MKB EUROLEASING GROUP
MKB Euroleasing group is involved in automobile sales, financing and insurance brokerage, thus providing complex services to its customers.
The total volume of new car sales continued to decline in 2006 with the market shrinking by 8.6 percent. In light of the increased risks, the group focused its activity on improving portfolio quality and maintaining profitability rather than increasing the financing volumes. Car financing activity is centralised in MKB Eurocredit and affiliated companies. Fleet management is performed through MKB Euroleasing Autópark Zrt, and insurance brokerage is undertaken by Eurorisk Kft. and Netrisk Kft. Car dealers are managed within the group by Carnet Zrt.
At the end of 2006, the Group was serving more than 178,000 customers.
The strategic alliance concluded in 2001 has proved to be wholly justified, and the business co-operation between MKB Bank and MKB Euroleasing has led to successes in numerous fields.
Vehicle financing
The customer financing business line of the Group is continuously among the largest in vehicle financing in Hungary.
In order to manage the risks which have increased as a result of the growing market pressure, at the beginning of the year the group decided to adopt new, even more stringent and prudent risk management procedures. Portfolio quality consequently improved, however, the volume of customer lending dropped in line with the general market trend. The total amount of new customer lending of the Group was HUF 34.5 billion in 2006 (against HUF 73.6 billion in 2005).
By 2006 the retail customer base of the business line reached 80,000 clients.
In 2006, the number of financed vehicles dropped by 27 percent. The number of new customer financing agreements was 17,563 in 2006, down from 24,099 in 2005.
Co-operation with strategic partners – TFSH (Toyota) and PSAFH (PSA) – continues to be important in the activity of the business line.
Fleet management services
During 2006, MKB Euroleasing Autópark Zrt. significantly increased its fleet and thus succeeded in maintaining its market positions. The number of vehicles financed and managed in 2006 was 6,451, up by 105 percent from 3,124 in 2005. The T-Com tender awarded to the company in 2005 contributed significantly to this outstanding result, which brought 2,466 cars under the company’s management.
Car trading
In the domestic market the MKB Euroleasing group has a unique commercial network. Despite the shrinking market environment, CarNet Zrt., a vehicle trading subsidiary within the MKB-Euroleasing group, closed an extremely successful year. In 2006, the CarNet network sold 5,635 new cars (against 4,439 in 2005), representing a 27 percent increase, and 4,024 used cars, up 8.5 percent from 3,708 in 2005.
Insurance brokerage
Within the group, vehicle insurance brokerage is performed by the traditionally operating Eurorisk Kft. and by the online intermediary Netrisk Kft. operating solely on the internet. Eurorisk has been the market leader in motor insurance brokerage for several years. In the course of 2006, a total of 11,310 comprehensive and 23,506 third-party liability insurance policies were written. (In 2005, 14,271 comprehensive and 24,671 third-party liability motor insurance policies were contracted).
Having achieved far better results than planned, Netrisk Kft. maintained its No1. position in the rapidly developing online insurance brokerage segment. In 2006, the company brokered 1,762 comprehensive and 66,928 third-party liability motor insurance policies (compared with 1,268 comprehensive and 68.322 third-party motor insurance policies in 2005).
BRANCH NETWORK OF MKB GROUP IN CENTRAL AND EASTERN EUROPE
Business and Financial Performance of MKB Romexterra Bank in 2006
The Romanian Economy
GDP growth in 2006 reached around 7%, over the initially estimated 6%, due to the development of the industrial production, the good year in agriculture and the controlled inflation. The investments increased by 14.2% in 2006. The account deficit will probably be around 9.5% and the budget deficit is 0.8% of GDP. The industrial output growth reached 7.1% at end December 2006.
The inflation rate for 2006 was 4.9%, thus, below the targeted figure of 5% by the NBR. The unemployment rate was 5.2% at end December 2006. The exchange rate at the end of 2006 was 3,38 RON for one EUR. The capital market evolutions are still show investors interest: the BVB BET indicator increased in 2006 by 22.3%, although less compared to the 51% increase registered in the previous year. The country risk by S&P: BBB-, by Moody’s Ba1 and by Fitch BBB.
The Romanian Banking Sector
Strong credit expansion, higher competition and narrowing interest rate margins characterized 2006. At the same time, the country is still attractive for newcomers, KBC, Fortis (Belgium), Millenium BCP (Portugal), Bank of Cyprus, Banca Nationale del Lavoro (Italy) etc. entered the market in 2007.
Average assets surged by 34.6% y/y (in Jan-Dec against 2005) and banks’ capital increased by 30.9%. The volume of non-government credit increased by 53.7% in Jan-Dec 2006 as compared to whole 2005.
Loans to households increased by 90% over the first 11 months of last year alone to reach some 11% of the GDP. Net loans to firms and public sector surged by more than four times y/y to EUR 704mn in October. Banks’ net profits for Jan-Nov were 6% up against whole 2005 already (9% profit rise when calculated in Euro).
Number of local bank branches opened in 2006 exceeded 1,100, which brings the total number of branches at year-end 33% up in y/y terms on top of developing electronic services.
The business performance of MKB Romexterra Bank
The Bank successfully increased its business activity, the number of clients rose by
17% to 175 200 (from 149,500 in 2005). On business line level, the number of retail clients
increased by 17.4% to 165,200 (2005: 140,700) and the number of corporate clients reached 10,000 (2005: 8,800) by increasing 13,9%.
The number of cards showing the expansion were also on the steady rise totalling 164,100 at year-end. Business card increased by 66%, while the bank successfully
started to sell VISA Classic and Gold on top of the electronic and affinity cards which represents the bulk of its portfolio.
The market share of the Bank in corporate loans increased from 0.8% in 2005 to 0.9% in 2006. In corporate deposits the market share was slightly down to 1.1% (2005: 1.4%). The Bank raised its market share in retail loans from 0.4% to 0.6%., and in retail deposits the market share remained 0,7%.
The geographic coverage of the Bank further improved: at the end of 2006, the bank network reached 60 units, of which 52 were already operational.
The financial performance of MKB Romexterra Bank (IFRS, consolidated)
The consolidated total assets of MKB Romexterra Bank reached RON 1,273.7 million (2005: RON 1,110.1 million). Thanks to the strong lending activity during 2006, the loan portfolio increased by 65.5% to RON 780.2 million in 2006 (2005: RON 471.4 million). The customer deposits of MKB Romexterra Bank grew by 3.2%, from RON 819.9 million in 2005 to RON 846.0 million in 2006. The shareholder’s equity amounted RON 202.2 million (2005: RON 181.6 million)
The gross operating income increased by 28.4% to RON 123.5 million (2005: RON 96.2 million). The operating expenses reached RON 87.1 million (2005: RON 68.1), so the operating profit was RON 36.4 million. The impairments and provision charges totalled up to RON 12.3 million. The pre-tax profit of the Bank reached RON 24.2 million, which resulted in a ROAE of 12.8% and a ROAA: 2.0% for 2006.
At the end of 2006 the staff number totalled to 801 employees which was an 8.2 % increase compared with the previous year.
With respect to increased confidence, last autumn S&P raised its long-term counterparty credit rating on MKB Romexterra Bank to 'BB-' from 'B', following MKB's (BBBpi/--/--) acquisition of a 55.36% majority stake. The 'B' short-term rating was affirmed. The outlook is stable for MKB Romexterra Bank.
Synergies and Harmonisation with MKB Bank:
Harmonisation an development project organization has been set up to support the Bank in three major types of activities at the start: establishment of control procedures and group standards, enhance capabilities through business development and last but not least Risk Management process improvements. Besides that, the project also co-ordinates and monitors the information and knowledge sharing between the two bank’s various departments and facilitates their communication. After the first phase, harmonisation will focus on the business processes to deliver best practices from the Group to MKB Romexterra Bank.
The business partnership between the two banks consisted of a refinancing facility provided for Romexterra Leasing by MKB in the amount of EUR 6 million.
Outlook for 2007
As far as the economic scene is concerned, in 2007 GDP will likely grow at 6%. Investments will follow an ascending trend and will increase by 11.5%. The current account deficit will diminish to 9.0% of the GDP in 2007. Although the NBR has targeted an inflation rate of 4% +/-1% for 2007, there are estimations that this will be around 5% and an exchange rate of 3,55 RON for one EUR is estimated for the end of 2007.
The key business policy objective of the MKB Romexterra Bank is to increase its market shares in line with the general Group’s strategy. Leveraging on MKB’s expertise, The Bank intends to increase the number of corporate clients by the same pace as the market share, and also by selling new products and services and using the synergies in the Group.
Total Assets will reach 2.0 bn RON (64% increase), loans close to 1.3 bn RON, while deposits 1.3 bn RON after 50% increase from 2006. ROE will likely not deteriorate despite significant investments. Capital adequacy will exceed regulatory minimum of 12%.
Product developments support the expansion strategy. The main target for large corporate clients is to improve the existing loan portfolio products. For the SME business the objective is to develop investment loans. In retail business the main target is to develop the medium and upper segment, offering new products for the actual clients in order to strengthen the loyalty, developing the “financial adviser“ service for the clientele.
In 2007 the bank intensively develops its branch network to increase mainly its countryside coverage. This would mean a countrywide network of around 90 sales units of all types by the end of the year. Developing alternative sales channels (e- banking, retailers, terratel and telesales) are also in the spotlight for 2007.
2004 2005 2006
Total Assets 722 056 1 110 117 1 273 723 Share Capital 185 569 185 569 199 969 Reserves (17 724) (7 669) (1 623)
Gross Operating Income 74 419 96 210 123 502 Operating Expenses (62 600) (68 074) (87 058) Impairments and Provision Charges 4 664 (8 918) (12 279)
Profit Before Taxation 16 483 19 218 24 165
Profit After Taxation 15 517 16 426 21 258
Pre-tax Return on Average Equity (ROAE) 12,0% 11,1% 12,8%
Earnings per Average Outstanding Share (EPS) 8,4% 8,9% 10,6%
Pre-tax Return on Average Assets (ROAA) 2,8% 2,1% 2,0%
Cost-to-Income Ratio 84,1% 70,8% 70,5%
Capital Adequacy Ratio 21,8% 17,7% 17,9%
Key Figures
(Consolidated, IFRS) (RON thou)
ROMEXTERRA BANK SA
Consolidated Balance Sheet as at December 31, 2006
2006 2005
RON thou
ASSETS
Cash balances 279 432 184 839
Amounts due from the National Bank of Romania 18 940 185 540
Amounts due from other banks 81 582 83 038
Financial assets at fair value through profit or loss 2 070 2 661
Investments in securities 30 181 109 358
Loans and advances to customers 780 154 471 396
Other assets 25 646 29 938
Investments in consolidated subsidiaries, jointly controlled entities and associates 9 180 6 963
Intangibles, property and equipment 46 538 36 384
1 273 723 1 110 117
LIABILITIES
Amounts due to the National Bank of Hungary
Amounts due to other banks 113 336 8 729
Current accounts 131 768 278 742
Deposit accounts 714 243 541 174
Certificates of deposit 26 987 25 503
Financial liabilities at fair value through profit or loss
Other liabilities and provisions 13 609 16 765
Deferred tax liability 717 84
Borrowed funds and debt securities 70 859 57 565
Subordinated debt 1 071 519 928 562 SHAREHOLDERS' EQUITY Share capital 199 969 185 569 Reserves 29 312 26 333 Accumulated deficit -30 935 -34 002 198 346 177 900 Minority interests 3 858 3 655 1 273 723 1 110 117 (audited, IFRS)
ROMEXTERRA BANK SA
Consolidated Income Statement for the year ended December 31, 2006
2006 2005
RON thou
Interest income 147 279 105 426
Interest expense 51 743 35 405
Net interest income 95 536 70 021
Net income from commissions and fees 16 231 16 756
111 767 86 777
Other operating income 11 735 9 433
123 502 96 210
Impairments and provisions for losses -12 279 -8 918
111 223 87 292
Operating expenses -87 058 -68 074
Profit before taxation 24 165 19 218
Taxation 2 907 2 792
Profit after taxation 21 258 16 426
THE PERFORMANCE OF MKB UNIONBANK AD IN 2006
The Bulgarian economy
In 2006 the Bulgarian economy developed at a high pace. Projected GDP at the end of the third quarter of 2006 was BGN 34.917 million, and its real y/y growth was 6.3%. Positive expectations for the development of the economy associated with the country’s accession to the EU as of 1 January 2007 attracted considerable FDI and external funding. Foreign investments for 2006 are to exceed EUR 4 billion, EUR 1.7 billion more than in 2005. The growing trade deficit in the country causes some concern. As of 30 November it reached EUR 4.5 billion (18.8 % of GDP), however, it was offset entirely by foreign investments and external financing. The forex reserves of the country increased by BGN 3.04 billion, growing by 21.1% at the end of 2006 to reach BGN 17.46 billion. The industrial output growth reached 3.5% at November 2006.
The upward trend in the gross external debt sustained in 2006. As of November it reached EUR 18.7 billion, comprising 77.4 % of GDP. It should be noted that the increase was due mainly to the private non-guaranteed debt whereas government debt decreased to EUR 4.6 4.5 billion by the end of November.
The 7.3% inflation reported in 2006 is 2.3 pps higher than in the previous year. Unemployment at the end of 2006 stood at 9.1 %, down by 1.6 pps. Favourable economic conditions in the past year reflected in the high business climate index and positive ratings of the country: in October 2006 Standard & Poor's Ratings Services raised the country’s credit rating in foreign currency to 'BBB+/A-2' from 'BBB/A-3'. Moody’s country rating is A1.
The fixed exchange rate of Euro against the Bulgarian Lev was maintained at 1.95583 BGN for one EUR.
The Bulgarian banking sector
In 2006 the banking system maintained its stable development. The aggregated net profit of the commercial bank system increased by 38.2% y/y to BGN 807.6mn (EUR 412.9mn) last year. Returns on average assets improved to 2.2% last year, as compared with 2.1% a year earlier. Net income from interests increased by 17.4% y/y to BGN 1.6bn. The bank penetration ratios retained a fast pace of expansion, as the total value of assets managed by the 32 players in the sector advanced by 28.4% in a year to BGN 42.2bn or 92.5% of the projected full-year GDP.
The stock of bank credits, net of specific reserves, went up by 24.6% to BGN 22.1 bn or 48.5% of GDP in 2006. Trade loans accounted for the highest share in the system’s credit portfolio, approximately 60%, and the share of mortgage loans reached about 15%.
The asset growth is due to all financing funds, though predominantly to the steady growth of the deposit base, which reached BGN 33.2 bn. The funds deposited by NFIs’ and other clients’ funds constitute the greatest part of the funds amounting to BGN 27.6 bn (demand deposits: BGN 11,2 bn, term deposits: BGN 13,4 bn, savings: BGN 2,9 bn).
Although the bank penetration rates are already comparable to the new EU member states, they are expected to grow steadily in medium terms due to relatively low
non-bank financial intermediation, large net inflows of foreign investments, and further improvement to the standards of the more matured EU economies.
Innovation and consolidation characterised the banking sector in Bulgaria in 2006: it was a year of major acquisitions and of laying the groundwork for future mergers, part of a process that began when the privatisation of the banking sector ended in previous years. In January, Icelandic tycoon Thor Bjorgolfsson’s Novator investment fund had bought 18.27 per cent of Bulgaria’s Economic and Investment Bank (EIBank). The dominant acquisition and merger story in the banking sector in 2006 was the merger between UniCredit’s Bulbank and HVB Bank Biochim and Hebros belonging to Bank Austria Creditanstalt. In April, Dutch financial services group ING launched life insurance operations in Bulgaria. In May the purchase of Bulgaria's Unionbank by MKB Bank was finalised. In H2, the acquisition story that generated the most excitement was that of DZI Bank by Greece’s Eurobank EFG.
Since June 2006 BNB has gradually started to lift the effective administrative restrictions (so called credit ceilings), controlling the credit growth pace. BNB abolished the applicable limitations as from January 1st 2007. However, in case the credit growth pace accelerates and overpasses 20% per annum, BNB preserves its right to employ additional adequate measures.
The business performance of MKB Unionbank
The Bank dynamically started to accomplish its new strategy, in line with this the number of clients increased by 51 %. At the end of 2006 the active clients of the Bank amounted to 55,889 (2005: 37,007) of which 8,585 (2005: 7,381) were corporate clients and 47,304 (2005: 29,626) private individuals.
Even more remarkable that individual clients and households business which was brought to strategic focus at MKB Unionbank recently showed a dynamic development in 2006, leading to 60% increase in client numbers. The number of bank cards increased by more than 25,000 and reached 35,983 at end-2006 (2005: 10,560). Card sales are incomparably more intensive now, than at the start of this business. The number of ATMs doubled in a course of 2006 from 12 to 24.
The geographic coverage of the Bank was further improved by 5 new bank units established during the year to reach 47 bank units (branches and offices) at end-2006.
The market share of MKB Unionbank in corporate loans reached 2.08% in 2006 (2005: 2.13%). In corporate deposits the market share reached 2.65% (2005: 2.43%). The Bank doubled its market share in retail loans from 0.33% to 0.66%, and in retail deposits the market share is expected to rise to 1.19% from 0.99% 2005.
The financial performance of MKB Unionbank
According to IFRS, audited, consolidated financial statements in 2006 MKB Unionbank’s assets increased by 27.5 % and exceeded BGN 608.8 million at the end of the year (2005: BGN 477.5 million). Customer loans rose by 25.2 % to reach BGN 351.3 million (2005: BGN 280.5 million). In 2006 the opportunities for further lending growth were very limited in the context of the restrictive measures of the Central Bank on banks’ credit activity. This resulted in a 57.7 % loans-to-assets ratio and a comparatively lower profitability of the bank assets. The credit portfolio has good quality, with over 60-day overdue loans accounting for only 0.57 %.
MKB Unionbank has ended 2006 with a positive financial result before taxation amounting to BGN 1.8 million (2005: 15.9 million). The gross operating income reached BGN 27.6 million (2005: BGN 29.7 million). The operating expenses was BGN 22.2 million, so the operating profit was BGN 5.4 million (2005: BGN 9.2 million). The impairments and provisions for losses totalled up to BGN 3.7 million. The return on assets stood at 0.3% (2005: 3.7%), and the return on the equity was 2.8 % (2005: 28.6%). Cost to income ratio stood at 80.6% (2005: 69.1%), already reflecting the effects of development programs launched after MKB’s investment which will bear fruits in the forthcoming years. At the end of 2006 the capital base amounted to BGN 63.6 million (2.1% increase). The capital adequacy stood at a safe 15.0% (2005: 14.8%).
At the end of 2006 the total staff was 743 employees (17.2 % increase compared with the previous year’s data: 634). The Head Office employees totalled 228 people (2005: 179; 27.4% increase), while the number of people employed in the branch network was 515 (2005: 455; 13.2% increase). The HO staff increase relates mainly to the new tasks and objectives of the Bank as a part of MKB Group, while the staff number increase in branch network is due to the new bank units opened.
In 2006 the subsidiary of the Bank - Unionleasing, has increased its lease portfolio by 68 % to reach BGN 7.6 million. As a result of the co-operation with MKB, the company has utilized a EUR 3 million short-term loan, extended by it. An important role for Unionleasing’s business development in the past year was placed to the close co-operation with Unionbank and its branch network.
Synergies and Harmonisation with MKB Bank:
Unionbank has joined the MKB/BayernLB group in May 2006 as a result of the acquisition of 60 % of the Bank’s equity by MKB Bank. This change in ownership created especially favourable possibilities for its development and strategic partnership. During the short period of the co-operation, with the support of MKB, several streams of comprehensive harmonization and development project were implemented, practically in all aspects of the Bank’s operation. Most attention was focused on the following: intensive adaptation of the bank standards and procedures; organizational restructuring of management systems and decision-taking tools and implementation control; unification of the risk control and management system, preparation of investment and treasury management concept; changes in the report system and its transformation in conformity with the bank group’s standards; changes in the organization and planning activity requirements and transition to mid-term planning; elaboration of a branch network development strategy; introduction of client segmentation, assessment and introduction of new standards and requirements towards the information and communication systems; introduction of a centralized approach for implementation of non-banking, logistic activities, etc.
The business partnership between the two banks consisted of a refinancing for MKB Unionbank provided by MKB which at the end of 2006 amounted to over EUR 36 million. The loans committed to clients by MKB against MKB Unionbank’s guarantees regarding projects in Bulgaria are over EUR 4 million. The significance of the co-operation in acquisition of new foreign clients, active in Bulgaria, is gradually increasing.
Outlook for 2007
In 2007 the economic forecasts show good opportunities for the country’s economic development with its EU membership being an important factor for acquisition of new foreign investments and implementation of projects financed by European funds. The GDP will continue its relatively high dynamics– growth of over 5.5 – 6.0 % but at the same time the problem with regard to the current account deficit will stay, regardless of the forecasted higher dynamics of export. In 2007 the CPI will probably be around 4.5-6.5%, the CA balance in percentage of the GDP will be above 13%, and the budget balance is supposed to reach 0.8-2% of the GDP.
MKB Unionbank’s development in 2007 is expected to be an extraordinary challenge in its history up to the present – the targets set determine sharp increase in the business development dynamics as a whole and increase in the market shares in the corporate clients segment as well as in that of the individuals. At the end of 2007 the Bank’s assets should exceed BGN 990 million /increase of over 60 %/ and should represent 1.95 – 2.1 % of the bank system’s assets /1.43 % in 2006 /. Similarly, the profit before tax should increase despite heavy spending in investment into the future, while reasonable improvement of the efficiency indices is also expected.
MKB Bank will provide extensive support in the development of all business lines. According to a strategic decision, MKB Unionbank sold its asset leasing specialized subsidiary to the Bulgarian subsidiary of MKB Bank’s domestic strategic partner, Deutsche Leasing, the transaction carried out at the beginning of 2007. This agreement broadens the services and product base offered to the traditionally strong SME base.
MKB UNIONBANK
2004 2005 2006
Total Assets 373 922 477 493 608 837 Share Capital 15 412 15 412 15 412 Reserves 33 246 46 832 48 168
Gross Operating Income 27 056 29 662 27 594 Operating Expenses (16 395) (20 504) (22 241) Impairments and Provision Charges (3 460) 6 369 (3 746)
Profit Before Taxation* 7 201 15 856 1 790
Profit After Taxation 5 821 13 488 1 486
Pre-tax Return on Average Equity (ROAE) 15,7% 28,6% 2,8% Earnings per Average Outstanding Share (EPS) 37,8% 87,5% 9,6%
Pre-tax Return on Average Assets (ROAA) 1,9% 3,7% 0,3%
Cost-to-Income Ratio 60,6% 69,1% 80,6%
Capital Adequacy Ratio 17,5% 14,8% 15,0%
* Consolidated pre-tax profit of MKB Unionbank and Unionleasing (2005, 2006)
Key Figures
(Consolidated, IFRS) (BGN thousand)
Consolidated Balance Sheet as at December 31, 2006 MKB UNIONBANK IFRS 2006 2005 BGN thousand ASSETS Cash balances 12 451 8 589
Amounts due from the National Bank of Bulgaria 31 639 18 426
Amounts due from other banks 147 689 93 879
Financial assets at fair value through profit or loss 32 387 50 978
Investments in securities 15 537 17 020
Loans and advances to customers 351 264 280 456
Other assets 2 233 2 154
Investments in consolidated subsidiaries, jointly controlled entities and associates -
-Intangibles, property and equipment 7 192 5 991
Non current assets classified as held for sale 8 445
-608 837
477 493
LIABILITIES
Amounts due to the National Bank of Bulgaria -
-Amounts due to other banks and other financial institutions 25 330 34 717
Current accounts 172 547 112 247
Deposit accounts 296 483 189 685
Certificates of deposit -
-Financial liabilities at fair value through profit or loss -
-Other liabilities and provisions 1 889 4 055
Deferred tax liability 158 243
Borrowed funds and debt securities 42 006 74 302
Subordinated debt -
-Liabilities directly associated with non curent assets classified as held for sale 6 844
-545 257 415 249 SHAREHOLDERS' EQUITY Share capital 15 412 15 412 Reserves 48 168 46 832 63 580 62 244 608 837 477 493
Consolidated Income Statement for the year ended December 31, 2006 IFRS 2006 2005 BGN thousand Interest income 41 105 35 586 Interest expense (19 867) (14 010)
Net interest income 21 238 21 576
Net income from commissions and fees 5 817 5 878
Other operating income 539 2 208
Impairments and provisions for losses (3 746) 6 369
Operating expenses (22 241) (20 504)
Profit before taxation 1 607 15 527
Taxation (273) (2 317)
Profit after taxation (from continuing operations) 1 334 13 210
Discontinued operations (profit for the year from discontinued operations)** 152 278
Profit for the year 1 486 13 488
