6 991 (6 951) 40 7 809 0 Liability side hedge deal 0 806 (806) (51) (755) 742 (13) 0 0 Total hedge interest rate swaps 7 849 1 608 6 241 5 6 236 (6 209) 27 7 809 0
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 68 11. PROPERTY, PLANT AND EQUIPMENT 2022 2021 Property, plant and equipment 4 778 5 186 Right of use assets 1 801 1 863 Net book value 6 579 7 049 Property, plant and equipment Real estates Production machinery Equipment Total Gross value Opening balance 2022 6 111 0 4 047 10 158 Additions 97 0 280 377 Disposals (44) 0 (252) (296) Closing balance 2022 6 164 0 4 075 10 239 Depreciation Opening balance 2022 (2 634) 0 (2 338) (4 972) Charge for the year (80) 0 (633) (713) Disposals 27 0 197 224 Closing balance 2022 (2 687) 0 (2 774) (5 461) Net book value 31 December 2021 3 477 0 1 709 5 186 31 December 2022 3 477 0 1 301 4 778 Real estates Production machinery Equipment Total Gross value Opening balance 2021 5 950 0 3 305 9 255 Additions 173 0 1 022 1 195 Disposals (12) 0 (280) (292) Closing balance 2021 6 111 0 4 047 10 158 Depreciation Opening balance 2021 (2 556) 0 (2 044) (4 600) Charge for the year (89) 0 (563) (652) Disposals 11 0 269 280 Closing balance 2021 (2 634) 0 (2 338) (4 972) Net book value 31 December 2020 3 394 0 1 261 4 655 31 December 2021 3 477 0 1 709 5 186
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 69 Right of use assets Real estates Parking places Cars, trucks Total Gross value Opening balance 2022 2 790 279 57 3 126 Additions 430 118 25 573 Disposals (215) (21) (11) (247) Closing balance 2022 3 005 376 71 3 452 Depreciation Opening balance 2022 (1 136) (101 (26) (1 263) Charge for the year (545) (74) (14) (633) Disposals 215 21 9 245 Closing balance 2022 (1 466) (154) (31) (1 651) Net book value 31 December 2021 1 654 178 31 1 863 31 December 2022 1 539 222 40 1 801 Real estates Parking places Cars, trucks Total Gross value Opening balance 2021 2 079 108 42 2 229 Additions 884 171 15 1 070 Disposals (173) 0 0 (173) Closing balance 2021 2 790 279 57 3 126 Depreciation Opening balance 2021 (812) (41) (11) (864) Charge for the year (495) (60) (15) (570) Disposals 171 0 0 171 Closing balance 2021 (1 136) (101 (26) (1 263) Net book value 31 December 2020 1 267 67 31 1 365 31 December 2021 1 654 178 31 1 863 Expenses relating to short-term leases and to leases of low-value assets that are not shown as right to use assets are included in general and administrative expenses: 2022 2021 Short-term leases 111 109 Leases of low-value assets 42 29 153 138
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 70 11.1 INVESTMENT PROPERTIES 2022 2021 Cost 35 627 35 319 Reclassification 0 0 Accumulated impairment 0 0 Accumulated depreciation (1 877) (1 752) Net book value 33 750 33 567 Net opening balance 33 567 33 638 Reclassification 0 0 Additions 342 97 Disposal – net 0 (18) Impairment 0 0 Depreciation charge (159) (150) Closing net balance 33 750 33 567 The fair value of the investment properties presented in the table above is HUF 36 120 million (2021: 35 644 million) and is classified as level 3 in the fair value hierarchy. The fair value of investment properties were determined by external valuers using methods based on income approache or market comparative data approach. The following table presents the results related to investment properties. 2022 2021 Impairment on investment properties 0 0 Additions 0 0 Reversal 0 0 Total impairment 0 0 Expenses from investment properties Acquisition cost 0 0 Maintenance expenses (602) (456) Sale related cost 0 0 Total (602) (456)
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 71 12. INTANGIBLE ASSETS Property rights Intellectual properties Total Gross value Opening balance 2022 871 12 314 13 185 Additions 50 1 757 1 807 Disposals (33) (231) (264) Closing balance 2022 888 13 840 14 728 Amortization Opening balance 2022 (679) (6 548) (7 227) Charge for the year (76) (864) (940) Disposals 34 220 254 Closing balance 2022 (721) (7 192) (7 913) Net book value 31 December 2021 192 5 766 5 958 31 December 2022 167 6 648 6 815 Property rights Intellectual properties Total Gross value Opening balance 2021 758 10 653 11 411 Additions 124 1 751 1 875 Disposals (11) (90) (101) Closing balance 2021 871 12 314 13 185 Amortization Opening balance 2021 (580) (5 888) (6 468) Charge for the year (103) (743) (846) Disposals 4 83 87 Closing balance 2021 (679) (6 548) (7 227) Net book value 31 December 2020 178 4 765 4 943 31 December 2021 192 5 766 5 958
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 72 13. OTHER ASSETS 2022 2021 Accrued income from reimbursed cost 6 965 8 866 Accrued fund management fee 1 089 988 Deferred expenses 1 935 1 702 Intermediated services 761 19 Deferred initial fair value adjustment 16 321 17 334 Interest subsidy settlements 2 222 2 Repossessed assets 105 120 Deferred income 451 147 Other 541 466 Special bank tax due to Covid-19 1 051 1 402 Total 31 441 31 046 Cost Reimbursement In the 2014-2020 programming period, the European Union is encouraging the expansion and more active use of financial instruments. The section 24/B of the government decree 272/2014. (XI. 5.) appointed MFB Zrt. as a fund of funds organization to carry out the professional use of the refundable EU resource amounting to HUF 650 billion. In the 2014-2020 programming period, the distribution of credit products is achieved through the "MFB Points" mediation system, which allows for a more efficient allocation of resources. Intermediaries ensures physical availability, and their staff carries out a significant part of the credit valuation, disbursement and monitoring activities for which the counterparty receives a specific intermediary remuneration. MFB points are operated by intermediary partners, therefore their costs and assets/liabilities are not included in the Group’s records. MFB Zrt. is entitled to get compensation for the costs incurred in carrying out the activities detailed in the Financing Contract concluded with the Hungarian State, which is paid by the Managing Authority to the Bank in accordance with specific rules and procedures. The remuneration is a set of justified and certified expenditure relating directly or indirectly - primarily for the Bank's organizational and infrastructure costs - to the implementation of the Financing Contract, recorded separately in the Bank accounting register. According to the Financing Agreement the Bank is not entitled to any additional fee or reimbursement from the Managing Authority. The Bank cannot have a profit from the remuneration. The amount presented in the table includes certified costs already incurred by the Bank and partially reimbursed by the Managing Authority. Deferred initial fair value adjustment In 2013 the National Bank of Hungary launched its so called Funding for Growth Scheme and in 2020 the FGS Hajrá program (both called FGS) in order to finance the operation and investments of small- and medium size businesses (SMB) as an economic development activity. Within both of these programs, SME’s fulfilling some present conditions were able to receive a preferential loan at a maximum interest rate of 2.5%, which was then refinanced by the National Bank of Hungary at 0% interest rate. The interest rates of these loans were lower than the interest rate of similar loans available in the market (off-market), therefore the initial fair value of loans received and provided were lower than their transaction value. This initial fair value difference was determined by the Bank however it was not accounted for in the profit or loss immediately given the unobservable inputs used in the calculation, but was accrued for the lifetime of the underlying deal. In accordance with the IFRS standards part of the related loan provided was reclassified to other assets, while part of the received loan with the same amount approximately as on the asset side was reclassified to other
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 73 liabilities. The unobservable input during the determination of the initial fair value difference was the differences customers’ credit risk and the Bank’s own credit risk. 2022 2021 Opening balance 17 334 5 677 Addition from new loans 2 873 13 723 Decrease due to sales (903) (45) Annual amortisation (2 983) (2 021) Closing balance 16 321 17 334 Repossessed real estates These repossessed real estates used to be served as a collateral behind loans provided by the Group. The Group primary aim with these real estates to sell. The provision created for these properties was HUF 12 million at 31 December 2022 (2021: HUF 1 million) Special bank tax due to Covid-19 In order to implement the Economic Protection Action Plan, a one-time special credit institution tax on the epidemiological situation for replenishing the Epidemiological Fund was introduced in 2020 amounting to HUF 1.7 billion for the Bank, which was paid in three equal instalments during the year. The profit and loss impact of it under the IFRS rules did not have to be shown in 2020, as under the special tax act the next 5 years of bank special tax liability will be deducted with this amount in five equal annual instalments, therefore this amount will reduce bank special tax expenditure for these years. 14. RECEIVABLES ON THE STATE DUE TO CURRENCY-HEDGING AGREEMENT The Bank’s foreign exchange risk originated from the foreign currency liabilities is hedged by the Foreign Exchange Guarantee Frame Agreement (FX Agreement) signed by the Hungarian Ministry of Finance originally in 2004 and later modified in 2014. This FX Agreement manages foreign exchange risks of the Bank’s foreign currency borrowings (EUR) and the State compensates any foreign exchange loss incurred on these borrowings and the Bank is required to pay to the State the amount of realized foreign exchange gains on these transactions. Under the agreement early financial settlement is possible for programs where asset-side final beneficiaries made repayment in excess of 20% of the original program framework actually used. The FX state guarantee frame for the Bank declared by the law was HUF 2 000 billion. 2022 2021 Guarantee frame maximum amount 2 000 000 2 000 000 Programmed amounts within the frame 1 477 809 1 512 679 Free frame 522 191 487 321 Sum used from the frame amount 836 796 826 110
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 74 2022 2021 Opening FX rates Year end NBH FX rate Opening FX rates Year end NBH FX rate Converted amount 621 709 836 796 639 496 826 110 from this amount already repaid by customers on which the balance is fixed 373 183 441 193 379 726 446 699 Foreign exchange losses 215 087 186 614 Amount already received from the State (relating to the not yet closed program) (60 976) (52 299) received during the year 11 489 0 Foreign exchange losses of FX state guarantee 154 111 134 315 Interest foreign exchange losses of FX state guarantee 27 928 27 766 Total foreign exchange losses on the converted amount 182 039 162 081 from this amount already repaid by customers on which the balance is fixed (95 938) (94 739) In 2022, the business activity covered by the hedging agreement was not significant, but the EUR/HUF exchange rate increased significantly, which was partially offset by the financial settlements during the year. However, without this exchange rate hedging mechanism, the Bank's open currency position would be significant. This increase is recognized in the income statement on the „Exchange differences [gain or (-) loss], net” line, thereby neutralizing the effect of the revaluation of foreign currency liabilities. The receivable is against the Hungarian State therefore the credit risk is marginal.
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 75 15. FINANCIAL LIABILITIES MEASURED AT AMORTIZED COST 2022 2021 Deposits Interbank deposits 23 859 103 148 Customer deposits (collateral behind loans) 19 264 11 836 Other customer deposits 5 397 26 921 48 520 141 905 Loans taken Refinancing loans 230 171 261 909 Other loans taken 556 736 336 968 786 907 598 877 Debt securities issued Listed HUF bonds 579 192 512 116 Listed FX bonds 823 370 572 914 from this listed on foreign stock exchange 501 049 461 336 1 402 562 1 085 030 Other financial liabilities Margin accounts 15 696 6 883 Creditors 2 244 1 947 Finance leases liabilities 1 886 1 968 19 826 10 798 Total 2 257 815 1 836 610 The Bank does not collect retail deposits. The corporate deposits contain such term deposits that are offered as collateral for the underlying loans or were collected for liquidity purposes. Also the line "deposits" includes inter-bank deposits used for liquidity management. “Loans taken” includes long-term liabilities in FGS programs. This category also includes the external loans of the subsidiaries.
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 76 15.1. DEBT SECURITIES ISSUED 2022 2021 Name of bond ISIN code Issue Maturity Interest rate Nominal value Carrying value Nominal value Carrying value Foreign currency bonds MFB BOND EUR 95.2M HU0000359039 2019.07.03 2022.09.28 fix 0.05% (annually) 0 0 15 037 15 109 2019.09.11 0 0 20 111 20 212 MFB BOND EUR 750M XS2010030752 2020.06.24 2025.06.24 fix 1.375% (annually) 300 188 301 150 276 750 277 215 MFB BOND EUR 500M XS2348280707 2021.06.09 2026.06.09 fix 0.375% (annually) 200 125 199 899 184 500 184 121 MFB BOND EUR 398.32M HU0000360821 2021.09.29 2023.06.28 fix 0.010% (annually) 35 802 35 801 33 007 32 999 2021.10.13 46 949 46 941 43 283 43 258 2022.05.19 21 501 21 356 2022.06.15 55 174 54 618 MFB BOND EUR 301,68M HU0000361779 2022.07.21 2024.06.26 fix 2.5% (annually) 36 374 36 359 2022.09.14 53 209 52 732 2022.09.28 19 936 19 537 2022.11.16 11 227 10 878 MFB BOND EUR 110,72M HU0000361928 2022.10.19 2023.10.26 fix 3.8% (annually) 44 317 44 099 Total foreign currency bonds 824 802 823 370 572 688 572 914 HUF bonds MFB202210 HU0000357702 2017.06.14 2022.10.26 fix 1.50% (annually) 0 0 4 500 4 498 2017.11.22 0 0 12 000 12 052 2019.06.20 0 0 20 000 20 111 MFB202710 HU0000357892 2017.10.04 2027.10.27 fix 3.00% (annually) 4 180 4 235 4 180 4 241 2019.10.09 16 890 17 808 16 890 17 971 2021.10.06 13 175 13 049 13 175 13 013 2021.11.04 34 910 33 688 34 910 33 429 MFB202406 HU0000358700 2019.02.06 2024.06.26 fix 2.6% (annually) 15 000 15 259 15 000 15 299 2019.03.06 13 300 13 517 13 300 13 544 2022.05.18 15 070 14 186 MFB202311 HU0000359138 2019.09.25 2023.11.24 fix 1.0% (annually) 17 110 17 130 17 110 17 133 2021.10.20 18 905 18 692 18 905 18 440 2021.11.04 3 171 3 132 3 171 3 087 2022.02.16 4 294 4 148 2022.10.26 5 703 5 001 MFB202208 HU0000359385 2019.12.11 2022.08.24 fix 0.5% (annually) 0 0 49 021 49 080 MFB202506 HU0000359674 2020.05.27 2025.06.24 fix 1.7% (annually) 35 000 35 402 35 000 35 437 MFB202604 HU0000360037 2020.10.21 2026.04.22 fix 1.9% (annually) 34 706 35 190 34 706 35 198 MFB203110 HU0000360771 2021.09.15 2031.10.22 fix 2.9% (annually) 33 950 33 270 33 950 33 284 2021.10.20 24 035 22 103 24 035 21 980
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 77 2022 2021 Name of bond ISIN code Issue Maturity Interest rate Nominal value Carrying value Nominal value Carrying value MFB203304 HU0000360896 2021.11.11 2033.04.20 fix 4.2% (annually) 9 600 9 802 9 600 9 378 MFB202810 HU0000360912 2021.11.17 2028.10.22 fix 3.9% (annually) 34 550 34 596 34 550 34 474 2021.12.01 23 495 22 631 23 495 22 417 MFB202410 HU0000361027 2021.12.08 2024.10.24 fix 4.3% (annually) 12 441 12 414 12 441 12 287 2022.02.02 16 550 16 484 2022.10.06 4 900 4 189 MFB202910 HU0000361035 2021.12.08 2029.10.24 fix 4.6% (annually) 10 680 10 507 10 680 10 418 MFB202704 HU0000361092 2021.12.15 2027.04.22 fix 4.5% (annually) 24 100 22 997 24 575 24 477 2022.01.19 24 575 25 607 2022.02.16 9 600 9 817 MFB202301 HU0000360888 2021.11.11 2023.01.25 fix 2.0% (annually) 27 504 28 115 27 504 27 364 2021.12.01 23 956 24 466 23 956 23 504 2022.01.19 39 584 40 415 MFB202511 HU0000361761 2022.06.15 2025.11.26 fix 7.8% (annually) 13 500 13 682 2022.09.15 6 700 6 194 2022.11.17 2 000 1 883 Total HUF bonds 582 587 579 192 516 654 512 116 Total bonds 1 407 389 1 402 562 1 089 342 1 085 030
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 78 In 2022 the Bank issued two new fix interest bearing EUR bond totalling EUR 412.4 million, and one new HUF bonds at a nominal value of HUF 22.2 billion. There was additional issuance on one existing EUR bonds amounting to EUR 191.57 million, while in case of HUF bonds five was involved totalling to HUF 105.2 billion face value. One EUR bond with a nominal value of EUR 95.2 million and two HUF bonds with a nominal value of HUF 85.5 billion expired during the year. In 2021 the Bank issued two new fix interest bearing EUR bond totalling EUR 706.75 million, and seven new fix rate HUF bonds at a nominal value of HUF 224.8 billion, while there was additional issuance on two existing bonds amounting to HUF 70 billion face value. Two EUR bonds with a nominal value of EUR 390 million and two HUF bonds with a nominal value of HUF 43 billion expired during the year. Reconciliation of liabilities arising from financing activities 2021 Proceeds from bond issuance Discount/ Premium Repayments at maturity Exchange rate change 2022 HUF bonds 512 116 144 448 8 149 (85 521) 0 579 192 EUR bonds 572 914 238 373 3 084 (39 152) 48 151 823 370 Total 1 085 030 382 821 11 233 (124 673) 48 151 1 402 562 2020 Proceeds from bond issuance Discount/ Premium Repayments at maturity Exchange rate change 2021 HUF bonds 283 379 286 684 263 (58 210) 0 512 116 EUR bonds 452 280 247 095 864 (142 173) 14 848 572 914 Total 735 659 533 779 1 127 (200 383) 14 848 1 085 030 16. PROVISIONS Provisions by title 2022 2021 Financial guarantees 210 1 621 Loan commitments 4 205 1 628 Subtotal for IFRS9 provision method 4 415 3 249 Legal cases 56 47 Other 469 251 Total (Note 29) 4 940 3 547 Based on the judgement of the legal department the amount of provision regarding legal cases are expected to be settled in more than twelve months after the reporting period. Other provisions include provision allocated for the employee jubilee program.
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 79 17. OTHER LIABILITIES 2022 2021 Non-income taxes 1 370 1 336 Settlement from wages 1 750 1 937 Deferred income 3 527 2 354 Accrued costs 691 426 Lending related liabilities 1 020 326 Liabilities related to factoring activity 132 102 Liabilities to managing authorities 5 110 4 962 Fees due before disbursement but not paid 81 61 Debtors’ advance payments 454 454 Venture capital note payment obligation 2 335 2 784 Deferred initial fair value adjustment 16 269 17 256 Other 692 138 Total 33 431 32 136 Liabilities to managing authorities include advances on expenditure reimbursement relating to the EU programming period 2007-2013 and 2014-2020 (see Note 13). Venture capital note payment obligation both as at 31 December 2022 and 2021 related to the subscribed but not yet paid capital increase of Central European Fund of Funds. The amount is payable as required by the investment plans. The deferred initial fair value adjustment line represents the initial fair value adjustment which is determined based on the internal models and is therefore deferred and amortized to the profit and loss in parallel to the amortization of the underlying instruments (loans taken in FGS and NHP Hajrá programs, see Note 13). 18. SHARE CAPITAL AND SHARE PREMIUM During 2022 the Bank received share capital increase of HUF 70 billion as at 27 October 2022 and an additional HUF 100 billion as at 23 December 2022. During 2021 the Bank received share capital increase of HUF 39 billion as at 3 December 2021 and an additional HUF 45 billion as at 22 December 2021. 100% of the shares are owned by the Hungarian State. The total value of the 519 900 (2021: 349 900) ordinary shares with HUF 1 million nominal value each was HUF 519 900 million (2021: 349 900 million). Share premium represents the difference between the nominal value of the subscribed share and the amount received at subscription. The Bank’s share premium both as at 31 December 2022 and 2021 was HUF 81 870 million. 19. OTHER RESERVES General reserve Other reserve includes general reserve that is in accordance with Section 83 of Act No. CCXXXVII of 2013 equal to ten percent of the net profit after tax. The general reserve as calculated under Hungarian Accounting and Banking Rules is treated as appropriations from retained earnings. The Bank is not allowed to pay dividend from the statutory reserves.
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 80 20. NON-CONTROLLING INTEREST NTH National Capital Holding Private Limited Company acquired a preferred share in MFB Invest during capital increase in December 2022. NTH subscribed 1 preferred share with a nominal value of 1 HUF and issue price 1 HUF. The preferred share assures the right for its owner to appoint the Executive Chairman and the majority of the Supervisory Board. Given that the 1 preferred share represents a very immaterial share from the company’s net asset the value of non-controlling interest is zero. 21. CONTINGENT LIABILITIES, COMMITMENTS To meet the financial needs of customers, the Group enters into various irrevocable commitments and contingent liabilities. These consist of financial guarantees and other undrawn commitments to lend. Other non-financial guarantees commit the Bank to make payments on behalf of customers in the event of a specific act, generally related to the import or export of goods. Guarantees carries a similar credit risk to loans. Even though these obligations may not be recognized on the statement of financial position, they do contain credit risk and are therefore part of the overall risk of the Group. 2022 2021 Loan commitments 214 366 226 633 Capital commitments 210 938 93 875 Guarantees 799 175 504 951 Guarantees and loan commitments total 1 224 479 825 459 Legal cases 304 316 Other commitments 1 601 1 476 Total 1 226 384 827 251 Capital commitments represents the subscribed but not yet paid capital increase of venture capital investments/notes that is payable as required by the investment plans if the investment is closer to a loan commitment. Other commitments represent potential further capital increase for the Central European Fund of Funds that is not included in the investment plans but its maximum amount was set in the foundation indeed of the fund. As owners’ decision is necessary to determine the actual need and amount therefore this amount is not yet an obligation.
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 81 22. NET INTEREST INCOME 2022 2021 Financial assets at fair value through other comprehensive income 603 563 Financial assets at amortized cost 105 797 45 332 Negative interest from financial liabilities 169 186 Interest income calculated using the effective interest method 106 569 46 081 Financial assets held for trading 1 740 214 Non-trading financial assets mandatorily at fair value through profit or loss 1 205 1 060 Derivatives – Hedge accounting 2 915 832 Other assets 4 255 4 144 Other similar income 10 115 6 250 Total interest income 116 684 52 331 Interest expense Financial liabilities held for trading (9 738) (1 514) Financial liabilities at amortized cost (61 053) (17 641) Derivatives – Hedge accounting 0 (126) Other liabilities (161) (8) Negative interest from financial assets (52) (274) Total interest expense (71 004) (19 563) Net interest income 45 680 32 768 Net interest income analysis by customer types: 23. DIVIDEND INCOME 2022 2021 Interest income Customers 74 131 38 569 National Bank of Hungary 9 078 4 623 Other banks 9 892 2 726 Securities 23 583 6 413 Total 116 684 52 331 Interest expense Customers (1 608) (388) National Bank of Hungary (4 227) (2 176) Other banks (35 967) (4 307) Securities (29 202) (12 692) Total (71 004) (19 563) Net interest income 45 680 32 768 2022 2021 Other investments 5 0 Total 5 0
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 82 24. NET FEE AND COMMISSION INCOME / EXPENSES 2022 2021 Fee and commission income Fund management fees 1 096 1 016 Guarantee fees 4 771 1 366 Loan servicing fees 310 959 Fees from receivable management 0 13 Other fees and commission 5 17 Total 6 182 3 371 Fee and commission expenses Agent fees (157) (130) Guarantee fees (775) (35) Bank account commission (63) (35) Other fees and commission (9) (3) Total (1 004) (203) Net fee and commission income / (expenses) 5 178 3 168 25. GAINS OR (-) LOSSES ON DERECOGNITION OF FINANCIAL ASSETS AND LIABILITIES NOT MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS, NET 2022 2021 Financial assets at amortized cost 229 246 Loans 0 (40) Debt securities 229 286 Financial assets at fair value through other comprehensive income 256 944 Debt securities 0 162 Equity instruments 256 782 Total 485 1 190 26. GAINS OR (-) LOSSES ON DERECOGNITION OF NON FINANCIAL ASSETS, NET 2022 2021 Derecognition loss of property, plant and equipment and intangible assets 29 31 Derecognition (loss), gain of exempted associates 451 (265) Derecognition (loss), gain of other assets 0 0 Total 480 (234)
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 83 27. OTHER OPERATING INCOME/EXPENSES 2022 2021 Other income Compensation received from EU 4 973 4 124 Consideration received from State 5 25 Recovery of previous years costs 209 18 Rental and management income from investment properties 3 129 2 806 Rental income 51 52 Revenue from consultancy 506 295 Deferred initial fair value of borrowings 4 076 2 076 Other 1 293 670 Total other operating income 14 242 10 066 Other expenses Donations (86) (100) Expenses related to previous years (301) (76) Taxes – except income tax and special bank tax (2 187) (1 436) Special bank tax (3 901) (2 639) Extra profit tax (5 194) 0 Other expenses related to lending and borrowing not part of effective interest (260) (190) Deferred initial fair value of loans granted (4 154) (2 049) Expenses from legal cases (4) (29) Other (321) (137) Total other operating expense (16 408) (6 656) The Bank receives compensations for performing the tasks in connection with 2007-13 and 2014-20 EU programming periods (further details in Note 13). The Bank received HUF 5 million (2021: HUF 25 million) consideration from the State for the exercising of owner’s rights as determined in the XXII chapter of the central budget .
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 84 28. GENERAL AND ADMINISTRATIVE EXPENSES 2022 2021 Wages and salaries (12 324) (11 198) Compulsory social security (1 868) (2 077) Other personnel expenses (2 072) (1 580) Personnel expenses (16 264) (14 855) Marketing (1 656) (1 590) Office and property maintenance (1 115) (925) System support and maintenance (961) (799) Expert fees (879) (832) Rental expense (532) (457) Post, newspapers and document filing (285) (357) Other material type services (489) (314) Electricity, water, gas supply (190) (117) Education (145) (107) Labour mediation (34) (28) Legal costs (86) (93) Media (123) (110) Membership fees (76) (65) Insurances (84) (78) Bank cost (123) (89) Traveling (57) (34) Other welfare services (42) (42) Other (327) (299) Other general administrative expenses (7 204) (6 336) Total general and administrative expenses (23 468) (21 191) The average number of the employees in 2022 was 838 (2021: 793). Expert fees include HUF 116.99 million gross fees paid to the auditor for the 2022 annual audit and other audit related services (2021: HUF 103.54 million). Audit fees paid to KPMG Hungary Ltd. amounted HUF 103.03 million (2021 HUF 97.53 million). There was no fee paid to the statutory auditor KPMG Hungary Ltd. neither in 2022 nor in 2021 for any non-audit services. KPMG Advisory Ltd. (member of KPMG Group) provided non-audit services to the Group during 2022 amounted to gross HUF 4.7 million (2021: HUF 4.7 million).
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 85 29. PROVISIONS OR (-) REVERSAL OF PROVISIONS 2022 2021 Other items Guarantees and loan commitments Total Other items Guarantees and loan commitments Total 1. Opening balance as 1 January (298) (3 249) (3 547) (248) (1 666) (1 914) 2. Charge (393) (2 611) (3 004) (106) (2 906) (3 012) 3. Release 108 1 792 1 900 40 1 498 1 538 4. Utilization 58 0 58 16 0 16 5. Foreign exchange difference 0 (347) (347) 0 (175) (175) 6. Closing balance at 31 December (525) (4 415) (4 940) (298) (3 249) (3 547) Net movement (excluding item 5.) (227) (819) (1 046) (50) (1 408) (1 458) Balance in the Profit or loss statement Other income (legal cases) (29) 0 (29) Impairment (-) or reversal of impairment of financial instruments (819) (819) 0 (1 408) (1 408) Amounts charged to wages (65) (65) (28) (28) Amount charged to other expenses (162) (162) 7 0 7 The table below presents the changes in the provision for financial guarantees and undrawn loan commitments during 2022 by credit risk stages. The movements represent every change during the year. Opening balance as at 1 January 2022 Net charge without stage transfer Charge due to origin Utilization and expiries From stage 1 to stage 2 From stage 2 to stage 1 From stage 2 to stage 3 FX impact Closing balance as at 31 December 2022 Guarantees (1 621) 1 768 (112) 1 0 0 0 (246) (210) Stage 1 (1 455) 1 621 (112) 1 18 (16) (246) (189) Stage 2 (166) 147 0 0 (18) 16 0 0 (21) Stage 3 0 0 0 0 0 0 0 Loan commitments (1 628) (823) (1 869) 216 0 0 0 (101) (4 205) Stage 1 (496) 73 (227) 212 194 0 7 (237) Stage 2 (1 132) (896) (1 482) 4 (194) 0 85 (108) (3 723) Stage 3 0 0 (160) 0 (85) 0 (245) TOTAL (3 249) 945 (1 981) 217 0 0 0 (347) (4 415)
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 86 The table below presents the changes in the provision for financial guarantees and undrawn loan commitments during 2021 by credit risk stages. Opening balance as at 1 January 2021 Net charge without stage transfer Charge due to origin Utilization and expiries From stage 1 to stage 2 From stage 2 to stage 1 From stage 2 to stage 3 FX impact Closing balance as at 31 December 2021 Guarantees (469) (172) (901) 1 0 0 0 (80) (1 621) Stage 1 (425) (293) (901) 1 245 (2) 0 (80) (1 455) Stage 2 (44) 121 0 0 (245) 2 0 0 (166) Stage 3 0 0 0 0 0 0 0 Loan commitments (1 197) 270 (655) 49 0 0 0 (95) (1 628) Stage 1 (118) 195 (655) 31 51 0 0 (496) Stage 2 (1 079) 75 0 18 (51) 0 0 (95) (1 132) Stage 3 0 0 0 0 0 0 0 TOTAL (1 666) 98 (1 556) 50 0 0 0 (175) (3 249) 30. IMPAIRMENT (-) OR REVERSAL OF IMPAIRMENT OF FINANCIAL INSTRUMENTS 2022 2021 Charge due to origin Net charge without stage transfer Total as at 31 December Charge due to origin Net charge without stage transfer Total as at 31 December Customer loans (839) (22 864) (23 703) (2 371) (11 603) (13 974) Loans to banks 0 0 0 0 (1) (1) Debt securities (893) (1 226) (2 119) (1 459) (428) (1 887) Deposits at Central and other banks 0 25 25 0 (8) (8) Other financial receivables 0 2 2 (28) 57 29 Other demand deposits 0 19 19 0 20 20 Guarantees (112) 1 769 1 657 (901) (171) (1 072) Loan commitments (1 869) (607) (2 476) (652) 316 (336) Subtotal (3 713) (22 882) (26 595) (5 411) (11 818) (17 229) Recovery of purchased receivables 9 034 12 031 Total profit and loss impact (17 561) (5 198) Recovery on purchased receivables represents the actual recovery since initial recognition or planned recovery due to the change in the assumptions in the model used to estimate the future recovery.
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 87 The table below presents the changes in the impairment for financial assets during 2022 by credit risk stages. The movements represent every change during the year. LOANS Opening balance as at 1 January 2022 Charge due to origin Utilizati on Net charge without stage transfer From stage 1 to stage 2 From stage 1 or 2 to stage 3 From stage 2 or 3 to stage 1 From stage 3 to stage 2 Unwin ding FX impact Closing balance as at 31 December 2022 Customer loans – Stage 1 (2 192) (368) 0 (2 741) 1 315 0 0 (174) (4 160) General governments (136) 0 0 53 0 0 0 (5) (88) Other financial corporations (348) (169) 0 (330) 87 0 0 0 (760) Other non-financial corporations (1 704) (151) 0 (2 513) 1 228 0 0 (169) (3 309) Households (4) (48) 0 49 0 0 0 0 (3) Loans to banks – Stage 1 (5) 0 0 0 0 0 0 0 (5) Refinancing loans 0 0 0 0 0 0 0 0 0 Other loans (5) 0 0 0 0 0 0 0 (5) Customer loans – Stage 2 (23 882) (65) 0 (18 554) (1 315) 9 380 0 (3) (1 614) (36 053) General governments 0 0 0 0 0 0 0 0 0 0 Other financial corporations (2 025) (65) 0 (9 084) (87) 6 524 0 (3) (45) (4 785) Other non-financial corporations (21 778) 0 0 (9 476) (1 228) 2 852 0 0 (1 569) (31 199) Households (79) 0 0 6 0 4 0 0 0 (69) Loans to banks – Stage 2 0 0 0 0 0 0 0 0 0 0 Refinancing loans 0 0 0 0 0 0 0 0 0 0 Other loans 0 0 0 0 0 0 0 0 0 0
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 88 LOANS Opening balance as at 1 January 2022 Charge due to origin Utilizati on Net charge without stage transfer From stage 1 to stage 2 From stage 1 or 2 to stage 3 From stage 2 or 3 to stage 1 From stage 3 to stage 2 Unwin ding FX impact Closing balance as at 31 December 2022 Customer loans – Stage 3 (12 099) (111) 0 (76) (9 380) 0 3 (260) (908) (22 831) General governments 0 0 0 0 0 0 0 0 0 0 Other financial corporations 0 (78) 0 (1 845) (6 524) 0 3 13 0 (8 431) Other non-financial corporations (12 092) (33) 0 1 765 (2 852) 0 0 (273) (908) (14 393) Households (7) 0 0 4 (4) 0 0 0 0 (7) Customer loans – POCI (11 700) (295) 0 (1 493) 0 0 0 0 0 (13 488) General governments 0 0 0 0 0 0 0 0 0 0 Other financial corporations (45) 0 0 45 0 0 0 0 0 0 Other non-financial corporations (1 858) (46) 0 (203) 0 0 0 0 0 (2 107) Households (9 797) (249) 0 (1 335) 0 0 0 0 0 (11 381) Loans to banks – Stage 3 0 0 0 0 0 0 0 0 0 0 Refinancing loans 0 0 0 0 0 0 0 0 0 0 Other loans 0 0 0 0 0 0 0 0 0 0 Customer loans - TOTAL (49 873) (839) 0 (22 864) 0 0 0 0 (260) (2 696) (76 532) General governments (136) 0 0 53 0 0 0 0 0 (5) (88) Other financial corporations (2 418) (312) 0 (11 214) 0 0 0 0 13 (45) (13 976) Other non-financial corporations (37 432) (230) 0 (10 427) 0 0 0 0 (273) (2 646) (51 008) Households (9 887) (297) 0 (1 276) 0 0 0 0 0 0 (11 460) Loans to banks - TOTAL (5) 0 0 0 0 0 0 0 0 0 (5) Refinancing loans 0 0 0 0 0 0 0 0 0 0 0 Other loans (5) 0 0 0 0 0 0 0 0 0 (5)
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 89 DEBT SECURITIES Opening balance as at 1 January 2022 Charge due to origin Net charge without stage transfer From stage 1 to stage 2 From stage 1 or 2 to stage 3 From stage 2 or 3 to stage 1 From stage 3 to stage 2 FX impact Closing balance as at 31 December 2022 Stage 1 (1 938) (893) (833) 48 0 0 (10) (3 626) Hungarian government bonds 0 0 0 0 0 0 0 0 Corporate bonds (1 935) (893) (835) 48 0 0 (10) (3 625) Mortgage bonds (3) 0 2 0 0 0 0 (1) Stage 2 (148) 0 (48) (48) 148 0 0 (96) Hungarian government bonds 0 0 0 0 0 0 0 0 Corporate bonds (148) 0 (48) (48) 148 0 0 (96) Mortgage bonds 0 0 0 0 0 0 0 0 Stage 3 0 0 (345) (148) 0 0 0 (493) Hungarian government bonds 0 0 0 0 0 0 0 0 Corporate bonds 0 0 (345) (148) 0 0 0 (493) Mortgage bonds 0 0 0 0 0 0 0 0 DEPOSITS AT CENTRAL AND OTHER BANKS Opening balance as at 1 January 2022 Charge due to origin Net charge without stage transfer From stage 1 to stage 2 From stage 1 or 2 to stage 3 From stage 2 or 3 to stage 1 From stage 3 to stage 2 Closing balance as at 31 December 2022 Stage 1* (31) 0 25 (6) Central bank deposits (3) 0 3 0 Other bank deposits (28) 0 22 (6) *: Only stage 1 deposits were at the Group portfolio in 2022. OTHER FINANCIAL ASSETS Opening balance as at 1 January 2022 Charge due to origin Net charge without stage transfer From stage 1 to stage 2 From stage 1 or 2 to stage 3 From stage 2 or 3 to stage 1 From stage 3 to stage 2 Closing balance as at 31 December 2022 Stage 2* (4) 0 2 (2) Trade receivables (4) 0 3 (1) Margin accounts 0 0 (1) (1) *: Only stage 2 receivables were at the Group portfolio in 2022.
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 90 OTHER DEMAND DEPOSITS Opening balance as at 1 January 2022 Charge due to origin Net charge without stage transfer From stage 1 to stage 2 From stage 1 or 2 to stage 3 From stage 2 or 3 to stage 1 From stage 3 to stage 2 FX impact Closing balance as at 31 December 2022 Stage 1* (25) 0 19 (4) (10) Cash balances with National Bank of Hungary (25) 0 16 0 (9) Other demand deposits 0 0 3 (4) (1) *: Only stage 1 deposits were at the Group portfolio in 2022. The table below presents the changes in the impairment for financial assets during 2021 by credit risk stages. LOANS Opening balance as at 1 January 2021 Charge due to origin Utilizati on Net charge without stage transfer From stage 1 to stage 2 From stage 1 or 2 to stage 3 From stage 2 or 3 to stage 1 From stage 3 to stage 2 Unwin ding FX impact Closing balance as at 31 December 2021 Customer loans – Stage 1 (1 293) (1 646) 0 (8) 810 0 (37) (18) (2 192) General governments (98) (23) 0 (14) 0 0 0 (1) (136) Other financial corporations (701) (64) 0 273 161 0 (17) 0 (348) Other non-financial corporations (476) (1 558) 0 (204) 571 0 (20) (17) (1 704) Households (18) (1) 0 (63) 78 0 0 0 (4) Loans to banks – Stage 1 (4) 0 0 (1) 0 0 0 0 (5) Refinancing loans (1) 0 0 1 0 0 0 0 0 Other loans (3) 0 0 (2) 0 0 0 0 (5) Customer loans – Stage 2 (17 178) (189) 0 (5 468) (810) 206 37 (197) (283) (23 882) General governments 0 0 0 0 0 0 0 0 0 0 Other financial corporations (1 060) (12) 0 (801) (161) 0 17 0 (8) (2 025) Other non-financial corporations (16 115) (177) 0 (4 669) (571) 206 20 (197) (275) (21 778) Households (3) 0 0 2 (78) 0 0 0 0 (79) Loans to banks – Stage 2 0 0 0 0 0 0 0 0 0 0 Refinancing loans 0 0 0 0 0 0 0 0 0 0 Other loans 0 0 0 0 0 0 0 0 0 0
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 91 LOANS Opening balance as at 1 January 2021 Charge due to origin Utilizati on Net charge without stage transfer From stage 1 to stage 2 From stage 1 or 2 to stage 3 From stage 2 or 3 to stage 1 From stage 3 to stage 2 Unwin ding FX impact Closing balance as at 31 December 2021 Customer loans – Stage 3 (22 945) (62) 9 446 1 342 (206) 0 197 (151) 280 (12 099) General governments 0 0 0 0 0 0 0 0 0 0 Other financial corporations 0 0 0 0 0 0 0 0 0 0 Other non-financial corporations (22 932) (62) 9 446 1 336 (206) 0 197 (151) 280 (12 092) Households (13) 0 0 6 0 0 0 0 0 (7) Customer loans – POCI (3 757) (474) 0 (7 469) 0 0 0 0 0 (11 700) General governments 0 0 0 0 0 0 0 0 0 0 Other financial corporations (45) 0 0 0 0 0 0 0 0 (45) Other non-financial corporations (1 956) (7) 0 105 0 0 0 0 0 (1 858) Households (1 756) (467) 0 (7 574) 0 0 0 0 0 (9 797) Loans to banks – Stage 3 0 0 0 0 0 0 0 0 0 0 Refinancing loans 0 0 0 0 0 0 0 0 0 0 Other loans 0 0 0 0 0 0 0 0 0 0 Customer loans - TOTAL (45 173) (2 371) 9 446 (11 603) 0 0 0 0 (151) (21) (49 873) General governments (98) (23) 0 (14) 0 0 0 0 0 (1) (136) Other financial corporations (1 806) (76) 0 (528) 0 0 0 0 0 (8) (2 418) Other non-financial corporations (41 479) (1 804) 9 446 (3 432) 0 0 0 0 (151) (12) (37 432) Households (1 790) (468) 0 (7 629) 0 0 0 0 0 0 (9 887) Loans to banks - TOTAL (4) 0 0 (1) 0 0 0 0 0 0 (5) Refinancing loans (1) 0 0 1 0 0 0 0 0 0 0 Other loans (3) 0 0 (2) 0 0 0 0 0 0 (5)
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 92 DEBT SECURITIES Opening balance as at 1 January 2021 Charge due to origin Net charge without stage transfer From stage 1 to stage 2 From stage 1 or 2 to stage 3 From stage 2 or 3 to stage 1 From stage 3 to stage 2 Closing balance as at 31 December 2021 Stage 1* (52) (1 459) (427) 0 0 0 (1 938) Hungarian government bonds 0 0 0 0 0 0 0 Corporate bonds (49) (1 459) (427) 0 0 0 (1 935) Mortgage bonds (3) 0 0 0 0 0 (3) Stage 2* (147) 0 (1) 0 0 0 (148) Hungarian government bonds 0 0 0 0 0 0 0 Corporate bonds (147) 0 (1) 0 0 0 (148) Mortgage bonds 0 0 0 0 0 0 0 *: Only stage 1 and 2 securities were at the Group portfolio in 2021. DEPOSITS AT CENTRAL AND OTHER BANKS Opening balance as at 1 January 2021 Charge due to origin Net charge without stage transfer From stage 1 to stage 2 From stage 1 or 2 to stage 3 From stage 2 or 3 to stage 1 From stage 3 to stage 2 Closing balance as at 31 December 2021 Stage 1* (23) 0 (8) (31) Central bank deposits 0 0 (3) (3) Other bank deposits (23) 0 (5) (28) *: Only stage 1 deposits were at the Group portfolio in 2021. OTHER FINANCIAL ASSETS Opening balance as at 1 January 2021 Charge due to origin Net charge without stage transfer From stage 1 to stage 2 From stage 1 or 2 to stage 3 From stage 2 or 3 to stage 1 From stage 3 to stage 2 Closing balance as at 31 December 2021 Stage 2* (33) (28) 57 (4) Trade receivables (33) (28) 57 (4) Margin accounts 0 0 0 *: Only stage 2 receivables were at the Group portfolio in 2021. OTHER DEMAND DEPOSITS Opening balance as at 1 January 2021 Charge due to origin Net charge without stage transfer From stage 1 to stage 2 From stage 1 or 2 to stage 3 From stage 2 or 3 to stage 1 From stage 3 to stage 2 Closing balance as at 31 December 2021 Stage 1* (45) 0 (20) (25) Cash balances with National Bank of Hungary 0 0 (25) (25) Other demand deposits (45) 0 45 0 *: Only stage 1 deposits were at the Group portfolio in 2021. 0
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 93 31. IMPAIRMENT OR (-) REVERSAL OF IMPAIRMENT OF INVESTMENTS IN EXEMPTED ASSOCIATES 2022 2021 1. Opening balance as at 1 January (6 938) (6 841) 2. Charge (2 288) (1 357) 3. Release and utilization 853 1 039 3.a. Release 125 540 3.b. Utilization 728 499 4. Foreign exchange difference 0 0 5. Reclassification (376) 221 6. Closing balance as at 31 December (8 749) (6 938) Net movement (1 811) (97) Balance in the Income statements (2+3a) (2 163) (817) 32. IMPAIRMENT (-) OR REVERSAL OF IMPAIRMENT OF NON-FINANCIAL INSTRUMENTS 2022 2021 Property, plant and equipment (Note 11) 0 0 Intangibles (Note 12) 0 0 Other assets (7) 0 Total (7) 0 The impairment movements related to other assets are presented in the below table. 2022 2021 Other assets Reposs essed assets Total Other assets Reposs essed assets Total 1. Opening balance as at 1 January (109) (1) (110) (114) (147) (261) 2. Charge 0 (11) (11) 0 0 0 3. Release and utilization 7 0 7 5 146 151 3.a. Release 4 0 4 0 0 0 3.b. Utilization 3 0 3 5 146 151 4. Closing balance as at 31 December (102) (12) (114) (109) (1) (110) Net movement 7 (11) (4) 5 146 151 Balance in the Income statements 4 (11) (7) 0 0 0
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 94 33. TAXATION Income tax expenses include current taxes and deferred taxes. In both 2022 and 2021 the corporate tax rate was 9%, the local tax rate was 2%, and the innovation contribution rate was 0.3%. 2022 2021 Current tax 3 013 1 994 from this corporate tax 1 133 535 from this local tax and innovation contribution 1 880 1 459 Deferred tax (442) 246 Total 2 571 2 240 The following table represents deferred tax asset and liability movements reported either in the income statement or in the other comprehensive income. 2022 2021 Recognized in profit or loss Recognized in OCI Deferred tax liability Deferred tax asset Recognized in profit or loss Recognized in OCI Deferred tax liability Deferred tax asset Tax expense 3 013 1 994 Deferred tax by titles Property, plant and equipment 14 74 17 0 60 0 Provisions (6) (21) (15) 0 (15) 0 Financial instruments (444) 36 3 008 (72) 233 1 3 400 (56) Tax loss carry forward (6) (36) 11 0 (30) 0 Total (442) 36 3 025 (72) 246 1 3 415 (56) Total tax expense in the Income statements 2 571 2 240
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 95 The following table reconciles income taxes as reported in the income statement. Reconciliation of effective tax rate 2022 2021 Tax rate Amount Tax rate Amount Profit before income taxes 29 418 10 049 Corporate tax 9.00% 2 648 9.00% 904 Local tax and innovation contribution impact 6.39% 1 880 14.52% 1 459 Corporate tax impact of subsidiaries negative result 1.56% 458 4.40% 442 Tax loss carry forward (0.92%) (272) (1.51%) (152) Subsidiary and equity consolidation impact (6.24%) (1 835) (2.59%) (260) Effect of other tax base modifying items (1.05%) (308) (1.52%) (153) Effective tax 8.74% 2 571 22.30% 2 240 No deferred tax liability was recorded on profits generated by the consolidation of subsidiaries and associates, since the Bank can influence the timing of the use of these temporary differences through its control or significant influence and it is probable that the resulting temporary differences will not be revised in the foreseeable future. If a loss has been incurred, no deferred tax asset has been recorded either, as it is not probable that sufficient taxable profits will be available against which the resulting deductible temporary difference may be used. The “other” line of tax reconciliation mostly includes the net effect of these items. The accumulated amount of tax losses carries forward in 2022 was HUF 74 833 million (2021: HUF 76 709 million). The tax losses originated until 2014 (HUF 54 322 million) can be carried forward until 31 December 2030. Those which are originated from 2015 can be carried forward in the next 5 years after origination (2022: 810 million, 2023: 3 144 million, 2024: 1 664, 2025: 12 254 million, 2027: 2 639 million). The future realization of the tax loss carries forward is uncertain and therefore a deferred tax asset is only recognized in an amount that compensates 50% of the deferred tax liability since according to the Hungarian tax legislation in force the losses that can be utilized on annual basis shall not be more than the 50% of the positive tax base. The amount of the not recognized deferred tax asset on tax loss carry forward as at 31 December 2022 is HUF 6 735 million (2021: HUF 6 904 million).
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 96 34. RELATED PARTIES The Bank is owned by the Hungarian State. The Bank identifies associates as related parties that are part of the MFB Group. The related parties also include members of the Executive board and the Board of Supervisors as well as companies over which these persons have control or significant influence. Transactions between the Bank and its consolidated companies are eliminated from the consolidated accounts. Related party transactions are carried out under normal market conditions. The Group using the option provided in IAS 24.25 and does not disclose its transactions with other state- owned companies and disclose only the most significant transactions with the Hungarian State such as state securities taxes and reimbursements. The definitions of the headings used in the table below are as follows. State: The ultimate controlling party. The State column in the below table includes the major items due to or from the various state bodies. The rows of securities include government securities issued by the Central Government Debt Management Agency (ÁKK). Tax payable or refundable to the National Tax and Customs Administration (NAV) is included in the tax receivables/liabilities lines. Other assets/liabilities include reimbursement from the Managing Authorities and advances received. Receivables from the State due to currency-hedging agreement include the claim on the Ministry of Finance. The income statement lines include the effects of the above items such as interest income, tax payments, or reimbursement income. Associates: Any company where the Bank has significant influence but has no control over financial and operational policies. 2022 2021 Associates State Associates State ASSETS Non-trading financial assets mandatorily at fair value through profit or loss 855 0 969 0 Loans to customers 855 0 969 0 Financial assets at fair value through other comprehensive income 0 60 537 0 32 537 Debt securities 0 60 537 0 32 537 Financial assets at amortized cost 33 572 44 655 22 340 55 727 Debt securities 0 42 158 0 53 494 Loans to customers 33 572 1 202 22 309 1 893 Other financial receivables 0 1 295 31 340 Investments in associates 267 935 169 870 Tax assets 0 0 Current tax assets 0 0 Other assets 2 784 8 386 0 9 076 Receivables from the state due to currency-hedging agreement* 193 162 162 273 *: from the presented amount HUF 31 300 million (2021: HUF 3 713 million) was presented in the income statements’ line “Exchange differences [gain or (-) loss], net”.
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 97 2022 2021 Associates State Associates State LIABILITIES Financial liabilities measured at amortized cost 1 094 0 2 151 0 Deposits 1 094 0 2 151 0 Tax liabilities 1 297 574 Current tax liabilities 1 297 574 Other liabilities 23 6 616 19 6 391 Guarantees and loan commitments 56 574 0 252 242 0 INCOME STATEMENTS Interest income 512 1 691 1 192 1 803 Interest expense (25) (4) Dividend income 0 0 Fee and commission income 4 27 Fee and commission expense (2) (6) Other operating income 174 4 920 294 4 368 Other operating expense (258) (8 726) (18) (3 874) Impairment (-) or reversal of impairment of financial instruments * (2 508) 0 (32) (16) Impairment or (-) reversal of impairment of investments in exempted associates (2 163) 0 (817) 0 Tax expense related to profit or loss (3 013) (1 994) *: the presented data excludes the collective impairment and provision created in accordance with the provision of IFRS 9 The key management personnel compensation in 2022 and 2021 was the following: 2022 2021 Members of the Board of Directors 29 27 Members of the Supervisory Board 19 22 CEOs and deputy CEOs 138 106 Total 186 155 The table above includes the short-term benefits paid to the key management personnel. There was not any post employment benefit, long term benefit or termination benefit paid to the key management personnel and there is no share-based payment programme operated by the Bank. There was also no loan disbursement to the key management personnel.
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 98 35. SEGMENT REPORTING Operating segments are components that engage in business activities that may earn revenues or incur expenses, whose operating results are regularly reviewed by the chief operating decision maker (CODM), and for which discrete financial information is available. The CODM is the person ‒ or group of persons ‒ who allocates resources and assesses the performance for the entity. The functions of the CODM are performed by the Management Board of the Group. The Group’s segment reporting is based on the following operating segments. Segments Activity Banking: Loans. deposits and other transactions and balances with customers and banks Investment: Activities related to securities and investments EU fund management: Activities related to the mediation of EU funds by the Bank Debt management: Activities related to purchase, debt management, factoring Venture capital funding: Activities related to venture capital funding Property utilization: Activities related to management of properties owned by the Group The Group does not prepare geographical breakdowns because its primary business is carried out in Hungary and it has no significant foreign operations. The results of the segments include the revenue and expenditure directly linked to that segment and the relevant part of the revenue and expenditure which may be assigned to a segment whether from external transactions or from other segments of the Group. Income statement items were broken down based on the principle that if an item is clearly assigned to the segment the total amount was presented there and where it cannot be clearly categorized the net segment’s asset-based allocation was followed. The banking and investment assets are clearly identifiable into the segments based on the Financial position statements lines. Liabilities and equity were separated into allocated and not-allocated parts. Not-allocated part represents the intangibles, property, plant and equipment, receivables from the state due to FX hedge agreement (those part which was already closed. no unpaid loan contract behind it) and the liquidity reserve set by internal policy (5% of the total assets). The remainder was allocated proportionally to each segment.
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 99 2022 Banking Investment EU fund management Debt management Venture capital funding Property management Total Total segment income and gain Interest income 106 650 0 0 7 941 2 036 57 116 684 from this interest income calculated using the effective interest method 96 535 0 0 7 941 2 036 57 106 569 from this other similar income 10 115 0 0 0 0 0 10 115 Fee and commission income 5 081 0 5 0 1 096 0 6 182 from this fund management fee 0 0 0 0 1 096 0 1 096 from this guarantee fees 4 771 0 0 0 0 0 4 771 from this loan servicing fees 310 0 0 0 0 0 310 from this fee from receivable management 0 0 0 0 0 0 0 from this other fees and commission 0 0 5 0 0 0 5 Dividend income 0 5 0 0 0 0 5 Gains on derecognition of financial assets and liabilities not measured at fair value through profit or loss, net 171 58 0 0 256 0 485 Gains on non-trading financial assets mandatorily at fair value through profit or loss, net (9) 0 0 0 10 394 0 10 385 Gains or (-) losses from hedge accounting, net 488 164 0 0 0 0 652 Exchange differences [profit], net 730 370 0 0 2 681 0 3 781 Other operating income 4 440 213 4 722 97 1 596 3 174 14 242 Total segment income and gain 117 551 810 4 727 8 038 18 059 3 231 152 416 Interest expenses (51 636) 0 0 (1 467) (17 440) (461) (71 004) Fee and commission expenses (1 004) 0 0 0 0 0 (1 004) from this agent fees (157) 0 0 0 0 0 (157) from this guarantee fees (775) 0 0 0 0 0 (775) from this bank account commission (63) 0 0 0 0 0 (63) from this other fees and commission (9) 0 0 0 0 0 (9) Gains on financial assets and liabilities held for trading, net (939) (315) 0 0 0 0 (1 254) Losses on derecognition of non-financial assets, net 0 33 0 8 414 25 480 Contract modification loss, net (3 018) 0 0 0 0 0 (3 018) Other operating expenses (10 782) (2 272) (110) (2 962) (139) (143) (16 408) Administrative expenses (6 259) (2 102) (4 041) (5 663) (4 095) (1 308) (23 468) Depreciation (666) (223) (429) (304) (686) (167) (2 475) Segment profit before impairment and provisions 43 247 (4 069) 147 (2 350) (3 887) 1 177 34 265
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 100 2022 Banking Investment EU fund management Debt management Venture capital funding Property management Total Impairment (-) or reversal of impairment on financial instruments (23 516) (139) 0 6 854 (760) 0 (17 561) Impairment (-) or reversal of impairment of investments in exempted associates 0 3 990 0 0 (6 153) 0 (2 163) Impairment of non-financial instruments 0 0 0 (11) 4 0 (7) Profit or (-) loss from associates 0 2 825 0 0 12 059 0 14 884 Segment income before tax 19 731 2 607 147 4 493 1 263 1 177 29 418 Income tax expense (982) (333) (5) (1 404) 247 (94) (2 571) Profit for the year 18 749 2 274 142 3 089 1 510 1 083 26 847 2022 Banking Investment EU fund management Debt management Venture capital funding Property management Total Segment revenue Interest income 106 650 0 0 7 941 2 036 57 116 684 Fee and commission income 5 081 0 5 0 1 096 0 6 182 Dividend income 0 5 0 0 0 0 5 Other operating income 4 440 213 4 722 97 1 596 3 174 14 242 Total segment revenue 116 171 218 4 727 8 038 4 728 3 231 137 113 Timing of revenue Point in time 9 521 218 4 727 97 2 692 3 174 20 429 Over time 106 650 0 0 7 941 2 036 57 116 684 2022 Banking Investment Not allocated Debt management Venture capital funding Property management Total Segment assets 1 741 865 222 296 256 174 68 788 93 308 1 915 2 384 346 Participation of segment from total assets 73.06% 9.32% 10.74% 2.89% 3.91% 0.08% 100.00% Segment liabilities 1 525 384 194 669 24 378 60 239 81 712 0 1 886 382 Participation of segment from total liabilities 80.87% 10.32% 1.29% 3.19% 4.33% 0.00% 100.00%
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 101 2021 Banking Investment EU fund management Debt management Venture capital funding Property management Total Total segment income and gain Interest income 42 618 0 0 8 592 1 115 6 52 331 from this interest income calculated using the effective interest method 36 628 0 0 8 592 855 6 46 081 from this other similar income 5 990 0 0 0 260 0 6 250 Fee and commission income 2 337 0 5 13 1 016 0 3 371 from this fund management fee 0 0 0 0 1 016 0 1 016 from this guarantee fees 1 366 0 0 0 0 0 1 366 from this loan servicing fees 959 0 0 0 0 0 959 from this fee from receivable management 0 0 0 13 0 0 13 from this other fees and commission 12 0 5 0 0 0 17 Dividend income 0 0 0 0 0 0 0 Gains on derecognition of financial assets and liabilities not measured at fair value through profit or loss, net 403 675 0 (157) 269 0 1 190 Gains on financial assets and liabilities held for trading, net 1 0 0 0 0 0 1 Gains on non-trading financial assets mandatorily at fair value through profit or loss, net 123 698 0 0 (458) 0 363 Gains or (-) losses from hedge accounting, net 21 6 0 0 0 0 27 Exchange differences [profit], net (51) (80) 0 0 640 0 509 Other operating income 2 135 49 4 249 118 649 2 866 1 066 Total segment income and gain 47 587 1 348 4 254 8 566 3 231 2 872 67 858 Interest expenses (14 515) (3 749) 0 (888) 0 (411) (19 563) Fee and commission expenses (203) 0 0 0 0 0 (203) from this agent fees (130) 0 0 0 0 0 (130) from this guarantee fees (35) 0 0 0 0 0 (35) from this bank account commission (35) 0 0 0 0 0 (35) from this other fees and commission (3) 0 0 0 0 0 (3) Losses on derecognition of non-financial assets, net (1) (486) 0 0 220 33 (234) Contract modification loss, net (1 045) 0 0 0 0 0 (1 045) Other operating expenses (4 932) (879) (95) (387) (203) (160) (6 656) Administrative expenses (6 022) (1 850) (3 573) (4 452) (4 314) (980) (21 191) Depreciation (563) (173) (334) (858) (134) (156) (2 218) Segment profit before impairment and provisions 20 306 (5 789) 252 1 981 (1 200) 1 198 16 748
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 102 2021 Banking Investment EU fund management Debt management Venture capital funding Property management Total Impairment (-) or reversal of impairment on financial instruments (9 411) (79) 0 4 431 (150) 11 (5 198) Impairment (-) or reversal of impairment of investments in exempted associates 0 1 083 0 0 (1 900) 0 (817) Impairment of non-financial instruments 0 0 0 0 0 0 0 Profit or (-) loss from associates 0 1 146 0 0 (1 830) 0 (684) Segment income before tax 10 895 (3 639) 252 6 412 (5 080) 1 209 10 049 Income tax expense (687) (209) 0 (865) (388) (91) (2 240) Profit for the year 10 208 (3 848) 252 5 547 (5 468) 1 118 7 809 2021 Banking Investment EU fund management Debt management Venture capital funding Property management Total Segment revenue Interest income 42 618 0 0 8 592 1 115 6 52 331 Fee and commission income 2 337 0 5 13 1 016 0 3 371 Dividend income 0 0 0 0 0 0 0 Other operating income 2 135 49 4 249 118 649 2 866 10 066 Total segment revenue 47 090 49 4 254 8 723 2 780 2 872 65 768 Timing of revenue Point in time 4 472 49 4 254 131 1 665 2 866 13 437 Over time 42 618 0 0 8 592 1 115 6 52 331 2021 Banking Investment Not allocated Debt management Venture capital funding Property management Total Segment assets 1 585 631 232 170 290 974 75 168 116 774 1 820 2 302 537 Participation of segment from total assets 68.86% 10.08% 12.64% 3.26% 5.07% 0.09% 100.00% Segment liabilities 1 399 764 204 955 30 674 66 357 103 086 1 607 1 806 443 Participation of segment from total liabilities 77.49% 11.35% 1.70% 3.67% 5.71% 0.08% 100.00%
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 103 36. FINANCIAL RISK MANAGEMENT The Group’s internal governance is consistent with its market weight and prominent business role, as well as its approved business model, and it incorporates the relevant risk principles, organizational structure, decision-making structures (including boards and committees), risk management rules, models and methodologies. The Group operates reporting lines that enable the monitoring of risk performance. Pursuant to Act XX of 2001 on the Hungarian Development Bank Joint Stock Company, the Bank (hereinafter: MFB Act) strives to balance business and risk management aspects. The Group is continually developing its comprehensive risk culture that, in line with the Group's risk appetite, ensures compliance with international standards and best practices, as well as applicable domestic regulatory conditions and recommendations, and the identification, measurement and management of risks related to banking operations. The Group has an approved credit risk policy in line with the Bank's strategic objectives, comprehensive risk management policies and other policies covering different segments of risks (operational risk, market risk, etc.). In connection with the IBOR reform, the various professional areas of the Bank continuously participate in professional forums and consultations. The Group's exposure is not significant because it has only one USD Libor-based interest-bearing loan transaction (in the amount of USD 56.48 million). Only this loan amount and its sources can be found in our books. Defining risk management principles includes defining risk appetite, risk management strategy and risk management policy, setting risk limits, defining and documenting risk management system processes, procedures, tasks, decision and control powers, identifying risks in a continuous, timely manner, development of procedures and methods for measuring risks, measuring, assessing and monitoring risks, preparing reports on risk management activities, and establishing procedures to be followed in the event of exceeding established risk limits. The Bank has a strategy and processes in order to determine and maintain the capital adequacy of the size and composition necessary to cover its current and future risks. It is the Government's legal obligation to ensure the long-term and stable functioning of the Bank, and it also monitors in detail the Bank's risk-taking activities, the expediency and profitability of management. The Bank quantifies all arising risks and presents them to its management bodies, despite the fact that, based on Section 8 (2) of the MFB Act, the Bank was exempted from the internal assessment of capital adequacy required by Section 97 of the CCXXXVII Act of 2013 on Credit Institutions and Financial Enterprises procedure and the excess capital requirement from formation and maintenance. Group's risk management framework is based on a coherent, integrated approach: • Due to its core business, the Group consciously assumes risks (lending, investment transactions) and manages the risks associated with core business. • A well-structured regulatory hierarchy provides the framework for risk management and control. • As part of its risk management activities, the Group identifies, measures and manages relevant risks that are critical to its operations, considering the overall risk profile. • Methodological knowledge extends to the volatility of risks in stress situations, i.e., the size of a capital buffer needed to keep risk plan values safe. • Key risk indicators to monitor each type of risk (limits, processes, measures) are used to return the value of the indicators to the expected zone.
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 104 • The Group operates a management information system as part of its reporting lines to support efficient risk decision-making while an external reporting service operates for supervisory purposes. The primary tools for developing a risk and risk management culture are the regular review and updating of risk and risk management policies and internal regulatory documents, the continuous communication of the defined value system and the regular training of employees in line with their roles and responsibilities in risk-taking, risk management and risk control. This way an informed risk culture is embedded in the day-to-day operations of the Group. The risk principles and strategies are approved by the Bank’s Board of Directors. The Board of Directors performing the management tasks and the Supervisory Board regularly receive reports prepared by the Risk Management Division on the composition and development of the Group’s portfolio. On this basis the implementation of the risk strategy can be evaluated. The risk management governance model defines the responsibilities and duties of different bodies and individuals within each organization, with the aim of ensuring the sound and efficient management of activities and the management of different types of risk. The decision-making process defines, in a consistent manner, the responsibilities and powers of decision-making, consistent with the complexity of its decision-making areas and its financial impact. The key decision-making bodies and decision-makers are listed in the Decision-making Agenda, and their powers, organization and procedures are defined in the Articles of Association, the Rules of Procedure of the Board of Directors and the Decision-making Agenda. Decision - making Bodies • Owner of property rights, • Board of Directors • Executive Board, • Assets-Liabilities Management Committee, • Individual Loans Committee, • EU Steering Committee, • Irregularities Management Committee, • Development Steering Committee. Bodies with specific powers defined in the Bank's regulatory document are also considered as Decision- making Bodies (e.g., Crisis Committee). The powers and responsibilities of each committee are contained in the Bank's Articles of Association, the Rules of Procedure of the Board of Directors and the Decision-Making Rules of Procedure. The determination of decision levels depends on the size of the commitment, the score and the level of coverage.
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 105 Risk Management Division and Strategic Risk Management Directorate The Risk Management Division is completely separated from the Business Areas organizationally. The Head of the Division is a member of the Executive Board and reports directly to the CEO. The Group exercises the Group’s risk control function through a dedicated organizational unit, the Strategic Risk Management Directorate, which is independent of the business areas and the operational risk management area. In view of the aspects of proportionality, it is not justified to operate the risk control area as an independent division, therefore, assessing the advantages and disadvantages, the Bank operates the Strategic Risk Management Directorate within the framework of the Risk Management Division. The organizational unit performing the risk control function is responsible for defining the Group's risk management framework, enforcing external and internal limits and controls, and monitoring the implementation of the above within the Group and through intermediaries. In line with this, the Division is responsible for the risk oversight of the Strategic Group and the operating of Group- level risk management. Departments of the Risk Management Division: • Operative Credit Risk Management Directorate The activities of the Operative Credit Risk Management Directorate include the identification and reduction of risks and the setting of risk limits in the preparation of credit and investment decisions. It is the responsibility of the Operative Credit Risk Management Directorate to monitor the risk assumptions at the time of contracting and disbursement and after the risk assumption. The Bank monitors the contractual obligations of its customers. o Risk Analysis Department The responsibilities of the Risk Analysis Department include the performance of risk analysis and risk control tasks for loans, investment transactions, fund managers and funds, the review and approval of customer ratings/limits, financial and sector analyses, checking the fulfillment of contract and disbursement conditions, making recommendations for impairment and provisioning. o Monitoring and EU Data Service Department Monitoring the exposures of clients in the portfolio owned by the Bank, developing and implementing approved action plans for clients with abnormal status. • Strategic Risk Management Directorate The Strategic Risk Management Directorate is responsible for the development and regulation of risk identification and measurement methodologies, the transparent presentation and application of risks, and the overall determination of risk losses. • Special Credit Risk Management Directorate During its restructuring, pre-recovery and preparatory activities, the Special Credit Risk Management Directorate is responsible for the pre-work out activities within the Bank, i.e., the design and management of risk mitigation and reimbursement processes and the determination of risk losses (impairment, provisions). • Financial Instruments Control Directorate The Financial Instruments Control Directorate carries out on-the-spot checks on loans refinanced from its own resources or outsourced to ensure compliance with credit targets.
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 106 • Quality Assurance Methodology Department Development and implementation of mid-term audit strategy and annual audit plan, preparation of internal auditing policies and methodology, and follow-up of audit findings. • Irregularity Management Department It performs tasks related to unauthorized use of resources in the EU programming periods: identification of responsibilities, registration, and reporting. Participates in the investigation of irregularities and unauthorized use of resources. The most significant risks arising from financial instruments to which the Group is exposed are credit risk, liquidity risk, market risk (currency exchange rate risk and banking book interest rate risks), climate change-related and environmental risk, operational risk. Risk management policies are set by the Board of Directors of the Bank in accordance with the rules and regulations set by the National Bank of Hungary. The application of and compliance to these policies is supervised by the Board. The Group has established reporting systems for continuous monitoring of these risks. A. CREDIT RISK a) Credit risk management Credit risk is the risk of financial loss to the Group if the client fails to meet its contractual obligations. Credit risk arises principally from the Group’s lending and investment activities, including the acquisition of investment certificates. The Group prepares and applies internal policies approved by the Board of Directors to achieve its strategy. These policies are intended to ensure the established and transparent risk exposure the control of assessment and decrease of risks. The risk-taking regulations and policies developed for the safe management and prudent operation of the Group are based on international and domestic professional practice, relevant legislation and supervisory recommendations and guidelines, Customer rating Customer and partner ratings must be performed during the decision-making process for all customers against whom the Group intends to take risks. Beyond that the Group rates its clients at least once per year and performs extra reviews when appropriate. The customer rating procedures applied by the Group are as follows: • customer qualification of new companies and project companies, • customer rating of operating companies, • classification based on consolidated financial statements, • customer rating in a standardized lending process, • customer rating of local government, • simplified customer rating based on objective and subjective criteria (under HUF 50 million. excluding new businesses or project companies), • Rating of venture capital funds and private equity funds, • country and customer rating (countries, national and international financial institutions. insurance companies)
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 107 Customers are classified into customer rating categories based on objective and subjective factors. The Group uses the so-called slotting method for customer ratings of new companies and project companies, in accordance with the Basel recommendation. The customer rating of operating companies and customers subject to rating based on consolidated financial statements is based on a PD-based rating model. This rating may be modified by a maximum of one category in each direction by subjective evaluation. A simplified rating is prepared using an expert model for the customer rating of individual entrepreneurs and primary producers in the standardized lending process, and for the rating of customers of exposures below HUF 50 million outside the standardized lending process. Simplified rating procedures are also largely based on objective indicators. The rating of local governments and budgetary institutions is based on the analysis of defined objective indicators and subjective indicators. The Group uses an expert model audited by an external expert to rate venture capital funds and private equity funds. The applied ratings are the following: Rating category PD average (corporate) Credit quality 1 0.003% outstanding 2 0.008% strong 3 0.205% good 4 0.700% average 5 2.500% acceptable 6 6.000% weak 7 19.195% insolvent 8 100.00% default The default category includes a retail or corporate customer against whom the Group or any of its subsidiaries has a non-performing exposure, i.e., who is more than 90 days in arrears with respect to a significant payment obligation to the Group or its subsidiary. The default category also includes a customer against whom a legally binding bankruptcy, liquidation, debt settlement, forced liquidation procedure or other procedure aimed at the termination of his activity, or a reorganization or restructuring procedure is in progress, or who is likely not to fulfill his payment obligations in full against the Group or any of its subsidiaries. In determining the default category, the Group considers compliance with Article 178 of the CRR and the relevant MNB regulations. For the application of the criterion in Article 178 (1) (a) of CRR, we apply the Special and Workout monitoring statuses applied by the Group, which induce a non- performing category. Evaluation of collateral The main types of collaterals accepted by the Group are as follows: • surety (surety of State (central budget), surety of guarantee institutions), • guarantee, • deposit (cash, security), • mortgage or pledges on property, plant and equipment, • pledge on rights, receivables, purchase price claims and equity interests. The market value of the collateral is adjusted by the coverage ratio. This ratio expresses the probable amount of recovery from the collateral and this adjusted collateral value is applied in the collateral registry and is considered in the impairment calculation.
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 108 The Group performs quarterly monitoring and – if appropriate – the remeasurement of collaterals. When remeasurement occurred the collateral registry is adjusted. Customer and Customer group limits, sector limits The customer limit is defined as the amount of the highest risk against one customer that can be undertaken. The maximum limit for a customer or customer group is the Bank's large exposures limit. Pursuant to Section 8 (1c) of the MFB Act, the large exposures limit does not apply to companies in the direct majority ownership of MFB, as well as to companies as defined in Annex 1 to the Act. Irrespective of the legal provision, the Group also applies customer and customer group limits to these companies. Pursuant to Section 8(1b) of Act XX of 2001 on Hungarian Development Bank, notwithstanding Article 4(1)(39) of Regulation (EU) No 575/2013, MFB Zrt. does not consider as a client group those clients to whom MFB Zrt. has provided loans for the purpose of subscribing or purchasing investment units and which constitute a single risk factor just with respect to the investment funds, fund manager or their interlinks. The determination of customer and customer group limits depends on, among other things, the result of customer and partner ratings, the amount of equity or net income according to the closed financial statements of companies and the amount of interest-bearing liabilities. The sectoral limit depends on the financial situation of the sector. The Bank classifies the sectors into eight risk groups by their financial position and determines limits for these groups. The sector group limits are the maximum of risk undertaken against clients classified into a given risk group. Staging Criteria For assets where there has been no significant credit risk increase since the initial recognition or are classified as low credit risk assets are classified in the performing credit risk category – Stage 1. Those transactions where significant credit risk increases have occurred since the initial recognition are classified into the increased credit risk category – Stage 2 - as far as the criteria for significant credit risk increase are met. The Group considers the following cases to be a significant increase in credit risk: • significant deterioration in customer ratings or falling into category 7, insolvent; • delays in the amount of the Bank’s or any of its Subsidiaries’ claims against the Customer for more than 30 days, exceeding the absolute or relative thresholds specified for retail and corporate clients, • delays in payments the Bank’s or any of its Subsidiaries’ receivables from the Customer that exceed 90 days and do not reach the significant credit obligation threshold and • change in other monitoring information, • restructuring, if the transaction was performing at the time of the restructuring. Information to be considered include the Group’s information about the customer transactions that are observable in the course of the business, but not accessible from a system, however indicate an increase in credit risk.
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 109 Impaired credit risk category – Stage 3 - is used for all transaction for which there is objective evidence of the default. These are the following: • transactions above the significant credit obligation threshold that are more than 90 days overdue, • transactions with status “special” or “workout” in the "early warning indicator" system, • transactions for which coercive measures have been taken against the customer (e.g., liquidation, bankruptcy, etc.) and terminated transactions • the customer has committed fraud in connection with the contract, has seriously breached any of its contractual obligations to the Group or a third party, a contractual security has been called, the customer has been liquidated. Credit impaired loans (purchased or incurred) are categorized as POCI and will remain in this category until their maturity or derecognition. In Stage 1 category the Group quantifies the 12-month expected credit loss, while in Stage 2 and Stage 3 it calculates the lifetime expected credit loss. Credit losses on financial assets equal to the present value of the difference between the contractual cash flows and the cash flows expected by the Group. The 12-month expected credit losses are part of the lifetime expected credit losses and indicate the lack of those lifetime cash flow that may occur due to the default of the counterparty within 12 months after the reporting date or if the expected life of the financial instrument is less than 12 months then a shorter period weighted with the probability of default (PD). Expected credit losses are the probability-weighted estimates of credit losses incurred during the expected life of the financial instrument (i.e., the present value of all cash flow deficits). The estimation of expected credit losses always reflects the potential for credit loss to occur or does not occur, even if the most likely result is that no credit loss occurs. The individually assessed estimate of expected credit losses shall reflect an unbiased and probability-weighted amount determined by evaluating a minimum of three possible outcomes. When determining the probability of default, the Group classifies credit institutions with external credit ratings and those credit institutions and financial undertakings that do not have external credit ratings, individual corporate loans, agricultural loans, loans through agents, municipalities and parties into different valuation groups based on partner and customer types. When segmenting the portfolio, the Group considers the credit risk categories by product type and sector code in order to determine the value of probability of default (PD), the loss given default (LGD) and the credit conversion factor (CCF), considering also the transactions covered by the State guarantee. During the corporate PD modeling, we modeled the probability of default according to the well-known function 1/(1+exp(Z), where Z is the linear combination of the explanatory variables. We identified 10 explanatory variables. With respect to the LGD parameter, segmentation in accordance with best practice was also implemented. We identified a total of 8 segments for which we developed the LGD models separately. As in the case of the PD parameter, we also had expert segments. During the LGD modelling, a weighted average calculation was essentially performed in the given segment, using the appropriately discounted collection cash flows.
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 110 For the purposes of determining PD, the Group treats an exposure as defaulted if one or more of the following conditions are met: • the debtor has been overdue for more than 90 days exceeding the significant credit obligation threshold for any payment obligation to the Group or any of its subsidiaries, • bankruptcy, liquidation, forced liquidation, debt settlement or other proceedings aimed at terminating the debtor's activities, or reorganization or restructuring proceedings are in progress against the debtor, the Group or any other bank granted a payment concession to the debtor in the light of its financial difficulties that it would not otherwise have made and the debtor was in default at the time of the restructuring, • the Group terminated the loan agreement due to the debtor's breach of contract, • the exposure was purchased by the Group at a significant discount (at least 20%), • the full fulfilment of the debtor's payment obligation is unlikely due to the following: o the Group refused to restructure the transaction, o the debtor's income has fallen significantly or is below the level required to fulfil his obligations under the contract, o the debtor has liquidity problems, o the debtor has committed a serious breach of contract against the Group or another bank, o the debtor has committed fraud in connection with the contract, o the debtor's claim was sold at a significant discount. In determining the credit conversion factor (CCF) used to determine the expected loss on off-balance sheet liabilities (guarantees, guarantee frames, unused credit lines), the Group classifies liabilities into four categories (1. Credit lines/guarantee frames; 2. Non financial not draw downed guarantees; 3. Financial not draw downed guarantees; 4. Draw downed guarantees). Incorporation of forward-looking information Forward-looking information for companies subject to collective impairment is included in the impairment through the PD values assigned to them. These risk parameters are obtained by multiplying the values provided by the corporate PD model by the macro-correction factor resulting from the macro model. Based on historical data, we identified those macroeconomic variables that are relevant to the default rate and thus the PD. These are: the annual changes in GDP, the housing price index and the yield on 5- year Hungarian government securities, delayed by two quarters for GDP and yield on government securities. As required, we defined three scenarios based on the estimated future trajectories of these variables: a baseline trajectory, an optimistic trajectory, and a pessimistic trajectory. The model assigns a correction factor to each scenario, and the resulting macro-correction factor is the weighted average of the factors assigned to the three scenarios, using the trajectories and the weighting prescribed by the National Bank of Hungary. The Bank examines the sensitivity of impairment to changes in scenarios during stress testing. According to the testing on the macro-correction factor relevant sub portfolio in case of the pessimistic scenario HUF 1 361 million additional impairment would be required while in case of the optimistic scenario HUF 1 167 million impairment would be released compared to the amount settled. The following table contains the details: Impairment & Provisions stressed values table EAD subject to FLI Actual I&P Optimisic I&P Pessimistic I&P Stage 1 781 088 2 941 2 152 3 860 Stage 2 85 606 1 413 1 035 1 855 Total 866 694 4 354 3 187 5 716
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 111 Forborne loans Except in cases where special rules relating to the payment moratorium are applied, the Group classifies the debt as restructured if due to the deterioration of the client's or partner's financial problems or creditworthiness the risk-taking contract had to be amended by granting a discount in order to avoid non-payment. The reclassification of a restructured claim to a non-restructured claim is subject to the European Banking Authority's Guide on prudential requirements for defaulted exposure and restructuring. Risk Management Aspects of COVID-19 and the war emergency Pursuant to Government Decree No. 47/2020 (III. 18), the Group has implemented the 2020 payment moratorium. As part of this (unless otherwise provided by the Client), the automatic determination of payment due dates, calculation of default interest, default event and staging due to the number of days of delay was suspended during the payment moratorium period. The Group does not consider the use of the payment moratorium to be an independent factor increasing credit risk or a Stage2 indicator. When the moratorium came into force, the Group changed the rules for classification into the increased credit risk category (Stage2) in such a way that it suspended the monitoring of the number of days overdue (delay of more than 30 days, the amount of which exceeds HUF 30 thousand, and delay of more than 90 days, the amount of which does not exceed the significant credit default threshold) for the period spent in the moratorium, but left all other indicators unchanged. The Group made all exposures subject to an individual examination that have been affected by the moratorium. During the regular monitoring activity, the Group individually reviewed whether the given obligor had difficulties in meeting its payment obligations, whether it was expected to have such difficulties, and whether it can be established that the debtor's financial situation has deteriorated. In the course of the investigation, the Group has considered the provisions of Article 178 (1) (a) of CRR and MNB Recommendation 13/2019 (VII.2). After 1 November 2021, the Group continued to suspend the calculation of days past due for exposures affected by the credit repayment moratorium (Moratorium 3) and did not automatically establish a default event. However, in the light of the revised payment deadlines, it examined whether other conditions for the classification of these exposures as defaulted exposures (unlikely to pay) had been met. After 1 November 2021, the Group assumed, as a general rule, that a debtor registered in Moratorium 3 had or will have experiencing difficulty meeting its financial obligations and had therefore classified such exposures as restructured and reclassified them as Stage 2 due to a significant increase in credit risk. It only deviated from this assumption and the recording of the exposure as a restructured exposure based on a detailed examination supported by evidence in individual cases. The Group assessed participation in Moratorium 4 or the agricultural moratorium as a significant increase in credit risk, so the stage classification of the affected transactions according to IFRS could not be better than stage 2. In the case of corporate exposures, participation in Moratorium 4 only results in classification in stage 2 if there is a detailed, evidence-supported and documented justification. The Group does not classify as repeatedly restructured exposures that: • have been reclassified solely due to the expiry of the 9 months spent in Moratorium 1 and Moratorium 2 and receive payment relief (interest, principal payment rescheduling, extension of maturity) through debt modification schemes after Moratorium 2, and • they have been restructured once since 1 January 2011 and it has become necessary to amend the contract to be restructured solely based on the time spent in the moratorium. The use of Moratorium 4 is also not suitable for further multiple forced restructuring.
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 112 Following the procedure described above, the monitoring process is suitable for the Group to individually determine the need for classification as a defaulted exposure (including the “unlikely to pay” conditions) and the need for a restructuring schedule for repayment rescheduling, and to establish the adequate impairment/provision. The effects of COVID-19 and the war emergency are considered in the group ECL calculation as follows. Forward-looking information is incorporated into the corporate PD values that determine the ECL, through the macro-correction multiplier resulting from the macro model. The strongest explanatory variable in the macro model is the GDP. Primarily, the drastic, negative change in the estimated future trajectory of GDP transmits COVID-19 and the war emergency to the model as a factor that increases the default probability. The source of the GDP forecasts, the baseline, optimistic and pessimistic trajectories defined by them, and the trajectory weighting are annexed to the MNB's quarterly circular 'Management Circular on the Use of Macroeconomic Information in the Application of IFRS 9 and Factors Indicating a Significant Increase in Credit Risk', which contains macroeconomic information. Such an annex shall be received at least 2 times and not more than 4 times a year. The macro model represents the effects of COVID-19 and the war emergency as an external factor affecting the whole economy through its strongest explanatory variable. Some transactions, the probability of default of which is obviously extremely affected by COVID-19 and the war emergency, have been transferred to the set of transactions for which ECL is calculated individually. Due to MFB's role as a development bank, the majority of its loan portfolio consists of large, long-term, loans with special conditions, provided directly to Clients, and their ECL is calculated on an individual basis. In 2022, the Group reviewed its large loans, which make up the most significant part of its portfolio, and increased the ECL for those transactions for which the expected impact of the pandemic or the war emergency justified it. In addition to the regular monitoring activity, the unique, large exposures were also subject to a unique, customer-level review based on the available and additionally requested information. The aspects of the review were the shortage of raw materials characteristic of the customer's area of operation, the rise in raw material prices, the drastic rise in energy prices, the analysis of the cost-bearing capacity of businesses, and the expected decrease in demand from households. In 2022, from the total risk cost at the portfolio level, the portion of those clients most impacted by the COVID epidemic reached HUF 5,2 bn additional provisioning, while we accounted for additional HUF 5,7 bn to those most impacted by the war emergency. This calculation has been prepared taking into consideration the exposures individually. Nevertheless naturally both clusters are impacted by the negative effects of deteriorating macroeconomical environment as well, this way the pure COVID – or war-impact is hardly identifiable accurately in itself (ceteris parfibus), rather we handle these features as an indication and guidance only, with emphasized importance in stricter monitoring of related clients and our planning of future cost of risk. In order to manage the increased credit risk due to COVID-19 and the war emergency, the Group strengthened and supplemented its reporting function to the Executive Board and the Supervisory Board. The Bank does not apply portfolio level management corrections or overlays.
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 113 b) Exposure to credit risk Gross book value of customer loans and loans to banks at amortized cost broken down into customer rating categories described under the risk management principles are as follows. 2022 customer rating categories Stage 1 Stage 2 Stage 3 POCI Total General governments 1 - 2 14 312 0 0 0 14 312 3 - 6 39 237 0 0 0 39 237 7 - 8 0 0 0 142 142 Total general governments 53 549 0 0 142 53 691 Other financial corporations 1 – 2 80 005 0 0 0 80 005 3 - 6 124 494 93 613 28 0 218 135 7 – 8 0 0 10 444 0 10 444 Total other financial corporations 204 499 93 613 10 472 0 308 584 Non-financial corporations 1 – 2 255 131 4 304 0 0 259 435 3 – 6 228 507 347 517 3 695 0 579 719 7 – 8 0 0 22 922 6 972 29 894 Total non-financial corporations 483 638 351 821 26 617 6 972 869 048 Households* 1 - 2 400 238 0 0 638 3 - 6 42 304 17 011 1 0 59 316 7 – 8 15 189 2 156 10 66 397 83 752 Total households 57 893 19 405 11 66 397 143 706 Total customer loans 799 579 464 839 37 100 73 511 1 375 029 Impairment (4 160) (36 053) (22 831) (13 488) (76 532) Maximum credit exposure 795 419 428 786 14 269 60 023 1 298 497 *: In case of family agricultural loans managed by intermediaries the Bank applies simplified staging rules which basically based on days past due and differ from the rules applicable to transactions directly managed by the Bank. Main reasons of this are the nature of this sub-portfolio and the limited information available for the intermediaries. 2022 customer rating categories Stage 1 Stage 2 Stage 3 POCI Total Banks 1 - 2 80 332 0 0 0 80 332 Total loans to banks 80 332 0 0 0 80 332 Impairment (5) 0 0 0 (5) Maximum credit exposure 80 327 0 0 0 80 327 Deposits at central and other banks 1 - 2 26 853 0 0 0 26 853 Total deposits at central and other banks 26 853 0 0 0 26 853 Impairment (6) 0 0 0 (6) Maximum credit exposure 26 847 0 0 0 26 847
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 114 2021 customer rating categories Stage 1 Stage 2 Stage 3 POCI Total General governments 1 - 2 2 622 0 0 0 2 622 3 - 6 36 050 0 0 0 36 050 7 - 8 0 0 0 18 18 Total general governments 38 672 0 0 18 38 690 Other financial corporations 1 – 2 115 886 0 0 0 115 886 3 - 6 93 715 95 242 0 0 188 957 7 – 8 0 1 522 0 142 1 664 Total other financial corporations 209 601 96 764 0 142 306 507 Non-financial corporations 1 – 2 71 430 19 348 0 0 90 778 3 – 6 347 468 253 875 0 0 601 343 7 – 8 0 1 508 21 564 7 403 30 475 Total non-financial corporations 418 898 274 731 21 564 7 403 722 596 Households* 1 - 2 2 114 59 0 0 2 173 3 - 6 58 331 4 444 1 0 62 776 7 – 8 641 3 173 11 68 853 72 678 Total households 61 086 7 676 12 68 853 137 627 Total customer loans 728 257 379 171 21 576 76 416 1 205 420 Impairment (2 192) (23 882) (12 099) (11 700) (49 873) Maximum credit exposure 726 065 355 289 9 477 64 716 1 155 547 *: In case of family agricultural loans managed by intermediaries the Bank applies simplified staging rules which basically based on days past due and differ from the rules applicable to transactions directly managed by the Bank. Main reasons of this are the nature of this sub-portfolio and the limited information available for the intermediaries. 2021 customer rating categories Stage 1 Stage 2 Stage 3 POCI Total Banks 1 - 2 57 609 0 0 0 57 609 Total loans to banks 57 609 0 0 0 57 609 Impairment (5) 0 0 0 (5) Maximum credit exposure 57 604 0 0 0 57 604 Deposits at central and other banks 1 - 2 42 420 0 0 0 42 420 Total deposits at central and other banks 42 420 0 0 0 42 420 Impairment (31) 0 0 0 (31) Maximum credit exposure 42 389 0 0 0 42 389
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 115 Undrawn loan commitments and guarantees broken down into customer rating categories described under the risk management principles are as follows. 2022 customer rating categories Stage 1 Stage 2 Stage 3 POCI Total Loan commitments 1 - 2 20 773 1 104 0 0 21 877 3 - 6 51 669 137 990 1 109 0 190 768 7 - 8 0 0 0 0 0 Total loan commitments 72 442 139 094 1 109 0 212 645 Capital commitments 1-2 210 938 0 0 0 210 938 Capital commitments 210 938 0 0 0 210 938 Guarantees 1 - 2 154 504 1 204 0 0 155 708 3 - 6 632 740 2 840 0 0 635 580 7 – 8 7 887 0 0 0 7 887 Total guarantees 795 131 4 044 0 0 799 175 Guarantees and capital and loan commitments total 1 078 511 143 138 1 109 0 1 222 758 2021 customer rating categories Stage 1 Stage 2 Stage 3 POCI Total Loan commitments 1 - 2 21 034 200 0 0 21 234 3 - 6 169 316 21 063 0 0 190 379 7 - 8 15 000 20 0 0 15 020 Total loan commitments 205 350 21 283 0 0 226 633 Capital commitments 1-2 93 875 0 0 0 93 875 Capital commitments 93 875 0 0 0 93 875 Guarantees 1 - 2 226 070 12 770 0 0 238 840 3 - 6 251 930 10 000 0 0 261 930 7 – 8 4 181 0 0 0 4 181 Total guarantees 482 181 22 770 0 0 504 951 Guarantees and capital and loan commitments total 781 406 44 053 0 0 825 459
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 116 The table below represents the gross carrying amount transfers between impairment categories for customer loans valued at amortized cost and for undrawn loan commitments and guarantees. The movements represent every change during the year. See the impairment and provision transfers between impairment categories in note 30. Opening balance as at 1 January 2022 New loans Sale Net movements without stage transfer From stage 1 to stage 2 From stage 1 or 2 to stage 3 From stage 2 or 3 to stage 1 From stage 3 to stage 2 Closing balance as at 31 December 2022 Customer loans Stage 1 728 257 175 190 0 (3 109) (103 517) (112) 2 870 799 579 General governments 38 672 0 0 14 877 0 0 0 53 549 Other financial corporations 209 601 106 146 0 (101 667) (9 581) 0 0 204 499 Other non-financial corporations 418 897 53 882 0 89 413 (78 442) (112) 0 483 638 Households 61 087 15 162 0 (5 732) (15 494) 0 2 870 57 893 Loans to banks 57 610 0 0 22 722 0 0 0 80 332 Refinancing loans 827 0 0 (481) 0 0 0 346 Other loans 56 783 0 0 23 203 0 0 0 79 986 Customer loans Stage 2 379 171 4 811 0 (2 062) 103 517 (18 016) (2 870) 288 464 839 General governments 0 0 0 0 0 0 0 0 0 Other financial corporations 96 764 4 611 0 (6 475) 9 581 (11 156) 0 288 93 613 Other non-financial corporations 274 731 200 0 5 296 78 442 (6 848) 0 0 351 821 Households 7 676 0 0 (883) 15 494 (12) (2 870) 0 19 405 Loans to banks 0 0 0 0 0 0 0 0 0 Refinancing loans 0 0 0 0 0 0 0 0 0 Other loans 0 0 0 0 0 0 0 0 0
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 117 Opening balance as at 1 January 2022 New loans Sale Net movements without stage transfer From stage 1 to stage 2 From stage 1 or 2 to stage 3 From stage 2 or 3 to stage 1 From stage 3 to stage 2 Closing balance as at 31 December 2022 Customer loans Stage 3 97 992 7 102 0 (12 323) 18 128 0 (288) 110 611 General governments 18 142 0 (18) 0 0 0 142 Other financial corporations 142 0 0 (538) 11 156 0 (288) 10 472 Other non-financial corporations 28 968 293 0 (2 632) 6 960 0 0 33 589 Households 68 864 6 667 0 (9 135) 12 0 0 66 408 Loans to banks 0 0 0 0 0 0 0 0 0 Refinancing loans 0 0 0 0 0 0 0 0 0 Other loans 0 0 0 0 0 0 0 0 0 Customer loans Total 1 205 420 187 103 0 (17 494) 0 0 0 0 1 375 029 General governments 38 690 142 0 14 859 0 0 0 0 53 691 Other financial corporations 306 507 110 757 0 (108 680) 0 0 0 0 308 584 Other non-financial corporations 722 596 54 375 0 92 077 0 0 0 0 869 048 Households 137 627 21 829 0 (15 750) 0 0 0 0 143 706 Loans to banks 57 610 0 0 22 722 0 0 0 0 80 332 Refinancing loans 827 0 0 (481) 0 0 0 0 346 Other loans 56 783 0 0 23 203 0 0 0 0 79 986
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 118 Opening balance as at 1 January 2022 New commitment s Drawn / matured commitmen ts Net movements without stage transfer From stage 1 to stage 2. or 3 From stage 2 or 3 to stage 1 From stage 2 to stage 3 Closing balance as at 31 December 2022 Stage 1 781 406 363 788 (90 658) 32 017 (28 382) 20 340 1 078 511 Loan commitments 205 350 68 171 (80 211) (98 126) (22 742) 0 72 442 Capital commitments 93 875 0 0 117 063 0 0 210 938 Guarantees 482 181 295 617 (10 447) 13 080 (5 640) 20 340 795 131 Stage 2 44 053 106 575 (3 630) (10 793) 28 382 (20 340) (1 109) 143 138 Loan commitments 21 283 106 575 (830) (9 567) 22 742 0 (1 109) 139 094 Guarantees 22 770 0 (2 800) (1 226) 5 640 (20 340) 0 4 044 Stage 3 0 0 0 0 0 1 109 1 109 Loan commitments 0 0 0 0 0 1 109 1 109 Guarantees 0 0 0 0 0 0 0 Total 825 459 470 363 (94 288) 21 224 0 0 0 1 222 758 Loan commitments 226 633 174 746 (81 041) (107 693) 0 0 0 212 645 Capital commitments 93 875 0 0 117 063 0 0 0 210 938 Guarantees 504 951 295 617 (13 247) 11 854 0 0 0 799 175
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 119 Opening balance as at 1 January 2021 New loans Derecognition Net movements without stage transfer From stage 1 to stage 2 From stage 1 or 2 to stage 3 From stage 2 or 3 to stage 1 From stage 3 to stage 2 Closing balance as at 31 December 2021 Customer loans Stage 1 751 255 242 797 (196 579) (18 173) (60 189) 0 9 146 728 257 General governments 212 355 8 430 (196 579) 14 466 0 0 0 38 672 Other financial corporations 208 369 63 663 0 (22 720) (44 193) 0 4 482 209 601 Other non-financial corporations 260 874 170 400 0 (4 489) (12 358) 0 4 470 418 897 Households 69 657 304 0 (5 430) (3 638) 0 194 61 087 Loans to banks 38 123 9 899 0 9 588 0 0 0 57 610 Refinancing loans 1 604 9 899 0 (10 676) 0 0 0 827 Other loans 36 519 0 0 20 264 0 0 0 56 783 Customer loans Stage 2 243 352 1 785 0 83 007 60 189 (356) (9 146) 340 379 171 General governments 0 0 0 0 0 0 0 0 0 Other financial corporations 54 760 568 0 1 725 44 193 0 (4 482) 0 96 764 Other non-financial corporations 183 741 1 217 0 81 913 12 358 (356) (4 470) 328 274 731 Households 4 851 0 0 (631) 3 638 0 (194) 12 7 676 Loans to banks 0 0 0 0 0 0 0 0 0 Refinancing loans 0 0 0 0 0 0 0 0 0 Other loans 0 0 0 0 0 0 0 0 0
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 120 Opening balance as at 1 January 2021 New loans Derecognition Net movements without stage transfer From stage 1 to stage 2 From stage 1 or 2 to stage 3 From stage 2 or 3 to stage 1 From stage 3 to stage 2 Closing balance as at 31 December 2021 Customer loans Stage 3 113 381 7 933 (11 822) (11 516) 356 0 (340) 97 992 General governments 0 0 0 18 0 0 0 18 Other financial corporations 142 0 0 0 0 0 0 142 Other non-financial corporations 41 194 1 051 (11 822) (1 483) 356 0 (328) 28 968 Households 72 045 6 882 0 (10 051) 0 0 (12) 68 864 Loans to banks 0 0 0 0 0 0 0 0 0 Refinancing loans 0 0 0 0 0 0 0 0 0 Other loans 0 0 0 0 0 0 0 0 0 Customer loans Total 1 107 988 252 515 (208 401) 53 318 0 0 0 0 1 205 420 General governments 212 355 8 430 (196 579) 14 484 0 0 0 0 38 690 Other financial corporations 263 271 64 231 0 (20 995) 0 0 0 0 306 507 Other non-financial corporations 485 809 172 668 (11 822) 75 941 0 0 0 0 722 596 Households 146 553 7 186 0 (16 112) 0 0 0 0 137 627 Loans to banks 38 123 9 899 0 9 588 0 0 0 57 610 Refinancing loans 1 604 9 899 0 (10 676) 0 0 0 827 Other loans 36 519 0 0 20 264 0 0 0 56 783
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 121 Opening balance as at 1 January 2021 New commitment s Drawn / matured commitmen ts Net movements without stage transfer From stage 1 to stage 2. or 3 From stage 2 or 3 to stage 1 From stage 2 to stage 3 Closing balance as at 31 December 2021 Stage 1 263 170 633 740 (20 357) (93 144) (22 003) 20 000 781 406 Loan commitments 173 993 150 269 (19 308) (97 941) (1 663) 0 205 350 Capital commitments 0 93 875 0 0 0 0 93 875 Guarantees 89 177 389 596 (1 049) 4 797 (20 340) 20 000 482 181 Stage 2 67 507 0 (34 713) 9 256 22 003 (20 000) 0 44 053 Loan commitments 50 926 0 (31 563) 257 1 663 0 0 21 283 Guarantees 16 581 0 (3 150) 8 999 20 340 (20 000) 0 22 770 Stage 3 0 0 0 0 0 0 0 Loan commitments 0 0 0 0 0 0 0 Guarantees 0 0 0 0 0 0 0 Total 330 677 633 740 (55 070) (83 888) 0 0 0 825 459 Loan commitments 224 919 150 269 (50 871) (97 684) 0 0 0 226 633 Capital commitments 0 93 875 0 0 0 0 0 93 875 Guarantees 105 758 389 596 (4 199) 13 796 0 0 0 504 951
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 122 Customer loans and loans to banks at fair value through profit and loss broken down into customer rating categories described under the risk management principles are as follows. 2022 customer rating categories Stage 1 Stage 2 Stage 3 Total General government 1 - 2 466 0 0 466 3 - 6 18 0 0 18 7 - 8 0 0 0 0 Total general government 484 0 0 484 Other financial corporation 1 – 2 0 0 0 0 3 - 6 1 386 672 0 2 058 7 – 8 0 0 55 55 Total other financial corporations 1 386 672 55 2 113 Other non-financial corporation 1 – 2 1 268 0 0 1 268 3 – 6 1 309 1 010 58 2 377 7 – 8 7 54 41 102 Total other non-financial corporations 2 584 1 064 99 3 747 Household 1 - 2 0 0 0 0 3 - 6 98 2 0 100 7 – 8 0 2 13 15 Total household 98 4 13 115 Total customer loans 4 552 1 740 167 6 459 Loans to banks 1 – 2 31 332 14 0 31 346 3 – 6 13 0 0 13 7 – 8 0 0 0 0 Total loans to banks 31 345 14 0 31 359 2021 customer rating categories Stage 1 Stage 2 Stage 3 Total General government 1 - 2 3 0 0 3 3 - 6 552 0 0 552 7 - 8 0 0 0 0 Total general government 555 0 0 555 Other financial corporation 1 – 2 0 0 0 0 3 - 6 2 350 549 0 2 899 7 – 8 0 0 0 0 Total other financial corporations 2 350 549 0 2 899 Other non-financial corporation 1 – 2 18 0 0 18 3 – 6 2 621 644 86 3 351 7 – 8 9 68 43 120 Total other non-financial corporations 2 648 712 129 3 489 Household 1 - 2 0 0 0 0 3 - 6 136 9 6 151 7 – 8 0 3 12 15 Total household 136 12 18 166 Total customer loans 5 689 1 273 147 7 109 Loans to banks 1 – 2 29 373 83 0 29 456 3 – 6 141 0 0 141 7 – 8 0 0 0 0 Total loans to banks 29 514 83 0 29 597
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 123 The table below represents debt securities by external rating categories 2022 2021 S&P rating Moody’s rating Amount S&P rating Moody’s rating Amount Amortized cost debt securities 439 103 385 538 Hungarian government bonds BBB Baa2 42 158 BBB Baa2 53 494 Corporate bonds* 390 765 325 899 Mortgage bonds BBB - 6 180 BBB - 6 145 FVOCI debt securities 60 537 32 537 Government bonds BBB Baa2 40 694 BBB Baa2 32 537 Discount treasury bills BBB Baa2 19 843 FVTPL debt securities 369 647 60 513 Venture capital notes – investment type ** 4 364 3 984 Venture capital notes – loan type** 365 283 56 529 *: International rating is not available for these corporate bonds. According to the internal rating system allocation in 2022 AT2 HUF 36 794 million, AT3 HUF 303 377 million, AT4 HUF 49 463 million, AT6 HUF 746 million, AT7 HUF 385 million. Recpectively the same amount in 2021 AT3 HUF 273 534 million, AT4 HUF 52 358 million, AT6 HUF 1 162 million, AT7 HUF 343 million. ** FVTPL debt securities have no international rating, their risk assessment is based on the investment policy and the performance of the target companies.
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 124 Exposure to credit risk and collaterals The general creditworthiness of a corporate customer tends to be the most relevant indicator of credit quality of a loan however, collateral provides additional security and the Group request that corporate borrowers provide it. The Group may take collateral in form of a first rank mortgage over real estate pledges on all corporate assets and other liens and guarantees (mostly state guarantees) as detailed in the next subsection. The purpose of the table is to present a comparison between the net carrying amount of the customer loans and loans to bank at amortized cost and the corresponding collateral amounts to show the coverage. The fair value of the collaterals is limited by the net carrying amount of the loans and commitments. From 2022, the value of collateral represents the value allocated to loans after applying the collateral multiplier while in 2021 the total collateral value was applied. To ensure comparability tables for 2021 were modified accordingly. LOANS AT AMORTIZED COST Under collateralized Full or over collateralized Uncollateralized Total 31 December 2022 carrying value of loans fair value of collateral carrying value of loans fair value of collateral carrying value of loans carrying value of loans fair value of collateral Customer loans 594 622 263 167 155 018 155 018 548 857 1 298 497 418 185 General governments 51 901 29 681 500 500 1 202 53 603 30 181 Other financial corporations 225 652 120 036 347 347 68 609 294 608 120 383 Other non-financial corporations 316 643 113 141 79 820 79 820 421 577 818 040 192 961 Households 426 309 74 351 74 351 57 469 132 246 74 660 Loans to banks 40 082 40 025 0 0 40 245 80 327 40 025 Refinancing loans 0 0 0 0 346 346 0 Other loans 40 082 40 025 0 0 39 899 79 981 40 025 Total 634 704 303 192 155 018 155 018 589 102 1 378 824 458 210
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 125 Under collateralized Full or over collateralized Uncollateralized Total 31 December 2021 LOANS AT AMORTIZED COST carrying value of loans fair value of collateral carrying value of loans fair value of collateral carrying value of loans carrying value of loans fair value of collateral Customer loans 572 340 324 926 182 928 182 928 400 279 1 155 547 507 854 General governments 23 747 11 912 12 914 12 914 1 893 38 554 24 826 Other financial corporations 237 130 154 059 150 150 66 809 304 089 154 209 Other non-financial corporations 310 891 158 541 79 363 79 363 294 910 685 164 237 904 Households 572 414 90 501 90 501 36 667 127 740 90 915 Loans to banks 36 904 36 900 0 0 20 700 57 604 36 900 Refinancing loans 0 0 0 0 826 826 0 Other loans 36 904 36 900 0 0 19 874 56 778 36 900 Total 609 244 361 826 182 928 182 928 420 979 1 213 151 544 754 The following table includes the reconciliation of the collateral value and the net carrying value for credit impaired (stage 3 and POCI) loans only. The fair value of the collaterals is limited by the net carrying amount of the loans. Under collateralized Full or over collateralized Uncollateralized Total 31 December 2022 LOANS AT AMORTIZED COST carrying value of loans fair value of collateral carrying value of loans fair value of collateral carrying value of loans carrying value of loans fair value of collateral Customer loans 6 522 4 588 22 825 22 825 44 945 74 292 27 413 General governments 0 0 0 0 142 142 0 Other financial corporations 1 792 985 249 249 0 2 041 1 234 Other non-financial corporations 4 344 3 330 10 379 10 379 2 366 17 089 13 709 Households 386 273 12 197 12 197 42 437 55 020 12 470 Loans to banks 0 0 0 0 0 0 0 Refinancing loans 0 0 0 0 0 0 0 Other loans 0 0 0 0 0 0 0 Total 6 522 4 588 22 825 22 825 44 945 74 292 27 413
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 126 Under collateralized Full or over collateralized Uncollateralized Total 31 December 2021 LOANS AT AMORTIZED COST carrying value of loans fair value of collateral carrying value of loans fair value of collateral carrying value of loans carrying value of loans fair value of collateral Customer loans 5 164 3 358 31 510 31 510 37 519 74 193 34 868 General governments 0 0 0 0 18 18 0 Other financial corporations 0 0 0 0 97 97 0 Other non-financial corporations 4 640 2 989 9 614 9 614 764 15 018 12 603 Households 524 369 21 896 21 896 36 640 59 060 22 265 Loans to banks 0 0 0 0 0 0 0 Refinancing loans 0 0 0 0 0 0 0 Other loans 0 0 0 0 0 0 0 Total 5 164 3 358 31 510 31 510 37 519 74 193 34 868 The following table includes the carrying amount of the customer loans and loans to banks mandatorily at fair value through profit and loss and the corresponding collateral amounts. The fair value of the collaterals is limited by the net carrying amount of the loans. LOANS AT FAIR VALUE Under collateralized Full or over collateralized Uncollateralized Total 31 December 2022 carrying value of loans fair value of collateral carrying value of loans fair value of collateral carrying value of loans carrying value of loans fair value of collateral Loans and advances to banks 0 0 0 0 31 359 31 359 0 Municipality loan program 0 0 0 0 22 511 22 511 0 Business development loan program 0 0 0 0 3 384 3 384 0 Agricultural development loan program 0 0 0 0 5 369 5 369 0 Retail loan program 0 0 0 0 95 95 0 Customer loans 1 097 1 052 1 054 1 054 4 308 6 459 2 106 General governments 0 0 484 484 0 484 484 Other financial corporations 0 0 0 0 2 113 2 113 0 Other non-financial corporations 1 097 1 052 455 455 2 195 3 747 1 507 Households 0 0 115 115 0 115 115 Total 1 097 1 052 1 054 1 054 35 667 37 818 2 106
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 127 LOANS AT FAIR VALUE Under collateralized Full or over collateralized Uncollateralized Total 31 December 2021 carrying value of loans fair value of collateral carrying value of loans fair value of collateral carrying value of loans carrying value of loans fair value of collateral Loans and advances to banks 0 0 0 0 29 597 29 597 0 Municipality loan program 0 0 0 0 24 230 24 230 0 Business development loan program 0 0 0 0 4 578 4 578 0 Agricultural development loan program 0 0 0 0 615 615 0 Retail loan program 0 0 0 0 174 174 0 Customer loans 20 18 1 181 1 181 5 908 7 109 1 199 General governments 0 0 555 555 0 555 555 Other financial corporations 0 0 0 0 2 899 2 899 0 Other non-financial corporations 14 12 466 466 3 009 3 489 478 Households 6 6 160 160 0 166 166 Total 20 18 1 181 1 181 35 505 36 706 1 199 Exposure to credit risk and collaterals –off-balance sheet items Under collateralized Full or over collateralized Uncollateralized Total 31 December 2022 carrying value of commitments fair value of collateral carrying value of commitments fair value of collateral carrying value of commitments carrying value of commitments fair value of collateral Loan commitments and guarantees 747 168 517 997 16 807 16 807 456 297 1 220 272 534 804 Loan commitments 40 702 14 704 4 503 4 503 165 164 210 369 19 207 Capital commitments 0 0 0 0 210 938 210 938 0 Guarantees 706 466 503 293 12 304 12 304 80 195 798 965 515 597 Under collateralized Full or over collateralized Uncollateralized Total 31 December 2021 carrying value of commitments fair value of collateral carrying value of commitments fair value of collateral carrying value of commitments carrying value of commitments fair value of collateral Loan commitments and guarantees 520 453 361 637 15 581 15 581 286 255 822 289 377 218 Loan commitments 82 371 16 548 10 576 10 576 132 137 225 084 27 124 Capital commitments 0 0 0 0 93 875 93 875 0 Guarantees 438 082 345 089 5 005 5 005 60 243 503 330 350 094
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 128 c) Collateral and other security enhancements An estimate of the fair value of collateral and other security enhancements (up to the amount of receivables) is shown in the table below. 31 December 2022 State guarantee Property Other mortgage Other Total collateral Uncolla- terialised Total LOANS AT AMORIZED COST carrying value of loans fair value of collateral carrying value of loans fair value of collateral carrying value of loans fair value of collateral carrying value of loans fair value of collateral carrying value of loans fair value of collateral carrying value of loans carrying value of loans Customer loans 83 694 82 041 259 731 180 325 233 707 121 246 172 508 34 573 749 640 418 185 548 857 1 298 497 General governments 12 700 12 680 39 701 17 502 0 0 0 0 52 401 30 182 1 202 53 603 Other financial corporations 66 278 64 645 0 0 146 162 49 256 13 559 6 481 225 999 120 382 68 609 294 608 Other non-financial corporations 4 704 4 704 204 185 147 100 28 625 13 070 158 949 28 087 396 463 192 961 421 577 818 040 Households 12 12 15 845 15 723 58 920 58 920 0 5 74 777 74 660 57 469 132 246 Loans to banks 40 082 40 025 0 0 0 0 0 0 40 082 40 025 40 245 80 327 Refinancing loans 0 0 0 0 0 0 0 0 0 0 346 346 Other loans 40 082 40 025 0 0 0 0 0 0 40 082 40 025 39 899 79 981 Other category mostly includes suretyship (HUF 16 718 million) and cash deposits (HUF 6 994 million), and it also includes other collaterals (HUF 10 861 million). 31 December 2021 State guarantee Property Other mortgage Other Total collateral Uncolla- terialised Total LOANS AT AMORIZED COST carrying value of loans fair value of collateral carrying value of loans fair value of collateral carrying value of loans fair value of collateral carrying value of loans fair value of collateral carrying value of loans fair value of collateral carrying value of loans carrying value of loans Customer loans 178 224 167 647 238 041 165 823 192 972 114 227 146 031 60 157 755 268 507 854 400 279 1 155 547 General governments 12 111 12 111 24 550 12 715 0 0 0 0 36 661 24 826 1 893 38 554 Other financial corporations 109 595 109 360 0 0 111 671 38 264 16 014 6 585 237 280 154 209 66 809 304 089 Other non-financial corporations 56 500 46 158 187 250 127 035 16 488 11 150 130 016 53 561 390 254 237 904 294 910 685 164 Households 18 18 26 241 26 073 64 813 64 813 1 11 91 073 90 915 36 667 127 740 Loans to banks 36 904 36 900 0 0 0 0 0 0 36 904 36 900 20 700 57 604 Refinancing loans 0 0 0 0 0 0 0 0 0 0 826 826 Other loans 36 904 36 900 0 0 0 0 0 0 36 904 36 900 19 874 56 778 Other category mostly includes suretyship (HUF 22 094 million) and cash deposits (HUF 5 993 million), and it also includes bank guarantees (HUF 18 million) and other collaterals (HUF 32 052 million).
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 129 The following table includes an estimate of the fair value of collateral and other security enhancements (up to the amount of receivables) for credit impaired (stage 3 and POCI) loans only. 31 December 2022 State guarantee Property Other mortgage Other Total collateral Uncolla- terialised Total LOANS AT AMORIZED COST carrying value of loans fair value of collateral carrying value of loans fair value of collateral carrying value of loans fair value of collateral carrying value of loans fair value of collateral carrying value of loans fair value of collateral carrying value of loans carrying value of loans Customer loans 0 0 26 697 25 703 1 926 1 164 724 544 29 347 27 411 44 945 74 292 General governments 0 0 0 0 0 0 0 0 0 0 142 142 Other financial corporations 0 0 0 0 1 926 1 164 115 69 2 041 1 233 0 2 041 Other non-financial corporations 0 0 14 114 13 238 0 0 609 470 14 723 13 708 2 366 17 089 Households 0 0 12 583 12 465 0 0 0 5 12 583 12 470 42 437 55 020 Loans to banks 0 0 0 0 0 0 0 0 0 0 0 0 Refinancing loans 0 0 0 0 0 0 0 0 0 0 0 0 Other loans 0 0 0 0 0 0 0 0 0 0 0 0 31 December 2021 State guarantee Property Other mortgage Other Total collateral Uncolla- terialised Total LOANS AT AMORIZED COST carrying value of loans fair value of collateral carrying value of loans fair value of collateral carrying value of loans fair value of collateral carrying value of loans fair value of collateral carrying value of loans fair value of collateral carrying value of loans carrying value of loans Customer loans 0 0 34 708 33 261 144 123 1 822 1 484 36 674 34 868 37 519 74 193 General governments 0 0 0 0 0 0 0 0 0 0 18 18 Other financial corporations 0 0 0 0 0 0 0 0 0 0 97 97 Other non-financial corporations 0 0 12 288 11 006 144 123 1 822 1 474 14 254 12 603 764 15 018 Households 0 0 22 420 22 255 0 0 0 10 22 420 22 265 36 640 59 060 Loans to banks 0 0 0 0 0 0 0 0 0 0 0 0 Refinancing loans 0 0 0 0 0 0 0 0 0 0 0 0 Other loans 0 0 0 0 0 0 0 0 0 0 0 0
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 130 The following table includes the carrying amount of the customer loans and loans to bank mandatorily at fair value through profit and loss and an estimate of the fair value of collateral and other security enhancements (up to the amount of receivables). 31 December 2022 State guarantee Property Other mortgage Other Total collateral Uncolla- terialised Total LOANS AT FAIR VALUE carrying value of loans fair value of collateral carrying value of loans fair value of collateral carrying value of loans fair value of collateral carrying value of loans fair value of collateral carrying value of loans fair value of collateral carrying value of loans carrying value of loans Loans and advances to banks 0 0 0 0 0 0 0 0 0 0 31 359 31 359 Municipality loan program 0 0 0 0 0 0 0 0 0 0 22 511 22 511 Business development loan program 0 0 0 0 0 0 0 0 0 0 3 384 3 384 Agricultural development loan program 0 0 0 0 0 0 0 0 0 0 5 369 5 369 Retail loan program 0 0 0 0 0 0 0 0 0 0 95 95 Customer loans 497 464 977 977 0 0 677 666 2 151 2 107 4 308 6 459 General governments 0 0 484 484 0 0 0 0 484 484 0 484 Other financial corporations 0 0 0 0 0 0 0 0 0 0 2 113 2 113 Other non-financial corporations 496 463 390 390 0 0 666 655 1 552 1 508 2 195 3 747 Households 1 1 103 103 0 0 11 11 115 115 0 115 31 December 2021 State guarantee Property Other mortgage Other Total collateral Uncolla- terialised Total LOANS AT FAIR VALUE carrying value of loans fair value of collateral carrying value of loans fair value of collateral carrying value of loans fair value of collateral carrying value of loans fair value of collateral carrying value of loans fair value of collateral carrying value of loans carrying value of loans Loans and advances to banks 0 0 0 0 0 0 0 0 0 0 29 597 29 597 Municipality loan program 0 0 0 0 0 0 0 0 0 0 24 230 24 230 Business development loan program 0 0 0 0 0 0 0 0 0 0 4 578 4 578 Agricultural development loan program 0 0 0 0 0 0 0 0 0 0 615 615 Retail loan program 0 0 0 0 0 0 0 0 0 0 174 174 Customer loans 74 74 1 057 1 057 0 0 70 68 1 201 1 201 5 908 7 109 General governments 0 0 555 555 0 0 0 0 555 555 0 555 Other financial corporations 0 0 0 0 0 0 0 0 0 0 2 899 2 899 Other non-financial corporations 72 72 353 353 0 0 55 53 480 478 3 009 3 489 Households 2 2 149 149 0 0 15 15 166 166 0 166
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 131 Collateral and other security enhancements to credit risk and collaterals –off-balance sheet items 31 December 2022 State guarantee Property Other mortgage Other Total collateral Uncolla- terialised Total carrying value of commitments fair value of collateral carrying value of commitments fair value of collateral carrying value of commitments fair value of collateral carrying value of commitments fair value of collateral carrying value of commitments fair value of collateral carrying value of commitments carrying value of commitments Loan commitments and guarantees 551 476 496 710 4 773 3 526 19 543 10 826 188 183 23 742 763 975 534 804 456 297 1 220 272 Loan commitments 1 408 1 408 4 450 3 213 12 999 4 282 26 348 10 304 45 205 19 207 165 164 210 369 Capital commitments 0 0 0 0 0 0 0 0 0 0 210 938 210 938 Guarantees 550 068 495 302 323 313 6 544 6 544 161 835 13 438 718 770 515 597 80 195 798 965 31 December 2021 State guarantee Property Other mortgage Other Total collateral Uncolla- terialised Total carrying value of commitments fair value of collateral carrying value of commitments fair value of collateral carrying value of commitments fair value of collateral carrying value of commitments fair value of collateral carrying value of commitments fair value of collateral carrying value of commitments carrying value of commitments Loan commitments and guarantees 362 771 327 422 63 323 9 421 19 445 13 784 90 495 26 591 536 034 377 218 286 255 822 289 Loan commitments 5 891 5 891 63 181 9 279 8 109 3 953 15 766 8 001 92 947 27 124 132 137 225 084 Capital commitments 0 0 0 0 0 0 0 0 0 0 93 875 93 875 Guarantees 356 880 321 531 142 142 11 336 9 831 74 729 18 590 443 087 350 094 60 243 503 330
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 132 The Central Budget determined a state guarantee frame for t he Bank’s asset side credit exposures (guarantee provided to the Bank) and also for liability side obligations (guarantee provided for the Bank). The amount and utilization (representing the amount allocated either to loan programs or individual loans) and the actual loan balance disbursed under the state guarantee frame and the related collaterals, being the state guarantee itself were the following. 2022 2021 Asset side state guarantee frame 1 700 000 1 700 000 Utilization 867 496 955 634 from this actual loan balance at yearend 651 703 421 214 Collaterals 514 580 385 837 Liability side guarantee frame 2 800 000 1 900 000 Utilization 2 015 526 1 585 369 Collaterals 2 090 109 1 622 414 d) Restructured loans The Group classifies a loan in the restructured category if it makes a discount or modification due to the current or expected financial difficulties of the borrower, which it would not have done if the borrower were solvent. The Group individually examined the expected solvency of borrowers who spent a longer period of time in the payment moratorium, the significance of the increase in credit risk, and decided whether to classify them as restructured, as well as decided on the stage classification. The Group did not consider the fact of involvement with the moratorium as an event that automatically triggers restructuring. Gross Impairment Net 31 December 2020 19 821 (12 097) 7 724 New restructured transactions 183 807 (16 042) 167 765 Changes in existing restructured loans (358) 1 165 807 Derecognition 0 0 0 Decrease due to repayment 0 0 0 Decrease due to recovery 0 0 0 FX change 711 (251) 460 31 December 2021 203 981 (27 225) 176 756 New restructured transactions 46 543 (44) 46 499 Changes in existing restructured loans (5 166) (4 305) (9 471) Derecognition 0 0 0 Decrease due to repayment (38 566) 1 633 (36 933) Decrease due to recovery (6) 0 (6) FX change 9 982 (2 008) 7 974 31 December 2022 216 768 (31 949) 184 819 Neither during 2022, nor during 2021 there was no such contract modification that would have led to derecognition and re-recognition implying derecognition gain or loss.
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 133 e) Concentration of credit risk The below table includes the concentration of credit risk by industry on net carrying amount for customer loans. Loans and advances to customers 2022 Stage 1 Stage 2 Stage 3 POCI Total Financial services 500 054 95 716 2 096 115 597 981 Property development 45 141 244 178 9 339 0 298 658 Other services (local governments. health-care, other services) 25 202 5 249 192 57 590 88 233 Construction (including motorway financing) 32 925 12 713 0 3 45 641 Industry 63 673 43 174 2 110 709 109 666 Agriculture 45 895 21 503 5 237 67 640 Transport, storage, post, telecoms 60 422 353 686 21 61 482 Trade 20 784 1 376 3 1 190 23 353 Accommodation, catering 5 875 6 264 0 163 12 302 Total 799 971 430 526 14 431 60 028 1 304 956 of which amortized cost 795 419 428 786 14 269 60 023 1 298 497 of which FVTPL 4 552 1 740 162 5 6 459 Loans and advances to customers 2021 Stage 1 Stage 2 Stage 3 POCI Total Financial services 366 077 95 429 0 1 258 462 764 Property development 73 301 211 101 6 581 0 290 983 Other services (local governments. health-care, other services) 24 705 6 328 193 60 786 92 012 Construction (including motorway financing) 47 735 1 131 0 2 48 868 Industry 55 643 29 176 2 233 1 044 88 096 Agriculture 63 322 8 854 11 235 72 422 Transport, storage, post, telecoms 74 648 256 596 15 75 515 Trade 21 627 1 167 0 1 235 24 029 Accommodation, catering 4 696 3 120 0 151 7 967 Total 731 754 356 562 9 614 64 726 1 163 527 of which amortized cost 726 065 355 289 9 477 64 716 1 155 547 of which FVTPL 5 689 1 273 137 10 7 109 B. LIQUIDITY RISK a) Principles of liquidity risk management The Group’s principal objective is to carry out secure and established course of business and the prevention of liquidity issues which could threaten the Group to meet its obligations. The liquidity management is determined by the nature of the business, the strategy, the annual business plan, the legal regulations and the regulatory activities of National Bank of Hungary. Liquidity means the availability of necessary funds in time needed to meet the obligations. Liquidity demand arises when the obligations become due. Liquidity risk is the gap between in and outflows in different amount and time.
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 134 Regulation (EU) No 575/2013 of the European Parliament and of the Council (CRR) and Directive 2013/36 / EU (CRD IV) of 26 June 2013 have transposed the Basel III. Regulation into the European regulatory framework for credit institutions. The new requirements were introduced gradually, and 2019 was the first year that all requirements were fully met. At the same time, MFB Zrt. was exempted from the liquidity requirements, which is included in the MFB Act. The Group has significant amount of primary liquidity reserves in the form of government securities and deposits with commercial banks, as well as other liquidity-providing Central Bank-eligible securities, therefore future cash outflows are continuously covered on the asset side. In addition, the Group’s liquidity was further increased in 2022 by the amount of capital increases received in several instalments. The Bank’s liquidity reserve as at 31 December 2022 and 2021 2022 2021 Par value Fair value Free disposal Par value Fair value Free disposal Hungarian government bonds 89 595 76 680 84 395 84 326 83 400 66 506 Hungarian discount bonds 20 485 19 843 20 485 0 0 0 Mortgage bonds issued by banks 6 285 5 044 6 285 6 285 5 869 2 264 Other Central Bank-eligible securities 304 960 236 241 136 960 263 660 245 073 263 660 Total 421 325 337 808 248 125 354 271 334 342 332 430 The members of the Group also had a significant amount of liquidity reserves, deposits of HUF 29,37 billion (2021: HUF 54.6 billion) were placed with domestic credit institutions. The Group primarily manages liquidity risk in a preventive manner, and strives to provide financing with a source that ensures the most suitable balance in terms of maturity, principal repayment and interest payment. The Group's fund-raising opportunities are favorable both at home and abroad, but at the same time, the Group's cost of funds has increased significantly in the recent period - as a result of the war emergency. Thus, due to the expiration of previously borrowed funds, as well as new demands on the asset side, the funds to be raised became more expensive. Cash flow statements are prepared at least on a monthly basis which contain all banking book cash flow items and credit and investment directorates predicted cash flow transactions considering different scenarios. For continuous liquidity management a liquidity forecast is prepared on a monthly basis. The Bank specifies in an instruction in which instruments the members of the Group may invest their free liquidity and regulates the Group's credit institution exposures with bank limits. The members of the Group report their exposures to the Bank on a monthly basis, which is approved by the Bank's ALCO (Asset Liability Committee). Pursuant to Article 8 (2) of the MFB Act, the Bank does not apply the rules on liquidity ratios and liquidity requirements set out in Articles 411-428 of CRR.
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 135 The Group measures its liquidity risks in the following ways: • Quantification of dependence on large individual deposits; • Comprehensive cash flow, liquidity forecast; • Stress-test; • Survival analysis; • Quantification of liquidity ratios. The Group manages its liquidity risks as follows: • Where possible (market opportunities, pricing), using the most appropriate liabilities for the assets side; • Designation and operation of appropriate processes and rules; • Set up a limit system; • Establishment of liquidity reserves; • Effective asset-liability management; • Provision of data by members of the Group. Liquidity ratios and the results of stress testing confirmed that the short and long-term liquidity positions are adequate at all times, due to the significant amount of liquidity reserves and the capital received during the year. Risk Management Aspects of COVID-19 With regard to the Group's liquidity, neither COVID-19 nor the payment moratorium caused any difficulties. The liquidity reserve that the Bank holds in government securities and other Central Bank- eligible securities is well above the amount of exposures that could be affected by the payment moratorium at the worst case scenario.
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 136 b) Remaining contractual maturities of financial liabilities Maturities on contractual (principal and interest), undiscounted cash flows of financial liabilities were as follows. The guarantees were classified in the first category irrespective of the actual maturity of the instrument. Similarly, the loan commitments were also classified in the first category as they can be drawn down at request. 2022 Carrying amount Gross nominal inflow/(outflow) Less than 1 month 1-3 months 3 months to 1 year 1-5 years More than 5 years Customer deposits 48 520 (62 253) (24 658) (4 525) (555) (5 803) (26 712) Loans from banks 786 907 (825 466) (762) (17 397) (87 595) (576 940) (142 772) Debt securities issued 1 402 562 (1 509 760) (92 864) 0 (278 427) (963 450) (175 019) Other financial liabilities 19 826 (19 826) (19 826) 0 0 0 0 Derivatives 4 062 (5 608) (463) (2 901) (263) (1 794) (187) inflow 55 289 78 285 0 290 73 outflow (55 752) (81 186) (263) (2 084) (260) Hedge derivatives 0 0 0 0 0 inflow 0 0 0 0 0 outflow 0 0 0 0 0 Total financial liabilities and derivatives 2 261 877 (2 422 913) (138 573) (24 823) (366 840) (1 547 987) (344 690) Guarantees 799 175 799 175 799 175 Capital commitments 210 938 210 938 0 31 983 122 222 56 733 0 Loan commitments 214 366 214 366 214 366 2021 Carrying amount Gross nominal inflow/(outflow) Less than 1 month 1-3 months 3 months to 1 year 1-5 years More than 5 years Customer deposits 141 905 (142 037) (130 114) (2) (2 155) (2 359) (7 407) Loans from banks 598 877 (627 356) (2 131) (5 457) (51 690) (368 290) (199 788) Debt securities issued 1 085 030 (1 175 587) (1 240) 0 (136 139) (787 756) (250 452) Other financial liabilities 10 798 (10 798) (10 798) 0 0 0 0 Derivatives 664 (294) (156) (43) (4) (40) (51) inflow 59 260 38 1 883 259 94 outflow (59 416) (81) (1 887) (299) (145) Hedge derivatives inflow 0 0 0 0 0 outflow 0 0 0 0 0 Total financial liabilities and derivatives 1 837 274 (1 956 072) (144 439) (5 502) (189 988) (1 158 445) (457 698) Guarantees 504 951 504 951 504 951 Capital commitments 93 875 93 875 2 774 55 849 3 880 31 372 0 Loan commitments 214 566 214 566 214 566 The Group is subject to additional HUF 54 537 million (2021: 261 696 million HUF) venture capital note payment obligation related to the equity consolidated associates that is payable as required by the investment plans.
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 137 C. MARKET RISKS Market risks are presented in the consolidated financial statements only for the Bank, because only the Bank has relevant exposure to market risk within the Group. The positions quantified accordingly and their effects adequately reflect the market risk exposure of the Group as a whole. a) Currency risk management – basis of risk management The Bank has assets and liabilities, both on and off-balance sheet, denominated in various foreign currencies. Foreign exchange risk arises when the actual or forecasted assets in a foreign currency are either greater or less than the liabilities in that currency. The Bank manages the currency structure of assets and liabilities on and off-balance sheet, utilizing forward foreign exchange transactions and other hedging instruments. It is the policy of the Bank that it should not speculate in currencies and should only take currency positions within strict limits. The Board of Directors establishes and monitors specific regulations based on statutory and internal limits and approves the overall strategy. Compliance to these limits is regularly monitored. The Foreign Exchange Guarantee Frame Agreement (FX Agreement) between the Bank and the Hungarian Ministry of Finance was signed in 2004, the modification was signed with the Ministry for National Economy in 2014. This FX Agreement manages foreign exchange risks of the Bank’s foreign currency borrowings (EUR). Based on this FX Agreement at the final maturity of the borrowings or upon introduction of EUR as the official currency of Hungary the State compensates any foreign exchange loss incurred on these borrowings and the Bank is required to pay to the State the amount of realized foreign exchange gains on these transactions in instalments. The amount of receivables from the State according to the FX Agreement is presented in Note 14. Monthly stress tests quantify the impact of possible exchange rate movements (+/- 10% shift for EUR/HUF and EUR/USD). The net exposure of the Bank is the total exposure decreased by the exposure fall under the FX state guarantee frame. The open position was long for EUR, CHF and GBP, and short for USD in 2022. With regard to the aggregate foreign exchange position, the strenghthening of the HUF would increase the bank's profit. As for the USD position, a strengthening of the USD would have a negative impact on the Bank's earnings. The following table represents the Bank’s foreign exchange position in which the effect of the currency hedging contract with the Hungarian State has been already adjusted. 2022 Absolute value Net position EUR 16 311 16 311 USD 4 422 (4 422) Other currencies 45 45 Total 20 778 11 934 2021 Absolute value Net position EUR 6 758 6 758 USD 3 519 (3 519) Other currencies 18 18 Total 10 295 3 257 According to the stress-tests, 10% change in HUF exchange rates in the worst direction would cause HUF 2 078 million decrease in the Bank’s foreign exchange income and thus the own equity as well (2021: HUF 1 030 million).
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 138 The Bank is exempted from keeping the trading book and does not take speculative positions due to a strategic decision. Accordingly, market risks (foreign exchange and interest rate) arise from the banking book, i.e., the normal operation of the bank (lending, raising funds). The Bank limits the amount of open foreign currency position and interest rate risk exposure by limits. Neither COVID-19 nor the related payment moratorium has an impact on the foreign exchange open position or the interest rate risk. The Bank closes the open foreign exchange position due to the possible increase in ECL due to COVID-19 with an appropriate market transaction. The Bank has set a limit of EUR 6 million for the foreign currency open position due to impairment/provision for foreign currency assets. If the amount of impairment/provision exceeds this limit, the Bank closes the position with a minimum of a market transaction equal to the amount of the overrun. b) Foreign exchange risk analysis of financial assets and liabilities 2022 HUF EUR USD Other currency Total Assets Cash, cash balances at central banks and other demand deposits 98 623 319 16 43 99 001 Financial assets held for trading 2 454 0 0 0 2 454 Non-trading financial assets mandatorily at fair value through profit or loss 324 108 83 357 0 0 407 465 Financial assets at fair value through other comprehensive income 83 617 7 600 809 0 92 026 Financial assets at amortized cost 1 325 047 496 287 27 762 0 1 849 096 Derivatives – Hedge accounting 15 128 0 0 0 15 128 Total financial assets (1) 1 848 977 587 563 28 587 43 2 465 170 Liabilities Financial liabilities held for trading 4 062 0 0 0 4 062 Financial liabilities at amortized cost 1 130 451 1 106 890 20 465 9 2 257 815 Derivatives – Hedge accounting 0 0 0 0 0 Total financial liabilities (2) 1 134 513 1 106 890 20 465 9 2 261 877 NET BALANCE SHEET POSITION (1) - (2) 714 464 (519 327) 8 122 34 203 293 Derivative notional amounts (94 861) 103 127 (9 514) 0 (1 248) NET FOREIGN EXCHANGE POSITION at 31 December 619 603 (416 200) (1 392) 34 202 045 Impact of receivables from State due to currency-hedging agreement 0 395 603 0 0 395 603 ADJUSTED NET FOREIGN EXCHANGE POSITION at 31 December 619 603 (20 597) (1 392) 34 597 648 The Bank manages foreign currency open positions (either short or long) within the strict limits approved by ALCO.
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 139 2021 HUF EUR USD Other currency Total Assets Cash, cash balances at central banks and other demand deposits 168 729 760 19 17 169 525 Financial assets held for trading 783 0 0 0 783 Non-trading financial assets mandatorily at fair value through profit or loss 93 529 3 690 0 0 97 219 Financial assets at fair value through other comprehensive income 39 595 7 008 0 0 46 603 Financial assets at amortized cost 1 279 956 344 489 16 990 0 1 641 435 Derivatives – Hedge accounting 7 849 0 0 0 7 849 Total financial assets (1) 1 590 441 355 947 17 009 17 1 963 414 Liabilities Financial liabilities held for trading 664 0 0 0 664 Financial liabilities at amortized cost 1 029 132 784 647 22 824 7 1 836 610 Derivatives – Hedge accounting 0 0 0 0 0 Total financial liabilities (2) 1 029 796 784 647 22 824 7 1 837 274 NET BALANCE SHEET POSITION (1) - (2) 560 645 (428 700) (5 815) 10 126 140 Derivative notional amounts (66 785) 62 752 4 299 0 266 NET FOREIGN EXCHANGE POSITION at 31 December 493 860 (365 948) (1 516) 10 126 406 Impact of receivables from State due to currency-hedging agreement 0 379 411 0 0 379 411 ADJUSTED NET FOREIGN EXCHANGE POSITION at 31 December 493 860 13 463 (1 516) 10 505 817 c) Principles of interest rate risk management Interest rate risk is measured by the extent to which changes in market interest rates impact margins and net interest income. Gaps in the value of assets, liabilities and off-balance sheet instruments that mature or reprice during a given period generate interest rate risk. The Bank gives special attention to the preventive management of interest rate risk. The Bank’s objective is to harmonize loans and their resources already during the acquisition of funds regarding maturity, interest base and repricing periods to prevent significant repricing mismatches. The Bank does not undertake interest rate exposure for speculative purposes. If the interest of loans and fund of loans are in mismatches, the Bank concludes interest rate swap deals to ensure the proper closing of the position. Before signing an interest rate swap deal a detailed proposal is prepared for the Asset-Liability Committee which determines the parameters of the deal. The analysis of interest rate risk exposure is prepared on a monthly basis. Regularly prepared reports in connection with interest rate risk management are the following: • Repricing balance sheet concerning full-scale assets and liabilities. • Calculation of BPV (Basis Point Value) and GAP • Stress-tests on interest rate risk exposure. • Stress-tests on the drastic changes of interest rates. • Measurement of applied interest bases in case of interest bearing assets and liabilities.
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 140 d) Interest rate risk analysis The interest rate risk analysis is presented only in relation to the Bank, as this risk is not relevant for the other members of the MFB Group. The performed interest rate risk reports and stress-tests indicate that the Bank’s exposure to interest rate risk according to market reference interest rates (EURIBOR, LIBOR, BUBOR) is low, greater changes in market rates - in any direction – do not cause great negative effect on the Bank’s profit due to the repricing consonance. During 2022, the direction of the exposure changed, as the maturity of large amounts of resources became less than 1 year, the repricing of which will have a significant impact on the Bank's interest income. By the end of 2022, the risk exposure has decreased, primarily thanks to the capital increase received in two instalments. According to stress-tests, 1% change in BUBOR and 0.25% change in EURIBOR – at the same time and in the same direction - causes approximately HUF 773 million effect (2021: HUF 1 427 million), while 3% change in BUBOR and 1% change in EURIBOR causes approximately HUF 2 181 million effect (2021: HUF 4 637 million) on the Bank’s annual interest income (the effect is negative in case of interest rate increase, positive in case of interest rate decrease). The Bank assess the possible effects of interest rate changes – considering different direction and degree – on the value of the Bank’s portfolio and on the capital using BPV (basis point value) GAP on a monthly basis. A 200 basis point increase in interest rates on interest-bearing assets and liabilities would have the following effect on the value of the Bank's capital, adjusted by revaluation band: 31 December 2022 1-30 days 31-90 days 91 days - 1 year 1 - 2 years 2 - 3 years 3 - 4 years 4 - 5 years over 5 years Total HUF 159 47 380 (391) 342 (2 000) 3 938 (28 947) (26 473) EUR (63) (164) 2 431 4 013 12 834 11 780 2 568 (45 731) (12 331) USD 0 (9) (16) (51) 372 (113) (103) 0 81 31 December 2021 1-30 days 31-90 days 91 days - 1 year 1 - 2 years 2 - 3 years 3 - 4 years 4 - 5 years over 5 years Total HUF 16 (380) (252) 1 382 (163) 687 755 (35 795) (33 748) EUR (21) (304) 145 3 730 944 18 814 14 274 (18 174) 19 008 USD 0 9 0 0 0 0 0 0 9
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 141 e) Market risk analysis From market risk point of view, it is important that the Bank is not licensed for investment services, and does not undertake speculative positions. Trading position contains short-term government bonds and own foreign exchange exposures. The Bank is exempted from keeping a trading book and preparing reports. The Bank performs VAR analysis for the FX position by its market risk management system. In the VAR calculations, the short government securities stock as well as the total open book foreign exchange position of the Bank are included. The VAR position calculated from the portfolio concerning 99% confidence level and 10 days holding period shows a low value, it was 0.12% of the regulatory capital as at 31 December 2022 (2021: 0.03%). This means that the probability of a HUF 720 million losses in the Bank’s FX position – concerning 10 days holding period – is only 1% as at 31 December 2022 (2021: HUF 114,2 million). VAR position – 31 December 2022 Regulatory capital (million HUF): 619 364 Absolute risk indicators Interest Foreign exchange Diversification Total VAR expressed as a percentage of Regulatory capital Net asset value 19 908 11 935 31 843 Parametric VAR 444 607 (331) 720 0.12 VAR position – 31 December 2021 Regulatory capital (million HUF): 446 877 Absolute risk indicators Interest Foreign exchange Diversification Total VAR expressed as a percentage of Regulatory capital Net asset value 0 3 258 0 3 258 Parametric VAR 0 114.2 0 114.2 0.03 D. OPERATIONAL RISK Operational risk refers to the probability of losses caused by inappropriately designed or incorrectly executed business processes, internal errors induced by people carelessly or deliberately, intentionally executed external attacks against banking systems or operational processes, inappropriate operating of IT infrastructure, effects of external environment. The operational risk loss data are presented in the consolidated financial statement on a Bank only basis as among the MFB Group members the Bank has a structured operational risk management framework that ensures systematic identification and assessment of operational risks, elaboration and implementation of measures for mitigation of such risks. Framework of effective banking operational risk management is based on proper internal governance which ensures that risk management policies, internal regulatory documentation and systems remain effective in a constantly changing business and regulatory environment.
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 142 For the above reason the Bank builds its operational risk management activity on the following principles: • Bank performs operational risk management in a decentralized way along central coordination. Operational risk management is coordinated by a designated colleague (OpRisk Coordinator) of Strategic Risk Management Directorate within Risk Division; execution of operation risk management is responsibility of all areas of the Bank. • Bank complies with the solvency capital requirement calculation concerning operational risk (CRR) by using basic indicator methodology. According to this method the capital requirement for operational risk is 15% of the CRR’s benchmark indicator. • Bank follows a comprehensive operational risk management approach: o Fully identifies and measures the risk elements inherent in the processes, systems, human activities and external environment (collection and analysis of loss data, based on the Operational Risk Management Regulations). Operational risk management also covers the core business of the bank and other (non-score banking) activities. o Process-focused, focusing on identifying losses and process efficiency improvement activity. o Methodology is proactive, collects potential risks as well not only already occurred and registered losses. • Management of the Bank receives information on relevant operational risk management events in standalone form or as part of other management reports quarterly. • The Bank provides education and training to all employees annually in order to improve risk awareness, general risk sensitivity and disseminate specific operational risk management knowledge. • The framework provides a common model for group members (subsidiaries) in terms of definitions, identification, measurement, monitoring, management, and risk mitigation. • Bank maintains a separate database about operational risks and losses, which enables to fulfil its internal and external obligations concerning identification, measurement, analysis, evaluation, management, reporting, monitoring and capital requirement calculation and supervisory reporting. • Operational risk management responsibilities and related tasks are also reflected in the job descriptions of the OpRisk Coordinator and designated colleagues of all concerned areas of the Bank. The Bank meets the solvency capital requirement for operational risks according to the basic indicator method, according to which the Bank's operational risk capital requirement was HUF 5 804 million on 31 December 2022 (2021: HUF 3 680 million). The Bank's operational risk losses are much lower than this on an annual basis. In 2022, the Bank incurred a gross operating risk loss of HUF 2.49 million. E. CAPITAL MANAGEMENT According to Section 1 (7) of the HDB Law the Bank applies the regulation No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (CRR) in the respect of least HUF 100 billion according to the HDB Law. Among the Group members only the Bank falls under the CRR regulations. The HDB Law exempt the Group from consolidated supervision therefore consolidated adjusted capital and capital adequacy is not prepared. The data in this section is identical with the stand-alone Bank data. In order to maintain its current solvency and to be able to meet its liabilities, the Bank must, at all times, have appropriate levels of primary core capital (i.e., Tier 1 capital: 4.5%), core capital (6.0%) and full regulatory capital (8.0%). Tier 1 capital has to contain the capital maintenance buffer (2.5%) mentioned prudential requirements with the differences set out in HDB Law. The Bank’s share capital must be at
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 143 in local Banking law. As of July 2022, the Bank was exempted from the internal capital adequacy assessment procedure prescribed in § 97 of the CCXXXVII Act of 2013 on credit institutions and financial enterprises based on § 8 (2) of the MFB Act. However the Bank determines the need for additional capital, which is a part of the internal capital adequacy assessment procedure, and presents it to its management bodies. The Bank meets the required capital requirements, so the capital position is considered stable. According to the requirements of the CRR, credit institutions must have an adequate amount of own funds to cover the risk of the activity performed at all times in order to maintain their current solvency and meet their obligations. Together with the capital maintenance buffer, it must continuously maintain an adjusted core capital ratio of at least 7% and a total capital adequacy ratio of 10.5%, which the Bank continued to comply with in 2022 and 2021, including the HUF 170 billion (2021: 84 billion) capital increase indicated in Note 18. Compliance with capital adequacy regulations is monitored by the National Bank of Hungary. The Bank complied with the regulatory and prudential regulations and the limits. The capital adequacy ratio exceeded the minimum required ratio both in 2022 and in 2021. The Bank informs the Board of Directors quarterly about the activities and changes in the capital during the period. The regulatory capital is calculated and the compliance with limits is examined on a monthly basis.
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 144 2022 2021 I. Calculation of Regulatory Capital Share capital 519 900 349 900 Share premium 81 870 81 870 Retained earnings 18 511 14 881 Accumulated other comprehensive income (5 892) (2 389) General reserve 1 058 294 Net result for the year 6 194 4 385 Common equity Tier 1 capital before deduction 621 641 448 941 Total amount of deducted item Intangible assets (2 277) (2 064) Common equity Tier 1 Capital (CET1) 619 364 446 877 Additional Tier1 Capital (AT1) 0 0 Tier 1 Capital (Tier1 or. T1) 619 364 446 877 General risk reserve 0 0 Tax impact of general risk reserve 0 0 Tier 2 Capital (T2) 0 0 Regulatory Capital (T1+T2) 619 364 446 877 II. Calculation of Capital Requirement Total capital requirement for credit risk 291 728 210 471 Total capital requirement for exchange rate risk 1 132 542 Total capital requirement for operating risk 5 804 3 680 Total capital requirement for credit valuation adjustment 505 652 Total Capital Requirement 299 169 215 345 Risk weighted exposure 3 739 608 2 691 812 III. Capital adequacy ratio 16.56% 16.60%
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 145 F. FAIR VALUE In order to increase the consistency and comparability of the fair value measurement and related disclosures, IFRS 13 sets out a fair value hierarchy, categorizing the inputs applied at determination of the fair values into three levels. The Group applies the following fair value hierarchy: Level 1: The fair value of financial instruments is based on their quoted market price in active markets for identical instruments that are available for the Bank at the reporting date. Level 2: The fair value of financial instruments is based on directly or indirectly observable data other than the quoted market price. The followings can be used for the valuation: quoted market prices in active markets for similar instruments, quoted prices for identical or similar instruments in markets that are considered less than active, or other valuation techniques in which all significant inputs are directly or indirectly observable from market data. Where discounted cash flow techniques are used, estimated future cash flows are based on the Bank’s economic estimates and the discount rate is a market related rate at the reporting date for an instrument with similar terms and conditions. Where valuation models are used, inputs are based on market related measures at the reporting date. Level 3: The fair value of financial instruments is based on inputs other than observable market data. The valuation is based on quoted prices for similar instruments for which significant unobservable adjustments or assumptions are required to reflect differences between the instruments. The Group considers the fair value of its financial instruments to be level 1 if it was determined exclusively based on level 1 data. Level 2 category is applied when the measurement was based not only level 1 inputs, but no level 3 input, was required. When more fair values are available, the use of higher fair values hierarchy get priority, therefore if a security is primarily categorized as level 2 but level 1 data is also available the level 1 data will be applied automatically. Valuation techniques include net present value and discounted cash flow models, comparison with similar instruments for which observable market prices exist and other valuation models. Assumptions and inputs used in valuation techniques include risk-free and benchmark interest rates, credit spreads and other premia used in estimating discount rates, bond and equity prices, foreign currency exchange rates, equity and equity index prices and expected price volatilities and correlations. The objective of valuation techniques is to arrive at a fair value measurement that reflects the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date. The Group uses widely recognized valuation models to determine the fair value of common and simple financial instruments, such as interest rate and currency swaps, that use only observable market data and require little management judgement and estimation. Observable prices or model inputs are usually available in the market for listed debt and equity securities, exchange-traded derivatives and simple OTC derivatives such as interest rate swaps. The availability of observable market prices and model inputs reduces the need for management judgement and estimation and also reduces the uncertainty associated with determining fair values. The availability of observable market prices and inputs varies depending on the products and markets and is prone to changes based on specific events and general conditions in the financial markets.
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 146 For more complex instruments, the Group uses proprietary valuation models, which are usually developed from recognized valuation models. Some or all the significant inputs into these models may not be observable in the market, and may be derived from market prices or rates or estimated based on assumptions. Examples of instruments involving significant unobservable inputs include certain OTC structured derivatives, certain loans, securities for which there is no active market. Valuation models that employ significant unobservable inputs require a higher degree of management judgement and estimation in the determination of fair value. Management judgement and estimation are usually required for the selection of the appropriate valuation model to be used, determination of expected future cash flows on the financial instrument being valued, determination of the probability of counterparty default and prepayments, determination of expected volatilities and correlations and selection of appropriate discount rates. Fair value estimates obtained from models are adjusted for any other factors, such as liquidity risk or model uncertainties, to the extent that the Group believes that a third party market participant would take them into account in pricing a transaction. Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the Bank and the counterparty where appropriate. For measuring derivatives both credit valuation adjustment (CVA) and debit valuation adjustment (DVA) are taken into consideration when market participants would take this into consideration in pricing the derivatives. Model inputs and values are calibrated against historical data and published forecasts and where possible, against current or recent observed transactions in different instruments and against broker quotes. This calibration process is inherently subjective and it yields ranges of possible inputs and estimates of fair value, and management uses judgement to select the most appropriate point in the range. The Group measures forward transactions (derivative transactions) and HUF loans to credit institutions at EURIBOR-based interest rates at fair value. As the Group does not provide investment services, it enters into forward transactions only with credit institution partners.
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 147 a) Financial instruments measured at fair value by the level of fair value hierarchy The following table analyses financial instruments measured at fair value at the reporting date by the level of the applied fair value hierarchy. The amounts are based on the values recognized in the statement of financial position. 2022 Level 1 Level 2 Level 3 Total FINANCIAL ASSETS Derivatives 2 454 2 454 Non-trading financial assets mandatorily at fair value through profit or loss 407 465 407 465 Debt securities 369 647 369 647 Loans to customers 6 459 6 459 Loans to banks 31 359 31 359 Financial assets at fair value through other comprehensive income 60 537 17 694 13 795 92 026 Equity instruments 17 694 13 795 31 489 Debt instruments 60 537 60 537 Derivatives – Hedge accounting 15 128 15 128 FINANCIAL LIABILITIES Derivatives 4 062 4 062 Derivatives – Hedge accounting 0 0 2021 Level 1 Level 2 Level 3 Total FINANCIAL ASSETS Derivatives 783 783 Non-trading financial assets mandatorily at fair value through profit or loss 97 219 97 219 Debt securities 60 513 60 513 Loans to customers 7 109 7 109 Loans to banks 29 597 29 597 Financial assets at fair value through other comprehensive income 32 537 14 066 46 603 Equity instruments 14 066 14 066 Debt instruments 32 537 32 537 Derivatives – Hedge accounting 7 849 7 849 FINANCIAL LIABILITIES Derivatives 664 664 Derivatives – Hedge accounting 0 0 The Bank uses the discounted future cash flows model for its derivatives that is adjusted by the credit risk of the counterparty (asset side) or the Bank’s own credit risk (liability side). The fair value of derivatives in hedge accounting is also calculated by using the same method. The underlying transactions in hedge accounting, the hedged item, are not reclassified into a fair value category, but remain in the amortized cost category.
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 148 Assets included in the „mandatorily at fair value through profit or loss” category are those failed on the SPPI test established by IFRS 9. The fair value of these items is determined based on the Group’s internal model, which considers the value of future cash flows and expected market yield surcharge when discounting. The Group calculates the fair value of loans based on the discounted expected cash flow and discounts the contractual (capital, interest, interest subsidy) or individually determined future expected cash flows with the current yield curve or reference rate flat, increased by the product-level spread. In case of collective valuation, all contractual cash flows are considered and discounted. In case of individual valuation, the calculation includes the total expected cash flow. The fair value calculation is performed only for the already disbursed part, therefore the undrawn amount does not affect the fair value calculated. The main inputs used for venture capital investments in this category take into account the fair value of the net asset value to the Bank, adjusted for the maximized first yield guarantee Venture capital fund units owned by the Bank are classified (determination of fair value) on a quarterly basis, in the initial phase of the capital funds, using the following methods. As the net asset value decreases in the years following the start-up of the equity fund due to the nature of the business and does not give an adequate picture of the potential of the investment, we assume that the enrty value (cost) gives a good approximation of the fair value of the investment in the initial period. An alternative to determining fair value is the so-called plan performance model. The point is that it does not focus on an annual fact/fact- based assessment, but on a plan/fact-based assessment measured cumulatively from the start of the fund. The main parameters of the plan performance model are: fulfillment of placements, costs accounted for in the fund, expenses of financial operations / recognized impairment ratio, amount of exits, net asset value. Venture capital funds have no material liabilities and no other material assets. For debt securities presented as financial instruments at fair value through other comprehensive income (formerly available for sale securities), the fair values are determined as the average of the best buy and sale price available publicly disclosed by Government debt management agency for the reporting date. For the fair value determination of equity securities, the Group considers the expected return on the market, the marketability of the item, its mobilization (the supply and demand conditions and the available market prices, the proportion from the net equity of the investment) and the probability and magnitude of the loss. There was no transfer among the different fair value hierarchy categories.
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 149 b) Movement of financial assets categorized into level 3 2022 Customer loans Loans to banks Other equity instruments Debt securities Opening balance as at 1 January 7 109 29 597 14 066 60 513 New disbursements/acquisition/capital increases 2 492 4 914 18 153 230 549 Reclassification from Associates or to exempted associates (734) 68 457 Sales 0 0 (511) 0 Repayments (1 267) (2 964) Profit or loss (fair value changes) during the year (627) (93) 46 10 128 Fair value changes during the year accounted into OCI 60 Conversion to other investments or exempted associates (1 343) 0 409 0 Other reclassification 95 (95) 0 0 Transfers from/to level 3. hierarchy category 0 0 0 0 Closing balance at 31 December 6 459 31 359 31 489 369 647 2021 Customer loans Loans to banks Other equity instruments Debt securities Opening balance as at 1 January 8 068 35 014 9 275 3 651 New disbursements/acquisition/capital increases 1 450 150 5 685 56 125 Sales 0 0 (188) 0 Repayments (1 382) (5 682) Profit or loss (fair value changes) during the year (451) 115 (8) 737 Fair value changes during the year accounted into OCI (39) Transfers from/to level 3. hierarchy category (576) 0 (659) 0 Closing balance at 31 December 7 109 29 597 14 066 60 513 The Group used discounted cash flow model valuation technique to determine the fair value for customer and bank loans in level 3 category both as at 31 December 2022 and 2021. The significant unobservable inputs applied were the probability of default and the individual credit spread of the given customer, by the way they do not significantly affect the fair value measurement. For equity instruments the Group applied discounted cash flow model for the expected net cash flow derived from the entity. Significant increase in any of the input parameters in isolation would result in lower fair values. In case of equity instruments increase in expected net cash flows would result in higher fair value.
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 150 c) Financial instruments not measured at fair value by the level of fair value hierarchy 2022 Level 1 Level 2 Level 3 Total Carrying value Cash. cash balances at central banks and other demand deposits 98 944 98 944 99 001 Financial asset at amortized cost 41 030 0 1 537 600 1 578 630 1 849 096 Debt securities 41 030 346 256 387 286 439 103 Hungarian government bonds 35 986 35 986 42 158 Corporate bonds 346 256 346 256 390 765 Mortgage bonds 5 044 5 044 6 180 Loans 1 160 197 1 160 197 1 378 824 Customer loans 1 093 419 1 093 419 1 298 497 General governments 49 661 49 661 53 603 Other financial corporations 243 737 243 737 294 608 Other non-financial corporations 699 340 699 340 818 040 Households 100 681 100 681 132 246 Loans to banks 66 778 66 778 80 327 Refinancing loans 345 345 346 Other loans 66 433 66 433 79 981 Other financial assets 4 322 4 322 4 322 Trade receivables 1 119 1 119 1 119 Margin accounts 3 203 3 203 3 203 Deposits at central and other banks 26 825 26 825 26 847 Central bank deposits 0 0 0 Other bank deposits 26 825 26 825 26 847 Financial liabilities at amortized cost 1 231 329 570 902 1 802 231 2 257 815 Customer deposits 41 055 41 055 48 520 Interbank deposits 23 849 23 849 23 859 Customer deposits (collateral behind loans) 12 615 12 615 19 264 Other customer deposits 4 591 4 591 5 397 Due from banks 510 021 510 021 786 907 Refinancing loans 140 787 140 787 230 171 Other loans taken 369 234 369 234 556 736 Debt securities issued 1 231 329 1 231 329 1 402 562 Listed HUF bonds 453 860 453 860 579 192 Listed CCY bonds 777 469 777 469 823 370 from this listed on foreign stock exchange 454 288 454 288 501 049 Other financial liabilities 19 826 19 826 19 826 Margin accounts 15 696 15 696 15 696 Creditors 2 244 2 244 2 244 Other financial liabilities 1 886 1 886 1 886
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 151 2021 Level 1 Level 2 Level 3 Total Carrying value Cash. cash balances at central banks and other demand deposits 6 169 485 169 491 169 525 Financial asset at amortized cost 57 201 0 1 571 886 1 629 087 1 641 435 Debt securities 57 201 307 629 364 830 385 538 Hungarian government bonds 50 865 50 865 53 494 Corporate bonds 307 629 307 629 325 899 Mortgage bonds 6 336 6 336 6 145 Loans 1 221 511 1 221 511 1 213 151 Customer loans 1 165 119 1 165 119 1 155 547 General governments 35 875 35 875 38 554 Other financial corporations 298 989 298 989 304 089 Other non-financial corporations 702 754 702 754 685 164 Households 127 501 127 501 127 740 Loans to banks 56 392 56 392 57 604 Refinancing loans 815 815 827 Other loans 55 577 55 577 56 777 Other financial assets 357 357 357 Trade receivables 320 320 320 Margin accounts 37 37 37 Deposits at central and other banks 42 389 42 389 42 389 Central bank deposits 19 800 19 800 19 801 Other bank deposits 22 589 22 589 22 588 Financial liabilities at amortized cost 1 052 942 688 884 1 741 826 1 836 610 Customer deposits 138 358 138 358 141 905 Interbank deposits 103 131 103 131 103 148 Customer deposits (collateral behind loans) 9 101 9 101 11 836 Other customer deposits 26 126 26 126 26 921 Due from banks 539 728 539 728 598 877 Refinancing loans 225 984 225 984 261 909 Other loans taken 313 744 313 744 336 968 Debt securities issued 1 052 942 1 052 942 1 085 030 Listed HUF bonds 473 810 473 810 512 116 Listed CCY bonds 579 132 579 132 572 914 from this listed on foreign stock exchange 455 830 455 830 461 336 Other financial liabilities 10 798 10 798 10 798 Margin accounts 6 883 6 883 6 883 Creditors 1 947 1 947 1 947 Other financial liabilities 1 968 1 968 1 968 The fair value of cash and cash equivalents and demand and short-term bank deposits was considered to be equal to the carrying amount at the reporting date. Where available, the fair value of loans and advances is based on observable market transactions. Where observable market transactions are not available, fair value is estimated using valuation models, such as discounted cash flow techniques. Input into the valuation techniques includes expected lifetime credit losses, interest rates, prepayment rates and primary origination or secondary market spreads. For collateral-dependent impaired loans, the fair value is measured based on the value of the underlying collateral. Input into the models may include data from third party brokers based on OTC trading activity, and information obtained from other market participants, which includes observed primary and secondary transactions. In case of purchased and issued debt securities measured at amortized cost, the fair value of the instrument is calculated based on the daily market closing rates available in the Inforex system. Where this information is not available, the securities are classified into level 2 or 3 fair value hierarchy and accordingly, discounted cash flow method is applied by using the current market yield curves. The fair
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 152 value of issued bonds is determined based on data provided by market makers, however as there is no active market for these bonds therefore they were categorized into level 2. The fair value of deposits from banks and customers is estimated using discounted cash flow techniques, applying the rates that are offered for deposits of similar maturities and terms. The fair value of deposits payable on demand is the amount payable at the reporting date.
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 153 37. OFFSETTINGS The below tables include all repurchase agreements and all such derivatives where ISDA agreements allows the net settlements. Financial assets subject to offsetting and potential offsetting agreements – 2022 Gross carrying amount Amounts set off against financial liabilities Net carrying amount Potential effect of netting agreement not qualifying for offsetting in the Financial Position Statements Net amount after potential offsetting Financial instruments Cash collateral received Non-cash financial collateral received Derivatives 17 582 0 17 582 (15 696) 0 0 1 886 Repurchase agreements 0 0 0 0 0 0 0 Total 17 582 0 17 582 (15 696) 0 0 1 886 Financial liabilities subject to offsetting and potential offsetting agreements - 2022 Gross carrying amount Amounts set off against financial assets Net carrying amount Potential effect of netting agreement not qualifying for offsetting in the Financial Position Statements Net amount after potential offsetting Financial instruments Cash collateral given Non-cash financial collateral given Derivatives 4 062 0 4 062 (3 203) 0 0 859 Reverse repurchase agreements 0 0 0 0 0 0 0 Total 4 062 0 4 062 (3 203) 0 0 859
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 154 Financial assets subject to offsetting and potential offsetting agreements - 2021 Gross carrying amount Amounts set off against financial liabilities Net carrying amount Potential effect of netting agreement not qualifying for offsetting in the Financial Position Statements Net amount after potential offsetting Financial instruments Cash collateral received Non-cash financial collateral received Derivatives 8 632 0 8 632 (6 883) 0 0 1 749 Repurchase agreements 0 0 0 0 0 0 0 Total 8 632 0 8 632 (6 883) 0 0 1 749 Financial liabilities subject to offsetting and potential offsetting agreements - 2021 Gross carrying amount Amounts set off against financial assets Net carrying amount Potential effect of netting agreement not qualifying for offsetting in the Financial Position Statements Net amount after potential offsetting Financial instruments Cash collateral given Non-cash financial collateral given Derivatives 664 0 664 (37) 0 0 627 Reverse repurchase agreements 0 0 0 0 0 0 0 Total 664 0 664 (37) 0 0 627
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 155 38. MATURITY TABLE The following table shows the residual maturity breakdown of financial assets and liabilities. The guarantees were classified in the category „within a year”, irrespective of the actual maturity of the credit line holding period. The loan commitments were classified based on their actual maturity. 2022 2021 Within a year Over a year Total Within a year Over a year Total Financial Assets Cash, cash balances at central banks and other demand deposits 99 001 99 001 169 525 169 525 Financial assets held for trading 2 454 2 454 783 783 Non-trading financial assets mandatorily at fair value through profit or loss 1 930 405 535 407 465 5 460 91 759 97 219 Financial assets at fair value through other comprehensive income 21 249 70 777 92 026 8 794 37 809 46 603 Financial assets at amortized cost 247 026 1 602 807 1 849 833 298 385 1 343 050 1 641 435 Derivatives – Hedge accounting 15 128 15 128 7 849 7 849 Total Financial Assets 386 788 2 079 119 2 465 907 490 796 1 472 618 1 963 414 Financial Liabilities Financial liabilities held for trading 4 062 4 062 664 664 Financial liabilities at amortized cost 458 491 1 799 324 2 257 815 310 886 1 525 724 1 836 610 Derivatives – Hedge accounting 0 0 0 0 Total Financial Liabilities 462 553 1 799 324 2 261 877 311 550 1 525 724 1 837 274 Guarantees 799 175 799 175 504 951 504 951 Capital commitments 154 205 56 733 210 938 62 503 31 372 93 875 Loan commitments 184 279 30 087 214 366 79 842 146 791 226 633 The Group manages liquidity risk through liquidity reserves (Central Bank eligible securities) and liquidity GAP limits. It provides timely renewal and replacement of expiring funds.
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 156 39. EXERCISING OWNER’S RIGHTS The Bank exercises the owner’s rights in the name of the Hungarian State for state owned companies determined by the appendix 1. of th e HDB Law and in venture capital funds determined by the decrees 8/2016. (IV.19.) and 64/2016. (XII.28.) of Ministry for National Development, furthermore 15/2022. (XII.6) of Ministry for Economic Development. Income and expenses arising from the management of State shares form the income and expenses, or financing income and expenses of the central budget. The Bank acts as an agent (not allowed to sell the entities and is not entitled for any dividend (unless has its own investment in the entity) in this relationship and receives only cost reimbursement from the State for fulfilling the owner’s right activity, amounted to HUF 5 million (2021: HUF 25 million) presented on “Other operating income” line. The companies and venture capital funds in which the Bank exercises the owner’s rights at 31 December 2022 and 2021 are the following: Name of the company / fund Activity State ownership Share capital 2022 2021 2022 2021 ABC Kockázati Tőkealap Venture capital fund 69.77% 69.77% 4 300 4 300 AJH Növekedési Kockázati Tőkealap Venture capital fund 69.99% 69.99% 4 286 4 286 Bonitás Kockázati Tőkealap Venture capital fund 69.23% 69.23% 6 500 6 500 Bonitás Kockázati Tőkealap II Venture capital fund 76.87% 76.87% 12 158 12 158 Capitalisatio Kockázati Tőkealap Venture capital fund 70,00% 70,00% 13 351 13 351 Conor Seed Capital Kockázati Tőkealap Venture capital fund 69.77% 69.77% 2 150 2 150 Core Venture Közös Magvető Kockázati Tőkealap Venture capital fund 69.93% 69.93% 1 319 1 319 Core Venture Közös Növekedési Kockázati Tőkealap Venture capital fund 69.93% 69.93% 4 290 4 290 DBH Investment Kockázati Tőkealap Venture capital fund 70.00% 70.00% 5 000 5 000 Diákhitel Központ Zártkörűen Működő Részvénytársaság Crediting 100.00% 100.00% 300 300 Euroventures IV. Kockázati Tőkealap Venture capital fund - 100.00% - 7 821 Finatech I. Kockázati Tőkealap Venture capital fund 69.96% 69.96% 4 288 4 288 Finatech II. Kockázati Tőkealap Venture capital fund 70.00% 70.00% 13 351 13 351 Forte Kockázati Tőkealap Venture capital fund 70.00% 70.00% 3 857 3 857 Garantiqa Hitelgarancia Zártkörűen Működő Részvénytársaság Other financial supplementary services 74.03% 43.72% - 9 652 GRAN Kockázati Tőkealap Venture capital fund - 69.77% - 1 450
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 157 Name of the company / fund Activity State ownership Share capital 2022 2021 2022 2021 GRAN II. Kockázati Tőkealap Venture capital fund - 69.77% - 800 GRAN III. Kockázati Tőkealap Venture capital fund 74.03% 74.03% 6 931 6 931 Green Europe Agrár Tőkealap Capital fund 74.00% - 112 879 - Kutatás-fejlesztési és Innovációs Állami Tőkealap Venture capital fund 100.00% 100.00% 30 000 30 000 Infokommunikációs Állami Tőkealap Venture capital fund 100.00% 100.00% 6 075 6 075 Irinyi I. Kockázati Tőkealap Venture capital fund - 100.00% - 7 477 Morando Kockázati Tőkealap Venture capital fund 69.94% 69.94% 6 506 6 506 OTP Kockázati Tőkealap I. Venture capital fund 55.88% 55.88% 6 800 6 800 PBG FMC Tőkealap Venture capital fund 69.77% 69.77% 4 300 4 300 Perion 2013. Kockázati Tőkealap Venture capital fund 68,00% 68,00% 3 884 3 884 Prosperitás Profit Közös Növekedési Kockázati Tőkealap Venture capital fund 69.98% 69.98% 6 430 6 430 Prosperitás Proseed Közös Magvető Kockázati Tőkealap Venture capital fund 69.77% 69.77% 2 150 2 150 Regionális Fejlesztési Holding Zártkörűen Működő Részvénytársaság Economy development activities 100.00% 100.00% 23 842 23 842 Solus I. Kockázati Tőkealap Venture capital fund 70.00% 70.00% 13 351 13 351 Solus II. Kockázati Tőkealap Venture capital fund 87.51% 87.51% 8 010 8 010 Takarék Kockázati Tőkealap I. Venture capital fund 76.92% 76.92% 12 150 12 150 Üzleti Infokommunikációs, Digitalizációs Tőkealap Venture capital fund 100.00% 100.00% 9 346 9 346 Valor Capital Közös Zártvégű Kockázati Tőkealap Venture capital fund 69.99% 69.99% 2 934 3 087 Venturio 2013. Kockázati Tőkealap Venture capital fund 68.00% 68.00% 4 411 4 411 X-VENTURES ALPHA I. Kockázati Tőkealap Venture capital fund 70.00% 70.00% 2 492 2 492 X-Ventures Béta Kockázati Tőkealap Venture capital fund 69.77% 69.77% 3 280 3 280 Vespucci Capital I. Kockázati Tőkealap (volt X-Ventures Delta Kockázati Tőkealap) Venture capital fund 70.00% 70.00% 13 351 13 351 X-Ventures Gamma Kockázati Tőkealap Venture capital fund 70.00% 70.00% 13 351 13 351
MFB Hungarian Development Bank Private Limited Company and its subsidiaries Notes to Consolidated Financial Statements for the year ended 31 December 2022 (amounts presented are expressed in HUF million unless otherwise noted) 158 40. EVENTS AFTER THE REPORTING PERIOD All adjusting events after the balance sheet date have been considered the preparation of the consolidated financial statements of the Group. There were no material events that occurred after the balance sheet date that would impact the Group’s consolidated financial statements.
MFB Hungarian Development Bank Private Limited Company Consolidated management report for the year 2022
MFB’s annual consolidated management report for 2022 2 Table of contents Introduction ................................................................................................................................ 3 1. Operating conditions .............................................................................................................. 4 2. Business events in 2022 ......................................................................................................... 6 2.1. MFB Hungarian Development Bank Private Limited Company .................................... 7 2.2. Activities of the main companies included in the scope of consolidation .................... 10 2.3. Key features of the internal audit and risk management systems of the corporate group ..... 15 3. Main features of the consolidated accounts ......................................................................... 16 3.1. Balance sheet total ......................................................................................................... 16 3.2. Shareholders’ equity ...................................................................................................... 16 3.3. Profit for the year .......................................................................................................... 17 3.4. Key indicators of MFB’s consolidated operations ........................................................ 19 4. The MFB Group’s strategic business policy concept of 2022 ............................................. 22 5. Other key processes .............................................................................................................. 23 6. Major events since the balance sheet date ............................................................................ 26
MFB’s annual consolidated management report for 2022 3 Introduction The MFB Hungarian Development Bank Private Limited Company (hereinafter: MFB Zrt., MFB, Bank) has prepared its management report containing consolidated data for 2022 in accordance with Act CXX of 2001 on the Capital Market and Decree 24/2008. (VIII. 15.) of the Ministry of Finance on the detailed rules of reporting on publicly traded securities. The purpose of the report is to allow MFB Zrt.’s governing bodies to learn the details of the operations and business processes of the Bank and its subsidiaries (“Group” or “MFB Group”) in the reporting period, and, based on balance sheet and income statement data, to gain an accurate picture of the Group’s financial management in 2022. The performance of MFB Zrt. and MFB Group in 2022 was shaped by the goal of re-launching the economy, and creating and promoting the growth of sustainable activity. Achieving these goals was made more difficult by the prolonged negative economic impact following the coronavirus outbreak and the general economic crisis aggravated by the outbreak of the Russo- Ukrainian war and the subsequent acceleration of inflation and energy crises. In Hungary, the sharp increase in inflation during 2022 also entailed a rise in loan interest rates, which causes domestic companies to be less able or willing to borrow. This is also confirmed by the MFB’s company questionnaire surveys (MFB-INDIKÁTOR): by autumn 2022 the share of firms planning to raise some kind of external financing in the next 12 months fell from 27% in the previous year to 23%. Despite this, the Bank continued to make new commitments and new lending in the amount of nearly HUF 1 240 billion in 2022 as well, following the previous year’s high commitment values. In 2022, businesses continued to benefit from a number of own and EU-sourced MFB loan and capital programmes, individual loans and guarantees complementing the lending activities, in order to fulfil their investment and working capital requirements, to address liquidity problems and ultimately to help the economy restart and regain stability. The growth in business activity resulted in an increase in the capital requirement of an extent such that the parent company MFB Zrt.’s total capital adequacy ratio threatened to fall to a level that would have been prohibitive for further growth by the end of 2022. To forestall this and to ensure the stability of its operations, the Bank received a total of HUF 170 billion in capital contributions from the owner, in two instalments. Due to the lingering effects of the coronavirus epidemic and the negative impact on businesses of the economic environment deteriorated by the crisis situation caused by the Russo-Ukrainian war, the Bank had to create higher provisions in 2022. Among the operational risks in 2022, health risks continued to be prominent. Due to the prolongation of the coronavirus epidemic, with regard to smaller teams and departments at the Bank, particular attention had to be paid to ensuring the professional substitution of staff. In summary, MFB had another successful year in 2022. Business activity continued to show significant growth, with MFB being available to businesses with loan, capital and guarantee products. Meanwhile, the Bank achieved a positive result, which, in addition to the capital increase by the founders, supported the growth of shareholders’ equity.
MFB’s annual consolidated management report for 2022 4 1. Operating conditions Macroeconomic effects Uncertainty at the global level (Russo-Ukrainian war, Chinese lockdowns caused by the coronavirus) as well as economic overheating in previous years have led to a sudden increase in commodity prices and a rising interest rate environment in 2022, which will negatively impact investment through a number of channels. Despite the challenges over the past year, investment in Hungary rose moderately (+1.0% yoy). Although investments decreased in most sectors, investments in the manufacturing sector, which are of key significance, increased by 20.7%. Gross corporate loans increased by 15.5% (+ HUF +1 683.6 billion) in 2022, which was higher than the growth in the same period of 2021 (+10.4%). The increase was primarily driven by foreign currency loans, partly due to increasingly competitive interest rates compared to forint loans, and partly because the weakening of the forint in the middle of the year played a key role in the growth of foreign currency loans, which increased the value of foreign currency loans in forint. In terms of domestic funding costs, 2022 was characterised by a tightening monetary policy, rising central bank base rates and money market interest rates. The National Bank of Hungary continued the cycle of interest rate hikes launched in June 2021, with the base rate rising from 2.40% at the beginning of the year to 13.00% in September, a 23-year high. Legislative changes with a significant bearing on the operations of the MFB Group1 The table below shows the year-end utilisation of state guarantee and interest subsidy facilities approved for the Bank under Act XC of 2021 on the central budget of Hungary for the year 2022: data in HUF million Limit Drawn down Available Fundraising limit 2 800 000 2 015 526 784 474 Loan financing, surety and guarantee limit 1 700 000 868 293 831 707 Exchange rate hedging agreement limit 2 000 000 1 477 809 522 191 Interest subsidy limit 700 000 57 549 642 451 Among the legislative changes affecting MFB Zrt. in 2022, the amendments to Act XX of 2001 on the Hungarian Development Bank Private Limited Company effective from 28 July 2022 and 11 August 2022 deserve to be highlighted 2 , which, among other things, will promote the 1 Companies in which, pursuant to the provisions of Act XX of 2001 on MFB Hungarian Development Bank Private Limited Company, MFB’s direct and indirect voting share is greater than 50%. 2 The amendment of Act XX of 2001 on the Hungarian Development Bank Private Limited Company (hereinafter: MFB Act) – to ensure consistency in the rules for determining internal capital requirements – provides for the maintenance of the regulatory capital requirement by not considering the internal capital adequacy assessment procedure and the corresponding capital build-up to be applicable in the case of MFB Zrt. Furthermore, in the interest of expanding its development banking activities, the amendment also ensures MFB Zrt. the possibility to provide non-repayable grants and to expand the scope of business entities operating with MFB Zrt.’s direct or indirect ownership by including business entities that provide business management, other management consulting or other financial intermediation services not elsewhere classified as their principal activity. Furthermore, the proposal also contains technical amendments. The proposal also repeals the provision of the MFB Act under which the central budget provides for the
MFB’s annual consolidated management report for 2022 5 expansion of MFB Zrt.’s scope of activities. In addition, the extraordinary legislation on the emergency situation(s) ordered by the Government (including in particular the provisions concerning the moratorium and the freeze on reference and default interest rates) also affected the activity of MFB Zrt. Founder’s Resolutions The minister without portfolio responsible for the management of national assets, who exercised shareholder rights in respect of the Bank until 23 May 2022, then the Minister for Economic Development, who exercises shareholder rights from 24 May 2022, passed several important resolutions pertaining to the Bank’s operations. In accordance with the tasks and powers defined in the Articles of Association, most of the Founder’s Resolutions of 2022 amended the Articles of Association, concerned the taking of business decisions, specifying deadlines for their completion and describing the method for verifying their implementation, and stipulated the increase in MFB Zrt.’s registered capital, as well as the recall, appointment or re-appointment of executive officers. organisational operating costs of the Hungarian Development Bank Private Limited Company (hereinafter: MFB Zrt.) arising from the exercise of ownership rights on behalf of the State. The reason for the repeal of this provision is that the tasks of MFB Zrt. in exercising its ownership rights on behalf of the State have been significantly reduced, so there is no justification for providing it with operating aid in this context. The amendment of Act XX of 2001 on the Hungarian Development Bank Private Limited Company narrows the list of business entities in respect of whose State-owned shares MFB Hungarian Development Bank Private Limited Company exercises ownership rights on behalf of the State under this Act.
MFB’s annual consolidated management report for 2022 6 2. Business events in 2022 MFB is the lead credit institution of a company group in long-term state ownership that provides a complex range of services. The core of the companies included in the scope of consolidation consists of MFB’s strategic investments, i.e. the MFB Group, in other words companies in which MFB holds a more than 50% voting share connected to its direct and indirect assets as per the provisions of Act XX of 2001 on MFB Hungarian Development Bank Private Limited Company. On this basis, the MFB Group (excluding MFB) included 15 companies or capital funds at the end of 2022. The combined (pre-consolidation) net losses of the MFB Group in 2022 (without MFB) was HUF 213 million. The largest profit in 2022 was also achieved by MKK Zrt., which had an annual profit of HUF 3,038 million on an IFRS basis. The main reason for the lower consolidated profit than in the previous year is that the company paid a significant amount of extra profit tax in 2022. The individual companies’ net earnings for the year, recognised for the purposes of consolidation and before adjustments, were as follows: HUF million 2022 2021 Change according to IFRS 3 083 5 547 -2 464 MKK Magyar Követeléskezelő Zrt. 3 083 5 547 -2 464 according to HAS -3 296 -3 173 -123 MFB Ingatlanfejlesztő Zrt. 1 083 1 118 -36 MFB Invest Befektetési és Vagyonkezelő Zrt. 55 46 9 Hiventures Kockázati Tőkealap-kezelő Zrt. 410 422 -12 MFB Growth Capital Fund -2 322 -2 369 47 Fashion & Design Capital Fund -376 -190 -186 Debrecen City Capital Fund -210 -276 66 Székesfehérvár City Capital Fund -114 -135 21 Kaposvár City Capital Fund -82 -91 9 Nyíregyháza City Capital Fund -109 -110 1 Pécs City Capital Fund -78 -48 -30 Veszprém City Capital Fund -73 -84 11 Rural Development Capital Fund -1 0 -1 FOCUS VENTURES Zrt. (MFB Invest Tőkealap-kezelő Zrt.) 251 156 95 MFB Corporate Investment and Transaction Private Equity Fund -1 729 -1 612 -117 Total -213 2 374 -2 587 The core activities of the companies differ, and so we have highlighted the key aspects of the operations of the various members of the MFB Group individually below.
MFB’s annual consolidated management report for 2022 7 2.1. MFB Hungarian Development Bank Private Limited Company MFB was the dominant institution within the MFB Group in terms of both capitalisation and total assets. Business processes Lending, new guarantees In terms of MFB-funded loans and guarantees, 2022 resulted in continued significant growth following the strong increase in activity in 2021. In 2022 the Bank approved 4% more loan applications than it had in the previous year, in a total value of HUF 424 billion, of which HUF 323 billion were loan applications approved for large individual transactions and HUF 101 billion for loan programmes. In 2022 the value of new loan disbursements was HUF 400 billion; at the end of the year the Bank’s total loans amounted to nearly HUF 1 450 billion, which was HUF 195 billion higher than at the end of 2021. In 2022, the Bank subscribed a total of HUF 77 billion in corporate bonds, the year-end corporate bond portfolio amounted to HUF 388 billion. In 2022 the Bank granted its customers new guarantees of HUF 319 billion; the year-end stock of guarantees exceeded HUF 719 billion. Equity interests In 2022 MFB’s subscriptions of investment units in the various capital funds and thus its support for the capital placements made through these funds continued to be heavily represented among its direct investments. Capital increases in its own businesses and investment unit subscription commitments amounted to HUF 341 billion in 2022, the main elements of which were the following: • Subscription of investment units of MFB-funded market capital funds, • Commitment to increase the capital of MFB Invest Zrt, The Bank’s net equity interests portfolio grew by HUF 376.1 billion in 2022 3 , to HUF 755 billion. Actual capital placements and investment unit subscriptions amounted to HUF 341 billion in 2022. EU funds management MFB was a funds management entity in the 2007-2013 programming period, and acts as the Fund of Funds implementing entity for the 2014-2020 European Union programming period; it disposes over the available funds in its own name, but for the benefit of the Managing Authorities. Consequently, it maintains separate records of the funds of programming periods; these do not form part of the Bank’s balance sheet. The MFB Points network achieved a loan disbursement volume of HUF 87 billion in 2022. The total of EU loans disbursed by the nationwide MFB Points network operated by the domestic banks (Takarékbank Zrt., MKB Bank Nyrt. which as from the merger on 31 March 2022 also includes Budapest Bank Zrt. [the banks of Magyar Bankholding Zrt.], as well as OTP Bank 3 Also presented in this part of the balance sheet are the capital fund units recognised among Non-trading financial instruments mandatorily measured at fair value through profit or loss.
MFB’s annual consolidated management report for 2022 8 Nyrt, and Gránit Bank Zrt.), in the period from its 2016 launch to the end of 2022 exceeded HUF 706 billion. Also worthy of note is the fact that more than 8,000 applications from companies were received in the subject year, which is 22% of the total number of applications received between 2016 and 2022. In 2022 the Bank disbursed EU funds totalling HUF 101.17 billion through intermediaries, including loans of HUF 87 billion and venture capital of HUF 14.14 billion. MFB Zrt.’s direct EU lending amounted to HUF 234 million. The total disbursement was thus HUF 101.40 billion. Resource management In 2022, MFB raised medium and long-term external funds in the amount of HUF 614.4 billion. 52.6% of the funds raised were in forint, and 47.4% in euro. The Bank issued nearly EUR 604 million in foreign currency bonds during the year. In addition, HUF 151.5 billion of bonds were issued, and loans of EUR 100 million, and HUF 140 billion were drawn down primarily to fund its asset-side growth. Management The Bank’s net interest income (HUF 37 578 million) exceeded the previous year’s figure due to the short-term positive impact of the rising interest rate environment. Net fee and commission income (HUF 4 090 million), thanks to the larger guarantee portfolio, came in higher than the previous year’s figure, while dividend income (HUF 1 405 million) was slightly below the figure for 2021. Expenses of banking operations (HUF 13,728 million) increased only slightly, despite the significant increase in business activity, while the effect on profit of changes in impairment/provisions (HUF 26,721 million) is higher than the 2021 figure due to the prolonged economic crisis. Among other items, the modelled accounting gain on market funds measured at fair value (HUF 11 105 million) was some of the larger items. The Bank spent HUF 1 826 million on capital expenditures in banking operations in 2022. These capital investments were aimed at ensuring the necessary infrastructure, implementing developments required for performing the requisite range of tasks, and at replacing obsolete equipment. Summary The Bank’s activities in 2022 were largely determined by responses to the emerging general economic crisis and the measures taken to restart the economy. In 2022, the Bank provided significant funds to businesses to mitigate the economic damage and to expand investments to support economic growth. Accordingly, the balance sheet total increased in line with the expansion of the loan, corporate bond and investment portfolio. In addition, one of the key goals of the Bank in 2022 was to ensure the optimal and rational use of state assets, and in 2022 the Bank realised a profit after tax of HUF 6.2 billion. 2022 was the first year of implementation of the Bank’s new medium-term strategy for 2022- 2030. In the medium-term strategy, the Bank anticipated new commitments of HUF 1 600 billion up to 2025 and a further commitment of HUF 3 600 billion between 2025 and 2030. 78% of the expected commitment up to 2025 was already delivered in 2022.
MFB’s annual consolidated management report for 2022 9 Based on MFB’s latest survey conducted at the end of 2022, the Hungarian economy has an unmet lending gap of around HUF 570 billion (including investment loans, working capital loans and overdraft facilities). The size of the gap measured in the investment credit market, which is a priority area for monitoring, is estimated at HUF 440 billion, the gradual filling of which is a justifiable task, in line with EU principles as well.
MFB’s annual consolidated management report for 2022 10 2.2. Activities of the main companies included in the scope of consolidation As of 31 December 2022, the key information relating to the subsidiaries included in the scope of consolidation was as follows: MKK Magyar Követeléskezelő Zrt. The management of retail-customer debt and of other, proprietary receivables continues to be predominant within the Company’s business activity, and within this, its main activities include the management of tax and contribution claims purchased from the tax authority (in a decreasing extent in line with the depletion of the portfolio), workout activity, brokerage activity and factoring. The Company’s operations continued undisturbed in 2022 and its liquidity position remained stable. It also retained its market presence and share during the year. The more notable debt purchase transactions were the following: • In 2022, the company continued to purchase secured and unsecured claims against private individuals in the consumer debt market. • In 2022 as well, the company continued to manage Széchenyi credit card receivables, and purchased from Garantiqa Hitelgarancia Zrt. on 4 occasions. In 2022, most of the firm’s revenues came from its core activity, specifically from yields and income earned on the individual claims. MKK Zrt.'s after-tax profit for the year 2022 under the Hungarian Accounting Standards (HAS) is HUF 8,016 million, while under IFRS it is HUF 3,083 million. MFB Invest Befektetési és Vagyonkezelő Zrt. The company’s tasks include implementing individual large-scale priority investments, making placements through its own funds, performing fund-of-funds activities, as well as subscribing to corporate bonds. The company participates as an expert and co-owner in various projects that yield benefits over the long term and are considered a priority for the national economy. The company concluded an agency agreement with MFB Zrt. for the exercising of voting rights related to the latter’s interest in Hiventures Zrt (In most matters, MFB exercises ownership rights, with the exception of, for example, capital increases). At the beginning of 2022, the firm’s eight-year strategy was adopted, which aims to maintain the above pillars and expand its placements with regard to its product offering. The company’s placements amounted to HUF 61 724 million in 2022, as a result of which net long-term (invested) assets increased by HUF 144 854 million, or more than 71%, compared to 2021. Within the placements of 2022, a significant portion is accounted for by investments in capital funds managed by market-based fund managers as part of its fund-of-funds activity (HUF 45 215 million – 73% of the placements of the reporting year). The Company participated as an investor in the creation of a number of new capital funds implemented by external fund managers in 2022, where the resources provided by MFB Invest Zrt. were supplemented with market-based funding, thus providing a more substantial financing opportunity for businesses implementing developments – typically SMEs. FOCUS VENTURES Zrt., which is owned by MFB Invest Zrt., continued the investment activities related to city funds that it had begun in 2019, and established new city funds, with MFB Invest Zrt. as investor, billion and established the Rural Development Fund with HUF 3 billion capital, which aims to provide pre-grant
MFB’s annual consolidated management report for 2022 11 capital financing to enterprises holding a grant award letter issued by the Managing Authority for the 2014-2020 programming period. The company's profit for 2022 is HUF 55 million. FOCUS VENTURES Tőkealap-kezelő Zrt. The primary task of the company is to perform fund management activities in respect of the 100% own funds of MFB Invest Zrt., with special regard to the management of city funds of key importance to the national economy. In 2022, the company achieved a net after-tax profit of HUF 251 million with a sales revenue of HUF 637,899 thousand. In 2022 the fund manager created one additional capital fund with HUF 3 billion in subscribed capital, and thus the total subscribed capital of the managed funds reached HUF 32 billion. The following capital fund was created in 2022: - Rural Development Capital Fund (HUF 3 billion subscribed capital) In the case of the new fund, the emphasis in 2022 was on creating the preconditions for operation, while in the case of the previously established funds, investment activity has already begun. The result of the Capital Fund Manager is HUF 251 million. Debrecen City Capital Fund The aim of the capital fund, established in 2019 with an envelope of HUF 10 billion, is primarily to finance projects implemented in Debrecen and Hajdú-Bihar counties, thus providing growth opportunities for businesses in the region. The management of the fund is performed by FOCUS VENTURES Zrt. The result of the Capital Fund is HUF -210 million. Székesfehérvár City Capital Fund The aim of the capital fund, established in 2019 with an envelope of HUF 5 billion, is to finance projects implemented in Székesfehérvár and Fejér County, thus providing growth opportunities for companies in the region. The management of the fund is performed by FOCUS VENTURES Zrt. The result of the Capital Fund is HUF -114 million. Kaposvár City Capital Fund The aim of the capital fund established with an envelope of HUF 3 billion in 2020 is to finance projects in Kaposvár and its catchment area, as well as in Somogy county, thus providing growth opportunities for businesses in the region. The management of the fund is performed by FOCUS VENTURES Zrt. The result of the Capital Fund is HUF -82 million. Veszprém City Capital Fund The aim of the capital fund established with an envelope of HUF 3 billion in 2020 is to finance projects in Veszprém and its catchment area, as well as in Veszprém county, thus providing growth opportunities for businesses in the region. The management of the fund is performed by FOCUS VENTURES Zrt. The result of the Capital Fund is HUF -73 million.
MFB’s annual consolidated management report for 2022 12 Nyíregyháza City Capital Fund The aim of the capital fund established with an envelope of HUF 5 billion in 2021 is to finance projects in Nyíregyháza and its catchment area, as well as in Szabolcs-Szatmár-Bereg county, thus providing growth opportunities for businesses in the region. The management of the fund is performed by FOCUS VENTURES Zrt. The result of the Capital Fund is HUF -109 million. Pécs City Capital Fund The aim of the capital fund established with an envelope of HUF 3 billion in 2021 is to finance projects in Pécs and its catchment area, as well as in Baranya county, thus providing growth opportunities for businesses in the region. The management of the fund is performed by FOCUS VENTURES Zrt. The result of the Capital Fund is HUF -78 million. Rural Development Capital Fund The purpose of the Capital Fund, established in 2022 with a budget of HUF 3 billion, is to provide pre-grant capital financing to enterprises holding a grant award letter issued by the Managing Authority under Annex 3, point 11 of Government Decree 272/2014 (5/11/2014) on the rules for the use of aid from certain EU funds in the 2014-2020 programming period. The management of the fund is performed by FOCUS VENTURES Zrt. The result of the Capital Fund is HUF -1 million. Hiventures Kockázati Tőkealap-kezelő Zrt. The main objective of the strategy adopted by the MFB Group member Hiventures Kockázati Tőkealap-kezelő Zrt. for 2017-2021 is to build a venture capital fund management company that is able to provide venture capital investment from the incubation to the growth phase, using EU funds and MFB Zrt.'s own resources, thus contributing to the long-term growth of the national economy. Over the years, the activities of the Fund Manager have expanded significantly, first opening up to the traditional SME sector, then to large corporates in the equity financing sector, and then, in the wake of the COVID-19 crisis, to the provision of rescue financing to distressed economic operators. Hiventures Zrt., operating as a subsidiary of MFB Invest Zrt., is responsible for the management of bulk capital investment activities through the MFB Growth Capital Fund, MFB Corporate, Investment and Transaction Private Capital Fund and the Fashion & Design Capital Fund which are owned by the Bank, as well as through the EU capital funds (State Fund for Research, Development and Innovation - RDI, the Information and Communication Capital Fund - ICC, and the Digitalisation Capital Fund - DCF). Hiventures has been an active investor in domestic energy and energy efficiency projects since before the energy crisis of the Russo-Ukrainian war. In 2022, the Corporate business line launched the Energy Efficiency Capital Programme, within the scope of which investments of up to EUR 500,000 – EUR 3 million are provided for energy efficiency investments and capacity expansion, primarily to industrial, manufacturing and production companies. Due to the declining managed portfolio, in 2022 the company’s fund management fee income and its operating expenses were both higher than in 2021, and thus the pre-tax profit was HUF 410 million. MFB Corporate Investment and Transaction Private Equity Fund
MFB’s annual consolidated management report for 2022 13 The MFB VBTMA fund has share capital of HUF 75 billion, and the following target markets can be considered as the target group: (i) Generational change – to provide an opportunity to ensure that family businesses affected by generational change, but which cannot be resolved by succession within the family, are sold in an orderly manner to the management of the company concerned or to external managements or investors, while preserving the viability of these companies. (ii) Transaction focus – to provide the opportunity to be an investment partner in corporate and real estate transactions, thereby facilitating acquisitions, successful corporate mergers or real estate transactions that substantially contribute to the domestic growth and the expansion of businesses – SMEs and large companies – abroad. (iii) Economic development – to provide capital financing for investments that, for whatever reason, cannot be financed solely through equity and debt, but are important from the aspect of the domestic economy (e.g. climate change, health, green energy, digitalisation, infrastructure). (iv) Restructuring – to provide equity financing to businesses – SMEs and large companies – that were previously prospering but are now temporarily in financial difficulty, in order to help them get back on a growth path. (v) SME and Company Rescue Capital Programme – to provide rapid (within 30 days) capital financing to businesses that are experiencing financial difficulties as a result of the economic situation caused by the coronavirus, but are essentially profitable and viable firms with insufficient or no access to loan or other financing. As from October 2022, the previously established KKVPRO and InvestPRO businesses have been merged. The result of the Private Capital Fund is HUF -1,729 million. Fashion & Design Capital Fund The aim of the Fashion & Design Capital Fund, which was launched in September 2019 with funding of HUF 5 billion, is to finance start-ups or young innovative companies with high growth potential in the fashion and design sector that, through the capital support, can create innovative products or services by implementing their ideas and refining prototypes that can then be taken to the international market. Through the new fund, the Hungarian economy and Hiventures will open up towards an industry in which there are substantial opportunities for innovation and digital transformation, as well as for launching new clothing products and fashion accessories. To this end, as a first step, Hiventures entered into a strategic cooperation agreement with the Hungarian Fashion & Design Agency in 2019. The result of the Capital Fund is HUF -376 million. MFB Growth Capital Fund In terms of development stages, the Capital Fund finances micro, small and medium-sized enterprises (and in some cases, large companies) that are at the start of the development and financing chain. Hiventures can make investments in three main phases within this framework, namely: • pre-seed investments: the pre-seed phase is where visions at the idea stage are given business substance, and the idea owners are prepared to raise capital later; • seed investments: the seed phase is where a significant part of product development takes place and, in some cases, where market validation begins; and
MFB’s annual consolidated management report for 2022 14 • growth investments: this is the stage when a product is launched to the market or its sales are increased, or new markets are entered. In terms of investment focus, the MFB Growth Capital Fund takes an industry-flexible approach and thus has a broad industry focus, primarily aiming to build a portfolio of companies that mainly develop and sell innovative products and services. In terms of geographical focus, all regions of Hungary are eligible for funding, with the proviso that, in the case of investment in a foreign-based company, the resources made available must be used or benefited from domestically. The result of the Capital Fund is HUF -2 322 million. MFB-Ingatlanfejlesztő Zrt. During the reporting period, the Company operated as the real estate competence centre of the MFB Group. As part of this, it performed the banking group’s property management, development, utilisation and sales tasks, but under its new strategy from 2022, it also completed market-based purchases of properties that were consistent with its existing activities and portfolio (e.g. office buildings), which allowed it to stabilise its profit-generating capacity. In 2022, the company continued to perform operation and utilisation activities with respect to the properties taken over from the members of the MFB Group. During the year, 3 properties taken over within the MFB Group were sold for a total of HUF 30 million. The Company’s after-tax profit for the year 2022 was a profit of HUF 1 083 million.
MFB’s annual consolidated management report for 2022 15 2.3. Key features of the internal audit and risk management systems of the corporate group According to Section 134 (3) of the Accounting Act relating to consolidated management reports, if the negotiable securities of a company included in consolidation have been admitted for trading on a regulated market of any country of the European Economic Area, it must include in the consolidated management report a description of the main features of the corporate group’s internal audit and risk management systems in connection with the preparation of the consolidated annual accounts. Given the fact that the bonds issued by MFB had been admitted for trading on the Stock Exchange, we present below the main features of the corporate group’s internal audit and risk management systems in connection with the preparation of the consolidated annual accounts: • MFB’s companies included in the consolidation circle are consolidated on the basis of reporting packages containing Hungarian annual accounts and IFRS adjustments audited by independent statutory auditors and, in the case of subsidiaries newly added to the consolidation circle, on the basis of a “purchase price allocation” (PPA) val uation prepared by an independent consultancy firm. • In its consolidation accounting policy, MFB specifies the deadlines and the contents of the consolidation data reports. • MFB decides on the business policy and business plans of the companies belonging to the MFB Group, and approves the founder’s resolutions and general meeting mandates relating to these companies, including the election of the senior executives, supervisory board members, and the companies’ chief executive officers. • MFB delegates a representative to the Supervisory Board and Board of Directors of all the consolidated companies. • MFB’s Internal Audit Directorate may audit the members of MFB Group on the basis of the internal audit plan approved by MFB’s Supervisory Board. In order to ensure t he consistent quality of internal audit within the Group, the Bank applies a group-wide policy that sets out the internal control processes and the methodologies to be applied, and assures the independence of the internal audit function within the organisation. In 2022, the Internal Audit Directorate audited the asset declaration procedures and processes in MFB and the companies belonging to the MFB Group. • In accordance with Section 8 (2) of the MFB Act, MFB is exempt from the requirements relating to consolidated supervision. At the same time, MFB lays down, in Board directives, specific rules on group-level risk taking, which contain guidance for the risk management activities of the MFB Group in respect of lending, market and operational risk. The members of the MFB Group have integrated the provisions of the group-level rules into their own regulations. • MFB exercises monitoring activity in respect of the members of the MFB Group through monthly and quarterly reporting. The risk management policy of the MFB Group, the hedging policy, and the price, credit, interest rate, liquidity and cash flow risks are described in detail in Note 36 of the consolidated statements.
MFB’s annual consolidated management report for 2022 16 3. Main features of the consolidated accounts MFB’s consolidated annual accounts for the year 2022 contain the following key data in accordance with international accounting standards: • The consolidated balance sheet total was HUF 2,993.802 million as at 31 December 2022. • The value of consolidated shareholders’ equity amounted to HUF 689,266 million at the end of 2022. • Consolidated net profit for the year 2021 was HUF 26,847 million. The explanations for the significant quantifiable features of the consolidated accounts are as follows: 3.1. Balance sheet total The change in the balance sheet total under international accounting standards was the following: Balance sheet total (IFRS) In 2022 the group-level balance sheet total amounted to HUF 2,994 billion, which is 26% higher than the 2021 figure. During the year, the increased balance sheet total was mainly due to an increase in lending activity, corporate bond purchases, as well as capital placements and subscriptions for investment units, which can be attributed to the activities of MFB, the parent company. MFB’s HUF 2,970 billion balance sheet total represents 99% of the group’s balance sheet total. 3.2. Shareholders’ equity The capitalisation of the group provides sufficient medium-term funding for operations and assures the secure discharge of tasks. The value of, and the annual change in, shareholders’ equity according to international accounting standards was as follows: 2 401 669 2 373 041 2 969 978 2 993 802 0 500 000 1 000 000 1 500 000 2 000 000 2 500 000 3 000 000 3 500 000 HUF million 2021.12.31 2022.12.31 Non-consolidated Consolidated
MFB’s annual consolidated management report for 2022 17 Shareholders’ equity (IFRS) The increase in consolidated shareholders’ equity in 2022 is primarily due to the fact that MFB received a founder's capital injection in two tranches in 2022, totalling HUF 170 billion. The purpose of the capital increase is to comply with increasing prudential limits, mainly linked to investment tasks. 3.3. Profit for the year MFB’s non-consolidated 2022 profit after tax for the year under international accounting standards was HUF 6,194 million. Taking into account the changes due to consolidation, MFB's consolidated profit after tax for 2022 increased to HUF 26,847 million, which is mainly related to the results of associates in 2022. The diagram below shows the changes in the stand-alone and consolidated profit figures (IFRS): 2021 2022 Change Stand-alone profit for the year 4 385 6 194 1 809 Consolidated profit for the year 7 809 26 847 19 038 - of which: Owner's share of profit 7 809 26 847 19 038 - of which: Earnings attributable to minority interests 0 0 0 448 942 496 095 621 641 689 266 0 100 000 200 000 300 000 400 000 500 000 600 000 700 000 800 000 HUF million 2021.12.31 2022.12.31 Non-consolidated Consolidated
MFB’s annual consolidated management report for 2022 18 Profit for the financial year (IFRS) The changes in the consolidated profit figures are summarised in the following table: HUF million 2021 2022 Index Net interest and commission income 35 936 50 858 142% General and administrative expenses (23 409) (25 943) 111% Expense reimbursement 4 150 4 978 120% Effect of impairment and provisions (6 015) (19 731) 328% Other income/expenses 3 264 30 214 934% Taxes (6 117) (13 529) 221% Profit for the financial year 7 809 26 847 347% MFB's consolidated profit after tax for the year is HUF 26,847 million. In examining the profit items, it should be noted that • Net interest and commission income in 2022 is higher than in the previous year, due to an increase in the interest-bearing assets of MFB, as parent company, and a further improvement in margins compared to 2021. The central bank base rate increased by more than 10 percentage points in 2022. The rising interest rate environment had a positive effect in the short term, and the revaluation of assets took place before the change in interest rates affecting liabilities. • Expenses exceed the amount of the previous year. The increase in personnel expenses is primarily due to higher average headcount at Group level. The rise in the cost of materials is mainly due to higher energy prices as a result of the Russo-Ukrainian war that broke out on 24 February 2022. Changes in general and administrative expenses are detailed in the following diagram: 4 385 7 809 6 194 26 847 0 4 000 8 000 12 000 16 000 20 000 24 000 28 000 HUF million 2021. 2022. Non-consolidated Consolidated
MFB’s annual consolidated management report for 2022 19 General and administrative expenses (IFRS) • The cost reimbursement line includes the reimbursement of costs related to tasks associated with the management of EU funds and to the exercise of state ownership rights. The figure for cost reimbursements received grew in 2022, mainly due to the increase in costs associated with EU tasks. • The result of the change in impairment/provisions shows a negative value, primarily due to the impairment charges recognised as a result of higher business activity in 2022, in addition to which the Bank also recognised more impairment due to the war and COVID. • The gain on the balance of other income and expenses in 2022 (significantly higher than in the previous year) is due to the consolidation of the results of associates and the recognition of the fair value of private equity securities in the market. • The higher amount of taxes paid in 2022 compared to last year is mainly due to the extra profit tax introduced in 2022, the higher value of the special bank tax and the higher value of the bank supervision fee, in line with the increase in business activity. 3.4. Key indicators of MFB’s consolidated operations Financial indicators ROA HUF million, % 2021 2022 Index 1. Profit for the year 7 809 26 847 343.80% 2. Balance sheet total 2 373 041 2 993 802 126.16% 3.=1/2 Return on assets (ROA) 0.33% 0.90% 272.51% 12 526 23 409 13 728 25 943 0 5 000 10 000 15 000 20 000 25 000 30 000 HUF million 2021. 2022. Non-consolidated Consolidated
MFB’s annual consolidated management report for 2022 20 ROE HUF million, % 2021 2022 Index 1. Profit for the year 7 809 26 847 343.80% 2. Shareholders’ equity 496 095 689 266 138.94% 3.=1/2 Return on equity (ROE) 1.57% 3,90% 247.44% Both the ROA and ROE ratios are more favourable than in 2021, thanks to the significantly higher net profit. The positive impact of the more favourable profit on the indicator was only partly offset by the increase in balance sheet total (in the case of ROA), and by the higher shareholders’ equity resulting from the capital increases (in the case of ROE). Cost/income ratio HUF million, % 2021 2022 Index 1. General and administrative expenses 23 409 25 943 110.82% 2. Net interest and commission income 35 936 50 858 141.52% 3.=1/2 Cost/income ratio 65.15% 51.02% 78.31% Due to the more dynamic growth of revenues than costs, the indicator for 2022 is more favourable than the previous year’s value. Liquid assets ratio HUF million, % 2021 2022 Index 1. Liquid assets (cash, MNB deposits, securities available for sale) 304 705 237 291 77.88% 2. Total assets 2 373 041 2 993 802 126.16% 3.=1/2 Liquid assets ratio 12.84% 7.93% 61.73% The ratio of government securities and interbank items (together: liquid assets) to total assets is lower than in the base period. This is because while assets increased significantly due to lending activity, liquid assets decreased due to the volume of central bank deposits. The volume of liquid assets available at the end of 2022 continues to provide sufficient cover to deal with an unforeseen liquidity emergency situation. Leverage HUF million, % 2021 2022 Index 1. Balance sheet total 2 373 041 2 993 802 126.16% 2. Shareholders’ equity 496 095 689 266 138.94% 3.=1/2 Leverage indicator 4.78 4.34 90.80% As the shareholders’ equity increased more than the balance sheet total during the year, the Bank's consolidated leverage indicator decreased compared to 2021. Due to the capital injection, the Bank has sufficient capital in consolidated terms to ensure its reliable operation.
MFB’s annual consolidated management report for 2022 21 Non-financial indicators Headcount management in MFB and its subsidiaries persons, % 2021 2022 Index 1. Closing headcount 808 823 101.8% 2. Average headcount 792.8 835.4 105.4% In line with the increase in tasks (investment activity), both the closing and the average headcount increased in 2022. Announced MFB programmes and sub- programmes number, HUF billion, % 2021 2022 Index 1. MFB programmes (number) 12 6 50.0% 2. Total programme funds (HUF billion) 669 224 33.5% At the end of 2022, the following six loan programmes funded by MFB Zrt. were available: ▪ MFB Széchenyi Microcredit Refinancing Programme 2.0 announced for refinancing the Széchenyi Microcredit MAX scheme of KAVOSZ Zrt. (announced budget: HUF 80 billion) ▪ MFB Competitiveness Loan Programme (announced budget: HUF 15 billion) ▪ MFB Agri Loan Programme (announced budget: HUF 100 billion) ▪ MFB Agri Working Capital Loan Programme 2020 (announced budget: HUF 15 billion) ▪ MFB Food Industry Working Capital Loan Programme 2020 (announced budget: HUF 6 billion) ▪ MFB TÉSZ Working Capital Loan Programme 2020 (announced budget: HUF 8 billion) The deadline for loan applications for the MFB Competitiveness Loan Programme and the MFB Agricultural Loan Programme was 30 December 2022. In respect of the three agricultural working capital loan programmes (MFB Agricultural Working Capital Loan Programme 2020, MFB Food Industry Working Capital Loan Programme 2020, MFB TÉSZ Working Capital Loan Programme 2020), the deadline for loan application was 30 November 2022 (contracting date: 31 December 2022); the latter three loan programmes are in the process of renewal. Announced EU programmes number, HUF billion, % 2021 2022 Index 1. EU programmes (number) 29 29 100.00% 2. Total EU programme funds (HUF billion) 901 1013 112.4% The increase in the Gross Budget for 2022 is due to the second and third reopening of GNIOP 8.3.5.B, the former with an increase of around HUF 13 billion and the latter with an increase of HUF 100 billion. .
MFB’s annual consolidated management report for 2022 22 4. The MFB Group’s strategic business policy concept of 2022 The basic task of MFB Zrt. and its group is to provide domestic companies with financing under favourable terms, which will stimulate investment and development, as well as to support long- term economic development priorities and to raise the funds from the money market that are needed for these. MFB Zrt. sees 2023 as the year of financial stability and maintained activity, and its goal is to maintain the financing of the economy by providing the necessary funding, ensuring a stable background for businesses. The most important objectives for 2023: • The goal is to maintain the stability of the Hungarian economy in the face of global financial and economic difficulties, to facilitate the financing of businesses, and to ensure the continued availability of loan, guarantee and capital financing. • To ensure the stability and profitable management of the outstanding stock following the significant new commitments in 2021-2022. • To continue to expand own resources and EU lending in 2023. • To maintain the nominal value of shareholders’ equity, and positive profit after tax. • Cost and investment levels in line with business activity and operations. The main challenge for 2023 is the economy-wide energy crisis and the resulting rising inflation. MFB Zrt. is both directly and indirectly affected by the significant increase in energy prices. Directly, it is reflected in the Bank’s results through its operating costs and expenses, while indirectly, it has an impact on the demand for loans and the range of products offered. MFB’s main product development responses to the energy crisis are as follows: • The Bank intends to increase the number and value of MFB-funded loan programmes by developing a new loan programme to finance investments to improve the energy efficiency of the existing building stock of SMEs and to promote the use of renewable energy. • The MFB will relaunch a HUF 100 billion working capital loan programme for Hungarian enterprises with zero interest rate, from EU funds. The programme is launched under one of the MFB’s most popular EU-funded loans, the “Loan Programme for Technological Modernisation of Micro, Small and Medium-sized Enterprises” (GINOP-8.3.5-18), with the declared aim of supporting small and medium-sized enterprises to maintain stability and retain employees in the face of rising operating costs. • In addition to the rise in the cost of new loans, repricing of existing loans can also be a major burden for companies, but MFB is trying to prevent companies from drifting towards total insolvency by providing advice and restructuring. Nevertheless, in 2023 the Bank must continue to allow for financial and business risks that may affect the success of the business plan, including the protracted impact of the coronavirus epidemic and the war, financial market volatility and persistently high interest rates, resource scarcity, the returns on the subsidiary portfolio, the timely implementation of capital fund placements and the challenges of renewing channels and products. Managing these risks will remain a key task in the future.
MFB’s annual consolidated management report for 2022 23 5. Other key processes Sustainability at MFB Zrt: In 2022, the Bank committed to be at the forefront of promoting good practices and approaches in terms of sustainability and to start developing a range of “green & social” loans, investments and other financial products linked to environmentally relevant objectives, by reviewing its previous lending and investment practices from a sustainability perspective. As part of this, the ESG and Business Advisory Directorate was established in April 2022, with the task to coordinate sustainability-related tasks within the Bank. Generation and publication of a Sustainability (ESG) Report: On 23 December 2022, the Bank officially published its first Sustainability (ESG) Report, presenting its ESG performance in 2021, which presented the Bank’s operations, the main guidelines of its responsible corporate governance, its ESG-centred operation and financial banking activities, its results and its impact on the environment and society in an objective and transparent manner, in line with the Global Reporting Initiative (GRI) standard. The Sustainability (ESG) Report also covered the members of the MFB Group as a presentation. The Sustainability Report is available on the Bank’s website. Developing a Sustainable Financing Framework: In 2022, the Bank completed its Sustainable Financing Framework, which provides a unified framework for managing the Bank's sustainability-related green and socially-focused lending targets for its placements, including both the eligibility categories and exclusions for these targets. Furthermore, it also provides guidance on the assessment and selection of eligible projects, the rules for the use of funding and the content of the annual public reporting on disbursements made in accordance with the conditions of the Framework. The external expert review of the Framework is ongoing. Bank-wide compliance with the MNB Green Recommendation: The Bank continued to implement the tasks set out in Recommendation No. 10/2022 (VIII.2) of the National Bank of Hungary on “climate-related and environmental risks and the integration of environmental sustainability considerations into the activities of credit institutions” (hereinafter: Green Recommendation), involving the relevant areas, in accordance with the action plan undertaken. Our aim is to integrate sustainability-related banking activities into the operations and processes of existing organisations in the medium term. In accordance with the action plan formulated on the basis of the recommendation, a risk management strategy and policy has been approved, in which climate change risks and environmental risks have been defined in order to ensure consistency in the data collection to be developed. In addition to providing appropriate information to senior management, the Bank also provided employees with training opportunities with a focus relevant to sustainability (e.g. MFB Academy training programmes were developed for employees on current sustainability issues, and the e-learning exam system now includes a presentation of the Bank’s Green Office programme). On the other hand, the Bank's renewed intranet platform now has a dedicated ESG platform, helping to develop the ESG approach of the Bank's employees. In order to increase the Bank’s role as a responsible employer and reduce MFB’s own emissions, the environmental impact of the Bank’s office operations was assessed and the related action plan for their improvement was elaborated in the framework of the MFB Green Office programme during the year, taking into account the employees’ observations. As a result of the certification process carried out in collaboration with an external expert, the Bank was awarded the right to use the Green Office label. In connection with the programme, the Bank’s
MFB’s annual consolidated management report for 2022 24 CO2 emissions for 2021 have been determined by measuring its carbon footprint in line with international standards, which will constitute the basis for operational improvement plans to reduce Scope1-2 emissions. Emissions from the Bank’s own operations and reducing these The Bank does not itself carry out environmentally damaging activities, and gives emphasis in its product portfolio to loan purposes that finance environmental investments. The Bank does not conduct any research or experimental development activities of its own; the elements of product development are described in detail in the section on lending. Responsible employer In its human resource policy the Bank is committed to condemning any form of discrimination – based on sex, age, religion, race, political or trade union affiliation, language of other differences – and respecting the rights of the disabled. MFB directly supports the development of communities, the promotion of financial literacy and the creation of opportunities. Respect for human rights is an important consideration with regard to both business partners and employees, and the Bank places great emphasis on this issue in its regulations, the organisation of its operations, its communication, and its complaint handling processes. The Bank does not have a separate diversity policy applicable to the managing and supervisory bodies, as it is partly defined in the Code of Conduct and Ethics. MFB is taking steps to create the conditions for a family friendly workplace. In relation to this, employees expecting a baby or wishing to work while on maternity leave may choose to work part-time, while all employees have the option of occasionally working from home if they wish. MFB Zrt. also makes efforts to financially support married employees who are planning or already raising a family. The benefits provided by the Bank include one-off and regular allowances and other benefits (e.g. home loans). The Bank continued to work on protecting the health of its employees in 2022: it financed occupational health and medical examinations as well as measures to protect against the coronavirus. Corporate social responsibility In accordance with the “company tradition” established in previous years, in the run-up to Christmas 2022, a collection of non-perishable food items and gifts (toys, books, etc.) for families living in shelters run by the Ecumenical Charity Service was made with the assistance of MFB employees, who helped wrap and deliver the items. The Bank supplemented the collection of employees with donations of non-perishable food. In connection with the sale of real estate, MFB-Ingatlanfejlesztő Zrt. made provisions in the amount of HUF 13.5 million in 2020 for environmental remediation as a liability in connection with the buyer's warranty claim, which was released in 2022. The following Companies have branch sites: • MKK Zrt. – business address, as per the Articles of Association: 1138 Budapest, Madarász Viktor u. 47-49. • MFB-Ingatlanfejlesztő Zrt. – The Company’s business sites: • 1135 Budapest, Szegedi út 35-37. • 1134 Budapest, Dózsa György út 128-130.
MFB’s annual consolidated management report for 2022 25 – The Company’s branch offices: • 2800 Tatabánya, Bárdos László u. 2. • 9970 Szentgotthárd, Füzesi út 3/b. • 2700 Cegléd, Fürdő utca 24. • 3100 Salgótarján, Kassai sor 6. • 3100 Salgótarján, Alkotmány út 18. fszt. • 3100 Salgótarján, Alkotmány út 18. I. emelet MFB and the other members of the MFB Group do not have any business sites outside their registered office.
MFB’s annual consolidated management report for 2022 26 6. Major events since the balance sheet date All adjusting events after balance sheet date have been taken into account in the preparation of the consolidated financial statements of the Group. There were no material events that occurred after the balance sheet date that would impact the Group’s consolidated financial statements. Budapest, 25 April 2023 Dr. Levente Sipos-Tompa Chairman and Chief Executive Officer Zsolt Leskó Chief Financial Officer
Corporate Governance Report (MFB Group) 2022 Budapest, 25 April 2023
2 Introduction Pursuant to Section 95/B(1) on the business report under Act C of 2000 on Accounting, any business whose negotiable securities have been admitted for trading on a regulated market of a Member State of the European Economic Area is required to publish a Corporate Governance Statement in its business report. MFB Hungarian Development Bank Private Limited Company (hereinafter: MFB Zrt., Bank or the Company) is thus required to publish a statement with respect to the bonds it issues. MFB Zrt. has published the following report on its corporate governance practices during the 2022 financial year. The Company’s internal system of governance and control is based on the Recommendations and Proposals for Corporate Governance, approved by the Budapest Stock Exchange on 8 December 2020. The corporate governance principles defined in the Recommendations have been adopted by the Company without any material differences. It must be, however, taken into consideration that MFB Zrt. is a single-member private joint-stock company, where, on the basis of Section 1(2) of Act XX of 2001 on Magyar Fejlesztési Bank Részvénytársaság (hereinafter: MFB Act) and Section I of Annex 2 of Act CXCVI of 2011 on National Assets, 100% of the shares representing the Company are exclusively owned by the Hungarian State. Any alienation of the shares or offering of the same as security shall be deemed null and void. As part of its responsibilities under Sections 3(1) to (4a) of the MFB Act, the Company is required to proceed, both independently and in cooperation with other Hungarian and international organisations, in accordance with the requirements of transparency, expediency, economy, efficiency and prudence, with a view to securing the development funds required to achieve the economic development objectives defined by the medium and long-term economic strategy of the Government. The Company shall act on behalf of its sole shareholder, the Hungarian State. The objectives of the State and the acting Government are set out by the law or conveyed to the Company by a Government Resolution. The shareholder’s (owner’s) rights of the State over MFB Zrt. shall be exercised by the Minister responsible for supervising state assets. On the basis of Section 103 (1) 8 of Government Decree No 182/2022 of (V.24.) setting out the duties and competences of the members of the Government, the Minister for Economic Development assets is a member of the Government, responsible for supervising state assets (hereinafter: the person exercising shareholder’s rights). The person exercising shareholder’s rights shall issue the founder’s resolution for the Company, thus determining the Company’s strategic decisions. In a founder’s resolution, the person exercising shareholder’s rights shall require the Company to carry out the tasks set out in the Government’s resolutions. The person exercising shareholder’s rights shall decide on the selection, appointment, recall and discharge of members of the Board of Directors, members and the Chair of the Supervisory Board and the Chief Executive Officer heading the Company’s work organisation under an employment contract. Pursuant to Act CXXII of 2009 on publicly owned companies (hereinafter: Kgtv. Act), MFB Zrt. is a publicly owned company. For the purposes of the provisions of the Kgtv. Act, the Company is treated as a company of priority importance for the national economy.
3 In other words, MFB Zrt’s corporate governance practices are determined by the economic development objectives set in the Government’s medium and long-term economic strategy, its classification as a company of priority importance for the national economy, the characteristics of being a single-member private joint-stock company and the provisions of the MFB Act and the Statutes of MFB Zrt. Based on its size and the number of its employees, the Company is a large enterprise. It has a formalised operation. In addition to Act CCXXXVII of 2013 on credit institutions and financial companies (hereinafter: Hpt. Act), the Company’s Statutes and the provisions of the rules of procedure of the Board of Directors and the Supervisory Board, the governance and functioning of the Company are determined by the remuneration policy, which is under the competence of the person exercising shareholder’s rights, and internal regulations required by EU and national legislation and provisions applicable to credit institutions. 1.1 A brief presentation of the operation of the Board of Directors / Governing Board, and the distribution of responsibilities and tasks between the Board of Directors / Governing Board and the management. The Board of Directors is the Company’s managing body. Members of the Board of Directors are the Company’s executive officers. The Board of Directors consists of 5 members. Members of the Board of Directors are appointed – for a 5-year term – and recalled by the person exercising shareholder’s rights. The Board of Directors is headed by its Chair. The Chair of the Board is elected by the Board members from among themselves. During the term of his or her mandate, the CEO shall be a member of the Board of Directors, without a specific decision by the person exercising shareholder’s rights. Notwithstanding the term specified in Article 14(4) of the MFB Act, the CEO shall remain a member of the Board for the entire duration of his or her mandate. In the event that the Chair of the Board of Directors and the CEO is the same person, pursuant to the third sentence of Section 15(2) of the MFB Act, the CEO shall be entitled to use the title of Chairman & CEO. Members of the Board of Directors may be recalled from their office at any time by the person exercising shareholder’s rights without further explanation. At least two members of the Board shall be employees of the Company (internal members). According to Section 149 (2) of the Hpt. Act, the directors of the company pursuant to the Hpt. Act may be elected as internal members of the Board of Directors. The Board membership of internal members shall cease immediately on the termination of their employment. Members of the Board of Directors and their family members may not be Members of the European Parliament, Members of Parliament, members of any municipal/local governments or spokespersons for a national or ethnic minority. The Chair of the Board of Directors and Board members shall make a declaration of property in accordance with the applicable statutory provisions. The Board shall exercise its rights and responsibilities as a corporate body. The Board shall draw up the Company’s reports under the International Financial Reporting Standards (IFRS) in accordance with the Accounting Act and a proposal for the appropriation of net profit and submit them to the person exercising shareholder’s rights for approval. The Board of Directors shall ensure that the Company’s books are appropriately maintained. Moreover, the responsibilities of the Board shall include the approval of the Company’s regulations on organisation and operation as well as any regulations assigned by the Rules of Procedure of the Board or by the law to the competence of the Board. Similarly, the Board of Directors shall make a decision on any
4 major issues specified in the Board’s Rules of Procedure. The Company shall not have an appointing committee or a remuneration committee. The person exercising shareholder’s rights may not deprive the Board of Directors of its powers. Meetings of the Board shall be convened as appropriate but at least once every three months. Board meetings shall be convened by the Chair of the Board through the forwarding of an invitation to Board members at least 8 days prior to the proposed date of the meeting. The invitation shall specify the venue, date and hour of the meeting and the proposed agenda of the meeting; any written documents relevant to the agenda shall be attached to the invitation as far as possible. Any issue that has not been included in the agenda of the meeting shall only be discussed by the Board of Directors if at least two-thirds of the Board members are present and all attending members unanimously agree that the agenda item in question should be discussed at the meeting. The representative of the party exercising ownership rights and the The Chair of the Supervisory Board shall be invited to any meeting of the Board of Directors. Any member of the Board of Directors may request that a Board meeting be convened, specifying the agenda to be discussed by such meeting. The meeting shall be convened by the Chair of the Board of Directors for a day within 15 days of such request. Meetings of the Board of Directors shall have a quorum if it is attended by the majority of Board members. Decisions shall be made by a simple majority of the votes of attending members. The unanimous vote of the Board of Directors shall be required for decisions provided for in Section 106 of the Hpt. Act (internal loans) and decisions under Section 144(3) of the Hpt. Act. The Board may also adopt a decision without convening a meeting, in writing (by mail or fax) (urgent written procedure). Moreover, the Chair of the Board of Directors may convene an emergency Board meeting. 1.2 An introduction of the Board of Directors / Governing Board, Supervisory Board and management members (for board members, also indicating each member’s status of independence), a presentation of the boards structures. As at 31 December 2022, the members of the Board of Directors are as follows: 1. Dr. Levente Sipos-Tompa, internal member of the Board of Directors , Chairman & CEO, 2. Tamás István Tuli, internal member of the Board of Directors, 3. Dr. Zsolt József Bohács, external member of the Board of Directors, 4. Dr. István Varga, external member of the Board of Directors 5. Dr. Melinda Gitta Szeles, external member of the Board of Directors. The start and end dates of the mandates are set out in detail under item 13 of the Company’s Certificate of Incorporation. As at 31 December 2022, the Chair and the members of the Supervisory Board are as follows: 1. Dr.Péter Pataki, Chair of the Supervisory Board 2. Katalin Erzsébet Nagyné Maros, member of the Supervisory Board, 3. Endre Vincze, member of the Supervisory Board 4. Ervin Gönczy, member of the Supervisory Board, employee representative 5. Dr. Anett Vékony, member of the Supervisory Board, employee representative
5 The start dates of the mandates are set out in detail under item 15 of the Company’s Certificate of Incorporation. The Bank’s most senior officer responsible for operations is the Chief Executive Officer. The Company’s Chief Executive Officer is Dr. Levente Sipos-Tompa. The employee is entitled to substitute the Chief Executive Officer is Tamás István Tuli Deputy Chief Executive Officer and Ildikó Edit Zátrok Deputy Chief Executive Officer. 1.3 Specifying the number of meetings which the Board of Directors / Governing Board, Supervisory Board and committees held in the given period, completed with attendance rates. In 2022, the Board of Directors had met 5 times and adopted decisions 57 times without holding a meeting by urgent written procedure, with the following participation rates: Date of Board meeting/ adopted a decision by urgent written procedure Participation rate 1. 28 March 2022-meeting Of 5 members, 5 participated 2. 27 April 2022-meeting Of 5 members, 4 participated 3. 17 June 2022-meeting Of 5 members, 4 participated 4. 30 August 2022 - meeting Of 5 members, 5 participated 5. 13 December 2022- meeting Of 5 members, 5 participated Written procedure 1. 6 January 2022 Of 5 members, 5 participated 2. 13 January 2022 Of 5 members, 5 participated 3. 19 January 2022 Of 5 members, 5 participated 4. 21 January 2022 Of 5 members, 5 participated 5. 25 January 2022 Of 5 members, 5 participated 6. 26 January 2022 Of 5 members, 5 participated 7. 11 Februay 2022 Of 5 members, 5 participated 8. 15 Februay 2022 Of 5 members, 5 participated 9. 17 February 2022 Of 5 members, 4 participated 10. 24 February 2022 Of 5 members, 4 participated 11. 8 March 2022 Of 5 members, 5 participated 12. 16 March 2022 Of 5 members, 5 participated 13. 17 March 2022 Of 5 members, 5 participated 14. 18 March 2022 Of 5 members, 5 participated 15. 24 March 2022 Of 5 members, 5 participated 16. 25 March 2022 Of 5 members, 5 participated 17. 30 March 2022 Of 5 members, 5 participated 18. 31 March 2022 Of 5 members, 5 participated 19. 1 April 2022 Of 5 members, 5 participated 20. 6 April 2022 Of 5 members, 5 participated 21. 14 April 2022 Of 5 members, 5 participated 22. 20 April 2022 Of 5 members, 5 participated 23. 3 May 2022 Of 5 members, 5 participated 24. 12 May 2022 Of 5 members, 5 participated 25. 16 May 2022 Of 5 members, 5 participated 26. 20 May 2022 Of 5 members, 5 participated
6 Date of Board meeting/ adopted a decision by urgent written procedure Participation rate 27. 25 May 2022 Of 5 members, 5 participated 28. 31 May 2022 Of 5 members, 5 participated 29. 2 June 2022 Of 5 members, 5 participated 30. 7 June 2022 Of 5 members, 5 participated 31. 8 June 2022 Of 5 members, 5 participated 32. 23 June 2022 Of 5 members, 5 participated 33. 27 June 2022 Of 5 members, 5 participated 34. 7 July 2022 Of 5 members, 5 participated 35. 12 July 2022 Of 5 members, 4 participated 36. 15 July 2022 Of 5 members, 5 participated 37. 15 July 2022-II procedure Of 5 members, 5 participated 38. 26 July 2022 Of 5 members, 5 participated 39. 9 August 2022 Of 5 members, 5 participated 40. 10 August 2022 Of 5 members, 5 participated 41. 15 August 2022 Of 5 members, 5 participated 42. 18 August 2022 Of 5 members, 5 participated 43. 8 September 2022 Of 5 members, 5 participated 44. 13 September 2022 Of 5 members, 5 participated 45. 28 September 2022 Of 5 members, 5 participated 46. 29 September 2022 Of 5 members, 5 participated 47. 25 October 2022 Of 5 members, 4 participated 48. 26 October 2022 Of 5 members, 5 participated 49. 2 November 2022 Of 5 members, 5 participated 50. 14 November 2022 Of 5 members, 5 participated 51. 29 November 2022 Of 5 members, 5 participated 52. 6 December 2022 Of 5 members, 5 participated 53. 9 December 2022 Of 5 members, 5 participated 54. 14 December 2022 Of 5 members, 5 participated 55. 21 December 2022 Of 5 members, 5 participated 56. 22 December 2022 Of 5 members, 5 participated 57. 28 December 2022 Of 5 members, 4 participated
7 In 2022the Supervisory Board had held 6 meetings and made decisions in 13 cases without holding a meeting, by written voting. Date of Supervisory Board meeting/ adopted a decision by written procedure Participation rate 1. 27 January 2022-meeting Of 6 members, 5 participated 2. 24 February 2022-meeting Of 6 members, 5 participated 3. 28 Mach 2022-meeting Of 6 members, 4 participated 4. 17 June 2022 -meeting Of 5 members, 4 participated 5. 30 August 2022- meeting Of 5 members, 5 participated 6. 15 December 2022 - meeting Of 5 members, 4 participated Written procedure 1. 2 February 2022 Of 6 members, 5 participated 2. 11 April 2022 Of 5 members, 5 participated 3. 21 April 2022 Of 5 members, 5 participated 4. 27 April 2022 Of 5 members, 5 participated 5. 25 May 2022 Of 5 members, 5 participated 6. 30 May 2022 Of 5 members, 4 participated 7. 11 August 2022 Of 5 members, 4 participated 8. 15 August 2022 Of 5 members, 4 participated 9. 9 September 2022 Of 5 members, 5 participated 10. 19 September 2022 Of 5 members, 5 participated 11. 24 October 2022 Of 5 members, 4 participated 12. 8 November 2022 Of 5 members, 5 participated 13. 17 November 2022 Of 5 members, 5 participated 1.4 A presentation of the work done by the Board of Directors / Governing Board, the Supervisory Board and the management as well as the considerations for assessing their individual members. Specifying if the assessment carried out in the given period resulted in any changes. The Company has implemented a set of regulations drawn up by the person exercising shareholder’s rights in consideration of the provisions of Act CXXII of 2009 on the more economical operation of publicly owned companies (hereinafter: Kgtv. Act) and Government Resolution No 1660/2015 (IX. 15.) regarding the renewal of the system of remuneration of management employees of companies in majority public ownership (hereinafter: Govt. Resolution), in respect of the method and amount of the remuneration of executive officers, members of the Supervisory Board and management employees and the system of their remuneration (hereinafter: Remuneration Policy). The Remuneration Policy has been amended by the person exercising shareholder's rights as from 12 July 2021 by the Founder’s Resolution No. 14/2021 (VII.12.). The main rules for defining and assessing the system of performance requirements (annual bonuses) for executive employees are as follows: - A bonus-based remuneration system shall be implemented for managers in order to encourage the successful achievement of business policy and economic targets for the year concerned and efficient operation; - As a performance requirement, any target condition should be based on performance that can be objectively defined and be based on performing one’s job with reasonable expertise and
8 diligence. In case of a performance objective comprising the achievement of the key figure(s) of the business plan, the target conditions have to be set within ranges. A performance objective comprising the achievement of the key figure(s) of the business plan cannot be set solely if its fulfilment resulted in the 100% payment of the related bonus; - The amount of the annual bonus of a manager shall not exceed the extent regulated in the relevant Government Decision. If the Company has made a loss, no bonus shall be paid to the manager; - The performance requirements and conditions should preferably be defined simultaneously with or within 30 days of the adoption of the business plan for the year, unless under exceptional circumstances where they may be set at a later date; - The performance requirements shall be assessed and settled simultaneously with or within 30 days of the adoption of the financial statement (balance sheet) for the financial year, unless under exceptional circumstances, where it may take place at a later date; - If any of in the set performance requirements or not, or partially fulfilled, the employer’s rights shall decide, on the amount and the payment of the bonus in proportion to the otherwise fulfilled performance requirements; - Where the employment of a manager is terminated during the year, the bonus shall be payable on a pro rata basis simultaneously with the adoption of financial statement closing the financial year according to the Act on Accounting or within 30 days of the adoption of the financial statement; - The circumstances listed in the Remuneration Policy may be considered as factors reducing or excluding the payment of a bonus. The person entitled to set the performance requirements may determine additional factors reducing or excluding the payment of a bonus. 1.5 A report on the operation of each committee, elaborating on the professional background of committee members, the number of and the attendance rate at the meetings held as well as the major topics discussed at the meetings and a presentation of the general operation of each committee. When presenting the operation of the Audit Committee, any decision by the Board of Directors / Governing Board against the proposal of the committee should be mentioned (also including the explanations offered by the Board of Directors / Governing Board). The Company website, where all tasks delegated to the committees and the dates of the members’ appointment must be published, should also be mentioned. (If this information is not available on the Company website, it must be included in the Corporate Governance Report.) Supervisory Board The Supervisory Board consists of 5 members. The Chair and members of the Supervisory Board are appointed for a definite period of up to 5 years and are recalled by the person exercising shareholder's rights. At least one-third of the members of the Supervisory Board shall be employee representatives for as long as the Company has more than 200 (two hundred) full-time employees on an average annual basis. Only natural persons may be Supervisory Board members; other than employee representatives, they may not be employees of the Company. The Supervisory Board shall supervise the Company’s management. Within the frames of this authority, the Supervisory Board may request information from senior executives and employees of the company, may inspect the company's accounting records, registers, books and documents, may examine the company's payment account, cash register, securities and commodities, as well as its contracts, or may place them under examination by an expert.Such information may also be requested or inspected or the Company’s records may also be examined or ordered to be examined by individual members of the Supervisory Board.
9 The Supervisory Board shall have all rights and obligations set out for the supervisory boards of credit institutions by the applicable legislation in effect from time to time. The Supervisory Board shall: a) ensure that the Bank has a comprehensive and fully functional control system; b) put forth a proposal for the Company’s auditor and his or her fee; c) verify the Bank’s annual and interim financial statements, including the annual publication information; d) technically manage and review the internal audit unit; as part of that function, the Supervisory Board shall 1. adopt the annual review plan of the internal audit unit, 2. discuss, at least once every six months, the reports drawn up by internal audit and review the implementation of the required measures, 3. assist, where appropriate, the efforts of internal audit by inviting external experts, 4. put forth proposals for adjusting the number of staff of the internal audit unit, e) draw up recommendations and proposals on the basis of the findings of inspections by internal audit; f) decide with respect to any preliminary agreement related to the establishment, or the termination by the Bank, of the employment of the internal auditor and the head of the internal audit unit. Without the application of Section 3:123 of the Civil Code, the Supervisory Board is obliged to examine all relevant business policy reports requiring the decision of the holder of ownership rights, as well as all submissions relating to matters within the competence of the holder of ownership rights. The holder of ownership rights may decide on the reports pursuant to the Accounting Act only in the possession of the written report of the Supervisory Board. Decisions regulated in Section 106 (1) of the Hpt. Act (internal loan) require, in addition to the unanimous decision of the Board of Directors of the company, the consent of the Supervisory Board. Meetings of the Supervisory Board shall be convened by the Chair of the Supervisory Board in writing (by mail, email or fax sent to members), the invitation being conveyed to the membersof the Supervisory Board at least eight 8 eight days beforethe date of the meeting. The invitation shall include the agenda of the meeting along with the proposals for the issues concerning the agenda items. Any two Supervisory Board members may request in writing the Chair to convene a Supervisory Board meeting, specifying the reason and the goal of the proposed meeting. Where the Chair fails to convene a meeting within 5 (five) days of receipt therequest, such meeting may be convened by any member having requested that the meeting be convened. The Supervisory Board shall have a quorum if more than two-thirds of its members or at least 3 (three) members are present at the meeting. Decisions of the Supervisory Board shall be adopted by a majority of votes by members of the Supervisory Board. The Supervisory Board may also adopt a decision without convening a meeting, in writing (by mail or fax) exceptionally, in particularly and immensely justified cases. A decision shall have been adopted if, within 3 (three) days of dispatch (or, in exceptional cases, within a shorter period specified by the Chair), at least 2/3 (two-thirds) of the members of the Supervisory Board (but a minimum of 3 members) have sent their votes to the Bank’s registered office in the form of a private deed of full probative value. There shall be no need to wait for the vote of a member of the Supervisory Board if such member previously notified the Chair of the Supervisory Board of the fact that, during the period concerned, he/she would not be able to participate in the work of the Supervisory Board, in person or through a written voting procedure, due to another engagement.
10 The rules of procedure of the Supervisory Board shall be determined by the Supervisory Board and approved by the person exercising shareholder's rights. The Chair of the Supervisory Board and Supervisory Board members shall make a declaration of property in accordance with the applicable legislation. Audit Committee The Audit Committee shall: a) assist the Supervisory Board in its activities, including – the review of the system of financial reporting, – the selection of an auditor, and – cooperation with the auditor; b) review and monitor the independence of the auditor, including in particular compliance with Article 5 of Regulation (EU) No 537/2014 of the European Parliament and of the Council of 16 April 2014 on specific requirements regarding statutory audit of public-interest entities and repealing Commission Decision 2005/909/EC; c) monitor the statutory audit of the annual and consolidated annual financial statements, taking into account the findings and conclusions made during the quality review of statutory public oversight auditing, conducted by an authority carrying out public oversight auditing duties (Act LXXV of 2007 on the Chamber of Hungarian Auditors, the Activities of Auditors, and on the Public Oversight of Auditors (hereafter: Kkt. Act)); d) monitor the efficiency of the Bank’s internal control and risk management systems, putting forward recommendations where appropriate; e) monitor the process of financial reporting, putting forward recommendations where appropriate. The functions and competences of the Audit Committee are set out in detail in the rules of procedure of the Audit Committee. As at 31 December 2022, the Chair and the members of Audit Committee are as follows: 1. Dr. Péter Pataki, Chair of the Audit Committee, 2. Endre Vincze, member of the Audit Committee, 3. Katalin Erzsébet Nagyné Maros, member of the Audit Committee. In2022, the Audit Committee held 1 meetings and made decisions in 13 times without holding a meeting by written voting. The participation rate was as follows. Date of Audit Committee meeting/ adopted a decision by written procedure Participation rate 1. 17 June 2022 Of 3 members, 3 participated Written procedure 1. 18 January 2022 Of 3 members, 3 participated 2. 24 January 2022 Of 3 members, 3 participated 3. 4 February 2022 Of 3 members, 3 participated 4. 23 March 2022 Of 3 members, 3 participated 5. 21 April 2022 Of 3 members, 3 participated 6. 24 May 2022 Of 3 members, 3 participated
11 Date of Audit Committee meeting/ adopted a decision by written procedure Participation rate 7. 8 August 2022 Of 3 members, 2 participated 8. 5 September 2022 Of 3 members, 3 participated 9. 7 September 2022 Of 3 members, 2 participated 10. 26 September 2022 Of 3 members, 3 participated 11. 16 November 2022 Of 3 members, 3 participated 12. 28 November 2022 Of 3 members, 3 participated 13. 15 December 2022. Of 3 members, 3 participated Detailed information on the 2022 meetings of the Board of Directors and the Supervisory Board is set out in section 1.3. The Company’s internal decision-making bodies include: a) the person exercising shareholder's rights, b) Board of Directors, c) Management Body, d) Asset-Liability Management Committee, e) Individual Credit Committee, f) EU Management Committee, g) Infringement Management Committee, h) Developmental Management Committee. Other internal decision-making bodies of the Company by individual power (eg. Crisis Committee) are regulated by the regulation documents of the Bank. The Company’s internal decision preparation bodies include the: a) Support Committee, b) Housing Committee, c) Aid Committee, d) Public Procurement Preparation and Assessment Committee, e) Workplace Health and Safety Committee, f) Health and Safety Parity Body, g) Ethics Committee, h) Scrapping Committee. The Company shall publish on its website information on managers and members of its government bodies. 1.6 A description of the system of internal controls, an evaluation of the activities performed in the given period. A report on the efficiency and effectiveness of the risk management procedures. (Information about where shareholders can access the Board of Directors / Governing Board report on the operation of internal controls.) The Bank shall develop and operate its internal audit system in accordance with the characteristics, scope, complexity and risks of its activities with a view to ensuring that it conducts its activities under an appropriate management system and appropriate controls in order to achieve the objectives of the organisation.
12 Organisational structure and the defining of functions and responsibilities In terms of its organisational structure and within the specific organisational units, the Bank shall define competences in order to delimit the functions and responsibilities related to specific processes as well as the specific functions and responsibilities pertaining to cross-organisational processes, isolating those functions that are incompatible from the point of view of the process. The processes, responsibilities and controls are set out in the regulatory documents, whereas the functions and responsibilities pertaining to each job are set out in the job descriptions. Decision-making system In addition to defining the functions and competences, it is of priority importance to exactly define the competences related to the making of personal and committee decisions in order to ensure that a clear, transparent and consistent framework system, commensurate with the complexity and the financial consequences of each topic is in place to assist the decision-making process during day-to-day operation. Regulatory framework system By setting up the area focusing on the adoption of a consistent Group-level regulatory concept and process control, the Bank intends to ensure that the regulatory structure concerning the processes and activities is suitably consistent and uniform and that sufficiently detailed regulatory documents that cover the entire process are drawn up for each process. When drawing up the regulatory documents, the Legal Directorate and in addition the Operational Development and Regulatory Directorate the Compliance Directorate ensure that they fully comply with the statutory provisions. Internal defence lines Within its organisation, the Bank has implemented a three-tier risk protection system. Keeping the proportionality principle in mind, in order to execute the internal control, the Bank has implemented efficient, comprehensive internal control functions (risk control function, compliance function, internal audit function, information security and prevention of fraud functions). Board of Directors/Suvervisory Board I. Chief Executive Officer A) Mangement 1. Internal procedure, controls built in the procedure and management controls B) Risk management, Compliance, Bank- and Information Security/ BCP/ DRP, Prevention of fraud II. Audit Comitee A) Internal Audit, B) Audit In order to ensure the independence of control functions, 1) the control function’s staff shall not engage in any activities under their control; 2) it shall be organisationally separate from the functional and organisational areas it controls; 3) its remuneration shall not be dependent on the performance of the areas controlled; 4) the control function shall have access to the resources required for its operation.
13 Risk management The Bank’s risk control function is carried out by within the Risk Management Division, a dedicated organisational unit independent from the business areas. The framework of risk management and control is provided by an appropriately structured regulatory hierarchy, ensuring prudent banking operation through abstract guidelines at a high level and through increasingly detailed instructions and rules of procedure at the lower levels. In order to reasonably limit the assumption of risks, limits are applied in order to observe risk levels so as to ensure that targets are achieved in accordance with the relevant risk appetite. The function is given sufficient priority during the decision-making process in order to ensure that risk criteria are assessed and sufficiently considered when making any decision. Compliance The compliance function covers the institution as a whole as well as each organisational unit, business area and activity, in particular with regard to ethic, conflict of interest issues, market abuses and the prevention of money laundering. The Compliance Directorate, an organisational unit independent of business and other banking area, performs the compliance function of the Bank. The activities of the Compliance Directorate are determined by compliance statute issued as a group-level directive also contains the expectations of MFB Zrt. regarding the compliance activities of the companies belonging to the MFB Group. Internal audit The Bank maintains an autonomous internal audit department, which is structurally and functionally independent of its other areas; the resources required for internal audit activities are made available on a continuous basis. Internal audit is an independent and objective activity aiming to provide reasonable assurance (verification) and advice with a view to improving the Bank’s operation and increase its success. As part of its activities, it examines and provides reasonable assurance, supported by sufficient evidence, on whether the risk management, governance and control systems, and processes developed and operated by management, comply with the relevant requirements. It promotes the achievement of the Bank’s objectives through an appropriate and efficient methodology and through risk-based control activities. Information system In addition to the regulation of processes and the conscious separation of functions and responsibilities, the level of control of processes is also improved within the information systems. In the majority of its basic processes, the Bank applies information systems that purposefully support the strengthening of the control environment of processes, thus ensuring the appropriate implementation of processes through various built-in automated mechanisms. Access to the information system is granted through multi-level filters (business manager, data owner), which are regularly reviewed. Authorisations are assigned in a way that ensures that each employee is granted active authorisation only to applications that are relevant to his or her duties, and in addition, staff responsible for data-entry and approval functions are separated from each other. Built-in and follow-up controls The Bank designs its administrative processes and regulatory documents are a way that enables controls to be built into the various processes. Controls are thus incorporated into the various processes in order to ensure that any task should only be carried out once the previous task has been verified and corrected where appropriate, in order to ensure the conformity of the inputs of complementary tasks. No single operation may be carried out, processed and verified by the same person, as that would not ensure the identification and correction of errors detected during implementation.
14 The Bank’s regulatory documents set out the task and process-specific control points, i.e. the control activities. The Bank’s procedures are developed in a way that ensures that any transaction is only implemented after a documented review. At the Bank, the heads of the competent organisational units are responsible for the implementation of built-in control and management control. Management control The various management levels and the organisational structure aim to facilitate the efficient achievement of the Bank’s objectives and strategy. Management control functions must be carried out at each level of management. Management control tools include requiring employees to report, requesting reports, exercising the right to sign documents, the verification of the fulfilment of tasks from a formal and substantive point of view, on-site reviews carried out in person and the operation of the management information system. The heads of individual organisational units shall oversee their team members and require them to report on a regular basis, as provided for in internal regulations and rules of procedure. The detailed rules for management control, including reports and business trips, are set out in the regulatory documents. Management information system The development and operation of a management information system encompassing all of its activities are an important element of the Bank’s control system. The purpose of the management information system is to ensure that consistent and comprehensive information are available for the various levels of management during governance and control. The Bank’s management information system includes the entirety of Bank and Group-level information generated for the management on a timely basis at sufficient depth as well as the system that forwards such collected and properly processed information to the user in due time, while being capable of responding to changes. The internal reports constituting the management information system, the frequency of submission of such reports and the indication of the relevant management level shall be set out in a regulatory document and be regularly reviewed. Exercising shareholder control The Bank shall exercise control over the organisations belonging to the MFB Group. As part of such shareholder supervision, the Bank extends the elements of its internal control system listed above to an extent that ensures that the operation of the various companies is appropriately monitored and governed, and that the common goals of the MFB Group are achieved, as well as ensuring the requisite and sufficient exchange of information between the Bank and other Group companies. 1.7. Information on whether the auditor performed any activities not related to auditing. The Bank’s auditor for the 2022 financial year was the KPMG Hungária Könyvvizsgáló, Adó- és Közgazdasági Tanácsadó Korlátolt Felelősségű Társaság. The MFB Group availed itself of certain non-audit services (other than prohibited non-audit services) from the KPMG Network, especially from the KPMG Korlátolt Felelősségű Társaság but in respect of such services the independence of the auditor was not breached, in accordance with the provisions of Articles 22 and 22b of Directive 2006/43/EC of the European Parliament and of the Council of 17 May 2006 on statutory audits of annual accounts and consolidated accounts, amending Council Directives
15 78/660/EEC and 83/349/EEC and repealing Council Directive 84/253/EEC, Sections 61 to 65 of the Kkt. Act, Article 5 of Regulation (EU) 2014/537 of the European Parliament and of the Council and Section 67/A of the Kkt. Act. 1.8. An overview of the Company's publication policy and its insider trading policy. A separate policy provides for the prohibition of insider trading and market manipulation, stipulating that persons performing managerial duties and persons closely associated with them and employees having access to inside information are prohibited from entering into transactions or charging other persons with entering into transactions involving securities issued by the Bank or derivatives or other financial instruments related to said securities. The Company has not implemented a share-based incentive scheme. With regard to the publishing of information, the Company acts in accordance with the applicable laws and stock exchange regulations. 1.9. An overview of the method of exercising shareholder rights. The Company’s capital stock amounts to HUF 519,900,000,000 ( Five Hundred and Nineteen Billion Nine Hundred Million Forints), which consists of 519,900 printed registered ordinary shares of a nominal value of HUF 1,000,000 each. The Company’s shares are non-transferable. Each share embodies the same rights. Where the Company’s capital stock is increased from assets additional to the capital stock, the new shares are acquired by the State without consideration. Depending on the decision of the person exercising shareholder's rights, the capital stock may be reduced by reducing the number or the nominal value of the shares, or both. The person exercising shareholder's rights shall not pay any amount out of the capital stock before the reduction in the capital stock has been registered in the Companies Register. The Board of Directors shall be entitled to issue shares of combined denomination and to break up shares of combined denomination. The Board of Directors shall keep the register of shareholders on the registered shares in accordance with the provisions of the Hpt. Act and Act V of 2013 on the Civil Code (hereinafter: Civil Code). The register of shareholders shall be accessible to any person. 1.10. A brief presentation of the rules for the conduct of the General Meeting. Since the Company is a single-member joint-stock company, it has no shareholders’ meeting; matters under the competence of the founder are decided upon by the person exercising shareholder's rights in writing, by a founder’s resolution, subject to the provisions applicable to the Company. Proposals for the person exercising shareholder's rights shall be approved by the Company's Board of Directors and discussed by the Supervisory Board. Any decision shall take effect on its communication to the executive officers. 1.11. Demonstration of how the issuer complies with Chapter IV of Act LXVII of 2019 on the Promotion of Long-Term Shareholder Participation and the Amendment of Certain Acts for the Purpose of Legal Harmonization. The company is not subject to Act LXVII of 2019 on the Promotion of Long-Term Shareholder Participation and the Amendment of Certain Acts for the Purpose of Legal Harmonization, so the regulations in question do not apply to the company.
16 Corporate Governance Report on compliance with the Corporate Governance Recommendations As part of the Corporate Governance Report, the Company makes a statement regarding the extent to which it has implemented in its own corporate governance practice the recommendations and proposals specified in the relevant sections of the Corporate Governance Recommendations issued by the Budapest Stock Exchange Ltd., by completing the following tables. These tables provide an overview for the investors of the extent of the compliance - by the relevant company - with certain requirements set out in the Corporate Governance Recommendations at glance, and enable easy comparison of the practices of the specific companies. Level of compliance with the Recommendations The Company indicates whether it follows the relevant recommendation or not, and if not, briefly explains the reasons why it did not follow that specific recommendation. R 1.1.1 Does the Company have an organisational unit dealing with investor relationship management, or a designated person to perform these tasks? Yes. R 1.1.2 Are the Company’s Articles of Association available on the Company’s website? Yes. R 1.1.4 If the Company’s Articles of Association allow shareholders to exercise their rights in their absence, did the Company publish the methods and conditions of doing so, including all necessary documents? No. Explanation: the Company is a single-member joint-stock company with no shareholder’s meeting. In lieu of the shareholder's meeting, matters under the competence of the supreme decision- making body are decided on by a founder’s resolution issued by the person exercising shareholder's rights, which decision is equivalent to the decision of the shareholder's meeting. R 1.2.1 Did the Company publish on its website a summary document containing the rules applicable to the conduct of its General Meetings and to the exercise of voting rights by shareholders? No. Explanation: the Company is a single-member joint-stock company with no shareholder’s meeting. R 1.2.2 Did the Company publish the exact date when the range of those eligible to participate in a given company event is set (record date), and also the last day when the shares granting eligibility for participating in a given company event are traded? No. Explanation: the Company is a single-member joint-stock company with no shareholder’s meeting. R 1.2.3 Did the Company hold its General Meetings in a manner providing for maximum shareholder participation? No. Explanation: the Company is a single-member joint-stock company with no shareholder’s meeting.
17 R 1.2.6 The Company did not restrict the shareholders’ right to designate a different representative for each of their securities accounts to represent them at any General Meeting. (Answer Yes, if not) No. Explanation: the Company is a single-member joint-stock company with no shareholder’s meeting. R 1.2.7 For proposals for the agenda items, were the Board of Directors’ draft resolution and also the Supervisory Board’s opinion disclosed to the shareholders? Yes. R 1.3.3 The Company did not restrict the right of its shareholders attending a General Meeting to request information, add comments and submit proposals, or set any preconditions for these with the exception of some measures taken to conduct the General Meeting in a correct manner and as intended. (Answer Yes, if not) No. Explanation: the Company is a single-member joint-stock company with no shareholder’s meeting. R 1.3.4 By answering the questions raised at the General Meeting, did the Company ensure compliance with the information provision and disclosure principles set out in legal and stock exchange requirements? No. Explanation: the Company is a single-member joint-stock company with no shareholder’s meeting. R 1.3.5 Did the Company publish on its website the answers to the questions that the representatives of the Company’s boards or its auditor present at the General Meeting could not satisfactorily answer at the meeting within 3 working days following the General Meeting, or an official statement explaining why it refrained from giving answers? No. Explanation: the Company is a single-member joint-stock company with no shareholder’s meeting. R 1.3.7 Did the Chairman of the General Meeting order a recess or suggest that the General Meeting be postponed when a proposal or proposal relating to a particular issue on the agenda was submitted which the shareholders hadn’t had a chance to become familiar with before the General Meeting? No. Explanation: the Company is a single-member joint-stock company with no shareholder’s meeting. R 1.3.8.1 The Chairman of the General Meeting did not use a combined voting procedure for a decision related to electing and recalling executive officers and Supervisory Board members. (Answer Yes, if not) No. Explanation: the Company is a single-member joint-stock company with no shareholder’s meeting, but the above principle was observed in respect of the decision of the person exercising shareholder's rights.
18 R 1.3.8.2 For executive officers or Supervisory Board members, whose nominations were supported by shareholders, did the Company disclose the identity of the supporting shareholder(s)? No. Explanation: the Company is a single-member joint-stock company with no shareholder’s meeting. R 1.3.9 Prior to discussing agenda items concerning the amendment of the Articles of Association, did the General Meeting pass a separate resolution to determine whether to decide on each amendment of the Articles of Association by individual votes, joint votes, or votes combined in a specific way? No. Explanation: the Company is a single-member joint-stock company with no shareholder’s meeting. R 1.3.10 Did the Company publish the minutes of the General Meeting containing the resolutions, the description of the draft resolutions and any important questions and answers related to the draft resolutions within 30 days following the General Meeting? No. Explanation: the Company is a single-member joint-stock company with no shareholder’s meeting. R 1.6.1.1 Do the Company’s publication guidelines cover the procedures for electronic, online disclosure? Yes. R 1.6.1.2 Does the Company design its by considering the aspects of disclosure and the information of investors? Yes. R 1.6.2.1 Does the Company have an internal publication policy in place which covers the processing the information listed in Section 1.6.2 of the Recommendations document? Yes. R 1.6.2.2 Do the internal regulations of the Company cover the methods for the assessment of events judged to be important for publication? Yes. R 1.6.2.3 Did the Board of Directors/Governing Board assess the efficiency of the publication processes? No. Explanation: the Company’s internal regulations on communication ensure that any information intended for publication is published as soon as possible on the Company’s website and in the printed press. The shareholder is notified by the Board of Directors in the annual financial report.
19 R 1.6.2.4 Did the Company publish the findings of the efficiency assessment of the publication process? No. Explanation: the Company’s internal regulations on communication ensure that any information intended for publication is published as soon as possible on the Company’s website and in the printed press. The shareholder is notified by the Board of Directors in the annual report. R 1.6.3 Did the Company publish its annual company event calendar? No. Explanation: since the Company is a single-member joint-stock company, no corporate events calendar has been drawn up. On the company website, market operators are notified of any major announcements (loan schemes and financing opportunities), financial statements, press releases, events and publications. Since the strategic objectives and main activities of MFB Zrt. are set out for the public in the MFB Act, any information for the public is only required in the case of a change in such objectives and activities. The Company's strategic objectives and their implementation are described in the annual report, which is published on the company website in Hungarian and English. R 1.6.4 Did the Company publish its strategy, business ethics and policies regarding other stakeholders? No. Explanation: Since the strategic objectives and main activities of MFB Zrt. are set out for the public by law (Act XX of 2001), no specific information for the public needs to be published. The Company's strategic objectives and the implementation of these are described in the annual report, which is published on the company website. The major detailed conditions of the Company's main activities, the rules for credit products, their rules of procedure and the names of refinancing partners and brokers involved in the implementation of specific loan programmes are published on the company website on a continuous basis. The Company's Ethics Statement is available on the company website. R 1.6.5 Did the Company publish the career information of Board of Directors / Governing Board, Supervisory Board and management members in its annual report or on the company website? Yes. R 1.6.6 Did the Company publish all relevant information about the internal organisation and the operation of the Board of Directors / Governing Board and the Supervisory Board, about the work of the management, the assessments of these and the changes in the current year? No. Explanation: Due to the fact that the Company is privately held, it is not subject to such disclosure obligation. R 1.6.8 Did the Company publish its risk management guidelines and information about its system of internal controls, the main risks and the principles for their management? Yes.
20 R 1.6.9.1 Did the Company publish its guidelines relating to the trading of its shares by insiders? No. Explanation: The shares of the Company are non-negotiable and, therefore, no policies have been drawn up regarding the trading of shares. Members of the Board of Directors, the Supervisory Board and the management may not acquire an interest in the Company’s securities. There is no share-based incentive scheme. R 1.6.9.2 Did the Company disclose the share of the Board of Directors / Governing Board, Supervisory Board and management members in the securities issued by the Company in the annual report or in some other way? No. Explanation: Members of the Board of Directors, the Supervisory Board and the management may not acquire shares in the company's securities. R 1.6.10 Did the Company publish the relationship of Board of Directors / Governing Board, Supervisory Board and management members may have with third parties which could affect the operation of the Company? No. Explanation: the conflict of interest rules concerning employees and members of the Board of Directors and the Supervisory Board are provided for in the MFB Act, the Hpt. Act and the Civil Code, whereas an internal policy ensures compliance with such rules. R 2.1.1 Does the Company’s Articles of Association contain clear provisions regarding the responsibilities and competences of the General Meeting and the Board of Directors / Governing Board? No. Explanation: the Company is a single-member joint-stock company; matters under the competence of the supreme decision-making body are decided on by a founder’s resolution issued by the person exercising shareholder's rights, which is equivalent to a resolution of the shareholder’s meeting. The article of association contains clear provisions regarding the responsibilities of the founder and the Board of directors. R 2.2.1 Does the Board of Directors / Governing Board have a rules of procedure in place defining the organisational structure, the actions for arranging for and conducting the meetings and the tasks regarding the adopted resolutions, as well as other issues related to the operation of the Board of Directors / Governing Board? Yes. R 2.2.2 Does the Company publish the procedure used for nominating Board of Directors / Governing Board members? No. Explanation: the Company is a single-member joint-stock company; matters under the competence of the shareholders’ meeting are decided upon by the person exercising shareholder's rights in writing, subject to the provisions applicable to the Company. The appointment, recall and discharge of members of the Board of Directors fall under the competence of the person exercising shareholder's rights.
21 R 2.3.1 Does the Supervisory Board provide a detailed description of its operation and duties, as well as the administrative procedures and processes followed by it, in its rules of procedure and work plan? Yes. R 2.4.1.1 Did the Board of Directors / Governing Board and the Supervisory Board hold meetings periodically at a predefined interval? Yes. R 2.4.1.2 Did the rules of procedure of the Board of Directors / Governing Board and the Supervisory Board provide rules for the conduct of meetings that cannot be planned in advance, and for decision-making using electronic telecommunications means? Yes. R 2.4.2.1 Did board members have access to the proposals to be presented at the meeting of the respective board at least five days prior to the meeting? Yes. R 2.4.2.2 Did the Company arrange the proper conduct of the meetings, the drawing up of the meeting minutes and management of the resolutions made by the Board of Directors / Governing Board and the Supervisory Board? Yes. R 2.4.3 Do the rules of procedure provide for the regular or ad hoc participation of non-board members at respective board’s meetings? Yes. R 2.5.1 Were the members of the Board of Directors / Governing Board and the Supervisory Board nominated and elected in a transparent process, and was the information about the candidates made public in due time before the General Meeting? No. Explanation: the Company is a single-member joint-stock company; matters under the competence of the shareholders’ meeting are decided upon by the person exercising shareholder's rights in writing, subject to the provisions applicable to the Company. The appointment, recall and discharge of members of the Board of Directors and the Supervisory Board and determining the remuneration of the members and Chair of the Board fall under the competence of the person exercising shareholder's rights. A 2.5.2 Does the composition and size of the boards comply with the principles set out in Section 2.5.2 of the Recommendations? Yes.
22 A 2.5.3 Did the Company ensure that the newly elected Board of Directors / Governing Board and Supervisory Board members became familiar with the structure and operation of the Company and their tasks were carried out as members of the respective boards? Yes. R 2.6.1 Did the Governing Board / Supervisory Board request (in the context of preparing the annual corporate governance report) its members considered to be independent to confirm their independence at regular intervals? No. Explanation: The Board of Directors does not request its members, considered to be independent, to confirm their independence at regular intervals. R 2.6.2 Does the Company provide information about the tools which ensure that the Board of Directors / Governing Board assesses objectively the management’s activities? No. Explanation: The Company is a single-person joint-stock company, where the Board of Directors is responsible for monitoring the management’s performance. Fees are determined by the person exercising employer’s rights. The employer’s rights over the CEO are exercised by the Minister exercising the government’s exclusive shareholder’s (owner’s) rights. The Minister decides on the selection, appointment, recall and discharge of the Chair and the members of the Board of Directors, members and the Chair of the Supervisory Board, members of the Audit Committee and the Chief Executive Officer. R 2.6.3 Did the Company publish its guidelines concerning the independence of its Governing Board / Supervisory Board members and the applied independence criteria on its website? No. Explanation: On its website, the Company does not specifically publish the guidelines concerning the independence of the Board of Directors and the Supervisory Board and the relevant independence criteria, as they are provided for in the Hpt. Act, the Civil Code, the MFB Act and the Kgtv. Act. R 2.6.4 Does the Supervisory Board of the Company have any members who has held any position in the Board of Directors or in the management of the Company in the previous five years, not including cases when they were involved to ensure employee participation? Yes. R 2.7.1 Did members of the Board of Directors / Governing Board inform the Board of Directors / Governing Board and (if applicable) the Supervisory Board (or the Audit Committee if a uniform governance system is in place) if they, or individuals they have business relations with, or their relatives have interest in any business transactions of the Company (or any subsidiaries thereof) which excludes their independence? Yes.
23 R 2.7.2 Were transactions and assignments between members of boards/ members of the management/individuals closely associated with them and the Company/subsidiaries of the Company carried out in accordance with the Company’s general business practice but applying more stringent transparency rules compared to general business practice, and were they approved? No. Explanation: There was no such transaction. R 2.7.3 Did board members inform the Supervisory Board / Audit Committee (Nominating Committee) if they had received an appointment for board membership or management position of a company not belonging to the Company Group? No. Explanation: members of the Company’s Board of Directors and Supervisory Board may only be executive officers or Supervisory Board members as specified by the MFB Act. When they are elected, members must issue a statement on their existing status as an executive officer and their Supervisory Board membership, and must notify the competent organisational unit of the Company of any change to such status in accordance with MFB Zrt’s relevant policy. R 2.7.4 Did the Board of Directors / Governing Board develop guidelines for the flow of information and the management of insider information within the Company, and monitor compliance with them? Yes. R 2.8.1 Did the Company create an independent internal audit function that reports directly to the Audit Committee / Supervisory Board? Yes. R 2.8.2 Does Internal Audit have unrestricted access to all information necessary for carrying out audits? Yes. R 2.8.3 Did shareholders receive information about the operation of the system of internal controls? Yes. R 2.8.4 Does the Company have a function ensuring compliance (compliance function)? Yes. R 2.8.5.1 Is the Board of Directors / Governing Board or a committee operated by it responsible for the supervision and management of the entire risk management of the Company? Yes.
24 R 2.8.5.2 Did the relevant organisation of the Company and the General Meeting received information about the efficiency of the risk management procedures? Yes. R 2.8.6 With the involvement of the relevant areas, did the Board of Directors / Governing Board develop the basic principles of risk management taking into account the special idiosyncrasies of the industry and the Company? Yes. R 2.8.7 Did the Board of Directors / Governing Board define the principles for the system of internal controls to ensure the management and control of the risks affecting the Company’s activities as well as the achievement of its performance and profit objectives? Yes. R 2.8.8 Did internal control systems functions report about the operation of internal control mechanisms and corporate governance functions to the competent board at least once a year? Yes. R 2.9.2Did the Board of Directors / Governing Board invite the Company’s auditor in an advisory capacity to the meetings on financial reports? Yes.
25 Level of compliance with proposals P 1.1.3 Does the Company’s Articles of Association provide an opportunity for shareholders to exercise their voting rights also when they are not present in person? No. Explanation: the Company is a single-member joint-stock company with no shareholder’s meeting. P 1.2.4 Did the Company determine the place and time of General Meetings initiated by shareholders by taking the initiating shareholders’ proposal into account? No. Explanation: the Company is a single-member joint-stock company with no shareholder’s meeting. P 1.2.5 Does the voting procedure used by the Company ensure a clear, unambiguous and fast determination of voting results, and in the case of electronic voting, also the validity and reliability of the results? No. Explanation: the Company is a single-member joint-stock company with no shareholder’s meeting. P 1.3.1.1 Were the Board of Directors/Governing Board and the Supervisory Board represented at the General Meeting? No. While the Company has no shareholders’ meeting, the Board of Directors and the Supervisory Board submit their opinion on the founder’s resolutions issued by the person exercising shareholder’s rights. P 1.3.1.2 In the event the Board of Directors/Governing Board and the Supervisory Board was absent, was it disclosed by the Chairman of the General Meeting before discussion of the agenda began? No. Explanation: the Company is a single-member joint-stock company with no shareholder’s meeting. P 1.3.2.1 The Articles of Association of the Company did not preclude any individuals from receiving an invitation to the General Meetings of the Company at the initiative of the Chairman of the Board of Directors/Governing Board and being granted the right to express their opinion and to add comments there if that person’s presence and expert opinion is presumed to be necessary or help provide information to the shareholders and help the General Meeting make decisions. (Answer Yes, if not) No. Explanation: the Company is a single-member joint-stock company with no shareholder’s meeting.
26 P 1.3.2.2 The Articles of Association of the Company did not preclude any individual from receiving an invitation to the General Meetings of the Company at the initiative of shareholders requesting to supplement the agenda items of the General Meeting and from being granted the right to express their opinion and to add comments there. (Answer Yes, if not) No. Explanation: the Company is a single-member joint-stock company with no shareholder’s meeting. P 1.3.6 Does the annual report of the Company prepared as specified in the Accounting Act contain a brief, easy-to-understand and illustrative summary for shareholders, including all material information related to the Company’s annual operation? Yes. P 1.4.1 In line with Section 1.4.1, did the Company pay dividend within 10 working days to those of its shareholders who had submitted all the necessary information and documents? No. Explanation: no dividends were paid by the Company. P 1.6.11 Did the Company publish its information in English as well, in line with the provisions of Section 1.6.11? Yes P 1.6.12 Did the Company inform its investors about its operation, financial situation and assets on a regular basis, but at least quarterly? Yes. P 2.9.1 Does the Company have in place internal procedures regarding the use of external advisors and outsourced activities? Yes.