K&H Bank

Bába ÁgnesCFO

The outlooks of the Hungarian Banking Sector

Budapest, 21 April 2004

Balance Sheet total

Balance Sheet Total/ GDP (Hungary vs. EU)

0%

50%

100%

150%

200%

250%

300%

2000 2001 2002 2003 EU(2001)

GRE

Annual growth

0%

5%

10%

15%

20%

25%

30%

2001 2002 2003

Hungarian BankingSector

the depth of financial intermediation (total assets/GDP) is quite low in Hungary reasons:

1.) low level of household savings and lending2.) corporate lending: much more developed but still underdeveloped compared to EU empirical studies:

direct relation exists between GDP/capita and depth of financial intermediation the GDP growth and the (real) growth of total assets is faster

in Hungary than in EU countries

loans, deposits

Loans/ GDP (Hungary vs. EU)

0%

20%

40%

60%

80%

100%

120%

2000 2001 2002 2003 EU (2001)

Deposits/ GDP (Hungary vs. EU)

0%

20%

40%

60%

80%

100%

120%

2000 2001 2002 2003 EU (2001)

the loans and deposits to GDP ratios are much below the EU average

(around 40%), but while loans grow aggressively, deposits stagnateretail lending still lags considerably behind EU (even Greece and

Portugal has high ratios) –> rapid convergencealong with growing income and wealth, the savings rate will improve

–> slow convergenceslowly converging deposits vs. rapidly growing loans: increasing

importance of external financing

retail loansRetail loans/ GDP (Hungary vs. EU)

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2000 2001 2002 2003 EU (2001)

very low basis, strong, rapid convergence to EU proportion (consumption, home-building)

still a lot of room to grow (delayed consumption is significant)

retail loans

0%

20%

40%

60%

80%

100%

2001 2002 2003 EMU2001

Composition of the retail loans(Hungary vs. EMU)

Consumer and other

Housing loans

Mortgage loans as a percentage of GDP

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45%

50%

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Greece Ireland Portugal Spain Hungary

high dinamics of housing loansthe composition of retail lending is already „EU conform”although state subsidy system is a driver, lower HUF

interest environment and FCY loans can give independence to the market

consequence: equally big potential in consumer and housing loans

retail deposits

Retail deposits/ GDP (Hungary vs. EU)

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10%

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30%

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50%

60%

2000 2001 2002 2003 EU (2001)

0%

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100%

2001 2002 2003 EU(2000)

Composition of households' financial assets (Hungary vs. EU)

other

insurance premiumreservesshares, otherownership participationsecurities other thansharescash and deposists

high proportion of cash and deposit type investments (almost double of EU)

considerable lag in insurance and share type savingsaccelerating convergence of insurance type assetsno convergence is expected in share type investments

corporate loans and deposits

Corporate loans/ GDP (Hungary vs. EU)

0%

5%

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15%

20%

25%

30%

35%

40%

45%

50%

2000 2001 2002 2003 EU (2001)

Corporate deposits/ GDP (Hungary vs. EU)

11%

11%

12%

12%

13%

13%

14%

14%

15%

2000 2001 2002 2003 EU (2001)

relatively close to EU ratio (compared to retail) within corporate funding the weight of bank loans is higher than in EU

(financial intermediation: Banks vs. Capital markets –> German model)

a further growth (higher than GDP growth) is expected due to primarily to small and medium enterprises (half of them has no bank financing relationship)

deposits: already at EU level -> no significant growth potential (compared to GDP) -> K&H: market share is an opportunity

profitability indicators

ROA (Hungary vs. EU)

0.0%

0.5%

1.0%

1.5%

2.0%

1999 2000 2001 2002 2003 EU2001

Cost/ income(Hungary vs. EU)

0%

20%

40%

60%

80%

100%

1999 2000 2001 2002 2003 EU2001

Real ROE (inflation adjusted) (Hungary vs. EU)

-5%

0%

5%

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20%

1999 2000 2001 2002 2003 EU2001

Cost/ income (2003)

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10%20%

30%

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60%70%

80%

Raiff MKB CIB OTP K&H

profitability ratios are already comperable or higher than in EU countriesincreasing competition will

result in decreasing margins (retail segment) offset by further improvement in operating expenses

profitability indicators

Non-interest income/ Total income(Hungary vs. EU)

0%5%

10%15%20%25%30%35%40%45%

1999 2000 2001 2002 2003 EU2001

Net fee income/ Net interest income(Hungary vs. EU)

0%

10%

20%

30%

40%

50%

1999 2000 2001 2002 2003 EU2001

still high (although decreasing) proportion of interest income

drivers of improvement: loan related fees, asset management products

provisions

Non-performing loans/ Loans(Hungary vs. EU)

0.0%

1.0%

2.0%

3.0%

4.0%

2002 EU 2001

Non-performing loans: doubtful and bad

still worse loan qualitymissing retail interbank customer information

retail margins 1

the forecasted decrease in consumer margins is the consequence of the domestic competition and the lower risks (debtor records)

margins of housing loans: determined by the government’s subsidy policy

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

EMU (2002) HUNGARY (2004 FEB)

Retail loan margin (consumer loan - short term)

interest rate level

money market referencerate6.55%

14.18%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

EMU (2002) HUNGARY (2004 FEB)

Retail loan margin (housing loan)

interest rate level

money market referencerate

0.61%

-0.16%

retail margins 2

The pricing will be deteminated by the domestic competition in the future too (liquidity position of the banking sector).

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

EMU (2002) HUNGARY (2004 FEB)

Retail deposit margin (short term)

interest rate level

money market referencerate1.19%

2.35%

corporate margins

loan margins are expected to increase from their very low level

the margins on deposits within a year are approx. at the same level in Hungary and the EMU, therefore the deposit margins will not change considerably

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

EMU (2002) HUNGARY (2004 FEB)

Corporate deposit margin (short term)

interest rate level

money market referencerate

1.19%

0.97%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

EMU (2002) HUNGARY (2004 FEB)

Corporate loans margin (short term)

interest rate level

money market referencerate2.97%

1.75%

strategy of K&H

rapidly increasing consumer and SME lending & leasing

modest growth of upper corporate segmentsmarket share gain in deposits on a modestly growing

marketinsurance as a differentiatorstrong mutual funds growth