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View Annual Report 2008 Annual Report 2008 annual report 2 OTP Bank Annual Report 2008 Contents 4 Message from the Chairman and Chief Executive Offi cer 9 Financial Highlights 10 Macroeconomic and fi nancial environment in 2008 15 Business Reports 16 Activities and business results of the Bank Group in 2008 20 The business operations of OTP Group members in Hungary 31 The business operations of foreign subsidiaries 37 Management’s Analysis 38 Management’s Analysis of developments in the Bank’s fi nancial position 55 Financial Summary 57 Financial Reports 58 Independent Auditors’ Report (consolidated, based on IFRS) 60 Balance Sheet (consolidated, based on IFRS) 61 Statements of Operations (consolidated, based on IFRS) 62 Statement of Cash Flows (consolidated, based on IFRS) 63 Statement of Changes in Shareholders’ Equity (consolidated, based on IFRS) 64 Notes to Consolidated IFRS Financial Statements for the year ended 31 December 2008 109 Independent Auditors’ Report (unconsolidated, based on IFRS) 111 Balance Sheet (unconsolidated, based on IFRS) 112 Profi t and Loss Account (unconsolidated, based on IFRS) 113 Statement of Cash Flow (unconsolidated, based on IFRS) 114 Statement of Changes in Shareholders’ Equity (unconsolidated, based on IFRS) 115 Notes to Unconsolidated IFRS Financial Statements for the year ended 31 December 2008 157 Corporate Governance 158 Senior management of OTP Bank and executive members of the Board of Directors 160 Non-executive members of the Board of Directors of OTP Bank 162 Members of the Supervisory Board of OTP Bank 163 Information for the Shareholders 165 Declaration on Corporate Governance practice 168 Anti-money Laundering Measures 169 Corporate Social Responsibility Contents 3 Message from the Chairman and Chief Executive Offi cer DEAR SHAREHOLDERS, As Hungary’s leading bank and one of the region’s most important financial institutions, every year OTP is faced with a greater set of challenges. Looking back on the previous year, 2008 was in all respects the most difficult year in the Company’s history, though certainly not in terms of the competition or holding our market positions. Priorites adapted In 2007 the signs of a deposit withdrawals, and deteriorations in the worldwide slowdown in quality of loan portfolios. to changing economic growth had already environment begun to appear, but in 2008 Amid such a substantial worsening of its operating the full scale of the crisis environment, the management regards the emerged, and the recession took on global OTP Group’s performance in 2008 as an outstanding proportions. It would be hard to list all the negative success: although the HUF 219 billion profit events that have occurred – the disappearance of after tax was slightly below the original target, venerable, centuries-old fi nancial institutions, record it exceeded market expectations. The 5.2% losses, fi nancial scams and mass redundancies – growth in net profi ts is an excellent result in light but the psychological tipping point was undoubtedly of the problems of the second half of the year, reached with the bankruptcy of Lehman Brothers and the sharp rise in the foreign subsidiaries’ in September, which led not only to a sharp fall in contribution to the result also warrants a mention. the price of bank shares and the immediate drying up of liquidity, but more importantly to a crisis of In response to the change in market circumstances confidence at systemic level. All players in the the Group has had to rethink its priorities: first bank sector suffered as a result of these factors. and foremost management has focused on Investors suddenly turned away from the ensuring the stable capital position and liquidity eastern-European region, which had formerly needed for safe operation, and on adhering to a been regarded as safe, displaying dynamic growth prudent provisioning policy. Although the quality and representing an attractive target for capital of the consolidated loan portfolio deteriorated investment; and the currencies of these countries, tangibly, the 5.4% ratio of problematic loans dogged by weak external balance indicators and is manageable under the new, stricter structural defi ciencies, depreciated considerably in risk-management procedures, while the almost value. The last quarter of 2008 was characterised 60% coverage rate represents a satisfactory by a tangible drop in lending activity, temporary guarantee of security for the future. 4 OTP Bank Annual Report 2008 The year 2008 was also a milestone in the to adapt and respond to the rapidly changing Company’s operation in the sense that, following market conditions, through strengthening of the the acquisitions of recent years, this was the fi rst strategic management and controlling functions. year in which a subsidiary was sold: in February an agreement was made between OTP Bank With regard to the Bank Group’s performance last and the French Groupama, regarding the sale, year, the consolidated net profit was a record to the latter, of 100% of the shares in of HUF 303.5 billion (+45.5%), to which the Garancia Insurance. This well-timed deal, following one-off profi t items from the sale of Garancia Insurance the deduction of taxes and costs from the made a substantial contribution. At the same time HUF 164 billion original purchase price, boosted the the management also decided to recognise Group’s profi t and strengthened its capital position signifi cant goodwill impairment for the Ukrainian with a one-off revenue item of HUF 121.4 billion. and Serbian subsidiaries, which lowered the result by As a part of the transaction, OTP Bank and HUF 92.6 billion. Adjusted for these two large one-off Groupama concluded a long-term cooperation items, and for the HUF 4.7 billion non–realized loss agreement with each other regarding the cross-selling incurred on strategic open positions, the OTP Group’s of fi nancial and insurance products. In the addition profi t after tax was HUF 219 billion, which was in to this, Groupama appeared as a strategic owner line with the management’s original expectations. among the shareholders of the Bank with its signifi cant 8% share. In 2008 the consolidated balance sheet total rose by 11.6%, to HUF 9,442 billion, while the gross Aware of the importance of maintaining stable loan portfolio grew at the considerably higher rate liquidity, the Bank used a diverse range of of 21.5% (to HUF 7,001 billion), in contrast to channels to procure funds. In the first half of the 3.6% increase in deposits. At year-end the 2008 two major international bond transactions Bank’s equity exceeded HUF 1,048 billion. By were concluded by OTP Mortgage Bank and international standards the profitability and OTP Bank, in a value of EUR 1 billion and effi ciency indicators continue to be outstanding: EUR 500 million respectively, based on the HUF 219 billion profi t after tax wich Stable capital position, while Bulgaria’s DSK is adjusted with one–off items and reflect, the received a EUR 160 million real business performance, the consolidated outstanding profitablity syndicated loan. Following rate of return on assets was 2.4%, while the and efficiency the drying up of the return on equity was 22.5%. As a result of international capital markets, the strict cost management policy, the cost-to-income fundraising efforts began to focus on the targeted ratio dropped below 50% (49.6%), which use of domestic savings, through the holding of represents a 3% improvement year on year. major campaigns promoting deposit products, and The OTP Group’s consolidated capital adequacy retail bond issues. As a result, the Bank reliably ratio, calculated from IFRS data, is 15.3%, and the met its liabilities as they fell due, and it continues share of tier-1 capital was 11.2%, which is well to have a liquidity reserve suffi cient to ensure its above the European average and significantly security, even with regard to the future. exceeds similar indicators at OTP’s most important competitors. Not any new acquisitions were made in 2008. However, consolidation of the Rostov-based DNB Due to the more rapid increase in Bank penetration took place in May, while in Ukraine and Russia the in the neighbouring countries on the one hand expansion of the branch network continued, and and to the fi scal adjustment measures in Hungary to all intents and purposes the image change was on the other hand, the foreign subsidiaries completed at all the subsidiaries. The Subsidiary contribution to group-level results continued to Integration and Management Committee, which grow in 2008, as 49.3% (+5.5%) of the was set up in 2007, as well as the Management consolidated loan portfolio, and 31% (+6%) Committee, effectively ensured the Group’s ability of the profi t after tax was generated by the foreign Message from the Chairman and Chief Executive Officer 5 subsidiaries. Last year was the fi rst in which all The Merkantil Group’s profi t also fell as a result the foreign subsidiary banks turned profit. of the worsening market environment; stricter lending conditions were imposed, but loan The deterioration in the lending environment led quality remained stable. to a significant increase in the Bank’s funding Among the foreign subsidiaries, it was once again costs, but the re-pricing of asset portfolios in DSK Bank that performed the most impressively, several countries – notably Bulgaria and with a profit after tax of over HUF 30 billion, Ukraine – and the deliberate reduction in the representing a rise of almost 17.47%. The bank Hungarian corporate loan portfolio, which has a continues to boast excellent profitability and lower margin, meant that the net interest margin effi ciency indicators (ROE: 20.7%, cost-to-income: remained stable.
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