otp 2014 annual report 4

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OTP BankAnnual Report2014


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Financial Statements


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72 OTP Bank Annual Report 2014


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73IFRS consolidated nancial statements


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Statement of nancial position(consolidated, based on IFRS, as at 31 December 2014, in HUF million)

Note 2014 2013Cash, amounts due from banks and balances with the National Banks 4. 2,307,632 539,125Placements with other banks, net of allowance for placement losses 5. 281,006 273,479Financial assets at fair value through profit or loss 6. 289,275 415,605Securities available-for-sale 7. 839,152 1,637,255Loans, net of allowance for loan losses 8. 5,864,241 6,245,210Associates and other investments 9. 23,381 23,837Securities held-to-maturity 10. 709,369 580,051Property and equipment 11. 206,440 261,523Intangible assets 11. 158,721 193,721Other assets 12. 291,835 211,241TOTAL ASSETS 10,971,052 10,381,047Amounts due to banks, the Hungarian Government, deposits fromthe National Banks and other banks 13. 708,274 784,212

Deposits from customers 14. 7,673,478 6,866,606Liabilities from issued securities 15. 267,084 445,218Financial liabilities at fair value through profit or loss 16. 183,994 87,164Other liabilities 17. 592,088 421,353Subordinated bonds and loans 18. 281,968 267,162TOTAL LIABILITIES 9,706,886 8,871,715

Share capital 19. 28,000 28,000Retained earnings and reserves 1,288,757 1,532,164Treasury shares 21. (55,940) (55,599)Non-controlling interest 22. 3,349 4,767TOTAL SHAREHOLDERS’ EQUITY 1,264,166 1,509,332TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 10,971,052 10,381,047

Budapest, 17 March 2015

The accompanying notes to consolidated nancial statements on pages 78 to 163 form an integral part of these Consolidated FinancialStatements prepared in accordance with International Financial Reporting Standards.


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Statement of comprehensive income(consolidated, based on IFRS, for the year ended 31 December 2014, in HUF million)

2014 2013NET (LOSS)/PROFIT FOR THE YEAR (102,258) 64,108Fair value adjustment of securities available-for-sale 13,019 (1,721)Derivative financial instruments designated as Cash-flow hedge 507 531Net investment hedge in foreign operations (4,489) (1,357)Foreign currency translation difference (108,057) (33,159)Change of actuarial losses related to employee benefits (6) (39)NET COMPREHENSIVE INCOME (201,284) 28,363From this, attributable to:

Non-controlling interest (1,418) (1,016)Owners of the company (199,866) 29,379


Statement of recognized income(consolidated, based on IFRS, for the year ended 31 December 2014, in HUF million)

Note 2014 2013Interest Income

Loans 708,873 771,542Placements with other banks 94,941 207,951Securities available-for-sale 41,969 71,743Securities held-to-maturity 39,934 33,002Amounts due from banks and balances with the National Banks 16,498 4,207Securities held for trading – 924Other 7,015 –

Total Interest Income 909,230 1,089,369Interest Expense

Amounts due to banks, the Hungarian Government, deposits fromthe National Banks and other banks 100,615 189,539

Deposits from customers 138,179 197,236Liabilities from issued securities 13,826 34,896Subordinated bonds and loans 13,883 11,412Other 6,630 2,558

Total Interest Expense 273,133 435,641NET INTEREST INCOME 636,097 653,728Provision for impairment on loan and placement losses 5., 8., 23. 446,830 262,569

NET INTEREST INCOME AFTER PROVISION FOR IMPAIRMENT ON LOANAND PLACEMENT LOSSES 189,267 391,159

Income from fees and commissions 24. 265,392 257,135Expense from fees and commissions 24. 49,736 55,378

Net prot from fees and commissions 215,656 201,757Foreign exchange gains, net 156,918 18,279Gains on securities, net 6,911 11,546Dividend income 4,824 2,474(Provision)/Release of provision on securities available-for-saleand held-to-maturity (297) 11

Other operating income 25. 14,379 26,392Other operating expense 25. (232,609) (39,795)

from this: provision on contingent liabilities due to regulationsrelated to customer loans 25. (194,798) –

Net operating (loss)/gain (49,874) 18,907Personnel expenses 206,335 204,277Depreciation and amortization 11. 65,947 78,017Other administrative expenses 236,410 244,477

Other administrative expenses 25. 508,692 526,771(LOSS)/PROFIT BEFORE INCOME TAX (153,643) 85,052Income tax 26. 51,385 (20,944)NET (LOSS)/PROFIT FOR THE YEAR (102,258) 64,108From this, attributable to:

Non-controlling interest (273) (91)Owners of the company (101,985) 64,199

Consolidated earnings per share (in HUF)Basic 38. (382) 241Diluted 38. (382) 240

IFRS consolidated nancial statements


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Statement of cash-ows(consolidated, based on IFRS, for the year ended 31 December 2014, in HUF million)

OPERATING ACTIVITIES Note 2014 2013(Loss)/Profit before income tax (153,643) 85,052Goodwill impairment 11. 22,225 30,819Depreciation and amortization 11. 43,722 47,198Provision/(Release of provision) for impairment on securities 7., 10. 297 (11)Provision for impairment on loan and placement losses 5., 8. 446,830 262,569Provision for impairment on investments 9. 1,244 1,370Provision for impairment on other assets 12. 5,066 4,313Provision on assets subject to operating leases 1,048 –Provision on investment properties 3,612 –Provision for impairment on off-balance sheet commitments and contingent liabilities 17. 195,310 3,990Share-based payment 2., 29. 4,393 5,704Change of actuarial losses related to employee benefits (6) (39)Unrealized (losses)/gains on fair value change of securities held for trading (2,907) 859Unrealized (losses)/gains on fair value change of derivative financial instruments (33,140) 4,921

Net changes in assets and liabilities in operating activitiesChanges in financial assets at fair value through profit or loss 250,821 (219,517)Net increase in loans, net of allowance for loan losses (48,611) (113,672)Increase in other assets before provisions for impairment 20,557 (67,833)Increase in assets subject to operating lease before provisions for impairment (24,442) –Increase in investment properties before provision for impairment (27,034) –Net increase in deposits from customers 806,872 315,898Decrease in other liabilities (26,908) (1,785)Net (increase)/decrease in compulsory reserves at the National Banks (41,130) 7,414Dividend income (4,824) (2,474)Income tax paid (20,571) (21,739)

Net Cash Provided by Operating Activities 1,418,781 343,037INVESTING ACTIVITIES

Net (increase)/decrease in placement with other banks before allowancefor placements losses (7,537) 83,761

Increase in securities available-for-sale (15,402,966) (24,460,762)Decrease in securities available-for-sale 16,213,064 24,233,421Net decrease/(increase) in investments in subsidiaries 2,490 (2,711)Net increase in investments in associates (3,278) (14,560)Buy-out of non-controlling interests – (1,124)Dividend income 4,824 2,474Increase in securities held-to-maturity (156,594) (161,411)Decrease in securities held-to-maturity 31,094 10,673Additions to property, equipment and intangible assets 11,526 (59,286)Disposals of property, equipment and intangible assets 12,455 15,190Net increase in advances for investments included in other assets (27) (29)

Net Cash Provided by/(Used in) Investing Activities 705,051 (354,364)FINANCING ACTIVITIES

Net (decrease)/increase in amounts due to banks, the Hungarian Government, depositsfrom the National Banks and other banks (75,938) 249,888

Cash received from issuance of securities 56,165 72,186Cash used for redemption of issued securities (234,299) (270,091)Increase/(Decrease) in subordinated bonds and loans 14,806 (24,333)Decrease in non-controlling interest (1,418) (1,016)Foreign currency translation (106,925) (32,270)Payments to ICES holders* (4,003) (4,111)Net change in Treasury shares (4,249) (1,316)Dividend paid (40,594) (33,592)

Net Cash Used in Financing Activities (396,455) (44,655)Net increase/(decrease) in cash and cash equivalents 1,727,377 (55,982)Cash and cash equivalents at the beginning of the period 275,947 331,929Cash and cash equivalents at the end of the period 2,003,324 275,947Analysis of cash and cash equivalents

Cash, amounts due from banks and balances with the National Banks 539,125 602,521Compulsory reserve established by the National Banks (263,178) (270,592)

Cash and cash equivalents at the beginning of the period 275,947 331,929Cash, amounts due from banks and balances with the National Banks 4. 2,310,476 539,125Net cash outow due to acquisition 31. (2,844) –Compulsory reserve established by the National Banks 4. (304,308) (263,178)

Cash and cash equivalents at the end of the period 2,003,324 275,947


* See more details in Note 20.


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Statement of changes in shareholders’ equity(consolidated, based on IFRS, for the year ended 31 December 2014, in HUF million)

Note Sharecapital

Capitalreserve

Share-basedPaymentreserve

Retainedearnings and

reserves

Putoption

reserve

Treasuryshares

Non-controlling

interest

Total

Balance as at 1 January 2013 28,000 52 10,800 1,579,188 (55,468) (53,802) 5,783 1,514,553Net profit for the year – – – 64,199 – – (91) 64,108Other Comprehensive Income – – – (34,820) – – (925) (35,745)Share-based payment 29. – – 5,704 – – – – 5,704Dividend for the year 2012 – – – (33,600) – – – (33,600)Sale of Treasury shares 21. – – – – – 17,943 – 17,943Treasury shares– gain on sale – – – 481 – – – 481– acquisition 21. – – – – – (19,740) – (19,740)Payments to ICES holders 20. – – – (3,248) – – – (3,248)Buy-out of non-controllinginterests – – – (1,124) – – – (1,124)

Balance as at 31 December 2013 28,000 52 16,504 1,571,076 (55,468) (55,599) 4,767 1,509,332Net profit for the year – – – (101,985) – – (273) (102,258)Other Comprehensive Income – – – (97,881) – – (1,145) (99,026)Share-based payment 29. – – 4,393 – – – – 4,393Dividend for the year 2013 – – – (40,600) – – – (40,600)Sale of Treasury shares 21. – – – – – 27,180 – 27,180Treasury shares– loss on sale – – – (3,908) – – – (3,908)– acquisition 21. – – – – – (27,522) – (27,522)Payments to ICES holders 20. – – – (3,425) – – – (3,425)Balance as at 31 December 2014 28,000 52 20,897 1,323,277 (55,468) (55,941) 3,349 1,264,166




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The Bank and its subsidiaries (“Entities of theGroup“, together the “Group”) provide a full rangeof commercial banking services through a wide

1.2 Base of Accounting

The Entities of the Group maintain theiraccounting records and prepare its statutoryaccounts in accordance with the commercial,banking and scal regulations prevailing inHungary and in case of foreign subsidiaries inaccordance with the local commercial, bankingand scal regulations.

The Group’s presentation currency is theHungarian forint (“HUF”).

network of 1,434 branches. The Group has operat-ions in Hungary, Bulgaria, Russia, Ukraine, Croatia,Romania, Slovakia, Serbia and Montenegro.

Due to the fact that the Bank is listed oninternational and national stock exchanges,the Bank is obliged to present its nancialposition in accordance with InternationalFinancial Reporting Standards (“IFRS”).

Certain adjustments have been madeto the entities’ statutory accounts in orderto present the Consolidated FinancialPosition and Statement of Recognized

and Comprehensive Income of theBank in accordance with all standards and

2014 2013The structure of the Share capital by shareholders:

Domestic and foreign private and institutional investors 97% 97%Employees 2% 2%Treasury shares 1% 1%

Total 100% 100%

2014 2013The number of employees at the Group:

The number of employees at the Group 35,919 38,203The average number of employees at the Group 35,796 37,487

NOTES TO THE C ONSOLI DATED FINA NCIALSTATEMENT S FOR THE YE AR E NDED3 1 D E C E M B E R 2 0 1 4

NOTE 1: ORGANIZATION AND BASIS OF CONSOLI DATED FINANCIA LSTATEMENTS

1.1 General information

OTP Bank Plc. (the “Bank” or “OTP”) wasestablished on 31 December 1990, when thepreviously State-owned company wastransformed into a public liability company.

The Bank’s registered offi ce address is16 Nádor Street, Budapest 1051.

In 1995, the shares of the Bank were listedon the Budapest and the Luxembourg StockExchanges and were also listed on the SEAQboard on the London Stock Exchange andPORTAL in the USA.

These Consolidated Financial Statementswere approved by the Board of Directors andauthorised for issue on 17 March 2015.


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interpretations approved by the InternationalAccounting Standards Board (“IASB”).

The Consolidated Financial Statements have beenprepared in accordance with IFRS as adopted bythe European Union (the “EU”). IFRS as adopted

by the EU do not currently differ from IFRS asissued by the IASB, except for portfolio hedgeaccounting under IAS 39 Financial Instruments:Recognition and Measurement (“IAS 39”) whichhas not been approved by the EU. As the Groupdoes not apply portfolio hedge accounting underIAS 39, there would be no impact on theseConsolidated Financial Statements, had it beenapproved by the EU before the preparation ofthese nancial statement.

1.2.1 The effect of adopting newand revised International FinancialReporting Standards effective from1 January 2014

The following standards, amendments to theexisting standards and interpretations issued bythe IASB and adopted by the EU are effective forthe current period:

– IFRS 10 “Consolidated Financial Statements”,adopted by the EU on 11 December 2012(effective for annual periods beginning on orafter 1 January 2014),

– IFRS 11 “Joint Arrangements”, adoptedby the EU on 11 December 2012 (effectivefor annual periods beginning on or after1 January 2014),

– IFRS 12 “Disclosures of Interests in OtherEntities”, adopted by the EU on 11 December2012 (effective for annual periods beginningon or after 1 January 2014),

– IAS 27 (revised in 2011) “Separate FinancialStatements”, adopted by the EU on11 December 2012 (effective for annualperiods beginning on or after 1 January 2014),

– IAS 28 (revised in 2011) “Investments inAssociates and Joint Ventures”, adopted bythe EU on 11 December 2012 (effective for

annual periods beginning on or after1 January 2014),

– Amendments to IFRS 10 “ConsolidatedFinancial Statements”, IFRS 11 “JointArrangements” and IFRS 12 “Disclosuresof Interests in Other Entities” – TransitionGuidance, adopted by the EU on 4 April 2013(effective for annual periods beginning on or

after 1 January 2014),– Amendments to IFRS 10 “ConsolidatedFinancial Statements”, IFRS 12 “Disclosuresof Interests in Other Entities” and IAS27 (revised in 2011) “Separate FinancialStatements” – Investment Entities, adoptedby the EU on 20 November 2013 (effectivefor annual periods beginning on or after1 January 2014),

– Amendments to IAS 32 “Financialinstruments: presentation” – OffsettingFinancial Assets and Financial Liabilities,adopted by the EU on 13 December 2012(effective for annual periods beginningon or after 1 January 2014),

– Amendments to IAS 36 “Impairment ofassets” – Recoverable Amount Disclosuresfor Non-Financial Assets, adopted by the EUon 19 December 2013 (effective for annualperiods beginning on or after 1 January2014),

– Amendments to IAS 39 “FinancialInstruments: Recognition and Measurement”– Novation of Derivatives and Continuation ofHedge Accounting, adopted by the EU on 19December 2013 (effective for annual periodsbeginning on or after 1 January 2014).

The adoption of these amendments to theexisting standards has not led to any changes inthe Group’s accounting policies.

1.2.2 New and revised Standardsand Interpretations issued by IASBand adopted by the EU but not yeteffective

At the date of authorization of these nancialstatements, the following standards,amendments to the existing standards and

interpretations issued by IASB and adopted bythe EU were in issue but not yet effective:



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– Amendments to various standards“Improvements to IFRSs (cycle 2010–2012)”resulting from the annual improvementproject of IFRS (IFRS 2, IFRS 3, IFRS 8, IFRS13, IAS 16, IAS 24 and IAS 38) primarilywith a view to removing inconsistencies and

clarifying wording – adopted by the EU on17 December 2014 (amendments are to beapplied for annual periods beginning on orafter 1 February 2015),

– Amendments to various standards“Improvements to IFRSs (cycle 2011–2013)”resulting from the annual improvementproject of IFRS (IFRS 1, IFRS 3, IFRS 13 andIAS 40) primarily with a view to removinginconsistencies and clarifying wording –adopted by the EU on 18 December 2014(amendments are to be applied for annualperiods beginning on or after 1 January 2015),

– Amendments to IAS 19 “Employee Benets”– Dened Benet Plans: EmployeeContributions – adopted by the EU on 17December 2014 (effective for annual periodsbeginning on or after 1 February 2015),

– IFRIC 21 “Levies” adopted by the EU on 13June 2014 (effective for annual periodsbeginning on or after 17 June 2014).

1.2.3 Standards and Interpretationsissued by IASB, but not yet adoptedby the EU

– IFRS 9 “Financial Instruments” (effectivefor annual periods beginning on or after1 January 2018),

– IFRS 14 “Regulatory Deferral Accounts”(effective for annual periods beginning on orafter 1 January 2016),

– IFRS 15 “Revenue from Contracts withCustomers” (effective for annual periodsbeginning on or after 1 January 2017),

– Amendments to IFRS 10 “ConsolidatedFinancial Statements” and IAS 28“Investments in Associates and JointVentures” – Sale or Contribution of Assetsbetween an Investor and its Associate or

Joint Venture (effective for annual periodsbeginning on or after 1 January 2016),

– Amendments to IFRS 10 “ConsolidatedFinancial Statements”, IFRS 12 “Disclosureof Interests in Other Entities” and IAS28 “Investments in Associates and JointVentures” – Investment Entities: Applyingthe Consolidation Exception (effective

for annual periods beginning on or after1 January 2016),– Amendments to IFRS 11 “Joint Arrangements”

– Accounting for Acquisitions of Interests inJoint Operations (effective for annual periodsbeginning on or after 1 January 2016),

– Amendments to IAS 1 “Presentation ofFinancial Statements” – Disclosure Initiative(effective for annual periods beginning on orafter 1 January 2016),

- Amendments to IAS 16 “Property, Plant andEquipment” and IAS 38 “Intangible Assets”– Clarication of Acceptable Methods ofDepreciation and Amortisation (effective forannual periods beginning on or after1 January 2016),

– Amendments to IAS 16 “Property, Plantand Equipment” and IAS 41 “Agriculture”– Agriculture: Bearer Plants (effective forannual periods beginning on or after1 January 2016),

– Amendments to IAS 27 “Separate FinancialStatements” – Equity Method in SeparateFinancial Statements (effective forannual periods beginning on or after1 January 2016),

– Amendments to various standards“Improvements to IFRSs (cycle 2012–2014)”resulting from the annual improvementproject of IFRS (IFRS 5, IFRS 7,IAS 19 and IAS 34) primarily with a viewto removing inconsistencies and clarifyingwording (amendments are to be appliedfor annual periods beginning on or after1 July 2016).

The hedge accounting regarding the portfolioof nancial assets and liabilities, whoseprinciples have not been adopted by the EU,is still unregulated.According to the Group’s estimates, application

of hedge accounting for the portfolio of nancialassets or liabilities pursuant to IAS 39:


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“Financial Instruments: Recognition andMeasurement”, would not signicantly impactthe nancial statements, if applied as at thebalance sheet date.The adoption of the above presented Amendmentsand new Standards and Interpretations would

have no signicant impact on the ConsolidatedFinancial Statements except of the applicationof IFRS 9 which might have signicantimpact on the Group Consolidated FinancialStatements, the Group will analyse the impactafter the adoption of the standard by EU.

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Signicant accounting policies applied in thepreparation of the accompanying ConsolidatedFinancial Statements are summarized below:

2.1 Basis of Presentation

These Consolidated Financial Statementshave been prepared under the historicalcost convention with the exception of certainnancial instruments, which are recorded atfair value. Revenues and expenses are recordedin the period in which they are earned orincurred.

The presentation of Consolidated FinancialStatements in conformity with IFRS requiresthe Management of the Group to makeestimates and assumptions that affect thereported amounts of assets and liabilities anddisclosure of contingent assets and liabilities asof the date of the nancial statements and theirreported amounts of revenues and expensesduring the reporting period. Actual results coulddiffer from those estimates.Future changes in economic conditions,business strategies, regulatory requirements,accounting rules and other factors could resultin a change in estimates that could have amaterial impact on future nancial statements.

2.2 Foreign currency translation

In preparing the nancial statements of

each individual group entity, transactions incurrencies other than the entity’s presentation

currency are translated into HUF are recognizedat the rates of exchange prevailing at thedates of the transactions. At the end of eachreporting period, monetary items denominatedin foreign currencies are retranslated at theexchange rates quoted by the National Bankof Hungary (“NBH”), or if there is no offi cialrate, at exchange rates quoted by OTP as at thedate of the Consolidated Financial Statements.Non-monetary items carried at fair value thatare denominated in foreign currencies areretranslated at the rates prevailing at the datewhen the fair value was determined. Non-monetary items that are measured in termsof historical cost in a foreign currency are notretranslated.

Exchange differences on monetary items arerecognized in prot or loss in the period inwhich they arise except for:• exchange differences on foreign currency

borrowings relating to assets underconstruction for future productive use, whichare included in the cost of those assetswhen they are regarded as an adjustmentto interest costs on those foreign currencyborrowings;

• exchange differences on transactionsentered into in order to hedge certain foreigncurrency risks (see Note 2.7 below forhedging accounting policies); and

• exchange differences on monetary itemsreceivable from or payable to a foreignoperation for which settlement is neitherplanned nor likely to occur (therefore

forming part of the net investment in theforeign operation), which are recognized


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initially in Other Comprehensive Income andreclassied from equity to prot or loss onrepayment of the monetary items.

For the purposes of presenting ConsolidatedFinancial Statements, the assets and liabilities

of the Group’s foreign operations are translatedinto HUF using exchange rates prevailing atthe end of each reporting period. Income andexpense items are translated at the averageexchange rates for the period, unless exchangerates uctuate signicantly during that period,in which case the exchange rates at thedates of the transactions are used. Exchangedifferences arising, if any, are recognized inOther Comprehensive Income and accumulatedin equity (attributed to non-controlling interestsas appropriate).

On the disposal of a foreign operation(i.e. a disposal of the Group’s entire interestin a foreign operation, or a disposal involvingloss of control over a subsidiary that includesa foreign operation, a disposal involving lossof joint control over a jointly controlled entitythat includes a foreign operation, or a disposalinvolving loss of signicant inuence over anassociate that includes a foreign operation), allof the exchange differences accumulated inequity in respect of that operation attributableto the owners of the Group are reclassied toprot or loss.

In addition, in relation to a partial disposalof a subsidiary that does not result in theGroup losing control over the subsidiary, theproportionate share of accumulated exchangedifferences are re-attributed to non-controllinginterests and are not recognized in prot orloss. For all other partial disposals (i.e. partialdisposals of associates or jointly controlledentities that do not result in the Group losingsignicant inuence or joint control), the pro-portionate share of the accumulated exchangedifferences is reclassied to prot or loss.

Goodwill and fair value adjustments on

identiable assets and liabilities acquiredarising on the acquisition of a foreign operation

are treated as assets and liabilities of theforeign operation and translated at the rateof exchange prevailing at the end of eachreporting period. Exchange differences arisingare recognized in Other Comprehensive Incomeand accumulated in equity.

2.3 Principles of consolidation

Included in these Consolidated FinancialStatements are the accounts of thosesubsidiaries in which the Bank exercisescontrol. The list of the major fully consolidatedsubsidiaries, the percentage of issued capitalowned by the Bank and the description of theiractivities is provided in Note 31. However,certain subsidiaries in which the Bank holds asignicant interest have not been consolidatedbecause the effect of consolidating suchcompanies is not material to the ConsolidatedFinancial Statements as a whole (see Note 2.13).As the ultimate parent, the Bank is preparingconsolidated nancial statement of the Group.

2.4 Accounting for acquisitions

Business combinations are accounted for usingpurchase method of accounting. Any goodwillarising on acquisition is recognized in theConsolidated Statement of Financial Positionand accounted for as indicated below.The acquisition date is the date on whichthe acquirer effectively obtains control overthe acquiree. Before this date, it should bepresented as Advance for investments withinOther assets.Goodwill, which represents the residual cost ofthe acquisition after obtaining the control overthe acquiree in the fair value of the identiableassets, liabilities and contingent liabilitiesacquired, is held as an intangible assetand recorded at cost less any accumulatedimpairment losses in the Consolidated FinancialStatements.

If the Group loses control of a subsidiary,derecognizes the assets (including any


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goodwill) and liabilities of the subsidiary at theircarrying amounts at the date when control islost and recognizes any difference as a gainor loss on the sale attributable to the parent inStatement of Recognized Income.Goodwill acquired in a business combination

is tested for impairment annually ormore frequently if events or changes incircumstances indicate. The goodwill isallocated to the cost generating units that areexpected to benet from the synergies of thecombinations.The Group calculates the fair value based ondiscounted cash-ow model. The 5 year periodexplicit cash-ow model serves as a basis forthe impairment test by which the Group denesthe impairment need on goodwill based onthe strategic factors and nancial data of itscash-generating units.The Group, in its strategic plan, has taken intoconsideration the effects of the present globaleconomic situation, the cautious recovery ofeconomic situation and outlook, the associatedrisks and their possible effect on the nancialsector as well as the current and expectedavailability of wholesale funding.

Negative goodwill (gain from bargain purchase),when the interest of the acquirer in the net fairvalue of the acquired identiable net assetsexceeds the cost of the business combination,is recognized immediately in the ConsolidatedStatement of Recognized Income as otherincome.

2.5 Securities held-to-maturity

Investments in securities, traded in activemarket (with xed or determinable cash-ows)are accounted for on a settlement date basisand are initially measured at fair value.At subsequent reporting dates, securities thatthe Group has the expressed intention andability to hold to maturity are measured atamortised cost, less any impairment lossesrecognized to reect irrecoverable amounts.

The annual amortisation of any discountor premium on the acquisition of a

held-to-maturity security is aggregated withother investment income receivable over theterm of the investment so that the revenuerecognized in each period represents a constantyield on the investment.Such securities comprise mainly securities

issued by the Hungarian and foreignGovernment, discounted Treasury bills,mortgage bonds and corporate bonds.

2.6 Financial assets at fair valuethrough prot or loss

2.6.1 Securities held for trading

Investments in securities are accounted foron a settlement date basis and are initiallymeasured at fair value. Securities held fortrading are measured at subsequent reportingdates at fair value. Unrealized gains and losseson held for trading securities are recognized inprot or loss and included in the ConsolidatedStatement of Recognized Income for the period.Such securities consist of corporate shares,Hungarian and foreign government bonds,discounted treasury bills and other securities.

2.6.2 Derivative nancialinstruments

In the normal course of business, the Groupis a party to contracts for derivative nancialinstruments, which represent a very low initialinvestment compared to the notional valueof the contract and their value depends onvalue of underlying asset and are settled inthe future. The derivative nancial instrumentsused include interest rate forward or swapagreements and currency forward or swapagreements and options. These nancialinstruments are used by the Group both fortrading purposes and to hedge interest raterisk and currency exposures associated with itstransactions in the nancial markets.

Derivative nancial instruments are accountedfor on a trade date basis and are initially



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measured at fair value and at subsequentreporting dates also at fair value. Fair valuesare obtained from quoted market prices,discounted cash-ow models and option pricingmodels as appropriate. The Group adopts multicurve valuation approach for calculating the net

present value of future cash-ows – based ondifferent curves used for determining forwardrates and used for discounting purposes.It shows the best estimation of such derivativedeals that are collateralised as the Group hasalmost all of its open derivative transactionscollateralised.Changes in the fair value of derivative nancialinstruments that do not qualify for hedgeaccounting are recognized in prot or loss andare included in the Consolidated Statementof Recognized Income for the period. Eachderivative deal is determined as asset when fairvalue is positive and as liability when fair valueis negative.

Certain derivative transactions, while providingeffective economic hedges under the riskmanagement policy of the Group, do not qualifyfor hedge accounting under the specic rules ofIAS 39 and are therefore treated as derivativesheld for trading with fair value gains and lossescharged directly to the Consolidated Statementof Recognized Income.

2.7 Derivative nancial instrumentsdesignated as a fair-valueor cash-ow hedge

Changes in the fair value of derivatives that aredesignated and qualify as fair value hedges andthat prove to be highly effective in relation to thehedged risk, are recorded in the ConsolidatedStatement of Recognized Income along withthe corresponding change in fair value of thehedged asset or liability that is attributableto the specic hedged risk. The ineffectiveelement of the hedge is charged directly to theConsolidated Statement of Recognized Income.The conditions of hedge accounting applied by

the Bank are the following: formally designedas hedge, proper hedge documentation is

prepared, effectiveness test is performed andbased on it the hedge is qualied as effective.

Changes in fair value of derivatives that aredesignated and qualify as cash-ow hedges andthat prove to be highly effective in relation to the

hedged risk are recognized as reserve in othercomprehensive income. Amounts deferredin equity are transferred to the ConsolidatedStatement of Recognized Income and classiedas revenue or expense in the periods duringwhich the hedged assets and liabilities effectthe Consolidated Statement of RecognizedIncome for the period. The ineffective elementof the hedge is charged directly to theConsolidated Statement of Recognized Income.The Group terminates the hedge accountingif the hedging instrument expires or is sold,terminated or exercised, or the hedge no longermeets the criteria for hedge accounting or theGroup revokes the designation.

2.8 Offsetting

Financial assets and liabilities may beoffset and the net amount is reported in theConsolidated Statement of Financial Positionwhen the Group has a legally enforceable rightto set off the recognized amounts and thetransactions are intended to be reported in theConsolidated Statement of Financial Positionon a net basis. The Group does not offset anynancial assets and nancial liabilities.

2.9 Embedded derivatives

Sometimes, a derivative may be a componentof a combined nancial instrument thatincludes a host contract and a derivative (theembedded derivative) effecting cash-ows orotherwise modifying the characteristics of thehost instrument. An embedded derivative mustbe separated from the host instrument andaccounted for as a separate derivative if, andonly if:

• The economic characteristics and risks of theembedded derivative are not closely related


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85

to the economic characteristics and risks ofthe host contract;

• A separate nancial instrument with thesame terms as the embedded derivativewould meet the denition of a derivative as astand-alone instrument; and

• The host instrument is not measured at fairor is measured at fair value but changesin fair value are recognized in OtherComprehensive Income.

2.10 Securities available-for-sale

Investments in securities are accounted for on asettlement date basis and are initially measuredat fair value. Securities available-for-saleare measured at subsequent reporting datesat fair value. Unrealized gains and losses onavailable-for-sale nancial instruments arerecognized directly in Other ComprehensiveIncome, except for interest and foreign exchangegains/losses on monetary items, unless suchavailable-for-sale security is part of an effectivehedge. Such gains and losses will be reportedwhen realized in Consolidated Statement ofRecognized Income for the applicable period.Such securities consist of Hungarian andforeign government bonds, corporate bonds,discounted Treasury bills and other securities.Other securities include shares in investmentfunds, shares in non-nancing companies andventure capital fund bonds.

The provision for impairment is calculatedbased on discounted cash-ow methodologyfor debt instruments and calculated based onfair valuation on equity instruments, using theexpected future cash-ow and original effectiveinterest rate if there is objective evidence ofimpairment based on signicant or prolongeddecrease in fair value.

Securities available-for-sale are remeasuredat fair value based on quoted prices oramounts derived from cash-ow models. Incircumstances where the quoted market prices

are not readily available, the fair value of debtsecurities is estimated using the present value

of future cash-ows and the fair value of anyunquoted equity instruments are calculatedusing the EPS ratio.

Those available-for-sale nancial assets thatdo not have a quoted market price and whose

fair value cannot be reliably measured byother models mentioned above, are measuredat cost, less provision for impairment, whenappropriate. This exception is related onlyto equity instruments. Impairment on equityavailable-for-sale securities is accounted onlyif there is a signicant or prolonged decrease inthe market value. Impairment losses recognisedin prot or loss for equity AFS securities is notreversed through prot or loss.

2.11 Loans, placements with otherbanks and allowance for loan andplacement losses

Loans and placements with other banks areaccounted at amortized cost, stated at theprincipal amounts outstanding (includingaccrued interest), net of allowance for loan orplacement losses, respectively. Transaction feesand charges should adjust the carrying amountat initial recognition and be included in effectiveinterest calculation. Loans and placementswith other banks are derecognised when thecontractual rights to the cash-ows expire orthey are transferred. Interest and amortisedcost are accounted using effective interest ratemethod.When a borrower is unable to meet paymentsas they fall due or, in the opinion of theManagement, there is an indication that aborrower may be unable to meet payments asthey fall due, all unpaid interest is impaired.

According to IAS 39, initially nancial assetshall be recognized at fair value which isusually equal to transaction value of loansand receivables. Initial fair value of loans andreceivables lent at interest below marketconditions is lower than their transaction

price. As a consequence the Bank is deferringthe difference between the fair value at initial



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recognition and the transaction price relatingto loans and receivables because input data formeasuring the fair values are not available onobservable markets.

The amount of allowance is the difference

between the carrying amount and therecoverable amount, being the present valueof the expected cash-ows, including amountsrecoverable from guarantees and collateral,discounted at the original effective interest rate.

Allowance for loan and placement losseswith other banks represent Managementassessment for potential losses in relationto these activities.The allowances for loan and placement lossesare maintained to cover losses that have beenspecically identied. Collective impairmentlosses of portfolios of loans, for which noobjective evidence of impairment has beenidentied on an individual basis, are maintainedto reduce the carrying amount of the portfoliosof nancial assets with similar credit riskcharacteristics to their estimated recoverableamounts at the balance sheet date. Theexpected cash-ows for portfolios of similarassets are estimated based on historical lossexperience. Historical loss experience is thebasis for calculating the expected loss, whichis adjusted by the loss conrmation period,which represents the average time lag betweenoccurrence of a loss event and conrmation ofthe loss. This concept enables recognition ofthose losses that have occurred in the portfolioat the balance sheet date.If the reason for provisioning is no longerdeemed appropriate, the redundantprovisioning charge is released into netoperating income. If, in a subsequent period,the amount of the impairment loss decreasesand the decrease can be related objectivelyto an event occurring after the impairmentwas recognised (such as an improvementin the debtor’s credit rating), the previouslyrecognised impairment loss shall be reversedby adjusting an allowance account. The reversal

shall not result in a carrying amount of thenancial asset that exceeds what the amortised

cost would have been had the impairment notbeen recognised at the date the impairment isreversed.

Write-offs are generally recorded after allreasonable restructuring or collection

activities have taken place and the possibilityof further recovery is considered to be remote.The loan is written off against the relatedaccount “Provision for impairment on loanand placement losses” in the ConsolidatedStatement of Recognized Income.

The Group applies partial or full write-off forloans based on the denitions and prescriptionsof nancial instruments in accordance with IAS39. If the Group has no reasonable expectationsregarding a nancial asset (loan) to berecovered, it will be written off partially or fullyat the time of emergence. A loan will be writtenoff if it has overdued or was terminated by theGroup.The gross amount and impairment loss of theloans shall be written off in the same amount tothe estimated maximum recovery amount whilethe net carrying value remains unchanged. Inthese cases there is no reasonable expectationfrom the clients to complete contractual cashows therefore the Group does not accrueinterest income in case of write-off.Loan receivables legally demanded from clientsare equal to the former gross amount of theloan before the write-off.

2.12 Sale and repurchaseagreements, security lending

Where debt or equity securities are sold undera commitment to repurchase them at a pre-determined price, they remain on Statementof Financial Position and the considerationreceived is recorded in Other liabilitiesor Amounts due to banks, the HungarianGovernment, deposits from the National Banksand other banks. Conversely, debt or equitysecurities purchased under a commitment to

resell are not recognized in the Statement ofFinancial Position and the consideration paid


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87

is recorded either in Placements with otherbanks or Deposits from customers. Interest isaccrued evenly over the life of the repurchaseagreement.In the case of security lending transactions theGroup doesn’t recognize or derecognize the

securities because believes that the transferorretains substantially all the risks and rewardsof the ownership of the securities. Only anancial liability or nancial receivable isrecognized for the consideration amount.

2.13 Associates and otherinvestments

Companies where the Bank has the ability toexercise signicant inuence are accountedfor using the equity method. However, certainassociated companies in which the Bank holdsa signicant interest have not been accountedfor in accordance with the equity methodbecause the effect of using the equity methodto account for such companies is not materialto the Consolidated Financial Statements as awhole.

Unconsolidated subsidiaries and associatedcompanies that were not accounted for usingthe equity method and other investments wherethe Bank does not hold a signicant interest arerecorded according to IAS 39, when appropriate.Gains and losses on the sale of investmentsare determined on the basis of the specicidentication of the cost of each investment.

2.14 Property and equipment,Intangible assets

Property and equipment and Intangibleassets are stated at cost, less accumulateddepreciation and amortization and impairment,if any. The depreciable amount (book value lessresidual value) of the non-current assets mustbe allocated over the useful lives.

Depreciation and amortization are computedusing the straight-line method over the

estimated useful lives of the assets based onthe following annual percentages:

Intangible assets

Software 3.33–50%Property rights 1–50%

Property 1–50%Offi ce equipment and vehicles 2.5–50%

Depreciation and amortization on Property andequipment and Intangible assets commence onthe day such assets are placed into service.At each balance sheet date, the Groupreviews the carrying value of its Propertyand equipment and Intangible assets todetermine if there is any indication that thoseassets have suffered an impairment loss.If any such indication exists, the recoverableamount of the asset is estimated to determinethe extent (if any) of the impairment loss.Where it is not possible to estimate therecoverable amount of an individual asset,the Group estimates the recoverable amountof the cash-generating unit to which the assetbelongs.

Where the carrying value of Property andequipment and Intangible assets is greaterthan the estimated recoverable amount, it isimpaired immediately to the estimatedrecoverable amount.

The Group may conclude contracts forpurchasing property, equipment and intangibleassets, where the purchase price is settledin foreign currency. By entering into suchagreements, rm commitment in foreigncurrency due on a specied future date arisesat the Group.Reducing the foreign currency risk causedby rm commitment, forward foreign currencycontracts may be concluded to ensure theamount payable in foreign currency on aspecied future date on one hand and toeliminate the foreign currency risk arisinguntil settlement date of the contract on theother hand.

In the case of effective hedge the realisedprot or loss of hedging instrument is stated



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as the part of the cost of the hedged asset as ithas arisen until recognising the asset and it istightly connecting to the purchasing.

2.15 Financial liabilities

The nancial liabilities are presented withinnancial liabilities at fair value through protor loss or nancial liabilities measured atamortized costs. In connection to the nancialliabilities at fair value through prot or loss,the Group presents the amount of change intheir fair value originated from the changes ofmarket conditions and business environment.Financial liabilities at fair value through protor loss are either nancial liabilities held fortrading or they are designated upon initialrecognition as at fair value through prot orloss. In the case of nancial liabilities measuredat amortized cost fees and commissions relatedto the origination of the nancial liability arerecognized through prot or loss during thematurity of the instrument. In certain cases theGroup repurchases a part of nancial liabilities(mainly issued securities or subordinatedbonds) and the difference between the carryingamount of the nancial liability and the amountpaid for it is recognized in the net prot or lossfor the period and included in other operatingincome.

2.16 Leases

Leases are classied as nance leaseswhenever the terms of the lease transfersubstantially all the risks and rewards ofownership to the lessee. All other leases areclassied as operating leases.

The Group as a lessor

Amounts due from lessees under nanceleases are recorded as other receivables at theamount of the net investment in the lease of

the Group. Finance lease income is allocated toaccounting periods so as to reect a constant

rate of return on the net investment outstandingof the Group in respect of the leases. Directcosts such as commissions are included inthe initial measurement of the nance leasereceivables.Rental income from operating leases is

recognized on a straight-line basis over theterm of the relevant lease.

The Group as a lessee

Assets held under nance leases, which conferrights and obligations similar to those attachedto owned assets, are capitalised at their fairvalue and depreciated over the useful lives ofassets. The principal element of each futurelease obligation is recorded as a liability,while the interest elements are charged tothe Consolidated Statement of RecognizedIncome over the period of the leases to producea constant rate of charge on the balance ofprincipal payments outstanding.

Payments made under operating leasesare charged to the Consolidated Statementof Recognized and Comprehensive Incomeon a straight-line basis over the term of thelease. When an operating lease is terminatedbefore the lease period has expired,any payment required to be made to thelessor by way of penalty is recognized as anexpense in the period in which terminationtakes place.

2.17 Investment properties

Investment properties of the Group areland, buildings, part of buildings which held(as the owner or as the lessee under a nancelease) to earn rentals or for capital appreciationor both, rather than for use in the productionor supply of services or for administrativepurposes or sale in the ordinary courseof business. The Group measures theinvestment properties at amortized cost

and according to the opinion of the Managementthere isn’t signicant difference between the


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89

fair value and the carrying value of the theseproperties.

2.18 Treasury shares

Treasury shares are shares which are purchasedon the stock exchange and the over-the-countermarket by the Bank and its subsidiariesand are presented in the ConsolidatedFinancial Position at cost as a deduction fromConsolidated Shareholders’ Equity.Gains and losses on the sale of treasuryshares are credited or charged directly toshareholder’s equity. Derecognition of treasuryshares is based on the FIFO method.

2.19 Interest income and interestexpense

Interest income and expenses are recognized inprot or loss in the period to which they relate,using the effective interest rate method. Interestfrom loans and deposits are accrued on a dailybasis. Interest income and expenses includerelevant transaction costs and the amortisationof any discount or premium between theinitial carrying amount of an interest-bearinginstrument and its amount at maturitycalculated on an effective interest rate basis.The Group recognizes interest income whenassumes that the interest associated with thetransaction will ow to the Group and the amountof the revenue can reasonably be measured.All interest income and expense recognizedare arising from loans, placements with otherbanks, securities held for trading, securitiesavailable-for-sale, securities held-to-maturityand amounts due to banks, deposits fromcustomers, liabilities from issued securities,subordinated bond and loans are presentedunder these lines of nancial statements.

2.20 Fees and Commissions

Fees and commissions are recognizedusing the effective interest method referring

to provisions of IAS 39, when they relate andhave to be included in amortized cost model.Certain fees and commissions that are notinvolved in the amortized cost model arerecognized in the Consolidated Statement ofRecognized Income on an accrual basis based

on IAS 18.

2.21 Dividend income

The Group recognizes dividend income in theConsolidated Financial Statements when itsright to receive payment is established.

2.22 Income tax

The annual taxation charge is based on the taxpayable under scal regulations prevailing inthe country where the company is incorporated,adjusted for deferred taxation.

Deferred taxation is accounted for using thebalance sheet liability method in respect oftemporary differences between the tax basesof assets and liabilities and their carrying valuefor nancial reporting purposes, measuredat the tax rates that apply to the future periodwhen the asset is expected to be realized or theliability is settled.

Deferred tax assets are recognizedby the Group for the amounts of incometaxes that are recoverable in future periodsin respect of deductible temporary differencesas well as the carryforward of unused taxlosses and the carryforward of unused taxcredits.

2.23 Off-balance sheetcommitments and contingentliabilities

In the ordinary course of its business, the Groupenters into off-balance sheet commitments

such as guarantees, letters of credit,commitments to extend credit and transactions



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with nancial instruments. The provision forimpairment on off-balance sheet commitmentsand contingent liabilities is maintained at a leveladequate to absorb future cash outows whichare probable and relate to present obligations.Management determines the adequacy of the

allowance based upon reviews of individualitems, recent loss experience, current economicconditions, the risk characteristics of thevarious categories of transactions and otherpertinent factors.

The Group recognizes provision when it has apresent obligation as a result of a past event;it is probable that an outow of resourcesembodying economic benets will be requiredto settle the obligation; and a reliable estimatecan be made of the obligation.

2.24 Share-based paymentand employee benet

The Bank has applied the requirements of IFRS2 Share-based Payment.

The Bank issues equity-settled share-basedpayment to certain employees. Equity-settledshare-based payment is measured at fairvalue at the grant date. The fair valuedetermined at the grant date of the equity-settledshare-based payment is expensed on astraight-line basis over the year, based on theBank’s estimate of shares that will eventuallyvest. Share-based payment is recorded inConsolidated Statement of Recognized Incomeas Personnel expenses.

Fair value is measured by use of a binomialmodel. The expected life used in the modelhas been adjusted, based on Management’sbest estimate, for the effects ofnon-transferability, exercise restrictions,and behavioural considerations. The Group hasapplied the requirement of IAS 19 EmployeeBenets. IAS 19 requires to recogniseemployee benets to be paid as a liability and

as an expense in the Consolidated FinancialStatements.

2.25 Consolidated Statementof Cash-ows

For the purposes of reporting ConsolidatedStatement of Cash-ows, cash and cashequivalents include cash, due from banks and

balances with the National Banks, excluding thecompulsory reserve established by the NationalBanks. Consolidated cash-ows from hedgingactivities are classied in the same categoryas the item being hedged. The unrealized gainsand losses from the translation of monetaryitems to the closing foreign exchange rates andunrealized gains and losses from derivativenancial instruments are presented net in thestatement of cash-ows for the monetary itemswhich were being revaluated.

2.26 Segment reporting

IFRS 8 Operating Segments requires operatingsegments to be identied on the basis ofinternal reports about components of theGroup that are regularly reviewed by the chiefoperating decision maker in order to allocateresources to the segments and to assess theirperformance.Based on the above, the segments identied bythe Group are the business and geographicalsegments.The Group’s operating segments under IFRS 8are therefore as follows: OTP Core Hungary,Russia, Ukraine, Bulgaria, Romania, Serbia,Croatia, Slovakia, Montenegro, Leasingsubsidiaries, Asset Management subsidiaries,Other subsidiaries, Corporate Center.

2.27 Comparative gures

There were no changes in prior period datadue to either prior period error or change inaccounting policies. In some notes certainamounts in the Consolidated FinancialStatements for the year ended 31 December 2014have been restructured within the particular note

to conform with the current year presentationand these amounts are not signicant.


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2.28 Government measures relatedto customer loan contracts

Act XXXVIII of 2014 on “Settlement of certainissues concerning the Uniformity Decisionof the Supreme Court related to customer loan

agreements1

provided by nancial institutions”(“Curia Law”) was promulgated on 18 July 2014.The Hungarian Parliament has adopted on24 September 2014 the Act XL of 2014 on“Rules of the settlement and certain otherissues put in Act XXXVIII of 2014 on Settlementof certain issues concerning the UniformityDecision of the Supreme Court related tocustomer loan agreements provided bynancial institutions” (“Act on Settlement”),based on that nancial institutions need tosettle up with their clients on account ofoverpayments arisen from invalidity of thebid-ask exchange rate spread and unilateralamendment of contractual clauses.Act on Settlement has specied the regulationsof Curia Law; obligation of settlement does notapply to credit cards, current account loans andmortgage housing loans supported by State.Furthermore amount due to customers can bereduced by total amount of allowances.Act LXXVII of 2014 on “Settlement of certainissues concerning the modication of thecurrency and interest conditions related tocustomer loan agreements” was promulgated.The act includes regulations about theconversion of foreign currency customermortgage loans into HUF which becamelegally effective on 1 February 2015 (“Act onConversion into HUF”). Hereinafter three actstogether are called as Acts on Customer Loans.

Based on these regulations the Grouprecognised the following items in the nancialstatements as at 31 December 2014:

a) Act on Settlement

The Group’s reimbursement obligationrelated to invalidity of the bid-ask exchangerate spread will be prospectively in amountof HUF 32.4 billion. Related to bid-ask

exchange rate spread the Group recognisedprovision for impairment in the amount of

HUF 1,776 million during the year 2013.Based on unilateral amendment of contractualclauses being assumed unfair, the Group, basedon estimation of the amount of expectedobligation related to loans under legalproceeding, recognised provision for

impairment in the amount of HUF 127.6 billion.In case of these amounts, provision forimpairment on mortgage loans concerned inconversion into HUF was recognised at foreignexchange rates applied in conversion into HUFin nancial statements as at 31 December2014 (CHF: 256.47; EUR: 308.97; JPY: 2.163).

In case of loans not concerned in conversioninto HUF – mostly foreign currency customerloans – the provision for impairment wasrecognized at foreign exchange ratesaccording to NBH as at 31 December 2014 inthese nancial statements.The Group is recognising the provisionon contingent liabilities related to Act onSettlement among the other off-balancesheet commitments and contingent liabilitiesin the IFRS Consolidated Statements.

b) Act on Conversion into HUF

Based on the Act on Conversion into HUF,in case of mortgage loans concerned inconversion into HUF, the Group recordsthe foreign currency loans, provision forimpairment, accrued interest and provision atforeign exchange rates applied in conversioninto HUF in IFRS nancial statements as at31 December 2014.

The foreign currency loans concerned inconversion into HUF and the relating fees needto be derecognised at the time of conversioninto HUF from IFRS nancial statementsand the HUF loans need to be recognised asnewly granted loans. According to IFRS, HUFloans shall be recognised initially at fair valueand for the new loans below-market interesttest should be prepared. Based on expectednegative fair value of loans, and due to theconversion into HUF of foreign currency loans,provision for impairment was recognised for

covering the expected loss of the hedgingpositions broken up in the amount of

1 Uncovered consumer loans and covered retail – mortgage and mortgage backed – loans, excluding SME loans are considered ascustomer loans.


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In the level of the Group provision recognised due to Act on Settlement is the following(in HUF mn):

Bid-askexchange rate

spread

Unilateralamendmentof interests

Unilateralamendment

of fees

Total

OTP Bank Plc. 7,377 34,926 1,824 44,127OTP Mortgage Bank Ltd. 13,978 74,493 66 88,537Merkantil Bank Ltd. 9,480 5,622 4,964 20,066Merkantil Car Ltd. 1,107 537 639 2,283OTP Real Estate Leasing Ltd. 462 4,501 – 4,963Subtotal 32,404 120,079 7,493 159,976Provision for impairment on foreigncurrency customer loans concernedin conversion into HUF

36,598

Total 196,574

In order to eliminate the negative effects of the Acts on its subsidiaries’ nancial positionand to secure the continuous capital adequacy, OTP provided capital contribution in amountof HUF 78,304 million in December 2014. At the same amount investment in subsidiarieswere increased:

HUF millionOTP Mortgage Bank Ltd. 56,581Merkantil Bank Ltd. 16,826OTP Real Estate Leasing Ltd. 4,897Total 78,304

HUF 36,598 million in the Group’s ConsolidatedIFRS Financial Statements.

c) Effect of the Acts on Customer Loans

on the Group

Provision on losses expected from

bid-ask exchange rate spread and unilateral

amendment was recognised up to theBank’s standalone expected lossesin the Bank’s nancial statements as at31 December 2014. Provision onexpected losses in case of subsidiaries isrecognised by subsidiaries in their nancial

statements.

In the same amount provision forimpairment on investment in subsidiarieswas recognised.

The Group still maintains the point of viewthat the group members keep completely theeffective regulations during its loan activitypractice.

d) Introduction of deferred tax relating to Acts

on Customer Loans

Prescription 29/ZS § of the Act LXXXI of19962 enables – based on accountingregulations in 44 § of Act on Settlement –

to recognise tax difference (“tax receivables”)

calculated for clients’ overpaymentsrelating to customer loan agreements inthe form of corporate tax, special tax ofbusiness partnerships, local businesstax, innovation contribution, special tax ofnancial institutions, up to the tax declaredand paid for the 2008–2014 tax years.Tax receivable shall be deducted from theamount of corporate tax payable for the2015 and the following tax years.

Furthermore prescription 29/ZS § of theAct LXXXI of 1996 enables to providenon-repayable nancial support or grant

for subsidiaries, for covering the costs and

2 On Corporate Tax and Dividend Tax.


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expenses directly incurred in connectionwith implementation of the Act on Settlement.This support has been claimed as expenseduring calculation of corporate tax.OTP Bank proposes to provide nancialsupport for its subsidiaries to cover their

losses.

The Bank recognized 33.2 billion HUF deferredtax receivable in the separate nancialstatements prepared for year 2014 due tothe expecting tax receivable based on Act onSettlement and considering the contributionprovided to the subsidiaries.

e) Derivative deals contracted due to the

obligations in relation with the act on

customers loan agreements

The Bank hedged its theoretically openedposition due to the effect of Act on Settlementand Act on Conversion into HUF with spot

and derivative deals contracted with NBH.With those subsidiaries which were affectedby the Act on Settlement the Bank concludedfurther derivative deals to have been coveredall the opened foreign exchange positions ofthe subsidiaries, so all the opened foreignexchange position was covered on Grouplevel by EUR/CHF market transactions.

NOTE 3: SIGNIFI CANT ACCOUNTING ESTIMATESAND DECISIONS IN THE APPLICATIONOF ACCOUNTING POLICIES

The presentation of nancial statementsin conformity with IFRS requires theManagement of the Group to make judgementabout estimates and assumptions thataffect the reported amounts of assets andliabilities and the disclosure of contingentassets and liabilities as at the date of thenancial statements and their reportedamounts of revenues and expenses duringthe reporting period. The estimates andassociated assumptions are based onhistorical experience and other factors thatare considered to be relevant. The estimatesand underlying assumptions are reviewedon ongoing basis. Revisions to accountingestimates are recognized in the period.Actual results could differ from thoseestimates. Signicant areas of subjectivejudgement include:

3.1 Impairment on loans andplacements

The Group regularly assesses its loan portfoliofor impairment. Management determines

the adequacy of the allowances based upon

reviews of individual loans and placements,recent loss experience, current economicconditions, the risk characteristics of thevarious categories of loans and otherpertinent factors. Provisioning involvesmany uncertainties about the outcomeof those risks and requires the Managementof the Group to make many subjectivejudgements in estimating the loss amounts.An impairment loss is incurred when there isobjective evidence of impairment due to oneor more events that occurred after the initialrecognition of the asset (‘a loss event’),when the loss has a reliably measurableimpact on the expected future cash owsfrom the nancial asset or group of nancialassets. Future cash ows are assessed bythe Group on the basis of estimates basedon historical parameters. The adoptedmethodology used for estimating impairmentallowances will be developed in line withthe further possibilities of accumulations ofhistoric impairment data from the existinginformation systems and applications.As a consequence, acquiring new data by theGroup could affect the level of impairment

allowances in the future.


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3.2 Valuation of instrumentswithout direct quotations

Financial instruments without direct quotationsin an active market are valued using thevaluation model technique. The models are

regularly reviewed and each model is calibratedfor the most recent available market data. Whilethe models are built only on available data,their use is subject to certain assumptions andestimates (e.g. correlations, volatilities, etc.).Changes in the model assumptions may affectthe reported fair value of the relevant nancialinstruments.IFRS 13 Fair Value Measurement seeks toincrease consistency and comparability in fairvalue measurements and related disclosuresthrough a ‘fair value hierarchy’. The hierarchycategorises the inputs used in valuationtechniques into three levels. The hierarchygives the highest priority to (unadjusted)quoted prices in active markets for identicalassets or liabilities and the lowest priority tounobservable inputs. The objective of a fairvalue measurement is to estimate the priceat which an orderly transaction to sell theasset or to transfer the liability would takeplace between market participants at themeasurement date under current marketconditions.

3.3 Provisions

Provisions are recognized and measured basedon IAS 37 Provisions, Contingent Liabilitiesand Contingent Assets. The Group is involvedin a number of ongoing legal disputes. Basedupon historical experience and expert reports,the Group assesses the developments inthese cases, and the likelihood and the

amount of potential nancial losses which areappropriately provided for (see Note 17.)

A provision is recognized by the Group whenit has a present obligation as a result of a past

event, it is probable that an outow of resourcesembodying economic benets will be requiredto settle the obligation, and a reliable estimatecan be made of the amount of the obligation.Provision for off-balance sheet items includesprovision for litigation, provision for retirementand expected liabilities, for commitments toextend credit, provision for warranties arisingfrom banking activities and provision forconrmed letter of credit.

3.4 Impairment on goodwill

Goodwill acquired in a business combinationis tested for impairment annually or morefrequently when there is an indication that theunit might be impaired, in accordance with IAS36 “Impairment of assets”.The Group calculates the fair value based ondiscounted cash-ow model. The 5 year periodexplicit cash-ow model serves as a basis forthe impairment test by which the Group denesthe impairment need on goodwill based onthe strategic factors and nancial data of itscash-generating units. In the calculation of thegoodwill impairment, also the expectationsabout possible variations in the amount ortiming of those future cash-ows, the timevalue of money, represented by the currentmarket risk-free rate of interest and otherfactors are reected. Goodwill impairmentis recorded among the Depreciation andamortization in the Consolidated Statementof Recognized Income.


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95

NOTE 4: CASH, AMOUNTS DUE FROM BANKS AND BALANCES WITHTHE NATIONAL BANKS (in HUF mn)

2014 2013Cash on hand

In HUF 66,332 68,063In foreign currency 143,668 120,069

210,000 188,132

Amounts due from banks and balances with the National BanksWithin one year:In HUF* 1,798,959 51,807In foreign currency 298,035 298,528

2,096,994 350,335Over one year:

In HUF – –In foreign currency – 435

– 435Accrued interest 638 223

2,097,632 350,993Total 2,307,632 539,125Compulsory reserve set by the National Banks 304,308 263,178


NOTE 5: PLACEMENTS WITH OTHER BANKS, NET OF ALLOWANCE FOR PLACEMENT LOSSES (in HUF mn)

2014 2013Within one year:


278,906 268,322Over one year:

In HUF – –In foreign currency 2,032 4,911

2,032 4,911Accrued interest 115 277Provision for impairment on placement losses (47) (31)Total 281,006 273,479

* Securities issued by the NBH were changed into two-weeks NBH deposit during the year ended 31 December 2014.

Interest conditions of placements with other banks:

2014 2013In HUF 0.4%–6.6% 0.1%–9.0%In foreign currency 0.01%–14.9% 0.01%–11.9%Average interest rates on placements with other banks 1.22% 1.48%

An analysis of the change in the provision for impairment on placement with other banks, net ofallowance for placement losses is as follows:

2014 2013Balance as at 1 January 31 1,111Provision for the year 874 28Release of provision for the year (854) (367)Use of provision – (712)Foreign currency translation difference (4) (29)Closing balance 47 31


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NOTE 6: FINANCIA L ASSETS AT FAIR VALUE THROUGH PROFITOR LOSS (in HUF mn)

2014 2013Shares 59,231 73,703Government bonds 22,942 34,817Discounted Treasury bills 3,414 2,159Securities issued by the NBH* – 209,347Other securities 4,439 14,615Other non-interest bearing securities 3,989 5,912

94,015 340,553Accrued interest 625 987Total 94,640 341,540

Positive fair value of derivative nancial instruments classied held for trading:

2014 2013CCIRS and mark-to-market CCIRS** classied as held for trading 85,010 8,444Foreign exchange swaps classied as held for trading 48,636 5,357Interest rate swaps classied as held for trading 43,401 53,667Option contracts classified as held for trading 7,128 –Foreign exchange forward contracts classied as held for trading 6,237 104Other derivative transactions classied as held for trading 4,223 6,493

194,635 74,065Total 289,275 415,605

Securities held for trading:

An analysis of securities held for trading portfolio by currency:

2014 2013

Denominated in HUF 81.7% 86.9%Denominated in foreign currency 18.3% 13.1%Total 100.0% 100.0%

An analysis of government bond portfolio by currency:

2014 2013Denominated in HUF 54.0% 9.5%Denominated in foreign currency 46.0% 90.5%Total 100.0% 100.0%Interest rates on securities held for trading 1.5%–11.0% 2.9%–13.0%Average interest rates on securities held for trading 2.06% 1.46%

* Securities issued by the NBH were changed into two-weeks NBH deposit during the year ended 31 December 2014.** CCIRS: Cross Currency Interest Rate Swaps (see Note 28.).


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97

Interest conditions and the remaining maturities of securities held for tradingcan be analysed as follows:

2014 2013Within ve years:

With variable interest 1,125 7,245With xed interest 23,466 249,085

24,591 256,330

Over ve years:With variable interest 6 663With xed interest 6,198 3,945

6,204 4,608Non-interest bearing securities 63,220 79,615Total 94,015 340,553

NOTE 7: SECURITIES AVAILABLE-FOR-SALE (in HUF mn)

2014 2013Government bonds 680,323 318,263Discounted Treasury bills 42,168 38,088Corporate bonds 37,457 71,148

From this:Listed securities:


11,598 67,930Non-listed securities:

In HUF 3,261 3,218In foreign currency 22,598 –

25,859 3,218Bonds issued by NBH* – 1,151,208Other securities 21,138 8,562Other non-interest bearing securities 43,646 41,702

From this:Listed securities:


7,114 6,521Non-listed securities:


36,532 35,181824,732 1,628,971

Accrued interest 15,694 9,250Provision for impairment on securities available-for-sale (1,274) (966)Total 839,152 1,637,255


* Securities issued by the NBH were changed into two-weeks NBH deposit during the year ended 31 December 2014.


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An analysis of government bonds by currency:

2014 2013Denominated in HUF 81.2% 47.1%Denominated in foreign currency 18.8% 52.9%Total 100.0% 100.0%

Interest conditions and the remaining maturities of available-for-sale nancial assetscan be analysed as follows:


With variable interest 2,701 4,258With xed interest 616,404 1,500,316

619,105 1,504,574Over ve years:

With variable interest 117 3,730With xed interest 161,864 78,965161,981 82,695

Non-interest bearing securities 43,646 41,702Total 824,732 1,628,971

2014 2013Short-term loans and promissory notes (within one year) 2,245,818 2,537,167Long-term loans and promissory notes (over one year) 4,690,266 4,875,633

6,936,084 7,412,800Accrued interest 57,242 68,044Provision for impairment on loan losses (1,129,085) (1,235,634)Total 5,864,241 6,245,210

2014 2013Interest rates on securities available-for-sale denominated in HUF 1.7%–8.0% 2.9%–8.0%Interest rates on securities available-for-sale denominatedin foreign currency 0.3%–28.0% 0.3%–22.0%

Average interest rates on securities available-for-sale denominatedin HUF 3.07% 4.10%

Average interest rates on securities available-for-sale denominatedin foreign currency 5.85% 9.12%

NOTE 8: LOANS, NET OF ALLOWANCE FOR LOAN LOSSES (in HUF mn)

An analysis of the change in the provision for impairment on securitiesavailable-for-sale is as follows:

2014 2013Balance as at 1 January 966 1,226Provision for the year 297 1

Release of provision – (1)Use of provision – (265)Foreign currency translation difference 11 5Closing balance 1,274 966

An analysis of securities available-for sale by currency:

2014 2013Denominated in HUF 84.6% 82.6%Denominated in foreign currency 15.4% 17.4%Total 100.0% 100.0%

Certain securities are hedged against interest rate risk. See Note 40.


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99

An analysis of the loan portfolio by currency:

2014 2013In HUF 29% 27%In foreign currency 71% 73%Total 100% 100%

Interest rates of the loan portfolio are as follows:2014 2013

Short-term loans denominated in HUF 0.04%–42.0% 0.3%–40.4%Long-term loans denominated in HUF 0.04%–42.0% 0.3%–40.4%Short-term loans denominated in foreign currency 0.01%–64.9% 0.01%–66%Long-term loans denominated in foreign currency 0.01%–66.9% 0.01%–64.9%Average interest rates on loans denominated in HUF 4.68% 4.94%Average interest rates on loans denominated in foreign currency 16.23% 16.54%Gross loan portfolio on which interest to customers is not being accrued 17.9% 18.4%


An analysis of the change in the provision for impairment on loan losses is as follows:

2014 2013Balance as at 1 January 1,235,634 1,154,176Provision for the year 708,743 514,614Release of provision (319,393) (328,859)Partial write-off* (237,593) –Increase due to acquisition 772 –Use of provision (85,494) (79,996)Foreign currency translation difference (173,584) (24,301)Closing balance 1,129,085 1,235,634

Provision for impairment on loan and placement losses is summarized as below:

2014 2013Provision for impairment (Release of provision) on placement losses 10 (374)Provision for impairment on loan losses 446,820 262,943Total 446,830 262,569

2014 2013Investments

Investments in associates (non-listed) 17,768 15,583

Other investments (non-listed) at cost** 8,917 12,48526,685 28,068

Provision for impairment on investments (3,304) (4,231)Total 23,381 23,837

NOTE 9: ASSOCIATES AND OTHER INVESTMENTS (in HUF mn)

* See details in Note 2.11.** These instruments do not have a quoted market price in an active market and whose fair value cannot be reliably measured.

An analysis of the change in the provision for impairment on investments is as follows:

2014 2013Balance as at 1 January 4,231 2,968Provision for the year 1,244 1,370Change due to merge (1,927) –Use of provision (245) (132)

Foreign currency translation difference 1 25Closing balance 3,304 4,231


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An analysis of the change in the provision for impairment on securities held-to-maturityis as follows:

2014 2013Balance as at 1 January 775 770Provision for the year – 21Release of provision – (32)Foreign currency translation difference 39 16Closing balance 814 775

2014 2013Interest rates of securities held-to-maturity with variable interest 0.02%–2.5% 0.02%–4.25%Interest rates of securities held-to-maturity with xed interest 0.9%–12.0% 2.6%–10.9%Average interest rates on securities held-to-maturity 6.34% 6.71%

2014 2013Government bonds 692,410 564,522Mortgage bonds 522 493Discounted Treasury bills 519 457Corporate bonds 7 1,070

693,458 566,542Accrued interest 16,725 14,284Provision for impairment on securities held-to-maturity (814) (775)Total 709,369 580,051

NOTE 10: SECURI TIES HELD-TO-MATURITY (in HUF mn)

An analysis of securities held-to-maturity by currency:

2014 2013Denominated in HUF 92.7% 89.8%Denominated in foreign currency 7.3% 10.2%Total 100% 100%

In most cases, interest on variable rate bonds isbased on the interest rates of 90 day Hungariangovernment Treasury bills and is adjusted

semi-annually. Interest on xed rate andvariable rate securities is, in most cases, paidsemi-annually.

Interest conditions and the remaining maturities of securities held-to-maturitycan be analysed as follows:


With variable interest 7,438 16,457With xed interest 375,972 212,112

383,410 228,569

Over ve years:With variable interest – –With xed interest 310,048 337,973

310,048 337,973Total 693,458 566,542


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For the year ended 31 December 2014:

NOTE 11: PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS(in HUF mn)

An analysis of the changes in the goodwill for the six month period ended 31 December 2014is as follows:

GoodwillCost

Balance as at 1 January 145,564Additions –Foreign currency translation difference (22,277)Impairment for the current period (22,225)Balance as at 31 December 101,062

Net book valueBalance as at 1 January 145,564Balance as at 31 December 101,062

Book value of the goodwill allocated to the appropriate cash generation units:

List of units HUF millionJSC “OTP Bank” (Russia) 41,806DSK Bank EAD 28,541OTP banka Hrvatska d.d. 18,280OTP Bank Romania S.A. 6,257Monicomp Ltd. 5,732OTP Banka Slovensko a.s. 93Other** 353Total 101,062

Intangible assetsand goodwill

Property Offi ceequipmen

and vehicles

Constructionin progress

Total

CostBalance as at 1 January 374,911 222,634 188,906 26,341 812,792Additions 41,354 7,292 14,785 18,246 81,677Acquisition 252 1,472 430 2 2,156Foreign currency translation differences (20,986) (3,887) (5,142) 165 (29,850)Disposals (49,075) (2,398) (16,275) (32,777) (100,525)Transfer* (628) (28,190) (20,939) – (49,757)Change in consolidation scope 27 - 90 6 123Balance as at 31 December 345,855 196,923 161,855 11,983 716,616

Depreciation and AmortizationBalance as at 1 January 181,190 49,799 126,559 – 357,548Charge for the year (without goodwill impairment) 22,614 5,346 15,762 – 43,722Goodwill impairment 22,225 – – – 22,225Foreign currency translation differences 3,207 (1,311) (4,219) – (2,323)Disposals (41,945) (180) (13,168) – (55,293)Transfer* (179) (6,909) (7,403) – (14,491)Change in consolidation scope 22 – 45 – 67Balance as at 31 December 187,134 46,745 117,576 – 351,455

Net book valueBalance as at 1 January 193,721 172,835 62,347 26,341 455,244Balance as at 31 December 158,721 150,178 44,279 11,983 365,161

* Assets subject to operating lease and investment properties are differentiated according to their purposes for use so they had beentransferred from tangible and intangible assets to other assets (see more details in Note 12.).

** Other category includes: OTP Real Estate Leasing Ltd., Nimo 2002 Ltd., POK DSK-Rodina a.d.

The Bank prepared the IFRS goodwill impairmenttests of the subsidiaries based on two

different net present value calculation methods

that shows the same result; however theyrepresent different economical logics. On one

hand is the discount cash-ow method (DCF)


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that calculates the value of the subsidiaries bydiscounting their expected cash-ow; on theother hand the economic value added (EVA)method estimates the value of the subsidiariesfrom the initial invested capital and the presentvalue of the economic prot that the companies

are expected to generate in the future.

The Bank applied a cash-ow model with anexplicit period between 2015–2017, except inthe case of “OTP Bank” JSC (Russia) and JSCOTP Bank (Ukraine) where the explicit periodwas 2015–2019, where for 2015 the actual,accepted annual nancial plans are includedand the actual nancial strategic plans(2016–2017) were used as forecasts for theperiod between 2018 and 2019.

Present value calculation with the DCF method

The Bank calculated the expected cash-owfor the given period based on the expectedafter-tax prot of the companies. For calculatingthe discount factor it was considered the baserates of the national banks in the actual macroforecasts as risk free rates and the Groupcalculated risk premiums by modifying thecountry risk premiums that are published ondamodaran.com with the CDS of the differentcountries spread as at 31 December 2014.

The values of the subsidiaries in the DCFmethod were then calculated as the sum ofthe discounted cash-ows of the explicit period,the present value of the terminal values and theinitial free capital assuming an effective capitalstructure.

Present value calculation with the EVA method

A company creates positive economic prot/value if the protability of the invested capitalis higher than the normal prot – the prot thatcan be usually generated in the banking sector –,which means that the company’s protabilityexceeds the expected yield. The economic protof the subsidiaries was calculated by deductingthe cost of invested capital from the net protfor the year. The applied discount factor andthe indicators used for calculating the residualvalue (long-term cost of capital and growthrate) are the same that are used in the DCFmethod.

Summary of the impairment test for the year

ended 31 December 2014

Based on the valuations of the subsidiaries,the total IFRS goodwill, recorded for OTP BankJSC (Ukraine) as at the balance sheet date, wasimpaired, which meant HUF 22,225 millionconsolidated IFRS goodwill impairment as at31 December 2014.

For the year ended 31 December 2013:

Intangible assetsand goodwill

Property Offi ceequipmen

and vehicles

Constructionin progress

Total

CostBalance as at 1 January 363,524 214,736 187,618 18,928 784,806Additions 32,622 11,394 22,509 29,217 95,742Foreign currency translation differences (7,438) (901) (893) 97 (9,135)Disposals (13,939) (2,605) (20,562) (22,755) (59,861)Change in consolidation scope 142 10 234 854 1,240Balance as at 31 December 374,911 222,634 188,906 26,341 812,792

Depreciation and AmortizationBalance as at 1 January 125,775 44,867 125,022 – 295,664Charge for the year (without goodwill impairment) 22,192 5,644 19,362 – 47,198Goodwill impairment 30,819 – – – 30,819Foreign

otp 2014 annual report 4

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