bank of china limited hungarian branch financial...

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BANK OF CHINA LIMITED HUNGARIAN BRANCH

Financial Statements

31 December 2018


Financial Statements – 31 December 2018

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CONTENTS

STATEMENT OF PROFIT OR LOSS ..................................................................................... 4

STATEMENT OF COMPREHENSIVE INCOME ..................................................................... 5

STATEMENT OF FINANCIAL POSITION .............................................................................. 6

STATEMENT OF CHANGES IN EQUITY ............................................................................... 8

STATEMENT OF CASH FLOW .............................................................................................. 9

1. Introduction ..................................................................................................................11

2. Operating Environment of the Bank ...........................................................................12

3. Significant Accounting Policies ..................................................................................13

3.1 First-time adoption of IFRS ...................................................................................14

3.2 Changes in Accounting policies ..........................................................................20

3.3 Specific items of Statement of Financial Position ..............................................35

4. Critical Accounting Estimates and Judgements in Applying Accounting Policies .47

5. Adoption of IFRS ..........................................................................................................49

6. New Accounting Pronouncements .............................................................................50

7. Net Interest Income ......................................................................................................53

8. Net fee and commission income .................................................................................54

9. Net trading income .......................................................................................................54

10. Credit impairment losses and provisions ...................................................................55

11. Other operating income ...............................................................................................55

12. Personnel expense .......................................................................................................56

13. Operating expenses .....................................................................................................57

14. Income tax expenses ...................................................................................................58

15. Other Comprehensive Income .....................................................................................60

16. Cash, Cash Equivalents and Balances with central banks .......................................61

17. Loans and advances to banks and other financial institutions ................................61

18. Loans and advances to customers .............................................................................65

19. Financial instruments measured at fair value through OCI .......................................72

20. Derivative financial instruments ..................................................................................72

21. Investment securities ...................................................................................................75

22. Property, plant and equipment ....................................................................................77



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23. Intangible assets ..........................................................................................................79

24. Deferred income tax .....................................................................................................80

25. Other assets..................................................................................................................82

26. Deposits from banks and other financial institutions ................................................82

27. Deposits from customers ............................................................................................83

28. Debt securities in issue ...............................................................................................83

29. Provisions .....................................................................................................................84

30. Other liabilities .............................................................................................................85

31. Dotation capital and reserves ......................................................................................86

32. Profit transfer to head office ........................................................................................87

33. Off-Balance Sheet items ..............................................................................................88

34. Financial Risk Management .........................................................................................88

34.1 Overview ................................................................................................................88

34.2 Financial risk management framework ................................................................88

34.3 Credit Risk .............................................................................................................89

34.4 Market Risk ............................................................................................................96

34.5 Liquidity Risk ....................................................................................................... 104

34.6 Geographical risk concentration ........................................................................ 107

35. Contingencies and Commitments ............................................................................. 108

36. Related party transactions ......................................................................................... 109

37. Fair Value Disclosures ............................................................................................... 111

38. Events after the end of the Reporting Period ........................................................... 114



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STATEMENT OF PROFIT OR LOSS

For the year ended 31 December 2018

In millions of Hungarian Forint Notes 2018 2017

Interest income 7 64,987 54,372

- Interest income using EIR method 7 64,987 54,372

- Other interest income

- -

Interest expense 7 (37,970) (27,827)

Net interest income 7 27,017 26,545

Fee and commission income 8 1,398 318

Fee and commission expense 8 (518) (278)

Net fee and commission income 8 880 40

Net trading income 9 (493) 393

Net investment income

- -

Net gains and losses from sale of amortized cost instruments

- -

Credit impairment losses and provisions 10 1,815 (831)

Other operating income 11 902 821

Net other operating income 2,224 383

Personnel expenses 12 (973) (1,192)

General and administrative expenses 13 (2,870) (2,809)

Depreciation and amortization expense 22-23 (11) (12)

Banking tax expense 13 (2,857) (1,533)

Other operating expenses 13 (1,008) (2,963)

Operating profit 22,402 18,459

Profit before income tax 22,402 18,459

Income tax income (expense) 14 (2,533) (2,414)

Profit for the year

19,869 16,045

The above statement of profit or loss should be read in conjunction with the accompanying notes.



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STATEMENT OF COMPREHENSIVE INCOME



Profit for the Year

19,869 16,045

Items that may be reclassified to profit or loss

Net gains on investments in debt instruments measured at FVOCI, net of tax

15 (121) -

Currency translation of foreign operations

- -

Items that will not be reclassified to profit or loss 15

Net gains on investments in equity instruments designated at fair value through other comprehensive income, net of tax

- -

Other comprehensive income for the year, net of tax 15 (121) -

Total comprehensive income for the year 15 19,748 16,045

The above statement of comprehensive income should be read in conjunction with the accompanying notes.

The financial statements were approved and authorised for issue by the Management and were signed on 13 May 2019.

Xu Haifeng

General Manager

dr. Erdős Ágnes

Deputy General Manager



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STATEMENT OF FINANCIAL POSITION


In millions of Hungarian Forint Notes

31 December 2018

31 December 2017

1 January 2017

ASSETS

Cash, cash equivalents and balances with central banks

16 39,790 4,352 4,784

Loans and advances to banks and other financial institutions

17 270,483 310,405 160,818

Loans and advances to customers 18 1,607,217 1,719,650 1,189,462

Trading assets

- - -

Financial assets measured at fair value through OCI

19 8,319 8,047 -

Derivative assets 20 561 2 -

Investment securities 21 4,994 4,998 19,517

Property, plant and equipment 22 2 - -

Intangible assets 23 10 20 14

Deferred income tax assets 24 1,329 - -

Other assets 25 859 131 78

Total assets 1,933,564 2,047,605 1,374,673

LIABILITIES AND EQUITY

Deposits from banks and other financial institutions

26 1,798,934 1,827,645 1,196,098

Deposits from customers 27 102,603 31,805 7,517

Trading liabilities

- - -

Financial liabilities designated at fair value through OCI

- - -

Derivative liabilities 20 674 80 -

Debt securities in issue 28 - 155,029 155,366

Provisions 29 206 - -

Current income tax liabilities 30 - - 80

Deferred income tax liabilities 24 5 - -

Other liabilities 30 2,630 2,170 781

Total liabilities excluding Net residual attributable to head office

1,905,052 2,016,729 1,359,842



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In millions of Hungarian Forint Notes 31 December

2018 31 December

2017 1 January

2017

Dotation capital 31 2,000 2,000 2,000

Total equity 2,000 2,000 2,000

Net residual attributable to head office 31 26,512 28,876 12,831

Total liabilities and equity including Net residual attributable to head office

1,933,564 2,047,605 1,374,673

The above statement of financial position should be read in conjunction with the accompanying notes.


Xu Haifeng

General Manager

dr. Erdős Ágnes




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STATEMENT OF CHANGES IN EQUITY


Attributable to owners of the Bank

In millions of Hungarian Forint Dotation capital

Retained earnings

Revaluation reserve of debt

instruments measured at FVOCI

Other reserves

Net residual attributable to

head office

Total attributable to

head office

Balance at 1 January 2017 2,000 10,836 - 1,995 12,831 14,831

Profit for the year - 16,045 - - 16,045 16,045

Other comprehensive income - - - - - -

Total comprehensive income for the year - 16,045 - - 16,045 16,045

Profit transferred to head office - - - - - -

General reserve - (1,604) - 1,604 -

Increase of dotation capital - - - - - -

Balance at 31 December 2017 2,000 25,277 - 3,599 28,876 30,876

Balance at 1 January 2018 2,000 25,277 - 3,599 28,876 30,876

Changes on initial application of IFRS 9 (see note 3) - (22,273) 161 - (22,112) (22,112)

Restated balance at 1 January 2018 2,000 3,004 161 3,599 6,764 8,764

Profit for the year - 19,869 - - 19,869 19,869

Other comprehensive income - - (121) - (121) (121)

Total comprehensive income for the year - 19,869 (121) - 19,748 19,748

Profit transferred to head office - - - - - -

General reserve - (1,987) - 1,987 - -

Increase of dotation capital - - - - - -

Balance at 31 December 2018 2,000 20,886 40 5,586 26,512 28,512

The above statement of changes in equity should be read in conjunction with the accompanying notes.



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STATEMENT OF CASH FLOW



Cash flows from operating activities

Profit before income tax

22,402

18,459

Adjustments:

Impairment losses on financial assets 10

(1,815)

831

Depreciation of property, plant and equipment 22-23

1

-

Amortisation of intangible assets and other assets 22-23

10

12 Net gains on disposal of property, plant and equipment, intangible assets and other long-term assets

-

-

Net gains on disposal of investment in subsidiaries, associates and joint ventures

-

-

Share of results of associates and joint ventures

-

-

Interest income received from financial investments 21

(516)

(530)

Dividends arising from investment securities

-

-

Net gains on financial investments

-

-

Interest expense arising from bonds issued 7

583

1,156

Accreted interest on impaired loans

-

-

Net changes in operating assets and liabilities: Net (increase) / decrease in due from and placements with and loans

to banks and other financial institutions 17

39,922

(149,587)

Net (increase) / decrease in precious metals

-

-

Net (increase) / decrease in financial assets at fair value through profit or loss

-

-

Net (increase) /decrease in loans and advances to customers 18

89,855

(531,017)

Net (increase) / decrease in other assets 25

(306)

(57) Net increase / (decrease) in due to banks and other financial institutions 26

(28,711)

631,547

Net increase / (decrease) in due to customers 27

70,798

24,288

Net increase / (decrease) in other borrowings

-

-

Net increase / (decrease) in other liabilities 30

1,039

1,389

Difference between income tax expense and payment 30

(426)

127

Income tax paid 14

(2,107)

(2,541)

Net cash from/(used in) operating activities

190,729

(5,923)



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Cash flows from investing activities Proceeds from disposal of property, plant and equipment, intangible

assets and other long-term assets

-

-

Proceeds from disposal of investment in subsidiaries, associates and joint ventures

-

-

Dividends received

-

-

Interest income received from financial investments 21

514

578

Proceeds from disposal/maturity of financial investments 21

4,995

10,911

Increase in investment in subsidiaries, associates and joint ventures

-

-

Purchase of property, plant and equipment, intangible assets and other long-term assets 22-23

(3)

(18)

Purchase of financial investments 21

(4,991)

(4,995)

Other net cash flows from investing activities 19

(190)

508

Net cash inflow / outflow from investing activities

325

6,984

Cash flow from financing activities

Proceeds from issuance of bonds

-

-

Proceeds from issuance of preferences shares of the Bank

-

-

Proceeds from non-controlling shareholders investment

-

-

Repayments of debts issued 28

(164,050)

-

Cash payments for interest on bonds issued 28

(543)

(1,055)

Profit transferred to head office

-

-

Other net cash flows from financing activities 28

8,977

(438)

Net cash from/(used in) financing activities

(155,616)

(1,493)

Effect of exchange rate changes on cash and cash equivalents

-

-

Net increase/(decrease) in cash and cash equivalents

35,438

(432)

Cash and cash equivalents at the beginning of the year 16

4,352

4,784

Cash and cash equivalents at the end of the year 16

39,790

4,352

Operational cash flows from interest and dividend

24,724

24,120

Interest received 7

60,916

50,971

Interest paid 7

36,192

26,851

Dividend received

-

-

Dividend paid

-

-

The above statement of cash flow should be read in conjunction with the accompanying notes.


Notes to the Financial Statements – 31 December 2018

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1. Introduction

Bank of China Limited Hungarian Branch was was established on 28 April 2014 and registered at Court of

Registration on 7 August 2014.

Hungary and China have a long history of trade and economic cooperation although far away from each other, and

have established a profound friendship cherished by both countries. Both being emerging-market countries, China

and Hungary are complementary in many areas of economic development. Hungary, with its advantageous

geographic position in the central part of Europe is a member of the European Union, which enables it to play a more

significant role in the economic and trade development between China and Hungary, as well as China and Europe.

The prospects of cooperation between the two countries are sure to be prosperous. With full support from Bank of

China Head Office, Bank of China Limited Hungarian Branch will prudently expand its business scope in compliance

with laws and regulations, and seize opportunities in the regional market and Sino-Hungarian trade.

Bank of China Limited Hungarian Branch focuses its business on all kinds of primary banking products, including

deposit, remittance, loan and credit, trade finance, international settlement and treasury businesses.

These financial statements have been prepared in accordance with International Financial Reporting Standards

(“IFRS”) and all applicable IFRSs that have been adopted by the EU for the year ended 31 December 2018 for Bank

of China Limited Hungarian Branch.

According to Hungarian Regulation (Act C of 2000 on Accounting, paragraph 177 (55)), from 1 January 2018, Bank of

China Limited Hungarian Branch (the “Branch”, the "Bank”) prepares standalone financial statements according to

International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) as

adopted by the European Union.

The Head Office has no power to amend the financial statements after issue.

The Bank’s Hungarian name is Bank of China Limited Magyarországi Fióktelepe. The Headquarters of the Bank is

1051 Budapest, József Nádor tér 7. The Bank’s professional supervisory authority is the National Bank of Hungary,

the statutory auditor company is the Ernst & Young Kft. (1132 Budapest, Váci út 20.), the person responsible for the

audit is Gabriella Virágh (registration number: MKVK-004245)

The person responsible for preparing the financial statements is Szabolcs Pintér (registration number: 119299).

The calendar year for the Bank is: 1 January – 31. December.

The legal form of the Bank is Branch Office, registered in Hungary at the Court of Registration, while the Head

Office’s country of incorporation is China.

In Budapest, the Bank provides services to its customers at the headquarters.



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The parent company of the Bank is Bank of China Limited (the “Founder”), formerly known as Bank of China, a State

owned joint stock commercial bank, founded on 5 February 1912.

The Bank is consolidated in the Financial Statements prepared by Bank of China Head Office (China 100818, Beijing

Fuxingmen Nei Daije 1.)

Registered address and place of business

The Bank’s registered address is: József Nádor tér 7, Budapest.

Presentation currency

These financial statements are presented in Hungarian Forints (million HUF), unless otherwise stated.

2. Operating Environment of the Bank

Republic of Hungary displays certain characteristics of an emerging market. Its economy is particularly sensitive to

the changes of the economic environment. The legal, tax and regulatory frameworks continue to develop and are

subject to frequent changes and varying interpretations.

There was an economic crisis in 2008, which lead to a serious economic downfall. The Hungarian economy has

recovered and it is developing year by year. In the 3rd

quarter of 2018, the Hungarian economy grew by 4.9%

compared to the same period of previous year.

The National Bank of Hungary started many programs, which help the development of the Hungarian Bank Sector.

These programs are the Family Housing Allowance (CSOK), IRS and FX Swap tenders and the Mortgage Bond

Purchase program. The Central Bank base rate is relatively low, the average base rate was 0,9% in 2018. It

encourages the customers to finance their investments using bank loans. The rate of the FIX/Variable interest risk

loans are increasing significantly, and customers prefer loans with fixed interest rates. The retail mortgage loan

market of Hungary is flourishing.

In Hungary, the credit institutions and financial institutions are required to pay the so called “bank tax”. Under IFRS

accounting requirements the definition of bank tax does not meet the definition of income tax under IFRS and the

amount is presented as an operating expense in the income statement.



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3. Significant Accounting Policies

The significant accounting policies adopted in the preparation of these financial statements are summarized below.

Basis of Preparation

These financial statements have been prepared in accordance with the International Financial Reporting Standards

(“IFRS”) and interpretations issued by the IFRS Interpretations Committee (IFRS IC) as adopted in the European

Union (EU), under the historical cost convention, as modified by the initial recognition of financial instruments based

on fair value and financial instruments categorized at fair value through profit and loss. The financial statements

comply with IFRS as issued by the International Accounting Standards Board (IASB). The preparation of the financial

statements in conformity with IFRS legislates the use of certain critical accounting estimates and requires

management to exercise judgments in the process of applying the Bank's accounting policies. The principal

accounting policies applied in the preparation of these financial statements are set out below. These policies have

been consistently applied to all the periods presented, unless otherwise stated.

Basis of Consolidation

The Branch has no interest in other companies, therefore not obliged to prepare consolidated financial statements.

Accrual basis of accounting

Financial statements are prepared using the accrual basis of accounting, except for cash flow information. Revenue

and costs are recognized as they are earned or incurred under the accruals basis of accounting, rather than when the

cash is received or paid.

Comparative information

The Bank presents comparative information in respect of the preceding period for all amounts reporting in the current

period’s financial statements. This includes comparative information for narrative and descriptive information if it is

relevant to understanding the current period’s financial statements. Except for the first time adoption of IFRS, the

Bank generally presents 2 Statements of Financial Position, 2 Statements of Profit or Loss and Other Comprehensive

Income, 2 Cash Flow Statements and 2 Statements of Changes in Equity and related notes. Besides the above

mentioned, an opening balance sheet is required where the Bank applies a change in accounting policy

retrospectively, makes a retrospective restatement of items, or reclassifies items in its financial statements, and this

has a material effect on the information in the balance sheet at the beginning of the preceding period.

Consistency of presentation

Generally the Bank retains the presentation and classification of items in the financial statements from one period to

the next, unless:

it is apparent, following a significant change in the nature of the Bank’s operations, that another presentation

or classification provides relevant and more reliable information; or

an IFRS requires a change in presentation.



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The Bank can only change its presentation if the new presentation is an improvement on the previous presentation.

Materiality

According to the Conceptual Framework for Financial Reporting financial statements must present financial

information about the reporting entity that is useful to existing and potential users of the information. In order for

financial information to be useful, it must be relevant and it must faithfully represent what it purports to represent.

Information is relevant if it influences users’ economic decisions by helping or confirming the evaluation of events of

the past, present or future.

Materiality depends on the size or amount of an item judged in relation to its circumstances. Information is material if

omitting it or misstating it could influence decisions that users make on the basis of financial information about a

specific reporting entity, that is about the Bank. For this reason, the Bank does not define one materiality level,

generally applicable for all financial statement line items, transactions and presentation requirements, but specific

transactions' materiality will be decided on a case by case basis using management's judgement. These decisions

will be documented as separate management decisions.

The following items qualify as material, regardless of their individual size:

• Related party transactions.

• A transaction or adjustment that changes a profit to a loss, and vice versa.

• A transaction or adjustment that takes an entity from having net current assets to net current liabilities, and vice versa.

• A transaction or adjustment that masks a change in earnings or other trends.

• A transaction or adjustment that concerns a segment or other portion of the entity's business that has been identified as playing a significant role in the entity's operations or profitability.

• A transaction or adjustment that affects an entity's compliance with loan covenants or other contractual requirements.

• Changes in laws and regulations.

• Non-compliance with laws and regulations.

• Fines against the entity by professional organizations including Tax Authorities and National Bank of Hungary.

• Legal cases.

• Dependency on a particular supplier, customer or employee.

3.1 First-time adoption of IFRS

These financial statements are the Bank’s first annual financial statements that comply with IFRS. The Bank’s IFRS

transition date is 1 January 2018. Subject to certain exceptions, First time adoption of international Financial

Reporting Standards (IFRS 1) requires retrospective application of the version of IFRS valid as of 31 December 2017

in preparing the opening IFRS statement of financial position at 1 January 2018 and in subsequent periods up to the

end of the first IFRS reporting period. In preparing these financial statements, the Bank has applied the mandatory

exceptions and has elected to apply the following optional exemptions:



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• Cumulative translation differences

• Leases

• Designation of previously recognised financial instruments

• Fair value measurement of financial assets or financial liabilities at initial recognition.

Exceptions from retrospective application, which are mandatory under IFRS1 are:

• All estimates, unless the bases adopted are not compliant with IFRS

• Derecognition of financial assets and liabilities

• Classification and measurement of financial assets.

The following reconciliations provide a quantification of the effect of the transition from Hungarian Accounting

Regulations to IFRS at 1 January 2017, 31 December 2017 and for the year ended 31 December 2017:

In millions of Hungarian Forint 31 December 2017 1 January 2017

Equity under HAR 30,876 14,831

Effects of changes in accounting policies:

(i) Loans and advances to customers: loan origination fees - -

(ii) Loans and advances to customers: impairment losses - -

(iii) Premises and equipment: restatement for hyperinflation - -

(iv) Trading securities: valuation at quoted bid prices - -

(v) Loans and advances to customers: gains/losses on initial recognition - -

(vi) Other securities at fair value through profit and loss - -

(vii) Due from other banks - -

(viii) Investment securities available for sale - -

(ix) Repurchase receivables - -

(x) Investment securities held to maturity - -

(xi) Investment in associates - -

(xii) Intangible assets - -

(xiii) Deferred tax: recognition under the balance sheet liability method - -

(xiv) Other: Fixed assets component accounting impact - -

(xv) Correction of - -

IFRS Equity 30,876 14,831



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In millions of Hungarian Forint 2017

Profit (loss) under HAR 16,045

Effects of changes in accounting policies:

(i) Interest income, loan origination fees -

(ii) Impairment loss on loans and advances -

(iii) Depreciation: restatement of premises and equipment for hyperinflation

-

(iv) Gains less losses from trading securities: valuation at quoted bid prices

-

(v) Interest income: gains/(losses) on initial recognition -

(vi) Gains less losses from other securities at fair value through profit and loss

-

(vii) Due from other banks -

(viii) Investment securities available for sale -

(ix) Repurchase receivables -

(x) Investment securities held to maturity -

(xi) Investment in associates -

(xii) Intangible assets -

(xiii) Deferred tax: recognition under the balance sheet liability method -

(xiv) Other: Fixed assets component accounting impact -

(xv) Correction of errors -

IFRS Total comprehensive income 16,045

The key adjustments for the differences between HAR and IFRS were attributable to the following:

Loan origination fees

Loan origination fees are deferred as part of interest income under the effective interest method as opposed to the

HAR cash basis of accounting.

Impairment loss on loans and advances

Provisions for loan impairment under HAR is calculated using a formalized procedure. The provision represents a

prescribed percentage of the gross loan amount and depends on credit history, the financial performance of the

borrower and certain other relevant factors. Under IFRS, the impairment provision is calculated as the difference

between the carrying amount and the estimated recoverable amount of the loans, calculated at the present value of

expected cash flows, including amount recoverable from guarantees and collateral, discounted at the instrument’s

effective interest rate.

Differences from the current recognition practices of the Bank

Under HAR, the Bank has elected to use fair value as the method of recognition of derivative contracts in accordance

with the Hungarian accounting regulations (in accordance with Sections 59/A-F of Act C of 2000 on Accounting, and

Sections 9/A-F of Government Decree No. 250/2000 on the Special Annual Reporting and Bookkeeping Obligations

of Credit Institutions and Financial Enterprises).



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For Bank of China Group reporting purposes, the Bank has classified financial instruments under IAS 39 as financial

assets available for sale, financial assets held to maturity, receivables from loans and other receivables originated by

an entity and other liabilities. The categories of financial assets held for trading and financial liabilities held for trading

were not used in the IFRS Group reporting package other than for derivatives.

Bank of China applied fair value primarily to available for sale securities, derivative financial instruments, acquired

receivables, and liabilities from securities borrowing transactions. Fair value is not applied to financial assets held to

maturity, receivables from loans and other receivables originated by an entity; equity investments, other financial

liabilities, and financial instruments whose fair value cannot be reliably measured.

From 1 January 2018 Bank of China consistently applies the accounting requirements of IFRS 9, the new financial

instruments standard (endorsed in the EU on 22 November 2016) which contains significant differences from the

requirements of IAS 39 for the classification of financial instruments.

Financial assets - Classification

Classification of financial instruments under the Hungarian Accounting Rules (HAR) is less complex than under IFRS.

Under HAR, most financial instruments are usually classified into two categories (fair valuation or at cost), however,

under IFRS there are more complex choices for initial classification which have implications on either profit or loss or

other comprehensive income.

IFRS 9 requires financial assets to be classified into two measurement categories: those measured at amortised cost

and those measured at fair value. Changes in fair value must be recognised either in profit or loss or in other

comprehensive income according to specific criteria.

To determine which category a financial asset must be classified into, management must examine whether a financial

asset qualifies as an equity instrument or a debt instrument. If the asset is a debt instrument, management must

examine its business model for handling the Bank’s financial assets, and the features of cash flows from financial

assets.

Financial instruments – initial and subsequent measurement

The measurement of fair value is different between IFRS and HAR and therefore a difference may arise on transition

to IFRS. Under IFRS, securities must be measured at fair value based on information as at the balance sheet date,

whereas, under HAR, fair value is based on information as at the balance sheet preparation date.

In addition, transaction costs directly related to the issue or acquisition of the financial instrument are required to be

recognised as part of the initial value of the financial instrument under IFRS, rather than directly recognised in profit

or loss, as required by the Hungarian accounting regulations. Then, throughout the life of the financial instrument,

these costs are amortised to profit or loss using the effective interest method. While we understand there are no

significant impacts of transaction costs anticipated at present, these need to be tracked and monitored in the future

under IFRS.

Based on the previous practice of the Bank of recognising interest under HAR, interest on loans is debited to the

client’s payment account and credited to the revenue account on the contractual due date and recognised as interest

received and similar income. Vested interest not yet due is accrued as part of the daily closing. Recognition of



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prepayments, transfers of items to the suspense account, recognition of unpaid interest as receivables and revenue

is in line with Section 17 of Government Decree 250/2000. Amounts are collected in sequence as stipulated by the

Civil Code and Section 10 (4) and (5) of Government Decree 250/2000.

Expenses and revenues from banking fees were recognised in the income statement when incurred, however, certain

expense items (e.g. on bonds issued) were accrued and released on a time-proportionate basis, using the straight

line method, over the term.

Under HAR, interest is recognised based on current interest rate of the loans, which may differ from market interest

rates. Under IFRS, the effective interest rate must reflect the market interest rate in all cases, which may result in a

difference when calculating amortised cost. This originates from the concept that the present value of future cash

flows is always calculated using market interest rates. If the current interest rate is lower than the market interest rate,

the amortised cost will be lower than the balance calculated in accordance with the Hungarian accounting

regulations, and interest income will be realised based on market interest rates.

Financial instruments – Impairment

Under HAR the Bank calculated impairment according to the Hungarian accounting regulations (in compliance with

Government Decree No. 250/2000 on the Special Annual Reporting and Bookkeeping Obligations of Credit

Institutions and Financial Enterprises).

Impairment was recognised for individual amounts above a materiality level of USD 200,000. For loan assets below

this limit, collective impairment was assessed and recognised at impairment rates corresponding to the relevant

classification categories (in compliance with Government Decree No. 250/2000).

Under IFRS 9, an entity will need to measure the loss allowance for a financial instrument at an amount equal to the

lifetime expected credit losses if the credit risk on that financial instrument has increased significantly since initial

recognition. The objective of the impairment requirements under IFRS 9 is to recognise lifetime expected credit

losses for all financial instruments for which there have been significant increases in credit risk since initial recognition

— whether assessed on an individual or collective basis — considering all reasonable and supportable information,

including that which is forward looking.

Current taxes

Under HAR, taxes are mainly classified based on their legal form and taxes to be recorded as income taxes are

explicitly listed in the Act on Accounting. As a result under HAR the following taxes are recognized as income tax:

Corporate income tax

Banking tax (“hitelintézeti különadó”)

Under IFRS, the substance of each tax shall be examined to determine whether it qualifies as income tax or not as

per IAS 12.5. Income taxes shall be recognized based on the rules set out in IAS 12. Other taxes based on their

substance may need to be classified as (other) operating expense or revenue decreasing item (so called sales tax).



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Deferred taxes

Under IFRS, in the case of income taxes, deferred taxes shall be recognized for temporary differences that arise as a

result of differences between the IFRS carrying value of an asset/liability and its tax base and for tax losses carried

forward. As under local GAAP, the concept of deferred taxes does not exist, this can cause significant differences

both in the balance sheet and income statement of the Bank.

Fixed assets and intangibles

Under HAR the fixed assets and intangibles were usually depreciated using the rates determined in the Act LXXXI of

1996 on Incomes taxes.

As a first-time adopter of IFRS, Bank of China may elect to measure an item of property, plant and equipment at the

date of transition to IFRS at its fair value and use that fair value as its deemed cost at that date under IFRS 1.

According to IAS 16, if the Company chooses the cost model, after recognition as an asset, an item of property, plant

and equipment shall be carried at its cost less any accumulated depreciation and any accumulated impairment

losses.

Residual value is (based on IAS 16.6) the estimated amount that an entity would currently obtain from disposal of the

asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition

expected at the end of its useful life. This is not materially different than the concept of residual value used under

HAR.

Under HAR it is generally accepted practice that companies depreciate low value assets in one amount. A numeric

threshold for capitalisation does not exist under IFRS (as opposed to HAR).

Transition of the Cash flow statements

IAS 7 contains the requirements related to the preparation and presentation of cash-flow statements under IFRS. As

the cash flow statement reflects movements in cash and cash equivalents, the definition of these is central to its

proper preparation. The definitions of cash and cash equivalents include any such items that are denominated in

foreign currencies. Cash is defined as “cash on hand and demand deposits”. Cash equivalents are defined as “short-

term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an

insignificant risk of changes in value”. As HAR lists the items to be classified as cash and does not include the

concept of cash equivalent, there may be a difference compared to IFRS. This might cause a significant difference in

the presentation of the statement of cash flows.

For the purpose of the Statement of Cash Flows, cash and cash equivalents consist of cash in hand, cheques and

nostro account balances including mandatory reserve deposits with Central Bank as defined above, net of

outstanding bank overdrafts (if any). The Bank may report cash flows from operating activities using either the direct

or indirect method. The Bank elects to prepare the Statement of Cash Flows using the indirect method for operating

activities.

The payments or receipts presented in the statement of cash flows represent transfers of cash and cash equivalents

by the Bank, including amounts charged or credited to current accounts of the Group’s counterparties held with the

Bank, such as loan interest income or principal collected by charging the customer’s current account or interest



20

payments or disbursement of loans credited to the customer’s current account, which represents cash or cash

equivalent from the customer’s perspective.

3.2 Changes in Accounting policies

The Bank has adopted IFRS 9 as issued by the IASB in July 2014 with a date of transition of 1 January 2018.

As permitted by the transitional provisions of IFRS 9, the Bank has elected not to restate comparative figures. Any

adjustments to the carrying amounts of financial assets and liabilities at the date of transition were recognized in

opening retained earnings and other reserves at the transition date. The Bank does not apply hedge accounting.

Depending on their initial classification, financial assets and financial liabilities are carried at fair value or amortised

cost as described below.

Financial instruments – Key measurement terms

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction

between market participants at the measurement date. The best evidence of fair value is price in an active market. An

active market is one in which transactions for the asset or liability take place with sufficient frequency and volume to

provide pricing information on an ongoing basis. The Bank considers a market for a particular financial instrument as

active if trades in the instrument occur on more than 90% of the trading days.

The fair value of a financial instrument traded in an active market is measured as the product of the quoted price for

the individual asset or liability and the quantity held by the entity. This is the case even if a market’s normal daily

trading volume is not sufficient to absorb the quantity held and placing orders to sell the position in a single

transaction might affect the quoted price.

The quoted market price used to value financial assets is the current bid price; the quoted market price for financial

liabilities is the current asking price.

A portfolio of financial derivatives or other financial assets and liabilities that are not traded in an active market is

measured at the fair value of a group of financial assets and financial liabilities on the basis of the price that would be

received to sell a net long position (i.e. an asset) for a particular risk exposure or paid to transfer a net short position

(i.e. a liability) for a particular exposure in an orderly transaction between market participants at the measurement

date. This is applicable for assets carried at fair value on a recurring basis if the Bank (a) manages the group of

financial assets and financial liabilities on the basis of the entity’s net exposure to a particular market risk (or risks), or

to the credit risk of a particular counterparty in accordance with the entity’s documented risk management or

investment strategy; (b) it provides information on that basis about the group of assets and liabilit ies to the entity’s

key management personnel; and (c) the market risks, including duration of the entity’s exposure to a particular market

risk, or risks arising from the financial assets and financial liabilities is substantially the same.

Valuation techniques such as discounted cash flow models or models based on recent arm’s length transactions or

consideration of financial data of the investees are used to measure fair value of certain financial instruments for

which external market pricing information is not available. Fair value measurements are analysed by level in the fair

value hierarchy as follows:



21

(i) level one (Level 1) are measurements at quoted prices (unadjusted) in active markets for identical assets or

liabilities,

(ii) level two (Level 2) measurements are valuations techniques with all material inputs observable for the asset or

liability, either directly (that is, as prices) or indirectly (that is, derived from prices), and

(iii) level three (Level 3) measurements are valuations not based on solely observable market data (that is, the

measurement requires significant unobservable inputs).

The Bank uses the valuation techniques commonly used by market participants to price financial instruments and

techniques which have been demonstrated to provide reliable estimates of prices obtained in actual market

transactions. The Bank makes use of all factors that market participants would consider in setting a price, and

incorporates these into its chosen valuation techniques and tests for validity using prices from any observable current

market transactions in the same instruments.

Whenever possible these models use observable market inputs and data including, for example, interest rate yield

curves, foreign currency rates and option volatilities. The results of using valuation techniques are calibrated against

industry practice and observable current market transactions in the same or similar instruments.

The Bank assesses assumptions and estimates used in valuation techniques including review of valuation model

assumptions and characteristics, changes to model assumptions, the quality of market data, whether markets are

active or inactive, other fair value adjustments not specifically captured by models and consistency of application of

techniques between reporting periods as part of its normal review and approval processes.

Valuation techniques are validated and periodically reviewed.

Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an

asset at the time of its acquisition and includes transaction costs.

Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a

financial instrument. An incremental cost is one that would not have been incurred if the transaction had not taken

place. Transaction costs include fees and commissions paid to agents (including employees acting as selling agents),

advisors, brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes and duties.

Transaction costs do not include debt premiums or discounts, financing costs or internal administrative or holding

costs.

Amortised cost is the amount at which the financial asset or financial liability is measured at initial recognition minus

the principal repayments, plus or minus the cumulative amortisation using the effective interest method of any

difference between that initial amount and the maturity amount and, for financial assets, adjusted for any loss

allowance. Accrued interest includes amortisation of transaction costs deferred at initial recognition and of any

premium or discount to maturity amount using the effective interest method. Accrued interest income and accrued

interest expense, including both accrued coupon and amortised discount or premium (including fees deferred at

origination, if any), are not presented separately and are included in the carrying values of related items in the

statement of financial position.



22

The effective interest method is a method of allocating interest income or interest expense over the relevant period,

so as to achieve a constant periodic rate of interest (effective interest rate) on the carrying amount.

The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts (excluding

future credit losses) through the expected life of the financial instrument or a shorter period, if appropriate, to the

gross carrying amount of a financial asset (i.e. its amortised cost before any impairment allowance) or to the

amortised cost of a financial liability. The calculation does not consider expected credit losses and includes

transaction costs, premiums or discounts and fees and points paid or received that are integral to the effective

interest rate, such as origination fees.

For purchased or originated credit-impaired (POCI) financial assets, assets that are credit-impaired at initial

recognition, the Bank calculates the credit-adjusted effective interest rate, which is calculated based on the amortised

cost of the financial asset instead of its gross carrying amount and incorporates the impact of expected credit losses

in estimated future cash flows.

The effective interest rate discounts cash flows of variable interest instruments to the next interest repricing date,

except for the premium or discount which reflects the credit spread over the floating rate specified in the instrument,

or other variables that are not reset to market rates. Such premiums or discounts are amortised over the whole

expected life of the instrument. The present value calculation includes all fees paid or received between parties to the

contract that are an integral part of the effective interest rate.

When the Bank revises the estimates of future cash flows, the carrying amount of the respective financial assets or

financial liability is adjusted to reflect the new estimate discounted using the original effective interest rate. Any

changes are recognised in profit or loss.

It is impracticable for the Bank to apply retrospectively the effective interest method in IFRS 9, as the retrospective

calculation of EIR is not supported by the system, and only the HAR figures are available as at the transition date,

therefore the fair value of the financial asset or the financial liability at the date of transition to IFRSs shall be the new

gross carrying amount of that financial asset or the new amortised cost of that financial liability at the date of

transition to IFRSs. According to the estimations of the Bank, based on the repricing of the floating rate loan portfolio,

the fair value of the loans doesn’t differ significantly from the book value, therefore the book value of the loans can be

considered as the fair value as at transition date.

Initial recognition of financial instruments

Trading securities, derivatives and other financial instruments at fair value through profit or loss are initially recorded

at fair value and transaction costs are expensed in the income statement. For all financial assets and financial

liabilities not carried at fair value through profit or loss, financial assets are initially recognised at fair value together

with transaction costs and financial liabilities are initially recognised at fair value net of transaction costs. Transaction

costs are those costs which are incremental and directly attributable to the acquisition or issue of the financial asset

or financial liability, such as fees and commissions.

Fair value at initial recognition is best evidenced by the transaction price. A gain or loss on initial recognition (Day 1

gain or loss) is only recorded if there is a difference between fair value and transaction price which can be evidenced



23

by other observable current market transactions in the same instrument or by a valuation technique whose inputs

include only data from observable markets.

When the fair value of financial assets and liabilities differs from the transaction price on initial recognition, the entity

recognises the difference as follows:

(a) When the fair value is evidenced by a quoted price in an active market for an identical asset or liability (i.e. a Level

1 input) or based on a valuation technique that uses only data from observable markets, the difference is recognised

as a gain or loss.

(b) In all other cases, the difference is deferred and the timing of recognition of deferred day one profit or loss is

determined individually. It is either amortised over the life of the instrument, deferred until the instrument’s fair value

can be determined using market observable inputs, or realised through settlement.

Financial assets and financial liabilities are recognised when the entity becomes a party to the contractual provisions

of the instrument. Regular way purchases and sales of financial assets are recognised on trade-date, the date on

which the Bank commits to purchase or sell the asset.

Classification and subsequent measurement of financial assets

From 1 January 2018, the Bank applies IFRS 9 and classifies its financial assets in the following measurement

categories:

• Fair value through profit or loss (FVPL);

• Fair value through other comprehensive income (FVOCI); or

• Amortised cost.

The classification requirements for debt and equity instruments are described below:

Debt instruments are those instruments that meet the definition of a financial liability from the issuer’s perspective,

such as loans, government and corporate bonds and trade receivables purchased from clients in factoring

arrangements without recourse.

Classification and subsequent measurement of debt instruments depend on:

(i) the Bank’s business model for managing the asset (“Business model assessment”); and

(ii) the cash flow characteristics of the asset (“SPPI test” – solely payment of principal and interest).

Based on these factors, the Bank classifies its debt instruments into one of the following three measurement

categories:

Amortised cost: Assets that are held for collection of contractual cash flows where those cash flows represent solely

payments of principal and interest, and that are not designated at FVPL, are measured at amortised cost. The

carrying amount of these assets is adjusted by any expected credit loss allowance recognised and measured.

Interest income from these financial assets is included in ‘Interest and similar income’ using the effective interest rate

method.



24

Fair value through other comprehensive income (FVOCI): Financial assets that are held for collection of

contractual cash flows and for selling the assets, where the assets’ cash flows represent solely payments of principal

and interest, and that are not designated at FVPL, are measured at fair value through other comprehensive income

(FVOCI). Movements in the carrying amount are taken through OCI, except for the recognition of impairment gains or

losses, interest revenue and foreign exchange gains and losses on the instrument’s amortised cost which are

recognised in profit or loss. When the financial asset is derecognised, the cumulative gain or loss previously

recognised in OCI is reclassified from equity to profit or loss and recognised in ‘Net Investment income’. Interest

income from these financial assets is included in ‘Interest income’ using the effective interest rate method.

Fair value through profit or loss: Assets that do not meet the criteria for amortised cost or FVOCI are measured at

fair value through profit or loss. Beside these assets, all the financial assets which are held for trading and financial

assets designated at fair value through profit and loss on initial recognition are measured at fair value through profit

or loss. Financial assets are classified as held for trading if they are acquired for the purpose of selling or

repurchasing in the near term through trading activities or form part of a portfolio of financial instruments that are

managed together for which there is evidence of a recent pattern of short term profit taking. A gain or loss on a debt

investment that is subsequently measured at fair value through profit or loss and is not part of a hedging relationship

is recognised in profit or loss and presented in the profit or loss statement within ‘Net trading income’ in the period in

which it arises, unless it arises from debt instruments that were designated at fair value or which are not held for

trading, in which case they are presented separately in ‘Net investment income’. Interest income from these financial

assets is included in ‘Interest income’ using the effective interest rate method.

Business model: the business model reflects how the Bank manages its assets in order to generate cash flows. That

is, whether the Bank’s objective is to hold the financial assets solely to collect the contractual cash flows from the

assets or is to collect the contractual cash flows and sell those financial assets. If a financial asset or group of

financial assets is not held within the ‘hold to collect’ or the ‘hold to collect and sell’ business model, it should be

measured at fair value through profit or loss. Factors considered by the Bank in determining the business model for a

group of assets include past experience on how the cash flows for these assets were collected, how the asset’s

performance is evaluated and reported to key management personnel, how risks are assessed and managed and

how managers are compensated.

The Bank annually reviews its business model assessment.

SPPI: Where the business model is to hold assets to collect contractual cash flows or to collect contractual cash flows

and sell, the Bank assesses whether the financial instruments’ cash flows represent solely payments of principal and

interest on the principal outstanding. In making this assessment, the Bank considers whether the contractual cash

flows are consistent with a basic lending arrangement i.e. interest includes only consideration for the time value of

money, credit risk, other basic lending risks and a profit margin that is consistent with a basic lending arrangement.

Where the contractual terms introduce exposure to risk or volatility that are inconsistent with a basic lending

arrangement, the related financial asset is classified and measured at fair value through profit or loss.

The Bank reclassifies debt investments when and only when its business model for managing those assets changes.

The reclassification takes place from the start of the first reporting period following the change. Such changes are

expected to be very infrequent.



25

The Bank may also irrevocably designate financial assets at fair value through profit or loss if doing so significantly

reduces or eliminates a mismatch created by assets and liabilities being measured on different bases. The Bank

currently does not apply the fair value option for financial assets.

Equity instruments are instruments that meet the definition of equity from the issuer’s perspective; that is,

instruments that do not contain a contractual obligation to pay and that evidence a residual interest in the issuer’s net

assets. Examples of equity instruments include basic ordinary shares.

The Bank subsequently measures all equity investments at fair value through profit or loss, except where the Bank’s

management has elected, at initial recognition, to irrevocably designate an equity investment at fair value through

other comprehensive income. The Bank’s policy is to designate equity investments as FVOCI when those

investments are held for purposes other than to generate investment returns. When this election is used, fair value

gains and losses are recognised in OCI and are not subsequently reclassified to profit or loss, including on disposal.

Impairment losses (and reversal of impairment losses) are not reported separately from other changes in fair value.

Dividends, when representing a return on such investments, continue to be recognised in profit or loss as other

income when the Bank’s right to receive payments is established.

Gains and losses on equity investments at FVPL are included in the ‘Net trading income’ line in the statement of profit

or loss.

Modification of loans: in case the Bank renegotiates or otherwise modifies the contractual cash flows of loans to

customers, the Bank assesses whether or not the new terms are substantially different to the original terms. The bank

does this by considering, among others, the following factors:

If the borrower is in financial difficulty, whether the modification merely reduces the contractual cash flows to

amounts the borrower is expected to be able to pay.

Whether any substantial new terms are introduced, such as a profit share/equity-based return that

substantially affects the risk profile of the loan.

Significant extension of the loan term when the borrower is not in financial difficulty.

Significant change in the interest rate.

Change in the currency the loan is denominated in.

Insertion of collateral, other security or credit enhancements that significantly affect the credit risk associated

with the loan.

If the terms are substantially different, the Bank derecognises the original financial asset and recognises a ‘new’

asset at fair value and recalculates a new effective interest rate for the asset. The date of renegotiation is

consequently considered to be the date of initial recognition for impairment calculation purposes, including for the

purpose of determining whether a significant increase in credit risk has occurred. However, the Bank also assesses

whether the new financial asset recognised is deemed to be credit-impaired at initial recognition, especially in

circumstances where the renegotiation was driven by the debtor being unable to make the originally agreed

payments. Differences in the carrying amount are also recognised in profit or loss as a gain or loss on derecognition.



26

If the terms are not substantially different, the renegotiation or modification does not result in derecognition, and the

Bank recalculates the gross carrying amount based on the revised cash flows of the financial asset and recognises a

modification gain or loss in profit or loss. The new gross carrying amount is recalculated by discounting the modified

cash flows at the original effective interest rate (or credit-adjusted effective interest rate for purchased or originated

credit-impaired financial assets).

Derecognition other than on a modification: financial assets or a portion thereof, are derecognised when the

contractual rights to receive the cash flows from the assets have expired, or when they have been transferred and

either:

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

the Bank neither transfers nor retains substantially all the risks and rewards of ownership, but the Bank has

not retained control.

Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated

third party without needing to impose restrictions on the sale.

The Bank enters into transactions where it retains the contractual rights to receive cash flows from assets but

assumes a contractual obligation to pay those cash flows to other entities and transfers substantially all of the risks

and rewards. These transactions are accounted for as ‘pass through’ transfers that result in derecognition if the Bank:

Has no obligation to make payments unless it collects equivalent amounts from the assets;

Is prohibited from selling or pledging the assets; and

Has an obligation to remit any cash it collects from the assets without material delay.

Collateral (shares and bonds) furnished by the Bank and under standard repurchase agreements and securities

lending and borrowing transactions are not derecognised because the Bank retains substantially all the risks and

rewards on the basis of the predetermined repurchase price, and the criteria for derecognition are therefore not met.

This also applies to certain securitisation transactions in which the Bank retains a subordinated residual interest.

Classification and subsequent measurement of financial liabilities

From 1 January 2018, the Bank applies IFRS 9 and classifies its financial liabilities in the following measurement

categories:

Amortised cost or

Fair value through profit or loss (FVPL).

In most cases the Bank classifies its financial liabilities as subsequently measured at amortised cost, except for:



27

Financial liabilities at fair value through profit or loss: this classification is applied to derivatives and financial liabilities

held for trading (e.g. short positions in the trading booking, if any).

The Bank does not designate other financial liabilities at fair value through profit or loss due to accounting mismatch

at initial recognition.

Gains or losses on financial liabilities designated at fair value through profit or loss are presented partially in other

comprehensive income (the amount of change in the fair value of the financial liability that is attributable to changes

in the credit risk of that liability, which is determined as the amount that is not attributable to changes in market

conditions that give rise to market risk) and partially profit or loss (the remaining amount of change in the fair value of

the liability). This is unless such a presentation would create, or enlarge, an accounting mismatch, in which case the

gains and losses attributable to changes in the credit risk of the liability are also presented in profit or loss;

Financial liabilities arising from the transfer of financial assets which did not qualify for derecognition,

whereby a financial liability is recognised for the consideration received for the transfer. In subsequent

periods, the Bank recognises any expense incurred on the financial liability; and

• Financial guarantee contracts and loan commitments.

Derecognition. Financial liabilities are derecognised when they are extinguished (i.e. when the obligation specified in

the contract is discharged, cancelled or expires).

The exchange between the Bank and its original lenders of debt instruments with substantially different terms, as well

as substantial modifications of the terms of existing financial liabilities, are accounted for as an extinguishment of the

original financial liability and the recognition of a new financial liability. The terms are substantially different if the

discounted present value of the cash flows under the new terms, including any fees paid net of any fees received and

discounted using the original effective interest rate, is at least 10% different from the discounted present value of the

remaining cash flows of the original financial liability. In addition, other qualitative factors, such as the currency that

the instrument is denominated in, changes in the type of interest rate, new conversion features attached to the

instrument and change in covenants are also taken into consideration. If an exchange of debt instruments or

modification of terms is accounted for as an extinguishment, any costs or fees incurred are recognised as part of the

gain or loss on the extinguishment. If the exchange or modification is not accounted for as an extinguishment, any

costs or fees incurred adjust the carrying amount of the liability and are amortised over the remaining term of the

modified liability

Impairment of financial assets (from 1 January 2018)

The Bank assesses on a forward-looking basis the expected credit losses (‘ECL’) associated with its debt instrument

assets carried at amortised cost and FVOCI and with the exposure arising from loan commitments and financial

guarantee contracts. The Bank recognises a loss allowance for such losses on a daily basis. The measurement of

ECL reflects:

An unbiased and probability-weighted amount that is determined by evaluating a range of possible

outcomes;



28

The time value of money; and

Reasonable and supportable information that is available without undue cost or effort at the reporting date

about past events, current conditions and forecasts of future economic conditions.

The measurement of the expected credit loss allowance for financial assets measured at amortised cost and FVOCI

is an area that requires the use of complex models and significant assumptions about future economic conditions and

credit behaviour (e.g. the likelihood of customers defaulting and the resulting losses).

A number of significant judgements are also required in applying the accounting requirements for measuring ECL,

such as:

Determining criteria for significant increase in credit risk;

Choosing appropriate models and assumptions for the measurement of ECL;

Establishing the number and relative weightings of forward-looking scenarios for each type of

product/market and the associated ECL; and

Establishing groups of similar financial assets for the purposes of measuring ECL.

Forward-looking adjustments

In accordance with the requirements of IFRS9, ECL calculation should be processed by forward-looking adjustments,

which takes into account the impact of future macroeconomic changes on expected credit losses.

Based on the credit risk characteristics of corporate loan, we choose the Merton model to complete the forward-

looking adjustments of PD. The formula for the Merton model is as follows:

𝑃𝐷𝑓𝑜𝑟𝑤𝑎𝑟𝑑 = 𝑁(𝑁−1(𝑃𝐷) − 𝑍𝑓𝑜𝑟𝑤𝑎𝑟𝑑√𝑅

√1 − 𝑅)

The definition of each factor is as follows:

𝑁 is the normal distribution function, 𝑁−1 is the inverse function of normal distribution

𝑃𝐷: annual marginal PD before adjustment

𝑃𝐷𝑓𝑜𝑟𝑤𝑎𝑟𝑑:adjusted annual marginal PD ( i.e. PiT-PD)

𝑍𝑓𝑜𝑟𝑤𝑎𝑟𝑑:forward-looking Z factor based on future macroeconomic forecasts

𝑅:the systemic risk factor for the value of a single debtor asset, here we use the regulatory correlation R representing

the systemic risk factor, which is applicable for calculating the credit risk exposure.

Corporate debtors:

50

)50(

50

)50(

11

11

124.01

1

11

12.0

e

e

e

eRPDPD



29

Financial debtors:

50

)50(

50

50

FI 11

11

124.01

1

11

12.025.1

e

e

e

eRPDPD

Since forward-looking Z factor is calculated in quarter, the annual marginal PD will be converted to adjusted 4

quarterly marginal PD using Z factor, then converted to PD table with different repayment frequency.

According to IFRS 9 the Bank uses a three-stage model for impairment based on changes in credit quality since initial

recognition.

A financial instrument that is not credit-impaired on initial recognition is classified as Stage 1 and has its

credit risk continuously monitored by the Bank.

If a significant increase in credit risk since initial recognition is identified, the financial instrument is moved to

Stage 2, but is not yet deemed to be credit-impaired.

If the financial instrument is credit-impaired, the financial instrument is then moved to Stage 3.

Financial instruments in Stage 1 have their ECL measured at an amount equal to the portion of lifetime

expected credit losses that result from default events possible within the next 12 months.

Instruments in Stages 2 or 3 have their ECL measured based on expected credit losses on a lifetime bases.

Purchased or originated credit-impaired financial assets are those financial assets that are credit-impaired

on initial recognition. Their ECL is always measured on a lifetime basis (Stage 3).

Based on the formula derivation results for ECL models, the formula for calculating the expected credit loss (ECL) for

the Bank:

ECL = ∑ ECL(t)t = ∑ EXP(t) ∙ DF(t) ∙ PD(t) ∙ LGD(t)t

Factors in the above formula are defined below:

t: time point of repayment during the lifetime.

EXP(t): the monetary value of overdue cash flows (principal + interest) as at time point t discounted to time

point t, i.e. residual outstanding principal at time point t. In the case of off-balance-sheet business, multiply

EXP(t) by the utilization ratio.

DF(t): The discount factor used to discount EXP(t) to the reporting date (the time point when t=0).

PD(t): Marginal probability of default between time point t-1 and time point t.

LGD(t): Loss given default at time t.

ECL(t): Expected credit loss at each time point of repayment during the lifetime.

The above described methodology relates to loan portfolios. For securities classified as FVOCI the Bank determines

the impairment when there has been a significant or prolonged decline in the fair value below its cost. This



30

determination of what is significant or prolonged requires judgement. In making this judgement, the Bank evaluates,

among other factors, the duration and extent to which the fair value of an investment is less than its cost, the extent to

which changes in fair value relate to credit events, and the financial health of and near-term business outlook for the

investee/underlying portfolio, including factors such as industry and sector performance, technological innovations,

credit ratings, delinquency rates, loss coverage ratios and counterparty risk.

For trade receivables the Bank shall measure the loss allowance at an amount equal to lifetime expected credit loss

for all trade receivables without a significant financing component and Bank may make an accounting policy choice

for receivables with a significant financing component. For lease receivables, an accounting policy choice to use the

expected lifetime loss approach can be made.

If the terms of an impaired financial asset held at amortised cost are renegotiated or otherwise modified because of

financial difficulties of the borrower or issuer, impairment is measured using the original effective interest rate before

the modification of terms. The renegotiated asset is then derecognized and a new asset is recognized at its fair value

only if the risks and rewards of the asset substantially changed. This is normally evidenced by a substantial difference

between the present values of the original cash flows and the new expected cash flows.

Impairment losses are always recognised through an allowance account to write down the asset’s carrying amount to

the present value of expected cash flows discounted at the original effective interest rate of the asset. For financial

assets with variable interest rate, the discount rate for measuring any impairment loss is the current effective interest

rate determined under the contract. The calculation of the present value of the estimated future cash flows of a

collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and

selling the collateral, whether or not foreclosure is probable. As a practical expedient, the Bank may measure

impairment on the basis of an instrument’s fair value using an observable market price.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively

to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the

previously recognised impairment loss is reversed by adjusting the allowance account through profit or loss for the

year. The reversal shall not result in a carrying amount of the financial asset that exceeds what the amortised cost

would have been had the impairment not been recognised at the date the impairment is reversed.

The Bank writes off financial assets, in whole or in part, when it has exhausted all practical recovery efforts and has

concluded there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of

recovery include:

ceasing enforcement activity and

where the recovery method is foreclosing on collateral and the value of the collateral is such that

there is no reasonable expectation of recovering in full.

Uncollectible assets are written off against the related impairment loss provision after all the necessary procedures to

recover the asset have been completed and the amount of the loss has been determined. Subsequent recoveries of

amounts previously written off are credited to impairment loss account in profit or loss for the year.



31

Reconciliation of statement of financial position balances from HAR to IFRS 9

The Bank performed a detailed analysis of its business models for managing financial asset and analysis of their

cash flow characteristics.

The following table reconciles the carrying amounts of financial assets, from their previous measurement category in

accordance with HAR to their new measurement categories upon transition to IFRS 9 on 1 January 2018:



32

Measurement category HAR carrying amount 31 December 2017 Reclassification Remeasurements

IFRS 9 carrying amount 1 January 2018 In millions of Hungarian Forint

Amortised cost

Cash and balances with central banks

Opening balance under HAR and closing balance under IFRS 9 4,352 4,352

Loans and advances to banks

Opening balance under HAR (including accruals) 310,405

Reclassification

Remeasurements

(2)

Closing balance under IFRS 9

310,403

Loans and advances to customers

Opening balance under HAR (including accruals) 1,719,650

Reclassification

Remeasurements: ECL allowance

(19,256)

Remeasurements: Deferred transaction costs

(4,886)


1,695,508

Investment securities – amortised cost

Opening balance under HAR (including accruals) -

Reclassification

Remeasurements


-

Investment securities – held to maturity


Reclassification


(1)


4,997

Total Financial assets measured at amortised cost 2,039,405 - (24,145) 2,015,260



33

Measurement category HAR carrying amount 31 December 2017 Reclassification Remeasurements

IFRS 9 carrying amount 1 January 2018 In millions of Hungarian Forint

Fair value through profit or loss (FVTPL)

Trading assets

Opening balance under HAR and closing balance under IFRS 9 -

-

Derivative financial assets

Opening balance under HAR and closing balance under IFRS 9 2 - - 2

Total Financial assets measured at FVTPL 2 - - 2

Fair value through other comprehensive income (FVOCI)

Investment securities – FVOCI (debt instruments)


Reclassification from available for sale debt instruments

8,047


(1)

Remeasurements: debt instruments measured at FVOCI

180


8,226

Financial assets measured at fair value through OCI (equity instruments)


Reclassification

Remeasurements


-

Investment securities - Available for sale financial assets


Reclassification

(8,047)

Remeasurements


-

Total Financial assets measured at FVOCI 8,047 - 179 8,226



34

As a result of the remeasurement, HUF 24 145 million remeasurement loss was recognized in opening reserves,

while HUF 179 million remeasurement gain was recognized in OCI at 1 January 2018.

The following explains how applying the new classification requirements of IFRS 9 led to changes in classification of

certain financial assets held by the Bank as shown in the table above:

Reconciliation of impairment allowance balances from HAR to IFRS 9

The following table reconciles the prior period’s closing impairment allowance measured in accordance with the

Hungarian regulations to the new impairment allowance measured in accordance with the IFRS 9 expected loss

model at 1 January 2018:

Measurement category Loan loss allowance and provision under

HAR Reclassification Remeasurements

Loan loss allowance under IFRS 9 In millions of Hungarian

Forint

Loans and receivables/Financial assets at amortised cost (IFRS 9)

Cash and balances with central banks

-

-

-

-

Loans and advances to banks

-

-

2

2 Loans and advances to customers

815

-

19,256

20,071

Investment securities

-

-

-

-

Held to maturity/Financial assets at amortised cost (IFRS 9)


-

-

1

1 Available for sale (IAS 39)/Investment securities FVOCI - debt instruments (IFRS)


-

-

1

1 Loan commitments and financial guarantees

Loans and advances to customers (loan commitments)

-

-

-

-

Provisions (loan commitments)

-

-

436

436 Provisions (financial guarantees)

-

-

1

1

Total

815

-

19,697

20,512



35

3.3 Specific items of Statement of Financial Position

Cash and cash equivalents

Cash and cash equivalents are items which are readily convertible to known amounts of cash and which are subject

to an insignificant risk of changes in value and with a maturity of three months or less. Cash and cash equivalents

include cash in hand (in HUF and FX), electronic cash equivalents, cheques and nostro account balances including

mandatory reserve deposits with Central Bank. The classification of cash and cash equivalents for measurement

purposes is determined based on the same requirements as other financial assets. Therefore, an assessment of the

business model and SPPI criterion was performed based on the specific facts and circumstances. Based on the

assessment the business model is Hold to Collect and the SPPI test is met (e.g. as only a benchmark rate, or nil,

interest is earned). As a result, cash and cash equivalents are carried at amortised cost.

Due from other banks, cash deposits

Amounts due from other banks are recorded when the Bank advances money to counterparty banks with no intention

of trading the resulting unquoted non-derivative receivable due on fixed or determinable dates. Amounts due from

other banks are carried at amortised cost, because they meet the SPPI test and the related business model is Hold to

Collect.

Loans and advances to customers

Loans and advances to customers are recorded when the Bank advances money to purchase or originate an

unquoted non-derivative receivable from a customer due on fixed or determinable dates, and has no intention of

trading the receivable. Loans and advances to customers, which meet the SPPI test and the related business model

are Hold to Collect, and are carried at amortised cost using the effective interest method.

Repossessed collateral

Repossessed collateral represents financial and non-financial assets acquired by the Bank in settlement of overdue

loans (compensation for the loans’ principal and interest). Repossessed assets are initially recognised at fair value

plus related costs when acquired and included in premises and equipment, other financial assets, investment

properties, non-current assets held for sale or inventories within other assets depending on their nature and the

Bank's intention in respect of recovery of these assets, and are subsequently remeasured and accounted for in

accordance with the accounting policies for these categories of assets. When there are indicators that the

recoverable amount is lower than carrying amount, the carrying amount is written down immediately to its recoverable

amount.

Where repossessed collateral results in acquiring control over a business, the business combination is accounted for

using the acquisition method of accounting with fair value of the settled loan representing the cost of acquisition.

Accounting policy for associates is applied to repossessed shares where the Bank obtains significant influence, but

not control. The cost of the associate is the fair value of the loan settled by repossessing the pledged shares.



36

Financial guarantee contracts and loan commitments

The Bank has the following financial guarantee contracts:

payment guarantee: the obligation to pay arises if the recipient fails to meet its payment

obligations.

Financial guarantee contracts and loan commitments are initially measured at fair value on the date the

guarantee was given, which is normally evidenced by the amount of fees received. Subsequent to initial recognition,

at the end of each reporting period, the commitments are measured at the higher of:

• The amount of the loss allowance, calculated as described in the Impairment of financial assets section of the

Accounting policy, that is the best estimate of expenditure required to settle the commitment at the end of each

reporting period); and

• The amount recognised (fair value) on initial recognition less income recognised in accordance with the principles of

IFRS 15 (the remaining unamortised balance of the amount at initial recognition).

Any increase in the liability relating to guarantees is recognised in the income statement. These estimates are

determined based on experience of similar transactions, historical losses and by the judgement of management.

Loan commitments provided by the Bank are measured as the amount of the loss allowance (calculated as

described in the Impairment of financial assets section of the Accounting policy). The Bank has not provided any

commitments to provide loans at a below-market interest rate, or that can be settled net in cash or by delivering or

issuing another financial instrument.

For loan commitments and financial guarantee contracts, the loss allowance is recognised as a provision. However,

for contracts that include both a loan and an undrawn commitment and the Bank cannot separately identify the

expected credit losses on the undrawn commitment component from those on the loan component, the expected

credit losses on the undrawn commitment are recognised together with the loss allowance for the loan. To the extent

that the combined expected credit losses exceed the gross carrying amount of the loan, the expected credit losses

are recognised as a provision.

Performance guarantees

Performance guarantees are initially recognised at their fair value, which is normally evidenced by the amount of fees

received. This amount is amortised on a straight-line basis over the life of the contract. At the end of each reporting

period, the performance guarantee contracts are measured at the higher of (i) the unamortised balance of the amount

at initial recognition and (ii) the best estimate of expenditure required to settle the contract at the end of each

reporting period, discounted to present value. Where the Bank has the contractual right to revert to its customer for

recovering amounts paid to settle the performance guarantee contracts, such amounts will be recognised as loans

and receivables upon transfer of the loss compensation to the guarantee’s beneficiary.



37

The Bank has the following performance guarantee contracts:

quality guarantee: the obligation to pay arises if the client fails to deliver the goods in the

appropriate quality.

advance payment guarantee: the obligation to pay arises if the contract is not performed.

performance guarantee: the obligation arises when performance is not in accordance with the

contract.

Sale and repurchase agreements and lending of securities

Sale and repurchase agreements (“repo agreements”), which effectively provide a lender’s return to the counterparty,

are treated as secured financing transactions. Securities sold under such sale and repurchase agreements are not

derecognised. Securities and bills sold subject to repurchase agreements (“Repos”) continue to be recognised, and

are recorded as “Financial investments”. The securities are reclassified as repurchase receivables in the statement of

financial position if the transferee has the right by contract or custom to sell or re-pledge the securities. The

corresponding obligation is included in “Deposits from banks and other financial institutions”.

Securities and bills purchased under agreements to re-sell (“Reverse repos”) are not recognised. The receivables are

recorded as “Loans and advances to banks and other financial institutions”. The difference between repurchase and

sale price is recognised as “Interest expense” or “Interest income” in the income statement over the life of the

agreements using the effective interest method.

Securities lending transactions are generally secured, with collateral taking the form of securities or cash. Securities

lent to counterparties by the Bank are retained in the financial statements in their original category, unless the

counterparty has the right by contract or custom to sell or repledge the securities, in which case they are reclassified

and presented separately.

Securities borrowed from counterparties by the Bank are not recognised in the financial statements of the Bank,

unless these are sold to third parties, in which case the purchase and sale are recorded in profit or loss for the year

within gains less losses arising from trading securities. Cash collateral received or advanced is recognised as a

liability or an asset in the consolidated financial statements.

Investment property

Investment property is property held by the Bank to earn rental income or for capital appreciation, or both and which

is not occupied by the Bank.

Investment properties are stated at cost less accumulated depreciation and provision for impairment, where required.

If any indication exists that investment properties may be impaired, the Bank estimates the recoverable amount as

the higher of value in use and fair value less costs to sell. The carrying amount of an investment property is written

down to its recoverable amount through a charge to profit or loss for the year. An impairment loss recognised in prior



38

years is reversed if there has been a subsequent change in the estimates used to determine the asset’s recoverable

amount. Earned rental income is recorded in profit or loss for the year within other operating income.

Subsequent expenditure is capitalised only when it is probable that future economic benefits associated with it will

flow to the Bank, and the cost can be measured reliably. All other repairs and maintenance costs are expensed when

incurred. If an investment property becomes owner-occupied, it is reclassified to premises and equipment.

Goodwill

Goodwill is carried at cost less accumulated impairment losses, if any. The Bank tests goodwill for impairment at least

annually and whenever there are indications that goodwill may be impaired.

Property and equipment

The Bank’s fixed assets comprise buildings, equipment and motor vehicles. When the costs attributable to the land

cannot be reliably measured and separated from that of the building at inception, the costs are included in the cost of

properties and buildings and recorded in “Property and equipment”. Assets purchased or constructed are initially

measured at acquisition cost or deemed cost, as appropriate. Such initial cost includes expenditure that is directly

attributable to the acquisition of the assets. Subsequent costs are included in an asset’s carrying amount, or

recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated

with the item will flow to the Bank and the cost of the item can be measured reliably. All other repairs and

maintenance costs are charged to the income statement during the financial period in which they are incurred.

Property and equipment are stated at cost less accumulated depreciation and provision for impairment, where

required.

Costs of minor repairs and day-to-day maintenance are expensed when incurred. Costs of replacing major parts or

components of premises and equipment items are capitalised, and the replaced part is retired.

Depreciation

Land (when it can be separated from the cost of buildings) and construction in progress are not depreciated.

Depreciation on other items of property and equipment is calculated using the straight-line method to allocate their

cost to their residual values over their estimated useful lives:



39

Estimated useful lives Estimated residual value

Buildings / premises 50 years 20%

Electrical network / pipelines /

air conditioning / heating

within buildings

25 years -

IT equipment 3 years -

Other equipment 7 years -

Business vehicles 5 years 20%

Leasehold improvements Shorter of useful life and the term

of the underlying lease

-

The residual value of an asset is the estimated amount that the Bank would currently obtain from disposal of the

asset less the estimated costs of disposal, if the asset were already of the age and in the condition expected at the

end of its useful life. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end

of each reporting period. If during the review process it is established that residual values or useful lives are different

from the ones stated in the accounting policy above, a separate decision is prepared by management. These

decisions will be documented as separate management decisions. These changes are treated as changes in the

accounting estimates and are accounted prospectively.

Intangible assets

Intangible assets are identifiable non-monetary assets without physical substance, including computer software and

other intangible assets. Computer software and other intangible assets are stated at acquisition cost less

accumulated amortisation and impairment. These costs are amortised on a straight-line basis over their estimated

useful lives with the amortisation recognised in the income statement. The value of intangible assets is reviewed for

impairment at each financial reporting date.

The Bank’s intangible assets other than goodwill have definite useful lives and primarily include capitalised computer

software, other licenses and similar rights. Acquired computer software licences are capitalised on the basis of the

costs incurred to acquire and bring to use the specific software.

The intangible assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each

reporting period. If during the review process it is established that residual values or useful lives are different from the

ones stated in the accounting policy above, a separate decision is prepared by management. These decisions will be

documented as separate management decisions. These changes are treated as changes in the accounting estimates

and are accounted prospectively.

Directly attributable staff costs of the software development team and an appropriate portion of relevant overheads

which can be directly attributed to preparing the asset for use are capitalised as part of the software. All other costs

associated with computer software, e.g. its maintenance, are expensed when incurred. Capitalised computer

software is amortised on a straight-line basis over expected useful lives of 3 years.



40

Other licenses and similar rights are amortised on a straight-line basis over expected useful lives of 6 to 7 years.

Operating leases

Where the Bank is a lessee in a lease which does not transfer substantially all the risks and rewards incidental to

ownership from the lessor to the Bank, the total lease payments are charged to “Operating expenses” in the income

statement for the year (rental expense) on a straight-line basis over the period of the lease.

Leases embedded in other agreements are separated if:

(a) fulfilment of the arrangement is dependent on the use of a specific asset or assets and

(b) the arrangement conveys a right to use the asset.

When the Bank is the lessor under operating leases, the assets subject to the operating lease are accounted for as

the Bank’s assets. Rental income is recognised as “Other operating income” in the income statement on a straight-

line basis over the lease term net of any incentives given to lessees.

Finance lease receivables

Where the Bank is a lessor in a lease which transfers substantially all the risks and rewards incidental to ownership to

the lessee, the assets leased out are presented as a finance lease receivable and carried at the present value of the

aggregation of the minimum lease payment receivable from the lessee, unguaranteed residual value and initial direct

costs of the future lease payments. Title may or may not eventually be transferred. Finance lease receivables are

initially recognised at commencement (when the lease term begins) using a discount rate determined at inception

(the earlier of the date of the lease agreement and the date of commitment by the parties to the principal provisions of

the lease). Impairment losses are recognised in profit or loss for the year according to the ECL methodology

described above for financial assets measured at amortised cost and FVOCI.

Finance lease liability

Where the Bank is a lessee in a lease which transferred substantially all the risks and rewards incidental to ownership

to the Bank, the assets leased are capitalised in property and equipment at the commencement of the lease at the

lower of the fair value of the leased asset, and the present value of the minimum lease payments. Each lease

payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance

balance outstanding. The corresponding liability to the lessor is included in “Other liabilities”. The interest cost is

charged to profit or loss for the year over the lease period using the effective interest method. The Bank adopts the

same depreciation policy for finance leased assets as those for which it has title rights. If the Bank can reasonably

determine that a lease will transfer ownership of the asset to the Bank by the end of the lease term, related assets

are depreciated over their useful life. If there is no reasonable certainty that the Bank can determine that a lease will

transfer ownership of the asset to the Bank by the end of the lease term, related assets are depreciated over the

shorter of the lease term and useful life.



41

Non-current assets classified as held for sale

Non-current assets and disposal groups, which may include both non-current and current assets, are classified in the

statement of financial position as ‘non-current assets held for sale’ if their carrying amount will be recovered

principally through a sale transaction, including loss of control of a subsidiary holding the assets, within twelve

months after the end of the reporting period rather than through continuing use. Non-current assets or disposal

groups classified as held for sale in the current period’s statement of financial position are not reclassified or re-

presented in the comparative statement of financial position to reflect the classification at the end of the current

period.

Discontinued operations

A discontinued operation is a component of the Bank that either has been disposed of, or that is classified as held for

sale, and: (a) represents a separate major line of business or geographical area of operations; (b) is part of a single

co-ordinated plan to dispose of a separate major line of business or geographical area of operations; or (c) is a

subsidiary acquired exclusively with a view to resale. Earnings and cash flows of discontinued operations, if any, are

disclosed separately from continuing operations with comparatives being re-presented.

Due to other banks

Amounts due to other banks are recorded when money or other assets are advanced to the Bank by counterparty

banks. The non-derivative liability is carried at amortised cost. If the Bank purchases its own debt, the liability is

removed from the statement of financial position and the difference between the carrying amount of the liability and

the consideration paid is included in gains or losses arising from early retirement of debt.

Customer accounts

Customer accounts are non-derivative liabilities to individuals, state or corporate customers and are carried at

amortised cost.

Debt securities in issue

Debt securities in issue include bonds issued by the Bank. Debt securities are stated at amortised cost. If the Bank

purchases its own debt securities in issue, they are removed from the statement of financial position and the

difference between the carrying amount of the liability and the consideration paid is included in gains arising from

early retirement of debt.

Other borrowed funds

Other borrowed funds include preference shares and shareholder loans. Preference shares and shareholder loans

are carried at amortised cost. Preference shares which carry a mandatory coupon or are redeemable on a specific

date or at the option of the shareholder are classified as financial liabilities and are presented in other borrowed

funds. The dividends on these preference shares are recognised as interest expense on an amortised cost basis,

using the effective interest method.



42

Derivative financial instruments

All derivative instruments are recognised as assets when fair value is positive, and as liabilities when fair value is

negative. Changes in the fair value of derivative instruments are included in profit or loss for the year (gains less

losses on derivatives). The Bank does not apply hedge accounting.

Certain derivative instruments embedded in other financial instruments are treated as separate derivative instruments

when their risks and characteristics are not closely related to those of the host contract.

Income taxes

Income taxes have been provided for in the financial statements in accordance with legislation enacted or

substantively enacted by the end of the reporting period. The income tax charge comprises current tax and deferred

tax and is recognised in profit or loss for the year, except if it is recognised in other comprehensive income or directly

in equity because it relates to transactions that are also recognised, in the same or a different period, in other

comprehensive income or directly in equity.

Current tax is the amount expected to be paid to, or recovered from, the taxation authorities in respect of taxable

profits or losses for the current and prior periods. Taxable profits or losses are based on estimates if the financial

statements are authorised prior to filing relevant tax returns and any adjustment to tax payable in respect of previous

years. Taxes other than on income are recorded within administrative and other operating expenses.

The Bank classifies its expenses for local business tax as Income tax.

Banking tax is classified as an operating expense.

Deferred income tax is provided using the balance sheet liability method for tax loss carry forwards and temporary

differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting

purposes.

Uncertain tax positions

The Bank’s uncertain tax positions are reassessed by management at the end of each reporting period. Liabilities are

recorded for income tax positions that are determined by management as more likely than not to result in additional

taxes being levied if the positions were to be challenged by the tax authorities. The assessment is based on the

interpretation of tax laws that have been enacted or substantively enacted by the end of the reporting period, and any

known court or other rulings on such issues. Liabilities for penalties, interest and taxes other than on income are

recognised based on management’s best estimate of the expenditure required to settle the obligations at the end of

the reporting period.



43

Provisions for liabilities and charges

Provisions for liabilities and charges are non-financial liabilities of uncertain timing or amount. They are accrued when

the Bank has a present legal or constructive obligation as a result of past events, it is probable that an outflow of

resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount

of the obligation can be made. Examples of provisions may include employee benefits and litigation. The amount

initially recognised as a provision should be the best estimate of the expenditure required to settle the present

obligation.

Levies and charges, such as taxes other than income tax or regulatory fees based on information related to a period

before the obligation to pay arises, are recognised as liabilities when the obligating event that gives rise to pay a levy

occurs, as identified by the legislation that triggers the obligation to pay the levy. If a levy is paid before the obligating

event, it is recognised as a prepayment

Trade and other payables

Trade payables are accrued when the counterparty has performed its obligations under the contract and are carried

at amortised cost. Other payables include taxes payable and incoming / outgoing customer payments transit

accounts.

Dotation capital

Dotation capital registered at Court of Registration is classified as equity.

Income and expense recognition

Interest income and expense for all interest-bearing financial instruments, except derivatives, are recognised on an

accruals basis within “Interest income” and “Interest expense” in the income statement using the effective interest

method. Interest income and expense for derivatives is recognised in “Net trading gains” in the income statement.

Fees integral to the effective interest rate include origination fees received or paid by the entity relating to the creation

or acquisition of a financial asset or issuance of a financial liability, for example fees for evaluating creditworthiness,

evaluating and recording guarantees or collateral, negotiating the terms of the instrument and for processing

transaction documents. In contracts with customers all of these origination fees are included under the term “upfront

fee”.

Issuance fees as well as internal approval fees (related to guarantees) and management fees (related to factoring)

also form part of the effective interest rate assuming they arise only if the contract is signed. The same rules apply to

accreditive fees and letter of credit issuance fees.

Coordination fees and arrangement (preparation) fees are part of the effective interest rate only if they are not related

to a separately identifiable service provided, being charged regardless of a signed contract.

Commitment fees received by the Bank to originate loans at market interest rates are integral to the effective interest

rate if it is probable that the Bank will enter into a specific lending arrangement and does not expect to sell the



44

resulting loan shortly after origination. The Bank does not designate loan commitments as financial liabilities at fair

value through profit or loss.

Supplemental fees (assuming they are payable on the available loan commitment) should not be part of the effective

interest rate, as they are related to the service of making the facility available for the debtor.

Legal fees are only part of the effective interest rate if they are not recharged expenses of the Bank. This also applies

to other transaction expenses, which are generally referred to as out-of-pocket expenses.

Banking charges are part of the effective interest rate only if they are not relating to a contingent event.

Enforcement and preservation costs are assumed to be costs of collecting outstanding loan receivables, which is a

separate service, therefore they are not part of the effective interest rate.

Fee and commission income

The Bank earns fee and commission income from a diverse range of services it provides to its customers. For those

services that are provided over a period of time, fee and commission income is accrued over that period. For other

services, fee and commission income is recognised when the transactions are completed.

Capitalisation of borrowing costs

Borrowing costs that are directly attributable to the acquisition, construction or production of an asset that necessarily

takes a substantial period of time to get ready for its intended use or sale (a qualifying asset), form part of the cost of

that asset, if the commencement date for capitalisation is on or after 1 January 2017. The Bank defines substantial

period of time as at least 1 year (12 months). Other borrowing costs are recognised as an expense using the effective

interest method. The Bank capitalises borrowing costs that would have been avoided if it had not made capital

expenditure on qualifying assets.

Functional currency

The functional currency of the operations of the Bank in Hungary is the currency of the primary economic

environment in which the entity operates: Hungarian forint (HUF).

The presentation currency of the Bank is the national currency of Hungary, Hungarian Forint (HUF). The figures of the

financial statements are presented in millions of HUF.

Foreign currency translation

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the

dates of the transactions, or the exchange rates that approximate the exchange rates prevailing at the dates of the

transaction. Foreign exchange gains and losses resulting from the settlement of such transactions and from the

translation of monetary assets and liabilities into each entity’s functional currency at year-end official exchange rates

of the National Bank of Hungary (“MNB”) are recognised in the income statement.



45

Translation at year-end rates does not apply to non-monetary items that are measured at historical cost.

Monetary assets and liabilities denominated in foreign currencies at the financial reporting date are translated at the

MNB foreign exchange rates ruling at that date. Changes in the fair value of monetary securities denominated in

foreign currency classified as FVTOCI are analysed between translation differences resulting from changes in the

amortised cost of the security and other changes in the carrying amount of the security. Translation differences

related to changes in the amortised cost are recognised in the income statement, and other changes in the carrying

amount are recognised in other comprehensive income. Translation differences on all other monetary assets and

liabilities are recognised in the income statement.

Non-monetary assets and liabilities that are measured at historical cost in foreign currencies are translated using the

foreign exchange rates at the date of the transaction. Non-monetary assets and liabilities that are measured at fair

value in foreign currencies are translated using the foreign exchange rates at the date the fair value is determined.

The effect of exchange rate changes on cash and cash equivalents is presented individually in the statement of cash flows.

Fiduciary assets

In case the Bank acts as a custodian, trustee or in other fiduciary capacity, that result in its holding or placing of

assets on behalf of individuals, securities investment funds, social security funds, insurance companies, qualified

foreign institutional investors, annuity schemes and other customers. These assets are not included in the statement

of financial position of the Bank, as they are not assets of the Bank. Commissions received from fiduciary activities

are shown in fee and commission income.

Offsetting

Financial assets and liabilities are offset and the net amount reported in the statement of financial position only when

there is a legally enforceable right to offset the recognised amounts, and there is an intention to either settle on a net

basis, or to realise the asset and settle the liability simultaneously. Such a right of set off:

(a) must not be contingent on a future event and

(b) must be legally enforceable in all of the following circumstances:

(i) in the normal course of business,

(ii) the event of default and

(iii) the event of insolvency or bankruptcy.

Staff costs and related contributions

Wages, salaries, contributions to the state pension and social insurance funds, paid annual leave and sick leave,

bonuses, and non-monetary benefits are accrued in the year in which the associated services are rendered by the

employees of the Bank, and are shown as Personnel expenses in the Statement of profit or loss. The Bank has no

legal or constructive obligation to make pension or similar benefit payments beyond the payments to the statutory

defined contribution scheme.



46

Presentation of operating expenses

The Bank will present in the notes an analysis of operating expenses recognised in profit or loss using a classification

based on the nature of expenses.

Presentation of statement of financial position in order of liquidity

The Bank does not have a clearly identifiable operating cycle and therefore does not present current and non-current

assets and liabilities separately in the statement of financial position. Instead, assets and liabilities are presented in

order of their liquidity. Notes to the financial statements include a detailed analysis of financial instruments by

expected maturity.

Deferred taxes

Deferred income tax is provided using the balance sheet liability method for tax loss carry forwards and temporary

differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting

purposes.

The principal temporary differences arise from asset impairment allowances, revaluation of certain financial assets

and financial liabilities including derivative contracts, revaluation of investment properties, depreciation of property

and equipment, provisions for pension, retirement benefits and salary payable.

In accordance with the initial recognition exemption, deferred taxes are not recorded for temporary differences on

initial recognition of an asset or a liability in a transaction other than a business combination if the transaction, when

initially recorded, affects neither accounting nor taxable profit.

Deferred tax balances are measured at tax rates enacted or substantively enacted at the end of the reporting period,

which are expected to apply to the period when the temporary differences will reverse or the tax loss carry forwards

will be utilised (related deferred income tax asset is realized or the deferred income tax liability is settled). Deferred

tax assets and liabilities are netted only within the individual companies' financial statements.

Deferred tax assets for deductible temporary differences and tax loss carry forwards are recorded only to the extent

that it is probable that future taxable profit will be available against which the deductions can be utilized. For

deductible temporary differences associated with investment in subsidiaries, associates and joint ventures, a deferred

tax asset is recognized to the extent that, and only to the extent that, it is probable that the temporary difference will

reverse in the foreseeable future; and taxable profit will be available against which the temporary difference can be

utilized.

Deferred tax liabilities shall be recognized for all taxable temporary differences, except to the extent that the deferred

tax liability arises from the initial recognition of goodwill, or the initial recognition of an asset or liability in a transaction

which is not a business combination, and at the time of the transaction, affects neither accounting profit nor taxable

profit/(tax loss). Deferred income tax liabilities on taxable temporary differences arising from investment in

subsidiaries, associates and joint ventures are recognized, except where the timing of the reversal of the temporary

difference can be controlled and it is probable that the difference will not reverse in the foreseeable future.



47

Deferred income tax is not recognized on post-acquisition retained earnings and other post acquisition movements in

reserves of subsidiaries where the Bank controls the subsidiary’s dividend policy, and it is probable that the difference

will not reverse through dividends or otherwise in the foreseeable future.

4. Critical Accounting Estimates and Judgements in Applying Accounting Policies

The Bank makes estimates and assumptions that affect the amounts recognized in the consolidated financial

statements, and the carrying amounts of assets and liabilities within the next financial year. Estimates and

judgements are continually evaluated and are based on management’s experience and other factors, including

expectations of future events that are believed to be reasonable under the circumstances. Management also makes

certain judgements, apart from those involving estimations, in the process of applying the accounting policies.

Judgements that have the most significant effect on the amounts recognized in the financial statements and

estimates that can cause a significant adjustment to the carrying amount of assets and liabilities within the next

financial year include:

Going Concern

Management prepares these financial statements on a going concern basis. In making this judgement management

considered the Bank’s financial position, current intentions, profitability of operations and access to financial

resources, and analyzed the future operations of the Bank.

Measurement of the expected credit loss allowance.

The Bank assesses on a forward-looking basis the expected credit losses (‘ECL’) associated with its debt instrument

assets carried at amortised cost and FVOCI and with the exposure arising from loan commitments and financial

guarantee contracts. The Bank recognises a loss allowance for such losses at each reporting date. The

measurement of ECL reflects:

• An unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes;

• The time value of money; and

• Reasonable and supportable information that is available without undue cost or effort at the reporting date about

past events, current conditions and forecasts of future economic conditions.

The measurement of the expected credit loss allowance for financial assets measured at amortised cost and FVOCI

is an area that requires the use of complex models and significant assumptions about future economic conditions and

credit behaviour (e.g. the likelihood of customers defaulting and the resulting losses).

A number of significant judgements are also required in applying the accounting requirements for measuring ECL,

such as:

• Determining criteria for significant increase in credit risk;

• Choosing appropriate models and assumptions for the measurement of ECL;



48

• Establishing the number and relative weightings of forward-looking scenarios for each type of product/market and

the associated ECL; and

• Establishing groups of similar financial assets for the purposes of measuring ECL.


recognition.

Business model

The business model reflects how the Bank manages the assets in order to generate cash flows. That is, whether the

Bank’s objective is solely to collect the contractual cash flows from the assets or is to collect both the contractual

cash flows and cash flows arising from the sale of assets. If neither of these is applicable (e.g. financial assets are

held for trading purposes), then the financial assets are classified as part of ‘other’ business model and measured at

FVPL. Factors considered by the Bank in determining the business model for a group of assets include past

experience on how the cash flows for these assets were collected, how the asset’s performance is evaluated and

reported to key management personnel, how risks are assessed and managed and how managers are compensated.

SPPI Test

Where the business model is to hold assets to collect contractual cash flows or to collect contractual cash flows and

sell, the Bank assesses whether the financial instruments’ cash flows represent solely payments of principal and

interest. In making this assessment, the Bank considers whether the contractual cash flows are consistent with a

basic lending arrangement i.e. interest includes only consideration for the time value of money, credit risk, other basic

lending risks and a profit margin that is consistent with a basic lending arrangement. Where the contractual terms

introduce exposure to risk or volatility that are inconsistent with a basic lending arrangement, the related financial

asset is classified and measured at fair value through profit or loss.

Equity Instruments

Equity instruments are instruments that meet the definition of equity from the issuer’s perspective; that is, instruments

that do not contain a contractual obligation to pay and that evidence a residual interest in the issuer’s net assets.

Examples of equity instruments include basic ordinary shares.

The Bank subsequently measures all equity investments at fair value through profit or loss, except where the Bank’s

and Branch’s management has elected, at initial recognition, to irrevocably designate an equity investment at fair

value through other comprehensive income. The Bank’s policy is to designate equity investments as FVOCI when

those investments are held for purposes other than to generate investment returns. When this election is used, fair

value gains and losses are recognized in OCI and are not subsequently reclassified to profit or loss, including on

disposal. Impairment losses (and reversal of impairment losses) are not reported separately from other changes in

fair value. Dividends, when representing a return on such investments, continue to be recognised in profit or loss as

other income when the Bank’s right to receive payments is established.

Fair value

Where the fair values of financial assets and financial liabilities recorded on the consolidated statement of financial

position cannot be derived from active markets, they are determined using variety of valuation techniques that include



49

the use of mathematical models. The input to these models is taken from observable markets where possible, but

where this is not feasible, a degree of judgement is required in establishing fair values. The judgements include

considerations of liquidity and model inputs such as correlations.

Provisions

Provisions for liabilities and charges are non-financial liabilities of uncertain timing or amount. They are accrued when

the Bank has a present legal or constructive obligation as a result of past events, it is probable that an outflow of

resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount

of the obligation can be made. Examples of provisions may include employee benefits and litigation.

The amount initially recognized as a provision should be the best estimate of the expenditure required to settle the

present obligation.

Levies and charges, such as taxes other than income tax or regulatory fees based on information related to a period

before the obligation to pay arises, are recognized as liabilities when the obligating event that gives rise to pay a levy

occurs, as identified by the legislation that triggers the obligation to pay the levy. If a levy is paid before the obligating

event, it is recognised as a prepayment.

5. Adoption of IFRS

The Bank’s IFRS transition date is 1 January 2017. The first IFRS reporting period is for the period from 1 January

2018 – 31 December 2018. Comparative financial information will be shown for one preceding period under HAR.

The first set of IFRS statements will comprise:

- 3 Statements of Financial Position (1 January 2017, 31 December 2017 and 31 December 2018)

- 2 Statements of Comprehensive Income (2017 and 2018)

- 2 Statements of Changes in Equity (2017 and 2018)

- 2 Statements of Cash Flows (2017 and 2018)

- Notes to Financial Statements.

For the above-mentioned reporting period, subject to certain exceptions, IFRS 1 requires retrospective application of

the version of standards and interpretations effective for the year ended 31 December 2018. This version will be

applied in preparing the opening IFRS statement of financial position at 1 January 2017 and in subsequent periods up

to the end of the first IFRS reporting period.



50

6. New Accounting Pronouncements

New Standards adopted by the Bank

IFRS 9 “Financial Instruments” (amended in July 2014 and effective for annual period beginning on or after 1

January 2018). The Bank has adopted IFRS 9 with the date of initial application of 1 January 2018. Key features of

the new standards are:

Financial assets are required to be classified into three measurement categories: those to be measured

subsequently at amortised cost, those to be measured subsequently at fair value through other

comprehensive income (FVOCI) and those to be measured subsequently at fair value through profit or loss

(FVPL).

Classification for debt instruments is driven by entity’s business model for managing the financial assets and

whether the contractual cash flows represent solely payments of principal and interest (SPPI). If a debt

instrument is held to collect, it may be carried at amortised cost if it also meets the SPPI requirement. Debt

instruments that meet the SPPI requirement that are held in portfolio where an entity both holds to collect

assets’ cash flows and sells assets may be classified as FVOCI. Financial assets that do not contain cash

flows that are SPPI must be measured at FVPL. (for example derivatives). Embedded derivatives are no

longer separated from financial assets but will be included in assessing the SPPI condition.

Investments in equity instruments are always measured at fair value. However, management can make an

irrevocable election to present changes in fair value in other comprehensive income, provided the instrument

is not held for trading. If the equity instrument is held for trading, changes in fair value are presented in profit

or loss.

Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried

forward unchanged to IFRS 9. The key change is that an entity will be required to present the effect of

changes in own credit risk of financial liabilities designated at fair value through profit or loss in other

comprehensive income.

IFRS 9 introduces a new model for the recognition of impairment losses – the expected credit losses (ECL)

model. There is a ‘three stage’ approach which is based on the change in credit quality of financial assets

since initial recognition. In practice, the new rules mean that entities will have to record an immediate loss

equal to the 12 month ECL on initial recognition of financial assets that are not credit impaired (or lifetime

ECL for trade receivables). Where there has been a significant increase in credit risk, impairment is

measured using lifetime ECL rather than 12-month ECL. The model includes operational simplifications for

lease and trade receivables.

Hedge accounting requirements were amended to align accounting more closely with risk management. The

standard provides entities with an accounting policy choice between applying the hedge accounting

requirements of IFRS 9 and continuing to apply IAS 39 to all hedges because the standard currently does

not address accounting for macro hedging.



51

Consequently, the revised requirements of the IFRS 7, “Financial Instruments: Disclosures”, have only been

applied to the current period. The comparative period disclosures repeat those disclosures made in the prior year.

IFRS 15 “Revenue from Contracts with Customers” (issued on 28 May 2014 and effective for the periods

beginning on or after 1 January 2018) and Amendments to IFRS 15 “Revenue from Contracts with Customers”

(issued on 12 April 2016 and effective for annual periods beginning on or after 1 January 2018). The Bank has

adopted IFRS 15, Revenue from Contracts with Customers, with the date of initial application of 1 January 2018. The

new standard was applied using the modified retrospective method, with the cumulative effect recognised in retained

earnings on 1 January 2018. The standard introduced the core principle that revenue must be recognised when the

goods or services are transferred to the customer, at the transaction price. Any bundled goods or services that are

distinct must be separately recognised, and any discounts or rebates on the contract price must generally be

allocated to the separate elements. When the consideration varies for any reason, minimum amounts must be

recognised if they are not at significant risk of reversal. Costs incurred to secure contracts with customers have to be

capitalised and amortised over the period when the benefits of the contract are consumed. As at 31 December 2018

the Bank didn’t have any contracts with customers in the scope of IFRS 15. According to the assessments by the

Bank, the standard does not have a material impact on its financial position.

IFRIC 22 “Foreign Currency Transactions and Advance Consideration” (issued on 8 December 2016 and

effective for annual periods beginning on or after 1 January 2018). The interpretation addresses how to determine the

date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related

asset, expense or income (or part hereof) on the de-recognition of a non-monetary asset or non-monetary liability

arising from an advance consideration in a foreign currency. Under IAS 21, the date of the transaction the purpose of

determining the exchange rate to use on initial recognition of the related asset, expense or income (or part thereof) is

the date on which an entity initially recognizes the monetary asset or non-monetary liability arising from the advance

consideration. If there are multiple payments or receipt of advance consideration, IFRIC 22 only applies in

circumstances in which an entity recognizes the non-monetary asset or non-monetary liability arising from an

advance consideration. IFRIC 22 does not provide application guidance on the definition of monetary and non-

monetary items. An adverse payment or receipt of consideration generally gives rise to the recognition of a non-

monetary asset or non-monetary liability; however, it may also give rise to a monetary asset or liability. An entity may

need to apply judgement in determining whether an item is monetary or non-monetary.

New Standards not yet adopted by the Bank

IFRS 16 “Leases” (issued on 13 January 2016 and effective for annual periods beginning on or after 1 January

2019). The new standard sets out the principles for the recognition, measurement presentation and disclosure of

leases. All leases result in the lessee obtaining the right to use an asset at the start of the lease and, if lease

payments are made over time, also obtaining financing. Accordingly, IFRS 16 eliminates the classification of leases

as either operating or finance lease as is required by IAS 17 and instead, introduces a single lessee accounting

model. Lessees will be required to recognize: (a) assets and liabilities for all leases with a term of more than 12

months, unless the underlying asset is of low value; and (b) depreciation of lease assets separately from interest on

lease liabilities in the income statement. IFRS 16 substantially carries forward the lessor accounting requirements in



52

IAS 17. Accordingly, a lessor continues to clarify its leases as operating leases or financing leases, and to account for

those two types of leases differently.

The Bank will implement IFRS 16 from 1 January 2019 by applying the modified retrospective method, meaning that

the comparative figures in the financial statements for the year ending 31 december 2019 will not be restated to show

the impact of IFRS 16. The operating leases which will be recorded on the balance sheet following implementation of

IFRS 16 are principally in respect of real estates. The anticipated impact of the standard on the Bank is the following:

on 1 January 2019 the Bank expects to recognise real estate asset use rights of approximately HUF 29

million,

at the same time HUF 26 million lease payment liability will be recognised,

the annual depreciation and interest expense will amount to HUF 10 million and HUF 0.2 million

respectively.

IFRIC 23 “Uncertainty over Income Tax Treatments” (issued on 7 June 2017 and effective for annual periods

beginning on or after 1 January 2019). IAS 12 specifies how to account for current and deferred tax, but not how to

reflect the effects of uncertainty. The interpretation clarifies how to apply the recognition and measurement

requirements in IAS 12 when there is uncertainty over income tax treatments. An entity should determine whether to

consider each uncertain tax, the effect of uncertainty will be reflected in determining the related taxable profit or loss,

tax bases, unused tax losses, unused tax credits or tax rates, by using either the most likely amount or the expected

value, depending on which method the entity expect to better predict the resolution of uncertainty. An entity will reflect

the effect of a change in facts and circumstances or of new information that effects the judgements or estimates the

required by the interpretation as a change on accounting estimates. Examples of changes in facts and circumstances

or new information that can result in the reassessment of a judgement or estimate include, but are not limited to,

examinations or actions by a taxation authority, changes in rules established by a taxation authority or the expiry of a

taxation authority’s right to examine or re-examine a tax treatment. The absence of agreement or disagreement by a

taxation authority with a tax treatment, in isolation, is unlikely to constitute a change in facts and circumstances or

new information that effects the judgements and estimates required by the Interpretation. According to the

assessments by the Bank, the interpretation does not have a material impact on its financial position.

The following new standards or amendments of standards are not relevant for the Bank:

IFRS 17 Insurance Contracts

Amendments to IFRS 9: Prepayment Features with Negative Compensation

Amendments to IAS 12 Income Taxes

Amendments to IFRS 10 and IAS 28: Sale or Contribution of Assets between an Investor and its Associate

or Joint Venture

Amendments to IAS 19: Plan Amendment, Curtailment or Settlement

Amendments to IAS 28: Long-term interests in associates and joint ventures

IFRS 3 Business Combinations

IFRS 11 Joint Arrangements

IAS 23 Borrowing Costs.



53

7. Net Interest Income

In millions of Hungarian Forint Year ended 31 December 2018

Year ended 31 December 2017

Interest income using EIR method

Cash and cash equivalents and balances with central banks (35) 9

Loans and advances to banks and other financial institutions 4,345 2,534

Loans and advances to customers 60,161 51,299

Financial assets measured at fair value through OCI 511 526

Investment securities 5 4

Other interest income

Trading assets - -

Derivative financial assets - -

Subtotal 64,987 54,372

Interest expense

Due to customers (37,148) (26,663)

Due to and placements from banks and other financial institutions (239) (8)

Bonds issued and other (583) (1,156)

Subordinated debt - -

Subtotal (37,970) (27,827)

Net interest income 27,017 26,545

Interest Income accrued on impaired financial assets - -



54

8. Net fee and commission income

In millions of Hungarian Forint Year ended 31 December

2018 Year ended 31 December

2017

Credit commitment fees - -

Guarantee and LC fees 84 231

Settlement and clearing fees 1 1

Account management fees 5 -

Agency commissions 1,270 83

Spread income from foreign exchange business - -

Bank card fees - -

Consultancy and advisory fees - -

Other 38 3

Fee and commission income 1,398 318

Fees paid to financial service providers and banks (503) (277)

Clearing fees - -

Other (15) (1)

Fee and commission expense (518) (278)

Net fee and commission income 880 40

9. Net trading income



Net gains/(losses) from foreign exchange and foreign exchange products (495) 393

Net gains from interest rate products 2 -

Net gains from equity products - -

Net gains from commodity products - -

Total (493) 393



55

10. Credit impairment losses and provisions



Loans and advances

- Stage 1 922 (829)

- Stage 2 645 -

- Stage 3 - -

- Purchased credit-impaired - -

Subtotal 1,567 (829)

Financial investments

- Financial assets measured at fair value through OCI 1 -

- Investment securities - -

- Trading assets - -

Subtotal 1 -

Provision on commitments and guarantees given 247 -

Other - (2)

Subtotal 247 (2)

Total 1,815 (831)

11. Other operating income



Income from recharged operating expenses (principal participant) 820 821

Donation received from other Bank of China entity - -

Changes in fair value of investment properties - -

Gains on disposal of property, plant and equipment, intangible assets and other assets

- -

Other 82 -

Total 902 821

The bank is principal in case of recharged operating expenses. This whole amount relates to the services provided by

Bank of China Limited Hungarian Branch to Bank of China Hungary (Close) Ltd.



56

12. Personnel expense



Salary and bonus 727 704

Benefits in kind 76 214

Training expenses 10 6

Salary related taxes 160 268

Retirement benefits - -

Other - -

Total 973 1,192

Average number of employees (all white collar) 2018 2017

Total: 24 23



57

13. Operating expenses

General and administrative expenses

In millions of Hungarian Forint Year ended 31 December 2018 Year ended 31 December 2017

Services provided by Bank of China (Hungary) Ltd.

2,428 2,424

Head office cost allocation 197 133

Outsourcing 35 65

Property rental fee 10 7

Rental fee of other assets - -

Advertising, marketing 26 55

Consultancy fees 16 18

Legal fees 18 20

Property management - -

Software maintenance 40 41

Telecommunication and network fees 23 15

Security service expense (1) -

Audit fees 63 20

Utility expense - -

Other expenses related to fixed assets 7 5

Travel expenses - -

Other 8 6

Total General and administrative expenses 2,870 2,809

Included in “General and administrative expenses” is principal auditors’ remuneration of HUF 63 million for the year

ended 31 December 2018 (2017: HUF 20 million).

Depreciation and amortization expense

Please refer to Notes on Property, plant and equipment and Intangible assets for depreciation and amortization

expenses.



58

Banking tax expense

The basis of the calculation is the total assets for the second period prior to the actual period, the tax base includes

the total asset value as at 31 December 2016 for the year 2018. The Act LIX of 2006 related to the Banking tax was

subject to modification for 2017, the tax rate below HUF 50 billion of total assets is 0,15%, while above HUF 50 billion

of the total assets, the tax rate is 0,21%.

Banking tax expense


Total assets for the second period prior to actual year 1,374,825

751,318

Deductible items

Placements to domestic credit institutions (108) (6,999)

Increasing items

Total tax base 1,374,717

744,319

Tax base below 50 bn HUF 50,000

50,000

Tax rate below 50 bn HUF 0.15% 0.15%

Tax base above 50 bn HUF 1,324,717

694,319

Tax rate above 50 bn HUF 0.21% 0.21%

Banking tax expense for the year 2,857

1,533

Other operating expenses


Other taxes 144 146

Banking supervision fee 391 417

Other professional fees 36 34

Donation within Bank of China Group 435 2,366

Other 2 -

Total 1,008 2,963

14. Income tax expenses

The income tax rate applicable to the Bank’s 2018 income is 9%.

The local business tax rate applicable to the Bank’s 2018 income is 2%.



59

In millions of Hungarian Forint 2018 2017

Current tax 1,552 2,414

Deferred tax (see separate note) 981 -

Income tax expense/(credit) for the year 2,533 2,414

Current income tax expense comprises the following:


Profit before tax 21,862 17,897

Tax base decreasing items

Depreciation and write-off assets according to tax regulation (11) (12)

Write-back of prior years’ tax base increasing provisions - -

20% of donation to organizations with public benefit status - -

IFRS transitional adjustments (12,260) -

Income of previous years (revision / self-revision) (70) (7)

Total tax base decreasing items (12,341) (19)

Tax base increasing items

Depreciation and write-off assets according to accounting regulations 11 12

Tax base increasing provision addition - 2

IFRS transitional adjustments 1,355 -

Expense of previous years (revision / self-revision) 301 189

Expenses not incurred in the interest of the company 504 2,462

Total tax base increasing items 2,171 2,665

Corporate income tax base 11,692 20,543

Corporate income tax expense for the year 1,052 1,849

Sport support tax credit (39) -

Corporate income tax self-revision relating to previous years (1) 3

Total corporate income tax expense for the year 1,012 1,852

Local business tax expense 540 562

Total current tax expense for the year 1,552 2,414

The effective income tax rate for 2018 is 7% (2017: 13%).

The Bank has no tax loss carry forwards.



60

15. Other Comprehensive Income

An analysis of other comprehensive income by item for each component of equity is as follows:

In millions of Hungarian Forint 31 December 2018 31 December

2017 1 January 2017

Revaluation of financial instruments 44 - -

Revaluation of premises and equipment - - -

Share of other comprehensive income in associates - - -

Exchange differences on translation to presentation currency

- - -

Income tax recorded directly in other comprehensive income

(4) - -

Total Other Comprehensive Income 40 - -

The cumulative amounts recognized in other comprehensive income relating to non-current assets held for sale (or

disposal group) are as follows:

In millions of Hungarian Forint 31 December 2018 31 December 2017

Revaluation reserve for financial instruments - -

Revaluation reserve for premises - -

Currency translation reserve - -



61

16. Cash, Cash Equivalents and Balances with central banks

In millions of Hungarian Forint 31

December 2018

31 December 2017

1 January 2017

Cash on hand - -

-

Cash balances with central bank 39,790 4,352 4,784

Total cash, cash equivalents and balances with central banks 39,790 4,352 4,784

All of the balances of cash equivalents are related to Central Bank as at 31 December 2018 and as at 31 December

2017. Deposits with Central Bank include mandatory reserve deposits which are not available for use in the Bank’s

day to day operations.

Interest rate analysis of cash and cash equivalents is disclosed in the note on Financial Risk Management.

17. Loans and advances to banks and other financial institutions

In millions of Hungarian Forint 31 December 2018 31 December 2017 1 January 2017

Placements with other banks 270,486 310,405 160,818

Reverse sale and repurchase agreements with other banks

- - -

Less: Credit loss allowance (3) - -

Total loans and advances to banks and other financial institutions (net)

270,483 310,405 160,818



62

Except for reverse sale and repurchase agreements, amounts due from other banks are not collateralised. Analysis

by credit quality of loans and advances to banks and other financial institutions outstanding at 31 December 2018, is

as follows:

In millions of Hungarian Forint Placements with other

banks Reverse repurchase

agreements Total

Neither past due nor impaired 270,486 - 270,486

Past due but not impaired (gross)

- less than 30 days overdue - - -

- 30 to 90 days overdue - - -



- over 360 days overdue - - -

Total past due but not impaired (gross) - - -

Balances individually determined to be impaired (gross)






Total individually impaired (gross) - - -

Less provision for impairment - - -

Loans and advances to banks (net) 270,486 - 270,486



63

Analysis by credit quality of amounts due from other banks outstanding at 31 December 2017, is as

follows:



agreements Total




















64

Analysis by credit quality of amounts due from other banks outstanding at 1 January 2017, is as

follows:



agreements Total


















The primary factor that the Bank considers in determining whether a deposit is impaired is its overdue status. As a

result, the Bank presents above an ageing analysis of deposits.



65

Analysis of loans and advances to banks and other financial institutions by Stages:

In millions of Hungarian Forint Stage 1 Stage 2 Stage 3 Purchased credit-

impaired Total

As at 31 December 2018


270,486

-

-

-

270,486

Allowance for impairment losses

(3)

-

- -

(3)

Loans and advances to banks (net)

270,483

-

-

-

270,483

Refer to the separate note with Fair Value Disclosures for the estimated fair value of each class of amounts of loans

and advances to banks and other financial institutions. Interest rate analysis of loans and advances to banks and

other financial institutions is disclosed in the note on Financial Risk Management.

18. Loans and advances to customers


Corporate loans and advances

- Loans and advances 1,625,504 1,717,047 1,188,439

- Trade finance 1,265 3,418 1,023

Total Loans and advances (gross) 1,626,769 1,720,465 1,189,462

Less: allowance for impairment losses (19,552) (815) -

Total credit loss allowance (19,552) (815) -

Total loans and advances to customers (net) 1,607,217 1,719,650 1,189,462



66

Identified impaired loans and advances

Analysis of loans and advances to customers by overdue and impaired status:

31 December 2018 31 December 2017 1 January 2017

In millions of Hungarian Forint Amount % of total Amount % of total Amount % of total


Neither past due nor impaired 1,469,287 90% 1,720,465 100% 1,189,462 100%

Past due but not impaired 157,482 10% - 0% - 0%

Impaired - 0% - 0% - 0%

Total Loans and advances (gross) 1,626,769 100% 1,720,465 100% 1,189,462 100%

Analysis of loans and advances to customers by Stages:

In millions of Hungarian Forint Stage 1 Stage 2 Stage 3 Purchased credit-

impaired Total

31 December 2018

Loans and advances to customers 1,440,507 186,262 - - 1,626,769

Allowance for impairment losses (6,224) (13,328) - - (19,552)

Loans and advances to customers (net) 1,434,283 172,934 - - 1,607,217



67

For the year ended 31 December 2017, under HAR, there was not any impairment needed. The impairment was determined according to regulation 39/2016 MNB. Under this

regulation, there are two categories: the performing and non-performing loans. For the previous period, there was not any non-performing loan in the Bank’s portfolio.

As the date of the first time application of IFRS is 01 January 2018, as comparative reasons, the Bank uses impairment under IAS 39, which was never applied by the Bank.

Movements in the provision for loan impairment during 2018 are as follows:

In millions of Hungarian Forint Corporate loans Trade finance Residential

property loans Other retail loans Total

Provision for loan impairment at 1 January 2018 (including IFRS 9 opening adjustment)

20,068 3 20,071

Recovery of/Provision for impairment during the year (1,579) 17

(1,562)

Amounts written off during the year as uncollectible

-

Transfer to non-current assets held for sale (and disposal groups)

-

Disposal of subsidiaries

-

Effect to translation to presentation currency 1,040 3

1,043

Provision for loan impairment at 31 December 2018

19,529 23 19,552



68

Movements in the provision for loan impairment during 2017 are as follows:

In millions of Hungarian Forint Corporate loans Trade finance Residential

property loans Other retail loans Total

Provision for loan impairment at 1 January 2017 - - - - -

Recovery of/Provision for impairment during the year 829 - - - 829

Amounts written off during the year as uncollectible - - - - -


- - - - -

Disposal of subsidiaries - - - - -

Effect to translation to presentation currency (14) - - - (14)

Provision for loan impairment at 31 December 2017

815 - - - 815

Concentrations of risk for loans and advances to customers

Analysis of loans and advances to customers by geographical area:



Hungary 18,094 1% 57,071 3% 36,039 3%

EU (other than Hungary) 530,574 33% 332,632 20% 219,429 18%

China and Hong Kong 359,610 22% 362,637 21% 304,669 26%

Other third countries 718,491 44% 968,125 56% 629,325 53%

Total loans and advances to customers (gross)

1,626,769 100% 1,720,465 100% 1,189,462 100%



69

Analysis of loans and advances to customers by industry:




Manufacturing 203,436 12% 73,656 4% 104,688 9%

Commerce and services 604,178 37% 858,461 50% 481,295 40%

Transportation 128,493 8% 96,775 6% 132,860 11%

Real estate - 0% - 0% - 0%

Production and supply of electricity, heating, gas, water

286,355 18% 403,149 23% 342,869 29%

Mining - 0% - 0% - 0%

Financial services 111,338 7% 226,064 13% 65,468 6%

Construction 6,801 0% 2,506 0% - 0%

Agriculture 11,749 1% - 0% - 0%

Telecommunication and postal services 274,419 17% 59,854 4% 62,282 5%

Other - 0% - 0% - 0%

Total loans and advances to customers (gross)

1,626,769 100% 1,720,465 100% 1,189,462 100%



70

Analysis of loans and advances to customers by collateral type:



Unsecured loans 606 050 37% 809 611 47% 623 556 52%

Guaranteed loans 68 190 4% 227 536 13% 80 487 7%

Collateralized and other secured loans

- Loans secured by property, plant and other immovable assets 5 634 0% 125 187 7% 143 722 12%

- Other pledged loans 946 895 59% 558 131 33% 341 697 29%

Total loans and advances to customers (gross) 1 626 769 100% 1 720 465 100% 1 189 462 100%

The loss allowance recognized in the period is impacted by a variety of factors, as described below:

Transfers between Stage 1 and Stage 2 or 3 due to financial instruments experiencing significant increases (or decreases) of credit risk or becoming credit-impaired in

the period, and the consequent “step up” (or “step down”) between 12 month and Lifetime ECL

Additional allowances for new financial instruments recognized during the period, as well as releases of financial instruments de-recognized in the period

Impact on the measurement of ECL due to changes made to models and assumptions

Discount unwind within ECL due to the passage of time, as ECL is measured on a present value basis

Foreign exchange retranslations for assets denominated in foreign currencies and other movements

Financial assets derecognized during the period and write-offs of allowances related to assets that were written off during the period

The following tables explain the changes in the loss allowance between the beginning and the end of the annual period due to these factors:



71

In millions of Hungarian Forint Stage 1

12 month ECL Stage 2

Lifetime ECL Stage 3

Lifetime ECL Purchased credit-

impaired Total

Loss allowance as at 1 January 2018 (including IFRS 9 opening adjustment)

8,409 11,662 - - 20,071

Transfers: - 1,215 - - 1,215

- Transfer from Stage 1 to Stage 2 - 1,215 - - 1,215

- Transfer from Stage 1 to Stage 3 - - - - -


New financial assets originated or purchased 2,270 - - - 2,270

Financial assets derecognized during the period (2,531) - - - (2,531)

Changes in PDs/LGDs/EADs (2,516) - - - (2,516)

Changes to model assumptions and methodologies - - - - -

Modification of contractual cash flows of financial assets

- - - - -

Unwind of discount - - - - -

FX and other movements 984 59 - - 1,043

Total net P&L charge during the period (1,793) 1,274 - - (519)

Other movements with no P&L impact - - - - -

Transfers: - - - - -



Financial assets derecognized during the period - - - - -

Write-offs - - -

-

Loss allowance as at 31 December 2018 6,616 12,936 - - 19,552



72

19. Financial instruments measured at fair value through OCI

The Bank has certain debt security portfolio measured at FVOCI. For these investments, typically government bonds,

changes in fair value are accumulated within the FVOCI reserve within equity. The accumulated changes in fair value

are transferred to profit or loss when the investment is derecognised or impaired.


recognition. Further details of credit impairment losses and provision see separate note on Financial Risk

Management.

The fair value of FVOCI government bonds including accrued interests is HUF 8 319 million as at 31 December 2018

(HUF 8 047million as at 31 December 2017). On disposal of these debt investments, any related balance (HUF 44

million as at 31 December 2018) within the FVOCI reserve is reclassified to profit or loss.

The following table assesses the loss allowance of financial instruments measured at fair value through OCI by

stages:

31 December 2018

31 December 2017

1 January 2017

In millions of Hungarian Forint

Stage 1 12 month

ECL

Stage 2 Lifetime

ECL

Stage 3 Lifetime

ECL

Purchased credit-

impaired Total Total Total

Gross carrying amount

8,319

-

-

-

8,319

8,047

-

Loss allowance

-

-

-

-

-

-

-

Carrying amount

8,319

-

-

-

8,319

8,047

-

20. Derivative financial instruments

The Bank enters into foreign currency exchange rate and interest rate related derivative financial instruments for

trading, and asset & liability management purposes.

The contractual/notional amounts of financial instruments provide a basis for comparison with the fair values of

instruments recognised in the statement of financial position but do not necessarily indicate the amounts of future

cash flows involved or the current fair value of the instruments and, therefore, do not indicate the Bank’s exposure to

credit or market risks. The derivative instruments become favourable (assets) and unfavourable (liabilities) as a result

of fluctuations in market interest rates or foreign currency exchange rates. The aggregate fair values of derivative

financial assets and liabilities can fluctuate significantly from time to time.



73

Derivatives are initially recognized at fair value on the date on which the derivative contract is entered into and are

subsequently remeasured at fair value. All derivatives are carried as assets when fair value is positive and as

liabilities when fair value is negative.

Certain derivatives are embedded in hybrid contracts, such as the conversion option in convertible bonds. If the

hybrid contract contains a host that is a financial asset, then the Bank assesses the entire contract as described in

the financial assets section above for classification and measurement purposes. Otherwise, the embedded

derivatives are treated as separate derivative when:

1. Their economic characteristics and risks are not closely related to those of the host contract

2. A separate instrument with the same terms would meet the definition of a derivative

3. The hybrid contract is not measured at fair value through profit or loss

The contractual/notional amounts and fair values of derivative instruments held by the Bank are set out in the

following tables. The table reflects gross positions before the netting of any counterparty positions (and payments)

and covers the contracts with settlement dates after the end of the respective reporting period.



74



Contractual/notional amount

Fair value


Fair value


Fair value

Assets Liabilities Assets Liabilities Assets Liabilities

Exchange Rate derivatives

- Currency forwards and swaps 134,125 245 357 17,474 2 80 - - -

- Currency options - - - - - - - - -

- Currency futures - - - - - - - - -

Subtotal 134,125 245 357 17,474 2 80 - - -

Interest rate derivatives

- Interest rate swaps - - - - - - - - -

- Interest rate options 32,151 77 77 - - - - - -

- Interest rate futures - - - - - - - - -

Subtotal 32,151 77 77 - - - - - -

Hybrid derivatives

Cross-currency interest rate swaps

32,201 239 240 - - - - - -

Subtotal 32,201 239 240 - - - - - -

Total 198,477 561 674 17,474 2 80 - - -



75

21. Investment securities


Government bonds 4,994 4,998 19,517

Municipal bonds - - -

Corporate bonds - - -

Promissory notes - - -

Total investment in securities (net) 4,994 4,998 19,517

The movement in investment securities is as follows:


Gross amount at 1 January 4,998 19,517

Additions 4,991 4,995

Reclassified from trading securities - -

Redemption (4,994) (2,997)

Interest Income accrual 5 4

Interest income received (5) (4)

Acquisitions through business combinations - -

Disposals - -

Transfer to Financial assets measured at FVOCI - (16,517)

Gross amount at 31 December 4,995 4,998

Impairment

Movements in the provision for impairment of investment securities during 2018 are as follows:

In millions of Hungarian Forint Government

bonds Municipal

bonds Corporate

bonds Promissory

notes Total

Provision for impairment of investment securities at 1 January (including IFRS 9 opening adjustment)

1 - - - 1

(Recovery of)/provision for impairment during the year

- - - - -


- - - - -


- - - - -


Effect to translation to presentation currency - - - - -

Provision for impairment of investment securities at 31 December

1 - - - 1



76

Movements in the provision for impairment of investment securities during 2017 are as follows:

In millions of Hungarian Forint Government

bonds Municipal

bonds Corporate

bonds Promissory

notes Total

Provision for impairment of investment securities at 1 January

- - - - -

(Recovery of)/provision for impairment during the year

- - - - -


- - - - -


- - - - -


Effect to translation to presentation currency - - - - -

Provision for impairment of investment securities at 31 December

- - - - -

Analysis of investment securities by Stages:

In millions of Hungarian Forint Stage 1 Stage 2 Stage 3 Purchased

credit-impaired

Total

As at 31 December 2018

Investment securities 4,995 - - - 4,995

Allowance for impairment losses (1) - - - (1)

Investment securities (net) 4,994 - - - 4,994



77

The primary factor that the Bank considers in determining whether an investment security is impaired is its overdue

status. As a result, the Bank presents below an ageing analysis of investment securities.

In millions of Hungarian Forint Stage 1 Stage 2 Stage 3 Purchased

credit-impaired

Total

Neither past due nor impaired 4,995 - - - 4,995

Past due but not impaired (gross) - - - - -

- less than 30 days overdue - - - - -

- 30 to 90 days overdue - - - - -

- 91 to 180 days overdue - - - - -

- 181 to 360 days overdue - - - - -

- over 360 days overdue - - - - -

Total not impaired (gross) 4,995 - - - 4,995


- less than 30 days overdue - - - - -

- 30 to 90 days overdue - - - - -

- 91 to 180 days overdue - - - - -

- 181 to 360 days overdue - - - - -

- over 360 days overdue - - - - -

Total impaired (gross) - - - - -

The investment securities are not collateralized.

22. Property, plant and equipment

The total cost of property, plant and equipment still in use, with 0 net book value was HUF 0.4 million as at 31

December 2018.

The below table shows the variation of property, plant, equipment and the related depreciation:



78

In millions of Hungarian Forint Buildings

Office and computer equipment Vehicles

Tangible assets in progress Total

Cost

Balance at 1 January 2017

-

-

-

-

-

Additions

-

-

-

-

-

Adjustment

-

-

-

-

-

Construction in progress transfer in/(out)

-

-

-

-

-

Deduction

-

-

-

-

-

Balance at 31 December 2017

-

-

-

-

-

Additions

-

3

-

-

3

Adjustment

-

-

-

-

-

Construction in progress transfer in/(out)

-

-

-

-

-

Deduction

-

-

-

-

-


-

3

-

-

3

Accumulated depreciation and impairment


-

-

-

-

-

Additions

-

-

-

-

-

Adjustment

-

-

-

-

-

Deductions

-

-

-

-

-


-

-

-

-

-

Additions

-

1

-

-

1

Adjustment

-

-

-

-

-

Deductions

-

-

-

-

-


-

1

-

-

1

Net book value


-

-

-

-

-


-

-

-

-

-


-

2

-

-

2



79

23. Intangible assets

The total cost of intangible assets still in use, with 0 net book value was HUF 15 million as at 31 December 2018.

In millions of Hungarian Forint Software Licenses Intangible assets

in progress Total

Cost

Balance at 1 January 2017 25 - - 25

Additions 18 - - 18

Adjustment - - - -

In progress transfer in/(out) - - - -

Deduction - - - -

Balance at 31 December 2017 43 - - 43

Additions - - - -

Adjustment - - - -

In progress transfer in/(out) - - - -

Deduction - - - -


Accumulated amortization and impairment


Additions 12 - - 12

Adjustment - - - -

Deductions - - - -


Additions 10 - - 10

Adjustment - - - -

Deductions - - - -


Net book value






80

24. Deferred income tax

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax

assets against current tax liabilities and when the deferred income taxes are related to the same final authority. The

table below includes the deferred income tax assets and liabilities of the Bank after offsetting qualifying amounts and

related temporary differences.


In millions of Hungarian Forint Temporary differences

Deferred tax assets/ liabilities

Temporary differences




Deferred income tax asset

13,683

1,329

5

-

3

-

Deferred income tax liabilities

(44)

(5)

-

-

-

-

Net

13,639

1,324

5

-

3

-

Deferred income taxes/liabilities and related temporary differences, before offsetting qualifying amounts, are

attributable to the following items:


Deferred income tax assets Temporary differences






IFRS 9 opening impairment adjustment

11,921

1,073

-

-

-

-

Impairment of other receivables

5

-

5

-

3

- Deferred loan related commission adjustment

1,757

256

-

-

-

-

Pension, retirement benefits and salary payments

-

-

-

-

-

-

Fair value changes of financial instruments at fair value through profit or loss and derivative financial instruments

-

-

-

-

-

-

Fair value changes of FVOCI securities

-

-

-

-

-

-

Depreciation of property, plant and equipment

-

-

-

-

-

-

Tax loss carry forward

-

-

-

-

-

-

Other temporary differences

-

-

-

-

-

-

Subtotal:

13,683

1,329

5

-

3

-



81

Deferred income tax liabilities Temporary differences







-

-

-

-

-

-

Fair value changes of FVOCI securities

(44)

(5)

-

-

-

-

Depreciation of property, plant and equipment

-

-

-

-

-

-

Revaluation of property, plant and investment properties

-

-

-

-

-

-

Other temporary differences

-

-

-

-

-

-

Subtotal:

(44)

(5)

-

-

-

-

Net

13,639

1,324

5

-

3

-

The movements in deferred income tax account are as follows:



As at 1 January including IFRS 9 transitional differences credited to retained earnings

2,290 -

(Debited) / Credited to the income statement (981) -

(Debited) / Credited to other comprehensive income 15 -

Other - -

As at 31 December 1,324 -

The deferred income tax credit/charge in the income statement comprises the following temporary differences:



IFRS 9 opening impairment adjustment (700) -

Impairment of other receivables - -

Deferred loan related commission adjustment (281) -

Pension, retirement benefits and salary payables - -


- -

Depreciation of property and equipment - -

Tax loss carry forward - -

Other temporary differences - -

Total (981) -



82

25. Other assets

In millions of Hungarian Forint 31 December

2018 31 December 2017 1 January 2017

Taxes receivable 606 51 4

Accounts receivable and prepayments 37 2 3

Deferred expenses 21 24 71

Fees receivable 4 1 -

Land use rights - - -

Accrued expense of loan transfer transactions 191 53 -

Repossessed assets - - -

Other - - -

Total 859 131 78

All of the above assets are expected to be recovered less than twelve months after the year-end.

26. Deposits from banks and other financial institutions


Due to:

- Bank of China Head Office 1,636,080 1,698,350 965,363

- Other Bank of China subsidiary/branch 105,189 75,782 211,513

- Central Banks 4 - -

- Other financial institutions 57,661 53,513 19,222

Total 1,798,934 1,827,645 1,196,098


Correspondent accounts of other banks 34,610 3,818 128

Term placements of other banks 1,764,324 1,823,827 1,195,970

Sale and repurchase agreements with other banks

- - -

Liability to return collateral sold or repledged - - -

Overdue term placements of other banks - - -

Total 1,798,934 1,827,645 1,196,098



83

27. Deposits from customers


2018 31 December

2017 1 January 2017

At amortized cost

Demand deposits

- Corporate deposits 20,411 746 7,475

- Personal deposits

- -

Subtotal: 20,411 746 7,475

Time deposits

- Corporate deposits 79,743 31,017 -

- Personal deposits - - -

Subtotal: 79,743 31,017 -

Certificates of deposit - - -

Other deposits 2,449 42 42

Total due to customers at amortized cost 102,603 31,805 7,517

At fair value

Structured deposits

- Corporate deposits - - -

- Personal deposits - - -

Total due to customers at fair value - - -

Total due to customers 102,603 31,805 7,517

28. Debt securities in issue

In 2015 the Bank joined the „Silk Road” bond issuing programme organized by Head Office, amounting to a total USD

20 billion. The Hungarian Branch participated by issuing bonds of nominal value EUR 500 million on 30 June 2015.

The bond matured on 30 June 2018.

Main parameters of the bond were the following:

ISIN code: XS1253376518,

Interest: floating, 3 month Euribor + 100 bps.

The below table shows the book value of the bond as at reporting dates:



84


2018 31 December

2017 1 January 2017

Issued bond - 155,029 155,366

Total debt securities issued - 155,029 155,366

29. Provisions

Movements in provision during 2018 are as follows:

In millions of Hungarian Forint Note Tax risks Off-balance sheet items Other Total

Carrying amount at 1 January 2018 including IFRS 9 transitional differences debited to retained earnings as at 1-Jan-2018 -

437 - 437

Addition charged to profit or loss

-

- - -

Additions through business combinations

-

- - -

Utilization of provision

-

- - -

Unwinding of the present value discount and effect of changes in discount rates

-

- - -

Unused amounts reversed

-

(247) - (247)

Other

-

16 - 16

Carrying amount at 31 December 2018 -

206 - 206

The HUF 247 million provision write-back relates to guarantees given and unutilized loan commitments. The “Other”

line includes the FX rate variation impact on provisions.

The 31 December 2018 balance of HUF 206 million provision relates to loan commitments and guarantees issued

(HUF 204 and HUF 2 million respectively).

Nature of obligation: the customers may utilize the undrawn loan facilities and the guarantees can be drawn down no

later than the contractual maturity of these commitments. The timing of the outflows are uncertain, the contract with

the furthest maturity date will expire on 30 June 2039. The amounts of outflows depend on the cutomers’ decisions or

circumstances.



85

Movements in provision during 2017 are as follows:

In millions of Hungarian Forint Note Tax risks Off-balance sheet items Other Total

Carrying amount at 1 January 2017 -

- - -

Addition charged to profit or loss

-

- - -

Additions through business combinations

-

- - -

Utilization of provision

-

- - -

Unwinding of the present value discount and effect of changes in discount rates

-

- - -

Unused amounts reversed

-

- - -

Other

-

- - -

Carrying amount at 31 December 2017 -

- - -

30. Other liabilities


2018 31 December

2017 1 January

2017

Items in process of clearance and settlement 1,681 32 -

Taxes payable 30 34 26

Salary and welfare payables - - -

Accrued general expenses 322 401 263

Deferred income 597 1,703 490

Suppliers - - 2

Short position in debt securities - - -

Insurance liabilities - - -

Bonds issued at fair value - - -

Due to and placements from banks and other financial institutions at fair value

- - -

Other - - -

Total Other liabilities 2,630 2,170 781

The Current income tax liabilities item of the Statement of Financial Position includes the Bank’s HUF 80 million

balance of Corporate income tax liability as at 1 January 2017.



86

31. Dotation capital and reserves

The Branch was established on 28 April 2014 and registered at Court of Registration on 7 August 2014. On 18

November 2014 Head Office provided USD 10 million equity for the operation of the Branch, of which HUF 2 000

million was recorded as dotation capital (issued capital), while HUF 433 million was posted as capital reserve.

Dotation capital:


2018 31 December

2017 1 January 2017

Dotation capital 2,000 2,000 2,000

Total 2,000 2,000 2,000

Reserves:


2018 31 December

2017 1 January 2017

Capital reserve 433 433 433

General reserve 5,153 3,166 1,562

Retained earnings 20,886 25,277 10,836

Other comprehensive income 40 - -

Total 26,512 28,876 12,831

The tables below present the total equity in two different structures as prescribed by Hungarian Law (Act C of 2000,

no. 114 / B. §) to help the reconciliation of the equity components presented in these IFRS financial statements and

the financial statements according to HAR published in previous years.

General reserve which is set aside as 10% of the profit calculated in accordance with Hungarian Accounting (banking

law 83. § (1)) standards for use against future losses.



87

IFRS financial statements


2018 31 December

2017 1 January 2017

Dotation capital 2,000 2,000 2,000

Net residual attributable to head office 26,512 28,876 12,831

Total dotation capital and Net residual attributable to head office

28,512 30,876 14,831

Based on the Hungarian Law (Act C of 2000, no. 114 / B. §)


2018 31 December

2017 1 January 2017

Dotattion capital in accordance with IFRS 2,000 2,000 2,000

Capital reserve 433 433 433

General reserve 5,153 3,166 1,562

Accumulated profit 3,004 10,836 -

Profit after tax 17,882 14,441 10,836

Revaluation reserve 40 - -

Total equity 28,512 30,876 14,831

from this

Registered dotation capital by the Registry Court 2,000 2,000 2,000

Distributable reserves available for profit transfer to head office

20,886 25,277 10,836

32. Profit transfer to head office


Profit to be transferred at 1 January - -

Profit transfer approved during the year - -

Profit transferred during the year - -

Profit to be transferred at 31 December - -

All profit transfers are declared and paid in Hungarian Forints.



88

33. Off-Balance Sheet items


Off-Balance Sheet commitments given

Undrawn credit lines 353,190 320,829 220,850

Guarantees given 9,806 6,915 8,234

Letters of credit 1,358 1,962 178

Other - - -

Total Off-Balance Sheet commitments given

364,354 329,706 229,262

Off-Balance Sheet commitments received

Guarantees received 77,153 239,156 81,342

Other collaterals received 987,323 1,121,203 738,157

Other - - -

Total Off-Balance Sheet commitments received

1,064,476 1,360,359 819,499

34. Financial Risk Management

34.1 Overview

The Bank has designed a series of risk management policies and has set up controls to analyse, identify, monitor and

report risks by means of relevant and up-to-date information systems. The Bank regularly reviews and revises its

risks management policies and systems to reflect changes in markets, products and emerging best practice.

The most significant types of risks to the Bank are credit risk, market risk and liquidity risk. Market risk includes

interest rate risk, currency risk and other price risk.

34.2 Financial risk management framework

The Board of Directors is responsible for establishing the overall risk appetite of the Bank and reviewing and

approving the risk management objectives and strategies.

Within this framework, the Bank’s senior management has overall responsibility for managing all aspects of risks,

including implementing risk management strategies, initiatives and credit policies and approving internal policies,

measures and procedures related to risk management. The Risk Management Department, the Corporate Banking

Department, the Financial Management Department and other relevant functional departments are responsible for

monitoring financial risks.



89

The Bank manages the risks at the branch level through direct reporting from the branches to the relevant

departments responsible for risk management at the Head Office. Business line related risks are monitored through

establishing specific risk management teams within the business departments. The Bank monitors and controls risk

management at subsidiaries by appointing members of their boards of directors and risk management committee as

appropriate.

34.3 Credit 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 obligations. Credit risk is one of the most significant risks for the Bank’s

business.

Credit risk exposures arise principally in lending activities and debt securities investment activities. There is also

credit risk in off-balance sheet financial instruments, such as derivatives, loan commitments, bill acceptance, letters of

guarantee and letters of credit.

Credit risk measurement

The estimation of credit exposure for risk management purposes is complex and requires the use of models, as the

exposure varies with changes in market conditions, expected cash flows and the passage of time. The assessment of

credit risk of an asset portfolio entails further estimations as to the likelihood of defaults occurring, of the associated

loss ratios and of default correlations between counterparties. The Bank measures credit risk using Probability of

Default (PD), Exposure at Default (EAD) and Loss Given Default (LGD). This is similar to the approach used for the

purposes of measuring Expected Credit Loss (ECL) under IFRS 9.

Customer Rating Scale

The Bank divides the credit rating into 27 levels, takes the letter character as rating identifier, namely AAA1, AAA2,

AAA3, AAA4, AAA5, AAA6, AAA7, AA1, AA2, AA3, A1, A2, A3, A4, BBB1, BBB2, BBB3, BB1, BB2, B1, B2, CCC1,

CCC2, CC1, CC2, C and D. D is the default level and others are non-default levels. The meanings of all these rating

levels are as follows:

AAA1: As the highest level of debtor rating, it indicates the lowest risk.

AAA2: It is the best level in the “Extremely low default risk” group, which is one of the three “investable and above”

groups.

AAA3: It is the medium level in the “Extremely low default risk” group, which is one of the three “investable and

above” groups.

AAA4: It is the poorest level in the “Extremely low default risk” group, which is one of the three “investable and above”

groups.

AAA5: It is the best level in the “Low default risk” group, which is one of the three “investable and above” groups.

AAA6: It is the medium level in the “Low default risk” group, which is one of the three “investable and above” groups.

AAA7: It is the poorest level in the “Low default risk” group, which is one of the three “investable and above” groups.



90

AA1: It is the best level in the “Relative low default risk” group, which is one of the three “investable and above”

groups.

AA2: It is the medium level in the “Relatively low default risk” group, which is one of the three “investable and above”

groups.

AA3: It is the poorest level in the “Relatively low default risk” group, which is one of the three “investable and above”

groups.

A1: It is the lowest risk level in the “Medium default risk” group, which is one of the five “non-default” groups below the

investable level, and is the most close to the investable levels.

A2: It is the “relatively low risk” level in the “Medium default risk” group, which is one of the five “non-default” groups

below the investable level.

A3: It is the “medium-to-low risk” level in the “Medium default risk” group, which is one of the five “non-default” groups


A4: It is the “Medium default risk” level in the “Medium default risk” group, which is one of the five “non-default”

groups below the investable level.

BBB1: It is the “relatively high risk” level in the “Medium default risk” group, which is one of the five “non-default”


BBB2: It is the “highest risk” level in the “Medium default risk” group, which is one of the five “non-default” groups


BBB3: It is the “relatively low risk” in the “Significant default risk” group, which is one of the five non-default groups


BB1: It is the “relatively high risk” level in the “Significant default risk” group, which is one of the five non-default


BB2: It is the “relatively low risk” in the “High default risk” group, which is one of the five non-default groups below the

investable level.

B1: It is the “relatively high risk” level in the “High default risk” group, which is one of the five non-default groups


B2: It is the “lowest risk” level in the “Very high default risk” group, which is one of the five non-default groups below

the investable level.

CCC1: It is the “Medium risk” level in the “Very high default risk” group, which is one of the five non-default groups


CCC2: It is the “highest risk” level in the “Very high default risk” group, which is one of the five non-default groups




91

CC1: It is the “lowest risk” level in the “Extremely high default risk” group, which is one of the five non-default groups


CC2: It is the “medium risk” level in the “Extremely high default risk” group, which is one of the five non-default groups


C: It the “highest risk” level in the “Extremely high default risk” group, which is one of the five non-default groups

below the investable level, and is the most close to the default level among all the non-default levels.

D: Overdue for more than 90 days or impossible to pay off all debt obligations in full amount.

The Bank’s internal rating scale is set out below:

S/N Rating scale PD floor PD cap Level PD (bp) Description

of risk level

1 AAA1 0.000% 0.015% 1

Very low 2 AAA2 0.015% 0.025% 2

3 AAA3 0.025% 0.035% 3

4 AAA4 0.035% 0.045% 4

5 AAA5 0.045% 0.060% 5

Low 6 AAA6 0.060% 0.080% 7

7 AAA7 0.080% 0.110% 9

8 AA1 0.110% 0.188% 13

Relatively

low 9 AA2 0.188% 0.271% 22

10 AA3 0.271% 0.450% 39

11 A1 0.450% 0.590% 51

Medium 12 A2 0.590% 0.770% 67

13 A3 0.770% 1.020% 89

14 A4 1.020% 1.340% 117

Relatively

high

15 BBB1 1.340% 1.760% 154

16 BBB2 1.760% 2.320% 203

17 BBB3 2.320% 3.060% 267

18 BB1 3.060% 4.020% 351

19 BB2 4.020% 5.300% 462

20 B1 5.300% 6.970% 608 Very high



92

S/N Rating scale PD floor PD cap Level PD (bp) Description

of risk level

21 B2 6.970% 9.170% 801

22 CCC1 9.170% 12.080% 1,054

23 CCC2 12.080% 15.900% 1,377

24 CC1 15.900% 20.920% 1,800

25 CC2 20.920% 27.500% 2,400

26 C 27.500% 100.000% 3,300

27 D 100.000% 100.000% 10,000 Default

Expected credit loss measurement

IFRS 9 outlines a “three-stage” model for impairment based on changes in credit quality since initial recognition as

summarized below:

Financial assets that have had no significant increase in credit risk since initial recognition are recognized and

measured as stage 1.

Financial assets that have had significant increase in credit risk since initial recognition but have no objective

evidence of impairment at the reporting date are recognized and measured as stage 2

Financial assets that have had significant increase in credit risk since initial recognition and also have objective

evidence of impairment at the reporting date are recognized and measured as stage 3.

Purchased or originated credit-impaired financial assets are those financial assets that are credit-impaired on

initial recognition. Their ECL is always measured on a lifetime basis (Stage 3).

𝑬𝑪𝑳= ∑𝑷𝑫(𝒕)*𝑳𝑮𝑫(𝒕)*𝑬𝑿𝑷(𝒕)*𝑫𝑭(𝒕),

where:

PD(t): the probability of default at time t;

LGD(t): the loss given default at time t;

EXP(t): the outstanding value of principle;

DF(t): the discount factor used to discount the EXP (t) to the reporting date.

For stage 1 financial assets, t is the next 12 months from the reporting date; for stage 2&3 financial assets, t is the

remaining lifetime.



93

Change in credit quality since initial recognition

Stage 1 Stage 2 Stage 3

(Initial recognition) (Significant increase in credit risk since initial recognition)

(Credit-impaired asset)

12-month expected credit losses Lifetime expected credit losses Lifetime expected credit losses

Maximum exposure to credit risk before collateral held or other credit enhancements

The following table contains an analysis of the credit risk exposure of financial instruments for which an ECL

allowance is recognized. The gross carrying amount of financial assets below also represents the Bank’s maximum

exposure to credit risk on these assets.

In millions of Hungarian Forint 31 December 2018 31 December 2017

Credit risk exposure relating to on-balance sheet financial assets are as follows:

Balances with central banks 39,790 4,352

Loans and advances to banks and other financial institutions 270,483 310,405

Government certificates of indebtedness for bank notes issued

- -

Financial assets at fair value through profit or loss - -

Derivative financial assets - -

Loans and advances to customers 1,626,769 1,720,465

Financial investments

- Financial assets measured at fair value through OCI 8,319 8,047

- Investment securities 4,994 4,998

- Trading assets - -

Other assets - -

Subtotal 1,950,355 2,048,267

Credit risk exposures relating to off-balance sheet items are as follows:

- Letter of guarantee issued 9,806 6,915

- Loan commitments and other credit commitments 354,548 322,791

Subtotal 364,354 329,706

Total 2,314,709 2,377,973



94

Loans and advnaces to customers subject to impairment

The following table contains as analysis of the credit risk exposure on loans and advances to customers for which an ECL allowance is recognized. The gross carrying

amount of loans below also represents the Bank’s maximum exposure to credit risk on the assets.


Credit grade Stage 1

12 month ECL Stage 2

Lifetime ECL Stage 3

Lifetime ECL

Purchased credit-

impaired Total Total Total

Performing N/A N/A N/A N/A N/A 1,708,746 1,189,462

Special mention N/A N/A N/A N/A N/A 11,719 -

Substandard N/A N/A N/A N/A N/A - -

Doubtful N/A N/A N/A N/A N/A - -

Gross carrying amount 1,440,062 186,707 - - 1,626,769 1,720,465 1,189,462

Loss allowance (6,224) (13,328) - - (19,552) (815) -

Carrying amount 1,433,838 173,379 - - 1,607,217 1,719,650 1,189,462



95

Collaterals and other credit enhancements

The Bank employs a range of policies and practices to mitigate credit risk. The most common of these is accepting

collateral for funds advanced. The Bank has internal policies on the acceptability of specific classes of collateral or

credit risk mitigation.

The Bank prepares a valuation of the collateral obtained as part of the loan origination process. This assessment is

reviewed periodically. The principal collateral types for loans and advances are:

• Cash deposit

• Marketable and other securities

• Guarantees (Corporate guarantee, suretyship, joint and several guarantee, buy-back guarantees, State or

supranational entity’s guarantee, State owned entity’s guarantee, Bank guarantees)

• Mortgage

• Pledge on assets

• Pledge on receivables

• Floating charge

• Insurance

• Other

The basic criteria of the eligible collaterals have:

• Clear ownership

• Stable value (within an appropriate time limit) and “clear” market value, assessment of marketability and

availability

• Easy to sell and liquid

• Used for its original function.

The Bank does not accept collaterals which already provided by the customer in another legal transaction with a third

party as collateral, except for assets pledged in security with a mortgage pertaining to the real property.



96

Financial assets that are credit-impaired and related collateral held in order to mitigate potential losses are shown

below:

Credit-impaired assets Gross exposure Impairment allowance

Carrying amount Fair value of

collateral held

Loans to individuals: - - - -

- Mortgages - - - -

- Other - - - -

Loans to corporate entities: - - - -

- Loans and advances - - - -

- Discounted bills - - - -

Carrying amount - - - -

34.4 Market Risk

The Bank is exposed to market risks from on-balance and off-balance businesses, which may cause losses to the

Bank as a result of adverse changes in market prices of interest rate, exchange rate, equities and commodities.

Market risk arises from open positions in the trading and banking books. Both the Bank’s trading book and banking

book face market risks. The trading book consists of position in financial instruments and commodities that are held

with trading intent or in order to hedge other elements of trading book. The banking book consists of financial

instruments not included in the trading book.

Market risk measurement techniques and limits

The classification of the trading book and the banking book is the precondition and basis of market risk

management and accurate capital measurement. The trading book includes the financial instruments and commodity

positions held for the purpose of trading or avoiding the risks of other transactions, and other businesses of a bank

are classified to the banking book. The Bank adopts the corresponding measures for the identification, measurement,

monitoring and control of market risk according to the nature and characteristics of the trading book and the banking

book.

The purpose of market risk management is to control the market risk within the acceptable level for the Bank by

effectively manage market risk, optimize the allocation of market risk capital, strike a balance between risks and

returns, promote business development, and maximize the value of shareholders under the Bank’s overall risk

appetite determined by the Board of Directors.

The market risk management system shall fall in line with the Bank’s business nature, scale, complexity and risk

features and it shall be consistent with the Bank’s overall business development strategies, management

competence, capital strength and the overall market risk level.



97

Market risk management shall be based on the principles of risk management of the Bank. In the meantime,

according to the characteristics of market risk management, the Bank shall follow the principles of “integrated,

comprehensive and timely” in its management.

Integrated: market risk management shall be subject to the Bank’s coordinated management and centralized control.

The whole group is integrated in terms of market risk appetite, policy, risk assessment, system, model and data

standard.

Comprehensive: Departments , institutions and business lines that involve market risk, risk should be covered in the

market risk management, and other risk factor that are likely to transform into market risk should be taken into

consideration in management procedure to ensure effective control of market risk.

Timely: market risk management shall follow up on the latest development of the inside and outside environment,

respond rapidly, make decisions in a timely manner and make dynamic adjustment accordingly.

Market Risk Management of Trading Business

Client servicing business should meet the following management requirements:

1.1 In principle, positions arising from client servicing business should be hedged on a timely manner; therefore, the

Bank should not keep any exposure after risk hedging. However, residual market risk due to imperfect external

conditions should be brought into the market risk capital calculation and limits management system;

1.2 For client servicing business, exposures arising from counterparty default should be closed in a timely manner to

avoid unintended market risk. If the unintentional exposure needs to be kept for special reasons, senior management

needs to review and approve on a case by case basis to decide whether the exposure should be included in the

scope of market risk limits management system.

In the practice of trading business, market risk components should be well identified, decomposed and analyzed to

make sure total risk controllable. The Bank shall conduct the trading business within the business authorization scope

approved by Head Office.

Trading positions and market conditions change frequently, therefore trading positions should be marked to market in

time, revaluated at least once a day, and the market risk of trading business should also be measured at least once a

day. Measuring market risk needs to quantify the market risk undertaken by trading business under normal market

conditions to assess whether overall risk is controllable.

Market Risk Management of Banking Book

The objective of the Bank’s banking book interest rate risk management is to control the adverse impact of interest

rate changes on the Bank’s overall income and economic value within a tolerable degree through effective

management and promote sustainable income growth under the Bank’s overall business development strategies and

risk appetite.

The Bank shall properly arrange the sources and uses of foreign currency funds to minimize potential mismatch of

currencies. In consideration of the Bank’s considerable part of the income comes from foreign exchange business,



98

the banking book can keep foreign exchange exposures but the total exposure shall be kept under the limit set by

Head Office.

Measurement methods

The measurement methods of market risk include Value at Risk (VaR), stress test, sensitivity analysis (PVBP),

foreign exchange exposure analysis, net interest income analysis, and repricing gap analysis.

Measurement requirements for the trading book

The trading book uses such indicators as VaR, stress test and sensitivity analysis to measure overall market risk,

covering interest rate risk and exchange rate risk, and conduct qualified analysis to liquidity requirements of products.

Measurement requirements for the banking book

The market risk measurement of the banking book includes the measurement of interest rate risk and exchange rate

risk. The market risk measurement of the banking book shall assess the impact of interest rate changes on the

Bank’s operations from income perspective. The Bank uses the fluctuation ratio of net interest income (NII) and

repricing gap to measure the interest rate risk at present. The measurement of the exchange rate risk of the banking

book involves the measurement of non-trading foreign exchange exposure. The Bank uses total foreign exchange

exposure to measure the exchange rate risk at present.

Market Risk Monitoring and Control

The Bank shall provide continuous monitoring of market risk and exercise market risk limit management to effectively

convey its risk appetite. The limits are set in line with the instruction of the Head Office and will be reexamined once a

year. The Bank shall monitor and report actual risk conditions within and beyond the limit. Furthermore the Bank may

propose to Head Office on the limit setting according to the regulatory authority’s requirements and the actual

business and risk conditions of the Bank.

Market risk limit indicators include risk limit and trading limit.

1. Risk limit refers to the limit of market risk measured according to certain measurement methods, including VaR

limit, stress test limit, sensitivity limit, fluctuation ratio limit of net interest income and the limit of total foreign

exchange exposure.

2. Trading limit refers to the limit set for total trading positions or net trading positions, including the limit of trading

foreign exchange exposure.

The implementation of the authorized market risk limit shall be reported to senior management and Head Office

periodically.

When the actual risk reaches 90% of the authorized limit, the monitoring department shall inform the business

department immediately and report on causes, analysis, prediction of the future changes to the risk management and

compliance department. If necessary, the related departments shall find the countermeasures to avoid the limit

exceeding situation.



99

In case of limit exceeding situations, the monitoring department shall report to the risk management and compliance

department and senior management immediately. The related departments shall report on the causes and the

proposed solutions within five working days to senior management and Head Office.

Trading Book

The table below shows the VaR of the trading book by type of risk during the years ended 31 December 2018 and 31

December 2017:

2018 2017


Average High Low Average High Low

The Bank’s trading VaR

Interest rate risk - -

-

-

-

-

Foreign exchange risk

1

7

-

-

1

-

Volatility risk - -

-

-

-

-

Commodity risk - -

-

-

-

-

Total of the Bank’s trading VaR

1

7

-

-

1

-

Banking Book

The Bank performs sensitivity analysis by measuring the impact of a change in interest rates on “Net interest

income”. This analysis assumes that yield curves change in parallel while the structure of assets and liabilities based

on changes in the market situations, and controls the fluctuation of net interest income within an acceptable level.

The table below illustrates the potential impact of a 25 basis points interest rate increase and 25 basis points interest

rate decrease on the net interest income of the Bank. The actual situation may be different from the assumptions

used and it is possible that actual outcomes could differ from the estimated impact on net interest income of the

Bank.



100

(Decrease)/increase in net interest income

In millions of Hungarian Forint Currency Year ended 31 December 2018


+25 basis points parallel move in all yields curves

EUR 226 (40)

USD 314 (92)

CNY (6) 1

GBP 2 (30)

HKD 4 -

CZK - -

HUF 111 61

Total 651 (100)

-25 basis points parallel move in all yields curves

EUR (226) 40

USD (314) 92

CNY 6 (1)

GBP (2) 30

HKD (4) -

CZK - -

HUF (111) (61)

Total (651) 100

Foreign currency risk

Foreign exchange exposure comes from the mismatch of currencies in a bank’s on and off-balance sheet business.

Foreign exchange exposure analysis can measure the impact of exchange rate changes on a bank’s income in the

current period or economic value. The Bank has classified foreign exchange exposure formed in trading businesses

and non-trading businesses. Foreign exchange exposure analysis provides information on the positions of the

exposure of each foreign currency and the Bank’s overall exchange rate risk conditions. The Bank performs currency

risk sensitivity analysis to estimate the effect of potential exchange rate changes of foreign currencies against HUF

on profit before tax and equity.

The Table below indicates a sensitivity analysis of exchange rate changes of the currencies to which the Bank had

significant exposure:



101

Currency Change in

currency rate

Effect on profit before tax as at 31 December

2018

Effect on profit before tax as at 31 December

2017

Effect on equity as at

31 December

2018

Effect on equity as at

31 December 2017

EUR -1% (56) (39) - -

USD -1% 18 5 - -

CNY -1% (4) (2) - -

GBP -1% (6) (3) - -

Interest rate risk

The Bank takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on its

financial position and cash flows. Interest margins may increase as a result of such changes, but may reduce or

create losses in the event that unexpected movements arise. Management monitors on a daily basis and sets limits

on the level of mismatch of interest rate repricing that may be undertaken.

The table below summarizes the Bank’s exposure to interest rate risks. The table presents the aggregated amounts

of the Bank’s financial assets and liabilities at carrying amounts, categorized by the earlier of contractual interest

repricing or maturity dates:

In millions of Hungarian Forint Demand and less than 1

month

From 1 to 6 months

From 6 to 12 months

More than 1 year

Total

31 December 2018

Total interest-bearing assets 1,711,957 140,533 6,181 83,992 1,942,663

Total interest-bearing liabilities 341,269 1,463,670 49,291 42,191 1,896,421

Net interest sensitivity gap at 31 December 2018

1,370,688 (1,323,137) (43,110) 41,801 46,242

In millions of Hungarian Forint Demand and less than 1

month

From 1 to 6 months

From 6 to 12 months

More than 1 year

Total

31 December 2017

Total interest-bearing assets 613,026 1,084,641 248,189 94,160 2,040,016

Total interest-bearing liabilities 466,686 1,345,906 159,134 38,823 2,010,549

Net interest sensitivity gap at 31 December 2017

146,340 (261,265) 89,055 55,337 29,467

The table below summarizes interest rates for financial instruments at the reporting date (for securities, the interest

rates represent yields to maturity):



102

In % p.a. 2018

HUF USD EUR CNY GBP HKD CZK

Assets


-0.13% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%


0.05% 2.16% -0.06% 4.34% 0.00% 0.00% 0.00%

Loans and advances to customers 2.56% 4.40% 2.14% 0.00% 2.73% 2.78% 0.00%


0.00% 0.00% 0.00% 6.25% 0.00% 0.00% 0.00%

Investment securities 0.11% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Liabilities


1.15% 3.19% 0.32% 4.29% 0.86% 2.61% 0.55%

Deposits from customers 0.23% 2.82% 0.05% 0.00% 0.00% 0.00% 0.00%


0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Debt securities in issue 0.00% 0.00% 0.75% 0.00% 0.00% 0.00% 0.00%



103

In % p.a. 2017

HUF USD EUR CNY GBP HKD CZK

Assets


0.19% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%


0.02% 1.59% 0.03% 4.11% 0.00% 0.00% 0.00%

Loans and advances to customers 1.87% 3.64% 2.28% 2.99% 2.89% 2.21% 0.00%


0.82% 0.00% 0.00% 6.25% 0.00% 0.00% 0.00%

Investment securities 0.12% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Liabilities


1.15% 2.22% 0.37% 3.93% 0.60% 1.68% 0.00%

Deposits from customers 0.21% 0.00% 0.06% 0.00% 0.00% 0.00% 0.00%


0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Debt securities in issue 0.00% 0.00% 0.75% 0.00% 0.00% 0.00% 0.00%



104

34.5 Liquidity Risk

Assets available to meet all of the liabilities and to cover outstanding loan commitments include “Cash, cash

equivalents and balances with central banks”, “Loans and advances to banks and other financial institutions” and

“Loans and advances to customers”, etc. In the normal course of business, a proportion of short-term loan

contractually repayable will be extended and a portion of short-term customer deposits will not be withdrawn upon

maturity. The Bank would also be able to meet unexpected net cash outflows by entering into repurchase

transactions, and by selling securities and accessing additional funding sources.

Maturity analysis

The tables below analyse the Bank’s assets and liabilities into relevant maturity groupings based on the remaining

period at the financial reporting date to the contractual maturity date. For purposes of the table set forth, “Loans and

advances to customers” are considered overdue only if principal payments are overdue. In addition, for loans and

advances to customers that are repayable by installments, only the portion of the loan that is actually overdue is

reported as overdue. Any part of the loan that is not due is reported according to residual maturity.



105

31 December 2018

Overdue / Undrafted

On demand Less than 1

month 1 and 3 months

3 and 12 month

1 and 5 years Over 5 years Total

Assets


- 39,790 - - - - - 39,790


- 133,528 53,729 40,482 12,517 30,227 - 270,483

Loans and advances to customers - - 45,478 - 70,326 1,028,867 462,546 1,607,217

Trading assets - - - - - - - -


- - - - 8,319 - - 8,319

Derivative assets - - - 74 245 242 - 561

Investment securities - - - 3,000 1,994 - - 4,994

Other - - - - 710 - 149 859

Total assets - 173,318 99,207 43,556 94,111 1,059,336 462,695 1,932,223

Liabilities


- 34,610 3,846 - 51,427 1,696,384 12,667 1,798,934

Deposits from customers - 20,411 42 22,508 59,642 - - 102,603

Trading liabilities - - - - - - - -

Derivative liabilities - - - - 357 317 - 674

Bonds issued - - - - - - - -

Guarantees - - - - 18 - - 18

Other - - 1,681 - 539 346 46 2,612

Total liabilities - 55,021 5,569 22,508 111,983 1,697,047 12,713 1,904,841

Net liquidity gap - 118,297 93,638 21,048 (17,872) (637,711) 449,982 27,382



106

Contractual maturities of undiscounted cash flows of financial assets and liabilities:

31 December 2018

Overdue / Undrafted

On demand Less than 1

month 1 and 3 months

3 and 12 month

1 and 5 years Over 5 years Total

Assets


- 39,790 - - - - - 39,790


- 133,528 53,729 40,482 12,517 30,227 - 270,483

Loans and advances to customers - - 45,478 - 70,326 1,028,867 462,546 1,607,217

Trading assets - - - - - - - -


- - - - 8,319 - - 8,319

Derivative assets - - - 74 245 242 - 561

Investment securities - - - 3,000 1,994 - - 4,994

Other - - - - 710 - 149 859

Total assets - 173,318 99,207 43,556 94,111 1,059,336 462,695 1,932,223

Liabilities


- 34,611 3,852 - 51,931 1,803,492 15,216 1,909,102

Deposits from customers - 20,411 42 22,509 59,656 - - 102,618

Trading liabilities - - - - - - - -

Derivative liabilities - - - - 357 317 - 674

Bonds issued - - - - - - - -

Guarantees - - - - 18 - - 18

Other - - 1,681 - 539 346 46 2,612

Total liabilities - 55,022 5,575 22,509 112,501 1,804,155 15,262 2,015,024

Net liquidity gap - 118,296 93,632 21,047 (18,390) (744,819) 447,433 (82,801)



107

The liquidity management of the Bank requires considerations of the level of liquid assets necessary to settle

obligations as they fall due; maintaining access to a range of funding sources; maintaining funding contingency plans;

and monitoring liquidity ratios against regulatory requirements. The Bank calculates liquidity ratios on a daily basis in

accordance with the requirement of the Central Bank of Hungary. These ratios are:

Instant liquidity ratio; which is calculated as the ratio of highly-liquid assets to liabilities payable on demand. The ratio

was 315% at 31 December 2018 (2017: 670%).

Current liquidity ratio, which is calculated as the ratio of liquid assets to liabilities maturing within 30 calendar days.

The ratio was 286% at 31 December 2018 (2017: 101%).

Long-term liquidity ratio; which is calculated as the ratio of assets maturing after one year to equity and liabilities

maturing after one year. The ratio was 89% at 31 December 2018 (2017: 89%).

According to Basel III Liquidity Coverage Ratio (LCR) is an important ratio for measuring liquidity. The threshold for

this ratios is 100%.

The Bank’s LCR was 219 % on 31 December 2018 compared to 112% on 31 December 2017.

34.6 Geographical risk concentration

The geographical concentration of the Bank’s financial assets and liabilities at reporting date is set out below:

31 December 2018

In millions of Hungarian Forint Hungary EU (other than

Hungary) China and

Hong Kong Other third countries

Total

Financial assets


39,790 - - - 39,790


67,283 23,252 1,353 178,595 270,483

Loans and advances to customers 18,049 527,577 354,883 706,708 1,607,217

Trading assets - - - - -


8,319 - - - 8,319

Derivative assets - 239 322 - 561

Investment securities 4,994 - - - 4,994

Other assets 710 - - 149 859

Total financial assets 139,145 551,068 356,558 885,452 1,932,223



108

In millions of Hungarian Forint Hungary EU (other than

Hungary) China and

Hong Kong Other third countries

Total

Financial liabilities


57,772 183 1,666,986 73,993 1,798,934

Deposits from customers 74,685 21,706 6,212 - 102,603

Trading liabilities - - - - -


- - - - -

Derivative liabilities - 77 597 - 674

Debt securities in issue - - - - -

Other liabilities 2,094 215 1 320 2,630

Total financial liabilities 134,551 22,181 1,673,796 74,313 1,904,841

Net position in on-balance sheet financial instruments

4,594 528,887 (1,317,238) 811,139 27,382

Credit related commitments 203,541 97,946 50 62,817 364,354

35. Contingencies and Commitments

Legal proceedings: from time to time and in the normal course of business, claims against the Bank may be

received. On the basis of its own estimates and internal professional advice, management is of the opinion that no

material losses will be incurred in respect of claims, and accordingly no provision has been made in these financial

statements.

Tax contingencies: Hungarian tax legislation which was enacted at the end of the reporting period is subject to

varying interpretations when being applied to the transactions and activities of the Bank. Consequently, tax positions

taken by management and the formal documentation supporting the tax positions may be challenged by tax

authorities. Fiscal periods remain open to review by the authorities in respect of taxes for five calendar years

following the current tax year. The Hungarian transfer pricing legislation is aligned with the international transfer

pricing principles developed by the Organisation for Economic Cooperation and Development (OECD). This

legislation provides for the possibility of additional tax assessment for intercompany transactions if such transactions

are not on an arm’s-length basis.

Compliance with covenants: the Bank is subject to certain covenants primarily relating to its borrowings. Non-

compliance with such covenants may result in negative consequences for the Bank including growth in the cost of

borrowings and declaration of default. Management believes that the Bank was in compliance with covenants at 31

December 2018 and 31 December 2017.



109

36. Related party transactions

Parties are generally considered to be related if the parties are under common control, or one party has the ability to

control the other party or can exercise significant influence over the other party in making financial or operational

decisions. In considering each possible related party relationship, attention is directed to the substance of the

relationship, not merely the legal form.

At 31 December 2018, the outstanding balances with related parties were as follows:

In millions of Hungarian Forint BoC Head

Office

Other BoC branches and subsidiaries

Key management

personnel Total


- - - -


- 243,407 - 243,407

Loans and advances to customers - - - -

Trading assets - - - -


- - - -

Derivative assets 238 37 - 275

Investment securities - - - -

Other assets - - - -


1,636,080 105,189 - 1,741,269

Deposits from customers - - - -

Trading liabilities - - - -


- - - -

Derivative liabilities 548 - - 548

Debt securities in issue - - - -

Provisions - - - -

Other liabilities - 15 - 15

Guarantees received - 77,153 - 77,153

Guarantees given - 1,443 - 1,443



110

The income and expense items with related parties for 2018 were as follows:


Office


Key management

personnel Total

Interest income 62 3,391 - 3,453

Interest expense 32,937 3,260 - 36,197

Fee and commission income - 1,270 - 1,270

Fee and commission expense - 391 - 391

Net trading income - - - -

Net investment income - - - -

Credit impairment losses and provisions - - - -

Other operating income - 820 - 820

General and administrative expenses 197 2,428 345 2,970

Other operating expenses - 435 - 435

At 31 December 2017, the outstanding balances with related parties were as follows:


Office


Key management

personnel Total


- - - -


155,134 151,984 - 307,118

Loans and advances to customers - - - -

Trading assets - - - -


- - - -

Derivative assets 2 - - 2

Investment securities - - - -

Other assets - - - -


1,698,350 75,782 - 1,774,132

Deposits from customers - - - -

Trading liabilities - - - -


- - - -

Derivative liabilities 80 - - 80

Debt securities in issue - - - -

Provisions - - - -

Other liabilities - - - -

Guarantees received - 239,156 - 239,156

Guarantees given - 1,404 - 1,404



111

The income and expense items with related parties for 2017 were as follows:


BoC Head Office


Key management personnel

Total

Interest income

- 736 -

736

Interest expense

338 46 1

385

Fee and commission income

- 128 -

128

Fee and commission expense

- - -

-

Net trading income

- - -

-

Net investment income

- - -

-

Credit impairment losses and provisions

-

- -

-

Other operating income

- 4,790 -

4,790

General and administrative expenses

75

821 373

1,269

Other operating expenses

- - -

-

Share of profit of associates

- - -

-

Transactions with key management personnel

Key management personnel are those persons having authority and responsibility for planning, directing and

controlling the activities of the Bank, directly or indirectly, including Executive Officers.

The Bank enters into banking transactions with key management personnel in the normal course of business. During

the years ended 31 December 2018 and 2017, there were no material transactions and balances with key

management personnel on an individual basis.

The key management compensation for the years ended 31 December 2018 and 2017 comprises:



Compensation for short-term employment benefits 345 373

Compensation for post-employment benefits - -

37. Fair Value Disclosures

The table below includes the fair value of the financial assets and financial liabilities of the statement of financial

position. The level in the fair value hierarchy into which the recurring fair value measurements are categorized are as

follows::



112


In millions of Hungarian Forint Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total

Financial Assets - 13,878 1,917,490 1,931,368 - 13,047 2,034,407 2,047,454 - 19,657 1,355,064 1,374,721

Trading assets - - - - - - - - - - - -

- Hungarian government bonds - - - - - - - - - - - -

Investment securities - 4,998 - 4,998 - 4,998 - 4,998 - 19,657 - 19,657

- Hungarian government bonds - 4,998 - 4,998 - 4,998 - 4,998 - 19,657 - 19,657


- 8,319 - 8,319 - 8,047 - 8,047 - - - -

- Hungarian government bonds - 8,319 - 8,319 - 8,047 - 8,047 - - - -

Other financial assets - 561 1,917,490 1,918,051 - 2 2,034,407 2,034,409 - - 1,355,064 1,355,064

Foreign exchange forward contracts - 244 - 244 - 2 - 2 - - - -

Other financial derivatives - 317 - 317 - - - - - - - -

Fair value of financial assets not held at fair value

- - 1,917,490 1,917,490 - - 2,034,407 2,034,407 - - 1,355,064 1,355,064

- Cash, cash equivalents and balances with central banks

- - 39,790 39,790 - - 4,352 4,352 - - 4,784 4,784

- Loans and advances to banks and other financial institutions

- - 270,483 270,483 - - 310,405 310,405 - - 160,818 160,818

- Loans and advances to customers - - 1,607,217 1,607,217 - - 1,719,650 1,719,650 - - 1,189,462 1,189,462

Total assets recurring fair value measurements

- 13,878 1,917,490 1,931,368 - 13,047 2,034,407 2,047,454 - 19,657 1,355,064 1,374,721



113


In millions of Hungarian Forint Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total

Financial liabilities - 674 1,901,537 1,902,211 - 80 2,014,479 2,014,559 - - 1,358,981 1,358,981

Other financial liabilities - 674 1,901,537 1,902,211 - 80 2,014,479 2,014,559 - - 1,358,981 1,358,981

- Foreign exchange forward contracts - 357 - 357 - 80 - 80 - - - -

- Other derivative financial instruments - 317 - 317 - - - - - - - -

Fair value of financial liabilities not held at fair value

- - 1,901,537 1,901,537 - - 2,014,479 2,014,479 - - 1,358,981 1,358,981

- Deposits from banks and other financial institutions

- - 1,798,934 1,798,934 - - 1,827,645 1,827,645 - - 1,196,098 1,196,098

- Deposits from customers - - 102,603 102,603 - - 31,805 31,805 - - 7,517 7,517

- Debt securities in issue - - - - - - 155,029 155,029 - - 155,366 155,366

Total liabilities recurring fair value measurements

- 674 1,901,537 1,902,211 - 80 2,014,479 2,014,559 - - 1,358,981 1,358,981

The fair value of the financial liabilities is based on the book value as the interest rates of the financial liabilities are based on usual market conditions, the maturities of

most of these liabilities are within 1 year, and there are no special contract conditions, so no significant risk is associated with them. There are no trading liabilities in

the books as at the closing dates.



114

The description of valuation technique and description of inputs used in the fair value measurement for level 2

measurements for year 2018:

Valuation technique Inputs used

Assets at fair value

Financial assets


- Hungarian government bonds Discounted cash flows Yield curve


- Hungarian government bonds Discounted cash flows Yield curve

Other financial assets

- Foreign exchange forward contracts Discounted cash flows Yield curve

- Other derivative financial instruments Discounted cash flows Yield curve

Liabilities carried at fair value

Financial liabilities

Other financial liabilities

- Foreign exchange forward contracts Discounted cash flows Yield curve

- Other derivative financial instruments Discounted cash flows Yield curve

38. Events after the end of the Reporting Period

There were no matters arising, between the statement of financial position date and the date on which these financial

statements were approved by the Management, requiring adjustment or disclosure in accordance with IAS 10.


Xu Haifeng

General Manager

dr. Erdős Ágnes


bank of china limited hungarian branch financial...

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