Bank of China (Hungaria) Hitelintezet Zartkoruen Mukodo Reszvenytarsasag Annual Report 31 December 2017 Table of contents
Independent Auditors' Report - This is a translation of the Hungarian Report
Balance Sheet
Income Statement
Not es to the Financial Statements
Business Report Ernst & Young Kft. Tel: +36 1 451 8100 Ernst & Young ltd. Fax: +3614518199 EY H·ll32 Budapest Vaci ut 20. www.ey.com/hu 1399 Budapest 62. Pf.632, Hungary Cg. 01·09·267553 Building a better working world
This is a translation of the Hungarian Report
Independent Auditors' Report
To the Shareholder of Bank of China (Hungaria) Hitelintezet Zartkoruen Mukod6 Reszvenytarsasag
Report on the audit of the annual financial statements
Opinion
We have audited the accompanying 2017 annual financial statements of Bank of China (Hungaria) Hitelintezet Zartkoruen Mukod6 Reszvenytarsasag ("the Company"), which comprise the balance sheet as at 31 December 2017 - showing a balance sheet total of HUF 143,236 million and a profit for the period for the year of HUF 219 million-, the related profit and loss account for the financial year then ended and notes to the annual financial statements, including a summary of significant accounting policies.
In our opinion the annual financial statements give a true and fair view of the equity and financial position of the Company as at 31 December 2017 and of the results of its operations for the financial year then ended in accordance with the Act C of 2000 on Accounting ("Hungarian Accounting Law").
Basis for opinion
We conducted our audit in accordance with Hungarian National Auditing Standards and with applicable laws and regulations in Hungary, including also 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 ("Regulation (EU) No. 537 /2014"). Our responsibilities under those standards are further described in the "Auditor's responsibilities for the audit of the annual financial statements" section of our report.
We are independent of the Company in accordance with the applicable ethica l requirements according to relevant laws in effect in Hungary and the policy of the Chamber of Hungarian Auditors on the ethical rules and disciplinary proceedings and, concerning matters not regulated by any of these, with the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants (IESBA Code), and we have fulfilled our other ethica l responsi bilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
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Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the annual financial stat ements of the current period. Th ese matters were addressed in the context of our audit of the an nual financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context.
We have fulfilled the responsibilities described in the "Auditor's responsibilities for the audit of the annual financial statements section" of our report, including in relation to these matters. Accordingly, our audit included the performance of proced ures designed to respond to our assessment of the risks of material misstatement of the annual financial stat ements. The resu lts of our audit proced ures, including the procedures performed to address the matters below, provide the ba sis for our audit opinion on the accompanying annual financial statements.
Valuation of loans and receivables
The loans and receivables portfolio of Our audit procedures included among the Co mpany consist s of receivables others t he following procedures. from credit institutions including We assessed the design and test ed the intercompany and non-intercompany operating effectiveness of internal receivables in the amount of HUF controls over the credit origination, 93,835 million and loans to and recording and monitoring of loans and receivables from customers in the receiva bl es and controls over amount of HUF 27,143 million as at 31 impairment ca lculations including the December 2017 as disclosed in quality of underlying data and systems. sections 11 /2 and 111/1 of the notes to We test ed the loan and receivable the annual financial st atements. exposures on a sample ba sis. We t ested These loans and receivabl es are the proper classification of the selected measu red at amortized cost, less a exposures. provision for impairment. The We assessed the accuracy of collateral va luation of loans and receivables data for the se lected loan and require significa nt judgement of receivable exposures. management, such as the identification of non-performing loans, the We assessed t he determination of risk assessment of objective evidence for ratings of loan and receivable impairment. va luation of collaterals exposures. We evaluated the and the estimation of recoverable Company's assumptions on the amounts. expected future cas h flows, including the value of realizab le collateral and Due to the significa nce of loans to and estimates of recovery on default based receivables f ram credit institutions and
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customers (representing 84% of Total on our own understanding and Assets as at 31 December 2017) and available market information. the related estimation uncertainty, this For selected loan and receivable is considered a key audit matter. exposures we tested the management assessment for impairment provisioning. We also assessed the adequacy of the Company's disclosures in sections 11/2 and 111/1 of the financial statements to the requirements of the Hungarian Accounting Law.
Strong dependence on information technology (IT) systems
A significant part of the Company's We understood and assessed the overall financial reporting process is heavily IT control environment and the controls reliant on IT systems with automated in place which included controls over processes and controls over the access to systems and data, as well as capture, storage and extraction of system changes. We adjusted our audit information. A fundamental approach based on the financial component of these processes and significance of the system and whether controls is ensuring appropriate user there were automated procedures access and change management supported by that system. As audit protocols exist, and are being adhered procedures over the IT systems and to. application controls require specific These protocols are important because expertise, we involved IT audit they ensure that access and changes to specialists in the audit procedures. IT systems and related data are made We tested the operating effectiveness and authorized in an appropriate of controls over appropriate access manner. rights and val idating that only Due to the complexity of IT systems appropriate users had the ability to and nature of application controls we create, modify or delete user accounts consider this topic as a key audit for the relevant in-scope applications. matter. We also tested the operating effectiveness of controls around system development and program changes to establish that changes to the system were appropriately authorized and also developed and implemented properly. Additionall y, we assessed and tested the design and operating effectiveness of the application controls embedded in the processes relevant to our audit.
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Other information
Other information consists of the 2017 business report of the Company. Management is responsible for the preparation of the business report in accordance with the Hungarian Accounting Law and other relevant legal requirements, if any. Our opinion on the annual financial statements does not cover the business report.
In connection with our audit of the annual financial statements, our responsibility is to read the business report and, in doing so, consider whether 1) the business report is materially inconsistent with the annual financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated and 2) the business report has been prepared in accordance with the Hungarian Accounting Law and other relevant legal requirements, if any.
In our opinion, the business report of the Company for 2017 is consistent, in all material respects, with the 2017 annual financial statements of the Company and the relevant requirements of the Hungarian Accounting Law.
Since no other legal regulations prescribe for the Company further requirements with regard to its business report, we do not express opinion in this regard.
Further to the above, based on the knowledge we have obtained about the Company and its environment in the course of the audit we are required to report whether we have identified any material misstatement in the business report, and if so, the nature of the misstatement in question. We have nothing to report in this regard.
Responsibilities of management and those charged with governance for the annual financial statements
Management is responsible for the preparation and fair presentation of the annual financial statements in accordance with the Hungarian Accounting Law, and for such internal control as management determines is necessary to enable the preparation of annual financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the annual financial statements, management is responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting. Management is required to apply going concern principle unless the applicability of that principle is precluded by other provisions or there are facts and circumstances that contradict with the continuance of the Company's business activity.
Those charged with governance are responsible for overseeing the Company's financial reporting process.
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Auditor's responsibilities for the audit of the annual financial statements
Our objectives are to obtain reasonab le assurance about whether the annual financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable ass urance is a high level of ass urance, but is not a guarantee that an audit conducted in accordance with Hungarian National Auditing Standards and with applicable laws and regulations in Hungary, including also Regu lation (EU) No. 537 /20 14 wi ll always detect a material misstatement when it ex ist s. Misstatements ca n arise from fraud or error and are considered material if, ind ividually or in t he aggregate, they could reasonably be expected to inf lu ence the economic decisions of use rs taken on the basis of t hese annual financial statements.
As part of an audit in accordance with Hungarian National Auditing Standards and with applicable laws and regulations in Hungary, including also Regulation (EU) No. 537/2014 , we exercise professional judgment and maintain professional scepticism throughout the audit. We also: • Identify and assess the risks of mat erial misstatement of the annual financial stat ements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal cont rol relevant to the audit in order to design audit procedures that are appropriate in the circumstances , but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. • Eva luate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disc losures made by management. • Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exist s related to events or conditions that may cast significant doubt on the Company's ability to continue as a going concern. If we conclude that a material uncertainty ex ists, we are required to draw attention in our auditor's report to the related disclosures in the annual financial statements or, if such disclosures are inadeq uate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Company to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the annual financial statements, including the disc losures, and whether the annual financial statements represent the underlying tra nsact ions and events in a manner that achieves fair prese ntation.
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We communica te with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethica l requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bea r on our independence, and where applicable, related safeguards.
From the matters communicated with those charged with governance we determine those matters that were of most significance in the audit of the annual financial statements of the current period and are therefore the key audit matters.
Report on other legal and regulatory requirements
Reporting requirements on content of auditor's report in compliance with Regulation (EU) No. 537 /2014:
Appointment and Approval of Auditor
We were appointed as the statutory auditor of the Company by the Shareholder of the Company on 30 October 2017. Total uninterrupted engagement period, including previous renewals (extension of the period for which we were originally appointed) and rea ppointments for the statutory auditor, has lasted for 4 years.
Cons istency with Additional Report to Audit Committee
Our audit opinion on the annual financial statements ex pressed herein is co nsistent with the additional report to the audit committee of the Company, which we issued in accordance with Article 11 of the Regu lation (EU) No. 537 /2014 on the sa me date as t he date of this report.
Non-audit Services
We declare that no prohibited non-audit se rvices referred to in Article 5(1) of Regu lation (E U) No. 537 /2014 were provided by us to the Company and its controlled undertakings and we remained independent from the Company in conducting the audit.
In addition to statutory audit services and services disc losed in the business report and in the annual f inancial statements, no other services were provided by us to the Company and its controlled undertakings.
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The engagement partner on the audit resulting in this independent auditor's report is Viragh Gabriell a.
Budapest, 3 May 2018
(The original Hungarian language version has been signed.)
Viragh Gab riell a Virag h Gabriella engagement partner Registered auditor Ernst & Young Kft. Chamber membership No.: 004245 1132 Budapest. Vaci ut 20. Reg istration No.: 001165
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YEAR 2017 FINANCIAL STATEMENTS Bank of China (Hungary) Close Ltd. BALANCE SHEET
ASSETS Million HUF 31 December 3 1 December Item description 2016 2017 I. Cash and cash equivalents 6 510 5 338 - - 2. State securities 5 945 8 994 a) held for sale / trading 5 945 8 994 3. Loans and advances to credit institutions 115 482 93 835 a) nostro accounts 12 963 21 840 b) other receivables from financial service activities 102 519 71 995 ba) short term --- 64 791 52 146 of wh ich: - from related parties 52 146 - 51 575 - from National Bank of Hungary 0 0 bb) long term 37 728 19 849 of which: - from related parties 37 728 19 849 ------4. Loans and advances to customers l 958 27 143 -- a) receivables from financial service activities l 958 27 143 f-- aa) short term 643 - 770 ab) long term l 188 26 500 7. Shares, participations held for investment 10 10 a) shares, p~rticipations held for investment 10 10 -- - _ 8. Shares, participations in related parties 4 713 - 4 713 - a) shares, participations held for investment 4 713 4 713 of which: - participations in credit institutions 4 713 4 713 9. Intangible assets -- 50 33 a) intangible assets 50 33 10. Tangible assets 2 968 2 685 a) tangible assets for financial and investment services 2 968 2 685 aa) land and bui ldings 2 568 2 371 ab) technical equipment, machinery and vehicles 314 - 400 12. Other assets 278 257 b) other receivables 278 257 13. Accrued and deferred assets 338 228 a) accrued income 280 43 ______!J) deferred expenses 58 185 Total assets 138 252 143 236 of which: - CURRENT ASSETS [ l +2.a)+3.a)+3.ba)+3.c)+4.aa)+4.b)+5.aa)+5.ba)+6.a)+6.ba)+ 11 + 12 91 257 89 218 + related items from 2/A, 3/A, 4/A, 5/A, 6/A, 12/A and 12/B] - INVESTED ASSETS [2.b)+3.bb)+4.ab)+5.ab)+5.bb)+6.bb)+7+8+9+ l0 46 657 53 790 + related items from 2/A, 3/A, 4/A, 5/A, 6/A, 7/A, 12/A and 12/B]
Budapest, 3 May 2018
Bank of China (Hungary) Close Ltd. Bank of China (Hungary) Close Ltd. BALANCE SHEET
EQUITY AND LIABILITIES Million HUF
31 December 31December Item description 2016 2017
~ 1. Deposits and loans from credit institutions 2 733 27 545 - - a) sight deposits 118 I 480 b) term deposits from financial service activities 2 615 26 065 -- ba) sho11 term 2 600 8 384 of which: - from related parties 2 581 8 370 14 - from National Bank of Hunga1y - 19 - bb) long term - - - 15 17 681 of which: - from related parties -- 0 17 681 - from National Bank of Hungary 15 0 2. Deposits and loans from customers 107 968 90 229 b) other deposits from financial service activities 107 968 90 229 ba) sight 28 581 18 968 - bb) short te1m 79 387 71 26 1 - be) long term 0 0 4. Other liabilities 1 607 186 a) sho11 term 1 607 186 5. Accrued and deferred liabilities 786 920 - - a) deferred income 0 1 b) accrued expenses 786 919 6. Provisions - 43 44 d) other provision 43 44 7. Subordinated liabilities 8 811 7 765 a) subordinated loan 8 811 7 765 of which: - from related parties 8 811 7 765 8. Issued capital 6 700 6 700 10. Capital reserve 6 438 6 438 a) premium (the difference between face value and issue price) 6 438 6 438 11. General reserve 663 687 12. Accumulated profit reserve(+/-) 2 260 2 503 ~ esult for the period(+/-) 243 219 Total equity and liabilities 138 252 143 236 of which: - SHORT TERM LIABILITIES 112 293 100 279
[I.a)+ l .ba)+ l .c)+ 1/A+2.aa)+ 2.ab) +2.ba)+2.bb )+2.c)+2/A+3.aa)+ 3 .ba)+ 3 .ca)+4.a)+4/A ] --- - LONG TERM LIABILITIES 8 826 25 446 [ 1.bb)+2.ac) +2.bc)+3.ab )+3.bb) +3.cb )+4.b )+7] - - SHAREHOLDERS' EQUITY (8-9+ IO+ 11 +/-12+ 13+ l 4+/-15) 16 304 16 547 -
OFF BALANCE SHEET LIABILITIES Contingent liabilities 3 7871 l 3601 Contingent and future _li_ab_i_li_ti_es______~ ___ 3_ 7_87__ ~ __ 1_ 3_6~0
Budapest, 3 May 20 18
Bank of China (Hungary) Close Ltd. Bank of China (Hungary) Close Ltd. INCOME STATEMENT
Million HUF -- Item description 20 16 2017 1 1. Interest received and interest-type income 3 869 920 a) interest received (receivabl e) on fixed-interest securities signi fying a creditor relationship 52 29 b) other interest received a_ nd interest-type income 3 817 891 of wh ich: - from relat ed parties 354 736 2. Interest paid and interest-type expense 498 926 of which: - to related parties 204 384 NET INTEREST INCOME (1-2) 3 371 -6 4. Commissions and fees rec eived (receivable) 290 1 708 a) from income of other fi nancial services 290 1 708 of which: - from relat ed parties 7 128 5. Commissions and fees pai d (payable) 52 174 ~ ) from expense of other fi nancial services 52 174 6. Net result of financial ope,·ations [6.a)-6.b )+6.c)-6.d)] 98 30 a) from income of other fi nancial services 98 87 ~ b) from expense of other fi nancial serv ices 0 57 7. Other income from operati ons 2 533 4 795 a) income from non-financ ial and non-investment services 2 505 2 424 of whi ch: - from relat e d parties 2 505 2 424 b) other income 28 2 371 of whi ch: - from relat~ parties 0 2 366 8. General administration ex penses 4 956 5 375 a) personnel like expenses 3 066 3 247 aa) wages and salaries 1 925 2 169 ------ab) other personnel Ii ke expenses 507 453 ac) contributions on wages and salaries 634 625 of which: - social insuranee ~ penses 309 245 of which pen sion related expenses 275 217 b) other administration cost s (material like expenses) ____ I 890 2 128 9. Depreciation 260 234 I 0. Other expenses on operati ons 237 207 b) other expenses 237 207 >- 15. Result of ordinary business activities 787 537 of which: - RESULT OF FINANCIAL AND INVESTMENT SERVICES -I 718 - I 887 [l -2+3+4-5 +/-6+7 .b)-8-9-10.b)-l l + 12+ 12/A-13+ 14] ~ -RESULT OF NON-FINANCIAL AND NON-INVESTMENT SERVICES 2 505 2 424 [7.a)-10.a)] 19. Result before corporate tax (+/-15+18) 787 537 20. Corporate tax 517 294 21. Result after corporate ta X (+/-19-20) 270 243 22. General reserve (+/-) 27 24 23. Result for the period(+/-21-/+22) 243 219
Budapest, 3 May 2018
Bank of China (Hungary) Close Ltd. ,;I;\ i7 ~ «(f{~}ff.U) \:I:/ BANK OF CHINA (HUNGA.RIA) Z RT. Notes to the 3 1 December 2017 Financial Statements
NOTES TO THE FINANCIAL STATEMENTS
31 DECEMBER2017
1/19 t;I:\ f {&) «tf (ffdJff.U) \::1::1 BANK OF CHINA (HUNGARIA) ZRT. Notes to the 31 December 2017 Financial Statements
CONTENTS
I. GENERAL INFORMATION ...... 4
1/1. Identifying data ...... 4
1/2. Ownership structure, shares ...... 4
II. ACCOUNTING POLICY ...... 5
11/1. Preparing financial statements...... 5
11/2. Valuation of balance sheet items ...... 5 Valuation of foreign cun-ency assets and liabilities ...... 5 Valuation of loans and receivables ...... 5 hnpairment and provisions ...... 6 Depreciation ...... 7
11/3. Information considered significant from accounting point of view ...... 7 Modification in the valuation of assets and liabilities ...... 7 Significant en-or ...... 7
Ill. NOTES TO THE BALANCE SHEET...... 8
111/1. Assets...... 8 Cash and cash equivalents ...... 8 State securities ...... 8 Loans and advances to credit institutions ...... 8 Loans and advances to customers ...... 9 Shares, participations held for investment ...... 9 Shares, participations in related parties ...... 9 Intangible assets...... 9 Tangible assets ...... 10 Other assets ...... 10 Accrued and defen-ed assets ...... 10
111/2. Equity and liabilities ...... 11 Deposits and loans from credit institutions ...... 11 Deposits and loans from customers ...... 11 Other liabilities ...... 11 Accrued and defen-ed liabilities ...... 12 Provisions ...... 12 Subordinated liabilities ...... 12 Shareholders' equity ...... 12 Regulatory capital ...... 13
111/3. Breakdown of balance sheet items by foreign currency and local currency...... 13
2/19 Notes to the 3 1 December 2017 Financial Statements
IV. NOTES TO THE OFF BALANCE SHEET ITEMS ...... 14 Contingent and future liabilities ...... , ...... 14 Contingent and future receivables ...... 14 Currency spot transactions ...... 14 Off balance sheet interest and interest-type commission to receive ...... 14
V. NOTES TO THE INCOME STATEMENT ...... 15 Income by geographical areas ...... 15 Personnel like expenses, average number of employees ...... 15 Significant iten1s of utilized services ...... 16 Income and expense items with related parties ...... , ...... 16 Tax liability ...... 17
VI. CASH-FLOW (VERSION "A") ...... 18
VII. OTHER INFORMATION ...... 19 Contributions paid to National Deposit Insurance Fund and Resolution Fund...... I 9 Total fees charged by the Statutory Auditor...... 19 Remuneration and loans granted to the members of Board of Directors and Supervisory Board ...... 19 Selected financial ratios ...... 19
3/19 1:1:\ f (&) « (f (ff~ JJ: f.1J) \::.::, BANK OF CHINA (IIUNGARIA)ZRT. Notes to the 3 1 December 2017 Financial Statements
I. General information
1/1. Identifying data
The Bank's Hungarian name: Bank of China (Hungaria) Hitelintezet Zartkoruen Mukodo Reszvenytarsasag. The Bank's short name in English: Bank of China (Hungary) Close Ltd. refelTed to as "Bank".
Headquarters: I 051 Budapest, J6zsef nador ter 7. Tax number: 12899986-4-44 Court of Registration number: Cg: 0 1-10-044821 Legal supervisory authority: Metropolitan Court, Court of Registration Professional supervisory authority: National Bank of Hungary Statutory auditor company: Ernst & Young Kft. (1 132 Budapest, Vaci ut 20.) Person responsible for the audit: Viragh Gabriella (registration number: MKVK-004245) Representatives of the company to sign the report: Zhang Gang (1037 Budapest, Remete koz 39.) dr. Erdos Agnes ( I 037 Budapest, Jeles utca 188-190.) Person responsible for preparing the annual report: Pinter Szabolcs (registration number: 119299) Home page of the Bank: www.bankofchina.com/hu/en
The Bank is consolidated in the Financial Statements prepared by Bank of China Head Office (China 1008 18, Beijing, Fuxingmen Nei Dajie 1.).
In Budapest the Bank provides se1v ices to its customers at the headquarters and in Arena Comer branch (1087 Budapest, Hungaria korut 40-44.). In 2015 the Bank established foreign branches in Austria and Czech Republic: • Prague Branch: Na Florenci 211 6 / 15, Praha 1 - Nove Mesto, 11 0 00, • Vienna Branch: Borseplatz 6, IOIO Wien. In 2016 the Bank established a subsidiary company in Serbia: • Bank of China Srbija: Zoran Djindjic boulevard 2a, 11 070 Belgrade. In December 2016 the Bank transferred EUR 15 million (HUF 4,713 million) capital to its Serbian subsidiary. Bank of China Srbija started its operation in January 2017 only, therefore the first consolidated financial statements will be prepared on year 2017.
1/2. Ownership structure, shares
The Bank was established on 30 April 2002 as a limited liability company by its sole owner: Bank of China Limited (China 100818, Beijing, Fuxingmen Nei Dajie 1.).
The Bank's initia l share capital was HUF 2,700 million, which was paid by the Owner in two equal tranches ofUSD 5 million on 8 May 2002 and 6 September 2002.
In 2004 the Owner provided USD 7 million additional capital to the Bank. The capital increase was recorded at 196.31 HUF/USD exchange rate, increasing the issued capital by HUF 100 thousand and the capital reserve by HUF 1,374 million.
In 201 2 the Owner increased the Bank's capital by USD 40 million, of which HUF 4,000 million was recorded as issued capital, while HUF 5,064 million was booked as capital reserve. As at 31 December 2016 the Bank's issued capital was HUF 6,700 million.
4/19 t:J:\ f ~ fit_ (f (ffd ~ f.1J) ~ BANK OF CHINA (HUNGARIA)Z RT. Notes to the 31 December 2017 Financial Statements
The shares of the Bank
• I piece of series "A" registered share with face value of HUF 2,700 million, • I piece of series "B" share with face value of HUF I 00 thousand, • I piece of series "C" registered share with face value of HUF 4,000 million.
II. Accounting policy
The financial statements are prepared in line with the Act C of 2000 on Accounting, Government Decree 250/2000 on the special requirements of preparing annual report and bookkeeping by financial institutions and financial enterprises and Act CCXXXVII of 20 13 on credit institutions and financial enterprises. Based on the regulations above, the Bank established its accounting policy and accounting system in a way to ensure that the financial statements provide a reliable and fair picture of its operations. The Bank is subject to compulsory statutory audit.
11/1. Preparing financial statements
Balance sheet preparation date: 31 January of the year following the balance sheet date. The Bank's annual report consists of a balance sheet, an income statement with vertical layout and the supplementary notes, all are in line with the Government Decree 250/2000. As part of the supplementary notes, we prepare version "A" cash-flow statement. The Bank applies BOCS accounting system, developed by Bank of China. The accounting is based on the accounting policy, the chart and system of accounts. The expenses are recorded by expense type. All transactions and events impacting the assets, liabilities, financial position and profits and losses of the Bank are recorded based on accounting documents (vouchers). The rules of settlement, documentation, reporting, reconciliation, control and consolidating activities related to the intragroup transactions between the Hungarian Head Office and its foreign branches are defined by the "Financial Settlement Policy of Bank of China (Hungary) Ltd. and its foreign Branches".
11/2. Valuation of balance sheet items
The assets and liabilities are valued according to the Assets and liabilities valuation policy. In case of forward derivative transactions the Bank applies fair valuation, while the balance sheet and off balance sheet items resulting from all other transactions are reported at cost.
Valuation offoreigri curre11cy assets and liabilities The Bank keeps its accounting records in original currency and in Hungarian forint. Transactions denominated in foreign currencies are converted into Hungarian forint at the National Bank of Hungary's exchange rates effective on the date when the transaction occurred. Assets and liabilities denominated in fore ign currency are revalued at the National Bank of Hungary's exchange rates effective at the balance sheet date. Resulting foreign exchange gains or losses are recorded in the income statement.
Valuation of/oans and receivables Loans and receivables should be shown in the balance sheet at the amount approved or acknowledged, or at the book value decreased by the impairment already accounted and increased by the impairment written back.
5/19 ,:I;\ 'f (i) ~(f(~~:f.0) \::1::1 BANK OF CHINA (HUNGARI A)ZRT. Notes to the 31 December 20 17 Financial Statements
Interest income on loans is recognized in the income statement based on the principal, the interest rate and the term of the contract. Recognition of interest income is discontinued, and accrned interest in reversed (has to be shown in off balance sheet accounts) when a loan is classified into non-accrnal status. A loan is classified into non-accrual status when the loan becomes contractually past due more than 30 days, or its rating is different from "problem free" or "special attention".
Impairment and provisions The Bank considers lending, investment and country risks that arise in c01mection with assets by recording (and writing-back) impairment under assets. The Bank creates risk provisions to cover interest and exchange risks as well as risks connected to off balance sheet obligations and all other risks. The Bank fo llows the principle of "accurately classifying, prudently recognizing impairment loss, trnly reporting profit and reflecting business performance as it is". The Bank timely, accurately and prudently evaluates the expected loss of loans, and sets aside provision for the impairment in full. The loan impairment losses shall be assessed in respect of all on and off balance sheet credit assets including corporate loans, personal loans, trade finance, and off balance sheet credit assets. A loan shall be impaired, if there is objective evidence indicating impairment. The term 'objective evidence indicating the impairment of the loan ' refers to loss events occurring after the disbursement of a loan and having an adverse impact on the estimated future cash flow of an individual loan or a group of loans that can be reliably measured. The evidences indicating impairment of loans may be assessed in two ways: individual impairment provisioning or group impairment provisioning. 1. Individual impairment provisioning applies to all corporate loans. 2. Group impairment provisioning applies to personal loans if they qualify as small value receivables, i.e. below USD 200 thousand. The individual impairment shall be calculated based on the discounted cash flow ("DCF") method, which means that all the cash flows expected to be recovered for each impaired loan (including the value of the collaterals net of the expected disposal expenses) shall be discounted according to the original effective interest rate (the prevailing effective interest rate as agreed under the contract can be used as discount rate for floating interest rate loans when the recoverable amount is calculated), and the difference between the discounted cash flows to be recovered and the carrying amount of the loan shall be recognized as impairment losses, and individual impairment provisions shall be provided accordingly, but the impairment should not be less than the minimum provision requirement set for each below category: • problem free 0%, • special attention 1-10%, • substandard 11-30%, • doubtful 31-70%, • loss 71-100%.
Impairment should be accounted on investments in other companies, in case their market value at the balance sheet date is at least 20% lower compared to the purchase cost, provided that this difference exists on the long-tem1, at least for 1 year.
6/19 1:1:\ f ~ «(f (ffdJff.1J) \:::1:1 BANK OF CHINA (HUNGARIA)ZRT. Notes to the 31 December 20 17 Financial Statements
Depreciation Tangible and intangible fixed assets are declared in the balance sheet at cost, less accumulated depreciation. Depreciation is calculated from the date fo llowing the capitalization of the assets and is charged to the profit and loss accounts on a monthly basis.
The Bank applies the following depreciation rates: Tangible assets Buildings 2% IT equipment 33% Machine and other equipment 14,5% Vehicle 20% Fixed assets with purchase cost up to HUF 200 thousand 100%
Intangible assets Software 33% Other intangible assets (except for logo) 16,6% Logo 14.5%
We recognize a depreciation of20% per year on office fi t-out costs related to the rented properties used as branch or office, but for the purposes of corporate income tax we apply the 6% rate allowed by tax regulations. Depreciation is computed on the gross capitalized value of the assets applying the straight-line method over the estimated useful lives of the assets. In case of flats, vehicles and the office building at J6zsef nador ter 20% residual value is taken into account. The planned yearly depreciation can be modified only in case there is a significant change in the circumstances taken into account at the original determination of the depreciation. The Bank considers a change in circumstances significant, if its impact causes 20% increase or decrease of the yearly depreciation of the concerned asset. 11/3. Information considered significant from accounting point of view
Modificatio11 in the valuation ofassets and liabilities According to the going concern principle, the Bank modifies the valuation of its balance sheet items in case the change of circumstances and the conditions detem1ining the valuation is permanent and significant. The Bank defines a change permanent and significant if it lasts for at least 1 year and exceeds 20% of the concerned asset or liability.
Significa11t error The Bank considers errors significant, if the aggregate amount of material errors and their impact on previous year's equity exceeds 2% of previous year's balance sheet total.
7/1 9 ~ "f7 ~ «(f(~Jff.U) \::I:/ BANK OF CHINA (HUNGARIA)ZRT. Notes to the 3 1 December 2017 Financial Statements
III. Notes to the balance sheet
111/1. Assets
Cash a11d cash equivalents
Million HUF Cash and cash equivalents 3// /2/2016 3///2/2017 Cash 5 16 396 Nostro accounts held at National Bank of Hungary 5,994 4,942 Total cash and cash equivalents 6,510 5,338
State securities
Million HUF
3//12/2016 3//12/2016 31/12/20/6 31/12/2017 3// /2/2017 31//2/2017 !SIN code and lype ofsecurity Face value Book value Markel value Face value Book value Market value
HU0000520945 discount T-bill 3,000 2,972 3,000 0 0 0 HU000052 I 059 discount T-bill 3,000 2,973 2,999 0 0 0 H U000052 I 448 discount T-bi II 0 0 0 3,000 2,997 3,000 HU000052 I 521 discount T-bill 0 0 0 3,000 2,997 3,000 HU0000521844 discount T-bill 0 0 0 3,000 3,000 3,000 Total state securities 6,000 5,945 5,999 9,000 8,994 9,000
Loa11s and advatlces to credit institutio11s
Million HUF Malurity schedule 31/ /2/20/ 6 31//2/2017 Demand 12,963 2 1,840 ofwhich Bank ofChina Head Office 719 6,697 other Bank ofChina subsidiaries and branches 10,375 7,686 I - 90 days 64,791 3 1,65 1 ofwhich Bank a/China Head Office 0 7,754 olher Bank a/China subsidiaries and branches 5 1,575 23,897 9 1 days - I year 0 20,495 ofwhich o/her Bank ofChina subsidiaries and branches 0 20,495 Total short term 77,754 73,986 Over 5 years 37,728 19,849 ofwhich Bank ofChina Head Office 0 19,849 other Bank ofChina subsidiaries and branches 37,728 0 Total long term 37,728 19,849 Total loans and advances to credit institutions 115,482 93,s3s I
8/19 t:I:\ f (i) «(f (iuJff.O) \::.::I BANK OF CHINA (HUNGARIA)ZRT. Notes to the 31 December 2017 Financial Statements
Loa11s and a,lvances to customers
Million HUF Maturity schedule 31/12/20/6 3 !/12/2017 Demand 0 0 I - 90 days 42 27 91 days - I year 728 616 Total short term 770 643 I - 5 years 1, 105 17,367 Over 5 years 83 9, 133 Total long term 1,188 26,500 I Total loans and advances to customers 1,9ss I 21,143 I
Both the 2016 and 2017 year-end complete customer loan portfolio falls in the problem free category, therefore there was no need to book any impairment. The Bank had no restructured receivables in its books as at 31 December 2016 and 2017. As at 31 December 2017 the total amount of large exposures was HUF 26,279 million.
Shares, participatio11s held for ill vestment
The Bank owns I 00 pieces of shares of Garantiqa Hitelgarancia Zrt, each with a face value of HUF 100 thousand. Both the face value and the book value of this portfolio purchased in year 2003 is HUF 10 million, representing 0, 1276% share in the company.
Shares, participations in related parties
In December 2016 the Bank transferred EUR 15 million (HUF 4,713 million) capital to its 100% owned Serbian subsidiary company, Bank of China Srbij a.
Intangible assets
Million HUF Other intangible Intangible assets in lllta11gible assets Software Total assets prof(ress Gross value as at 31 December 2016 175 2 0 177 Increase 15 0 15 30 Decrease 0 0 -15 -1 5 FX difference I 0 0 I as at 3 I December 2017 191 2 0 193 Accumulated depreciation as at 31 December 20 16 126 I 0 127 Depreciation 32 I 0 33 Unplanned depreciation 0 0 0 0 Write-back unplanned depreciation 0 0 0 0 FX difference 0 0 0 0 Disposals 0 0 0 0 as at 3 I December 20 I 7 158 2 0 160 Net book value as at 3 I December 20 I 7 33 0 0 33
9/19 t:J:\ i7 ~ «(f (iuJff.1J) \:I!/ BANK OF CHINA (HUNGARI A)ZRT. Notes to the 31 December 2017 Financial Statements
Tangible assets
M illion HUF Ta11,:ible assets Buildings Equipment Vehicles Investments Total Gross value as at 3 I December 2016 2,840 692 78 0 3,610 Increase 10 49 0 59 11 8 Decrease - 1 - I 0 -59 -61 Gross value adjustment -I 93 0 0 0 -193 FX rate difference 0 6 0 0 6 as at 3 I December 20 I 7 2,656 746 78 0 3,480 Accumulated depreciation as at 3 1 December 2016 272 321 49 0 642 Depreciation 64 133 6 0 203 Depreciation adjustment 0 -2 0 0 -2 Unplanned depreciation 0 0 0 0 0 Write-back unplanned depreciation 0 0 0 0 0 FX rate difference 0 3 0 0 3 Disposals -51 0 0 0 -5 1 as at 3 I December 20 I 7 285 455 55 0 795 Net book value as at 31 December 2017 2,37 1 291 23 0 2,685
Other assets
M illion HUF Item description 31/12/2016 31/12/20/7 Caution deposits paid on rented assets 103 146 Advances paid to suppliers 13 57 Advances paid in relation to the establishment of Serbian subsidiaiy 105 0 Taxes receivable 35 36 Positive currency revaluation difference 0 I Other receivables 22 17 Total other assets 278 257
Accrued and deferred assets
M illion HUF Item description 31/ 12/20/ 6 3//12/2017 Accrued interest income 272 43 of which other Bank ofCh ina subsidiaries and branches 230 4 Accrued price margin of corporate deals obtained through transfer 8 0 Total accrued income 280 43 Deferred general expenses 58 185 Total deferred expenses 58 185 Total accrued and deferred assets 338 228
10/19 t,:\ i7 (&) il,c_(f (~yj:f.,J) \::a:, BANK OF CHINA (HUNGA.RIA)ZRT. Notes to the 31 December 2017 Financial Statements
111/2. Equity and liabilities
Deposits and loans from credit institutions
Million HUF Maturity schedule 3/ /12/2016 31/12/2017 Demand I 18 1,480 ofwhich Ba11k ofCh ina /-lead Office 0 1,335 other Bank of China subsidiaries a11d branches 118 145 I - 90 days 1,249 933 ofwhich other Bank of Chi11a subsidiaries and branches 1,244 930 91 days - I year 1,35 1 7,451 ofwhi ch other Bank ofChina subsidiaries and bra11ches 1,337 7,440 Total short term 2,718 9,864 I - 5 years 15 17,681 ofwhich Bank ofC hina Head Office 0 6,471 other Bank ofChina subsidiaries a11d branches 0 I l,210 Total long term 15 17,681 I Total deposits and loans from credit institutions 2,133 I 21,s4s I
The 31 December 2017 balance includes HUF 14 million due to National Bank of Hungary within the Funding for growth scheme. The 31 December 2016 balance payable to NBH amounted to HUF 33 million within the same scheme.
Deposits and loans from customers
Million HUF Maturity schedule 31/12/2016 31/12/2017 Demand 28,58 1 18,968 I - 90 days 79,015 70,864 91 days - I year 372 397 Total short term 107,968 90,229 I - 5 years Total long term
Total deposits and loans from customers 101,968 1 90,229 1
Other liabilities
Million HUF Item description 31/12/2016 3// /2/201 7 Remittance transit account balances 1,466 43 Taxes payable 72 102 Negative cu1Tency revaluation difference 0 0 Suppliers 33 0 Salaries payable 36 24 Balance of other transit accounts 0 17 Total other liabilities 1,607 186
11/19 Notes to the 3 1 December 2017 Financial Statements
Accrued and ,leferred liabilities
Million HUF Item description 31/ /2/2016 3 // 12/2017 Commission received in advance 0 1 Total deferred income 0 I Accrued interest expense 3 15 186 of which Bank ofCh ina Head Office 0 /38 other Bank ofChina subsidiaries and branches 45 25 Accrued general expenses 471 733 Total accrued expense 786 919 I Total accrued and deferred liabilities 786 I 920 I
Provisions
Million HUF FXrate Item description 3///2/2016 Addition Write-back 311/2/2017 difference
Other provision on advances and 43 3 2 0 44 caution deposits paid on rented assets
Subordinated liabilities
In 2011 Head Office provided a subordinated loan to the Bank amounting to USD 30 million for indefinite term. The applicable interest rate is 6 month Libor + 1,5%. The contract doesn't specify the possibility of converting the loan into equity. The local currency equivalent of the USD 30 million was HUF 7,765 million and HUF 8,8 11 thousand as at 31 December 2017 and 2016 respectively.
Sltareltolders' equitv
Million HUF
Item 311/2/2016 Increase Decrease 31/12/2017
Issued capital 6,700 0 0 6,700 Capital reserve 6,438 0 0 6,438 General reserve 663 24 0 687 Accumulated profit reserve 2,260 243 0 2,503 Result for the period 243 2 19 243 2 19 Total shareholders' equity 16,304 486 243 16,547
The balance of issued capital and capital reserve didn' t change in year 2017, see also chapter ,,1/2, Ownership structure, shares" for the relevant information on these items. The balance of genernl reserve increased by HUF 24 million which variation corresponds to the I 0% of year 2017 profit after tax. The HUF 243 million year 2016 result for the period was transferred to accumulated profit reserve.
12/1 9 t:J:\ f (&) '"'-'f (~5f;f;IJ) \:1:1 BANK OF CHINA (HUNGARI A)ZRT. Notes to the 3 1 December 20 17 Financial Statements
The 31 December 2017 balance of result for the period is HUF 219 million which corresponds to the profit after tax decreased by the general reserve. Based on the information available at the time of signing the financial statements, the year 2017 result for the period won't be transferred to Head Office in year 2018 as dividend payment.
Regulatory capital
The 31 December 2017 balance of regulatory capital is HUF 20,977 million, of which the tier 1 and tier 2 capitals are HUF 13,212 million and HUF 7,765 million respectively.
111/3. Breakdown of balance sheet items by foreign currency and local currency
Million HUF
3//12/2017 3//12/20/7 3//12/20/ 7 Assets Foreign currency HUF Total
I. Cash and cash equivalents 267 5,071 5,338 2. State securities 0 8,994 8,994 3. Loans and advances to credit institutions 93,827 8 93,835 4. Loans and advances to customers 26,851 292 27,143 7. Shares and participations held for investment 0 10 10 8. Shares and participations in related parties 0 4,713 4,713 9. Intangible assets 0 33 33 I 0. Tangible assets 0 2,685 2,685 12. Other assets 164 93 257 13. Accrued and deferred assets 197 31 228 Total assets 121,306 21,930 143,236
3//12/2017 3//12/2017 3// /2/2017 Equity and liabilities Foreign currency HUF Total
1. Deposits and loans from credit institutions 26,051 1,494 27,545 2. Deposits and loans from customers 88,313 1,916 90,229 4. Other liabilities 121 65 186 5. Accrued and deferred liabilities 576 344 920 6. Provisions 24 20 44 7. Subordinated liabilities 7,765 0 7,765 8. Issued capital 0 6,700 6,700 I 0. Capital reserve 0 6,438 6,438 11 . General reserve 0 687 687 12. Accumulated profit reserve 0 2,503 2,503 15. Result for the pe1iod 0 219 2 19 Total equity and liabilities 122,850 20,386 143,236
13/19 Notes to the 3 I December 2017 Financial Statements
IV. Notes to the off balance sheet items
Contingent and future liabilities M illion HUF Co11tinzent liabilities 31/12/2016 31/12/2017 Guarantees given 3,390 1,297 Unutilized portion of credit lines 32 33 Letter of creel it 365 30 Total contingent liabilities 3,787 1,360
The Bank had no open derivative transactions as at 3 I December 20 I 6 and 2017. All currency swap transactions of year 2017 were arranged on the interbank market (OTC), all of wh ich had been settled by the balance sheet date.
The total impact of currency swap transactions on year 20 I 6 and 2017 profit before tax amounted to HUF 52 million and HUF 21 million loss respectively.
Contingent and future receivables Million HUF
31/12/2016 31/12/2017 Contingent receivables Value ofcolla teral Value ofco llateral
Guarantees received from banks 202 260 Other guarantees received 0 782 Real estate mortgage 904 975 Caution deposits 614 568 Total contingent receivables 1,720 2,585
Currency spot transactions Million HUF Soot transactions 31/12/2016 31/12/2017 Spot receivable 19 250 Spot liability 19 249
Off balance sheet interest and interest-type commission to receive
As at 3 I December 20 I 7 and 20 I 6 the Bank had no interests and commissions to receive on bad loans shown as off balance sheet items.
14/19 t:r:\ i' (i) «lf (ffd}ff.U) \::.:::, BANK OF CHINA (HUNGARIA)ZRT. Notes to the 31 December 2017 Financial Statements
V. Notes to the income statement
Income bv geographical areas
Million HUF
EU Other China and Income Hung{//y (except Russia lhird Total Hong Kong Hungary) countries Interest received and in terest-type income 78 106 43 0 693 920 Commissions and fees received/ receivable 81 69 1 11 0 618 208 1,708 Income of other financial services 87 0 0 0 0 87 Other income from operations 4,793 2 0 0 0 4,795 Total income 5,039 799 153 618 901 7,510
The Bank provides cross-border financial services in other EU countries and third countries as well. In 20 17 HUF 32 thousand withholding tax was transferred to fo reign tax authorities from the Branch's income.
Perso1111el like expenses, average number of emplovees
The average number of employees in Hw1gary was 64 and 60 in 2017 and 2016 respectively. The average number of persons employed by the foreign branches was 36 and 25 in 2017 and 2016 respectively.
Million HUF Hungary Foreign branches Total Personnel like expenses 2016 2017 2016 2017 2016 2017 Salaries 1,125 1,087 800 1,082 1,925 2, 169 Other personnel like expenses 308 308 199 145 507 453 Contributions on wages and salaries 443 380 191 245 634 625 Total personnel like expenses 1,876 1,775 1,190 1,472 3,066 3,247
15/19 Notes to the 31 December 2017 Financial Statements
Sig11ificant items of utilized services
Significant items of utilized services exceeding HUF 25 million in year 2017 and / or in year 2016:
Million HUF
Significant items ofu tilized services 2016 2017
Services provided by Bank of China Limited Hungarian Branch 671 82 1 Head Office cost allocation 17 75 Outsourcing 106 72 Prope1ty rental fee 290 345 Rental fee of other assets 46 57 Adve1tising, marketing 135 165 Consultancy fees I 12 98 Legal fees 78 38 Property management 61 80 Software maintenance 50 38 Telecommunication and network fees 46 56 Security service expense 32 35 Audit fees 29 29 Uti lity expense 27 26 Total significant items of utilized services 1,700 1,935
Income and expense items with related parties
In 2017 the Bank recorded HUF 736 million interest income, HUF 128 million commission income and HUF 384 million interest expense with Bank of China Head Office and other Bank of China subsidiaries and branches. The HUF 2,424 million reported as other income of non-financial services corresponds to the operating expenses recharged to Bank of China Limited Hungarian Branch. The HUF 82 I million general expenses recharged from Bank of China Limited Hungarian Branch are included in the total general operating expenses of the Bank. The Bank received a donation of HUF 2,366 million from Bank of China Limited Hungarian Branch which is included in other income.
16/19 1:1:\ i1 ® «(f(~Jff.lJ) \:.::, BANK OF CHINA (IIUNGARIA)ZRT. Notes to the 31 December 20 17 Financial Statements
Tax liability
Corporate income tax MiUion HUF Profit before tax of the Hungarian activity 1,934
Tax base decreasing items Depreciation and write-off assets according to tax regulations 226 Wtite-back of prior years' tax base increasing provisions 2 20% of donations to organizations with public benefit status I Income of previous years (revision / self-revision) 11 Total tax base decreasing items 240
T.ax base increasmz items Depreciation and write-off assets according to accounting regulations 234 Tax base increasing provision addition 3 Expense of previous years (revision / self-revision) 164 Expenses not incurred in the interest of the company 119 Total tax base increasing items 520 Tax base 2,214 Corporate income tax liability of 2017 200
Banking tax Million HUF Profit before tax of the Hungarian activity 1,934 Profit before tax of foreign branches - 1,483 Total profit before tax 451 Special tax of financial institutions 85 Tax base of special tax of credit institutions (adjusted profit before tax) 536 Special tax of credit institutions (30%, but maximum the special tax of financial institutions) 85 Corporate income tax self-revision relating to previous years 9 Total tax liability (corporate income tax+ special tax of credit institutions) 294
17/19 ,:I;\ 'f ~ «trc~~:~,J> w BANK OF CHINA (HUNGARIA)ZRT. Notes to the 31 December 20 17 Financial Statements
VI. Cash-flow {version "A")
Million HUF
Item description 2016 2017
+ Interest received 3 869 920 Income from other financial services (less write-back value loss of securities and + 388 I 795 positive revaluation difference ofreceivables) Other income (less write-back and utilization of provisions, write-back value loss of + 0 2 369 inventories and write-back unplanned depreciation) Income from investment services (less write-back value loss ofsec urities and + 0 0 positive revaluation difference) + Income from non-financial and investment services 2505 2424 + Dividend received 0 0 - Interest paid -498 -926 Expense on other financial services (less value loss of securities and negative - -52 -231 revaluation difference ofreceivables) Other expenses (less provisions, value loss of inventories and unplanned - -23 1 -204 depreciation) Expens es on investment services (less value loss of securities and negative - 0 0 revaluation difference) - Expenses on non-financial and investment services 0 0 - General expenses -4 956 -5 375 - Corporate tax for the period -517 -294 - Dividends paid -40 0
OPERA TING CASH-FLOW 468 478
± Variation in liabilities (increase +, decrease-) 82652 4605 ± Variation in loans and other receivables (increase-, decrease +) -76 840 -3 516 ± Variation in inventories (increase-, decrease +) 0 0 ± Variation in securities-current assets (increase-, decrease +) -2 973 -3 049
± Variation in inves tment securities (increase-, decrease+) -4 713 0
± Variation in investments (increase-, decrease +) 0 0 ± Variation in intangible assets (increase-, decrease +) -30 -16
± Variation in tangible assets - less investments (increase-, decrease+) -378 82
± Variation in accrued and deferred assets (increase-, decrease+) -257 110 ± Variation in accrued and deferred liabilities (increase+, decrease-) 440 134 + Issue of shares (selling price) 0 0 + Final cash receipt based on regulations 0 0 - Final cash delive1y based on regulations 0 0 - Withdrawal ofsha res (nominal value) 0 0
NEfCASH-FLOW -1 631 -1172 of which - Variation in cash and cheque ( increase+, decrease-) 97 -121 - Vaiiation in nostro accounts (increase +, decrease-) -1 728 -1 051
I 8/19 /;J:\ f ~ {jL 'f (ifd ~: f.1J) \::a::, BANK OF CHINA (HUNGJ\RIA)ZRT. Notes to the 31 December 2017 Financial Statements
VII. Other information
Contributions paid to National Deposit I11sura11ce Fu11d a11d Resolution Fu11d
The Bank paid HUF 11 million contribution to National Deposit Insurance Fund both in 2016 and 2017. The Bank joined Resolution Fund in 2014, the year of its establislunent, and paid HUF 1 million risk-based fee in 20 17, compared to HUF 2 million risk-based fee paid in 2016.
Total fees charged by the Statutory Auditor
In 2017 the Auditor charged HUF 32 million for the statutory audit of financial statements and other auditing services, of which HUF 13 million was the expense of the foreign branches. In 2016 the Auditor charged HUF 29 million for the statutory audit of financial statements and other auditing services, of which HUF 17 million was the expense of the foreign branches.
Remuneration and loans granted to the members ofBoard ofDirectors and Supervisory Board
The Board of Directors consists of 3 external and 2 internal members. The internal members are not entitled for any remuneration related to their activities as board members. The annual remuneration paid to the external members amounted to HUF 10 million both in 2017 and 2016. The Bank didn't grant any loans to the members of Board of Directors in 2016. The Bank didn't grant any remuneration or loan to the 3 members of the Supervisory Board in 2017 and 2016.
Selected /i11ancial ratios
Name and calculation method ofratio 2016 2017 Return on average assets (ROAA) = profit after tax I average balance sheet total 0.28% 0.17% Return on average equity (ROAE) = profit after tax / average shareholders' equity 1.67% 1.48% Liquidity ratio = current assets/ short term liabilities 81.27% 88.97% Invested assets ratio = invested assets/ total assets 33.75% 37.55% Shareholders' equity ratio = shareholders' equity / total liabilities 11.79% 11.55%
Budapest, 3 May 2018 V1 Bank of China (Hungary) Close Ltd,
19/19 Year 2017 Business Report of Bank of China (Hungary) Close Ltd.
Economic environment
2017 was a successful year for the Hungarian economy. Increasingly positive data in the regular reports published by Hungarian Central Statistics Office showed favorable trends in various economic sectors. In year 2017 the pace of the Hungarian GDP growth rate significantly exceeded last year's 2% growth in Hungary and the EU average. As the center of the business region, Hungary will remain the major development area of the Bank in Central Eastern Europe. This provides Bank of China Group (the Group) international platfonn for development and a large space for growth. In return we dedicated ourselves to this nation, closely following the Group's strategic goal of "Serving Society, Delivering Excellence".
Pursuant to the lowest corporate income tax rate in the region and other advantages, Hungary will be more and more attractive for the global large enterprises, the "Going Global" Chinese companies, the fortune World Top 500 enterprises, industrial leaders and financial institutions in the covered region.
Achievements, strategy
In 2017 Bank of China (Hungary) Ltd. (the Bank) successfully established new client relationships in Central Eastern Europe. The high-quality customer base will be further expanded, and better services will be provided to our existing customers in the region. The Bank's activities help the customers to overcome the "difficult and unaffordable financing" problem. Our Group enhanced the Bank' s brand image by increasing the influence of the Bank on the local market.
The Bank considers social responsibility as pa11 of its business strategy, which is evidenced by charity and sponsorship agreements. In 2017 Forint-RMB debit cards were issued in order to increase our clients' convenience and strengthen the relationship between the customers and the Bank.
In 2017 the Bank finished the preparation phase of the IFRS transition both on the level of business models and in terms of accounting system. Beginning from 1 January 2018 the Bank applies IFRS as requested by the Hungarian regulations. Our intention is to deepen the reforms and innovation, to take advantage of the trend of internationalization, and to grow on a broader platform by taking the initiative in order to meet the changing market challenges.
According to the Group's strategy, the Bank closely cooperates with the other Bank of China units, especially with Bank of China Limited Hungarian Branch.
The Bank acting as the RMB clearing center of Central Eastern Europe intends to further extend its CNY denominated transactions.
In 2018 the Bank will enhance the activities of its foreign branches established in Prague and Vienna, and intends to increase its market share in Serbia through its Serbian subsidiary.
The Bank pays special attention to the continuous monitoring of capital requirements and the liquidity position.
The Bank is ready to facilitate additional projects which may develop the economic relationship between China and Hungary.
Employment policy
The most important aim of the Bank's employment policy is to ensure the efficient operation and dynamic growth. The Bank provides continuous training to its employees and maintains the commitment and motivation of the staff. The average number of employees, including foreign branches, increased by 18% compared to 2016.
Financial instruments
The Bank determines the classification of its financial instruments at initial recognition. The Bank classifies its financial instruments into the following categories: trading, held to maturity and available for sale.
A financial instrument is classified as held for trading if it is acquired or incurred principally for the purpose of selling it in the near term or if it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of recent actual pattern of short-term profit-making. Derivatives are also categorized as held for trading unless they are designated and effective as hedging instruments. In 2017 the Bank concluded only trading derivative transaction, for all of which fair value accounting was applied. Held to maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Bank's management has the positive intention and ability to hold to maturity.
Available for sale investments are non-derivative financial assets which can be sold or held to maturity.
The Bank fo llowed all requirements of Bank of China Head Office in hedging poli cy and didn't have any hedging transactions till the end of year 2017.
Risk management
The Bank follows the efficient quality control and risk monitoring principles of Bank of China Head Office, which ensures the excellent quality of the customer portfolio.
The Bank comprehensively followed local regulatory and Bank of China Head Office requirements, earnestly canied out risk inspection and pushed forward its compliance work of effective risk data aggregation and risk reporting, so as to ensure compliant operations. In addition, the Bank improved its comprehensive risk management mechanism, strengthened the consolidated risk management of the Bank and sped up the constmction of its risk management infonnation system, improved its risk rep01iing capability and promoted the technologies in risk management.
Price, credit, interest, liquidity and cash-flow exposures
The most significant types of risks to the Bank are credit risk, market risk and liquidity risk. The Bank takes on exposure to credit risk, which is the risk that a customer or counterparty will cause a financial loss for the Bank by failing to discharge an obligation. Market risk includes interest rate risk, currency risk and other price risk. The Bank is exposed to market risks from on-balance sheet and off-balance sheet businesses, which may cause losses to the Bank as a result of adverse changes in market prices of interest rate and exchange rate. The Bank continued to develop and improve its liquidity risk management mechanism with the aim of effectively identifying, measuring, monitoring and controlling liquidity risk, thus ensuring that liquidity demand is met in a timely manner and at a reasonable cost. Year 2017 financial performance
The 31 December 2017 balance sheet total of the Bank amounted to HUF 143.2 billion, including HUF 129.9 billion interest-bearing items on the asset side and HUF 90.2 billion customer deposits on the liability side.
The year 2017 profit after tax amounted to HUF 243 million. Following the transfer of HUF 24 million to the general reserve account, the Bank's result for the period was HUF 219 million.
There were no significant events or pa1ticularly important developments which took place following the balance sheet date.
Budapest, 3 May 2018
Bank of China (Hungary) Close Ltd.