OTP BANK PLC ANNUAL REPORT 2021 (AS DEFINED IN ACT CXX OF 2001 ON THE CAPITAL MARKET) BUDAPEST, 13 APRIL 2022 Dear Shareholders! OTP Bank Plc. hereby provides you with the Annual Report of OTP Bank Plc. for the year 2021, which is based on the audited financial statements approved by the Annual General Meeting of the Company on 13 April 2022. On behalf of OTP Bank Plc. we declare that, to the best of our knowledge, the separate and consolidated financial statements which have been prepared in accordance with the applicable accounting standards, present a true and fair view of the assets, liabilities, financial position and profit and loss of OTP Bank Plc. and its consolidated subsidiaries and associates, and give a fair view of the position, development and performance of OTP Bank Plc. and its consolidated subsidiaries and associates, describing the principal risks and uncertainties, and do not conceal facts or information which are relevant to the evaluation of the Issuer’s position. 13 April 2022, Budapest dr. Sándor Csányi Chairman & CEO László Bencsik Deputy CEO CONTENTS BUSINESS REPORT 2021 (SEPARATE) BUSINESS REPORT 2021 (CONSOLIDATED) INDEPENDENT AUDITORS’ REPORT (SEPARATE AND CONSOLIDATED, IN ACCORDANCE WITH IFRS) SEPARATE FINANCIAL STATEMENTS IN ACCORDANCE WITH IFRS (2021) CONSOLIDATED FINANCIAL STATEMENTS IN ACCORDANCE WITH IFRS (2021) OTHER INFORMATIONS ANNUAL REPORT 2021 BUSINESS REPORT 2021 (SEPARATE) ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (SEPARATE) SEPARATE STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2021 (IN HUF MILLION) Cash, amounts due from banks and balances with the National Bank of Hungary Placements with other banks, net of allowance for placement losses Repo receivables Financial assets at fair value through profit or loss Financial assets at fair value through other comprehensive income Securities at amortised cost Loans at amortised cost Loans mandatorily measured at fair value through profit or loss Investments in subsidiaries Property and equipment Intangible assets Right of use assets Investment properties Current tax assets Derivative financial assets designated as hedge accounting relationships Other assets 2021 2020 474,945 2,567,212 33,638 246,462 641,939 3,071,038 4,032,465 662,012 1,573,008 81,817 62,161 17,231 4,328 - 17,727 224,488 579,120 1,535,884 183,364 160,483 911,950 2,007,692 3,417,760 480,937 1,548,972 77,974 57,639 13,479 1,936 593 6,817 169,794 TOTAL ASSETS 13,710,471 11,154,394 Amounts due to banks and deposits from the National Bank of Hungary and other banks Repo liabilities Deposits from customers Leasing liabilities Liabilities from issued securities Financial liabilities at fair value through profit or loss Derivative financial liabilities designated as held for trading Derivative financial liabilities designated as hedge accounting relationships Deferred tax liabilities Current tax liabilities Other liabilities Subordinated bonds and loans TOTAL LIABILITIES Share capital Retained earnings and reserves Treasury shares TOTAL SHAREHOLDERS' EQUITY 1,051,203 86,580 9,948,532 17,932 22,153 20,133 192,261 18,690 1,507 4,776 259,964 271,776 766,977 109,612 7,895,735 14,106 28,435 25,902 99,987 3,104 3,062 1,464 223,433 304,243 11,895,507 9,476,060 28,000 1,845,836 (58,872) 28,000 1,697,133 (46,799) 1,814,964 1,678,334 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 13,710,471 11,154,394 ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (SEPARATE) SEPARATE STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 2021 (IN HUF MILLION) Interest Income: Interest income calculated using the effective interest method Income similar to interest income Interest income and similar to interest income total Interest Expense: Interest expenses total NET INTEREST INCOME Loss allowance on loan, placement and repo receivables losses Loss allowance on securities at fair value through other comprehensive income and on securities at amortised cost Provision for loan commitments and financial guarantees given Change in the fair value attributable to changes in the credit risk of loans mandatorily measured at fair value through profit of loss Risk cost total NET INTEREST INCOME AFTER RISK COST LOSSES ARISING FROM DERECOGNITION OF FINANCIAL ASSETS MEASURED AT AMORTISED COST MODIFICATION LOSS Income from fees and commissions Expenses from fees and commissions NET PROFIT FROM FEES AND COMMISSIONS Foreign exchange losses Gains on securities, net Losses on financial instruments at fair value through profit or loss Gains on derivative instruments, net Dividend income Other operating income Other operating expenses NET OPERATING INCOME Personnel expenses Depreciation and amortization Other administrative expenses OTHER ADMINISTRATIVE EXPENSES PROFIT BEFORE INCOME TAX Income tax NET PROFIT FOR THE YEAR Earnings per share (in HUF) Basic Diluted ANNUAL REPORT 2021 2021 2020 302,373 105,663 408,036 239,633 81,663 321,296 (155,491) (99,630) 252,545 221,666 (38,841) (57,671) (1,484) (130) (1,848) (3,202) (16,255) (56,710) (405) (63,126) 195,835 158,540 (2,700) (3,279) (7,017) (17,358) 300,803 (52,276) 248,527 (5,638) 2,104 (6,494) 3,436 99,037 11,265 (41,636) 62,074 (136,126) (40,692) (178,611) (355,429) 141,290 (15,951) 125,339 259,781 (40,750) 219,031 (4,518) 17,595 (671) 7,057 60,973 7,900 (28,064) 60,272 (118,498) (38,948) (154,165) (311,611) 105,595 (13,121) 92,474 455 455 333 333 OTP BANK BUSINESS REPORT 2021 (SEPARATE) SEPARATE STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2021 (IN HUF MILLION) NET PROFIT FOR THE YEAR Items that may be reclassified subsequently to profit or loss: Fair value adjustment of debt instruments at fair value through other comprehensive income Deferred tax (9%) related to fair value adjustment of debt instruments at fair value through other comprehensive income Gains / (Losses) on separated currency spread of financial instruments designated as hedging instrument Deferred tax (9%) related to (losses) / gains on separated currency spread of financial instruments designated as hedging instrument (Losses) / Gains on derivative financial instruments designated as cash flow hedge Deferred tax (9%) related to gains on derivative financial instruments designated as cash flow hedge Items that will not be reclassified to profit or loss: Fair value adjustment of equity instruments at fair value through other comprehensive income Deferred tax (9%) related to equity instruments at fair value through other comprehensive income Total NET COMPREHENSIVE INCOME 2021 2020 125,339 92,474 (37,163) (14,459) 3,410 1,262 1,681 (1,526) (151) 137 (6,307) (296) - 27 1,407 (3,275) (281) 310 (37,404) (17,820) 87,935 74,654 ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (SEPARATE) POST-BALANCE SHEET EVENTS Post-balance sheet events cover the period until 17 February 2022. Hungary Against the initially planned 2 pps social security contribution cut effective from July 2022, the government reduced employers’ taxes by 4 pps already from 1 January 2022 (the 1.5% vocational training contribution was abolished and the social contribution taxes were cut by 2.5 pps). On 25 January 2022 the NBH hiked the base rate by 50 bps to 2.9%. On 27 January 2022 the NBH hiked the rate of the 1-week central bank deposit by 30 bps to 4.3%. On 15 February 2022 the CSO revealed the final GDP growth figures: accordingly, in 4Q 2021 the quarterly expansion of 2.1% was stronger than expected, lifting the annual growth rate to 7.1% in 2021 as a whole (seasonally and working day adjusted). Mr. Mihály Varga (Minister of Finance) announced that the government expects 5.9% growth for 2022. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (SEPARATE) MACROECONOMIC OVERVIEW The Hungarian economy grew by 7.2% in 2021, stronger than had been expected. The rapid expansion was supported by both an intensive vaccination campaign and strong fiscal and monetary support measures. Rapid growth could continue in 2022, and it can draw near 6%, thanks to the government's economic support measures and, hopefully, the recovery of tourism after the pandemic. As a result of the rapid growth of demand, coupled with the rise of the global inflation, Hungary's central bank started a monetary tightening cycle in June 2021, to prevent the increasing inflation risks. As part of this, the Monetary Council raised the central bank base rate to 0.9% on 22 June from 0.6%, and also raised the one-week deposit rate to 0.9%. By the end of 2021, the base rate had risen to 2.4% and the one-week deposit rate to 4%. As inflation rose steadily and reached 7.9% in January 2022, interest rate hikes continued in January and February 2022, with 50-basis-points increases each time. According to the MNB's data, both retail and non-financial corporate loan portfolios expanded dynamically, at double-digit rates in 2021. The former grew by 15% and the latter by almost 11%. Within retail loans, one of the main drivers was the subsidized baby loan, which amounted to HUF 1,569 billion at the end of 2021. Housing loans increased by 15% in 2021, and the value of new contracts also hit record in 2021, approaching HUF 1,300 billion, supported by the increase in home renovation loans. The stock of cash loans increased by 16.6% in 2021, while the stock of home equity loans shrank by about 4.0%, following the trend of the previous years. In connection with the favourable developments observed in the domestic banking sector and the improved assessment of the Hungarian macroeconomic situation, on 13 July 2021 Moody’s improved the Hungarian “macro profile” effective for banks operating in Hungary, which resulted in rating upgrades for several domestic banks (Budapest Bank, MKB Bank, Raiffeisen Bank) and also contributed to the placement on review for upgrade of OTP Bank’s baseline credit assessment (BCA). In September 2021 Moody’s upgraded the Hungarian sovereign rating to ‘Baa2’ underpinned by the strong growth rebound throughout the first half of 2021 and the projected strong growth outlook over the coming years, which will support fiscal consolidation and reduction in the government's debt burden. DIGITAL AND IT INNOVATIONS We announced the SmartBank mobile application’s phase-out for retail customers, which will be replaced with Digital Contract’s new channels, OTP internet- & mobile banking applications. By the end of 2021, more than 600,000 OTP customers registered for the new Digital Contract. During the pandemic digital activity of OTP clients has increased significantly, which was supported by online campaigns, customer education in branches and continuous development of our digital services. In 2021 new end-to-end processes were launched in new internet- & mobile banking applications such as online personal loan request, installment payment for credit card, purchase of government securities, prepaid mobile phone top-up, QR payment of postal cheques (including not completely filled cheques). Several innovative features serve customer needs such as open banking function to view foreign bank account balances, donation opportunity for money transfers, Apple Pay card digitization, branch appointment feature, profile picture setting and maintenance of notification settings. We pay special attention for improvements of Personal Finance Manager to support financial awareness, and for launch of other innovative features (such as payment and other beyond banking services). As an important milestone of banking chat platform extension we launched chat opportunity in new internetbank in 2021, so we can serve several client needs also in identified chats. We automated the most often topics: 15 new automated chatbot processes went live in 2021, with which our customers can get help without human intervention in 7x24 hours. As the end of a multi-annual process we renewed our branch and Contact Center front-end system. Remote Expert from Home service launched in December 2021 which ensures to clients the consultation video call not only in branches but also from home at a pre-arranged time. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (SEPARATE) BRANCH NETWORK OF OTP BANK The Bank provides a full range of commercial banking services through a nationwide network and its branches are available to customers in Hungary. 1013 Budapest, Alagút utca 3. 1011 Budapest, Iskola utca 38-42. 1015 Budapest, Széna tér 7. 1012 Budapest, Vérmező út 4. 1024 Budapest, Fény utca 11-13. 1025 Budapest, Törökvész út 1/a 1026 Budapest, Szilágyi Erzsébet fasor 121. 1087 Budapest, Könyves Kálmán krt. 76-1. sz. 1148 Budapest, Nagy Lajos király útja 19-21. 1081 Budapest, Népszínház utca 3-5. 1149 Budapest, Fogarasi út 15/b. 1083 Budapest, Futó utca 35-45 1149 Budapest, Bosnyák tér 17. 1191 Budapest, Üllői út 201. 1146 Budapest, Thököly út 102/b. 1094 Budapest, Ferenc krt. 13. 1152 Budapest, Szentmihályi út 131. 1085 Budapest, Kálvin tér 12-13. 1151 Budapest, Fő utca 64. 1097 Budapest, Könyves Kálmán krt. 12-14. 1157 Budapest, Zsókavár utca 28. 1021 Budapest, Hüvösvölgyi út 138. 1163 Budapest, Jókai Mór utca 3/b. 1033 Budapest, Flórián tér 15. 1025 Budapest, Szépvölgyi út 4/b. 1095 Budapest, Soroksári út 32-34. 1102 Budapest, Kőrösi Csoma sétány 6. 1161 Budapest, Rákosi út 118. 1173 Budapest, Ferihegyi út 93. 1039 Budapest, Heltai Jenő tér 2. 1103 Budapest, Sibrik Miklós utca 30. 1173 Budapest, Pesti út 5-7. 1032 Budapest, Bécsi út 154. 1106 Budapest, Örs vezér tere 25 1181 Budapest, Üllői út 377. 1033 Budapest, Szentendrei utca 115. 1106 Budapest, Örs Vezér tere 25/A 1.em 1041 Budapest, Erzsébet utca 50. 1115 Budapest, Bartók Béla út 92-94. 1048 Budapest, Kordován tér 4. 1042 Budapest, Árpád út 63-65. 1117 Budapest, Móricz Zsigmond körtér 18. 1118 Budapest, Rétköz utca 5. 1052 Budapest, Deák Ferenc utca 7- 9. 1117 Budapest, Hunyadi János út 19. 1117 huszonharmadika utca 8-10. Budapest, Október 1188 Budapest, Vasút utca 48. 1183 Budapest, Üllői út 440. 1195 Budapest, Üllői út 285. 1195 Budapest, Vak Bottyán út 75 a- c 1204 Budapest, Kossuth Lajos utca 44-46. 1238 Budapest, Grassalkovich út 160. 1055 Budapest, Szent István krt. 1. 1051 Budapest, Nádor utca 16. 1054 Budapest, Széchenyi rkp. 19. 1066 Budapest, Oktogon tér 3. 1077 Budapest, Király utca 49. 1073 Budapest, Erzsébet krt. 41. 1075 Budapest, Károly krt. 1. 1076 Budapest, Thököly út 4 1075 Budapest, Károly krt. 25. 1085 Budapest, József krt. 33. 1085 Budapest, József krt. 53. 1126 Budapest, Böszörményi út 9-11. 1203 Budapest, Bíró Mihály utca 7. 1123 Budapest, Alkotás utca 53 1239 Budapest, Bevásárló utca 2. 1124 Budapest, Apor Vilmos tér 11. 1055 Budapest, Nyugati tér 9. 1137 Budapest, Pozsonyi út 38. 1062 Budapest, Váci út 1-3. 1138 Budapest, Váci út 135-139 1133 Budapest, Váci út 80. 1134 Budapest, Váci út 17. 1135 Budapest, Lehel út 70-76. ANNUAL REPORT 2021 1211 Budapest, Kossuth Lajos utca 86. 1211 Budapest, Kossuth Lajos utca 99. 1221 Budapest, Kossuth Lajos utca 31. 1222 Budapest, Nagytétényi út 37-45. 7621 Pécs, Rákóczi út 44. 7621 Pécs, Rákóczi út 1. OTP BANK BUSINESS REPORT 2021 (SEPARATE) 7632 Pécs, Pécs-Kertváros,Diana tér 14. 6000 Kecskemét, Dunaföldvári út 2. 3580 Tiszaújváros, Szent István út 30. 7633 Pécs, Pécs-Újmecsekalja,Ybl Miklós utca 7/3. 7300 Komló, Kossuth Lajos utca 95/1. 6320 Solt, Kossuth Lajos utca 48-50. 6080 Szabadszállás, Dózsa György út 1. 5600 Békéscsaba, Szt István tér 3. 3600 Ózd, Városház tér 1/a. 3980 Sátoraljaújhely, Széchenyi tér 13. 7700 Mohács, Jókai utca 1. 3900 Szerencs, Kossuth tér 3/a. 7800 Siklós, Felszabadulás utca 60- 62. 7900 Szigetvár, Vár utca 4. 7720 Pécsvárad, Bem utca 2/b 5700 Gyula, Bodoky utca 9. 5800 Mezőkovácsháza, Árpád utca 177. 5900 Orosháza, Kossuth Lajos utca 20. 7370 Sásd, Dózsa György utca 2. 5540 Szarvas, Kossuth Lajos tér 1. 7960 Sellye, Köztársaság tér 4. 5520 Szeghalom, Tildy Zoltán utca 4- 8. 7940 Szentlőrinc, Munkácsy utca 16/A 5630 Békés, Széchenyi tér 2. 7773 Villány, Baross Gábor utca 36. 5830 Battonya, Fő utca 86. 7754 Bóly, Hősök tere 8/b. 5510 Dévaványa, Árpád utca 32. 6000 Kecskemét, Korona utca 2. 5742 Elek, Gyulai út 5. 6000 Kecskemét, Szabadság tér 5. 5500 Gyomaendrőd, Szabadság tér 7 6500 Baja, Deák Ferenc utca 1. 5650 Mezőberény, Kossuth Lajos tér 12. 6300 Kalocsa, Szent István király út 43-45. 5820 Mezőhegyes, Zala Gy ltp. 7. 6200 Kiskőrös, Petőfi tér 13. 5720 Sarkad, Árpád fejedelem tér 5. 6400 Kiskunhalas, Sétáló utca 7 5940 Tótkomlós, Széchenyi utca 4-6. 3700 Kazincbarcika, Egressy Béni út 50. 3950 Sárospatak, Eötvös József utca 2. 3630 Putnok, Kossuth Lajos út 45. 3800 Szikszó, Kassai utca 16. 3770 Sajószentpéter, Bethlen Gábor utca 1/a. 3450 Mezőcsát, Hősök tere 23. 3910 Tokaj, Rákóczi utca 37. 3527 Miskolc, József Attila utca 87. 6720 Szeged, Takaréktár utca 7. 6720 Szeged, Aradi vértanúk tere 3. 6791 Szeged, Negyvennyolcas utca 3. 6600 Szentes, Kossuth Lajos utca 26. 6640 Csongrád, Szentháromság tér 2-6. 6100 Kiskunfélegyháza, Petőfi tér 1 6430 Bácsalmás, Szt János utca 32. 6087 Dunavecse, Fő út 40. 6070 Izsák, Szabadság tér 1. 6440 Jánoshalma, Rákóczi utca 10. 6237 Kecel, Császártöltési utca 1. 6120 Kiskunmajsa, Csendes köz 1. 6090 Kunszentmiklós, Kálvin tér 11. 5661 Újkígyós, Kossuth Lajos utca 38. 6800 Hódmezővásárhely, Andrássy út 1. 5530 Vésztő, Kossuth Lajos utca 72. 6900 Makó, Széchenyi tér 14-16. 5525 Füzesgyarmat, Szabadság tér 1. 5600 Békéscsaba, Andrássy út 37- 43. 6760 Kistelek, Kossuth Lajos utca 6-8 6782 Mórahalom, Szegedi út 3. 6724 Szeged, Rókusi krt. 42-64. 3530 Miskolc, Uitz B. utca 6. 6724 Szeged, Londoni krt. 3. 3530 Miskolc, Rákóczi út 1. 8000 Székesfehérvár, Ősz utca 13. 3531 Miskolc, Győri kapu 51. 2060 Bicske, Bocskai köz 1. 6050 Lajosmizse, Dózsa György utca 102/a. 3535 Miskolc, Árpád út 2. 6449 Mélykút, Petőfi tér 18. 3780 Edelény, Tóth Árpád út 1. 3860 Encs, Bem József utca 1. 6230 Soltvadkert, Szentháromság utca 2. 6060 Tiszakécske, Béke tér 6. 2400 Dunaújváros, Dózsa György út 4/e. 8060 Mór, Deák Ferenc utca 2. 7000 Sárbogárd, Ady Endre út 172. 3400 Mezőkövesd, Mátyás király utca 149. 2457 Adony, Petőfi Sándor utca 2. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (SEPARATE) 8130 Enying, Kossuth Lajos utca 43. 4087 Hajdúdorog, Petőfi tér 9-11. 2483 Gárdony, Szabadság út 18. 4138 Komádi, Fő utca 1-3. 8154 Polgárdi, Deák Ferenc utca 16. 4181 Nádudvar, Fő utca 119. 8000 Székesfehérvár, Fő utca 7. 4090 Polgár, Barankovics tér 15. 8000 Székesfehérvár, Holland fasor 2. 4242 Hajdúhadház, Kossuth utca 2. 9022 Győr, Teleki László utca 51. 9011 Győr, Győr-Szentiván, Déryné út 77. 4032 Debrecen, Egyetem tér 1. 4254 Nyíradony, Árpád tér 6. 4025 Debrecen, Hatvan utca 2-4. 3070 Bátonyterenye, Bányász utca 1/a. 3170 Szécsény, Feszty Árpád utca 1. 2700 Cegléd, Szabadság tér 6. 2370 Dabas, Bartók Béla út 46. 2100 Gödöllő, Szabadság tér 12-13. 2200 Monor, Kossuth Lajos utca 88/b. 2760 Nagykáta, Bajcsy-Zsilinszky utca 1. 9400 Sopron, Teleki Pál út 22./A 3300 Eger, Törvényház utca 4. 2300 Ráckeve, Szt István tér 3. 9300 Csorna, Soproni út 58. 3390 Füzesabony, Rákóczi utca 77. 2000 Szentendre, Pannónia út 1-3. 9200 Mosonmagyaróvár, Fő utca 24 3200 Gyöngyös, Fő tér 1. 2600 Vác, Széchenyi utca 3-7. 9400 Sopron, Várkerület 96. fszt. 1. 3360 Heves, Hősök tere 4. 2120 Dunakeszi, Barátság utca 29. 9330 Kapuvár, Szt István király utca 4-6. 3000 Hatvan, Kossuth tér 8. fszt. 1. 2030 Érd, Budai út 24. 9431 Fertőd, Fő utca 7. 9317 Szany, Ady Endre utca 2. 9024 Győr, Bartók Béla út 53/b. 9024 Győr, Kormos István utca 6. 9026 Győr, Egyetem tér 1. 9027 Győr, Budai út 1. 4025 Debrecen, Pásti utca 1-3. 4025 Debrecen, Piac utca 45-47. 4032 Debrecen, Füredi út 43. 4100 Berettyóújfalu, Oláh Zsigmond utca 1. 4150 Püspökladány, Kossuth utca 2. 4220 Hajdúböszörmény, Kossuth Lajos utca 3. 4080 Hajdúnánás, Köztársaság tér 17-18/a. 3021 Lőrinci, Szabadság tér 25/A 2750 Nagykőrös, Szabadság tér 2. 3250 Pétervására, Szt Márton utca 9. 2440 Százhalombatta, Szent István tér 8. 3245 Recsk, Kossuth Lajos út 93. 3300 Eger, Széchenyi utca 2. 2800 Tatabánya, Fő tér 32. 2510 Dorog, Bécsi út 33. 2900 Komárom, Mártirok útja 23. 2890 Tata, Ady Endre utca 1-3. 2500 Esztergom, Rákóczi tér 2-4. 2840 Oroszlány, Rákóczi utca 84. 2941 Ács, Gyár utca 14. 2740 Abony, Kossuth Lajos tér 3. 2730 Albertirsa, Vasút utca 4/a. 2170 Aszód, Kossuth Lajos utca 42- 46. 2040 Budaörs, Szabadság utca 131/a. 2330 Dunaharaszti, Dózsa György utca 25. 2230 Gyömrő, Szt István utca 17. 2340 Kiskunlacháza, Dózsa György utca 219. 2870 Kisbér, Batthyány tér 5. 2364 Ócsa, Szabadság tér 1. 2536 Nyergesújfalu, Kossuth Lajos utca 126. 2721 Pilis, Rákóczi utca 9. 2800 Tatabánya, Bárdos László utca 2. 4200 Hajdúszoboszló, Szilfákalja utca 6-8. 3100 Salgótarján, Rákóczi út 22. 4060 Balmazújváros, Veres Péter utca 3. 2660 fejedelem utca 44. Balassagyarmat, Rákóczi 2085 Pilisvörösvár, Fő utca 60 2310 Szigetszentmiklós, Ifjúság útja 17. 2220 Vecsés, Fő utca 170. 2360 Gyál, Kőrösi út 160. 4110 Biharkeresztes, Kossuth utca 4. 3060 Pásztó, Fő utca 73/a. 2143 Kistarcsa, Hunyadi utca 7. 4130 Derecske, Köztársaság utca 111. 2651 Rétság, Rákóczi Ferenc utca 28-30. 2119 Pécel, Kossuth tér 4. 2092 Budakeszi, Fő utca 174. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (SEPARATE) 2141 Csömör, Határ út 6. 4492 Dombrád, Szabadság tér 7. 2040 Budaörs, Sport út 2-4. 2120 Dunakeszi, Nádas utca 6. 2310 Szigetszentmiklós, Háros utca 120. 2013 Pomáz, József Attila utca 17. 2083 Solymár, Szent Flórián utca 2. 2220 Vecsés, Fő utca 246-248 2112 Veresegyház, Fő út 52 2234 Maglód, Esterházy utca 1. 2030 Érd, Iparos út 5. 2225 Üllő, Pesti út 92/b. 7400 Kaposvár, Széchenyi tér 2. 7400 Kaposvár, Honvéd utca 55. 8700 Marcali, Rákóczi utca 6-10. 7500 Nagyatád, Korányi Sándor utca 6. 8600 Siófok, Fő tér 10/a 7570 Barcs, Séta tér 5. 8630 Balatonboglár, Dózsa György utca 1. 8840 Csurgó, Petőfi tér 20. 8640 Fonyód, Ady Endre utca 25. 8693 Lengyeltóti, Csalogány utca 2. 8660 Tab, Kossuth Lajos utca 96. 7561 Nagybajom, Fő út 107 8638 Balatonlelle, Rákóczi út 202-204 4400 Nyíregyháza, Rákóczi utca 1. 4900 Zsigmond utca 4. Fehérgyarmat, Móricz 4600 Kisvárda, Szt László utca 30. 4700 Mátészalka, Szalkay László utca 34. 4300 Nyírbátor, Zrínyi utca 1. 4800 Vásárosnamény, Szabadság tér 33. 4561 Baktalórántháza, Köztársaság tér 4. 7030 Paks, Dózsa György utca 33. 4233 Balkány, Szakolyi utca 5. 4765 Csenger, Ady Endre utca 1. 4501 Kemecse, Móricz Zsigmond utca 18. 7090 Tamási, Szabadság utca 33 7150 Bonyhád, Szabadság tér 10. 7200 Dombóvár, Dombó Pál utca 3. 7020 Dunaföldvár, Béke tér 11. 7081 Simontornya, Petőfi utca 68. 4320 Nagykálló, Árpád utca 10. 7130 Tolna, Kossuth Lajos utca 31. 4450 Tiszalök, Kossuth Lajos utca 52/a. 4440 Tiszavasvári, Kossuth Lajos utca 6. 4244 Újfehértó, Fő tér 15. 4625 Záhony, Ady Endre út 27-29. 5000 Szolnok, Szapáry utca 31. 5000 Szolnok, Nagy Imre krt. 2/a. 5100 Jászberény, Lehel vezér tér 28. 5440 Kunszentmárton, Kossuth Lajos utca 2. 5350 Tiszafüred, Piac tér 3. 5200 Törökszentmiklós, Kossuth Lajos út 141. 7030 Paks, Kishegyi út 44/a 7140 Bátaszék, Budai út 13. 9700 Szombathely, Fő tér 3-5. 9700 Szombathely, Rohonci út 52. 9900 Körmend, Vida József utca 12. 9600 Sárvár, Batthyány utca 2. 9500 Celldömölk, Kossuth Lajos utca 18. 9730 Kőszeg, Kossuth Lajos utca 8. 9970 Szentgotthárd, Mártírok út 2. 9800 Vasvár, Alkotmány utca 2. 9737 Bük, Kossuth Lajos utca 1-3. 5300 Karcag, Kossuth Lajos tér 15. 9700 Szombathely, Király utca 10. 5310 Kisújszállás, Szabadság tér 6. 9970 Szentgotthárd, Füzesi út 15. 5400 Mezőtúr, Szabadság tér 29. 5420 Túrkeve, Széchenyi utca 32-34. 5130 Jászapáti, Kossuth Lajos út 2-8. 5123 Ferenc utca 4-6. Jászárokszállás, Rákóczi 8200 Veszprém, Brusznyai Árpád utca 1. 8400 Ajka, Szabadság tér 18. 8500 Pápa, Fő tér 22. 8300 Tapolca, Fő tér 2. 5055 Jászladány, Kossuth Lajos utca 77. 8230 Balatonfüred, Petőfi Sándor utca 8. 5340 Kunhegyes, Szabadság tér 4. 8100 Várpalota, Újlaky út 2. 5321 Kunmadaras, Karcagi út 2-4. 5435 Martfű, Szolnoki út 142 5430 Tiszaföldvár, Kossuth Lajos út 191. 8220 Balatonalmádi, Baross Gábor utca 5/a. 8460 Devecser, Kossuth Lajos utca 13. 8330 Sümeg, Kisfaludy Sándor tér 1. 5000 Szolnok, Széchenyi krt. 135. 8420 Zirc, Rákóczi tér 15. 7100 Szekszárd, Szent István tér 5-7. 8900 Zalaegerszeg, Kisfaludy utca 15-17. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (SEPARATE) 8800 Nagykanizsa, Deák tér 15. 8868 Letenye, Szabadság tér 8. 8380 Hévíz, Erzsébet királyné utca 11. 8960 Lenti, Dózsa György utca 1. 8360 Keszthely, Kossuth Lajos utca 38. 8790 Zalaszentgrót, Batthyány utca 11. 1054 Budapest, Szabadság tér 7-8. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (SEPARATE) STATEMENT ON CORPORATE GOVERNANCE PRACTICE Corporate governance practice OTP Bank Plc., being registered in Hungary, has a corporate governance policy that complies with the provisions on companies of the act applicable (Civil Code). As the company conducts banking operations, it also adheres to the statutory regulations pertaining to credit institutions. Beyond fulfilling the statutory requirements, as a listed company on the Budapest Stock Exchange (BSE), the company also makes an annual declaration on its compliance with the BSE’s Corporate Governance Recommendations. After being approved by the General Meeting, this declaration is published on the websites of both the Stock Exchange (www.bet.hu) and the Bank (www.otpbank.hu). System of internal controls OTP Bank Plc., as a provider of financial and investment services, operates a closely regulated and state- supervised system of internal controls. OTP Bank Plc. has detailed risk management regulations applicable to all types of risks (credit, country, counterparty, market, liquidity, operational, compliance), which are in compliance with the regulations on prudent banking operations. Its risk management system extends to cover the identification of risks, the assessment and analysis of their impact, elaboration of the required action plans and the monitoring of their effectiveness and results. The business continuity framework is intended to provide for the continuity of services. Developed on the basis of international methodologies, the lifecycle model includes process evaluation, action plan development for critical processes, the regular review and testing of these, as well as related DRP activities. OTP Bank Plc.'s internal audit system is realised on several levels of control built on each other. The system of internal checks and balances includes process-integrated control, management control, independent internal audit organisation and executive information system. The independent internal audit organisation as an element of internal lines of defence promotes the statutory and efficient management of assets and liabilities, the defence of property, the safe course of business, the efficient operation of internal control systems, the minimisation of risks, moreover it reveals and reports deviations from statutory regulations and internal rules, makes proposal to abolish deficiencies and follows up the execution of actions. The independent internal audit organisation annually and quarterly prepares group-level reports on control actions for the executive boards. Once a year, the internal audit organisation with the prior opinion of the Audit Committee draws up, for the Supervisory Board and the Board of Directors, objective and independent reports in respect of the operation of risk management, internal control mechanisms and corporate governance functions. Furthermore, in line with the provisions of the Credit Institutions Act, reports, once a year, to the Supervisory Board and the Board of Directors on the regularity of internal audit tasks, professional requirements and the conduct of audits, and on the review of compliance with IT and other technical conditions needed for the audits. In line with the regulations of the European Union, the applicable Hungarian laws and supervisory recommendations, OTP Bank Plc. operates an independent organisational unit with the task of identifying and managing compliance risks. IT Controls Applications are developed by both in-house group resources and by third parties. OTP Bank applies administrative, logical and physical control measures commensurate with the risk to protect the IT systems storing and processing data, as follows: • access to data/systems is only possible on the basis of a predefined authorisation management process that applies the principle of least privilege, ensures segregation of responsibilities, that has regular access right reviews and ensures that dismissed employees’ access is revoked; • user authentication, authorisation and password management processes are controlled by policies and • audited; the systems have well-separated test and development environments, which ensures that program developments or modifications are only deployed to the operational environment after proper, controlled testing and approval; • systems are protected by appropriate network perimeter protection, various security devices and network • segmentation, furthermore all network communications are protected; the IT systems that store and process data are regularly backed up and stored in controlled premises with adequate protection for long-term retention, and the organisation carries out regular back-up tests; • adequate redundancy is applied for IT systems that store and process data to ensure business continuity and disaster resiliency; ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (SEPARATE) • has developed a BCP for critical systems and processes, which is regularly tested and reviewed; • the Bank collects and retains the complete log of all data processing activities and the confidentiality, availability, integrity and non-repudiation of these audit logs are ensured; there is a continuous, up-to-date protection against malicious codes; it ensures the regular implementation of vendor patches and updates for the environments used; it uses a data leakage protection solution to reduce the risk of data loss; it ensures the continuous monitoring of the operation of the physical and virtual environment system elements, and the detection and management of events, where possible automatically; the above measures are documented at an appropriate level, which ensures the traceability of the implementation of data security requirements in a transparent manner; it ensures the irretrievable deletion of the data stored on the media, the destruction of the media and the documentation of the destruction of the media during secure operational media disposal processes; it enforces data protection requirements already at the design stage of the implementation of the IT systems storing and processing personal data and of the systems operational processes related to them; it ensures that its employees have adequate knowledge of data protection requirements and provides regular data protection and information security training for them. • • • • • • • • General meeting The General Meeting is the supreme governing body of OTP Bank Plc. The regulations pertaining to its operation are set forth in the Company’s Articles of Association, and comply fully with both general and special statutory requirements. Information on the General Meeting is available in the Corporate Governance Report. In view of the situation caused by the epidemic, on 22 February 2021 the Parliament voted Act I of 2021 on the prevention of the coronavirus pandemic, which extended the scope of the Government Decree 502/2020 (XI.16.) (Government Decree) until 22 May 2021. Pursuant to such, in line with Section 9 of the Government Decree, the resolutions on the published agenda items were passed by OTP Bank Plc’s Board of Directors acting in the competence of the General Meeting on 16 April 2021. The Extraordinary General Meeting was held on 15 October 2021 in accordance with the general rules, traditionally, with the personal participation of the shareholders, subject to Section 3 (1) of the Government Decree, also in line with the Act I of 2021 on the prevention of the coronavirus pandemic. Regulations and information to be presented in the Business Report concerning securities conferring voting rights issued by the Company and senior officials, according to the effective Articles of Association, and ownership structure The Company’s registered capital is HUF 28,000,001,000, that is twenty-eight thousand million one thousand Hungarian forint, divided into 280,000,010 that is Two hundred and eighty million and ten dematerialised ordinary shares with a nominal value of HUF 100 each, and a total nominal value of HUF 28,000,001,000, that is twenty eight billion one thousand Hungarian forint. The ordinary shares of the Company specified all have the same nominal value and bestow the same rights in respect of the Company. There are no restrictions in place concerning the transfer of issued securities constituting the registered capital of the Company. No securities with special control rights have been issued by the Company. Special Employee Partial Ownership Plan Organization No. I. of OTP Employees and Special Employee Partial Ownership Plan Organization No. II. of OTP Employees (hereinafter referred to as: OTP SEPOPs) were established based on the decision of the Company’s certain employees and executives considered as employees pursuant to the Act XLIV of 1992 on Employee Partial Ownership Plan. Management rights of OTP SEPOPs are exercised by a trust named Alapítvány az OTP Munkavállalók Különleges Résztulajdonosi Programjáért, founded by the same employees setting up OTP SEPOPs. The Company did not participate either in foundation or in management of OTP SEPOPs. The Company in line with the ESOP Act initiated an employee share ownership plan having a remuneration purpose and founded OTP Bank ESOP Organization for its execution (hereinafter referred to as ESOP Organization). Pursuant to the laws, the management rights over the ESOP Organization are exercised by a law firm, the so called trustee. In the case of the ESOP Organization Szűcs Law Firm is entitled to exercise the authorities of the trustee. The Company participated in the foundation of the ESOP Organization, however, after its foundation it cannot participate in its management, and according to the laws, it is not entitled to either give orders or to recall the trustee. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (SEPARATE) Rules on the restrictions of the voting rights: The Company’s ordinary shares confer one vote per share. An individual shareholder or group of shareholders may not exercise voting rights in respect of in an extent exceeding 25%, or – if the voting rights of another shareholder or group of shareholders exceed 10% – exceeding 33% of the total voting rights represented by the shares conferring voting rights at the Company’s General Meeting. The shareholder is obliged to notify the Company’s Board of Directors without delay if the shareholder directly or indirectly, or together with other shareholders in the same group of shareholders, holds more than 2% of the voting rights represented by the shares conferring voting rights at the Company’s General Meeting. Concurrently with this, the shareholder is obliged to designate the shareholders through which the indirect voting right exists, or the members of the group of shareholders. In the event of a failure to provide such notification, or if there are substantive grounds for assuming that the shareholder has made a misleading declaration regarding the composition of the shareholder group, then the shareholder’s voting right shall be suspended and may not be exercised until the shareholder has met the above obligations. The notification obligation stipulated in this paragraph and the related legal consequences are also incumbent upon individuals who are classified or may be classified as the Company’s shareholders under Article 61 of the Capital Markets Act. The Company must also be provided with proof of the conditions for exemption from the notification obligation in accordance with Section 61 (7)-(8) and Section 61 (10)-(11)-(12), of the Capital Markets Act. Shareholder group: the shareholder and another shareholder, in which the former has either a direct or indirect shareholding or has an influence without a shareholding (collectively: a direct and/or indirect influence); furthermore: the shareholder and another shareholder who is exercising or is willing to exercise its voting rights together with the former shareholder, regardless of what type of agreement between the participants underlies such concerted exercising of rights. For determining the existence and extent of the indirect holding, the rules of the Credit Institutions Act relating to the calculation of indirect ownership shall be applied. If the voting rights that may be exercised by a shareholder group exceed the threshold stipulated in the first paragraph of this section, the voting rights shall be reduced in such a way that the voting rights relating to the shares most recently acquired by the group of shareholders shall not be exercisable. If there are substantive grounds to presume that the exercising of voting rights by any shareholder or shareholders might result in a breach of the rules of the Capital Markets Act relating to the acquisition of a controlling interest, the Board of Directors’ authorised representative responsible for the registration of shareholders at the venue of the General Meeting, or the Chairman of the General Meeting, may exclude the affected shareholders from attending the General Meeting or exercising voting rights. The General Meeting has exclusive authority with respect to the decision regarding the delisting of the shares (qualified majority). When making the decisions, shares embodying multiple voting rights shall represent one share. The Company is not aware of any kind of agreements among the owners that could give rise to the restriction of the transfer of issued securities and/or the voting rights. Rules on the appointment and removal of executive officers, and rules on amendment of the Articles of Association: The Board of Directors has at least 5, and up to 11 members. When making the decisions, shares embodying multiple voting rights shall represent one share. The members of the Board of Directors are elected by the General Meeting based on its decision uniformly either for an indefinite period or for five years; in the latter case the mandate ends with the General Meeting concluding the fifth financial year following the election. The mandate of a member elected during this period expires together with the mandate of the Board of Directors. The Board of Directors elects a Chairman and, may elect one or more Deputy Chairmen, from among its own members, whose period of office shall be equal to the mandate of the Board of Directors. The Chairman of the Board of Directors is also the Chief Executive Officer (Chairman & CEO) of the Company, unless the Board of Directors decides within its competence that the position of Chairman of the Board of Directors and the Chief Executive Officer of the Company are held by separate persons. The membership of the Board of Directors ceases to exist by a. expiry of the mandate, b. resignation, ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (SEPARATE) c. recall, d. death, e. f. the occurrence of grounds for disqualification as regulated by law. termination of the employment of internal (executive) Board members. The General Meeting has exclusive authority with respect to the following matters: the recall of members of the Board of Directors, the Supervisory Board and Audit Committee, and of the auditor; (qualified majority) More than one third of the members of the Board of Directors and the non-executive members of the Supervisory Board may be recalled within a 12-month period only if any shareholder holds more than 33% of the shares issued by the Company, which have been obtained by the shareholder by way of a public purchase offer. except in the cases referred by these Articles of Association to the authority of the Board of Directors, the establishment and amendment of the Articles of Association; (qualified majority); the General Meeting decides on proposals concerning the amendment of the Articles of Association – based on a resolution passed by shareholders with a simple majority – either individually or en masse. The Board of Directors is obliged to prepare the Company’s financial statements in accordance with the Accounting Act, and make a proposal for the use of the profit after taxation; prepare a report once a year for the General Meeting, and once every three months for the Supervisory Board, concerning management, the status of the Company’s assets and business policy; provide for the proper keeping of the Company's business books; perform the tasks referred to its authority under the Credit Institutions Act, in particular: - ensuring the integrity of the accounting and financial reporting system; - elaborating the appropriate strategy and determining risk tolerance levels for each business unit concerned; - setting risk assumption limits; - providing the necessary resources for the management or risk, the valuation of assets, the use of external credit ratings and the application of internal models. The following, in particular, come under the exclusive authority of the Board of Directors: election of the Chairman & Chief Executive Officer of the Company, and exercising employer’s right in respect thereof; election of one or more Deputy Chairmen of the Board of Directors; determination of the annual plan; the analysis and assessment of the implementation of business-policy guidelines, on the basis of the Company’s quarterly balance sheet; decisions on transactions referred to the authority of the Board of Directors by the Company's organisational and operational regulations; decision on launching, suspending, or terminating the performance of certain banking activities within the scope of the licensed activities of the Company; designation of the employees entitled to sign on behalf of the Company; decision on the increasing of registered capital at the terms set out in the relevant resolution of the General Meeting; decision to acquire treasury shares at the terms set out in the relevant resolution of the General Meeting; decision on approving internal loans in accordance with the Credit Institutions Act; decision on the approval of regulations that fundamentally determine banking operations, or are referred to its authority by the Credit Institutions Act. The following shall qualify as such regulations: - - - - - - - the collateral evaluation regulations, the risk-assumption regulations, the customer rating regulations, the counterparty rating regulations, the investment regulations, the regulations on asset classification, impairment and provisioning, the organisational and operational regulations, which contain the regulations on the procedure for assessing requests related to large loans, the regulations on the transfer of signatory rights; - the decision on approving the Rules of Procedure of the Board of Directors; ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (SEPARATE) decision on steps to hinder a public takeover procedure; decision on the acceptance of a public purchase offer received in respect of treasury shares; decision on the commencement of trading in the shares in a regulated market (flotation); decision on the cessation of trading in the shares in a given regulated market, provided that the shares are traded in another regulated market (hereinafter: transfer). The Board of Directors is exclusively authorised to: decide, in the cases specified in the Civil Code, on acceptance of the Company’s interim balance sheet, subject to the prior approval of the Supervisory Board; decide, instead of the General Meeting, to pay an advance on dividends, subject to the preliminary approval of the Supervisory Board; make decisions regarding any change in the Company’s name, registered office, permanent establishments and branches, and in the Company’s activities – with the exception of its core activity – and, in relation to this, to modify the Articles of Association should it become necessary to do so on the basis of the Civil Code or the Articles of Association; make decision on mergers (if, according to the provisions of the law on the transformation, merger and demerger of legal entities, the approval of the General Meeting is not required in order for the merger to take place). The Board of Directors directly exercises employer's rights in respect of the Chairman & CEO. The person affected by a decision may not participate in the decision making. Employer rights in respect of the executive directors of the Company are exercised by the Board of Directors through the Chairman & CEO, with the proviso that the Board of Directors must be notified in advance of the appointment and dismissal of the Deputy CEOs. With regard to issues related to the exercising of employer's rights in respect of employees, the Company is represented by the Chief Executive Officer and by the senior company employees defined in the Organisational and Operational Regulations of the Company, in accordance with the delegation of authority approved by the Board of Directors. If the Chairman of the Board of Directors and the CEO are different persons, the employer rights in respect of the other executive directors of the Company (CEO, deputy CEOs) are exercised by the Board of Directors through the Chairman of Board of Directors, with the proviso that the Board of Directors shall be notified in advance of the appointment and dismissal of the CEO and Deputy CEOs. With regard to issues related to the exercising of employer's rights in respect of employees, the Company is represented by the persons defined in the Organisational and Operational Regulations of the Company, in accordance with the delegation of authority approved by the Board of Directors. The Board of Directors may delegate, to individual members of the Board of Directors, to executive directors employed by the Company, and to the heads of the individual service departments, any task that does not come under the exclusive authority of the Board of Directors in accordance with these Articles of Association or a General Meeting resolution. The Company may acquire treasury shares in accordance with the rules of the Civil Code. The prior authorisation of the General Meeting is not required for the acquisition of treasury shares if the acquisition of the shares is necessary in order to prevent a direct threat of severe damage to the Company (this provision is not applicable in the event of a public purchase offer aimed at buying up the Company’s shares), as well as if the Company acquires the treasury shares in the context of a judicial procedure aimed at the settlement of a claim to which the Company is entitled, or in the course of a transformation. The Company has not made agreements in the meaning of points (j) and (k) in paragraph 95/A of Act No. C of 2000 on Accounting. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (SEPARATE) Ownership structure of OTP Bank Plc. Description of owner Total equity 1 January 2021 Voting rights1 Quantity Ownership share Voting rights 1 Quantity 31 December 2021 Ownership share 20.93% 71.60% 4.79% 0.11% 0.85% 1.55% 0.08% 0.04% 0.04% 100.00% Domestic institution/company Foreign institution/company Domestic individual Foreign individual Employees, senior officers Treasury shares2 Government held owner International Development Institutions Other3 TOTAL 1 Voting rights in the General Meeting of the Issuer for participation in decision-making. 2 Treasury shares do not include the OTP shares held by ESOP (OTP Bank Employee Stock Ownership Plan Organization). Pursuant to Act V of 2013 on the Civil Code, OTP shares held by the ESOP are not classified as treasury shares, but the ESOP must be consolidated in accordance with IFRS 10 Consolidated Financial Statements standard. On 31 December 2021 ESOP owned 7.656.897 OTP shares. 74,637,180 186,733,858 12,805,389 319,712 1,941,018 3,251,484 188,326 120,871 2,172 280,000,010 58,605,628 200,480,153 13,424,090 319,346 2,393,390 4,334,140 219,800 108,981 114,482 280,000,010 26.97% 67.47% 4.63% 0.12% 0.70% 0.00% 0.07% 0.04% 0.00% 100.00% 21.26% 72.73% 4.87% 0.12% 0.87% 0.00% 0.08% 0.04% 0.04% 100.00% 26.66% 66.69% 4.57% 0.11% 0.69% 1.16% 0.07% 0.04% 0.00% 100.00% 3 Non-identified shareholders according to the shareholders’ registry. Number of treasury shares held in the year under review (2021) OTP Bank Subsidiaries TOTAL 1 January 4,334,140 0 4,334,140 31 March 4,330,609 0 4,330,609 30 June 1,120,786 0 1,120,786 30 September 1,077,322 0 1,077,322 31 December 3,251,484 0 3,251,484 SHAREHOLDERS WITH OVER/AROUND 5% STAKE AS AT 31 DECEMBER 2021 Name Nationality1 Activity2 MOL (Hungarian Oil and Gas Company Plc.) KAFIJAT Group KAFIJAT Ltd. MGTR Alliance Ltd. Groupama Group Groupama Gan Vie SA Groupama Biztosító Ltd. D D D D F/D F D C C C C C C C Number of shares 24,000,000 19,661,409 9,839,918 9,836,491 14,311,769 14,140,000 171,769 Ownership3 Voting rights3,4 Notes5 8.57% 7.02% 3.51% 3.51% 5.11% 5.05% 0.06% 8.67% 7.10% 3.56% 3.55% 5.17% 5.11% 0.06% - - - - - - - 1 Domestic (D), Foreign (F). 2 Custodian (CU), Public Institution (PU), International Development Institutions (ID), Institutional (I), Company (C), Private (PR), Employee or senior officer (E). 3 Rounded to two decimals. 4 Voting rights in the General Meeting of the Issuer for participation in decision-making. 5 Eg: professional investor, financial investor, etc. Senior officers, strategic employees and their shareholding of OTP shares as at 31 December 2021 Type1 Name Position IT IT IT IT IT IT IT IT IT IT IT FB FB FB FB FB FB SP SP dr. Sándor Csányi 2 Chairman and CEO Deputy Chairman Tamás Erdei member Gabriella Balogh member Mihály Baumstark member, Deputy CEO Péter Csányi member dr. István Gresa member, Deputy CEO Antal Kovács György Nagy 3 member dr. Márton Gellért Vági member member dr. József Vörös member, Deputy CEO László Wolf Chairman Tibor Tolnay Deputy Chairman dr. Gábor Horváth member Klára Bella member dr. Tamás Gudra member András Michnai member Olivier Péqueux Deputy CEO László Bencsik Deputy CEO György Kiss-Haypál TOTAL No. of shares held by management: 1 Employee in strategic position (SP), Board Member (IT), Supervisory Board Member (FB) 2 Number of OTP shares owned by Dr. Sándor Csányi directly or indirectly: 4,080,034 3 Number of OTP shares owned by György Nagy directly or indirectly: 600,000 Commencement date of the term 15/05/1992 27/04/2012 16/04/2021 29/04/1999 16/04/2021 27/04/2012 15/04/2016 16/04/2021 16/04/2021 15/05/1992 15/04/2016 15/05/1992 19/05/1995 12/04/2019 16/04/2021 25/04/2008 13/04/2018 Expiration/termination of the term 2026 2026 2026 2026 2026 2026 2026 2026 2026 2026 2026 2023 2023 2023 2023 2023 2023 Number of shares 293,907 32,285 1,393 44,000 1 173,258 79,244 0 0 171,114 532,143 54 0 344 0 100 0 10,038 3,137 1,341,018 ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (SEPARATE) Committees1 Members of the Board of Directors Dr. Sándor Csányi – Chairman Mr. Tamás Erdei – Deputy Chairman Ms. Gabriella Balogh2 Mr. Mihály Baumstark Dr. Tibor Bíró3 Mr. Péter Csányi2 Dr. István Gresa Mr. Antal Kovács Mr. György Nagy2 Dr. Antal Pongrácz3 Dr. László Utassy3 Dr. Márton Gellért Vági2 Dr. József Vörös Mr. László Wolf Members of the Supervisory Board Mr. Tibor Tolnay – Chairman Dr. József Gábor Horváth – Deputy Chairman Ms. Klára Bella Dr. Tamás Gudra4 Mr. András Michnai Mr. Olivier Péqueux Dr. Márton Gellért Vági5 Members of the Audit Committee Dr. József Gábor Horváth – Chairman Mr. Tibor Tolnay – Deputy Chairman Dr. Tamás Gudra6 Mr. Olivier Péqueux Dr. Márton Gellért Vági7 The résumés of the committee and board members are available in the Corporate Governance Report/Annual Report. Personal and organizational changes On 12 March 2021, the labour contract of Mr. Tibor Johancsik, Deputy CEO in charge of IT had been terminated by mutual agreement. The new head of the Digital Division (IT Division until 1 May 2021) is Mr. Péter Csányi, who had been in charge of digital developments and sales as managing director until his appointment. Key task of the area in transition is going to be the efficient support of the Bank’s digital transformation through further improving customer experience. The new strategy of the division is aimed at creating such an IT that has business competence, but also serving as a platform for other business areas while setting the pace of digitalization in accordance with the National Bank of Hungary’s digital recommendations. On 16 April 2016 the Board of Directors acting in the competency of the Annual General Meeting elected Ernst & Young Ltd. as the Bank’s auditor concerning the audit of OTP Bank Plc.’s separate and consolidated annual financial statements in accordance with International Financial Reporting Standards for the year 2021, from 1 May 2021 until 30 April 2022. On 16 April the Board of Directors acting in the competency of the Annual General Meeting, elects Dr. Tamás Gudra as member of the Supervisory Board (SB) and of Audit Committee (AC) of the Company until the Annual General Meeting of the Company closing the 2022 business year, but not later than 30 April 2023. 1 Personal changes can be found in the „Personal and organizational changes” chapter. 2 From 16 April 2021, she/he is a member of the Board of Directors of OTP Bank Plc. 3 His term of office expired on 16 April 2021. 4 From 16 April 2021, he is a member of the Supervisory Board of OTP Bank Plc. 5 His position on the Supervisory Board was terminated on 16 April 2021. 6 From 16 April 2021, he is a member of the Audit Committe of OTP Bank Plc. 7 His position on the Audit Committee was terminated on 16 April 2021. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (SEPARATE) On 16 April 2021 the Board of Directors acting in the competency of the Annual General Meeting, elects Dr. Sándor Csányi Mr. Antal György Kovács Mr. László Wolf Mr. Tamás György Erdei Mr. Mihály Baumstark Dr. István Gresa Dr. József Zoltán Vörös Mr. Péter Csányi Mrs. Gabriella Balogh Mr. György Nagy Dr. Gellért Márton Vági as members of the Board of Directors (BoD) of the Company until the Annual General Meeting of the Company closing the 2025 business year, but not later than 30 April 2026. On 16 April 2021, Dr. Sándor Csányi was elected as Chairman of the Bank’s Board of Directors and in accordance with subsection 4 of section 9 of the Articles of Association of the Company as Chief Executive Officer (Chairman & CEO). Dr. Sándor Csányi performs his duties until the closing AGM of the fiscal year 2025 but latest until 30 April 2026. On 16 April 2021 Mr. Tamás György Erdei, the member of the Board of Directors, was elected a Deputy Chairman of the Board of Directors. Mr. Tamás György Erdei performs his duties until the closing AGM of the fiscal year 2025 but latest until 30 April 2026 Operation of the executive boards OTP Bank Plc. has a dual governance structure, in which the Board of Directors is the Company’s executive management body in its managerial function, while the Supervisory Board is the management body in its supervisory function of the Company. It controls the supervision of the lawfulness of the Company’s operation, its business practices and management, performs oversight tasks and accepts the provisions of the Bank Group's Remuneration Policy. The effective operation of Supervisory Board is supported by the Audit Committee, as a committee, which also monitors the internal audit, the risk management, the reporting systems and the activities of the auditor. In order to assist the performance of the governance functions the Board of Directors founded and operates, as permanent or other committees, such as the Management Committee, the Remuneration Committee, the Nomination Committee and the Risk Assumption and Risk Management Committee. To ensure effective operation OTP Bank Plc. also has a number of further permanent committees. OTP Bank Plc. gives an account of the activities of the executive boards and the committees every year in its Corporate Governance Report. The Board of Directors held 9, the Supervisory Board held 6 meetings, while the Audit Committee held 2 meetings in 2021. In addition, resolutions were passed by the Board of Directors on 180, by the Supervisory Board on 90 and by the Audit Committee on 28 occasions by written vote. Policy of diversity OTP Bank Plc. determines and regulates the criteria for the selection of senior executives in line with European Union as well as domestic legal requirements and directives fundamentally determining the operation of credit institutions. When designating members of the management bodies (Board of Directors, Supervisory Board) as well as appointing members of the Board of Directors and administrative members (Management), OTP Bank Plc. considers the existence of professional preparation, the high-level human and leadership competence, the versatile educational background, the widespread business experience and business reputation of the utmost importance, at the same time, it is also highly committed to taking efficient measures in order to ensure diversity with regard to corporate operation, including the gradual improvement in women’s participation rate. OTP Bank Plc.’s Nomination Committee continuously keeps tracking the European Union and domestic legislation relating to women’s quota on its agenda, in that when unambiguously worded expectations are announced, it promptly takes the necessary measures. In accordance with OTP Bank Plc.’s currently approved strategy, the goal is to have at least one female member in both the Bord of Directors and the Supervisory Board. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (SEPARATE) It is important to note, however, that, as a public limited company, the selection of the members of the management bodies falls within the exclusive competence of the General Meeting upon which – beyond its capacity to designate enforcing the above aspects to maximum effect – OTP Bank Plc. has no substantive influence. According to OTP Bank Plc.’s Articles of Association, a Board of Directors comprising 5-11 members and a Supervisory Board comprising 5-9 members are set up at OTP Bank Plc. Currently the Board of Directors operates with 11 members and has one female member, the Supervisory Board comprises 6 members and has one female member. The management of OTP Bank Plc. currently comprises 6 members and has no female member. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (SEPARATE) ENVIRONMENTAL POLICY, ENVIRONMENTAL PROJECTS Environmental protection principles OTP Group is committed to the protection of the environment, the combating of climate change and its impacts, and the preservation and low-impact use of natural resources. OTP Bank’s environmental activities are regulated in its Environmental Regulation, which is revised annually. The Regulation ensures legal compliance and the consideration and integration of environmental criteria into the Bank’s business operations in order to minimise the environmental impacts of operating and maintaining the Bank’s organisation. It also sets out the rules on implementing the principles of sustainable procurement. OTP Group members operate in full compliance with environmental legislation and received no fines in 2020. In CDP’s Climate Change Questionnaire, OTP Group was rated at B- in 2021, thus retaining its previous rating. The environmental impacts of the OTP Group are related to the provision of financial services and directly from its operations. In connection with the provision of financial services, the management of environmental risks and the exploitation of environmental opportunities take place within the framework of the Environmental, Social and Governance (ESG) strategy; therefore, these activities are presented in the chapter Non-financial Report. Our efforts to reduce the direct environmental impact of OTP Group’s operations are centred around improving energy efficiency and reducing paper usage. The environmental risks associated with our operations are analysed and managed within our operational risk management process. Potential risks are identified during the annual process-based self-assessment, and the assessment of climate change risks is also included in the scenario analysis of risks with low probability but high impact. Energy consumption and business travel OTP Group uses state-of-the-art technology in new construction and renovation projects; we are also continually expanding our use of LED lighting technology. We are constantly seeking opportunities to increase energy efficiency, by analysing the energy efficiency and consumption characteristics of our buildings. As part of our renovation process, we are replacing air conditioning units, always ensuring that the new units use environmentally-friendly coolants. Thanks to its energy efficiency investments in 2021, OTP Bank consumed 1,400 GJ less energy. Whenever a branch of the parent bank is renovated, we always examine the possibility of installing solar panels and heat pumps. In 2021, we installed solar panels at two branches and a holiday resort. Our systems generated a total of 842 GJ energy from solar power. Moreover, our central archives facility has been using geothermal energy for several years, amounting to 3,499 GJ in 2021. The solar panels of our subsidiaries generated a total of 893 GJ of solar power. We are committed to using green electricity. One of DSK Bank's data centres in Sofia procures electricity from 100% renewable sources, and from 2022, we will cover 100% of the electricity demand of the parent bank and our Serbian and Croatian subsidiaries in the same way. Energy use across the Banking Group has been greatly impacted by the pandemic. Regarding ventilation and fresh air in our buildings, air recirculation was suspended and ventilation was intensified instead, which increased our energy usage; however, the high percentage of staff working from home reduced our electricity consumption. The number of business trips and the size of the vehicle fleet are determined by the needs of the business. Our Group’s vehicle policy sets carbon limits; moreover, the choice of cars includes environmentally-friendly vehicles in all vehicle categories. In 2021, our Romanian subsidiary purchased two electric cars, our Bulgarian bank seven and our Croatian bank three hybrid cars. The number of kilometres travelled also decreased at group level and for OTP Bank, partly due to the measures related to the pandemic and partly due to business reasons. The amount of business travel has been reduced significantly by the use of online meetings, which has become common practice due to hybrid work. Our existing bicycle storage facilities continued to be available to both customers and employees in 2021. OTP Bank provided new storage facilities at three branches and the new Record Office, our Bulgarian and Ukrainian subsidiaries have each created new bicycle storage spaces at two locations, while the Albanian bank provided bicycle storage at five locations at the capital's branches. Energy consumption figures are presented for OTP Bank. The bank’s overall energy consumption decreased by 5% compared to the previous year. Energy consumption per capita is unchanged. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (SEPARATE) Volume of energy consumption, OTP Bank Total energy consumption (GJ) Per capita energy consumption (GJ) Energy consumption data are derived from readings; the measured consumption volumes are converted to energy using local average calorific values The projection of the per capita value is the average number of full-time employees (TMD). 1 Data adjusted for the consumption of Monicomp merged into OTP Bank, which was not available at the time of the previous year's statement. 2020 251,7301 26.75 2021 263,228 26.75 Efforts to reduce paper use OTP Group has been consistently endeavouring to reduce paper use and printing. OTP Bank reduced its office paper usage by 17% over 2020, with the pandemic and increased rates of working from home playing a significant role in this development. Thanks to a change in printing technology, paper consumption decreased by 6.5%; however, at the group level, there was no further decrease compared to the drop in 2020. At our Romanian, Ukrainian and Russian subsidiaries, the use of paper has decreased with the expansion of digital processes. OTP Bank and its Romanian subsidiary increased its share of recycled paper in paper use. OTP Bank uses FSC-certified paper for its invoices and marketing flyers, as well as recycled paper for DM letters. Our Serbian subsidiary also uses FSC-certified paper and our Slovenian subsidiary PEFC-certified paper. Paper usage quantities, OTP Bank Total amount of paper used (t) (office, packaging, indirect) Per capita paper use (kg)1 1 The projection is based on the average number of full-time employees (TMD). 2020 1,137 121 2021 978 99 Sustainable use and waste management We follow the principle of using all our equipment, devices and machines for the longest time reasonably possible. We explicitly aim to use furniture until the end of its lifecycle, reusing it multiple times and ensuring the compatibility of replacements. OTP Bank, DSK Bank, OTP Bank Romania and OTP Banka Srbija all follow the practice of making charitable donations of any furniture no longer used but in good condition, as well as functioning IT equipment (mostly computers and laptops), to institutions and organisations in need. OTP Bank was the first bank in Hungary to issue a bank card made largely (85%) of recycled plastic. The card was available to junior customers, and we issued 50,000 recycled cards to our customers over the year. In 2021, our Serbian subsidiary reduced its purchases of plastic packaging products and began using paper cups for water dispensers. Our Romanian, Croatian, Serbian, Montenegrin and Moldovan subsidiaries also use refilled toners to reduce waste from the use of toners and ink cartridges. All members of OTP Group collect and manage hazardous waste and paper containing business secrets selectively, in compliance with the relevant laws and regulations. The selective collection of non-confidential paper waste, PET bottles and glass is available in the head office buildings of OTP Bank, while the collection of packaging metal has also been available since 2021. During the year, we also set up selective waste collection in ten bank branches. Our Ukrainian subsidiary operates selective paper collection at its head office building. Our Serbian subsidiary collects paper waste selectively in its branches and head office buildings. Our Albanian subsidiary collects paper waste selectively. Our Romanian subsidiary collects all paper, metal, glass and plastic selectively. Our Slovenian subsidiary also collects communal waste selectively (including biodegradable food waste). Our Croatian subsidiary has collected paper and plastic waste selectively for years, and from 2021, metal and glass waste will also be collected separately. DSK Bank operates selective waste collection at its sites in Sofia and Varna and has expanded the selective collection of paper waste during the year. Our Montenegrin subsidiary has introduced selective paper waste collection at its head office and its archives facility. Most members of our Banking Group have a tradition of raising awareness and taking joint action to protect environmental and natural resources. In 2021, we supported several environmental initiatives and encouraged the environmentally conscious behaviour of our employees. OTP Bank and OTP Bank Serbia have joined the Mastercard Priceless Planet Coalition, launched in 2020, and are participating in a campaign that encourages consumers to protect the environment and actively contribute to this goal themselves. The Priceless Planet Coalition aims to preserve the environment through the restoration of 100 million trees over five years and to help mitigate the adverse effects of climate change. By 2022, three afforestation sites have been selected in Kenya, Brazil and Australia, but more will be added later. OTP Bank has supported the Priceless Planet Coalition with a donation of 100,000 euros, while our Serbian subsidiary has committed to planting a tree for each bank account opened. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (SEPARATE) DSK Bank was the first bank in Bulgaria to join the Mastercard Wildlife Impact Card programme. The bank and Mastercard support the issuance of all Mastercard Wildlife Impact cards with one dollar spent on protecting and restoring natural habitats. The credit card is made of environmentally friendly material. DSK Bank also supported the One Tree Initiative, which aims to create an interactive map of Sofia’s tree stock. The tree survey was conducted by volunteers, registering a total of more than 12,000 trees. The bank also supported the initiative of the Hungarian Cultural Institute, within the framework of which bicycle storage spaces will be installed in front of cultural institutions. The aim of the project was to ensure the environmentally friendly accessibility of cultural institutions. Our Croatian subsidiary also supported the “Drop into the Sea” ecological action of the Telašćica Nature Reserve, which drew attention to the threat to marine ecosystems and fish stocks due to increasing amounts of waste. The bank also supported Ekotlon, the biggest plogging competition. In addition to collecting litter, the event also supported a kindergarten with eco-equipment purchased from its registration fees. Generator (Gamechanger), our Serbian subsidiary’s local start-up programme, launched the Generator Zero competition in 2021, specifically seeking and rewarding innovative solutions to reduce its carbon footprint. Organisations had until the end of the year to apply for the competition, and the winner will receive mentoring for further development and promotion in addition to the cash prize. Ten finalists were selected from the 72 projects nominated. We are also extending the scope of our employee involvement programmes: To promote environmental awareness, we wrote about the reduction in paper use and disposable plastics in the OTP Bank’s online magazine. Our Croatian subsidiary has reduced its use of plastics and implemented even more responsible waste management in three cities under the “Green Way to Green” programme. Our Serbian bank has launched an awareness-raising initiative among employees to increase environmentally and business-friendly behaviour and reduce CO2 emissions. The bank also supported the Green Serbia 2021 campaign, which planted trees in ten cities. In order to make employees more sensitive to the environment, our Slovenian subsidiary bank organised a workshop and presentation for managers and e-learning for employees. In 2021, the Bank joined the Slovenian Green Network, which brings together more than 400 companies, educational institutions, institutes and other organisations with a variety of projects for sustainable development and social responsibility. Our Ukrainian subsidiary has joined the “Batteries, inward” campaign, in which used batteries are collected and delivered to a recycling plant in Romania. The bank sent more than 200 kg of batteries to be recycled. Following its energy renovations, our Montenegrin subsidiary will also train its employees in the energy- conscious use of the systems. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (SEPARATE) NON-FINANCIAL STATEMENT – OTP BANK PLC. (SEPARATE) The social, environmental and wider economic performance and impacts of OTP Group are also reported in its dedicated Sustainability Report. The Sustainability Report for 2021 is a group-level report that meets the GRI (Global Reporting Initiative) Standard and is certified by an independent third party. It is available as a digital version on OTP Bank’s website. The information in this chapter is provided in order to comply with the Accounting Act, while also aiming to keep the duplication of information to a minimum. Information concerning environmental protection and climate change is provided mainly in the chapter on environmental Policy and Environmental Protection Measures. OTP Bank is committed to ethical business conduct in all respects; our principles are set out in our Code of Ethics, which is binding for all our employees and agents. Our financial services and operations have significant social and environmental impacts; thus, our objective is to manage risks responsibly while taking advantage of opportunities and delivering positive outcomes. In 2021, OTP Bank signed the UN Environment Programme Finance Initiative (UNEP FI), a framework for the sustainable banking sector. The Principles are the leading framework for ensuring that banks’ strategy and practice align with the vision society has set out for its future in the UN Sustainable Development Goals and the Paris Climate Agreement. Banks who have signed the Principles commit to be ambitious in their sustainability strategies, working to mainstream and embed sustainability into the heart of their business. The integration of sustainability is supported by a strong organisational background, which was completed in 2021. The ESG transformation covers both OTP Bank and its subsidiaries and is managed by an ESG Committee established by the Board of Directors. The Committee is the decision-making body responsible for ESG strategy, plans and policies and for supporting the Bank's governing bodies in the performance of ESG tasks. The Chairman of the Committee is appointed by the Board of Directors. The ESG Committee has established an ESG Operational Subcommittee, which provides operational support to the ESG Committee and help in the preparation of decisions. The head of the Subcommittee - also the head of ESG Business Transformation - is the Director of the Green Programme Directorate. The three key areas of ESG integration are ESG business transformation, ESG risk management and ESG control function. The ESG Strategy of the OTP Group was approved by the Management Committee in 2021. The OTP Group wishes to play a leading role regionally in financing a fair and gradual transition to a low-carbon economy as well as building a sustainable future by offering balanced financing opportunities. OTP Group approaches ESG from three main perspectives: as a responsible service provider, as a responsible employer and as a responsible social player. In addition to business opportunities, the strategy includes the management of relevant risks as well as social and corporate governance objectives. The strategy covers the period up to 2024, and our goal is to achieve full ESG integration at group level. Green Finance We have taken significant steps towards exploiting the potential of green finance. Green mortgage loans (distributed by OTP Bank, and held in the balance sheet of OTP Mortgage Bank) and green covered bonds (issued by OTP Mortgage Bank) help achieve real estate goals for sustainability. OTP Mortgage Bank has set the strategic goal of increasing the proportion of green loans within new loan disbursements and has also created a framework for green mortgage bonds. The bank was the first in the domestic market to issue a green mortgage bond, building on the Hungarian National Bank's (MNB) green mortgage purchase programme. The company issued securities with a total nominal value of HUF 95 billion in 2021, so in addition to the previously disbursed green loans, the company also provided funds to finance the green loans to be disbursed after the issue. The Mortgage Bank publishes the most important financial and environmental impact data relating to mortgage bonds annually. The first report presenting information for the year 2021 will be published at the same time as the company’s annual report. The MNB Green Home Programme was launched in the second half of 2021 as part of the Growth Loan Programme. These loans with a maximum interest rate of 2.5% help customers buy and build energy-efficient new homes. Under the programme, the Hungarian National Bank provides refinancing sources to credit institutions at 0% interest rates, provided that the energy requirements for the financed property are met. The central bank provides a total of HUF 200 billion in funds for the programme. We experienced interest in this loan structure that exceeded expectations, and by the end of 2021, our bank group had concluded contracts in the amount of HUF 20.1 billion and disbursed loans in the amount of HUF 4.9 billion. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (SEPARATE) Loan products of the Hungarian Development Bank (MFB) financed by both EU and from MFB’s own sources were still available at OTP Bank in 2021. The population had access to preferential loans through these structures in order to implement energy improvements. During the year, we entered into loan agreements amounting to HUF 5 billion, accounting for 7% of all loans contracted through MFB Points. We have developed four new products for corporate lending to help meet renewable energy production, electro-mobility, green agricultural goals and high-energy office investments. The total amount of loans cleared under the green housing, corporate and municipal capital relief programme provided by the MNB in OTP Bank is approximately HUF 74.5 billion. A significant proportion of green loans comprise projects for the utilisation of renewable energy sources within the framework of project financing. Renewable energy projects represent a considerable share of green lending in our project financing. In 2021, we signed contracts for eight new projects at OTP Group level in the amount of HUF 81.5 billion, a significant increase compared to previous years. The projects are located in Hungary, Bulgaria, Romania and Croatia, and the financing was partly implemented with the involvement of the subsidiaries. The projects generated 1,175 MW of renewable capacity, but funding is not always provided by OTP Group alone. At group level, the project financing portfolio related to renewable energy projects had reached HUF 84.2 billion by the end of the year, of which OTP Bank's share was HUF 57.8 billion. In 2021, loans promoting energy efficiency, the use of renewable energy and e-mobility were available from our subsidiaries in Croatia, Romania, Montenegro, Albania and Moldova. Our goal for 2025 is to have green products available in all segments for OTP Core, while the development of green financing plans at subsidiaries will take place in 2022. OTP Bank plans to issue green bonds in 2022 to finance group-level projects. The purpose of the OTP Fund Management OTP Climate Change 130/30 Fund is to provide investment opportunities in the shares of developed and emerging market companies that may be the winners of directives, legal regulations and economic policy changes aimed at mitigating the effects of climate change. The net asset value of the Fund at the end of 2021 was HUF 36.3 billion. In 2021, together with the OTP Omega Fund, we started to amend the management regulations of the OTP Climate Change 130/30 Fund in order to meet the criteria of a fund promoting environmental or social characteristics or a combination thereof, i.e. Sustainable Finance Disclosure Regulation (SFDR) Article 8. The table below shows the disclosures of the OTP Group and banks operating in EU member states in accordance with Regulation (EU) 2020/852 (Taxonomy Regulation). Disclosure under Article 8 Delegated art 10 OTP Group consolidated Art 10 (3) a, Eligible proportion * Art 10 (2) a, Non-eligible proportion* Art 10 (2) b, Proportion of derivatives * Art 10 (2) b, Proportion to central gov., central bank, supranational issuer* Art 10 (2) c, Proportion of non-NFRD undertakings* Art 10 (2) Proportion of trading portfolio* Art 10 (2) Proportion of on-demand loans* inter-bank ANNUAL REPORT 2021 0.15% 67.29% 0.93% 27.14% 8.48% 1.17% 4.77 OTP BANK BUSINESS REPORT 2021 (SEPARATE) Disclosure under Article 8 Delegated art 10 DSK Bank OTP Bank Croatia SKB Bank OTP Bank Romania 0.41% 0.21% 0% 0.11% Art 10 (3) d, XI. Annex disclosures information towards Contextual quantitative indivators incl. scope of assets and activities covered, data sources and limitation. year from second Starting of implementationonly: Explanations of the nature and objectives of Taxonomy- the aligned economic activities and Taxonomy-aligned evouolution of economic time, distingiushing between business related and methodological and data-related elements. activities over Description of the compliance with Regulation (EU) 2020/852 the business undertaking’s financial startegy, product design process and engagement and with counterparties. clients in exposures: for credit institutions that are not required to dsiclose quantitative information fo trading Quakitative information ont he alignment of trading (EU) portfolios 2020/852, overall composition, trendsm objectives and policy; Regulation includong with among examined Exposures to taxonomy-eligible activities were non-financial corporations. Companies covered by the NFRD were defined as listed companies with more than 500 employees based on Nace code *Excluding exposures to be excluded from the denominator of KPIs by the Regulation. Taxonomy elgible activities were examined. Our goals for green funding and the activities we have implemented can be found in the text pf NFRD. Our goals for green funding and the activities we have implemented can be found in the text pf NFRD. Taxonomy eligible activities were examined. the weight of other or additional information in support of the financial undertaking’s strategy and the financing of taxonomic activities in relation to their total activity. Taxonomy eligible activities were examined. Our goals for green funding and the activities we have implemented can be found in the text pf NFRD. Green asset ratio in corporate lending: In relation to the mitigation and adaptation objectives of the taxonomy regulation, we have examined the corporate portfolio based on the NACE codes that can be attributed to activities in the delegated act. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (SEPARATE) OTP Bank Group's corporate lending activities are linked to environmentally sustainable economic activities in the EU Member States8 in the followings scope: Share of the taxonomy-adjusted corporate portfolio of EU core and subsidiary banks in total non-segmented exposures at group level: 8.3% Share of the taxonomy-adjusted corporate portfolio of EU core and subsidiary banks in the total EU core and subsidiary corporate portfolio: 42.3%. ESG risk management In order to integrate ESG aspects, comply with legal obligations and the Hungarian National Bank's Green Programme, we continued to develop our ESG lending policy in 2021. At group level, we have introduced a lending and monitoring ESG risk management framework for non-retail and non-motorised leasing assets. The framework also includes the ESG Exclusion List, which comprises activities excluded from financing by OTP Group, as well as the industry ESG risk heat map. In 2021, ESG credit risk exposure became part of internal reporting. In accordance with the Hungarian National Bank’s Green Programme, we will continue to include ESG factors in the rest of the portfolio and in respect of collateral. The purpose of ESG risk management in lending is to identify ESG risks and reduce transaction risks arising from the environmental and social risk factors associated with financing. By integrating these issues into our lending process, we are also emphasising the importance of our clients adopting excellent environmental and social practices. We invest and lend the money deposited with us in a way ensuring that it will not serve illegal purposes, or those contrary to the values of society. OTP Bank will not finance: customers whose financing is forbidden in international agreements, EU acts or national laws; those whose activity is likely to violate public morals or social value systems, or is connected to crime; those who are connected, directly or indirectly, to criminal activities or to the deliberate violation or evasion of legal; regulations; transactions classified as prohibited business sectors (e.g. the illegal arms trade, prohibited gambling, drug trade, or any other illegal activity); and transactions that fail to meet environmental standards. The OTP Bank Group does not finance transactions that violate the laws of the country concerned or international law. In accordance with our regulations, our banking group always expects and examines compliance with environmental regulations during lending. Violation of commitments and expectations is sanctioned in the framework credit agreements. In accordance with the SFDR's expectations, we have developed an investment risk management policy for all relevant group members, so that investment risk management has been integrated into decision-making processes during investment advisory and portfolio management activities, and information on this has been provided to clients. Our statements on the integration of sustainability risks and the adverse effects of investment decisions on sustainability factors (PAIs) are available on our websites. In addition to the legal requirements, the prospectuses containing the product characteristics of the investment funds also include the ESG score calculated by the bank, helping customers make decisions and orient themselves. We have strengthened the assessment of ESG risks in our operational risk management scenario analyses by analysing a separate scenario related to climate change, and we have also indicated the risks affected by ESG in both the risk self-assessment and the loss database. Responsible customer service In carrying out our financial intermediary duties we ensure that the savings of our customers remain safe at all times. Our rules guarantee that the standards of responsible lending are observed regarding the avoidance of over-indebtedness, fair, understandable, complete and attentive information provision and adequate product offers. 8 EU core and subsidiary banks means: OTP Nyrt, DSK Banka EAD, OTP Bank Romania S.A., OTP banka Hrvatska d.d., SKB banka d.d. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (SEPARATE) Our principles and guidelines on the fair treatment of customers and the compliance of consumer protection are set out in our Compliance Policy. In designing our products, we follow the principles of ethical product development. Our New Product Policy prescribes the assessment of potential risks to consumers. We offer personalised administrative options to our customers with the highest level of service quality and continuous innovations. The coronavirus pandemic increased the use of online channels, and our Banking Group also encouraged this trend. We use TRI*M methodology to measure the satisfaction of our retail customers. OTP Bank’s client retention power increased by three points to 69 points in 2021, while the average satisfaction score among competitors also increased slightly. The average TRI*M of banks in Central Europe was 77 points. OTP Bank’s stated objective is to serve its customers without fault. In order to improve customer satisfaction, we are also continuously improving our complaint management practices. Our Complaint Management Policy, Complaint Management Regulation and a Glossary are available to view in our branches as well as on our website. In 2021, the most typical complaints at OTP Bank were related to the payment moratorium and unapproved payment transactions. The number of both complaints and legitimate complaints decreased significantly in 2021 compared to the outstanding values of 2020, which could be attributed to the significant changes made during the year. The declining trend also prevailed at group level. In 2021, we continued to improve our complaint management practices, including expanding our complaint analysis process and the range of complaints that can be resolved immediately. Customer complaint data, OTP Bank1 Number of warranted complaints Ratio of warranted complaints Compensation paid (HUF million) 1 Includes data from OTP Housing Savings and OTP Mortgage Bank. 2 Corrected data. 2020 202,040 67% 842 2021 155,298 62% 36 Our objective is to provide equal access for persons living with disability, through services adapted to their special needs, in line with the Accessibility Strategy of OTP Bank. Accessibility is integrated into our website, which supports one-handed use and provides accessibility options including text-to-speech software and video content transcripts. Physical accessibility was also provided in every branch but one in 2021. Tactile guide strips are available in 38% of our branches. Our customers can request special-needs services at the queue management machine, with physical push buttons and tactile strips also assisting them in using the device. Interpreter Services are available at 167 branches; this is a service allowing a sign language interpreter to assist with administration tasks through a live video chat. Induction loop amplifier systems are also available in 38% of branches. Moreover, we have made text-to-speech software available on 910 of our ATMs. Security and data protection Security is a top concern for us. The principles and main guidelines concerning security at the bank are set forth in the Security Policy, which is approved by the Board of Directors. The policy covers all aspects of security, including IT and cyber security, which have become increasingly important. OTP Bank's Group-level Information Security Policy and Cyber Security Strategy of OTP Bank were completed in 2021, and the development of a Group-level cyber security strategy was launched. The processing and protection of personal data is covered by the Compliance Policy, which is also approved by the Board of Directors. Both policies prescribe the regular evaluation of risks and the need to maintain and enhance awareness. The handling and protection of personal data is covered by the Compliance Policy also approved by the Board of Directors. We also developed security processes and applied solutions in 2021, with our innovations focusing on the cyber security centre, the central log analysis system, authorisation management and virus protection. In addition we made customer communication more effective in detecting suspicious transactions. The number of distributed denial-of-service (DDoS) and phishing attacks increased significantly at group level compared to previous years. We published several awareness campaigns for our customers, providing information on our intranet and through security awareness training, which was also focused on phishing. Besides protecting against phishing activities, the European Cyber Security Month programmes focused on presenting the security challenges of modern application development and operations. White-collar crime, which causes significant losses to customers and the banking group, decreased at most subsidiaries due to our continuous development, more efficient employee action and stricter controls. We have reviewed our anti-money laundering training material to ensure our employees gain greater knowledge of this and have started to develop harmonised training at group level. The number of suspected money laundering ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (SEPARATE) reports by bank employees increased by eight percent. During the year, OTP Bank reported 68 cases of suspected money laundering. Our Banking Group has experienced numerous card-related attacks; in these cases the sharing of important information was extremely helpful in the prevention of fraudulent transactions. The number of successful card fraud cases has been kept low continuously, which demonstrates that our systems operate effectively. The ratio of bank card fraud to turnover is significantly lower than the European average published by MasterCard (for OTP Bank it is 0.0071% and the consolidated ratio of subsidiaries is 0.00986%, while the European average stands at 0.0414%). In the case of OTP Bank we were able to prevent bank card fraud of HUF 5.5 billion. Losses expected from the detected criminal activities amounted to HUF 447 million in the case of OTP Bank and HUF 2.2 billion at Group level. The amount of loss prevented was HUF 457 million at OTP Bank and HUF 2.0 billion at OTP Group. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (SEPARATE) Fight against corruption and against the practice of bribery discrimination The Code of Ethics and the Anti-Corruption Policy of OTP Bank contains provisions on the fight against corruption and against the practice of bribery, also on the acceptance of individual differences and the denial of (https://www.otpbank.hu/portal/en/EthicalDeclaration https://www.otpbank.hu/static/portal/sw/file/OTP_EtikaiKodex_EN.pdf, https://www.otpbank.hu/static/portal/sw/file/OTP_Anti_Corruption_Policy_202102.pdf). As it can be read in the foreword of the Code and the Anti-Corruption Policy as well, the Bank and its management have adopted the principle of zero tolerance towards corruption and bribery, taking a definite stance against all forms of corruption and giving full support to the fight against corruption. In addition, the Code states that "As an ethical and compliant institution, the Bank and its management are fully committed to ensuring observance of all relevant legislation, including anti-corruption statutes." The Bank has set up an ethics reporting system (whistleblowing), which is for the reporting and the handling of the reports on suspected or actual violation of the values set forth in the Code of Ethics, where anonymous reporting of ethics issues is also possible. The Bank conducts inquiries for the purpose of detecting, preventing anomalies in connection with reports made or anomalies it became aware of otherwise. Through the Bank's ethics reporting system a total of 26 reports were received in 2021, 8 of them was reclassified as complaints and 2 case’s investigation resulted in declaring ethics offense – though not due to corruption, bribery or discrimination. The Bank has created and maintains its Code of Ethics to keep reputational risk and financial losses, which may incur in relation to corruption, bribery and discrimination, on a minimum level. Both employees and newcomers receive education on the Code of Ethics, and in addition, the acceptance to be bound by it is a prerequisite for their employment. Any requests from third parties affecting human rights are treated by the Bank as a priority. We manage the risks regarding the fight against corruption and bribery within the framework of our operational risk management process. Our quarterly compliance reports cover the changes in risks as well as the steps necessary steps to manage them. The reports are presented to the Management Committee and the Board of Directors; the annual report is also submitted to the Supervisory Board. Citizenship OTP is one of the most generous charitable donors in Hungary, giving a total of HUF 2.3 billion in charitable donations, almost half of which was for educational purposes, primarily the development of financial culture. We aim to provide genuine and effective help by supporting programmes and causes that serve the interests of society. We cooperate with a number of local non-governmental organisations, concentrating our donated funds and monitoring their usage and the results achieved. Our efforts were focused on the following areas: developing financial literacy: attitude shaping; sponsoring culture and the arts: creating and preserving values; equal opportunities: helping the disadvantaged and those in need; and sport. We consider donation habits a part of financial literacy; therefore, in 2021 we took a significant step forward in encouraging our customers to support the social initiatives that they consider important financially. Under the digital donation programme we enabled them to make donations simply and easily while taking care of their day-to-day finances. Donation has become possible on our digital platforms, including our website, the internetbank, the mobile application, the Simple application, as well as through 750 ATMs and the digital points of 80 branches. Our Bank assumes all extra costs of the donation, including both the transaction tax of customers and the costs of NGOs. Our Bank also cooperates with the supported organisations and we supplement the donations of our customers. In addition, in our experience, our customers view the Bank’s participation as a guarantee that their donations will truly go to the right beneficiary. In 2021 we supported the initiatives of 6 foundations through customer donations in the amount of HUF 250 million. The Humanitas Social Foundation supports vulnerable communities and individuals with a focus on healthcare and education; donation recipients are selected through an application process. Its most important activity in 2020 involved priority support to hospitals. We supported 30 hospitals, 18 educational institutions and one foundation through the Foundation in 2021. In order to provide more effective assistance, we provided targeted, tailored asset support to institutions. The OTP Fáy András Foundation provides financial and economic education services, a key element of which is operating the OK Educational and Innovation Centre. The Foundation provides youth, adult and vocational ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (SEPARATE) training. The activities of the Foundation in 2021 were determined mostly by the coronavirus pandemic and several planned activities could not be organised as a result. However, the Foundation developed 30 curricula in 2021. Digital education continued to be the focus of the year, with more than 17,000 students attending online and nearly 2,500 classroom training. Roma youth also participated in financial and economic training through the Roma Education Fund. Significant progress has been made in the development and testing of the Financial Basic Education Programme in adult education. During the training, in which participation is free of charge and without prior knowledge, users acquire essential personal money management and general economic knowledge and improve their financial literacy. The Foundation also continued its previous programmes, so the teacher training programme of Eötvös Loránd University (ELTE), the regular Teachers' Club and the summer camps took place. The Foundation's national awareness-raising programme also continued, with screenings of short films on national commercial television channels around 400 times, covering topics such as housing renovation, business start-ups and data security. Responsible employment Our goal is to create value for our employees by focusing on them in a constantly changing environment. The central objective of our human resource strategy is to intensify employee experience and commitment. In 2021 we conducted an employee satisfaction survey at Group level with a high response ratio of 92%. Based on the results, the rate of employee satisfaction was 70%, slightly lower than the average of the international financial sector. The action plans prepared in response to the feedback for all areas that needed improvement were approved by the Management Committee. We developed our activities during the year along the lines of the six priorities stated in our strategy, also relying on the results of the employee satisfaction survey. We launched numerous projects that will result in significant changes; for example, we developed the framework of Group-level dialogue, and placed management development on new foundations. Although the pandemic slightly delayed the implementation of the international talent programme, we created a uniform talent framework at Group level and operated local talent programmes. All of our employees participate in trainings; in addition to network and head office management development, we rejuvenated the frameworks of our employees’ skills development. Due to the pandemic situation, hybrid work performance became typical in 2021. We maintained access to the tools promoting our employees’ emotional, mental and physical health and their ability to stand firm under harsh circumstances, and once again in 2021, numerous employees took recourse to them. OTP Bank’s employees (31 December) 2020 2021 9,826 Employees, total (individuals) 100% Distribution by gender Turnover rate1 10.5% 1 Compared to the end-of-year headcount; includes termination of employment both by employee and by employer, as well as retirement. 10,078 100% 14.3% Total Men Women 6,424 65.4% 11.2% 3,402 34.6% 9.3% Total Men Women 6,531 64,8% 14.1% 3,547 35.2% 14.5% Ethical conduct and legal compliance also remain core principles in our human resource management. OTP Bank analyses and manages the risks relating to employment within its operational risk management process. Our employees’ interests are represented by their trade union, with a Collective Agreement setting out the rights and obligations of every employee. The Bank’s Code of Ethics declares its commitment to providing a safe and healthy working environment and states its expectation of mutual respect between executive officers and employees, including the prohibition of discrimination and harassment. We consistently apply the principle of “equal pay for equal work”, including providing equal pay to men and women for the same position and performance. Within the objective limitations of specific job descriptions, we allow for flexible working hours and part-time employment options. We encourage healthy lifestyle choices, offering a complex health insurance package, and subsidising recreation and sporting activities. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (SEPARATE) Short description of the business model of the company OTP Bank is the market-leading credit institution in Hungary. As for its business model, the Bank offers high- quality financial services to retail, private banking, micro and small business, medium and large corporate, as well as municipality clients through both its branch network and its steadily developing digital channels. The Bank provides comprehensive retail and corporate banking services: its activities include deposit collection from customers and raising money from the money and capital markets. On the asset side, OTP Bank offers mortgage loans, consumer credits, working capital and investment loans to companies, as well as loans to municipalities, whereas its liquidity reserves are invested in money and capital market instruments. Moreover, the Bank provides a wide range of state-of-the-art services, including the areas of wealth management, investment services, payment services, treasury and other services. In addition, OTP Bank's Hungarian subsidiaries deliver a wide range of further financial services. The Bank owns foreign subsidiaries in many countries of Central and Eastern Europe through capital investments. Non-financial performance indicators Internal audit: 203 closed audits, 1,478 recommendations, 1,478 accepted recommendations Compliance with Budapest Stock Exchange (BSE) Recommendations (yes/no ratio): 72 yes, 0 no; Compliance: 18 closed consumer protection related investigations Bank security: the expected value of damages resulting from detected criminal offenses is HUF 447,124,093, HUF 460,655,117. In 2021, we filed an official complaint in 620 cases on suspicion of money laundering. There is a slight decrease in 2021, when this number changed from 4438 in the previous year to 4,432, a decrease of 8.4%. In the case of OTP, the ratio of bank card misuse to turnover is still lower than the European average published by MasterCard (last year's figures: OTP Bank 0.0071%, European average 0.0414%). Ethics issues: 26 ethics reports, establishing ethics offense in 2 cases. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (SEPARATE) LIST OF NON-AUDIT SERVICES BY SERVICE CATEGORIES USED BY THE BANK The statutory audit of OTP Bank is carried out by Ernst and Young Ltd., in addition to which the following services were contracted: Issue of Comfort letters Engagements to review historical financial statements and interim financial statements (ISRE 2400, 2410) Consultation relating to interpretation and implementation of accounting standards and relating to accounting of potential future transaction Pre- or post-transaction due diligence services relating to acquisition of assets or entites or sales transactions or other transactions: financial, accounting, taxation, legal and IT specific services - except for buy-side lead advisory, transactional and negotiation support ANNUAL REPORT 2021 BUSINESS REPORT 2021 (CONSOLIDATED) ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) CONSOLIDATED FINANCIAL HIGHLIGHTS9 AND SHARE DATA 2020 HUF million 259,636 (50,631) Main components of the adjusted Statement of recognised income Consolidated after tax profit 2021 HUF million 456,428 (40,474) Change % 76 (20) Adjustments (total) Consolidated adjusted after tax profit without the effect of adjustments Pre-tax profit Operating profit Total income Net interest income Net fees and commissions Other net non-interest income Operating expenses Total risk costs One off items Corporate taxes Main components of the adjusted balance sheet closing balances Total assets Total customer loans (net, FX adjusted) Total customer loans (gross, FX adjusted) Performing (Stage 1+2) customer loans (gross, FX-adjusted) Allowances for possible loan losses (FX adjusted) Total customer deposits (FX adjusted) Issued securities Subordinated loans Total shareholders' equity Indicators based on adjusted earnings ROE (from accounting net earnings) ROE (from adjusted net earnings) ROA (from adjusted net earnings) Operating profit margin Total income margin Net interest margin Cost-to-asset ratio Cost/income ratio Provision for impairment on loan and placement losses-to-average gross loans ratio Total risk cost-to-asset ratio Effective tax rate Net loan/(deposit+retail bond) ratio (FX adjusted) Capital adequacy ratio (consolidated, IFRS) - Basel3 Tier1 ratio - Basel3 Common Equity Tier 1 ('CET1') ratio - Basel3 Share Data EPS base (HUF) (from unadjusted net earnings) EPS diluted (HUF) (from unadjusted net earnings) EPS diluted (HUF) (from adjusted net earnings) Closing price (HUF) Highest closing price (HUF) Lowest closing price (HUF) Market Capitalization (EUR billion) Book Value Per Share (HUF) Tangible Book Value Per Share (HUF) Price/Book Value Price/Tangible Book Value P/E (trailing, from accounting net earnings) P/E (trailing, from adjusted net earnings) Average daily turnover (EUR million) Average daily turnover (million share) 310,268 496,902 351,802 537,437 1,169,920 788,079 293,112 88,729 (632,483) (187,995) 2,360 (41,534) 587,853 660,391 1,313,124 884,012 325,548 103,563 (652,733) (72,538) - (90,951) 2020 2021 23,335,841 13,715,487 27,553,384 15,743,922 14,575,916 16,634,454 13,736,409 15,756,503 (860,429) (890,532) 18,152,563 464,214 274,704 2,537,112 2020 10.9% 13.0% 1.4% 2.47% 5.37% 3.61% 2.90% 54.1% 21,068,644 436,325 278,334 3,036,766 2021 17.0% 18.5% 2.0% 2.62% 5.21% 3.51% 2.59% 49.7% 1.15% 0.30% 0.86% 11.8% 76% 17.7% 15.4% 15.4% 2020 1,004 1,003 1,200 13,360 15,630 8,010 10.2 9,061 8,436 1.5 1.6 14.4 12.1 22 0.7 0.29% 15.5% 75% 19.1% 17.5% 17.5% 2021 1,739 1,738 1,896 16,600 19,400 12,920 12.6 10,846 10,190 1.5 1.6 10.2 9.4 19 0.4 60 67 23 12 12 11 17 3 (61) 119 % 18 15 14 15 3 16 (6) 1 20 pps 6.1 5.5 0.5 0.16 (0.15) (0.11) (0.31) (4.4) (0.84) (0.57) 3.7 (1) 1.4 2.1 2.1 % 73 73 58 24 24 61 23 20 21 4 3 (29) (22) (12) (38) 9 Structural adjustments made on consolidated IFRS profit and loss statement as well as balance sheet, together with the calculation methodology of adjusted indicators are detailed in the Supplementary data section of this Report. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) ACTUAL CREDIT RATINGS S&P GLOBAL OTP Bank and OTP Mortgage Bank – FX long-term issuer credit rating MOODY'S OTP Bank – FX long term deposits OTP Bank – Dated subordinated FX debt OTP Mortgage Bank – Covered bonds SCOPE OTP Bank – Issuer rating OTP Bank – Covered bonds FITCH OTP Bank Russia – Long term credit rating BBB Baa1 Ba1 A1 BBB+ BB+ B ACTUAL ESG RATINGS AWARDS In the Euromoney Awards for Excellence 2021 OTP Bank received the “Best Bank in Central and Eastern Europe” award. In addition, the Bank won the title of “Best Bank in Hungary” and its subsidiaries also proved to be the best in Bulgaria, Montenegro and Albania. Global Finance named again in 2021 OTP Bank the safest bank in Hungary, thus it joined the group the World’s Safest Banks, furthermore OTP Bank received the “Best Bank Award” again in Hungary in 2021. In the annual ranking of The Banker magazine, member of Financial Times Group, the OTP Group has become the “Best Bank in Central and Eastern Europe”. In addition, the Hungarian, Montenegrin, Croatian and Slovenian subsidiaries of the OTP Group received the “Bank of the Year” award. SHARE PRICE PERFORMANCE OTP Bloomberg EMEA Banks Index (relative to OTP) CECE Banking Sector Index (relative to OTP) HUF 21,000 19,000 17,000 15,000 13,000 11,000 9,000 7,000 31/12/2019 30/06/2020 31/12/2020 30/06/2021 31/12/2021 ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) MANAGEMENT’S ANALYSIS OF THE FULL-YEAR 2021 RESULTS OF OTP GROUP According to the preliminary Hungarian GDP data published on 15 February 2022, the annual growth rate was 7.1% y-o-y. The faster than originally expected GDP-growth was mainly due to the targeted and successful measures initiated by the Government and the Hungarian Central Bank aimed at safeguarding the economy. These steps to a large extent helped the economy to reach its pre-Covid performance by 3Q 2021 with the employment level reaching new heights. Acknowledging the results in restoring the economy, in January 2022 Fitch affirmed the sovereign rating (‘BBB’) and its stable outlook. As for 2022, the Government expects 5.9% annual GDP growth, 4.9% budget deficit with the public debt to GDP ratio declining further; the average inflation may be 4.8%. The recent inflation figures, however manifest upward risk. During the course of the year there have been significant changes in the monetary policy: as a respond to elevating inflation NBH started a tightening trend and the base rate was increased from 0.6% to 2.4%, whereas the 1-week deposit rate reached 4% by the end of 2021. Following a 50 bps rate hike on 22 February, the base rate stood at 3.4%, whereas on 24 February the 1-week deposit rate was hiked to 4.6%. The 3M Bubor, i.e. the reference rate for floating rate loans started 2021 at 0.75% and closed at 4.21% (+346 bps y-o-y) and by mid-February stood at 4.58%. The 10-year Government bond yielded 4.51% at the end of 2021, since then it increased further. The local currency was volatile during 2021 and finally closed at 369.0 against the EUR. As a meaningful change, two essential tools playing important role during the last couple of years in boosting economic performance through supporting the local corporate sector, namely the Funding for Growth Go! Scheme and the Bond Funding for Growth Scheme, have been gradually phased out in the second half of 2021. At the same time NBH launched its FGS Green Home programme focused on sustainable household funding. According to the report published by the NBH on 2 February 2022, in 2021 both the household loan volumes and corporate exposures expanded steadily: the former grew by 11% y-o-y, and the corporate portfolio by 15%, respectively, supported also by the payment moratorium putting on hold principal amortization. Within the retail segment the main engine was the subsidized baby loans; total sector level volumes reached HUF 1,569 billion by the end of December underpinning an almost 50% y-o-y growth. Cash loan volumes leaped by 17.0% y-o-y, whereas housing loan volumes grew by 15% y-o-y; home equity exposures kept eroding by 4% y-o-y following the trend of recent years. On a Group level all economies enjoyed favourable trends in 2021 coupled with numerous rating upgrades or improving outlooks. Alongside the improving GDP and employment statistics, in a few countries local central banks had to react to surging inflation with definite monetary tightening: the Ukrainian and Russian base rate was increased by 300 bps and 425 bps y-o-y, and in Romania by 50 bps, respectively. With regard to the recent pandemic developments, despite the significant differences in vaccination levels across the Group, the general trend is rather the gradual easing/relaxing of restriction measures. Consolidated earnings: HUF 497 billion adjusted profit after tax, stabilizing NIM, stable credit quality, improving efficiency, with performing increasing by 15% y-o-y (FX-adjusted) loan volumes organically The annual performance was clean of new acquisitions, however the y-o-y dynamics were affected by the sale of the Slovakian subsidiary at the end of 2020. The integration process of the second Serbian acquisition was completed in 2Q 2021, the anticipated cost synergies have been utilized. In 2021 the total amount of adjustments comprised -HUF 40.5 billion within the accounting earnings of HUF 456.4 billion (after tax), by HUF 10 billion less than in 2020. The major items were as follows: -HUF 18.9 billion special banking tax on financial institutions (after tax) paid by the Hungarian operation; -HUF 15.5 billion effect of acquisitions (after tax) related mainly to the Bulgarian, Serbian and Slovenian integration expenses; -HUF 15 billion related to the expected negative one-off effect of the debt repayment moratorium in Hungary and Serbia (after tax); +HUF 6 billion related to the treasury share swap agreement between MOL and OTP, reflecting the share price changes and the updated model calculation for dividend pay-outs. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) +HUF 1.9 billion tax shield related to the recognition or reversal of impairment charges booked in relation to the revaluation of investments in certain subsidiaries (after tax); In 2021 OTP Group posted HUF 588 billion the pre-tax profit (+67% y-o-y). The corporate tax burden was more than twice as big as in the base period mainly due to the higher pre-tax earnings. Besides, starting from 2021, in the adjusted P&L structure the Hungarian local business tax and innovation contribution (IPA) payable by Hungarian Group members was presented on the corporate taxes line against the previous practice of showing it as part of operational expenses10. That particular amount in 2020 comprised HUF16.5 billion (in the stock exchange report it was presented amongst operational expenses), while in 2021 it was HUF 19.2 billion (shown on the corporate tax line). The Group posted HUF 496.9 billion consolidated adjusted profit in 2021 (+60% y-o-y), the adjusted ROE for the period reached 18.5% (+5.5 pps y-o-y). The size of the bottom-line profit to a large extent was shaped by total risk costs, their volume of HUF 72.5 billion was around a third of that in the base period. The operating profit showed a decent picture: in 2021 the Group posted HUF 660.4 billion, 23% more than in 2020. Adjusted for FX, the sale of OBS and IPA reclassification the increase would be 19.5% y-o-y. Total income advanced dynamically, by 13% y-o-y (without the effect of the sale of the Slovakian unit, FX-adjusted) with net interest income growing by the same magnitude, whereas the net fee & commission income grew somewhat slower (+12% y-o-y). Other net non-interest income surged by 17% y-o-y. Despite the annual net interest margin eroded further (2021: 3.51%, y-o-y -11 bps). The declining interest rate environment prevailing for years turned around in several markets, and in 2021 first the Ukrainian and Russian central banks, later the Hungarian, and most recently the Romanian hiked rates. However, the favourable impact of the higher interest rates for the interest income will be gradual and stretched out for several quarters given the time lag in repricing of variable rate assets. At the same time, there were several developments affecting the net interest margin negatively. On one hand FX changes had negative impact on annual NIM: during 2021 the HUF was 2.7% stronger y-o-y against the Ukrainian hryvna and by 3.8% against RUB, respectively. Also, NIM was negatively affected by the steady increase of deposit volumes through the dilution impact of higher total assets and the higher weight of low margin liquid assets. As for the whole Group, the annual NIM improved y-o-y at OTP Core, Ukraine and Russia, whereas other Group members suffered margin erosion at different scale. In 2021 operating expenses nominally grew by 3% y-o-y. However, adjusted for IPA and the sale of the Slovakian subsidiary the FX-adjusted y-o-y increase would be 7.7%. The annual cost-to-income ratio was 49.7% (-4.4 pps), whereas the cost to total assets ratio stood at 2.59% (-31 bps y-o-y). As for the overall performance of the Group, all operations but the Hungarian Fund Management and CKB (Montenegro) posted y-o-y improving adjusted profit after-tax. The profit contribution of non-Hungarian Group members leaped from 41% to 51% y-o-y. 2021 performing loan volumes grew 15% y-o-y (FX-adjusted). The Hungarian payment moratorium had a 1 pp positive impact on the consolidated portfolio growth (the principal is not amortizing, and the accrued interest adds to the outstanding principal). As a result, in 2021 the performing loan portfolio expansion exceeded HUF 2,000 billion. Last year all Group members posted y-o-y volume increase. Out of the major Group members the fastest loan growth was posted at the Ukrainian (+41%), Hungarian (+19%), the Russian (+18%) and Bulgarian (+11%) operations, but the Romanian, Serbian, Croatian and Slovenian dynamics were also outstanding. It was positive that strong volumes were coupled with improving market shares in several countries and segments. As for the major loan segments, during the last twelve months the consolidated FX-adjusted performing corporate exposures increased the fastest (+19%), followed by the expansion of the mortgage portfolio (+15%) and the consumer book (+14%) and leasing exposures (+11%). The MSE portfolio, however, shrank by 6% partly as a result of the phase-out of the Hungarian subsidized structures and also the reclassification between MLE and MSE segments during the course of the year. One of the side-effects of pandemic is the more cautious attitude in household spending and corporate investment activity, as a result the volume of overall savings increased. The FX-adjusted consolidated deposits grew by 16% y-o-y or HUF 2,916 billion, i.e. increased faster than loan volumes. The Hungarian, Ukrainian, Romanian and Croatian operations demonstrated double-digit deposit expansion. The consolidated net loan-to-deposit ratio decreased to 75% (-1 pp y-o-y). 10 The Hungarian local tax and innovation contribution was uniformly booked within the Corporate tax line in the accounting income statement and the consolidated IFRS report for 2020 and 2021, as well. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) At the end of December 2021, the gross operative liquidity reserves of the Group comprised EUR 9.1 billion equivalent (+EUR 0.2 billion y-o-y). The quality of the consolidated loan book remained stable in 2021, the major trends shaping the risk profile were overall favourable. By the end of 2021 the Stage 3 ratio under IFRS 9 was 5.3% underpinning a 0.4 pp y-o-y improvement. The own coverage of Stage 1, 2 and 3 exposures were 1.0%, 10.1% and 60.5%, respectively. In Hungary the payment moratorium was extended again until 30 June 2022, true, the scope of available clients was narrowed and clients had to opt-in until 31 October 2021. By the end of 2021 the total household and corporate exposure remaining under the moratorium comprised HUF 245 billion at OTP Core and Merkantil Group, which was 4.1% of total gross loan portfolio of those two entities. As a result of the moratorium extension retail and corporate exposures were shifted into Stage 3, elevating the Stage 3 ratio at OTP Core. The volume of credit risk costs for the whole year comprised -HUF 46 billion versus -HUF 158.4 billion in the base period. The annual credit cost ratio was 0.30%. Russian-Ukrainian situation In the second half of February 2022 the military conflict between Russia and Ukraine escalated. It is difficult to quantify the effect of the Ukrainian-Russian conflict regarding the Ukrainian and the Russian operations, the possible scenarios are covering a wide range of spectrum. According to the worst possible scenario, the Bank may lose its control over its investments, which under extreme conditions could result in the full write-off of the invested amount. The Consolidated Financial Statements do not contain any write-offs as possible consequences of the Ukrainian-Russian conflict, the Group recognizes it as not adjusting, post balance sheet event. OTP Group’s Ukrainian operation incorporates the Ukrainian bank, as well as the leasing and factoring companies. The country-consolidated Ukrainian total assets represented HUF 984 billion at the end of 2021 (3.6% of total consolidated assets), while net loans comprised HUF 614 billion (3.9% of consolidated net loans) and shareholders’ equity HUF 160 billion (5.3% of the consolidated total equity). At the end of 2021 the book value of the capital investment in the Ukrainian subsidiaries comprised HUF 105 billion; there was no goodwill at all, it was already written down entirely in 2014. The gross intragroup funding towards the Ukrainian operation represented HUF 72 billion, and taking into account the Ukrainian deposits placed with the HQ, i.e. the net group funding represented HUF 29 billion equivalent. According to the 28 February 2022 figures, the gross funding amounted to HUF 75 billion equivalent and the net intragroup funding stood at HUF 9 billion equivalent. The Ukrainian sub-consolidated RWA (“risk-weighted asset”) was HUF 1,115 billion by the end of 2021 (6.7% of the total consolidated RWA). The consolidated maximum capital effect on the potential write-off of the Ukrainian operation, taking into account the equity, the intragroup funding and the Ukrainian risk weighted assets, is estimated at 27 bps on the consolidated CET1 ratio, according to year-end figures. The Ukrainian operation posted HUF 39.0 billion adjusted profit in 2021 which represented 7.9% of OTP Group’s adjusted annual profit. The total assets of the Group’s Russian operation represented HUF 800 billion at the end of 2021 (2.9% of consolidated total assets), while net loans comprised HUF 621 billion (3.9% of consolidated net loans) and shareholders’ equity HUF 241 billion (7.9% of consolidated total equity). At the end of 2021 the book value of the capital investment in the Russian subsidiaries comprised directly HUF 74 billion and indirectly HUF 50 billion. The gross intragroup funding towards the Russian operation represented HUF 73 billion, and taking into account the Russian deposits placed with the Headquarter, i.e. the net group funding represented HUF 14 billion equivalent. On 28 February 2022 the gross intragroup funding reached HUF 52 billion equivalent, which equalled the net figure because there was no deposit placement by the Russian operation at other Group members. The Russian sub-consolidated RWA was HUF 822 billion by the end of 2021 (4.9% of the total consolidated RWA). ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) The consolidated maximum capital effect on the potential write-off of the Russian operation, taking into account the equity, the intragroup funding and the Russian risk weighted assets, is estimated at 116 bps on the consolidated CET1 ratio, according to year-end figures. The Russian operation posted HUF 37.6 billion adjusted profit in 2021 which represented 7.9% of OTP Group’s adjusted annual profit. According to the estimation of the Bank’s Management the Ukrainian-Russian conflict does not have considerably negative impact on the business activity, financial position, efficiency, liquidity and capital position of OTP Bank. Even after the recognition of the potential losses and write-offs outlined above, the Group's capital adequacy remains above the expected regulatory level. There is no sign of significant uncertainties having been arisen regarding carrying out its business as a going concern. The Bank’s Management is monitoring the situation of the Ukrainian-Russian conflict continuously and will take the necessary steps in order to moderate the business risk. Consolidated capital adequacy ratio (in accordance with BASEL III) At the end of 2021, the consolidated CET1 under the accounting scope of consolidation according to IFRS was 17.5% (+2.1 pps y-o-y). This ratio equals to the Tier1 ratio and includes the eligible annual profit. Effective from 1 July 2020 the original level of O-SII capital buffer (2%) was modified to 0% by the NBH until 31 December 2021. Afterwards, this buffer shall be rebuilt gradually, between 1 January 2022 and 31 December 2023. At the end of 2021 the countercyclical capital buffer requirement was 0% in Hungary, and the central bank stated that it does not plan to raise it in the short term. However, in Bulgaria the local central bank prescribed a 0.5% buffer for the local subsidiary, thus, the institution-specific countercyclical buffer requirement for OTP Group was 0.1%. As a result, the effective regulatory minimum requirement for the Tier 1 capital adequacy ratio for OTP Group was 9.6% for end-2021 (which also incorporated the effective SREP rate of 117.25%), whereas the minimum CET1 requirement was 7.9%. According to the decision of NBH, effective from March 2022 the SREP rate increased to 125%. Credit rating, shareholder structure In 2021 there was no change in S&P Global Ratings, accordingly, OTP Bank Plc.’s long-term issuer rating is ꞌBBBꞌ with stable outlook. On 13 July the ꞌBa1ꞌ dated subordinated debt rating of OTP Bank was placed on review for downgrade by Moody’s, while its ꞌBa3(hyb)ꞌ junior subordinated debt rating, the BCA (baseline credit assessment) and the adjusted BCA were placed on review for upgrade. The outlook on OTP Bank’s long-term deposit ratings was changed to positive from stable. At the same time, Moody’s placed on review for downgrade the ꞌBaa2ꞌ long- term issuer rating of OTP Mortgage Bank Ltd., while all other ratings and assessments of OTP Mortgage Bank were affirmed. On 28 September OTP Bank’s Counterparty Risk Assessment (CRA) was upgraded from ꞌBaa2ꞌ to ꞌBaa1ꞌ, at the same time the long-term deposit rating of ꞌBaa1ꞌ and the long-term Counterparty Risk Ratings (CRR) were put on credit watch with potential upgrade. Furthermore, Moody’s upgraded OTP Mortgage Bank’s CRA rating from ꞌBaa2ꞌ to ꞌBaa1ꞌ and put on credit watch with potential upgrade its long- term CRR rating. Finally, OTP MB’s mortgage bond rating was also upgraded from ꞌA2ꞌ to ꞌA1ꞌ. On 15 November Scope Ratings assigned an issuer rating of ꞌBBB+ꞌ, preferred senior unsecured debt rating of ꞌBBB+ꞌ, non-preferred senior unsecured debt rating of ꞌBBBꞌ and Tier 2 debt rating of ꞌBB+ꞌ to OTP Bank. The outlook for all ratings is stable. On 4 March 2022 Fitch downgraded OTP Bank Russia’s rating to ꞌBꞌ and put the ratings on Rating Watch Negative. Regarding the ownership structure of the Bank, on 31 December 2021 the following investors had more than 5% influence (voting rights) in the Company: MOL (the Hungarian Oil and Gas Company, 8.67%), the Kafijat Group (7.10%) and Groupama Group (5.17%). On 29 October 2021 OPUS Securities S.A.’s previous holding and influence (voting rights) in the Company dropped to nil. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) SUMMARY OF ECONOMIC POLICY MEASURES MADE IN THE LAST PERIOD AND OTHER IMPORTANT DEVELOPMENTS, AS WELL AS POST-BALANCE SHEET EVENTS Post-balance sheet events cover the period until 17 February 2022. Hungary Against the initially planned 2 pps social security contribution cut effective from July 2022, the government reduced employers’ taxes by 4 pps already from 1 January 2022 (the 1.5% vocational training contribution was abolished and the social contribution taxes were cut by 2.5 pps). On 25 January 2022 the NBH hiked the base rate by 50 bps to 2.9%. On 27 January 2022 the NBH hiked the rate of the 1-week central bank deposit by 30 bps to 4.3%. On 15 February 2022 the CSO revealed the final GDP growth figures: accordingly, in 4Q 2021 the quarterly expansion of 2.1% was stronger than expected, lifting the annual growth rate to 7.1% in 2021 as a whole (seasonally and working day adjusted). Mr. Mihály Varga (Minister of Finance) announced that the government expects 5.9% growth for 2022. Slovenia On 2 February 2022, the Slovenian Parliament passed a law requiring banks to compensate customers for losses arising from FX rate depreciation of more than 10% in the case of CHF mortgages disbursed between 2004 and 2010. The law came into force 15 days after its Parliamentary approval, and under the law banks have 60 days to notify their customers about the reimbursement and the recalculated new instalments. SKB Banka intends to file a constitutional objection against the law, and plans to submit the appeal to the local Constitutional Court after the law’s entry into force. A provision is expected to be made in March 2022 for the potential negative impact. Russia On 11 February 2022 CBR hiked the base rate by 100 bps to 9.5%. In the second half of February 2022 an armed conflict erupted between Russia and Ukraine. Ukraine On 20 January 2022 the National Bank of Ukraine raised its key interest rate by 1 pp to 10%. In the second half of February 2022 an armed conflict erupted between Russia and Ukraine. Romania The National Bank of Romania raised the key interest rate by 25 bps on 10 January 2022, and by further 50 bps on 10 February 2022 to 2.5%. Moldova On 13 January 2022, the National Bank of Moldova raised the key interest rate by 2 pps to 8.5%. On 15 February 2022, the National Bank of Moldova raised the key interest rate by 2 pps to 10.5%. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) CONSOLIDATED AFTER TAX PROFIT BREAKDOWN BY SUBSIDIARIES (IFRS)11 Consolidated after tax profit Adjustments (total) Consolidated adjusted after tax profit without the effect of adjustments Banks total1 OTP Core (Hungary)2 DSK Group (Bulgaria)3 OBH (Croatia)4 OTP Bank Serbia5 SKB Banka (Slovenia) OTP Bank Romania6 OTP Bank Ukraine7 OTP Bank Russia8 CKB Group (Montenegro)9 OTP Bank Albania OTP Bank Moldova OBS (Slovakia)10 Leasing Merkantil Group (Hungary)11 Asset Management OTP Asset Management (Hungary) Foreign Asset Management Companies (Ukraine, Romania, Bulgaria)12 Other Hungarian Subsidiaries Other Foreign Subsidiaries13 Corporate Centre14 Eliminations Total adjusted after tax profit of HUNGARIAN subsidiaries15 Total adjusted after tax profit of FOREIGN subsidiaries16 Share of foreign profit contribution 2020 HUF million 259,636 (50,631) 2021 HUF million 456,428 (40,474) Change % 76 (20) 310,268 285,103 159,303 40,957 14,830 7,298 9,665 1,558 26,104 16,317 4,307 1,959 3,973 (1,169) 7,661 7,661 9,824 9,747 77 8,241 108 (569) (101) 184,282 125,986 41% 496,901 468,962 213,377 76,790 33,448 32,104 16,822 4,253 39,024 37,624 4,140 5,522 5,858 - 7,998 7,998 6,321 6,116 205 10,205 50 2,887 479 241,062 255,839 51% 60 64 34 87 126 340 74 173 49 131 (4) 182 47 4 4 (36) (37) 166 24 (54) (608) (574) 31 103 11 11 Belonging footnotes are in the Supplementary data section of the Report. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) CONSOLIDATED STATEMENT OF PROFIT OR LOSS Main components of the adjusted Statement of recognized income Consolidated after tax profit Adjustments (total) Dividends and net cash transfers (after tax) Goodwill/investment impairment charges (after tax) Special tax on financial institutions (after corporate income tax) Expected one-off negative effect of the debt repayment moratorium in Hungary and Serbia (after corporate income tax) Effect of acquisitions (after tax) Result of the treasury share swap agreement (after tax) Consolidated adjusted after tax profit without the effect of adjustments Before tax profit Operating profit Total income Net interest income Net fees and commissions Other net non-interest income Foreign exchange result, net Gain/loss on securities, net Net other non-interest result Operating expenses Personnel expenses Depreciation Other expenses Total risk costs Provision for impairment on loan and placement losses Other provision Total one-off items Result of the treasury share swap agreement at OTP Core Corporate taxes Indicators ROE (from accounting net earnings) ROE (from adjusted net earnings) ROA (from adjusted net earnings) Operating profit margin Total income margin Net interest margin Net fee and commission margin Net other non-interest income margin Cost-to-asset ratio Cost/income ratio Provision for impairment on loan and placement losses-to-average gross loans Total risk cost-to-asset ratio Effective tax rate Non-interest income/total income EPS base (HUF) (from unadjusted net earnings) EPS diluted (HUF) (from unadjusted net earnings) EPS base (HUF) (from adjusted net earnings) EPS diluted (HUF) (from adjusted net earnings) Comprehensive Income Statement Consolidated after tax profit Fair value changes of financial instruments measured at fair value through other comprehensive income Fair value adjustment of derivative financial instruments designated as cash-flow hedge Net investment hedge in foreign operations Foreign currency translation difference Change of actuarial costs (IAS 19) Net comprehensive income o/w Net comprehensive income attributable to equity holders Net comprehensive income attributable to non-controlling interest Average exchange rate1 of the HUF HUF/EUR HUF/CHF HUF/USD 2020 259,636 (50,631) 213 886 (17,365) (28,262) (6,852) 310,268 351,802 537,437 1,169,920 788,079 293,112 88,729 44,927 14,193 29,610 (632,483) (312,495) (70,286) (249,702) (187,995) (158,421) (29,574) 2,360 2,360 (41,534) 2020 10.9% 13.0% 1.4% 2.47% 5.37% 3.61% 1.34% 0.41% 2.90% 54.1% 1.15% 0.86% 11.8% 33% 1,004 1,003 1,200 1,200 2020 259,636 2021 456,428 (40,474) 729 1,909 (18,893) (15,040) (15,506) 6,326 496,902 587,853 660,391 1,313,124 884,012 325,548 103,563 44,251 9,726 49,586 (652,733) (340,201) (72,816) (239,716) (72,538) (46,006) (26,532) - - (90,951) 2021 17.0% 18.5% 2.0% 2.62% 5.21% 3.51% 1.29% 0.41% 2.59% 49.7% 0.30% 0.29% 15.5% 33% 1,739 1,738 1,896 1,896 2021 456,428 (4,764) (44,877) (2) (8,591) 68,593 144 315,016 315,239 (223) 2020 HUF 351 328 308 0 0 61,729 42 473,322 472,281 1,041 2021 HUF 359 332 303 Change % 76 (20) 243 116 9 (47) 126 60 67 23 12 12 11 17 (2) (31) 67 3 9 4 (4) (61) (71) (10) 119 %/pps 6.1 5.5 0.5 0.16 (0.15) (0.11) (0.05) 0.00 (0.31) (4.4) (0.84) (0.57) 3.7 0 73 73 58 58 % 76 842 (100) (100) (10) (71) 50 50 (567) Change % 2 1 (2) 1 Exchange rates presented in the tables of this report should be interpreted as follows: the value of a unit of the other currency expressed in Hungarian forint terms, i.e. HUF/EUR represents the HUF equivalent of one EUR. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) ASSET-LIABILITY MANAGEMENT Similar to previous periods OTP Group maintained a strong and safe liquidity position… The primary objective of OTP Bank in terms of asset-liability management has not changed, that is to ensure that the Group’s liquidity is maintained at a safe level. Refinancing sources of the European Central Bank are available for OTP (ECB repo eligible security portfolio on Group level exceeded EUR 2 billion). Total liquidity reserves of OTP Bank remained steadily and substantially above the safety level. As of 31 December 2021 the gross liquidity buffer was around EUR 9.1 billion equivalent. The level of these buffers is significantly higher than the maturing debt within one year and the reserves required to manage possible liquidity shocks. As of 30 December 2021 OTP Group consolidated liquidity coverage (LCR) ratio was 180% (4Q 2020: 214%, 2Q 2021: 212%) while NSFR compliance has remained comfortable (2Q 2021: 135%, 4Q 2021: 137%). The volume of issued securities decreased on a consolidated basis by HUF 28 billion y-o-y, mainly because of the change of net volume of mortgage bonds issued by OTP Mortgage Bank and the redemption of corporate and retail bonds issued by OTP Bank in the total amount of approximately HUF 9 billion. The redemption of ICES bonds issued by OPUS Securities S.A. was accounted for in the equity. The temporary negative effect of ICES redemption on the Group’s liquidity position was counterbalanced as OTP Bank treasury shares were transferred from OPUS Securities, the issuer of ICES, to OTP Bank, which thus have become saleable and majority of those were sold to the Special Employee Partial Ownership Plan Organizations in December 2021. …and kept its interest-rate risk exposures low Interest-rate risk exposure of OTP Group is determined primarily by the positions of OTP Bank Plc. and OTP Mortgage Bank Ltd. Due to the forint liabilities on OTP Bank’s balance sheet, which respond to yield changes only to a moderate extent, the Bank has an interest-rate risk exposure resulting from its business operations. The Bank considers the reduction and closing of this exposure as a strategic matter. Consequently, it has been reducing its interest-rate risk exposure through the purchase of fixed-rate government securities in order to offset the negative impact of declining yields on net interest income. The increase of BUBOR is almost completely reflected in the interest rate of the variable rate forint assets of the Bank within 6 months: the loans get repriced typically in 3 months, the interest rate swaps (IRS) in 6 months, and other liquid assets within 1-3 months. On the deposit side the repricing is not automatic, its extent and speed depends on the level of interest rates and the liquidity postition of the Bank. The already manifested rate and yield increases in 2021 in Hungary exert a positive effect on the net interest income. Market Risk Exposure of OTP Group The consolidated capital requirement of the trading book positions, the counterparty risk and the FX risk exposure represented HUF 31.3 billion in total. OTP Group is an active participant of the international FX and derivative market. Open FX positions of group members are restricted to individual and global net open position limits (overnight and intraday), and to stop-loss limits. The open positions of the group members outside Hungary except for the Bulgarian DSK Bank – the EUR/BGN exposure of DSK under the current exchange rate regime does not represent real risk – were negligible measured against either the balance sheet total or the regulatory capital. Therefore, the group level FX exposure was concentrated at OTP Bank. In the last couple of years the main part of the FX exposure at OTP Bank was the strategic open FX position (EUR 310 million), kept in order to hedge the currency risk of the expected FX-denominated net earnings of the main foreign subsidiaries. In the course of 2021 the strategic open FX position was fully closed in accounting meaning. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) CONSOLIDATED STATEMENT OF FINANCIAL POSITION OF OTP GROUP Main components of the adjusted balance sheet TOTAL ASSETS Cash, amounts due from Banks and balances with the National Banks Placements with other banks, net of allowance for placement losses Financial assets at fair value through profit or loss Securities at fair value through other comprehensive income Net customer loans Net customer loans (FX adjusted1) Gross customer loans Gross customer loans (FX adjusted1) Gross performing (Stage 1+2) customer loans (FX-adjusted1) o/w Retail loans Retail mortgage loans (incl. home equity) Retail consumer loans SME loans Corporate loans Leasing Allowances for loan losses Allowances for loan losses (FX adjusted1) Associates and other investments Securities at amortized costs Tangible and intangible assets, net o/w Goodwill, net Tangible and other intangible assets, net Other assets TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY Amounts due to banks, the National Governments, deposits from the National Banks and other banks, and Financial liabilities designated at fair value through profit or loss Deposits from customers Deposits from customers (FX adjusted1) o/w Retail deposits Household deposits SME deposits Corporate deposits Accrued interest payable related to customer deposits Liabilities from issued securities o/w Retail bonds Liabilities from issued securities without retail bonds Other liabilities Subordinated bonds and loans2 Total shareholders' equity Indicators Loan/deposit ratio (FX adjusted1) Net loan/(deposit + retail bond) ratio (FX adjusted1) Stage 1 loan volume under IFRS 9 Stage 1 loans under IFRS9/gross customer loans Own coverage of Stage 1 loans under IFRS 9 Stage 2 loan volume under IFRS 9 Stage 2 loans under IFRS9/gross customer loans Own coverage of Stage 2 loans under IFRS 9 Stage 3 loan volume under IFRS 9 Stage 3 loans under IFRS9/gross customer loans Own coverage of Stage 3 loans under IFRS 9 90+ days past due loan volume 90+ days past due loans/gross customer loans Consolidated capital adequacy - Basel3 Capital adequacy ratio (consolidated, IFRS) Tier1 ratio Common Equity Tier 1 ('CET1') capital ratio Regulatory capital (consolidated) o/w Tier1 Capital o/w Common Equity Tier 1 capital Tier2 Capital o/w Hybrid Tier2 Consolidated risk weighted assets (RWA) (Credit&Market&Operational risk) o/w RWA (Credit risk) RWA (Market & Operational risk) Closing exchange rate of the HUF HUF/EUR HUF/CHF HUF/USD 2020 HUF million 23,335,841 2,432,314 1,148,987 235,194 2,140,118 13,528,586 13,730,752 14,363,281 14,575,916 13,736,409 7,619,159 3,585,272 3,290,818 743,068 5,065,053 1,052,197 (834,695) (845,164) 52,444 2,625,952 589,878 101,393 488,485 582,368 23,335,841 2021 HUF million 27,553,384 2,556,035 1,584,860 341,397 2,224,510 15,743,922 15,743,922 16,634,454 16,634,454 15,756,503 8,560,531 4,123,484 3,739,128 697,919 6,025,106 1,170,866 (890,532) (890,532) 67,223 3,891,335 689,290 105,640 583,650 454,811 27,553,384 1,219,446 1,608,533 17,890,863 18,152,563 12,992,703 10,774,361 2,218,342 5,151,386 8,474 464,214 1,326 462,888 949,502 274,704 2,537,112 2020 80% 76% 11,544,791 80.4% 1.0% 1,998,867 13.9% 10.4% 819,622 5.7% 62.3% 543,733 3.8% 2020 17.7% 15.4% 15.4% 2,669,806 2,316,118 2,316,118 353,688 89,935 15,046,888 13,389,536 1,657,352 2020 365 337 297 21,068,644 21,068,644 14,297,453 11,897,580 2,399,873 6,762,795 8,396 436,325 0 436,325 1,124,782 278,334 3,036,766 2021 79% 75% 13,561,883 81.5% 1.0% 2,194,620 13.2% 10.0% 877,951 5.3% 60.5% 535,445 3.2% 2021 19.1% 17.5% 17.5% 3,191,765 2,926,882 2,926,882 264,883 0 16,691,315 14,992,797 1,698,518 2021 369 357 326 Change % 18 5 38 45 4 16 15 16 14 15 12 15 14 (6) 19 11 7 5 28 48 17 4 19 (22) 18 32 18 16 10 10 8 31 (1) (6) (100) (6) 18 1 20 pps (1) (1) 17 1.2 0.0 10 (0.7) (0.4) 7 (0.4) (1.8) (2) (0.6) %/pps 1.4 2.1 2.1 20 26 26 (25) (100) 11 12 2 Change % 1 6 10 1 Exchange rates presented in the tables of this report should be interpreted as follows: the value of a unit of the other currency expressed in Hungarian forint terms, i.e. HUF/EUR represents the HUF equivalent of one EUR. 2 The ICES bonds were considered as Tier2 debt, but accounting-wise they were treated as part of the shareholders’ equity until 2Q 2021, but in 3Q 2021 the ICES bonds are no longer part of the shareholders’ equity. In the wake of the redemption of the ICES bonds announced on 14 September 2021, at the end of 3Q the HUF equivalent of ICES bonds (using the FX rate of 14 September) was recognized within the Other liabilities (HUF 179.8 billion) both on OTP Bank standalone and consolidated level, and within the consolidated shareholders’ equity the other reserves declined by HUF 89.9 billion and the retained earnings by HUF 89.9 billion. The ICES bonds were redeemed on 29 October 2021. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) OTP BANK’S HUNGARIAN CORE BUSINESS OTP Core Statement of recognized income: Main components of the Statement of recognised income After tax profit without the effect of adjustments Corporate income tax Pre-tax profit Operating profit Total income Net interest income Net fees and commissions Other net non-interest income Operating expenses Total risk costs Provision for impairment on loan and placement losses Other provisions Total one-off items Revaluation result of the treasury share swap agreement Indicators ROE ROA Operating profit margin Total income margin Net interest margin Net fee and commission margin Net other non-interest income margin Operating costs to total assets ratio Cost/income ratio Provision for impairment on loan and placement losses/average gross loans1 Effective tax rate 2020 HUF million 159,303 (16,558) 175,860 181,178 453,634 286,448 130,470 36,717 (272,457) (7,677) 2,374 (10,052) 2,360 2,360 2020 9.3% 1.5% 1.7% 4.34% 2.74% 1.25% 0.35% 2.6% 60.1% (0.06%) 9.4% 2021 HUF million 213,377 (40,594) 253,972 257,182 546,215 369,309 150,578 26,328 (289,034) (3,210) (1,116) (2,094) - - 2021 11.6% 1.6% 2.0% 4.22% 2.85% 1.16% 0.20% 2.2% 52.9% 0.02% 16.0% Change % 34 145 44 42 20 29 15 (28) 6 (58) (147) (79) pps 2.3 0.1 0.3 (0.12) 0.11 (0.08) (0.15) (0.4) (7.1) 0.08 6.6 1 Negative Provision for impairment on loan and placement losses/average gross loans ratio implies positive amount on the Provision for impairment on loan and placement losses line. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) Main components of OTP Core’s Statement of financial position: Main components of balance sheet closing balances Total Assets Net customer loans Net customer loans (FX adjusted) Gross customer loans Gross customer loans (FX adjusted) Stage 1+2 customer loans (FX-adjusted) Retail loans Retail mortgage loans (incl. home equity) Retail consumer loans SME loans Corporate loans Provisions Provisions (FX adjusted) Deposits from customers + retail bonds Deposits from customers + retail bonds (FX adjusted) Retail deposits + retail bonds Household deposits + retail bonds o/w: Retail bonds SME deposits Corporate deposits Liabilities to credit institutions Issued securities without retail bonds Total shareholders' equity Loan Quality Stage 1 loan volume under IFRS 9 (in HUF million) Stage 1 loans under IFRS 9/gross customer loans Own coverage of Stage 1 loans under IFRS 9 (%) Stage 2 loan volume under IFRS 9 (in HUF million) Stage 2 loans under IFRS 9/gross customer loans Own coverage of Stage 2 loans under IFRS 9 (%) Stage 3 loan volume under IFRS 9 (in HUF million) Stage 3 loans under IFRS 9/gross customer loans Own coverage of Stage 3 loans under IFRS 9 (%) 90+ days past due loan volume (in HUF million) 90+ days past due loans/gross customer loans Market Share Loans Deposits Total Assets Performance Indicators Net loans to (deposits + retail bonds) (FX adjusted) Leverage (closing Shareholder's Equity/Total Assets) Leverage (closing Total Assets/Shareholder's Equity) Capital adequacy ratio (OTP Bank, non-consolidated, Basel3, IFRS) Common Equity Tier1 ratio (OTP Bank, non-consolidated, Basel3, IFRS) 2020 HUF million 11,492,949 4,415,778 4,425,421 4,631,974 4,642,248 4,449,398 2,797,121 1,437,243 995,361 364,517 1,652,277 (216,196) (216,828) 8,083,488 8,122,814 5,394,876 4,254,102 1,326 1,140,774 2,727,938 858,230 513,860 1,766,639 2020 3,606,490 77.9% 0.8% 833,163 18.0% 10.1% 192,321 4.2% 54.5% 144,816 3.1% 2020 22.9% 25.3% 25.8% 2020 54% 15.4% 6.5x 26.7% 22.5% 2021 HUF million 14,207,399 5,310,327 5,310,327 5,549,248 5,549,248 5,293,960 3,320,579 1,613,416 1,246,723 460,440 1,973,381 (238,921) (238,921) 10,124,795 10,124,795 6,261,808 4,870,560 0 1,391,247 3,862,988 1,117,086 531,471 2,011,932 2021 4,327,232 78.0% 1.0% 966,727 17.4% 8.9% 255,288 4.6% 42.7% 136,003 2.5% 2021 24.4% 28.2% 26.9% 2021 52% 14.1% 7.1x 25.1% 21.8% Change % 24 20 20 20 20 19 19 12 25 26 19 11 10 25 25 16 14 (100) 22 42 30 3 14 %/pps 20 0.1 0.3 16 (0.6) (1.2) 33 0.4 (11.8) (6) (0.7) pps 1.5 2.9 1.1 pps (2) (1.2) 0.6x (1.6) (0.7) In June 2021, OTP Home Solutions was added to the range of companies that make up OTP Core; its balance sheet total was HUF 1.6 billion at the end of 2021. P&L developments In 2021 OTP Core's adjusted after-tax profit amounted to HUF 213.4 billion, 34% more than a year earlier. Starting from 2021, the local business tax and the innovation contribution paid by Hungarian Group members are presented on the corporate income tax line, rather than under operating expenses, in the adjusted P&L structure. At OTP Core, the local business tax and the innovation contribution amounted to HUF 15.2 billion in 2020 (presented under operating expenses), and to HUF 17.4 billion in 2021 (shown on the corporate income tax line). This item caused much of the increase in the annual effective corporate income tax rate. The above item explained 3.2 pps from the 7.1 pps improvement in the annual cost/income ratio, which would have decreased nearly 4 pps even without this technical effect, as income growth outpaced that of operating expenses. The full-year operating profit jumped by 42%. Even without the above reclassification affecting operating expenses, operating profit would have improved by 34%. Net interest income grew at an accelerating pace, by 29% y-o-y in 2021. This could be largely ascribed to the continued dynamic growth in business volumes, as well as to last year’s reversal of net interest margin’s erosion: it has risen by 11 bps y-o-y in full year 2021. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) The main reason for the favourable turn in the net interest margin development was that rising reference rates’ benign effect on interest revenues was more and more visible in the second half of the year. Overall, the effect of rising reference rates is reflected in the asset-side interest rates with a certain delay; what is more, the time lag in the repricing of variable-rate assets (mortgage and corporate loans with variable rates, central bank deposits, and government securities swapped to variable-rate) is also different. Of the short- term interbank interest rates, which are typically the reference rates for variable rate loans, the 3M BUBOR increased to 77 bps by end-March, to 105 bps by end-June, to 176 bps by end-September, and to 421 bps by end-December (from 75 bps at the end of 2020), while its quarterly average was 76 bps in 1Q, 87 bps in 2Q, 139 bps in 3Q, and 277 bps in 4Q 2021. The 3M BUBOR hit 459 bps on 17 February 2022. Likewise, the 6M BUBOR printed a similar pattern, hitting 479 bps on 17 February. Most of the deposits kept with the central bank was held in its one-week instrument; it amounted to HUF 750 billion at the end of 2021. Also, two one-off effects emerging in 1Q 2021 (a technical effect relating to the accounting of the loan repayment moratorium, and the repricing of cash loans for regulatory reasons) exerted a positive impact on the margin development, as they elevated the margin level in the first quarter, but have not helped the margin dynamics since then. On the other hand, partly as a result of the strong competition, the erosion of product-level spreads typically continued in the case of newly disbursed loans, adversely affecting the margin development. In 2021 as a whole, the changes in the balance sheet structure had an overall neutral effect on the y-o-y margin dynamics: although due to the sustained dynamic growth in deposits the weight of financial assets carrying lower margins than loans increased in the balance sheet (partly at the expense of loans), but the share of non-interest-bearing assets was in downtrend in recent quarters, and the weight of consumer loans within total loans grew, too. As a negative development, for the period between 1 January – 30 June 2022 the government introduced an interest rate cap for variable-rate retail mortgage loans, and with its decision announced on 18 February, for housing purposes financial leasing contracts, too. Accordingly, the affected exposures’ reference rate cannot be higher than the relevant reference rate as at 27 October 2021. Furthermore, according to Government Decree 537/2021. (IX. 15.) published on 15 September, credit institutions shall re-calculate the interest deferred during the period spent in the moratorium in the case of overdraft loans and credit card exposures. The base for the re-calculation shall be the NBH’s statistical data for the average annualized cash loan interest rate published for February 2020. The difference between the deferred interest booked according to the original contract and the re-calculated amount shall be refunded to the borrowers by way of crediting the borrowers’ account with the due amount. In the adjusted P&L structure, the negative effect of this regulatory change wa presented amongst the adjustment items, on the Expected one-off negative effect of the debt repayment moratorium in Hungary and Serbia line. Net fees and commissions rose by 15% y-o-y in 2021. The improvement can be attributed to the double- digit growth rate of commissions on deposits, transactions, cards, lending, as well as securities sales, fuelled by the strengthening economic activity compared to the base period. One-off items reduced the y-o-y growth of net fees and commissions by a total of HUF 3 billion. The annual other net non-interest income dropped by 28%, or nearly HUF 10 billion. This can be explained mainly by two items: the weaker foreign exchange result in 2Q 2021, and the weaker securities result in 4Q 2021, latter owing to the sale of government securities. The development of other income was also influenced by the fact that, starting from 2021, the recoveries from claims written off at OTP Factoring for legal reasons (e.g. irretraceable borrower, time-barred debt) are presented amongst other income, rather than under risk costs. Operating expenses grew by 6% y-o-y in 2021. In the reporting period, there were three major one-off or technical items that affected costs: first, starting from 2021, the local business tax and the innovation contribution (HUF 17.4 billion in 2021) are presented as part of corporate income tax, rather than under operating expenses. Second, in the second quarter, the provisions for untaken holidays on a pro rata temporis basis were moved to personnel expenses from the other risk costs line, and simultaneously, the HUF 3.1 billion amount for all such untaken holidays was recorded in 2Q. Third, in 4Q 2021, in the case of certain expected future bonus payments, the expected amount on a longer time horizon and according to model calculations was booked in a lump sum, against the previous practice of recognising the expected payments over the next12 months. This item explained HUF 5.4 billion increase in personnel expenses in 2021 y-o-y. Without items, expenses would have grown by 9% y-o-y, partly owing to higher personnel expenses (due to a 2% increase in annual average headcount and the implemented wage hikes), the steady rise in depreciation on the back of IT and digital development, as well as higher other expenses (due to stronger business activity, higher cost of hardware, office equipment, and other services, and supervisory fees increased by HUF 3.8 billion y-o-y). the effect of these three ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) On the whole, underlying credit quality trends were favourable in 2021. In 2021 total risk costs amounted to -HUF 3.2 billion (down from -HUF 7.7 billion in 2020), including -HUF 2.1 billion other risk costs partly relating to provisions for securities, while credit risk costs amounted to -HUF 1.1 billion. The main reason for the positive amount of total risk costs in the first two quarters was the continued recoveries on retail claims managed by OTP Faktoring, but these recoveries followed a declining path during the year. In the third quarter, nearly HUF 3 billion additional credit risk cost emerged as a result of the reclassification of certain corporate loans participating in the moratorium into the riskier Stage 2 bucket, in accordance with the more conservative approach applied by the Bank. In the fourth quarter, HUF 7.8 billion credit risk cost (the highest since 1Q 2020) weighed on profit. In the last quarter, credit risk costs were adversely affected by the additional provisions allocated to exposures participating in the extended moratorium: borrowers who applied for the extended loan repayment moratorium starting from November were reclassified into riskier categories (Stage 2 or Stage 3), based on the Bank’s assessment; moreover, the impairment parameters were also revised. In 2021, the loan repayment moratorium was first extended by three months (until the end of September 2021), then by one more month (until end-October), with unchanged terms and conditions. Between November 2021 and June 2022, only eligible borrowers who had applied for it at their bank in October 2021 are entitled to participate in the moratorium. At OTP Core, the volume of loans subject to the debt repayment moratorium was in downtrend in 2021: At the end of 2020 HUF 1,760 billion, at the end of 3Q 2021 HUF 1,286 billion, and at the end of 2021 HUF 237 billion worth of loans participated in the loan repayment moratorium; the latter makde up 4.3% of OTP Core’s total gross loan portfolio. Partly as a result of the above mentioned one-timer effects, at the end of 2021 the ratio of Stage 3 loans stood at 4.6%, while the Stage 2 ratioat 17.4%. At the end of the year the aggregated own provision coverage of the Stage 1+2 portfolio stood at 2.5%, while the own provision coverage of Stage 3 loans at 42.7%. The volume of more than 90 days past due (DPD90+) loans declined by HUF 5 billion both in full year 2020 and by HUF 1 billion in 2021 as a whole (FX-adjusted, without sales/write-offs and the revaluation of Faktoring’s claims). In 2021, HUF 10 billion non-performing loans were sold/written off (FX-adjusted). Balance sheet trends OTP Core’s balance sheet total grew by 24% y-o-y or more than HUF 2,700 billion in 2021. Most of this year-over-year increase stemmed from the inflow of deposits (+25%, or +HUF 2,040 billion), and a smaller part came from interbank liabilities’ increase (+30% y-o-y, +HUF 260 billion); the latter was partly explained by the expansion of loan volumes under the Funding for Growth scheme refinanced by the central bank. In full year 2021, the nominal growth in customer deposits significantly exceeded the increase in loans, which crystallized in the further rise in the volume of financial and other liquid assets. In 2021, the share of financial assets on OTP Core’s assets side rose by 4.3 pps y-o-y on average, while that of non-interest- bearing assets dropped by 2.6 pps, and the weight of net loans shrank by 1.7 pps. Performing (Stage 1+2) loans increased dynamically, this brought the full-year growth to 19% (FX-adjusted), of which 3 pps increase could be ascribed to the volume-boosting effect of the moratorium. Much of the yearly growth came from the government's and the national bank’s subsidized loan programmes (baby loan, CSOK subsidized housing loan, green mortgage loan, home renovation loan, Funding for Growth Go!, Széchenyi Card Go!). Regarding individual product categories, performing consumer loans jumped by 25% y-o-y. Within consumer loans, baby loans remained highly popular: in whole year 2021, the newly contracted amount at OTP Bank hit HUF 232 billion; this was consistent with a market share of 42.1% in 2021. In the case of cash loans, market pricing has been in effect since the beginning of 2021, as the regulatory interest rate cap expired. New cash loan placements grew by 50% last year. OTP Bank's market share in cash loan disbursements reached 38.4% in 2021, against 34.8% in full year 2020. All in all, performing cash loan volumes expanded by 17% y-o-y. To help borrowers take advantage of the government's home renovation subsidy, OTP made available both the mortgage-backed subsidized home renovation loan (from the beginning of February 2021) and the Bank's own unsecured home renovation cash loan product (from March 2021). By the end of December, loan applications for the unsecured product amounted to HUF 16 billion, and those for the secured product was close to HUF 37 billion. Because of its collateralized nature, the subsidized home renovation loan is presented among mortgage loans in the product structure, whereas the unsecured home renovation loan is shown under consumer loans. As for mortgage loans, the strong demand persisted: applications grew by 55% in full year 2021 HUF 43 billion of the applications () were for green housing loans with subsidized interest rates, under the central ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) bank’s FGS Green Home programme launched in October 2021. OTP Bank's market share in new mortgage loan contractual amounts was 31.5% in 2021 (against 32% in 2020). The Bank's corporate lending activity remained strong, largely because of the Funding for Growth Go! scheme launched by the Magyar Nemzeti Bank in April 2020. By the end of September 2021, the FGS Go! contracted amount reached the HUF 3,000 billion available amount at sector level, thus the programme was phased out by the central bank. Since the launch of this scheme, OTP Bank’s contracted amounts exceeded HUF 752 billion, which resulted in a market share of 26%. Because of the phasing out of the FGS Go! programme, in July 2021 the government introduced subsidized lending programmes for micro and small enterprises through the KAVOSZ Széchenyi Card scheme. Under the programme, by the end of December OTP Bank signed loan agreements worth more than HUF 130 billion. Overall, in 2021 at OTP core the outstanding expansion of loans to micro and small enterprises continued: their performing volumes surged 26% y-o-y (FX-adjusted), partly bolstered by the FGS Go! programme, which has already been ended. Performing corporate loans grew by 19% y-o-y (FX-adjusted). OTP Core’s 12-month customer deposit growth rate was 25% (FX-adjusted). Within this, the 42% jump in corporate deposits was outstanding, but retail deposits also increased by 14%. The net loan/deposit ratio stood at 52% at the end of 2021, marking a 2 pps y-o-y contraction. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) OTP FUND MANAGEMENT (HUNGARY) Changes in assets under management and financial performance of OTP Fund Management: After tax profit w/o dividends and net cash transfer Main components of P&L account Income tax Profit before income tax Operating profit Total income Net fees and commissions Other net non-interest income Operating expenses Other provisions Main components of balance sheet closing balances Total assets Total shareholders' equity Asset under management Assets under management, total (w/o duplicates)1 Volume of investment funds (closing, w/o duplicates) Volume of managed assets (closing) Volume of investment funds (closing, with duplicates)2 bond absolute return fund equity mixed commodity market guaranteed money market 2020 HUF million 9,747 (915 10,662 10,662 14,453 14,154 299 (3,791) (1) 2021 HUF million 6,116 (788) 6,904 6,918 10,044 9,799 245 (3,125) (14) 2020 2021 33,210 16,425 2020 HUF billion 1,201 828 373 1,183 376 374 248 133 28 20 5 24,988 12,792 2021 HUF billion 1,331 942 389 1,479 444 300 342 345 37 5 4 Change % (37) (14) (35) (35) (31) (31) (18) (18) % (25) (22) % 11 14 4 25 18 (20) 38 160 33 (73) (21) 1 The cumulative net asset value of investment funds and managed assets of OTP Fund Management, eliminating the volume of own investment funds (duplications) being managed in other investment funds and managed assets of OTP Fund Management. 2 The cumulative net asset value of investment funds with duplications managed by OTP Fund Management. In 2021, OTP Fund Management generated more than HUF 6 billion profit, 37% less than in 2020. The annual profit was shaped by the 31% y-o-y drop in fees and commissions, as the success fee revenues from funds with above-benchmark performance fell short of the 4Q 2020 level: while HUF 7.3 billion success fee was recorded in the 2020 base period, less than a third of that, HUF 1.9 billion was realized on the fund management activity in 2021. Last year the other income dropped by 18% y-o-y owing to two factors: the revaluation result of the investment units in the Company’s own books improved, which was offset by the decline in foreign exchange result. Last year 18% cost saving was achieved within that personnel expenses came down 21% y-o-y, in sync with the decline in bonus payments for funds’ performance. In 2021, the market of Hungarian investment funds was rather hectic: the accelerating inflation and interest rate hikes by the central banks transformed the structure of investment funds. Equity funds were the most successful ones last year: two of Hungary’s top three equity funds by assets under management, OTP Quality Fund and OTP Climate Change Fund, are both managed by the Company. Although bond funds’ performance was adversely affected by the rising yield environment, the capital influx helped their volumes further expand y-o-y. Overall, regarding the whole portfolio, the total wealth managed by OTP Fund Management expanded further, by 25% y-o-y. The Company's markets share rose by 1.3 pps y-o-y, to 26.0% by end-December 2021, thus preserving its leadership in the securities funds market. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) MERKANTIL GROUP (HUNGARY) Performance of Merkantil Group: Main components of P&L account After tax profit without the effect of adjustments Income tax Profit before income tax Operating profit Total income Net interest income Net fees and commissions Other net non-interest income Operating expenses Total provisions Provision for impairment on loan and placement losses Other provision Main components of balance sheet closing balances Total assets Gross customer loans Gross customer loans (FX-adjusted) Stage 1+2 customer loans (FX-adjusted) Retail loans Corporate loans Leasing Allowances for possible loan losses Allowances for possible loan losses (FX-adjusted) Deposits from customers Deposits from customer (FX-adjusted) Retail deposits Corporate deposits Liabilities to credit institutions Total shareholders' equity Loan Quality Stage 1 loan volume under IFRS 9 (in HUF million) Stage 1 loans under IFRS 9/gross customer loans Own coverage of Stage 1 loans under IFRS 9 Stage 2 loan volume under IFRS 9 (in HUF million) Stage 2 loans under IFRS 9/gross customer loans Own coverage of Stage 2 loans under IFRS 9 Stage 3 loan volume under IFRS 9 (in HUF million) Stage 3 loans under IFRS 9/gross customer loans Own coverage of Stage 3 loans under IFRS 9 Provision for impairment on loan and placement losses/average gross loans 90+ days past due loan volume (in HUF million) 90+ days past due loans/gross customer loans Performance Indicators ROA ROE Total income margin Net interest margin Operating costs / Average assets Cost/income ratio 2020 HUF million 7,661 (956) 8,617 10,280 21,283 17,688 40 3,555 (11,004) (1,663) (1,491) (171) 2020 667,120 416,987 417,282 402,526 6,993 51,520 344,013 (12,874) (12,888) 9,344 9,344 6,071 3,273 584,944 52,553 2020 343,668 82.4% 0.2% 58,592 14.1% 3.8% 14,727 3.5% 66.5% 0.38% 8,971 2.2% 2020 1.3% 15.7% 3.58% 2.97% 1.8% 51.7% 2021 HUF million Change % 7,998 (918) 8,916 11,961 23,291 20,680 116 2,495 (11,330) (3,045) (3,093) 48 2021 782,222 444,549 444,549 431,714 4,866 46,870 379,977 (14,230) (14,230) 8,198 8,198 5,166 3,032 688,675 59,246 2021 334,732 75.3% 0.4% 96,982 21.8% 5.3% 12,836 2.9% 60.0% 0.71% 5,852 1.3% 2021 1.0% 14.3% 3.05% 2.71% 1.5% 48.6% 4 (4) 3 16 9 17 187 (30) 3 83 107 (128) % 17 7 7 7 (30) (9) 10 11 10 (12) (12) (15) (7) 18 13 %/pps (3) (7.1) 0.2 66 7.8 1.5 (13) (0.6) (6.5) 0.33 (35) (0.8) pps (0.2) (1.4) (0.52) (0.26) (0.4) (3.1) The table presents the sub-consolidated performance of Merkantil Group, whose members are: Merkantil Bank Ltd., Merkantil Bérlet Ltd., NIMO 2002 Ltd., SPLC-P Ingatlanfejlesztő, Ingatlanhasznosító Ltd., SPLC Vagyonkezelő Ltd., and OTP Ingatlanlízing Ltd. In 2021, Merkantil Group posted HUF 8 billion adjusted after-tax profit, which brought its ROE to 14.3%. The 4% y-o-y profit growth stemmed from the 16% y-o-y improvement in operating profit, which was offset by the jump in risk costs. In 2021, net interest income grew by 17% y-o-y driven by the 7% y-o-y increase in performing loans and a 32% surge in financial assets, while annual net interest margin declined by 26 bps y-o-y. Annual operating expenses rose by 3% y-o-y. Without the effect of the local business tax and innovation contribution being presented on the corporate income tax line instead of costs starting from 2021, this rate would be 8%. Most of the underlying cost growth could be attributed to personnel and vehicle-related expenses, as well as higher supervisory fees. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) In 2021 total risk costs amounted to -HUF 3 billion. This was predominantly the result of the revision of the IFRS 9 model parameters, and of the additional loan loss provisions for the loans that remained in the extended moratorium from November 2021. Customers who had indicated their decision to remain in the moratorium were reclassified to riskier categories (Stage 2 or Stage 3), which resulted in additional loan loss provisions. At the end of the year, Merkantil Group’s loan volumes that participated in the moratorium amounted to HUF 8.3 billion, which represented 2% of total gross loans. As a result, the ratio of Stage 3 loans was 2.9% as at the end of 2021, yet it fell by 0.6 pp y-o-y. The own provision coverage of Stage 3 loans dropped to 60.6%. The own provision coverage of Stage 2 loans stood at 5.4% (+1.6 pps y-o-y). The volume of 90 days past due loans fell by HUF 0.7 billion (FX-adjusted, without sales/write-offs) in 2021. FX-adjusted performing (Stage 1+2) loans increased by 7% y-o-y Its dynamics benefited from the central bank’s Funding for Growth Scheme Go! programme launched in April 2020, under which Merkantil Bank’s contracted amount hit HUF 74 billion. Due to the termination of FGS Go!, since the beginning of July 2021 the government has been providing preferential, interest-subsidized funds to micro- and small enterprises through the KAVOSZ Széchenyi Card scheme. Under the programme, Merkantil Bank contracted more than HUF 32 billion in loans by the end of December. Merkantil Bank remained the market leader in both new loan placements and volumes. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) IFRS REPORTS OF THE MAIN FOREIGN SUBSIDIARIES OF OTP BANK DSK GROUP (BULGARIA) Performance of DSK Group: Main components of P&L account After tax profit without the effect of adjustments Income tax Profit before income tax Operating profit Total income Net interest income Net fees and commissions Other net non-interest income Operating expenses Total provisions Provision for impairment on loan and placement losses Other provision Main components of balance sheet closing balances Total assets Gross customer loans Gross customer loans (FX-adjusted) Stage 1 + 2 customer loans (FX-adjusted) Retail loans Corporate loans Car financing loans Allowances for possible loan losses Allowances for possible loan losses (FX-adjusted) Deposits from customers Deposits from customers (FX-adjusted) Retail deposits Corporate deposits Liabilities to credit institutions Total shareholders' equity Loan Quality Stage 1 loan volume under IFRS 9 (in HUF million) Stage 1 loans under IFRS 9/gross customer loans Own coverage of Stage 1 loans under IFRS 9 Stage 2 loan volume under IFRS 9 (in HUF million) Stage 2 loans under IFRS 9/gross customer loans Own coverage of Stage 2 loans under IFRS 9 Stage 3 loan volume under IFRS 9 (in HUF million) Stage 3 loans under IFRS 9/gross customer loans Own coverage of Stage 3 loans under IFRS 9 Provision for impairment on loan and placement losses/average gross loans 90+ days past due loan volume (in HUF million) 90+ days past due loans/gross customer loans Performance Indicators ROA ROE Total income margin Net interest margin Operating costs / Average assets Cost/income ratio Net loans to deposits (FX-adjusted) HUF/BGN (closing) HUF/BGN (average) FX rates 2020 HUF million 40,957 (3,707) 44,665 89,775 166,668 111,239 45,453 9,975 (76,893) (45,110) (44,875) (235) 2021 HUF million 76,790 (8,454) 85,244 106,241 178,470 112,869 54,508 11,093 (72,230) (20,997) (18,938) (2,059) 2020 2021 4,283,625 2,634,870 2,663,462 2,466,457 1,375,184 913,099 178,174 (185,829) (187,812) 3,587,364 3,642,801 3,056,883 585,918 17,010 620,379 2020 2,142,644 81.3% 1.0% 297,292 11.3% 12.6% 194,934 7.4% 65.6% 1.79% 126,242 4.8% 2020 1.0% 7.0% 4.13% 2.75% 1.9% 46.1% 68% 2020 HUF 186.7 177.9 4,627,132 2,922,886 2,922,886 2,741,964 1,609,216 927,478 205,270 (193,180) (193,180) 3,785,300 3,785,300 3,342,569 442,730 86,606 699,375 2021 2,454,806 84.0% 1.0% 287,157 9.8% 15.5% 180,922 6.2% 68.2% 0.70% 114,362 3.9% 2021 1.8% 11.8% 4.07% 2.58% 1.6% 40.5% 72% 2021 HUF 188.7 182.3 Change % 87 128 91 18 7 1 20 11 (6) (53) (58) 777 % 8 11 10 11 17 2 15 4 3 6 4 9 (24) 409 13 %/pps 15 2.7 0.1 (3) (1.5) 2.9 (7) (1.2) 2.5 (1.09) (9) (0.9) pps 0.7 4.8 (0.05) (0.18) (0.3) (5.7) 4 Change % 1 2 In 2021, DSK Group reached HUF 76.8 billion cumulated after-tax profit, 87% more than in 2020, due to improving operating results and lower risk costs. Annual operating profit grew by 18% y-o-y, mainly driven by a 20% surge in net fees and commissions. The improvement partly stemmed from a 6% y-o-y decline in operating expenses (in local currency terms): the cost synergies resulting from the integration of Expressbank were observable also in 2021, and the continuing decrease in average headcount brought down personnel costs. In 2021 the bank launched a comprehensive ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) project in order to transform its business and operational model, and develop its digital capabilities, which also supported the operational efficiency. With regard to the annual income, cumulated net interest income stagnated in BGN terms, as a joint result of the 18 bps erosion in net interest margin and increasing volumes. Net fee income grew by 18% in local currency last year, mainly as a result of stronger business activity and the introduction of new fees on deposits. Furthermore, fees related to loans and investment services also increased. The annual cost efficiency indicators showed an improving trend, with the cost-to-income ratio declining by 5.7 pps to 40.5% and operating expenses/average assets ratio declining by 0.3 pp to 1.6%. Performing (Stage 1+2) loan volumes grew by 11% y-o-y (FX-adjusted). The retail loan book expanded by 17% last year, supported by 29% y-o-y growth in new cash loan disbursement, as well as a 47% jump in mortgage loan disbursements. Performing corporate loan volumes rose by 2% last year. At the end of 2021, the bank’s market share by total asset value was 18.03%, which ranked it second on the market. In 2021, HUF 21 billion total risk cost weighed on profit, 53% less than in 2020. The 12-month credit risk cost ratio stood at 0.70% (-1.09 pps y-o-y). The ratio of Stage 2 loans declined by 1.5 pps (to 9.8%) from the previous year; the large corporate and the mortgage loan portfolios improved. Deposit volumes expanded by a total of 4% over the past 12 months. The FX-adjusted net loan/deposit ratio stood at 72% at the end of December. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) OTP BANK CROATIA Performance of OTP Bank Croatia: Main components of P&L account After tax profit without the effect of adjustments Income tax Profit before income tax Operating profit Total income Net interest income Net fees and commissions Other net non-interest income Operating expenses Total provisions Provision for impairment on loan and placement losses Other provision Main components of balance sheet closing balances Total assets Gross customer loans Gross customer loans (FX-adjusted) Stage 1+2 customer loans (FX-adjusted) Retail loans Corporate loans Leasing Allowances for possible loan losses Allowances for possible loan losses (FX-adjusted) Deposits from customers Deposits from customers (FX-adjusted) Retail deposits Corporate deposits Liabilities to credit institutions Total shareholders' equity Loan Quality Stage 1 loan volume under IFRS 9 (in HUF million) Stage 1 loans under IFRS 9/gross customer loans Own coverage of Stage 1 loans under IFRS 9 Stage 2 loan volume under IFRS 9 (in HUF million) Stage 2 loans under IFRS 9/gross customer loans Own coverage of Stage 2 loans under IFRS 9 Stage 3 loan volume under IFRS 9 (in HUF million) Stage 3 loans under IFRS 9/gross customer loans Own coverage of Stage 3 loans under IFRS 9 Provision for impairment on loan and placement losses/average gross loans 90+ days past due loan volume (in HUF million) 90+ days past due loans/gross customer loans Performance Indicators ROA ROE Total income margin Net interest margin Operating costs / Average assets Cost/income ratio Net loans to deposits (FX-adjusted) HUF/HRK (closing) HUF/HRK (average) FX rates 2020 HUF million 14,830 (2,771) 17,600 40,329 84,907 58,199 16,093 10,615 (44,578) (22,728) (19,491) (3,238) 2020 2,325,669 1,642,170 1,664,491 1,519,909 770,976 640,362 108,572 (100,920) (102,293) 1,634,652 1,664,844 1,255,438 409,406 287,647 328,165 2020 1,257,492 76.6% 0.8% 241,962 14.7% 5.7% 142,716 8.7% 53.9% 1.27% 68,712 4.2% 2020 0.7% 4.7% 3.93% 2.69% 2.06% 52.5% 94% 2020 HUF 48.4 46.6 2021 HUF million 33,448 (7,618) 41,065 43,422 88,736 60,933 18,183 9,619 (45,313) (2,357) 1,767 (4,124) 2021 2,576,445 1,811,376 1,811,376 1,667,213 875,737 676,124 115,351 (109,575) (109,575) 1,899,671 1,899,671 1,416,254 483,417 228,733 351,023 2021 1,448,458 80.0% 0.6% 218,754 12.1% 5.9% 144,163 8.0% 61.4% (0.11%) 73,826 4.1% 2021 1.4% 10.0% 3.73% 2.56% 1.90% 51.1% 90% 2021 HUF 49.1 47.6 Change % 126 175 133 8 5 5 13 (9) 2 (90) (109) 27 % 11 10 9 10 14 6 6 9 7 16 14 13 18 (20) 7 %/pps 15 3.4 (0.2) (10) (2.7) 0.1 1 (0.7) 7.5 (1.38) 7 (0.1) pps 0.7 5.3 (0.20) (0.13) (0.16) (1.4) (4) Change % 2 2 The Croatian bank realized HUF 33.5 billion after-tax profit in 2021, more than doubling its profit y-o-y., This was primarily caused by a favourable development in credit risk costs, but operating profit also improved (+8% y-o-y). Within annual income, net interest income expanded by 5%. The dynamic organic growth of loans was partly offset by a further erosion in net interest margin (-13 bps y-o-y). Net fees and commissions surged 13% y-o-y in 2021, mainly as a result of stronger economic activity and tourism, starting from the second quarter. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) Other income contracted by 9% y-o-y last year, largely because of the 31% q-o-q decline in the fourth quarter. The latter stemmed from the seasonally lower income from foreign currency exchange, as well as from the negative revaluation result owing to an IT-system-related write-off and unfavourable exchange rate fluctuations. Operating expenses rose by 2% (but dropped by 1% in local currency) in 2021, thus cost efficiency indicators improved. In 2021, HUF 2.4 billion total risk cost weighed on profit, which was a tenth of what was recorded in the base year. In the past quarter, the share of Stage 3 loans in the portfolio sank to 8.0%, while their own provision coverage grew to 61.4% (+7.5 pps y-o-y). The volume of 90 days past due loans grew by HUF 8.7 billion (FX-adjusted, without sales/write-offs) in 2021. It was in 4Q when considerable non-performing loans were sold/written off last year (nearly HUF 4 billion, FX-adjusted). As to lending activity, performing (Stage 1+2) loans surged 10% y-o-y (FX-adjusted). In the retail segment, mortgage (+67% y-o-y) and cash (+40%) loan disbursement volumes grew dynamically. Despite the strong fourth quarter, the volume of corporate loan disbursement contracted by 6% from the previous year. The FX-adjusted deposit volumes increased by 14% compared to end-2020, largely driven by the corporate segment, but the growth in the on-demand retail deposits also continued. The Croatian bank's liquidity position remained stable; the net loan/deposit ratio stood at 90% at the end of December (-4 pps y-o-y). ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) OTP BANK SERBIA Performance of OTP Bank Serbia: Main components of P&L account After tax profit without the effect of adjustments Income tax Profit before income tax Operating profit Total income Net interest income Net fees and commissions Other net non-interest income Operating expenses Total provisions Provision for impairment on loan and placement losses Other provision Main components of balance sheet closing balances Total assets Gross customer loans Gross customer loans (FX-adjusted) Stage 1+2 customer loans (FX-adjusted) Retail loans Corporate loans Leasing Allowances for possible loan losses Allowances for possible loan losses (FX-adjusted) Deposits from customers Deposits from customers (FX-adjusted) Retail deposits Corporate deposits Liabilities to credit institutions Total shareholders' equity Loan Quality Stage 1 loan volume under IFRS 9 (in HUF million) Stage 1 loans under IFRS 9/gross customer loans Own coverage of Stage 1 loans under IFRS 9 Stage 2 loan volume under IFRS 9 (in HUF million) Stage 2 loans under IFRS 9/gross customer loans Own coverage of Stage 2 loans under IFRS 9 Stage 3 loan volume under IFRS 9 (in HUF million) Stage 3 loans under IFRS 9/gross customer loans Own coverage of Stage 3 loans under IFRS 9 Provision for impairment on loan and placement losses/average gross loans 90+ days past due loan volume (in HUF million) 90+ days past due loans/gross customer loans Performance Indicators ROA ROE Total income margin Net interest margin Operating costs / Average assets Cost/income ratio Net loans to deposits (FX-adjusted) HUF/RSD (closing) HUF/RSD (average) FX rates 2020 HUF million 7,298 (1,157) 8,455 35,898 79,001 59,514 14,766 4,721 (43,102) (27,443) (22,170) (5,273) 2020 2,052,332 1,539,738 1,555,706 1,515,269 716,486 711,244 87,538 (43,597) (44,054) 1,147,712 1,162,891 686,059 476,832 548,354 273,046 2020 1,367,313 88.8% 0.8% 132,427 8.6% 8.5% 39,998 2.6% 53.6% 1.62% 22,697 1.5% 2020 0.4% 2.7% 4.25% 3.20% 2.32% 54.6% 130% 2020 HUF 3.1 3.0 2021 HUF million 32,104 (3,610) 35,714 40,754 83,494 62,497 14,410 6,586 (42,740) (5,040) (387) (4,653) 2021 2,224,715 1,715,347 1,715,347 1,665,924 786,945 794,091 84,889 (44,587) (44,587) 1,238,864 1,238,864 750,275 488,589 584,453 306,630 2021 1,542,170 89.9% 0.7% 123,754 7.2% 6.1% 49,423 2.9% 53.6% 0.02% 33,405 1.9% 2021 1.6% 11.4% 4.07% 3.05% 2.09% 51.2% 135% 2021 HUF 3.1 3.0 Change % 340 212 322 14 6 5 (2) 40 (1) (82) (98) (12) % 8 11 10 10 10 12 (3) 2 1 8 7 9 2 7 12 %/pps 13 1.1 (0.1) (7) (1.4) (2.4) 24 0.3 0.0 (1.59) 47 0.5 pps 1.2 8.6 (0.17) (0.15) (0.23) (3.4) 5 Change % 1 2 The Serbian banking group’s adjusted after-tax profit exceeded HUF 32 billion in 2021, almost 4.5 times more than in the previous year. This dynamic profit growth was largely the result of a sharp fall in risk costs, and 14% improvement in operating profit. Following the financial closure of the second Serbian acquisition at the end of September 2019, the integration continued as planned, and was successfully accomplished on 30 April 2021. The Serbian operation's total market share by balance sheet total jumped to 13.0% on pro forma basis (ranking No. 2), and it remained market leader in net loans (with 16.6% market share), according to the most recent data of end-September 2021. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) The total network in Serbia consists of 187 branches. Since the end of September 2019, it has contracted by a total of 53 units. At the end of 2021 the network had 2,707 employees, 16% (525 workers) less than at the end of September 2019. Operating expenses in 2021 stagnated y-o-y in HUF but dropped by 3% in local currency. The Bank’s annual cost/income ratio improved by 3.4 pps y-o-y, to 51.2%. Both the full-year and the fourth-quarter changes in after-tax profit were largely shaped by the size of risk costs. In 2021, total risk cost volume fell by 82% y-o-y, from more than HUF 27 billion in the previous year. The 2021 amount on the other risk cost line were mostly induced by legal disputes. In full year 2021, the income side grew by 6% y-o-y, supported by a 5% increase in net interest income, and a 40% jump in other income. Annual net fees and commissions contracted by 2% from the previous year’s level. As regards loan quality, the share of Stage 3 loans in the whole portfolio was at 2.9% at the end of December (+0.3 pp y-o-y). The DPD90+ volume (FX-adjusted, without sales/write-offs) grew by a total of HUF 13 billion in 2021. This brought the DPD90+ ratio 0.5 pp higher, to 1.9% y-o-y by the end of December. Performing (Stage 1+2) loan volumes increased by 10% y-o-y (FX-adjusted), while the deposit base increased by 7%. The bank’s net loan/deposit ratio rose in y-o-y terms, hitting 135%. In Serbia, borrowers could apply for the third phase of the loan moratorium until the end of April 2021; the moratorium (maximum six months from the date of entrance) ended at the end of October. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) SKB BANKA (SLOVENIA) Performance of SKB Banka (Slovenia): Main components of P&L account After tax profit without the effect of adjustments Income tax Profit before income tax Operating profit Total income Net interest income Net fees and commissions Other net non-interest income Operating expenses Total provisions Provision for impairment on loan and placement losses Other provision Main components of balance sheet closing balances Total assets Gross customer loans Gross customer loans (FX-adjusted) Stage 1+2 customer loans (FX-adjusted) Retail loans Corporate loans Leasing Allowances for possible loan losses Allowances for possible loan losses (FX-adjusted) Deposits from customers Deposits from customers (FX-adjusted) Retail deposits Corporate deposits Liabilities to credit institutions Total shareholders' equity Loan Quality Stage 1 loan volume under IFRS 9 (in HUF million) Stage 1 loans under IFRS 9/gross customer loans Own coverage of Stage 1 loans under IFRS 9 Stage 2 loan volume under IFRS 9 (in HUF million) Stage 2 loans under IFRS 9/gross customer loans Own coverage of Stage 2 loans under IFRS 9 Stage 3 loan volume under IFRS 9 (in HUF million) Stage 3 loans under IFRS 9/gross customer loans Own coverage of Stage 3 loans under IFRS 9 Provision for impairment on loan and placement losses/average gross loans 90+ days past due loan volume (in HUF million) 90+ days past due loans/gross customer loans Performance Indicators ROA ROE Total income margin Net interest margin Operating costs / Average assets Cost/income ratio Net loans to deposits (FX-adjusted) HUF/EUR (closing) HUF/EUR (average) FX rates 2020 HUF million 9,665 (2,439) 12,104 19,787 40,388 28,103 11,127 1,158 (20,601) (7,683) (6,244) (1,440) 2020 1,353,772 909,439 919,331 905,333 507,762 230,038 167,533 (14,876) (15,040) 1,136,666 1,150,365 985,148 165,217 29,524 166,124 2020 753,584 82.9% 0.5% 142,015 15.6% 4.3% 13,840 1.5% 36.3% 0.70% 3,620 0.4% 2020 0.8% 6.3% 3.18% 2.21% 1.62% 51.0% 79% 2020 HUF 365.1 351.2 2021 HUF million 16,822 (3,838) 20,660 19,595 42,354 27,673 13,258 1,423 (22,759) 1,065 1,819 (754) 2021 1,433,206 984,605 984,605 971,578 475,971 328,691 166,915 (16,271) (16,271) 1,213,698 1,213,698 895,652 318,046 15,565 179,515 2021 846,646 86.0% 0.3% 124,932 12.7% 5.0% 13,027 1.3% 56.1% (0.20%) 4,353 0.4% 2021 1.2% 10.0% 3.13% 2.04% 1.68% 53.7% 80% 2021 HUF 369.0 358.5 Change % 74 57 71 (1) 5 (2) 19 23 10 (48) % 6 8 7 7 (6) 43 0 9 8 7 6 (9) 93 (47) 8 %/pps 12 3.1 (0.2) (12) (2.9) 0.7 (6) (0.2) 19.8 (0.90) 20 0.0 pps 0.5 3.7 (0.05) (0.17) 0.06 2.7 1 Change % 1 2 In 2021, OTP’s Slovenian subsidiary generated HUF 16.8 billion adjusted profit, 74% more than in the base period. This substantial improvement was driven by the decline in risk costs. Operating profit was marginally smaller in 2021 than in the base period. The 5% growth in income largely stemmed from strong fees and commissions, mostly because of higher fee income from payment services and from deposits: the Bank introduced commissions for corporate and retail deposits above a certain amount. Full-year net interest income dropped by 4% in local currency as the growth in business volumes was offset by the 17 bps y-o-y erosion of net interest margin, to 2.04%, owing to the strong competition and the low interest rate environment. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) Operating expenses increased by 10% last year, mostly because of higher personnel expenses and administrative costs: annual supervisory costs rose, as did IT spending; amortization stagnated. The favourable development of the quality of the loan portfolio throughout the year enabled the release of provisions for loan losses and resulted in moderate risk cost. At the end of 2021, the ratio of Stage 3 loans (1.3%) improved by 0.2 pp y-o-y. The own provision coverage of Stage 3 loans grew by almost 20 pps y-o-y, to 56.1%, thus it is already nearing the Group average. The performing loan volumes grew by 7% y-o-y. One reason for the y-o-y increase in corporate deposits and loans was the change in the definition of the MSE and corporate segments in 3Q 2021 (just like in 1Q), thus part of the MSE loan stock (customers above a certain annual income) was reclassified into the corporate segment. Mortgage loan volumes grew by 8% y-o-y, disbursements jumped by more than 70%. Corporate loans and credit card loan volumes surged by double-digit rates y-o-y. The bank’s market share in cash loans improved y-o-y, but it slightly declined in mortgage and corporate loans, owing to the strong price competition. The FX-adjusted deposit book expanded by 6% y-o-y. The net-loan-to-deposit ratio stood at 80% at the end of the quarter (+1 pp y-o-y). ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) OTP BANK ROMANIA Performance of OTP Bank Romania: Main components of P&L account After tax profit without the effect of adjustments Income tax Profit before income tax Operating profit Total income Net interest income Net fees and commissions Other net non-interest income Operating expenses Total provisions Provision for impairment on loan and placement losses Other provision Main components of balance sheet closing balances Total assets Gross customer loans Gross customer loans (FX-adjusted) Stage 1+2 customer loans (FX-adjusted) Retail loans Corporate loans Leasing Allowances for possible loan losses Allowances for possible loan losses (FX-adjusted) Deposits from customers Deposits from customers (FX-adjusted) Retail deposits Corporate deposits Liabilities to credit institutions Total shareholders' equity Loan Quality Stage 1 loan volume under IFRS 9 (in HUF million) Stage 1 loans under IFRS 9/gross customer loans Own coverage of Stage 1 loans under IFRS 9 Stage 2 loan volume under IFRS 9 (in HUF million) Stage 2 loans under IFRS 9/gross customer loans Own coverage of Stage 2 loans under IFRS 9 Stage 3 loan volume under IFRS 9 (in HUF million) Stage 3 loans under IFRS 9/gross customer loans Own coverage of Stage 3 loans under IFRS 9 Provision for impairment on loan and placement losses/average gross loans 90+ days past due loan volume (in HUF million) 90+ days past due loans/gross customer loans Performance Indicators ROA ROE Total income margin Net interest margin Operating costs / Average assets Cost/income ratio Net loans to deposits (FX-adjusted) HUF/RON (closing) HUF/RON (average) FX rates 2020 HUF million 1,558 91 1,467 11,811 43,748 32,739 3,813 7,195 (31,937) (10,344) (7,840) (2,504) 2020 1,162,183 861,393 863,037 806,492 552,550 216,060 37,881 (48,174) (48,519) 710,047 712,274 508,556 203,718 284,173 127,238 2020 690,664 80.2% 1.0% 114,615 13.3% 9.0% 56,113 6.5% 54.6% 0.99% 38,713 4.5% 2020 0.1% 1.3% 4.18% 3.13% 3.05% 73.0% 114% 2020 HUF 75.0 72.6 2021 HUF million 4,253 (1,444) 5,697 8,937 46,699 36,270 4,143 6,285 (37,762) (3,240) (6,821) 3,581 2021 1,438,484 1,035,400 1,035,400 976,556 500,791 429,245 46,520 (54,780) (54,780) 830,717 830,717 436,727 393,990 402,553 164,914 2021 826,518 79.8% 1.0% 150,038 14.5% 8.4% 58,844 5.7% 57.5% 0.74% 35,921 3.5% 2021 0.3% 3.0% 3.75% 2.92% 3.04% 80.9% 118% 2021 HUF 74.6 72.8 Change % 173 288 (24) 7 11 9 (13) 18 (69) (13) (243) % 24 20 20 21 (9) 99 23 14 13 17 17 (14) 93 42 30 %/pps 20 (0.4) 0.0 31 1.2 (0.6) 5 (0.8) 2.9 (0.25) (7) (1.0) pps 0.2 1.8 (0.43) (0.21) (0.02) 7.9 4 Change % (1) 0 In 2021 OTP Bank Romania generated HUF 4.3 billion after-tax profit, which is consistent with 3% ROE. The tripling annual profit benefited from the 69% fall in risk costs. The annual operating profit dropped by 24%, as a result of y-o-y 7% higher total income, and 18% growth in operating expenses. The twelve-month net interest income surged 10% y-o-y in local currency. The annual dynamics was supported by the vigorous, 21% growth in performing (Stage 1+2) loan volumes, while net interest margin shrank by 21 bps y-o-y. Operating expenses surged by 18% y-o-y. Most of the higher costs stemmed from the growth strategy launched in 2019. The increase in personnel expenses was partly the result of the 8% y-o-y growth in the ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) average number of employees and wage hikes. The higher depreciation was due to the CAPEX requirement of developments, in line with the growth strategy. Within other expenses, supervisory fees grew at the strongest rate (+HUF 0.7 billion y-o-y). In 2021, total risk cost amounted to -HUF 3.2 billion. The 69% y-o-y decline stemmed from the lower credit risk cost than in the base period, and from the release of other provisions. As to loan quality, the volume of 90 days past due loans fell by HUF 1 billion (FX-adjusted, without sales/write-offs) last year. The ratio of Stage 3 loans declined by 1.4 pps y-o-y, to 5.7%, their own provision coverage stood at 57.5% at the end of 2021 (+2.9 pps y-o-y). The ratio of Stage 2 loans fell by 1.2 pps y-o- y, to 14.5%. The growth was driven by the revision of IFRS model parameters, during which a substantial retail volume was reclassified as Stage 2. The own provision coverage of Stage 2 loans edged higher (+0.6 pp y-o-y), and stood at 8.4% at the end of 2021. As to business activity, both new placements and volumes grew dynamically, in accordance with the Bank’s strategy. In 2021, mortgage loan placements increased by 25% y-o-y. Performing (Stage 1+2) loan volumes rose by 21% y-o-y (FX-adjusted). In the third quarter of 2021, group-level definitions were adopted for MSE and large corporate loans. As a result, certain exposures were reclassified between the two categories. Despite the successful deposit-taking (+17% y-o-y; FX-adjusted), the net loan/deposit ratio grew by 4 pps y-o-y, to 118%. The 30% y-o-y increase in total shareholders’ equity was largely the result of the capital increases by the parent bank (RON 250 million in March and RON 200 million in December). ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) OTP BANK UKRAINE Performance of OTP Bank Ukraine: Main components of P&L account After tax profit without the effect of adjustments Income tax Profit before income tax Operating profit Total income Net interest income Net fees and commissions Other net non-interest income Operating expenses Total provisions Provision for impairment on loan and placement losses Other provision Main components of balance sheet closing balances Total assets Gross customer loans Gross customer loans (FX-adjusted) Stage 1 + 2 customer loans (FX-adjusted) Retail loans Corporate loans Car financing loans Allowances for possible loan losses Allowances for possible loan losses (FX-adjusted) Deposits from customers Deposits from customers (FX-adjusted) Retail deposits Corporate deposits Liabilities to credit institutions Total shareholders' equity Loan Quality Stage 1 loan volume under IFRS 9 (in HUF million) Stage 1 loans under IFRS 9/gross customer loans Own coverage of Stage 1 loans under IFRS 9 Stage 2 loan volume under IFRS 9 (in HUF million) Stage 2 loans under IFRS 9/gross customer loans Own coverage of Stage 2 loans under IFRS 9 Stage 3 loan volume under IFRS 9 (in HUF million) Stage 3 loans under IFRS 9/gross customer loans Own coverage of Stage 3 loans under IFRS 9 Provision for impairment on loan and placement losses/average gross loans 90+ days past due loan volume (in HUF million) 90+ days past due loans/gross customer loans Performance Indicators ROA ROE Total income margin Net interest margin Operating costs / Average assets Cost/income ratio Net loans to deposits (FX-adjusted) HUF/UAH (closing) HUF/UAH (average) FX rates 2020 HUF million 26,104 (5,485) 31,589 42,030 67,385 48,581 13,540 5,264 (25,355) (10,441) (6,286) (4,155) 2021 HUF million 39,024 (8,242) 47,266 54,760 83,567 62,051 14,494 7,022 (28,806) (7,494) (5,827) (1,667) 2020 729,012 443,031 491,631 440,021 90,510 227,872 121,640 (46,200) (51,699) 493,884 546,495 244,679 301,815 91,059 117,071 2020 365,266 82.4% 1.9% 31,726 7.2% 15.9% 46,039 10.4% 74.3% 1.39% 28,401 6.4% 2020 3.8% 23.0% 9.78% 7.05% 3.68% 37.6% 81% 2020 HUF 10.5 11.4 2021 983,557 662,173 662,173 620,582 115,140 341,118 164,324 (47,830) (47,830) 671,002 671,002 275,196 395,805 115,714 159,756 2021 576,876 87.1% 1.9% 43,707 6.6% 18.5% 41,590 6.3% 69.6% 1.09% 21,914 3.3% 2021 4.7% 28.8% 10.06% 7.47% 3.47% 34.5% 92% 2021 HUF 11.9 11.1 Change % 49 50 50 30 24 28 7 33 14 (28) (7) (60) % 35 49 35 41 27 50 35 4 (7) 36 23 12 31 27 36 %/pps 58 4,7 0,0 38 (0,6) 2,6 (10) (4,1) (4,8) (0,30) (23) (3,1) pps 0.9 5.8 0.28 0.42 (0.21) (3.2) 11 Change % 14 (3) OTP Bank Ukraine's financial figures in HUF terms were affected by the UAH/HUF exchange rate moves: by the end of 4Q 2021, the hryvnia appreciated by 14% y-o-y and by 2% q-o-q against the HUF. The UAH’s annual average exchange rate weakened 3%. Therefore, the balance sheet and P&L dynamics in HUF terms differ from the ones expressed in local currency. OTP Bank Ukraine generated HUF 39 billion after-tax profit in 2021. Most of the 49% y-o-y growth stemmed from a 30% y-o-y improvement in operating profit. This was a result of a dynamic growth in income (+24% y-o-y in HUF terms), including the outstanding 28% growth of net interest income. All this offset the 14% increase in operating expenses, which was fuelled by a hike in personnel expenses. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) The Ukrainian base rate grew by a total of 300 bps, to 9% in 2021. The rising interest rate environment supported the steady improvement of net interest margin, which grew by 42 bps y-o-y, to 7.47%. The Ukrainian operation could further improve its cost efficiency: the cost/income ratio sank by 3.2 pps y-o-y, to 34.5%, as did the ratio of operating expenses to average balance sheet total, compared to the previous year (to 3.4%). Based on average shareholders’ equity and twelve-month profit in 2021, ROE was 28.8%, the highest ratio in the Group again. Total risk costs fell 28% y-o-y, to -HUF 7.5 billion in full year 2021. The annual risk cost rate stood at 1.09%. Owing to the improved loan quality, the volume of 90 days past due loans fell by HUF 6.5 billion (FX-adjusted, without sales/write-offs). Loan sales grew robustly in 2021. The FX-adjusted volume of performing (Stage 1+2) loans expanded by 41% last year, owing to a 50% jump in corporate loans, and a 27% surge in retail loans. Leasing activity was likewise strong in 2021, growing by 35% y-o-y. Thanks to the steady improvement in consumer loan sales, the Ukrainian bank could increase its market share in this segment, as well as in the performing corporate loan market. While loan volumes increased, the Ukrainian operation's liquidity position remained stable; the net loan/deposit ratio remained stable at 92%. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) OTP BANK RUSSIA Performance of OTP Bank Russia Main components of P&L account After tax profit without the effect of adjustments Income tax Profit before income tax Operating profit Total income Net interest income Net fees and commissions Other net non-interest income Operating expenses Total provisions Provision for impairment on loan and placement losses Other provision Main components of balance sheet closing balances Total assets Gross customer loans Gross customer loans (FX-adjusted) Stage 1 + 2 customer loans (FX-adjusted) Retail loans Corporate loans Allowances for possible loan losses Allowances for possible loan losses (FX-adjusted) Deposits from customers Deposits from customers (FX-adjusted) Retail deposits Corporate deposits Liabilities to credit institutions Subordinated debt Total shareholders' equity Loan Quality Stage 1 loan volume under IFRS 9 (in HUF million) Stage 1 loans under IFRS 9/gross customer loans Own coverage of Stage 1 loans under IFRS 9 Stage 2 loan volume under IFRS 9 (in HUF million) Stage 2 loans under IFRS 9/gross customer loans Own coverage of Stage 2 loans under IFRS 9 Stage 3 loan volume under IFRS 9 (in HUF million) Stage 3 loans under IFRS 9/gross customer loans Own coverage of Stage 3 loans under IFRS 9 Provision for impairment on loan and placement losses/average gross loans 90+ days past due loan volume (in HUF million) 90+ days past due loans/gross customer loans Performance Indicators ROA ROE Total income margin Net interest margin Operating costs / Average assets Cost/income ratio Net loans to deposits (FX-adjusted) HUF/RUB (closing) HUF/RUB (average) FX rates 2020 HUF million 16.317 (5.092) 21.409 65.068 123.198 99.872 22.503 823 (58.130) (43.659) (41.160) (2.499) 2020 688,980 597,849 656,236 564,686 486,612 78,074 (127,598) (140,026) 350,608 383,877 315,780 68,097 90,852 22,580 183,402 2020 447,094 74.8% 4.6% 67,394 11.3% 43.1% 83,361 13.9% 93.4% 6.36% 77,929 13.0% 2020 2.1% 8.9% 16.03% 13.00% 7.56% 47.2% 134% 2020 HUF 4.0 4.3 2021 HUF million 37.624 (9.690) 47.313 62.368 118.158 91.364 25.728 1.066 (55.790) (15.055) (13.075) (1.979) 2021 799,965 753,373 753,373 667,347 542,886 124,461 (131,878) (131,878) 411,633 411,633 307,663 103,970 85,485 8,842 240,724 2021 576,404 76.5% 3.8% 90,944 12.1% 31.1% 86,025 11.4% 95.1% 2.05% 87,550 11.6% 2021 5.4% 18.2% 17.02% 13.16% 8.04% 47.2% 151% 2021 HUF 4.4 4.1 Change % 131 90 121 (4) (4) (9) 14 30 (4) (66) (68) (21) % 16 26 15 18 12 59 3 (6) 17 7 (3) 53 (6) (61) 31 %/pps 29 1.7 (0.9) 35 0.8 (12.0) 3 (2.5) 1.7 (4.31) 12 (1.4) pps 3.3 9.3 0.99 0.16 0.47 0.0 17 Change % 10 (4) OTP Bank Russia's financial figures in HUF terms were affected by the HUF/RUB exchange rate's moves: in 4Q 2021, the rouble's closing exchange rate against the forint appreciated by 2% q-o-q, and 10% y-o-y. The annual average exchange rate weakened 4% y-o-y. Therefore, the balance sheet and the P&L dynamics in HUF terms differ from the ones expressed in local currency. OTP Bank Russia posted HUF 37.6 billion profit in 2021, 131% more than in the base period. The bank’s operating profit in local currency stagnated from the previous year, just like operating expenses. In RUB terms, 2021 total income did not change from 2020, because the 19% y-o-y growth in net fees and commissions offset the 5% contraction in net interest income. Net interest income was adversely affected ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) by the lower average interest rate on loans (in part because of the strong competition, partly because of regulatory reasons, partly because of composition effect), and this led to lower interest income on loans, despite growing volumes. Net interest margin crawled up y-o-y last year, partially supported by the overall decline in deposit interest expenses. The yield environment grew over the past year: the base rate increased by a total of 425 bps, to 8.5%. Operating expenses stagnated y-o-y in RUB. The annual cost/income ratio was 47.2%, similar to the previous year. Risk costs fell by 66% y-o-y 2021, owing to the pandemic-induced loan loss provisions set aside in the base period, the favourable portfolio quality trend in 2021, and the release of provisions owing to the revision of the IFRS 9 depreciation model parameters in 4Q 2021. The ratio of Stage 3 loans declined by 2.5 pps, to 11.4%, while that of Stage 1 loans upped by 1.7 pps, to 76.5%. The credit risk cost ratio dropped by 4.31 pps, to 2.05% y-o-y. The performing (Stage 1+2) loan volume expanded by 18% y-o-y (FX-adjusted), bolstered by the 12% retail and 59% corporate volume growth rates. During 2021, the composition of the portfolio shifted towards lower- margin corporate loans and car financing, while the ratio of retail consumer loans with higher risk profile dropped. New retail loan disbursements in 2021 were 28% higher y-o-y than in the previous year, while interest rates headed down. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) CKB GROUP (MONTENEGRO) Performance of CKB Group: Main components of P&L account After tax profit without the effect of adjustments Income tax Profit before income tax Operating profit Total income Net interest income Net fees and commissions Other net non-interest income Operating expenses Total provisions Provision for impairment on loan and placement losses Other provision Main components of balance sheet closing balances Total assets Gross customer loans Gross customer loans (FX-adjusted) Stage 1+2 customer loans (FX-adjusted) Retail loans Corporate loans Allowances for possible loan losses Allowances for possible loan losses (FX-adjusted) Deposits from customers Deposits from customers (FX-adjusted) Retail deposits Corporate deposits Liabilities to credit institutions Total shareholders' equity Loan Quality Stage 1 loan volume under IFRS 9 (in HUF million) Stage 1 loans under IFRS 9/gross customer loans Own coverage of Stage 1 loans under IFRS 9 Stage 2 loan volume under IFRS 9 (in HUF million) Stage 2 loans under IFRS 9/gross customer loans Own coverage of Stage 2 loans under IFRS 9 Stage 3 loan volume under IFRS 9 (in HUF million) Stage 3 loans under IFRS 9/gross customer loans Own coverage of Stage 3 loans under IFRS 9 Provision for impairment on loan and placement losses/average gross loans 90+ days past due loan volume (in HUF million) 90+ days past due loans/gross customer loans Performance Indicators ROA ROE Total income margin Net interest margin Operating costs / Average assets Cost/income ratio Net loans to deposits (FX-adjusted) HUF/EUR (closing) HUF/EUR (average) FX rates 2020 HUF million 4,307 (302) 4,609 8,353 22,095 17,188 4,446 461 (13,743) (3,743) (3,434) (309) 2021 HUF million 4,140 (817) 4,957 10,240 22,046 16,553 4,880 613 (11,805) (5,283) 647 (5,930) 2020 477,676 362,067 365,907 339,502 164,896 174,606 (24,510) (24,772) 324,671 329,051 216,100 112,951 58,967 76,556 2020 294,548 81.4% 1.3% 41,390 11.4% 9.3% 26,129 7.2% 63.9% 0.99% 17,538 4.8% 2020 0.9% 6.0% 4.70% 3.65% 2.92% 62.2% 104% 2020 HUF 365.1 351.2 2021 513,522 366,369 366,369 340,776 162,018 178,758 (23,504) (23,504) 386,572 386,572 235,340 151,232 19,698 82,029 2021 280,910 76.7% 1.0% 59,866 16.3% 6.5% 25,593 7.0% 66.0% (0.18%) 16,472 4.5% 2021 0.9% 5.2% 4.62% 3.47% 2.48% 53.5% 89% 2021 HUF 369.0 358.5 Change % (4) 170 8 23 0 (4) 10 33 (14) 41 (119) % 8 1 0 0 (2) 2 (4) (5) 19 17 9 34 (67) 7 %/pps (5) (4.7) (0.4) 45 4.9 (2.8) (2) (0.2) 2.1 (1.17) (6) (0.3) pps 0.0 (0.7) (0.08) (0.18) (0.45) (8.6) (15) Change % 1 2 In full year 2021, the Montenegrin CKB Group generated HUF 4.1 billion adjusted profit, which marked a 4% y-o-y decrease compared to the base period. The twelve-month operating profit grew by 23% y-o-y as operating expenses fell by 14%, while income was stable. One reason for the lower operating expenses was the synergies from the merger of the acquired Podgoricka banka: average headcount fell by 155 y-o-y, and the number of branches dropped to 34, from 48 at the end of 3Q 2020. Marketing, real estate-related, and hardware costs also subsided. Thus, the twelve-month cost/income ratio (53.5%) improved by 8.6 pps y-o-y. Full-year total income declined by 1% in local currency: owing to the narrowing margins the net interest income fell 5%, while net fees and commissions grew by 8% as tourism re-started and business activity intensified. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) Total risk cost in 2021 increased 41% y-o-y, primarily due to other risk costs generated in relation to an operational risk event. Performing (Stage 1+2) loans stayed flat y-o-y (FX-adjusted). In y-o-y comparison: cash loan disbursement grew by 11%, while mortgage loans increased by 27%. In full year 2021, the volume of DPD90+ loans dropped by HUF 0.3 billion (FX-adjusted, without sales and write-offs). The DPD90+ ratio (4.5%) declined 0.3 pp y-o-y, simultaneously with the sale/write-off of the HUF 1 billion ) worth of non-performing loans in 2021. At the end of 2021, the ratio of Stage 3 loans was 7.0% (- 0.2 pp y-o-y); their own coverage stood at 66%. The FX-adjusted deposit book expanded by 17% y-o-y. The net loan/deposit ratio stood at 89% at the end of the year (-15 pps y-o-y). At the end of December 2021, the total market share of OTP Group's Montenegrin operation by balance sheet total was 26.8%. The Bank retained its market leading position in Montenegro. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) OTP BANK ALBANIA Performance of OTP Bank Albania: Main components of P&L account After tax profit without the effect of adjustments Income tax Profit before income tax Operating profit Total income Net interest income Net fees and commissions Other net non-interest income Operating expenses Total provisions Provision for impairment on loan and placement losses Other provision Main components of balance sheet closing balances Total assets Gross customer loans Gross customer loans (FX-adjusted) Stage 1+2 customer loans (FX-adjusted) Retail loans Corporate loans Leasing Allowances for possible loan losses Allowances for possible loan losses (FX-adjusted) Deposits from customers Deposits from customers (FX-adjusted) Retail deposits Corporate deposits Liabilities to credit institutions Total shareholders' equity Loan Quality Stage 1 loan volume under IFRS 9 (in HUF million) Stage 1 loans under IFRS 9/gross customer loans Own coverage of Stage 1 loans under IFRS 9 Stage 2 loan volume under IFRS 9 (in HUF million) Stage 2 loans under IFRS 9/gross customer loans Own coverage of Stage 2 loans under IFRS 9 Stage 3 loan volume under IFRS 9 (in HUF million) Stage 3 loans under IFRS 9/gross customer loans Own coverage of Stage 3 loans under IFRS 9 Provision for impairment on loan and placement losses/average gross loans 90+ days past due loan volume (in HUF million) 90+ days past due loans/gross customer loans Performance Indicators ROA ROE Total income margin Net interest margin Operating costs / Average assets Cost/income ratio Net loans to deposits (FX-adjusted) HUF/ALL (closing) HUF/ALL (average) FX rates 2020 HUF million 1,959 (489) 2,448 5,904 11,597 9,824 1,278 495 (5,693) (3,455) (2,515) (940) 2021 HUF million 5,522 (986) 6,508 7,213 13,398 10,619 1,843 936 (6,186) (705) (880) 175 2020 286,606 180,815 185,390 179,767 83,135 93,097 3,536 (8,089) (8,285) 214,808 220,322 184,605 35,717 37,151 28,781 2020 143,701 79.5% 1.3% 31,620 17.5% 10.4% 5,494 3.0% 54.2% 1.55% 3,984 2.2% 2020 0.7% 7.3% 4.32% 3.66% 2.12% 49.1% 80% 2020 HUF 3.0 2.8 2021 350,848 219,890 219,890 212,699 84,207 124,691 3,801 (10,096) (10,096) 251,270 251,270 210,200 41,070 53,257 35,134 2021 191,308 87.0% 1.2% 21,391 9.7% 11.4% 7,190 3.3% 73.3% 0.46% 3,624 1.6% 2021 1.8% 17.6% 4.43% 3.51% 2.05% 46.2% 83% 2021 HUF 3.1 2.9 Change % 182 102 166 22 16 8 44 89 9 (80) (65) (119) % 22 22 19 18 1 34 7 25 22 17 14 14 15 43 22 %/pps 33 7.5 0.0 (32) (7.8) 1.0 31 0.2 19.1 (1.08) (9) (0.6) pps 1.1 10.3 0.11 (0.15) (0.08) (2.9) 3 Change % 4 3 On 6 December 2021, OTP Bank announced to purchase a 100% stake in Alpha Bank Albania, for EUR 55 million, which corresponds to a price / end of 2020 book value of 0.7. The closure of the transaction is expected in 2Q 2022, depending on regulatory approvals, therefore Alpha Bank Albania’s figures were not consolidated until the end of 2021. OTP Bank Albania generated HUF 5.5 billion after-tax profit in full year 2021; it has nearly tripled y-o-y. In 2021, operating profit grew by 22% y-o-y, supported by 16% expansion in total income, while operating expenses increased by 9%. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) The 8% expansion in annual net interest income was driven by volume growth, while interest margin narrowed. The 44% y-o-y jump in annual net fees and commissions can be put down to higher fee income from bank card transactions and from loan-related fees. The reason for the y-o-y jump in other net non- interest income was a technical one: the full-year revaluation gain on foreign currency-denominated provisions due to exchange rate fluctuations was reclassified from risk costs to other income in 3Q. This move is neutral to the net result, and the presentation of this item is thus in line with the practice of the Group’s other subsidiaries. The 9% y-o-y jump in annual operating expenses was influenced by higher personnel cost and depreciation, as well as rising supervisory fees among other expenses. Annual total credit risk cost amounted to -HUF 0.7 billion, in 80% y-o-y slump. In full year 2021, the volume of DPD90+ loans (FX-adjusted, without sales and write-offs) dropped by HUF 0.4 billion. The ratio of Stage 3 loans upped by 0.2 pp y-o-y to 3.3% by the end of 2021. The own provision coverage of Stage 3 loans increased by 19.1 pps y-o-y to 73.3%. The ratio of Stage 2 loans dropped by 7.8 pps y-o-y; their own provision coverage was 11.4% at the end of 2021. The FX-adjusted performing (Stage 1+2) loan volume expanded by 18% y-o-. In the third quarter of 2021, group-level definitions were introduced for MSE and large corporate loans. As a result, some volumes were reclassified between the two categories in the third quarter. The net loan/deposit ratio stood at 83% at the end of December 2021. Based on its balance sheet total, the market share of OTP’s Albanian operation was 6.4% at the end of December 2021; this ranks it the fifth biggest bank in the country ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) OTB BANK MOLDOVA Performance of OTB Bank Moldova: Main components of P&L account After tax profit without the effect of adjustments Income tax Profit before income tax Operating profit Total income Net interest income Net fees and commissions Other net non-interest income Operating expenses Total provisions Provision for impairment on loan and placement losses Other provision Main components of balance sheet closing balances Total assets Gross customer loans Gross customer loans (FX-adjusted) Stage 1+2 customer loans (FX-adjusted) Retail loans Corporate loans Leasing Allowances for possible loan losses Allowances for possible loan losses (FX-adjusted) Deposits from customers Deposits from customers (FX-adjusted) Retail deposits Corporate deposits Liabilities to credit institutions Total shareholders' equity Loan Quality Stage 1 loan volume under IFRS 9 (in HUF million) Stage 1 loans under IFRS 9/gross customer loans Own coverage of Stage 1 loans under IFRS 9 Stage 2 loan volume under IFRS 9 (in HUF million) Stage 2 loans under IFRS 9/gross customer loans Own coverage of Stage 2 loans under IFRS 9 Stage 3 loan volume under IFRS 9 (in HUF million) Stage 3 loans under IFRS 9/gross customer loans Own coverage of Stage 3 loans under IFRS 9 Provision for impairment on loan and placement losses/average gross loans 90+ days past due loan volume (in HUF million) 90+ days past due loans/gross customer loans Performance Indicators ROA ROE Total income margin Net interest margin Operating costs / Average assets Cost/income ratio Net loans to deposits (FX-adjusted) HUF/MDL (closing) HUF/MDL (average) FX rates 2020 HUF million 3,973 (540) 4,513 7,707 14,596 8,889 2,137 3,570 (6,889) (3,193) (2,695) (499) 2021 HUF million 5,858 (802) 6,660 7,835 15,271 9,698 2,344 3,230 (7,437) (1,175) (663) (512) 2020 249,921 132,081 138,650 134,504 72,740 58,146 3,618 (4,578) (4,804) 203,176 213,302 139,838 73,465 5,906 37,287 2020 121,459 92.0% 1.1% 6,670 5.1% 19.5% 3,952 3.0% 48.0% 2.23% 2,109 1.6% 2020 1.7% 10.7% 6.24% 3.80% 2.95% 47.2% 63% 2020 HUF 17.3 17.8 2021 310,511 166,573 166,573 163,525 90,473 69,231 3,820 (5,020) (5,020) 247,610 247,610 160,603 87,008 15,886 42,701 2021 153,157 91.9% 1.3% 10,368 6.2% 13.6% 3,048 1.8% 54.3% 0.46% 2,164 1.3% 2021 2.2% 15.2% 5.86% 3.72% 2.85% 48.7% 65% 2021 HUF 18.4 17.2 Change % 47 48 48 2 5 9 10 (10) 8 (63) (75) 3 % 24 26 20 22 24 19 6 10 5 22 16 15 18 169 15 %/pps 26 0.0 0.1 55 1.2 (5.9) (23) (1.2) 6.3 (1.76) 3 (0.3) pps 0.5 4.5 (0.39) (0.08) (0.09) 1.5 2 Change % 6 (4) In full year 2021, OTP Bank Moldova contributed to OTP Group's performance by HUF 5.9 billion profit. This is consistent with 47% y-o-y improvement, mostly caused by lower risk costs. ROE rose by 4.5 pps, to 15.2% in 2021. In 2021 operating profit rose by 2% y-o-y, driven by a 5% increase in total income; operating expenses surged 8%. Of core banking incomes, net interest income grew by 9% and net fees jumped by 10% y-o-y, which was related to revenues from cash and card transactions. Other net non-interest income dropped by 6% y-o-y in local currency, owing to lower gains on foreign currency exchange in 2021. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) The 8% y-o-y rise in twelve-month operating expenses was caused by fees paid to supervisory authorities12, as well as by the 8% increase in average headcount, and the resulting higher personnel expenses. In 2021, total risk cost fell by 63% y-o-y, as a result of the base effect of the loan loss provisions necessitated by the pandemic in 2020. In full-year 2021, the DPD90+ loan portfolio stagnated (FX-adjusted, without the impact of sales and write- offs). The ratio of Stage 3 loans was 1.8% (-1.2 pps y-o-y) at the end of 2021. The own provision coverage of Stage 3 loans was 54.3%. In 2021 the FX-adjusted stock of performing (Stage 1+2) loans expanded by 22% y-o-y. Within that, retail loans jumped by 24%, and corporate loans surged by 19%. In the third quarter of 2021, group-level definitions were introduced for MSE and large corporate loans. As a result, some volumes were reclassified between the two categories. The FX-adjusted deposit volume grew by 16% y-o-y. The net loan/deposit stood at 65% at the end of December, which is consistent 2 pps y-o-y growth. Based on total assets, the market share of OTP’s Moldavian operation was 14.2% at the end of December 2021; this ranks it the third biggest bank in Moldova. 12In 2021, payments were made not only the Deposit Protection Fund, but also to the Resolution Fund established in 2020, which had stipulated lower contribution in the base period. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) STAFF LEVEL AND OTHER INFORMATION 31/12/2020 31/12/2021 OTP Core DSK Group (Bulgaria) OBH (Croatia) OTP Bank Serbia SKB Banka (Slovenia) OTP Bank Romania OTP Bank Ukraine (w/o employed agents) OTP Bank Russia (w/o employed agents) CKB Group (Montenegro) OTP Bank Albania OTP Bank Moldova Foreign subsidiaries, total Other Hungarian and foreign subsidiaries OTP Group (w/o employed agents) OTP Bank Russia - employed agents OTP Bank Ukraine - employed agents OTP Group (aggregated) Branches ATM POS 362 1,920 334 1,094 488 124 323 217 83 51 149 95 86 161 135 224 34 38 54 115 80 148 1,168 2,865 125,800 14,329 11,037 16,657 4,167 6,256 402 704 6,421 0 0 59,973 Branches ATM POS Headcount (closing) 10,189 5,619 2,228 3,022 889 1,693 356 1,906 311 1,046 467 114 298 187 82 49 148 95 2,313 85 176 134 220 34 39 51 117 86 151 1,099 2,791 5,127 514 447 830 22,681 557 33,427 4,402 618 135,901 15,580 11,384 15,038 4,940 7,843 293 607 7,251 0 0 62,936 Headcount (closing) 10,506 5,539 2,279 2,707 864 1,740 2,341 4,992 517 454 899 22,332 568 33,406 3,783 657 1,530 4,785 185,773 38,447 1,455 4,697 198,837 37,846 Definition of headcount number: closing, active FTE (full-time employee). The employee is considered as full-time employee in case his/her employment conditions regarding working hours are in line with a full-time employment defined in the Labour Code in the reporting entity's country. Part-time employees are taken into account proportional to the full-time working hours being effective in the reporting entity’s country. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) STATEMENT ON CORPORATE GOVERNANCE PRACTICE Corporate governance practice OTP Bank Plc., being registered in Hungary, has a corporate governance policy that complies with the provisions on companies of the act applicable (Civil Code). As the company conducts banking operations, it also adheres to the statutory regulations pertaining to credit institutions. Beyond fulfilling the statutory requirements, as a listed company on the Budapest Stock Exchange (BSE), the company also makes an annual declaration on its compliance with the BSE’s Corporate Governance Recommendations. After being approved by the General Meeting, this declaration is published on the websites of both the Stock Exchange (www.bet.hu) and the Bank (www.otpbank.hu). System of internal controls OTP Bank Plc., as a provider of financial and investment services, operates a closely regulated and state- supervised system of internal controls. OTP Bank Plc. has detailed risk management regulations applicable to all types of risks (credit, country, counterparty, market, liquidity, operational, compliance), which are in compliance with the regulations on prudent banking operations. Its risk management system extends to cover the identification of risks, the assessment and analysis of their impact, elaboration of the required action plans and the monitoring of their effectiveness and results. The business continuity framework is intended to provide for the continuity of services. Developed on the basis of international methodologies, the lifecycle model includes process evaluation, action plan development for critical processes, the regular review and testing of these, as well as related DRP activities. OTP Bank Plc.'s internal audit system is realised on several levels of control built on each other. The system of internal checks and balances includes process-integrated control, management control, independent internal audit organisation and executive information system. The independent internal audit organisation as an element of internal lines of defence promotes the statutory and efficient management of assets and liabilities, the defence of property, the safe course of business, the efficient operation of internal control systems, the minimisation of risks, moreover it reveals and reports deviations from statutory regulations and internal rules, makes proposal to abolish deficiencies and follows up the execution of actions. The independent internal audit organisation annually and quarterly prepares group-level reports on control actions for the executive boards. Once a year, the internal audit organisation with the prior opinion of the Audit Committee draws up, for the Supervisory Board and the Board of Directors, objective and independent reports in respect of the operation of risk management, internal control mechanisms and corporate governance functions. Furthermore, in line with the provisions of the Credit Institutions Act, reports, once a year, to the Supervisory Board and the Board of Directors on the regularity of internal audit tasks, professional requirements and the conduct of audits, and on the review of compliance with IT and other technical conditions needed for the audits. In line with the regulations of the European Union, the applicable Hungarian laws and supervisory recommendations, OTP Bank Plc. operates an independent organisational unit with the task of identifying and managing compliance risks. IT Controls Applications are developed by both in-house group resources and by third parties. OTP Bank applies administrative, logical and physical control measures commensurate with the risk to protect the IT systems storing and processing data, as follows: • access to data/systems is only possible on the basis of a predefined authorisation management process that applies the principle of least privilege, ensures segregation of responsibilities, that has regular access right reviews and ensures that dismissed employees’ access is revoked; • user authentication, authorisation and password management processes are controlled by policies and • audited; the systems have well-separated test and development environments, which ensures that program developments or modifications are only deployed to the operational environment after proper, controlled testing and approval; • systems are protected by appropriate network perimeter protection, various security devices and network • segmentation, furthermore all network communications are protected; the IT systems that store and process data are regularly backed up and stored in controlled premises with adequate protection for long-term retention, and the organisation carries out regular back-up tests ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) • adequate redundancy is applied for IT systems that store and process data to ensure business continuity and disaster resiliency; • has developed a BCP for critical systems and processes, which is regularly tested and reviewed; • the Bank collects and retains the complete log of all data processing activities and the confidentiality, availability, integrity and non-repudiation of these audit logs are ensured; there is a continuous, up-to-date protection against malicious codes; it ensures the regular implementation of vendor patches and updates for the environments used; it uses a data leakage protection solution to reduce the risk of data loss; it ensures the continuous monitoring of the operation of the physical and virtual environment system elements, and the detection and management of events, where possible automatically; the above measures are documented at an appropriate level, which ensures the traceability of the implementation of data security requirements in a transparent manner; it ensures the irretrievable deletion of the data stored on the media, the destruction of the media and the documentation of the destruction of the media during secure operational media disposal processes; it enforces data protection requirements already at the design stage of the implementation of the IT systems storing and processing personal data and of the systems operational processes related to them; it ensures that its employees have adequate knowledge of data protection requirements and provides regular data protection and information security training for them. • • • • • • • • General meeting The General Meeting is the supreme governing body of OTP Bank Plc. The regulations pertaining to its operation are set forth in the Company’s Articles of Association, and comply fully with both general and special statutory requirements. Information on the General Meeting is available in the Corporate Governance Report. In view of the situation caused by the epidemic, on 22 February 2021 the Parliament voted Act I of 2021 on the prevention of the coronavirus pandemic, which extended the scope of the Government Decree 502/2020 (XI.16.) (Government Decree) until 22 May 2021. Pursuant to such, in line with Section 9 of the Government Decree, the resolutions on the published agenda items were passed by OTP Bank Plc’s Board of Directors acting in the competence of the General Meeting on 16 April 2021. The Extraordinary General Meeting was held on 15 October 2021 in accordance with the general rules, traditionally, with the personal participation of the shareholders, subject to Section 3 (1) of the Government Decree, also in line with the Act I of 2021 on the prevention of the coronavirus pandemic. Regulations and information to be presented in the Business Report concerning securities conferring voting rights issued by the Company and senior officials, according to the effective Articles of Association, and ownership structure The Company’s registered capital is HUF 28,000,001,000, that is twenty-eight thousand million one thousand Hungarian forint, divided into 280,000,010 that is Two hundred and eighty million and ten dematerialised ordinary shares with a nominal value of HUF 100 each, and a total nominal value of HUF 28,000,001,000, that is twenty eight billion one thousand Hungarian forint. The ordinary shares of the Company specified all have the same nominal value and bestow the same rights in respect of the Company. There are no restrictions in place concerning the transfer of issued securities constituting the registered capital of the Company. No securities with special control rights have been issued by the Company. Special Employee Partial Ownership Plan Organization No. I. of OTP Employees and Special Employee Partial Ownership Plan Organization No. II. of OTP Employees (hereinafter referred to as: OTP SEPOPs) were established based on the decision of the Company’s certain employees and executives considered as employees pursuant to the Act XLIV of 1992 on Employee Partial Ownership Plan. Management rights of OTP SEPOPs are exercised by a trust named Alapítvány az OTP Munkavállalók Különleges Résztulajdonosi Programjáért, founded by the same employees setting up OTP SEPOPs. The Company did not participate either in foundation or in management of OTP SEPOPs. The Company in line with the ESOP Act initiated an employee share ownership plan having a remuneration purpose and founded OTP Bank ESOP Organization for its execution (hereinafter referred to as ESOP Organization). Pursuant to the laws, the management rights over the ESOP Organization are exercised by a law firm, the so called trustee. In the case of the ESOP Organization Szűcs Law Firm is entitled to exercise the authorities of the trustee. The Company participated in the foundation of the ESOP Organization, ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) however, after its foundation it cannot participate in its management, and according to the laws, it is not entitled to either give orders or to recall the trusteeRules on the restrictions of the voting rights: The Company’s ordinary shares confer one vote per share. An individual shareholder or group of shareholders may not exercise voting rights in respect of in an extent exceeding 25%, or – if the voting rights of another shareholder or group of shareholders exceed 10% – exceeding 33% of the total voting rights represented by the shares conferring voting rights at the Company’s General Meeting. The shareholder is obliged to notify the Company’s Board of Directors without delay if the shareholder directly or indirectly, or together with other shareholders in the same group of shareholders, holds more than 2% of the voting rights represented by the shares conferring voting rights at the Company’s General Meeting. Concurrently with this, the shareholder is obliged to designate the shareholders through which the indirect voting right exists, or the members of the group of shareholders. In the event of a failure to provide such notification, or if there are substantive grounds for assuming that the shareholder has made a misleading declaration regarding the composition of the shareholder group, then the shareholder’s voting right shall be suspended and may not be exercised until the shareholder has met the above obligations. The notification obligation stipulated in this paragraph and the related legal consequences are also incumbent upon individuals who are classified or may be classified as the Company’s shareholders under Article 61 of the Capital Markets Act. The Company must also be provided with proof of the conditions for exemption from the notification obligation in accordance with Section 61 (7)-(8) and Section 61 (10)-(11)-(12), of the Capital Markets Act. Shareholder group: the shareholder and another shareholder, in which the former has either a direct or indirect shareholding or has an influence without a shareholding (collectively: a direct and/or indirect influence); furthermore: the shareholder and another shareholder who is exercising or is willing to exercise its voting rights together with the former shareholder, regardless of what type of agreement between the participants underlies such concerted exercising of rights. For determining the existence and extent of the indirect holding, the rules of the Credit Institutions Act relating to the calculation of indirect ownership shall be applied. If the voting rights that may be exercised by a shareholder group exceed the threshold stipulated in the first paragraph of this section, the voting rights shall be reduced in such a way that the voting rights relating to the shares most recently acquired by the group of shareholders shall not be exercisable. If there are substantive grounds to presume that the exercising of voting rights by any shareholder or shareholders might result in a breach of the rules of the Capital Markets Act relating to the acquisition of a controlling interest, the Board of Directors’ authorised representative responsible for the registration of shareholders at the venue of the General Meeting, or the Chairman of the General Meeting, may exclude the affected shareholders from attending the General Meeting or exercising voting rights. The General Meeting has exclusive authority with respect to the decision regarding the delisting of the shares (qualified majority). When making the decisions, shares embodying multiple voting rights shall represent one share. The Company is not aware of any kind of agreements among the owners that could give rise to the restriction of the transfer of issued securities and/or the voting rights. Rules on the appointment and removal of executive officers, and rules on amendment of the Articles of Association: The Board of Directors has at least 5, and up to 11 members. When making the decisions, shares embodying multiple voting rights shall represent one share. The members of the Board of Directors are elected by the General Meeting based on its decision uniformly either for an indefinite period or for five years; in the latter case the mandate ends with the General Meeting concluding the fifth financial year following the election. The mandate of a member elected during this period expires together with the mandate of the Board of Directors. The Board of Directors elects a Chairman and, may elect one or more Deputy Chairmen, from among its own members, whose period of office shall be equal to the mandate of the Board of Directors. The Chairman of the Board of Directors is also the Chief Executive Officer (Chairman & CEO) of the Company, unless the Board of Directors decides within its competence that the position of Chairman of the Board of Directors and the Chief Executive Officer of the Company are held by separate persons. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) The membership of the Board of Directors ceases to exist by g. expiry of the mandate, resignation, h. i. recall, j. death, k. l. the occurrence of grounds for disqualification as regulated by law. termination of the employment of internal (executive) Board members. The General Meeting has exclusive authority with respect to the following matters: the recall of members of the Board of Directors, the Supervisory Board and Audit Committee, and of the auditor; (qualified majority) More than one third of the members of the Board of Directors and the non-executive members of the Supervisory Board may be recalled within a 12-month period only if any shareholder holds more than 33% of the shares issued by the Company, which have been obtained by the shareholder by way of a public purchase offer. except in the cases referred by these Articles of Association to the authority of the Board of Directors, the establishment and amendment of the Articles of Association; (qualified majority); the General Meeting decides on proposals concerning the amendment of the Articles of Association – based on a resolution passed by shareholders with a simple majority – either individually or en masse. The Board of Directors is obliged to prepare the Company’s financial statements in accordance with the Accounting Act, and make a proposal for the use of the profit after taxation; prepare a report once a year for the General Meeting, and once every three months for the Supervisory Board, concerning management, the status of the Company’s assets and business policy; provide for the proper keeping of the Company's business books; perform the tasks referred to its authority under the Credit Institutions Act, in particular: - ensuring the integrity of the accounting and financial reporting system; - elaborating the appropriate strategy and determining risk tolerance levels for each business unit concerned; - setting risk assumption limits; - providing the necessary resources for the management or risk, the valuation of assets, the use of external credit ratings and the application of internal models. The following, in particular, come under the exclusive authority of the Board of Directors: election of the Chairman & Chief Executive Officer of the Company, and exercising employer’s right in respect thereof; election of one or more Deputy Chairmen of the Board of Directors; determination of the annual plan; the analysis and assessment of the implementation of business-policy guidelines, on the basis of the Company’s quarterly balance sheet; decisions on transactions referred to the authority of the Board of Directors by the Company's organisational and operational regulations; decision on launching, suspending, or terminating the performance of certain banking activities within the scope of the licensed activities of the Company; designation of the employees entitled to sign on behalf of the Company; decision on the increasing of registered capital at the terms set out in the relevant resolution of the General Meeting; decision to acquire treasury shares at the terms set out in the relevant resolution of the General Meeting; decision on approving internal loans in accordance with the Credit Institutions Act; decision on the approval of regulations that fundamentally determine banking operations, or are referred to its authority by the Credit Institutions Act. The following shall qualify as such regulations: - - - - the collateral evaluation regulations, the risk-assumption regulations, the customer rating regulations, the counterparty rating regulations, ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) - - - the investment regulations, the regulations on asset classification, impairment and provisioning, the organisational and operational regulations, which contain the regulations on the procedure for assessing requests related to large loans, the regulations on the transfer of signatory rights; - the decision on approving the Rules of Procedure of the Board of Directors; decision on steps to hinder a public takeover procedure; decision on the acceptance of a public purchase offer received in respect of treasury shares; decision on the commencement of trading in the shares in a regulated market (flotation); decision on the cessation of trading in the shares in a given regulated market, provided that the shares are traded in another regulated market (hereinafter: transfer). The Board of Directors is exclusively authorised to: decide, in the cases specified in the Civil Code, on acceptance of the Company’s interim balance sheet, subject to the prior approval of the Supervisory Board; decide, instead of the General Meeting, to pay an advance on dividends, subject to the preliminary approval of the Supervisory Board; make decisions regarding any change in the Company’s name, registered office, permanent establishments and branches, and in the Company’s activities – with the exception of its core activity – and, in relation to this, to modify the Articles of Association should it become necessary to do so on the basis of the Civil Code or the Articles of Association; make decision on mergers (if, according to the provisions of the law on the transformation, merger and demerger of legal entities, the approval of the General Meeting is not required in order for the merger to take place). The Board of Directors directly exercises employer's rights in respect of the Chairman & CEO. The person affected by a decision may not participate in the decision making. Employer rights in respect of the executive directors of the Company are exercised by the Board of Directors through the Chairman & CEO, with the proviso that the Board of Directors must be notified in advance of the appointment and dismissal of the Deputy CEOs. With regard to issues related to the exercising of employer's rights in respect of employees, the Company is represented by the Chief Executive Officer and by the senior company employees defined in the Organisational and Operational Regulations of the Company, in accordance with the delegation of authority approved by the Board of Directors. If the Chairman of the Board of Directors and the CEO are different persons, the employer rights in respect of the other executive directors of the Company (CEO, deputy CEOs) are exercised by the Board of Directors through the Chairman of Board of Directors, with the proviso that the Board of Directors shall be notified in advance of the appointment and dismissal of the CEO and Deputy CEOs. With regard to issues related to the exercising of employer's rights in respect of employees, the Company is represented by the persons defined in the Organisational and Operational Regulations of the Company, in accordance with the delegation of authority approved by the Board of Directors. The Board of Directors may delegate, to individual members of the Board of Directors, to executive directors employed by the Company, and to the heads of the individual service departments, any task that does not come under the exclusive authority of the Board of Directors in accordance with these Articles of Association or a General Meeting resolution. The Company may acquire treasury shares in accordance with the rules of the Civil Code. The prior authorisation of the General Meeting is not required for the acquisition of treasury shares if the acquisition of the shares is necessary in order to prevent a direct threat of severe damage to the Company (this provision is not applicable in the event of a public purchase offer aimed at buying up the Company’s shares), as well as if the Company acquires the treasury shares in the context of a judicial procedure aimed at the settlement of a claim to which the Company is entitled, or in the course of a transformation. The Company has not made agreements in the meaning of points (j) and (k) in paragraph 95/A of Act No. C of 2000 on Accounting. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) OWNERSHIP STRUCTURE OF OTP BANK PLC. Description of owner Domestic institution/company Foreign institution/company Domestic individual Foreign individual Employees, senior officers Treasury shares2 Government held owner International Development Institutions Other3 TOTAL 1 January 2021 31 December 2021 Total equity Ownership share 20.93% 71.60% 4.79% 0.11% 0.85% 1.55% 0.08% 0.04% 0.04% 100.00% Voting rights1 21.26% 72.73% 4.87% 0.12% 0.87% 0.00% 0.08% 0.04% 0.04% 100.00% Quantity 58,605,628 200,480,153 13,424,090 319,346 2,393,390 4,334,140 219,800 108,981 114,482 280,000,010 Ownership share Voting rights 1 26.66% 66.69% 4.57% 0.11% 0.69% 1.16% 0.07% 0.04% 0.00% 100.00% 26.97% 67.47% 4.63% 0.12% 0.70% 0.00% 0.07% 0.04% 0.00% 100.00% Quantity 74,637,180 186,733,858 12,805,389 319,712 1,941,018 3,251,484 188,326 120,871 2,172 280,000,010 1 Voting rights in the General Meeting of the Issuer for participation in decision-making. 2 Treasury shares do not include the OTP shares held by ESOP (OTP Bank Employee Stock Ownership Plan Organization). Pursuant to Act V of 2013 on the Civil Code, OTP shares held by the ESOP are not classified as treasury shares, but the ESOP must be consolidated in accordance with IFRS 10 Consolidated Financial Statements standard. On 31 December 2021 ESOP owned 7,656,897 OTP shares. 3 Non-identified shareholders according to the shareholders’ registry. NUMBER OF TREASURY SHARES HELD IN THE YEAR UNDER REVIEW (2021) OTP Bank Subsidiaries TOTAL 1 January 4,334,140 0 4,334,140 31 March 4,330,609 0 4,330,609 30 June 1,120,786 0 1,120,786 30 September 1,077,322 0 1,077,322 31 December 3,251,484 0 3,251,484 SHAREHOLDERS WITH OVER/AROUND 5% STAKE AS AT 31 DECEMBER 2021 Name Nationality1 Activity2 MOL (Hungarian Oil and Gas Company Plc.) KAFIJAT Group KAFIJAT Ltd. MGTR Alliance Ltd. Groupama Group Groupama Gan Vie SA Groupama Biztosító Ltd. D D D D F/D F D C C C C C C C Number of shares 24,000,000 19,661,409 9,839,918 9,836,491 14,311,769 14,140,000 171,769 Ownership3 Voting rights3,4 Notes5 8.57% 7.02% 3.51% 3.51% 5.11% 5.05% 0.06% 8.67% 7.10% 3.56% 3.55% 5.17% 5.11% 0.06% - - - - - - - 1 Domestic (D), Foreign (F). 2 Custodian (CU), Public Institution (PU), International Development Institutions (ID), Institutional (I), Company (C), Private (PR), Employee or senior officer (E). 3 Rounded to two decimals. 4 Voting rights in the General Meeting of the Issuer for participation in decision-making. 5 Eg: professional investor, financial investor, etc. Senior officers, strategic employees and their shareholding of OTP shares as at 31 December 2021 Type1 Name Position IT IT IT IT IT IT IT IT IT IT IT FB FB FB FB FB FB SP SP dr. Sándor Csányi 2 Chairman and CEO Deputy Chairman Tamás Erdei member Gabriella Balogh member Mihály Baumstark member, Deputy CEO Péter Csányi member dr. István Gresa member, Deputy CEO Antal Kovács György Nagy 3 member dr. Márton Gellért Vági member member dr. József Vörös member, Deputy CEO László Wolf Chairman Tibor Tolnay Deputy Chairman dr. Gábor Horváth member Klára Bella member dr. Tamás Gudra member András Michnai member Olivier Péqueux Deputy CEO László Bencsik Deputy CEO György Kiss-Haypál TOTAL No. of shares held by management: 1 Employee in strategic position (SP), Board Member (IT), Supervisory Board Member (FB) 2 Number of OTP shares owned by Dr. Sándor Csányi directly or indirectly: 4,080,034 3 Number of OTP shares owned by György Nagy directly or indirectly: 600,000 Commencement date of the term 15/05/1992 27/04/2012 16/04/2021 29/04/1999 16/04/2021 27/04/2012 15/04/2016 16/04/2021 16/04/2021 15/05/1992 15/04/2016 15/05/1992 19/05/1995 12/04/2019 16/04/2021 25/04/2008 13/04/2018 Expiration/termination of the term 2026 2026 2026 2026 2026 2026 2026 2026 2026 2026 2026 2023 2023 2023 2023 2023 2023 Number of shares 293,907 32,285 1,393 44,000 1 173,258 79,244 0 0 171,114 532,143 54 0 344 0 100 0 10,038 3,137 1,341,018 ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) Committees13 Members of the Board of Directors Dr. Sándor Csányi – Chairman Mr. Tamás Erdei – Deputy Chairman Mrs. Gabriella Balogh14 Mr. Mihály Baumstark Dr. Tibor Bíró15 Mr. Péter Csányi6 Dr. István Gresa Mr. Antal Kovács Mr. György Nagy6 Dr. Antal Pongrácz7 15 Dr. László Utassy7 Dr. Márton Gellért Vági6 Dr. József Vörös Mr. László Wolf Members of the Supervisory Board Mr. Tibor Tolnay – Chairman Dr. József Gábor Horváth – Deputy Chairman Ms. Klára Bella Dr. Tamás Gudra16 Mr. András Michnai Mr. Olivier Péqueux Dr. Márton Gellért Vági17 Members of the Audit Committee Dr. József Gábor Horváth – Chairman Mr. Tibor Tolnay – Deputy Chairman Dr. Tamás Gudra18 Mr. Olivier Péqueux Dr. Márton Gellért Vági19 The résumés of the committee and board members are available in the Corporate Governance Report/Annual Report. Personal and organizational changes On 12 March 2021, the labour contract of Mr. Tibor Johancsik, Deputy CEO in charge of IT had been terminated by mutual agreement. The new head of the Digital Division (IT Division until 1 May 2021) is Mr. Péter Csányi, who had been in charge of digital developments and sales as managing director until his appointment. Key task of the area in transition is going to be the efficient support of the Bank’s digital transformation through further improving customer experience. The new strategy of the division is aimed at creating such an IT that has business competence, but also serving as a platform for other business areas while setting the pace of digitalization in accordance with the National Bank of Hungary’s digital recommendations. On 16 April 2016 the Board of Directors acting in the competency of the Annual General Meeting elected Ernst & Young Ltd. as the Bank’s auditor concerning the audit of OTP Bank Plc.’s separate and consolidated annual financial statements in accordance with International Financial Reporting Standards for the year 2021, from 1 May 2021 until 30 April 2022. On 16 April the Board of Directors acting in the competency of the Annual General Meeting, elects Dr. Tamás Gudra as member of the Supervisory Board (SB) and of Audit Committee (AC) of the Company until the Annual General Meeting of the Company closing the 2022 business year, but not later than 30 April 2023. 13 Personal changes can be found in the „Personal and organizational changes” chapter. 14 From 16 April 2021, she is a member of the Board of Directors of OTP Bank Plc. 15 His term of office expired on 16 April 2021. 16 From 16 April 2021, he is a member of the Supervisory Board of OTP Bank Plc. 17 His position on the Supervisory Board was terminated on 16 April 2021. 18 From 16 April 2021, he is a member of the Audit Committe of OTP Bank Plc. 19 His position on the Audit Committee was terminated on 16 April 2021. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) On 16 April 2021 the Board of Directors acting in the competency of the Annual General Meeting, elects Dr. Sándor Csányi Mr. Antal György Kovács Mr. László Wolf Mr. Tamás György Erdei Mr. Mihály Baumstark Dr. István Gresa Dr. József Zoltán Vörös Mr. Péter Csányi Mrs. Gabriella Balogh Mr. György Nagy Dr. Gellért Márton Vági as members of the Board of Directors (BoD) of the Company until the Annual General Meeting of the Company closing the 2025 business year, but not later than 30 April 2026. On 16 April 2021, Dr. Sándor Csányi was elected as Chairman of the Bank’s Board of Directors and in accordance with subsection 4 of section 9 of the Articles of Association of the Company as Chief Executive Officer (Chairman & CEO). Dr. Sándor Csányi performs his duties until the closing AGM of the fiscal year 2025 but latest until 30 April 2026. On 16 April 2021 Mr. Tamás György Erdei, the member of the Board of Directors, was elected a Deputy Chairman of the Board of Directors. Mr. Tamás György Erdei performs his duties until the closing AGM of the fiscal year 2025 but latest until 30 April 2026 Operation of the executive boards OTP Bank Plc. has a dual governance structure, in which the Board of Directors is the Company’s executive management body in its managerial function, while the Supervisory Board is the management body in its supervisory function of the Company. It controls the supervision of the lawfulness of the Company’s operation, its business practices and management, performs oversight tasks and accepts the provisions of the Bank Group's Remuneration Policy. The effective operation of Supervisory Board is supported by the Audit Committee, as a committee, which also monitors the internal audit, the risk management, the reporting systems and the activities of the auditor. In order to assist the performance of the governance functions the Board of Directors founded and operates, as permanent or other committees, such as the Management Committee, the Remuneration Committee, the Nomination Committee and the Risk Assumption and Risk Management Committee. To ensure effective operation OTP Bank Plc. also has a number of further permanent committees. OTP Bank Plc. gives an account of the activities of the executive boards and the committees every year in its Corporate Governance Report. The Board of Directors held 9, the Supervisory Board held 6 meetings, while the Audit Committee held 2 meetings in 2021. In addition, resolutions were passed by the Board of Directors on 180, by the Supervisory Board on 90 and by the Audit Committee on 28 occasions by written vote. Policy of diversity OTP Bank Plc. determines and regulates the criteria for the selection of senior executives in line with European Union as well as domestic legal requirements and directives fundamentally determining the operation of credit institutions. When designating members of the management bodies (Board of Directors, Supervisory Board) as well as appointing members of the Board of Directors and administrative members (Management), OTP Bank Plc. considers the existence of professional preparation, the high-level human and leadership competence, the versatile educational background, the widespread business experience and business reputation of the utmost importance, at the same time, it is also highly committed to taking efficient measures in order to ensure diversity with regard to corporate operation, including the gradual improvement in women’s participation rate. OTP Bank Plc.’s Nomination Committee continuously keeps tracking the European Union and domestic legislation relating to women’s quota on its agenda, in that when unambiguously worded expectations are announced, it promptly takes the necessary measures. In accordance with OTP Bank Plc.’s currently approved ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) strategy, the goal is to have at least one female member in both the Bord of Directors and the Supervisory Board. It is important to note, however, that, as a public limited company, the selection of the members of the management bodies falls within the exclusive competence of the General Meeting upon which – beyond its capacity to designate enforcing the above aspects to maximum effect – OTP Bank Plc. has no substantive influence. According to OTP Bank Plc.’s Articles of Association, a Board of Directors comprising 5-11 members and a Supervisory Board comprising 5-9 members are set up at OTP Bank Plc. Currently the Board of Directors operates with 11 members and has one female member, the Supervisory Board comprises 6 members and has one female member. The management of OTP Bank Plc. currently comprises 6 members and has no female member. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) ENVIRONMENTAL POLICY, ENVIRONMENTAL PROJECTS OTP Group is committed to the protection of the environment, the combating of climate change and its impacts, and the preservation and low-impact use of natural resources. OTP Bank’s environmental activities are regulated in its Environmental Regulation, which is revised annually. The Regulation ensures legal compliance and the consideration and integration of environmental criteria into the Bank’s business operations in order to minimise the environmental impacts of operating and maintaining the Bank’s organisation. It also sets out the rules on implementing the principles of sustainable procurement. OTP Group members operate in full compliance with environmental legislation and received no fines in 2020. In CDP’s Climate Change Questionnaire, OTP Group was rated at B- in 2021, thus retaining its previous rating. The environmental impacts of the OTP Group are related to the provision of financial services and directly from its operations. In connection with the provision of financial services, the management of environmental risks and the exploitation of environmental opportunities take place within the framework of the Environmental, Social and Governance (ESG) strategy; therefore, these activities are presented in the chapter Non-financial Report. Our efforts to reduce the direct environmental impact of OTP Group’s operations are centred around improving energy efficiency and reducing paper usage. The environmental risks associated with our operations are analysed and managed within our operational risk management process. Potential risks are identified during the annual process-based self-assessment, and the assessment of climate change risks is also included in the scenario analysis of risks with low probability but high impact. Energy consumption and business travel OTP Group uses state-of-the-art technology in new construction and renovation projects; we are also continually expanding our use of LED lighting technology. We are constantly seeking opportunities to increase energy efficiency, by analysing the energy efficiency and consumption characteristics of our buildings. As part of our renovation process, we are replacing air conditioning units, always ensuring that the new units use environmentally-friendly coolants. Thanks to its energy efficiency investments in 2021, OTP Bank consumed 1,400 GJ less energy. Whenever a branch of the parent bank is renovated, we always examine the possibility of installing solar panels and heat pumps. In 2021, we installed solar panels at two branches and a holiday resort. Our systems generated a total of 842 GJ energy from solar power. Moreover, our central archives facility has been using geothermal energy for several years, amounting to 3,499 GJ in 2021. The solar panels of our subsidiaries generated a total of 893 GJ of solar power. We are committed to using green electricity. One of DSK Bank's data centres in Sofia procures electricity from 100% renewable sources, and from 2022, we will cover 100% of the electricity demand of the parent bank and our Serbian and Croatian subsidiaries in the same way. Energy use across the Banking Group has been greatly impacted by the pandemic. Regarding ventilation and fresh air in our buildings, air recirculation was suspended and ventilation was intensified instead, which increased our energy usage; however, the high percentage of staff working from home reduced our electricity consumption. The number of business trips and the size of the vehicle fleet are determined by the needs of the business. Our Group’s vehicle policy sets carbon limits; moreover, the choice of cars includes environmentally-friendly vehicles in all vehicle categories. In 2021, our Romanian subsidiary purchased two electric cars, our Bulgarian bank seven and our Croatian bank three hybrid cars. The number of kilometres travelled also decreased at group level and for OTP Bank, partly due to the measures related to the pandemic and partly due to business reasons. The amount of business travel has been reduced significantly by the use of online meetings, which has become common practice due to hybrid work. Our existing bicycle storage facilities continued to be available to both customers and employees in 2021. OTP Bank provided new storage facilities at three branches and the new Record Office, our Bulgarian and Ukrainian subsidiaries have each created new bicycle storage spaces at two locations, while the Albanian bank provided bicycle storage at five locations at the capital's branches. Energy consumption figures are presented for OTP Bank. The bank’s overall energy consumption decreased by 5% compared to the previous year. Energy consumption per capita is unchanged. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) Volume of energy consumption, OTP Bank Total energy consumption (GJ) Per capita energy consumption (GJ) Energy consumption data are derived from readings; the measured consumption volumes are converted to energy using local average calorific values The projection of the per capita value is the average number of full-time employees (TMD). 1 Data adjusted for the consumption of Monicomp merged into OTP Bank, which was not available at the time of the previous year's statement. 2020 251,7301 26.75 2021 263,228 26.75 Efforts to reduce paper use OTP Group has been consistently endeavouring to reduce paper use and printing. OTP Bank reduced its office paper usage by 17% over 2020, with the pandemic and increased rates of working from home playing a significant role in this development. Thanks to a change in printing technology, paper consumption decreased by 6.5%; however, at the group level, there was no further decrease compared to the drop in 2020. At our Romanian, Ukrainian and Russian subsidiaries, the use of paper has decreased with the expansion of digital processes. OTP Bank and its Romanian subsidiary increased its share of recycled paper in paper use. OTP Bank uses FSC-certified paper for its invoices and marketing flyers, as well as recycled paper for DM letters. Our Serbian subsidiary also uses FSC-certified paper and our Slovenian subsidiary PEFC-certified paper. Paper usage quantities, OTP Bank Total amount of paper used (t) (office, packaging, indirect) Per capita paper use (kg)1 1 The projection is based on the average number of full-time employees (TMD). Sustainable use and waste management 2020 1.137 121 2021 978 99 We follow the principle of using all our equipment, devices and machines for the longest time reasonably possible. We explicitly aim to use furniture until the end of its lifecycle, reusing it multiple times and ensuring the compatibility of replacements. OTP Bank, DSK Bank, OTP Bank Romania and OTP Banka Srbija all follow the practice of making charitable donations of any furniture no longer used but in good condition, as well as functioning IT equipment (mostly computers and laptops), to institutions and organisations in need. OTP Bank was the first bank in Hungary to issue a bank card made largely (85%) of recycled plastic. The card was available to junior customers, and we issued 50,000 recycled cards to our customers over the year. In 2021, our Serbian subsidiary reduced its purchases of plastic packaging products and began using paper cups for water dispensers. Our Romanian, Croatian, Serbian, Montenegrin and Moldovan subsidiaries also use refilled toners to reduce waste from the use of toners and ink cartridges. All members of OTP Group collect and manage hazardous waste and paper containing business secrets selectively, in compliance with the relevant laws and regulations. The selective collection of non-confidential paper waste, PET bottles and glass is available in the head office buildings of OTP Bank, while the collection of packaging metal has also been available since 2021. During the year, we also set up selective waste collection in ten bank branches. Our Ukrainian subsidiary operates selective paper collection at its head office building. Our Serbian subsidiary collects paper waste selectively in its branches and head office buildings. Our Albanian subsidiary collects paper waste selectively. Our Romanian subsidiary collects all paper, metal, glass and plastic selectively. Our Slovenian subsidiary also collects communal waste selectively (including biodegradable food waste). Our Croatian subsidiary has collected paper and plastic waste selectively for years, and from 2021, metal and glass waste will also be collected separately. DSK Bank operates selective waste collection at its sites in Sofia and Varna and has expanded the selective collection of paper waste during the year. Our Montenegrin subsidiary has introduced selective paper waste collection at its head office and its archives facility. Awareness-raising Most members of our Banking Group have a tradition of raising awareness and taking joint action to protect environmental and natural resources. In 2021, we supported several environmental initiatives and encouraged the environmentally conscious behaviour of our employees. OTP Bank and OTP Bank Serbia have joined the Mastercard Priceless Planet Coalition, launched in 2020, and are participating in a campaign that encourages consumers to protect the environment and actively contribute to this goal themselves. The Priceless Planet Coalition aims to preserve the environment through the restoration of 100 million trees over five years and to help mitigate the adverse effects of climate change. By 2022, three afforestation sites have been selected in Kenya, Brazil and Australia, but more will be added ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) later. OTP Bank has supported the Priceless Planet Coalition with a donation of 100,000 euros, while our Serbian subsidiary has committed to planting a tree for each bank account opened. DSK Bank was the first bank in Bulgaria to join the Mastercard Wildlife Impact Card programme. The bank and Mastercard support the issuance of all Mastercard Wildlife Impact cards with one dollar spent on protecting and restoring natural habitats. The credit card is made of environmentally friendly material. DSK Bank also supported the One Tree Initiative, which aims to create an interactive map of Sofia’s tree stock. The tree survey was conducted by volunteers, registering a total of more than 12,000 trees. The bank also supported the initiative of the Hungarian Cultural Institute, within the framework of which bicycle storage spaces will be installed in front of cultural institutions. The aim of the project was to ensure the environmentally friendly accessibility of cultural institutions. Our Croatian subsidiary also supported the “Drop into the Sea” ecological action of the Telašćica Nature Reserve, which drew attention to the threat to marine ecosystems and fish stocks due to increasing amounts of waste. The bank also supported Ekotlon, the biggest plogging competition. In addition to collecting litter, the event also supported a kindergarten with eco-equipment purchased from its registration fees. Generator (Gamechanger), our Serbian subsidiary’s local start-up programme, launched the Generator Zero competition in 2021, specifically seeking and rewarding innovative solutions to reduce its carbon footprint. Organisations had until the end of the year to apply for the competition, and the winner will receive mentoring for further development and promotion in addition to the cash prize. Ten finalists were selected from the 72 projects nominated. We are also extending the scope of our employee involvement programmes: To promote environmental awareness, we wrote about the reduction in paper use and disposable plastics in the OTP Bank’s online magazine. Our Croatian subsidiary has reduced its use of plastics and implemented even more responsible waste management in three cities under the “Green Way to Green” programme. Our Serbian bank has launched an awareness-raising initiative among employees to increase environmentally and business-friendly behaviour and reduce CO2 emissions. The bank also supported the Green Serbia 2021 campaign, which planted trees in ten cities. In order to make employees more sensitive to the environment, our Slovenian subsidiary bank organised a workshop and presentation for managers and e-learning for employees. In 2021, the Bank joined the Slovenian Green Network, which brings together more than 400 companies, educational institutions, institutes and other organisations with a variety of projects for sustainable development and social responsibility. Our Ukrainian subsidiary has joined the “Batteries, inward” campaign, in which used batteries are collected and delivered to a recycling plant in Romania. The bank sent more than 200 kg of batteries to be recycled. Following its energy renovations, our Montenegrin subsidiary will also train its employees in the energy- conscious use of the systems. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) NON-FINANCIAL STATEMENT – OTP BANK PLC. The social, environmental and wider economic performance and impacts of OTP Group are also reported in its dedicated Sustainability Report. The Sustainability Report for 2021 is a group-level report that meets the GRI (Global Reporting Initiative) Standard and is certified by an independent third party. It is available as a digital version on OTP Bank’s website. The information in this chapter is provided in order to comply with the Accounting Act, while also aiming to keep the duplication of information to a minimum. Information concerning environmental protection and climate change is provided mainly in the chapter on environmental Policy and Environmental Protection Measures. OTP Bank is committed to ethical business conduct in all respects; our principles are set out in our Code of Ethics, which is binding for all our employees and agents. Our financial services and operations have significant social and environmental impacts; thus, our objective is to manage risks responsibly while taking advantage of opportunities and delivering positive outcomes. In 2021, OTP Bank signed the UN Environment Programme Finance Initiative (UNEP FI), a framework for the sustainable banking sector. The Principles are the leading framework for ensuring that banks’ strategy and practice align with the vision society has set out for its future in the UN Sustainable Development Goals and the Paris Climate Agreement. Banks who have signed the Principles commit to be ambitious in their sustainability strategies, working to mainstream and embed sustainability into the heart of their business. The integration of sustainability is supported by a strong organisational background, which was completed in 2021. The ESG transformation covers both OTP Bank and its subsidiaries and is managed by an ESG Committee established by the Board of Directors. The Committee is the decision-making body responsible for ESG strategy, plans and policies and for supporting the Bank's governing bodies in the performance of ESG tasks. The Chairman of the Committee is appointed by the Board of Directors. The ESG Committee has established an ESG Operational Subcommittee, which provides operational support to the ESG Committee and help in the preparation of decisions. The head of the Subcommittee - also the head of ESG Business Transformation - is the Director of the Green Programme Directorate. The three key areas of ESG integration are ESG business transformation, ESG risk management and ESG control function. The ESG Strategy of the OTP Group was approved by the Management Committee in 2021. The OTP Group wishes to play a leading role regionally in financing a fair and gradual transition to a low-carbon economy as well as building a sustainable future by offering balanced financing opportunities. OTP Group approaches ESG from three main perspectives: as a responsible service provider, as a responsible employer and as a responsible social player. In addition to business opportunities, the strategy includes the management of relevant risks as well as social and corporate governance objectives. The strategy covers the period up to 2024, and our goal is to achieve full ESG integration at group level. Green Finance We have taken significant steps towards exploiting the potential of green finance. Green mortgage loans (distributed by OTP Bank, and held in the balance sheet of OTP Mortgage Bank) and green covered bonds (issued by OTP Mortgage Bank) help achieve real estate goals for sustainability. OTP Mortgage Bank has set the strategic goal of increasing the proportion of green loans within new loan disbursements and has also created a framework for green mortgage bonds. The bank was the first in the domestic market to issue a green mortgage bond, building on the Hungarian National Bank's (NBH) green mortgage purchase programme. The company issued securities with a total nominal value of HUF 95 billion in 2021, so in addition to the previously disbursed green loans, the company also provided funds to finance the green loans to be disbursed after the issue. The Mortgage Bank publishes the most important financial and environmental impact data relating to mortgage bonds annually. The first report presenting information for the year 2021 will be published at the same time as the company’s annual report. The NBH Green Home Programme was launched in the second half of 2021 as part of the Growth Loan Programme. These loans with a maximum interest rate of 2.5% help customers buy and build energy-efficient new homes. Under the programme, the Hungarian National Bank provides refinancing sources to credit institutions at 0% interest rates, provided that the energy requirements for the financed property are met. The central bank provides a total of HUF 200 billion in funds for the programme. We experienced interest in this loan structure that exceeded expectations, and by the end of 2021, our bank group had concluded contracts in the amount of HUF 20.1 billion and disbursed loans in the amount of HUF 4.9 billion. Loan products of the Hungarian Development Bank (MFB) financed by both EU and from MFB’s own sources were still available at OTP Bank in 2021. The population had access to preferential loans through these ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) structures in order to implement energy improvements. During the year, we entered into loan agreements amounting to HUF 5 billion, accounting for 7% of all loans contracted through MFB Points. We have developed four new products for corporate lending to help meet renewable energy production, electro-mobility, green agricultural goals and high-energy office investments. The total amount of loans cleared under the green housing, corporate and municipal capital relief programme provided by the NBH in OTP Bank is approximately HUF 74.5 billion. A significant proportion of green loans comprise projects for the utilisation of renewable energy sources within the framework of project financing. Renewable energy projects represent a considerable share of green lending in our project financing. In 2021, we signed contracts for eight new projects at OTP Group level in the amount of HUF 81.5 billion, a significant increase compared to previous years. The projects are located in Hungary, Bulgaria, Romania and Croatia, and the financing was partly implemented with the involvement of the subsidiaries. The projects generated 1,175 MW of renewable capacity, but funding is not always provided by OTP Group alone. At group level, the project financing portfolio related to renewable energy projects had reached HUF 84.2 billion by the end of the year, of which OTP Bank's share was HUF 57.8 billion. In 2021, loans promoting energy efficiency, the use of renewable energy and e-mobility were available from our subsidiaries in Croatia, Romania, Montenegro, Albania and Moldova. Our goal for 2025 is to have green products available in all segments for OTP Core, while the development of green financing plans at subsidiaries will take place in 2022. OTP Bank plans to issue green bonds in 2022 to finance group-level projects. The purpose of the OTP Fund Management OTP Climate Change 130/30 Fund is to provide investment opportunities in the shares of developed and emerging market companies that may be the winners of directives, legal regulations and economic policy changes aimed at mitigating the effects of climate change. The net asset value of the Fund at the end of 2021 was HUF 36.3 billion. In 2021, together with the OTP Omega Fund, we started to amend the management regulations of the OTP Climate Change 130/30 Fund in order to meet the criteria of a fund promoting environmental or social characteristics or a combination thereof, i.e. Sustainable Finance Disclosure Regulation (SFDR) Article 8. The table below shows the disclosures of the OTP Group and banks operating in EU member states in accordance with Regulation (EU) 2020/852 (Taxonomy Regulation). Disclosure under Article 8 Delegated art 10 OTP Group consolidated Art 10 (3) a, Eligible proportion * Art 10 (2) a, Non-eligible proportion* Art 10 (2) b, Proportion of derivatives * Art 10 (2) b, Proportion to central gov., central bank, supranational issuer* Art 10 (2) c, Proportion of non-NFRD undertakings* Art 10 (2) Proportion of trading portfolio* Art 10 (2) Proportion of on-demand inter-bank loans* DSK Bank OTP Bank Croatia SKB Bank 0.41% 0.21% 0% ANNUAL REPORT 2021 0.15% 67.29% 0.93% 27.14% 8.48% 1.17% 4.77 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) Disclosure under Article 8 Delegated art 10 OTP Bank Romania 0.11% Art 10 (3) d, XI. Annex disclosures information Contextual towards quantitative indivators incl. scope of assets and activities covered, data sources and limitation. year from second of Starting implementationonly: Explanations of the nature and objectives of Taxonomy- aligned economic activities and the evouolution Taxonomy-aligned of time, economic distingiushing between business related and methodological and data-related elements. activities over among examined Exposures to taxonomy-eligible activities non-financial were corporations. Companies covered by the NFRD were defined as listed companies with more than 500 employees based on Nace code *Excluding exposures to be excluded from the denominator of KPIs by the Regulation. Taxonomy elgible activities were examined. Our goals for green funding and the activities we have implemented can be found in the text pf NFRD. Description of the compliance with Regulation (EU) 2020/852 in the financial undertaking’s business startegy, product design process and engagement with clients and counterparties. information for credit institutions that are not required to dsiclose quantitative fo trading exposures: Quakitative information ont he alignment of trading portfolios with Regulation includong (EU) 2020/852, overall composition, trendsm objectives and policy; the weight of other or additional information in support of the financial undertaking’s strategy and the financing of taxonomic activities in relation to their total activity. Our goals for green funding and the activities we have implemented can be found in the text pf NFRD. Taxonomy eligible activities were examined. Taxonomy eligible activities were examined. Our goals for green funding and the activities we have implemented can be found in the text pf NFRD. Green asset ratio in corporate lending: In relation to the mitigation and adaptation objectives of the taxonomy regulation, we have examined the corporate portfolio based on the NACE codes that can be attributed to activities in the delegated act. OTP Bank Group's corporate lending activities are linked to environmentally sustainable economic activities in the EU Member States20 in the followings scope: Share of the taxonomy-adjusted corporate portfolio of EU core and subsidiary banks in total non-segmented exposures at group level: 8.3% Share of the taxonomy-adjusted corporate portfolio of EU core and subsidiary banks in the total EU core and subsidiary corporate portfolio: 42.3%. 20 EU core and subsidiary banks means: OTP Nyrt, DSK Banka EAD, OTP Bank Romania S.A., OTP banka Hrvatska d.d., SKB banka d.d. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) ESG risk management In order to integrate ESG aspects, comply with legal obligations and the Hungarian National Bank's Green Programme, we continued to develop our ESG lending policy in 2021. At group level, we have introduced a lending and monitoring ESG risk management framework for non-retail and non-motorised leasing assets. The framework also includes the ESG Exclusion List, which comprises activities excluded from financing by OTP Group, as well as the industry ESG risk heat map. In 2021, ESG credit risk exposure became part of internal reporting. In accordance with the Hungarian National Bank’s Green Programme, we will continue to include ESG factors in the rest of the portfolio and in respect of collateral. The purpose of ESG risk management in lending is to identify ESG risks and reduce transaction risks arising from the environmental and social risk factors associated with financing. By integrating these issues into our lending process, we are also emphasising the importance of our clients adopting excellent environmental and social practices. We invest and lend the money deposited with us in a way ensuring that it will not serve illegal purposes, or those contrary to the values of society. OTP Bank will not finance: customers whose financing is forbidden in international agreements, EU acts or national laws; those whose activity is likely to violate public morals or social value systems, or is connected to crime; those who are connected, directly or indirectly, to criminal activities or to the deliberate violation or evasion of legal; regulations; transactions classified as prohibited business sectors (e.g. the illegal arms trade, prohibited gambling, drug trade, or any other illegal activity); and transactions that fail to meet environmental standards. The OTP Bank Group does not finance transactions that violate the laws of the country concerned or international law. In accordance with our regulations, our banking group always expects and examines compliance with environmental regulations during lending. Violation of commitments and expectations is sanctioned in the framework credit agreements. In accordance with the SFDR's expectations, we have developed an investment risk management policy for all relevant group members, so that investment risk management has been integrated into decision-making processes during investment advisory and portfolio management activities, and information on this has been provided to clients. Our statements on the integration of sustainability risks and the adverse effects of investment decisions on sustainability factors (PAIs) are available on our websites. In addition to the legal requirements, the prospectuses containing the product characteristics of the investment funds also include the ESG score calculated by the bank, helping customers make decisions and orient themselves. We have strengthened the assessment of ESG risks in our operational risk management scenario analyses by analysing a separate scenario related to climate change, and we have also indicated the risks affected by ESG in both the risk self-assessment and the loss database. Responsible customer service In carrying out our financial intermediary duties we ensure that the savings of our customers remain safe at all times. Our rules guarantee that the standards of responsible lending are observed regarding the avoidance of over-indebtedness, fair, understandable, complete and attentive information provision and adequate product offers. Our principles and guidelines on the fair treatment of customers and the compliance of consumer protection are set out in our Compliance Policy. In designing our products, we follow the principles of ethical product development. Our New Product Policy prescribes the assessment of potential risks to consumers. We offer personalised administrative options to our customers with the highest level of service quality and continuous innovations. The coronavirus pandemic increased the use of online channels, and our Banking Group also encouraged this trend. We use TRI*M methodology to measure the satisfaction of our retail customers. OTP Bank’s client retention power increased by three points to 69 points in 2021, while the average satisfaction score among competitors also increased slightly. The average TRI*M of banks in Central Europe was 77 points. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) OTP Bank’s stated objective is to serve its customers without fault. In order to improve customer satisfaction, we are also continuously improving our complaint management practices. Our Complaint Management Policy, Complaint Management Regulation and a Glossary are available to view in our branches as well as on our website. In 2021, the most typical complaints at OTP Bank were related to the payment moratorium and unapproved payment transactions. The number of both complaints and legitimate complaints decreased significantly in 2021 compared to the outstanding values of 2020, which could be attributed to the significant changes made during the year. The declining trend also prevailed at group level. In 2021, we continued to improve our complaint management practices, including expanding our complaint analysis process and the range of complaints that can be resolved immediately. Customer complaint data, OTP Bank1 Number of warranted complaints Ratio of warranted complaints Compensation paid (HUF million) 1 Includes data from OTP Housing Savings and OTP Mortgage Bank. 2 Corrected data. 2020 202,040 67% 842 2021 155,298 62% 36 Our objective is to provide equal access for persons living with disability, through services adapted to their special needs, in line with the Accessibility Strategy of OTP Bank. Accessibility is integrated into our website, which supports one-handed use and provides accessibility options including text-to-speech software and video content transcripts. Physical accessibility was also provided in every branch but one in 2021. Our customers can request special-needs services at the queue management machine, with physical push buttons and tactile strips also assisting them in using the device. Tactile guide strips are available in 38% of our branches. Interpreter Services are available at 167 branches (47%); this is a service allowing a sign language interpreter to assist with administration tasks through a live video chat. Moreover, we have made text-to-speech software available on 910 of our ATMs (48%). Security and data protection Security is a top concern for us. The principles and main guidelines concerning security at the bank are set forth in the Security Policy, which is approved by the Board of Directors. The policy covers all aspects of security, including IT and cyber security, which have become increasingly important. OTP Bank's Group-level Information Security Policy and Cyber Security Strategy of OTP Bank were completed in 2021, and the development of a Group-level cyber security strategy was launched. The processing and protection of personal data is covered by the Compliance Policy, which is also approved by the Board of Directors. Both policies prescribe the regular evaluation of risks and the need to maintain and enhance awareness. The handling and protection of personal data is covered by the Compliance Policy also approved by the Board of Directors. We also developed security processes and applied solutions in 2021, with our innovations focusing on the cyber security centre, the central log analysis system, authorisation management and virus protection. In addition we made customer communication more effective in detecting suspicious transactions. The number of distributed denial-of-service (DDoS) and phishing attacks increased significantly at group level compared to previous years. We published several awareness campaigns for our customers, providing information on our intranet and through security awareness training, which was also focused on phishing. Besides protecting against phishing activities, the European Cyber Security Month programmes focused on presenting the security challenges of modern application development and operations. White-collar crime, which causes significant losses to customers and the banking group, decreased at most subsidiaries due to our continuous development, more efficient employee action and stricter controls. We have reviewed our anti-money laundering training material to ensure our employees gain greater knowledge of this and have started to develop harmonised training at group level. The number of suspected money laundering reports by bank employees increased by eight percent. During the year, OTP Bank reported 68 cases of suspected money laundering. Our Banking Group has experienced numerous card-related attacks; in these cases the sharing of important information was extremely helpful in the prevention of fraudulent transactions. The number of successful card fraud cases has been kept low continuously, which demonstrates that our systems operate effectively. The ratio of bank card fraud to turnover is significantly lower than the European average published by MasterCard (for OTP Bank it is 0.0071% and the consolidated ratio of subsidiaries is 0.00986%, while the European average stands at 0.0414%). In the case of OTP Bank we were able to prevent bank card fraud of HUF 5.5 billion. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) Losses expected from the detected criminal activities amounted to HUF 447 million in the case of OTP Bank and HUF 2.2 billion at Group level. The amount of loss prevented was HUF 457 million at OTP Bank and HUF 2.0 billion at OTP Group. Fight against corruption and against the practice of bribery discrimination The Code of Ethics and the Anti-Corruption Policy of OTP Bank contains provisions on the fight against corruption and against the practice of bribery, also on the acceptance of individual differences and the denial of (https://www.otpbank.hu/portal/en/EthicalDeclaration https://www.otpbank.hu/static/portal/sw/file/OTP_EtikaiKodex_EN.pdf, https://www.otpbank.hu/static/portal/sw/file/OTP_Anti_Corruption_Policy_202102.pdf). As it can be read in the foreword of the Code and the Anti-Corruption Policy as well, the Bank and its management have adopted the principle of zero tolerance towards corruption and bribery, taking a definite stance against all forms of corruption and giving full support to the fight against corruption. In addition, the Code states that "As an ethical and compliant institution, the Bank and its management are fully committed to ensuring observance of all relevant legislation, including anti-corruption statutes." The Bank has set up an ethics reporting system (whistleblowing), which is for the reporting and the handling of the reports on suspected or actual violation of the values set forth in the Code of Ethics, where anonymous reporting of ethics issues is also possible. The Bank conducts inquiries for the purpose of detecting, preventing anomalies in connection with reports made or anomalies it became aware of otherwise. Through the Bank's ethics reporting system a total of 26 reports were received in 2021, 8 of them was reclassified as complaints and 2 case’s investigation resulted in declaring ethics offense – though not due to corruption, bribery or discrimination. The Bank has created and maintains its Code of Ethics to keep reputational risk and financial losses, which may incur in relation to corruption, bribery and discrimination, on a minimum level. Both employees and newcomers receive education on the Code of Ethics, and in addition, the acceptance to be bound by it is a prerequisite for their employment. Any requests from third parties affecting human rights are treated by the Bank as a priority. We manage the risks regarding the fight against corruption and bribery within the framework of our operational risk management process. Our quarterly compliance reports cover the changes in risks as well as the steps necessary steps to manage them. The reports are presented to the Management Committee and the Board of Directors; the annual report is also submitted to the Supervisory Board. Citizenship OTP is one of the most generous charitable donors in Hungary, giving a total of HUF 2.3 billion in charitable donations, almost half of which was for educational purposes, primarily the development of financial culture. We aim to provide genuine and effective help by supporting programmes and causes that serve the interests of society. We cooperate with a number of local non-governmental organisations, concentrating our donated funds and monitoring their usage and the results achieved. Our efforts were focused on the following areas: developing financial literacy: attitude shaping; sponsoring culture and the arts: creating and preserving values; equal opportunities: helping the disadvantaged and those in need; and sport. We consider donation habits a part of financial literacy; therefore, in 2021 we took a significant step forward in encouraging our customers to support the social initiatives that they consider important financially. Under the digital donation programme we enabled them to make donations simply and easily while taking care of their day-to-day finances. Donation has become possible on our digital platforms, including our website, the internetbank, the mobile application, the Simple application, as well as through 750 ATMs and the digital points of 80 branches. Our Bank assumes all extra costs of the donation, including both the transaction tax of customers and the costs of NGOs. Our Bank also cooperates with the supported organisations and we supplement the donations of our customers. In addition, in our experience, our customers view the Bank’s participation as a guarantee that their donations will truly go to the right beneficiary. In 2021 we supported the initiatives of 6 foundations through customer donations in the amount of HUF 250 million. The Humanitas Social Foundation supports vulnerable communities and individuals with a focus on healthcare and education; donation recipients are selected through an application process. Its most important activity in ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) 2020 involved priority support to hospitals. We supported 30 hospitals, 18 educational institutions and one foundation through the Foundation in 2021. In order to provide more effective assistance, we provided targeted, tailored asset support to institutions. The OTP Fáy András Foundation provides financial and economic education services, a key element of which is operating the OK Educational and Innovation Centre. The Foundation provides youth, adult and vocational training. The activities of the Foundation in 2021 were determined mostly by the coronavirus pandemic and several planned activities could not be organised as a result. However, the Foundation developed 30 curricula in 2021. Digital education continued to be the focus of the year, with more than 17,000 students attending online and nearly 2,500 classroom training. Roma youth also participated in financial and economic training through the Roma Education Fund. Significant progress has been made in the development and testing of the Financial Basic Education Programme in adult education. During the training, in which participation is free of charge and without prior knowledge, users acquire essential personal money management and general economic knowledge and improve their financial literacy. The Foundation also continued its previous programmes, so the teacher training programme of Eötvös Loránd University (ELTE), the regular Teachers' Club and the summer camps took place. The Foundation's national awareness-raising programme also continued, with screenings of short films on national commercial television channels around 400 times, covering topics such as housing renovation, business start-ups and data security. Responsible employment Our goal is to create value for our employees by focusing on them in a constantly changing environment. The central objective of our human resource strategy is to intensify employee experience and commitment. In 2021 we conducted an employee satisfaction survey at Group level with a high response ratio of 92%. Based on the results, the rate of employee satisfaction was 70%, slightly lower than the average of the international financial sector. The action plans prepared in response to the feedback for all areas that needed improvement were approved by the Management Committee. We developed our activities during the year along the lines of the six priorities stated in our strategy, also relying on the results of the employee satisfaction survey. We launched numerous projects that will result in significant changes; for example, we developed the framework of Group-level dialogue, and placed management development on new foundations. Although the pandemic slightly delayed the implementation of the international talent programme, we created a uniform talent framework at Group level and operated local talent programmes. All of our employees participate in trainings; in addition to network and head office management development, we rejuvenated the frameworks of our employees’ skills development. Due to the pandemic situation, hybrid work performance became typical in 2021. We maintained access to the tools promoting our employees’ emotional, mental and physical health and their ability to stand firm under harsh circumstances, and once again in 2021, numerous employees took recourse to them. OTP Bank’s employees (31 December) 2020 2021 9,826 Employees, total (individuals) 100% Distribution by gender Turnover rate1 10.5% 1 Compared to the end-of-year headcount; includes termination of employment both by employee and by employer, as well as retirement. 10,078 100% 14.3% Total Men Women 6,424 65.4% 11.2% 3,402 34.6% 9.3% Total Men Women 6,531 64,8% 14.1% 3,547 35.2% 14.5% Ethical conduct and legal compliance also remain core principles in our human resource management. OTP Bank analyses and manages the risks relating to employment within its operational risk management process. Our employees’ interests are represented by their trade union, with a Collective Agreement setting out the rights and obligations of every employee. The Bank’s Code of Ethics declares its commitment to providing a safe and healthy working environment and states its expectation of mutual respect between executive officers and employees, including the prohibition of discrimination and harassment. We consistently apply the principle of “equal pay for equal work”, including providing equal pay to men and women for the same position and performance. Within the objective limitations of specific job descriptions, we allow for flexible working hours and part-time employment options. We encourage healthy lifestyle choices, offering a complex health insurance package, and subsidising recreation and sporting activities. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) Short description of the business model of the company OTP Bank is the market-leading credit institution in Hungary. As for its business model, the Bank offers high- quality financial services to retail, private banking, micro and small business, medium and large corporate, as well as municipality clients through both its branch network and its steadily developing digital channels. The Bank provides comprehensive retail and corporate banking services: its activities include deposit collection from customers and raising money from the money and capital markets. On the asset side, OTP Bank offers mortgage loans, consumer credits, working capital and investment loans to companies, as well as loans to municipalities, whereas its liquidity reserves are invested in money and capital market instruments. Moreover, the Bank provides a wide range of state-of-the-art services, including the areas of wealth management, investment services, payment services, treasury and other services. In addition, OTP Bank's Hungarian subsidiaries deliver a wide range of further financial services. The Bank owns foreign subsidiaries in many countries of Central and Eastern Europe through capital investments. Non-financial performance indicators – OTP Bank Plc. (standalone) Internal audit: 203 closed audits, 1,478 recommendations, 1,478 accepted recommendations Compliance with Budapest Stock Exchange (BSE) Recommendations (yes/no ratio): 72 yes, 0 no; Compliance: 18 closed consumer protection related investigations Bank security: the expected value of damages resulting from detected criminal offenses is HUF 447,124,093, HUF 460,655,117. In 2021, we filed an official complaint in 620 cases on suspicion of money laundering. There is a slight decrease in 2021, when this number changed from 4438 in the previous year to 4432, a decrease of 8.4%. In the case of OTP, the ratio of bank card misuse to turnover is still lower than the European average published by MasterCard (last year's figures: OTP Bank 0.0071%, European average 0.0414%). Ethics issues: 26 ethics reports, establishing ethics offense in 2 cases. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) LIST OF NON-AUDIT SERVICES BY SERVICE CATEGORIES USED BY THE BANK The statutory audit of OTP Bank is carried out by Ernst and Young Ltd., in addition to which the following services were contracted: Issue of Comfort letters Engagements to review historical financial statements and interim financial statements (ISRE 2400, 2410) Consultation relating to interpretation and implementation of accounting standards and relating to accounting of potential future transaction Pre- or post-transaction due diligence services relating to acquisition of assets or entites or sales transactions or other transactions: financial, accounting, taxation, legal and IT specific services - except for buy-side lead advisory, transactional and negotiation support ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) SUPPLEMENTARY DATA ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) FOOTNOTES OF THE TABLE ‘CONSOLIDATED AFTER TAX PROFIT BREAKDOWN BY SUBSIDIARIES (IFRS)’ General note: regarding OTP Core and other subsidiaries, profit after tax is calculated without received dividends and net cash transfers (and other adjustment items). Dividends and net cash transfers received from non-group member companies are shown on a separate line in one sum in the table, regardless to the particular receiver or payer group member company. (1) Aggregated adjusted after tax profit of OTP Core and foreign banks. (2) OTP Core is an economic unit for measuring the result of core business activity of OTP Group in Hungary. Financials of OTP Core are calculated from the partially consolidated IFRS financial statements of certain companies engaged in OTP Group’s operation in Hungary. These companies include OTP Bank Hungary Plc., OTP Mortgage Bank Ltd, OTP Building Society Ltd, OTP Factoring Ltd, OTP Financial Point Ltd., and companies providing intragroup financing; OTP Bank Employee Stock Ownership Plan Organization was included from 4Q 2016; OTP Card Factory Ltd., OTP Facility Management Llc., MONICOMP Ltd. and OTP Real Estate Leasing Ltd. were included from 1Q 2017 (from 1Q 2019 OTP Real Estate Lease Ltd. was eliminated from OTP Core); OTP Mobile Service Llc. and OTP Ingatlanpont Llc. were included from 1Q 2019; OTP eBIZ Ltd. was included from 1Q 2020; OTP OTP Home Solutions was included from 2Q 2021. The consolidated accounting results of these companies are segmented into OTP Core and Corporate Centre. Latter is a virtual entity. (3) The result and balance sheet of OTP Factoring Bulgaria EAD and DSK Leasing AD is included. From 1Q 2019 Expressbank AD and its subsidiarieswere included into the Bulgarian operation. (4) The statement of recognised income and balance sheet of OTP Leasing d.d. and SB Leasing d.o.o. was included. In February 2020 the company name of OTP banka Hrvatska dioničko društvo was changed to OTP banka dioničko društvo. (5) The financial performance of OTP Factoring Serbia d.o.o, OTP Lizing d.o.o, OTP Services d.o.o. and the newly acquired OTP banka Srbija is included. (6) The statement of recognised income and balance sheet of OTP Faktoring SRL and OTP Leasing Romania IFN S.A.was included. (7) Figures are based on the aggregated financial statements of OTP Bank JSC, LLC OTP Leasing, and OTP Factoring Ukraine LLC. (8) The statement of recognised income and balance sheet of LLC MFO “OTP Finance” is included in the Russian performance. (9) The statement of recognised income and balance sheet of the acquired Podgoricka banka was included, which merged into the Montenegrin bank in 4Q 2020. (10) P&L data are adjusted for the special banking tax and the Slovakian Deposit Protection Fund contributions being introduced again in 2014, as well as the contribution into the Resolution Fund. Including the financial performance of OTP Faktoring Slovensko s.r.o. The sale of the Slovakian subsidiary was concluded at the end of November 2020. (11) The subconsolidated adjusted after tax profit of Merkantil Group (Merkantil Bank Ltd., Merkantil Bérlet Ltd., OTP Real Estate Leasing Ltd., NIMO 2002 Ltd., SPLC-P Ltd., SPLC Ltd.) was presented (w/o dividends, net cash transfers and other adjustment items). (12) LLC AMC OTP Capital, OTP Asset Management SAI S.A. (Romania), DSK Asset Management EAD (Bulgaria). (13) OTP Buildings s.r.o. (Slovakia), Velvin Ventures Ltd. (Belize), R.E. Four d.o.o., Novi Sad (Serbia), SC Aloha Buzz SRL, SC Favo Consultanta SRL, SC Tezaur Cont SRL (Romania), Cresco d.o.o. (Croatia), OTP Osiguranje d.d. (Croatia), OTP Solution Fund (Ukraine). (14) Within OTP Group, the Corporate Centre acts as a virtual entity established by the equity investment of OTP Core for managing the wholesale financing activity for all the subsidiaries within OTP Group but outside OTP Core. Therefore the balance sheet of the Corporate Centre is funded by the equity and intragroup lending received from OTP Core, the intragroup lending received from other subsidiaries, and the subordinated debt and senior notes issued by OTP Bank. From this funding pool, the Corporate Centre is to provide intragroup lending to, and hold equity stakes in OTP subsidiaries outside OTP Core. Main subsidiaries financed by Corporate Centre are as follows: Hungarians: Merkantil Bank Ltd, Merkantil Leasing Ltd, OTP Fund Management Ltd, OTP Real Estate Fund Management Ltd, OTP Life Annuity Ltd; foreigners: banks, leasing companies, factoring companies. (15) Total Hungarian subsidiaries: sum of the adjusted after tax results of Hungarian group members, Corporate Centre and related eliminations. (16) Total Foreign subsidiaries: sum of the adjusted after tax profits of foreign subsidiaries. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) CALCULATION OF THE ADJUSTED LINES OF IFRS PROFIT AND LOSS STATEMENTS, AS WELL AS THE ADJUSTED BALANCE SHEET LINES PRESENTED IN THE REPORT, AND THE METHODOLOGY FOR CALCULATING THE FX-ADJUSTED VOLUME CHANGES In order to present Group level trends in a comprehensive way in the Report, the presented consolidated and separate profit and loss statements of this report were adjusted in the following way, and the adjusted P&Ls are shown and analysed in the report. Consolidated accounting figures together with Separate accounting figures of OTP Bank are still disclosed in the Supplementary Data section. Adjustments affecting the income statement: The after tax effect of adjustment items (certain, typically non-recurring items from banking operations’ point of view) are shown separately in the Statement of Recognised Income. The following adjustment items emerged in the period under review and the previous year: received dividends, received and paid cash transfers, the effect of goodwill/investment impairment charges, special tax on financial institutions, the expected one-off negative effect of the debt repayment moratorium in Hungary and Serbia, the impact of fines imposed by the Hungarian Competition Authority, the effect of acquisitions, and from 2021 the result of the treasury share swap agreement (earlier the latter was presented amongst the one-off revenue items in the adjusted income statement structure). Beside the Slovakian banking levy payable until 2Q 2020, the total amount of the special banking tax includes and the Slovakian Deposit Protection Fund contributions being introduced again in 2014, and the contribution into the Resolution Fund in Slovakia, too. In 4Q 2019 the following items have been moved from the Other operating expenses line among the Net interest income after loss allowance, impairment and provisions line: Release of loss allowance on securities at fair value through other comprehensive income and on securities at amortized cost, Provision for commitments and guarantees given, Release of impairment of assets subject to operating lease and of investment properties. In the adjusted P&L structure these items are presented amongst the Other provisions (adj.) line (through the Structural correction between Provision for loan losses and Other provisions adjustment line). From 1Q 2021 the Provision for commitments and guarantees given line contains lending activity-related amounts, therefore this line is no longer shifted from 1Q 2021. In 3Q 2021 (retrospectively from 3Q 2020) the components of the new Gain from derecognition of financial assets at amortized cost line in the accounting P&L were shifted back in the adjusted P&L structure to the lines on which they were presented previously. Other non-interest income is shown together with Gains and losses on real estate transactions, Net insurance result (appearing in the accounting P&L structure from 3Q 2017), Gains and losses on derivative instruments, and Gains and losses on non-trading securities mandatorily at fair value through profit or loss lines between 1Q 2019 – 4Q 2019, but without the above mentioned income from the release of pre-acquisition provisions and without received cash transfers. However other non-interest expenses stemming from non-financial activities are added to the adjusted net other non- interest income line, therefore the latter incorporates the net amount of other non-interest income from non-financial activities. OTP Bank’s share in the change in the shareholders’ equity of companies consolidated with equity method is reclassified from the After tax dividends and net cash transfers line to the Net other non-interest result (adj.) without one-offs line. In the addition to this, OTP Bank has changed the way how private equity funds managed by PortfoLion are recorded. As a result of this, as opposed to the previous method of recording the funds at book value (initial book value less impairments), the funds are now evaluated based on their net asset value. The change in the carrying value was reclassified to the Net other non-interest result (adj.) without one-offs line in the adjusted P&L structure. Furthermore, received cash transfers within the framework of the subsidy programme targeting the expansion of POS network in Hungary were reclassified from the After tax dividends and net cash transfers line to the Net other non-interest result (adj.) without one-offs line. Other provisions are separated from other expenses and shown on a separate line in the adjusted profit or loss statement. Other administrative expenses have been adjusted in the following way in order to create a category comprising administrative cost items exclusively. Other costs and expenses and other non-interest expenses were included into the adjusted Other non-interest expenses. At the same time, the following cost items were excluded from adjusted other non- interest expenses: paid cash transfers (except for movie subsidies and cash transfers to public benefit organisations, whereas from 2019 certain part of cash transfers to public benefit organizations was presented amongst net fees and commissions), Other other non-interest expenses stemming from non-financial activities, and special tax on financial institutions. Tax deductible transfers (offset against corporate taxes) paid by Hungarian group members were reclassified from Other non-interest expenses to Corporate income tax. As a result, the net P&L effect of these transfers (i.e. the paid transfer less the related corporate tax allowances) is recognised in the corporate income tax line of the adjusted P&L. The amount of tax deductible transfers offset against the special tax on financial institutions is shown on a net base on the special tax on financial institutions line. The financial transaction tax paid in Hungary is reclassified from other (administrative) expenses to net fee and commission income, both on consolidated and OTP Core level. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) OTP Group is hedging the revaluation result of the FX provisions on its FX loans and interest claims by keeping hedging open FX positions. In the accounting statement of recognized income, the revaluation of FX provisions is part of the risk costs (within line “Provision for loan losses”), other provisions and net interest income lines, whereas the revaluation result of the hedging open FX positions is made through other non-interest income (within line “Foreign exchange result, net”). The two items have the same absolute amount but an opposite sign. As an adjustment to the accounting statement of income, these items are eliminated from the adjusted P&L. By modifying only the structure of the income statement, this correction does not have any impact on the bottom line net profits. The Compensation Fund contributions are recognized on the Other administrative expenses line of the accounting income statement, and are presented on the financial transaction tax and/or Special tax on financial institutions line the in the adjusted P&L structure (due to the tax deductibility). In case of OTP Banka Slovensko and OTP Bank Romania the total revaluation result of intra-group swap deals – earlier booked partly within the net interest income, but also on the Foreign exchange gains and Net other non-interest result lines within total Other non-interest income – is presented on a net base on the net interest income line. Due to the introduction of IFRS16, certain items previously presented on the Other non-interest expenses line (rental fees) were moved to the interest expenses and depreciation lines in the accounting income statement. These items were shifted back to the Other non-interest expenses line in the adjusted P&L structure. Staring from 2020 the currency exchange result was shifted in the accounting P&L structure from the FX result to the net fees and commissions line, retroactively for the 2019 base period as well. In the adjusted P&L structure this item is moved to the FX result line. In 4Q 2021 the Modification gains or losses line (one of the components of the Provision for impairment on loan and placement losses) was presented on a separate line in the accounting P&L structure, retroactively from 1Q 2020. In the adjusted P&L this line was shifted back to the Provision for impairment on loan and placement losses line. Secondly, in 4Q 2021 the Gains and losses on non-trading securities mandatorily at fair value through profit or loss line was moved from the Gains / losses on securities to the Fair value adjustment on financial instruments measured at fair value through profit or loss line in the accounting P&L structure, retroactively from 1Q 2020. In the adjusted P&L this item remained part of the Gains / losses on securities. Thirdly, from 1Q 2021 the local business taxes and the innovation contribution payable by Hungarian Group members were booked on the Income tax expenses line, whereas these items were recognised amongst the Other general expenses. In 4Q 2021 this change was retrospectively reflected in the full-year 2020 accounting P&L, too, but in the adjusted P&L structure for the 2020 base period we continue to present these items amongst the Other non-interest expenses. Performance indicators (such as cost/income ratio, net interest margin, risk cost to average gross loans as well as ROA and ROE ratios, etc.) presented in this report are calculated on the basis of the adjusted profit and loss statement excluding adjustment items (unless otherwise indicated). Within the report, FX-adjusted statistics for business volume developments and their product breakdown, as well as the FX-adjusted stock of allowances for loan losses are disclosed, too. For FX adjustment, the closing cross currency rates for the current period were used to calculate the HUF equivalent of loan and deposit volumes in the base periods. Thus the the FX-adjusted volume change of DPD90+ loans (adjusted for sales and write-offs), instead of the previously applied 3Q 2009 FX rates, from 4Q 2020 onwards the actual end of period FX rates are used for calculating the FX-adjusted figures. earlier. Regarding volumes will FX-adjusted published different those from be Adjustments affecting the balance sheet: On 17 February 2020 OTP Bank announced the signing of the sale agreement of its Slovakian subsidiary. According to IFRS 5 the Slovakian bank was presented as a discontinued operation in the consolidated income statement and balance sheet until it was sold. With regards to the consolidated accounting balance sheet, all assets and liabilities of the Slovakian bank were shown on one line until 9M 2020 in the balance sheet (by the end of 4Q 2020 the Slovakian entity was deconsolidated). As for the consolidated accounting income statement, the Slovakian contribution for 2020 (in 2020 the January-October contribution was consolidated) was shown separately from the result of continued operation, on the Loss from discontinued operation line, i.e. the particular P&L lines in the ‘continuing operations’ section of the accounting P&L don’t incorporate the contribution from the Slovakian subsidiary. As opposed to this, the adjusted financial statements presented in the Stock Exchange Report incorporated the Slovakian banks’ balance sheet and P&L contribution in the relevant respective lines, in line with the structure of the financial statements monitored by the management. From the end of 2020, OTP Osiguranje d.d. was presented as asset classified as held for sale in the accounting financial statements. Accordingly, from end-2020 until its deconsolidation, i.e. until 2Q 2021 its assets and liabilities were shown on a separate line in the consolidated balance sheet. Regarding the 2020 and 2021 accounting statement of recognized income, the entity’s result was presented on the Gains from held for trading operations line, therefore the particular P&L lines in the ‘continuing operations’ section of the accounting P&L don’t incorporate the contribution from this entity. As opposed to this, the adjusted financial statements presented in the Stock Exchange Report incorporated the company’s balance sheet and P&L contribution in the relevant respective lines, in line with the structure of the financial statements monitored by the management. Finance lease receivables – earlier presented within customer loans – are shown on a separate line in the accounting balance sheet from the end of 2019. As for the adjusted balance sheet, net customer loans continue to include the stock of finance lease receivables. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) In the adjusted balance sheets presented in the analytical section of the report, the Stage 3 loans under IFRS 9 were netted with the provisions created in relation to the total exposure toward those particular clients, in case of the affected Group members. Therefore, this adjustment made on the accounting balance sheet has an impact on the consolidated gross customer loans and allowances for loan losses. ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) ADJUSTMENTS ON THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS (IFRS) Net interest income (-) Revaluation result of FX provisions (+) Presentation of the revaluation result of intra-group swaps on the net interest income line realized at the Romanian and Slovakian operations (-) Netting of interest revenues on DPD90+ loans with the related provision (booked on the Provision for loan losses line) at OTP Core and CKB (-) Effect of acquisitions (-) Initial NPV gain on the monetary policy interest rate swap (MIRS) deals (-) Reclassification due to the introduction of IFRS16 (+) Presentation of the contribution from discontinued operation on the adjusted P&L lines (-) Expected one-off negative effect of the debt repayment moratorium in Hungary and Serbia Net interest income (adj.) Net fees and commissions (+) Financial Transaction Tax (-) Effect of acquisitions (+) Presentation of the contribution from discontinued operation on the adjusted P&L lines (-) Structural shift of income from currency exchange from net fees to the FX result Net fees and commissions (adj.) Foreign exchange result (-) Revaluation result of FX positions hedging the revaluation of FX provisions (-) Presentation of the revaluation result of intra-group swaps on the net interest income line realized at the Romanian and Slovakian operations (-) Effect of acquisitions (+) Presentation of the contribution from discontinued operation on the adjusted P&L lines (+) Structural shift of income from currency exchange from net fees to the FX result Foreign exchange result (adj.) Gain/loss on securities, net (-) Effect of acquisitions (+) Presentation of the contribution from discontinued operation on the adjusted P&L lines (-) Revaluation result of the treasury share swap agreement (+) Structural adjustment due to the Gain from derecognition of financial assets at amortized cost line (against Gain/loss on securities, net) (+) Shifting of the Gains and losses on non-trading securities mandatorily at fair value through profit or loss line from the Net other non-interest income to the Gains or losses from securities line Gain/loss on securities, net (adj.) with one-offs (-) Revaluation result of the treasury share swap agreement (booked as Gain on securities, net (adj) at OTP Core) Gain/loss on securities, net (adj.) without one-offs Result of discontinued operation and gains from disposal of subsidiaries classified as held for sale (-) Effect of acquisitions Result of discontinued operation and gains from disposal of subsidiaries classified as held for sale (adj.) Gains and losses on real estate transactions Result of discontinued operation and gains from disposal of subsidiaries classified as held for sale (adj.) (+) Other non-interest income (+) Gains and losses on derivative instruments (+) Net insurance result (+) Losses on loans measured mandatorily at fair value through other comprehensive income and on securities at amortized cost (-) Shifting of the Gains and losses on non-trading securities mandatorily at fair value through profit or loss line from the Net other non-interest income to the Gains or losses from securities line (-) Received cash transfers (+) Other other non-interest expenses (+) Change in shareholders' equity of companies consolidated with equity method, and the change in the net asset value of the private equity funds managed by PortfoLion (-) Effect of acquisitions (-) Presentation of the revaluation result of intra-group swaps on the net interest income line realized at the Romanian and Slovakian operations (-) One-off impact of the CHF mortgage loan conversion programme and regulatory changes related to mortgage loans in Romania (-) Impact of fines imposed by the Hungarian Competition Authority (-) Netting of refunds related to legal cases (accounted for on the Net other non-interest result line) with the release of provisions created earlier for these cases (accounted for on the Other provisions line) from 1Q 2017 at OTP Bank Romania (+) Presentation of the contribution from discontinued operation on the adjusted P&L lines (-) Expected one-off negative effect of the debt repayment moratorium in Hungary and Serbia Net other non-interest result (adj.) without one-offs Gain from derecognition of financial assets at amortized cost (-) Structural adjustment due to the Gain from derecognition of financial assets at amortized cost line (against Gain/loss on securities, net) (-) Structural adjustment due to the Gain from derecognition of financial assets at amortized cost line (against Provision for impairment on loan and placement losses) Gain from derecognition of financial assets at amortized cost (adj.) 2021 HUF million 874,310 0 2020 HUF million 782,673 (57) 625 337 1,131 (2,680) 0 (1,556) 46 (5,925) 884,012 442,177 (68,818) (33) 0 47,843 325,548 (4,075) 0 (492) 0 (10) 47,843 44,251 5,559 (1,077) 14 2,766 1,031 4,812 9,726 - 9,726 116 (165) 282 6,424 282 74,246 6,797 657 (532) 4,812 165 (44,882) 11,155 (4) 1,117 (948) 0 (194) 387 0 49,586 1,884 1,031 854 0 5,951 (600) 0 (1,623) 8,755 15 788,079 397,635 (61,588) (145) 3,210 46,290 293,112 7,864 11,195 (1,964) 0 3 46,290 44,927 7,464 (98) 349 1,402 7,239 16,553 2,360 14,193 5,590 7,496 (1,907) 3,631 (1,907) 29,109 11,339 721 4,843 7,239 65 (5,800) 128 7,264 2,301 (226) 823 (216) 3,149 (1,646) 29,610 3,380 1,402 1,978 0 Provision for impairment on loan and placement losses (+) Modification gains or losses (+) Change in the fair value attributable to changes in the credit risk of loans mandatorily measured at fair value through profit of loss (27,723) (13,672) (16,289) (172,520) (29,773) (3,262) ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) (+) Loss allowance on securities at fair value through other comprehensive income and on securities at amortized cost (+) Provision for commitments and guarantees given (+) Impairment of assets subject to operating lease and of investment properties (-) Revaluation result of FX provisions (-) One-off impact of the CHF mortgage loan conversion programme and regulatory changes related to mortgage loans in Romania (+) Netting of interest revenues on DPD90+ loans with the related provision (booked on the Provision for loan losses line) at OTP Core and CKB (-) Effect of acquisitions (-) Structural correction between Provision for loan losses and Other provisions (+) Presentation of the contribution from discontinued operation on the adjusted P&L lines (-) Expected one-off negative effect of the debt repayment moratorium in Hungary and Serbia (+) Structural adjustment due to the Gain from derecognition of financial assets at amortized cost line (against Provision for impairment on loan and placement losses) Provision for impairment on loan and placement losses (adj.) Dividend income (+) Received cash transfers (+) Paid cash transfers (-) Sponsorships, subsidies and cash transfers to public benefit organisations (-) Dividend income of swap counterparty shares kept under the treasury share swap agreement (-) Change in shareholders' equity of companies consolidated with equity method, and the change in the net asset value of the private equity funds managed by PortfoLion (+) Presentation of the contribution from discontinued operation on the adjusted P&L lines After tax dividends and net cash transfers Depreciation (-) Effect of acquisitions (-) Reclassification due to the introduction of IFRS16 (+) Presentation of the contribution from discontinued operation on the adjusted P&L lines Depreciation (adj.) Personnel expenses (-) Effect of acquisitions (+) Presentation of the contribution from discontinued operation on the adjusted P&L lines Personnel expenses (adj.) Income taxes (-) Corporate tax impact of goodwill/investment impairment charges (-) Corporate tax impact of the special tax on financial institutions (+) Tax deductible transfers (offset against corporate taxes) (-) Corporate tax impact of the effect of fines imposed by the Hungarian Competition Authority (-) Corporate tax impact of the effect of acquisitions (+) Presentation of the contribution from discontinued operation on the adjusted P&L lines (-) Corporate tax impact of the expected one-off negative effect of the debt repayment moratorium in Hungary and Serbia (-) Corporate tax impact of the result of the treasury share swap agreement (-) Shifting of the Hungarian local business tax and innovation contribution for 2020 between corporate income tax and other non-interest expenses Corporate income tax (adj.) Other operating expense (-) Other costs and expenses (-) Other non-interest expenses (-) Effect of acquisitions (-) Revaluation result of FX provisions (-) One-off impact of the CHF mortgage loan conversion programme and regulatory changes related to mortgage loans in Romania (-) Netting of refunds related to legal cases (accounted for on the Net other non-interest result line) with the release of provisions created earlier for these cases (accounted for on the Other provisions line) from 1Q 2017 at OTP Bank Romania (+) Structural correction between Provision for loan losses and Other provisions (+) Presentation of the contribution from discontinued operation on the adjusted P&L lines (-) Expected one-off negative effect of the debt repayment moratorium in Hungary and Serbia Other provisions (adj.) Other administrative expenses (+) Other costs and expenses (+) Other non-interest expenses (-) Paid cash transfers (+) Film subsidies and cash transfers to public benefit organisations (-) Other other non-interest expenses (-) Special tax on financial institutions (recognised as other administrative expenses) (-) Tax deductible transfers (offset against corporate taxes) (-) Financial Transaction Tax (-) Effect of acquisitions (+) Reclassification due to the introduction of IFRS16 (+) Presentation of the contribution from discontinued operation on the adjusted P&L lines (+) Shifting of the Hungarian local business tax and innovation contribution for 2020 between corporate income tax and other non-interest expenses (-) Expected one-off negative effect of the debt repayment moratorium in Hungary and Serbia Other non-interest expenses (adj.) 2021 HUF million 2020 HUF million (3,974) (99) 438 0 339 1,131 0 (3,536) 0 (10,131) 854 (46,006) 15,648 165 (11,992) (11,873) 3,809 11,155 0 729 (94,995) (6,134) (16,064) (20) (72,816) (340,684) (781) (298) (340,201) (72,123) 1,909 1,787 (8,137) 0 5,738 (18) 1,487 (249) (90,951) (85,733) (6,508) (56,874) 0 0 609 194 (3,536) 4 (153) (26,532) (311,931) (6,508) (56,874) (11,992) (11,873) (44,882) (20,680) (8,137) (68,818) (10,370) (17,620) (106) (318) (239,716) (7,309) (8,662) 877 (10,997) 459 5,951 (2,149) (15,094) (3,024) (29,543) 1,978 (158,421) 527 65 (12,768) (12,508) 0 128 8 213 (92,762) (7,415) (16,447) (1,385) (70,286) (308,643) (2,785) (6,638) (312,495) (43,918) 886 1,773 (8,083) (74) 497 (80) 2,913 (16,542) (41,534) (39,447) (7,506) (18,568) 1,022 (141) (233) 216 (15,094) (243) 0 (29,574) (289,721) (7,506) (18,568) (12,768) (12,508) (5,800) (19,138) (8,083) (61,588) (9,940) (18,069) (4,105) (16,542) (249,702) ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) ADJUSTMENTS OF CONSOLIDATED IFRS BALANCE SHEET LINES Cash, amounts due from Banks and balances with the National Banks (+) Allocation of Assets classified as held for sale among balance sheet lines Cash, amounts due from Banks and balances with the National Banks (adjusted) Placements with other banks, net of allowance for placement losses (+) Allocation of Assets classified as held for sale among balance sheet lines Placements with other banks, net of allowance for placement losses (adjusted) Financial assets at fair value through profit or loss (+) Allocation of Assets classified as held for sale among balance sheet lines Financial assets at fair value through profit or loss (adjusted) Securities at fair value through other comprehensive income (+) Allocation of Assets classified as held for sale among balance sheet lines Securities at fair value through other comprehensive income (adjusted) Gross customer loans (incl. finance lease receivables and accrued interest receivables related to loans) (-) Accrued interest receivables related to DPD90+ / Stage 3 loans (+) Allocation of Assets classified as held for sale among balance sheet lines Gross customer loans (adjusted) Allowances for loan losses (incl. impairment of finance lease receivables) (-) Allocated provision on accrued interest receivables related to DPD90+ / Stage 3 loans (+) Allocation of Assets classified as held for sale among balance sheet lines Allowances for loan losses (adjusted) Securities at amortized costs (+) Allocation of Assets classified as held for sale among balance sheet lines Securities at amortized costs (adjusted) Tangible and intangible assets, net (+) Allocation of Assets classified as held for sale among balance sheet lines Tangible and intangible assets, net (adjusted) Other assets (+) Allocation of Assets classified as held for sale among balance sheet lines Other assets (adjusted) 2021 HUF million 2,556,035 0 2,556,035 1,584,860 0 1,584,860 341,397 0 341,397 2,224,510 0 2,224,510 16,670,469 36,015 0 16,634,454 (926,547) (36,015) 0 (890,532) 3,891,335 0 3,891,335 689,290 0 689,290 454,811 0 454,811 2020 HUF million 2,432,312 3 2,432,314 1,148,744 244 1,148,987 234,006 1,188 235,194 2,136,709 3,410 2,140,118 14,401,930 38,650 0 14,363,281 (873,344) (38,650) 0 (834,695) 2,624,921 1,031 2,625,952 589,743 135 589,878 588,378 (6,010) 582,368 Amounts due to banks, the National Governments, deposits from the National Banks and other banks, and Financial liabilities designated at fair value through profit or loss (+) Allocation of Liabilities directly associated with assets classified as held-for-sale among balance sheet lines Amounts due to banks, the National Governments, deposits from the National Banks and other banks, and Financial liabilities designated at fair value through profit or loss (adjusted) 1,608,533 1,219,446 0 0 1,608,533 1,219,446 Deposits from customers (+) Allocation of Liabilities directly associated with assets classified as held-for-sale among balance sheet lines Deposits from customers (adjusted) 21,068,644 17,890,863 0 0 21,068,644 17,890,863 Other liabilities (+) Allocation of Liabilities directly associated with assets classified as held-for-sale among balance sheet lines Other liabilities (adjusted) 1,124,782 0 1,124,782 949,502 0 949,502 ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) STATEMENT OF PROFIT OR LOSS OF OTP BANK PLC., ACCORDING TO IFRS STANDARDS AS ADOPTED BY THE EUROPEAN UNION (CONSOLIDATED)1 2021 HUF million 2020 HUF million Change % CONTINUING OPERATIONS Interest income calculated using the effective interest method Income similar to interest income Interest incomes Interest expenses NET INTEREST INCOME Risk cost total Loss allowance / Release of loss allowance on loans, placements and repo receivables Change in the fair value attributable to changes in the credit risk of loans mandatorily measured at fair value through profit of loss Loss allowance / Release of loss allowance on securities at fair value through other comprehensive income and on securities at amortized cost Provision for commitments and guarantees given Impairment / (Release of impairment) of assets subject to operating lease and of investment properties NET INTEREST INCOME AFTER LOSS ALLOWANCE, IMPAIRMENT AND PROVISIONS Income from fees and commissions Expense from fees and commissions Net profit from fees and commissions Modification gain or loss Foreign exchange gains / losses, net Foreign exchange result Gains and losses on derivative instruments Gains / Losses on securities, net Gain from derecognition of financial assets at amortized cost Gains / Losses on financial assets /liabilities measured at fair value through profit or loss Dividend income and gain / loss from associated companies Other operating income Gains and losses on real estate transactions Other non-interest income Net insurance result Other operating expense Net operating income Personnel expenses Depreciation and amortization Other administrative expenses Other administrative expenses PROFIT BEFORE INCOME TAX Income tax expense NET PROFIT FOR THE PERIOD FROM CONTINUING OPERATIONS 922,539 194,920 1,117,459 (243,149) 874,310 (47,645) 841,901 135,986 977,887 (195,216) 782,671 (190,875) (27,721) (172,520) (16,289) (3,262) (3,974) (99) (7,309) (8,662) 438 878 826,665 554,113 (111,939) 442,174 (13,672) 2,723 (4,075) 6,798 5,560 1,885 (532) 15,648 81,328 6,424 74,246 657 (85,732) 20,880 (340,684) (94,996) (311,932) (747,612) 528,435 (72,123) 456,312 591,796 486,529 (88,896) 397,633 (29,773) 19,204 7,864 11,340 7,465 3,380 4,843 527 33,461 3,631 29,109 721 (39,447) 29,433 (308,642) (92,761) (289,722) (691,125) 297,964 (43,918) 254,046 10 43 14 25 12 (75) (84) 399 (46) (99) (50) 40 14 26 11 (54) (86) (152) (40) (26) (44) (111) 143 77 155 (9) 117 (29) 10 2 8 8 77 64 80 From this, attributable to: Non-controlling interest Owners of the company DISCONTINUED OPERATIONS Gains from disposal of subsidiaries classified as held for sale Loss from discontinued operation PROFIT FROM CONTINUING AND DISCOUNTINUED OPERATION 1 The rows of the table are based on audited numbers, but the structure of the table can differ from the IFRS financial statements presented in the Annual Report (certain rows might be merged or represent different level of aggregation). 0 116 456,428 199 5,391 259,636 836 455,476 220 253,826 (98) 76 280 79 ANNUAL REPORT 2021 OTP BANK BUSINESS REPORT 2021 (CONSOLIDATED) STATEMENT OF FINANCIAL POSITION OF OTP BANK PLC., ACCORDING TO IFRS STANDARDS AS ADOPTED BY THE EUROPEAN UNION (CONSOLIDATED)1 Cash, amounts due from banks and balances with the National Banks Placements with other banks, net of loss allowance for placements Repo receivables Financial assets at fair value through profit or loss Securities at fair value through other comprehensive income Loans at amortized cost Loans mandatorily at fair value through profit or loss Finance lease receivables Associates and other investments Securities at amortized cost Property and equipment Intangible assets and goodwill Right-of-use assets Investment properties Derivative financial assets designated as hedge accounting Deferred tax assets Current income tax receivable Other assets Assets classified as held for sale / discontinued operations TOTAL ASSETS Amounts due to banks, the National Governments, deposits from the National Banks and other banks Repo liabilities Financial liabilities at fair value through profit or loss Deposits from customers Liabilities from issued securities Derivative financial liabilities held for trading Derivative financial liabilities designated as hedge accounting Leasing liabilities Deferred tax liabilities Current income tax payable Other liabilities Subordinated bonds and loans Liabilities directly associated with assets classified as held-for-sale / discontinued operation TOTAL LIABILITIES Share capital Retained earnings and reserves Treasury shares Non-controlling interest TOTAL SHARHOLDERS' EQUITY TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 2021 HUF million 2,556,035 1,584,861 61,052 341,397 2,224,510 13,493,183 1,068,111 1,182,628 67,222 3,891,335 411,136 248,631 50,726 29,882 18,757 15,109 29,978 276,785 2,046 27,553,384 2020 HUF million 2,432,312 1,148,743 190,849 234,007 2,136,709 11,674,842 802,605 1,051,140 52,443 2,624,920 322,766 239,004 46,283 38,601 6,820 22,317 38,936 266,474 6,070 23,335,841 1,567,348 1,185,315 79,047 41,184 21,068,644 436,325 202,716 11,228 53,286 24,045 36,581 717,880 278,334 117,991 34,131 17,890,863 464,213 104,823 11,341 48,451 25,990 27,684 607,737 274,704 Change % 5 38 (68) 46 4 16 33 13 28 48 27 4 10 (23) 175 (32) (23) 4 (66) 18 32 (33) 21 18 (6) 93 (1) 10 (7) 32 18 1 0 5,486 (100) 24,516,618 28,000 3,109,509 (106,941) 6,198 3,036,766 27,553,384 20,798,729 28,000 2,629,076 (124,080) 4,116 2,537,112 23,335,841 18 0 18 (14) 51 20 18 1 The rows of the table are based on audited numbers, but the structure of the table can differ from the IFRS financial statements presented in the Annual Report (certain rows might be merged or represent different level of aggregation). ANNUAL REPORT 2021 INDEPENDENT AUDITORS’ REPORT (CONSOLIDATED AND SEPARATE, IN ACCORDANCE WITH IFRS) ANNUAL REPORT 2021 Ernst & Young Kft. Ernst & Young Ltd. H-1132 Budapest Váci út 20. 1399 Budapest 62. Pf.632, Hungary Tel: +36 1 451 8100 Fax: +36 1 451 8199 www.ey.com/hu Cg. 01-09-267553 This is a translation of the Hungarian Report Independent Auditors' Report To the Shareholders of OTP Bank Nyrt. Report on the audit of the separate financial statements Opinion in (“the Company”) We have audited the accompanying 2021 separate financial statements of OTP Bank Nyrt. accompanying included Nem_konsz_IFRS_beszamolo_20211231_hun03.11.xhtml1 digital file, which comprise the separate statement of financial position as at 31 December 2021 - showing a balance sheet total of HUF 13,710,471 million and a total comprehensive income for the year of HUF 87,935 million -, the related separate profit or loss, separate statement of comprehensive income, separate statement of changes in equity, separate statement of cash flows for the year then ended and notes to the separate financial statements, including a summary of significant accounting policies. the In our opinion the separate financial statements give a true and fair view of the financial position of the Company as at 31 December 2021 and of its financial performance and its cash flows for the financial year then ended in accordance with International Financial Reporting Standards as adopted by the EU (“EU IFRSs”) and have been prepared, in all materials respects, in accordance with the supplementary requirements of Act C of 2000 on Accounting (“Hungarian Accounting Law”) relevant for separate financial statements prepared in accordance with EU IFRSs. Basis for opinion We conducted our audit in accordance with Hungarian National Auditing Standards and with applicable laws and regulations in Hungary, including also Regulation (EU) No. 537/2014 of the European Parliament and of the Council of 16 April 2014 on specific requirements regarding statutory audit of public-interest entities (“Regulation (EU) No. 537/2014“). Our responsibilities under those standards are further described in the “Auditor’s responsibilities for the audit of the separate financial statements” section of our report. 1 Digital identification of the above referred Nem_konsz_IFRS_beszamolo_20211231_hun03.11.xhtml separate financial statements, using SHA 256 HASH algorithm is 7B70D0042C4F288106C404CF838A2307C84AF2D88D6DE5A53C3599286E52C4ED A member firm of Ernst & Young Global Limited Page 1 / 9 We are independent of the Company in accordance with the applicable ethical requirements according to relevant laws in effect in Hungary and the policy of the Chamber of Hungarian Auditors on the ethical rules and disciplinary proceedings and, concerning matters not regulated by any of these, with the International Ethics Standards Board of Accountants’ (IESBA) International Code of Ethics for Professional Accountants (including International Independence Standards) (IESBA Code), and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Emphasis of matter We draw attention to Note 47 of notes to the separate financial statements, which describes the risk and potential impact of the Ukrainian-Russian conflicts on the Company and the entire OTP Group’s operation in Ukraine and Russia. Our opinion is not modified in respect of this matter. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the separate financial statements of the current period. These matters were addressed in the context of our audit of the separate financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. We have fulfilled the responsibilities described in the “Auditor’s responsibilities for the audit of the separate financial statements section” of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the separate financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying separate financial statements. Determination of expected credit losses relating to loans at amortised cost due to Material misstatements fraudulent financial reporting often result from understatement of expected credit losses. Credit impairment is a highly subjective area due to the level of judgement We involved valuation specialists to assist us in performing our audit procedures on ECL and related credit impairments. Our audit procedures included among others the following procedures. A member firm of Ernst & Young Global Limited Page 2 / 9 the applied by management in determining expected credit losses (“ECL”). The identification of impairment and the determination of recoverable amount are an inherently uncertain process involving various assumptions including the financial and factors, condition of the counterparty, expected future cash flows, and expected net selling prices of collaterals. The portfolios which give rise to the greatest uncertainty are typically those where impairments are derived from estimates of future cash flows and realizable value of collateral, calculated using collective impairment models, are unsecured or are subject to potential collateral shortfalls. These models require the of significant management correct segmentation, identification of significant changes in credit risk, the inclusion of forward-looking elements as well as the application of management overlay to reflect on circumstances beyond the modelling capabilities. Due to the significance of loans at amortised cost (representing 29% of Total Assets as of 31 December 2021) and the related estimation uncertainty, this is considered a key audit matter. regarding judgment periodic the the over identification We assessed the design and tested the operating effectiveness of internal controls over the approval, recording and monitoring of loans at amortized cost and controls over ECL calculations including the quality of underlying data and applications. We assessed the general controls IT environment of the applications from audit perspective relevant related to the determination of ECL. For ECL calculated on an individual basis, we tested the assumptions used by the management underlying the impairment and quantification focusing on loan cases with the most significant potential impact on the separate financial statements. We also assessed the management’s assumptions on the expected future cash flows, including the value of realisable collateral and estimates of recovery on default based on our own understanding and available market information. For ECL calculated on collective basis we evaluated the model governance, and methodologies, management used (probability of default, loss given default, significant changes in credit risk and forward-looking elements). We regulatory measures on the assumptions applied by the Company for ECL estimation purposes. We also assessed whether the disclosures in the separate financial statements appropriately reflect the Company’s exposure to credit risk and are compliant with the EU IFRSs. The Company’s disclosures about its risk management policies are included in Note 2.12 and 36.1 Credit risk which assumptions considered inputs the A member firm of Ernst & Young Global Limited Page 3 / 9 the specifically key explains assumptions used when determining credit risk and their evaluation are detailed in Note 11 Loans and Note 30 Risk cost. General Information Technology controls over the financial reporting process recognition A significant part of the Company's financial reporting process, including revenue is significantly reliant on IT systems with embedded automated processes and controls over the capture, storage and extraction of information. A fundamental component of these processes and controls is ensuring appropriate user access and change management protocols exist and are being adhered to. These protocols are important because they ensure that access and changes to IT systems and related data are made and authorized in an appropriate manner. As our audit of the financial statements sought to place a high level of reliance on IT systems and application controls related to financial reporting, a high proportion of the overall audit effort has been to out understand and test IT infrastructure relevant and applications application controls. Furthermore, the complexity of IT systems and nature of application controls requires special technology expertise and specialized skills to be involved in the audit we therefore consider this as a key audit matter. regarding including carried We focused our audit on those IT systems and controls that are significant for the Company’s financial reporting. As audit procedures over the IT systems and application controls require specific expertise, we involved IT audit specialists to assist us in performing our audit procedures. Our included among audit procedures others the following procedures. We understood and assessed the overall IT control environment and the included in place which controls controls over access to systems and data, as well as system changes. We adjusted our audit approach based on the financial significance of the system and whether there were automated procedures supported by that system. As part of our audit procedures we tested the operating effectiveness of controls over appropriate access rights to assess whether only appropriate users had the ability to create, modify or delete user accounts for the relevant in-scope applications. We also tested the operating effectiveness of controls around system development and program changes to establish that changes system were the appropriately authorized, developed and implemented. Additionally, we assessed and tested the design and the effectiveness operating application controls embedded in the processes relevant to our audit. to of A member firm of Ernst & Young Global Limited Page 4 / 9 The Company’s disclosures about its IT systems and related IT general and application controls are included in section System of internal controls and IT Controls of the Business report. Other matters The separate financial statements as at 31 December 2020 were audited by another auditor who expressed an unmodified opinion on those financial statements on 17 March 2021. Management is responsible for the presentation of the separate financial statements in the format that complies with the Article 3 of Commission (EU) Regulation 2019/815 of 17 December 2018 (“ESEF Regulation”). The scope of our audit was the human-readable content of the electronically identified digital file, which contains the separate financial statements. The scope of our audit did not include to review and consequently we do not report on, whether the digitalized information complies in all material respect with the requirements of ESEF Regulation. Other information Other information consists of the 2021 business report of the Company and the “Management’s Analysis” section of the annual report which have been made available to us before the date of our independent auditor’s report and of the “Message to the Shareholders”, “Corporate Governance” and “Macroeconomic and financial environment in 2021” sections of the annual report which are expected to be made available after the date of our independent auditor’s report but do not include the separate financial statements and our independent auditor’s report. Management is responsible for the other information, including preparation of the business report in accordance with the Hungarian Accounting Law and other relevant legal requirements, if any. Our opinion on the separate financial statements does not cover the other information. In connection with our audit of the separate financial statements, our responsibility is to read the business report and, in doing so, consider whether 1) the other information is materially inconsistent with the separate financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated and 2) the business report has been prepared in accordance with the Hungarian Accounting Law and other relevant legal requirements, if any. Our opinion on the business report should include the information required according to Subsection (2) e) and f) of Section 95/B of the Hungarian Accounting Law and we are required to confirm also whether the information prescribed in Subsection (2) a)- d) and g)-h) of Section 95/B of the Hungarian Accounting Law have been made available and whether the business report includes the non-financial statement as required by Section 95/C of the Hungarian Accounting Law. A member firm of Ernst & Young Global Limited Page 5 / 9 In our opinion, the business report of the Company, including the information required according to Subsection (2) e) and f) of Section 95/B of the Hungarian Accounting Law for 2021 is consistent, in all material respects, with the 2021 separate financial statements of the Company and the relevant requirements of the Hungarian Accounting Law. Since no other legal regulations prescribe for the Company further requirements with regard to its business report, we do not express opinion in this regard. We also confirm that the Company have made available the information required according to Subsection (2) a)-d) and g)-h) of Section 95/B of the Hungarian Accounting Law and that the business report includes the non-financial statement as required by Section 95/C of the Hungarian Accounting Law. Further to the above, based on the knowledge we have obtained about the Company and its environment in the course of the audit we are required to report whether we have identified any material misstatement in the business report, and if so, the nature of the misstatement in question. We have nothing to report in this regard. When we read the sections of the annual report, which had not yet been made available to us at the date of this report, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance. Responsibilities of management and those charged with governance for the separate financial statements Management is responsible for the preparation and fair presentation of the separate financial statements in accordance with EU IFRSs and for the preparation in accordance with the supplementary requirements of the Hungarian Accounting Law relevant for separate financial statements prepared in accordance with EU IFRSs, and for such internal control as management determines is necessary to enable the preparation of separate financial statements that are free from material misstatement, whether due to fraud or error. In preparing the separate financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company’s financial reporting process. A member firm of Ernst & Young Global Limited Page 6 / 9 Auditor’s responsibilities for the audit of the separate financial statements Our objectives are to obtain reasonable assurance about whether the separate financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Hungarian National Auditing Standards and with applicable laws and regulations in Hungary, including also Regulation (EU) No. 537/2014 will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these separate financial statements. As part of an audit in accordance with Hungarian National Auditing Standards and with applicable laws and regulations in Hungary, including also Regulation (EU) No. 537/2014, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: ► Identify and assess the risks of material misstatement of the separate financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. ► Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. ► Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. ► Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the separate financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern. ► Evaluate the overall presentation, structure and content of the separate financial statements, including the disclosures, and whether the separate financial statements represent the underlying transactions and events in a manner that achieves fair presentation. A member firm of Ernst & Young Global Limited Page 7 / 9 We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied. From the matters communicated with those charged with governance we determine those matters that were of most significance in the audit of the separate financial statements of the current period and are therefore the key audit matters. Report on other legal and regulatory requirements Reporting requirements on content of auditor’s report in compliance with Regulation (EU) No. 537/2014: Appointment and Approval of Auditor We were appointed as the statutory auditor of the Company by the General Assembly of Shareholders of the Company on 16 April 2021. Total uninterrupted engagement period, including previous renewals (extension of the period for which we were originally appointed) and reappointments for the statutory auditor, has lasted for one year. Consistency with Additional Report to Audit Committee Our audit opinion on the separate financial statements expressed herein is consistent with the additional report to the audit committee of the Company, which we issued in accordance with Article 11 of the Regulation (EU) No. 537/2014 on the same date as the date of this report. Non-audit Services We declare that no prohibited non-audit services referred to in Article 5(1) of Regulation (EU) No. 537/2014 were provided by us to the Company and its controlled undertakings and we remained independent from the Company in conducting the audit. In addition to statutory audit services and services disclosed in the business report and in the separate financial statements, no other services were provided by us to the Company and its controlled undertakings. A member firm of Ernst & Young Global Limited Page 8 / 9 The engagement partner on the audit resulting in this independent auditor’s report is Kónya Zsolt. Budapest, 17 March 2022 The original Hungarian version has been signed. Kónya Zsolt Engagement partner Ernst & Young Kft. 1132 Budapest, Váci út 20. Registration No. 001165 Nagyváradiné Szépfalvi Zsuzsanna Registered auditor Chamber membership No.: 005313 A member firm of Ernst & Young Global Limited Page 9 / 9 Ernst & Young Kft. Ernst & Young Ltd. H-1132 Budapest Váci út 20. 1399 Budapest 62. Pf.632, Hungary Tel: +36 1 451 8100 Fax: +36 1 451 8199 www.ey.com/hu Cg. 01-09-267553 This is a translation of the Hungarian Report Independent Auditors' Report To the Shareholders of OTP Bank Nyrt. Report on the audit of the consolidated financial statements Opinion We have audited the accompanying 2021 consolidated financial statements of OTP Bank Nyrt. (“the Company”) and its subsidiaries (altogether “the Group”) included in the accompanying CON 2021-12-31_HU_final_v5_119_1_preview.xhtml1 digital file, which comprise the consolidated statement of financial position as at 31 December 2021 - showing a balance sheet total of HUF 27,553,384 million and a total comprehensive income for the year of HUF 473,322 million -, the related consolidated statement of profit or loss, the consolidated statement of comprehensive income, consolidated statement of changes in equity, consolidated statement of cash flows for the year then ended and notes to the consolidated financial statements, including a summary of significant accounting policies. In our opinion the consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at 31 December 2021 and of its consolidated financial performance and its consolidated cash flows for the financial year then ended in accordance with International Financial Reporting Standards as adopted by the EU (“EU IFRSs”) and have been prepared, in all material respects, in accordance with the supplementary requirements of Act C of 2000 on Accounting (“Hungarian Accounting Law”) relevant for consolidated financial statements prepared in accordance with EU IFRSs. Basis for opinion We conducted our audit in accordance with Hungarian National Auditing Standards and with applicable laws and regulations in Hungary, including also Regulation (EU) No. 537/2014 of the European Parliament and of the Council of 16 April 2014 on specific requirements regarding statutory audit of public-interest entities (“Regulation (EU) No. 537/2014“). Our responsibilities under those standards are further described in the “Auditor’s responsibilities for the audit of the consolidated financial statements” section of our report. 1 Digital identification of the above referred CON 2021-12-31_HU_final_v5_119_1_preview.xhtml consolidated financial statements, using SHA 256 HASH algorithm is 072C2A820D46B8755FFE07F5A12CBC2A0899FFDA58EF9B5C9B355C22A95903DB A member firm of Ernst & Young Global Limited Page 1 / 8 We are independent of the Group in accordance with the applicable ethical requirements according to relevant laws in effect in Hungary and the policy of the Chamber of Hungarian Auditors on the ethical rules and disciplinary proceedings and, concerning matters not regulated by any of these, with the International Ethics Standards Board of Accountants’ (IESBA) International Code of Ethics for Professional Accountants (including International Independence Standards) (IESBA Code), and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Emphasis of matter We draw attention to Note 51 of notes to the consolidated financial statements, which describes the risk and potential impact of the Ukrainian-Russian conflicts on the Group’s operation in Ukraine and Russia. Our opinion is not modified in respect of this matter. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. We have fulfilled the responsibilities described in the “Auditor’s responsibilities for the audit of the consolidated financial statements section” of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the consolidated financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying consolidated financial statements. Determination of expected credit losses relating to loans at amortised cost Material misstatements due to fraudulent financial reporting often result from understatement of expected credit losses. Credit impairment is a highly subjective area due to the level of judgement applied by management in determining expected credit losses (“ECL”). The identification of impairment and the determination of the inherently recoverable amount are an uncertain various process assumptions and factors, including the involving We involved valuation specialists to assist us in performing our audit procedures on ECL and related credit impairments. Our audit procedures included among others the following procedures. We assessed the design and tested the operating effectiveness of internal controls over the approval, recording and monitoring of loans at amortized cost and controls over ECL calculations including the quality of underlying data and A member firm of Ernst & Young Global Limited Page 2 / 8 financial condition of the counterparty, expected future cash flows, and expected net selling prices of collaterals. The portfolios which give rise to the greatest uncertainty are typically those where impairments are derived from estimates of future cash flows and realizable value of collateral, calculated using collective impairment models, are unsecured or are subject to potential collateral shortfalls. the significant These models require of management periodic the regarding identification of significant changes in credit risk, the inclusion of forward-looking elements as well as the application of to management overlay reflect on the modelling circumstances beyond capabilities. Due to the significance of loans at amortised cost (representing 49% of Total Assets as of 31 December 2021) and the related estimation uncertainty, this is considered a key audit matter. judgment correct segmentation, realisable the model applications. We assessed the controls over the general the applications IT environment of relevant from audit perspective related to the determination of ECL. For ECL calculated on an individual basis, we tested the assumptions used by the management underlying the impairment identification and quantification focusing on loan cases with the most significant potential impact on the consolidated financial statements. We also assessed the management’s assumptions on the expected future cash flows, including the value of collateral and estimates of recovery on default based on our own understanding and available market information. For ECL calculated on collective basis we evaluated governance, methodologies, inputs and management assumptions used (probability of default, loss given default, significant changes in credit risk and forward-looking elements). We considered the regulatory measures on the assumptions applied by the Company for ECL estimation purposes. We also assessed whether the disclosures in the consolidated financial statements appropriately Group’s reflect exposure to credit risk and are compliant with the EU IFRSs. The Group’s disclosures about its risk management policies are included in Note 2.14 Loss allowance and Note 37.1 Credit risk which specifically explains the key assumptions used when determining credit risk and their evaluation are detailed in Note 11 Loans at amortised cost and at fair value and Note 31 Loss allowance / Impairment / Provisions. the A member firm of Ernst & Young Global Limited Page 3 / 8 General Information Technology controls over the financial reporting process including embedded A significant part of the Group's financial reporting process, revenue recognition is significantly reliant on IT automated systems with processes and controls over the capture, storage and extraction of information. A fundamental component of these processes and controls is ensuring appropriate user access and change management protocols exist and are being adhered to. These protocols are important because they ensure that access and changes to IT systems and related data are made and authorized in an appropriate manner. As our audit of the financial statements sought to place a high level of reliance on IT systems and application controls related to financial reporting, a high proportion of the overall audit effort has been carried out regarding to understand and test IT infrastructure and applications including relevant application controls. Furthermore, the complexity of IT systems and nature of application special technology expertise and specialized skills to be involved in the audit we therefore consider this as a key audit matter. requires controls audit and whether We focused our audit on those IT systems and controls that are significant for the Group’s financial reporting. As audit procedures over the IT systems and application controls require specific expertise, we involved IT audit specialists to assist us in performing our audit procedures procedures. Our included among others the following procedures. We understood and assessed the overall IT control environment and the controls in place which included controls over access to systems and data, as well as system changes. We adjusted our audit approach based on the financial significance of the system there were automated procedures supported by that system. As part of our audit procedures, we tested the operating effectiveness of controls over appropriate access rights to assess whether only appropriate users had the ability to create, modify or delete user accounts in-scope applications. We also tested the operating effectiveness of controls around system development and program changes to establish that changes to the system were appropriately authorized, developed and implemented. Additionally, we assessed and tested the design and operating effectiveness of the application controls embedded in the processes relevant to our audit. IT The Group’s disclosures about IT general and systems and related application controls are in included section System of internal controls and IT Controls in the consolidated business report. relevant the for its A member firm of Ernst & Young Global Limited Page 4 / 8 Other matters The consolidated financial statements as at 31 December 2020 were audited by another auditor who expressed an unmodified opinion on those financial statements on 17 March 2021. Management is responsible for the presentation of the consolidated financial statements in the format that complies with the Articles 3 and 4 of Commission (EU) Regulation 2019/815 of 17 December 2018 (“ESEF Regulation”). The scope of our audit was the human-readable content of the electronically identified digital file, which contains the consolidated financial statements. The scope of our audit did not include to review and consequently we do not report on, whether the digitalized information complies in all material respect with the requirements of ESEF Regulation. Other information Other information consists of the 2021 consolidated business report of the Group and the “Management’s Analysis” section of the annual report which have been made available to us before the date of our independent auditor’s report and of the “Message to the Shareholders”, “Corporate Governance” and “Macroeconomic and financial environment in 2021” sections of the annual report which are expected to be made available after the date of our independent auditor’s report but do not include the consolidated financial statements and our independent auditor’s report. Management is responsible for the other information, including preparation of the consolidated business report in accordance with the Hungarian Accounting Law and other relevant legal requirements, if any. Our opinion on the consolidated financial statements does not cover the other information. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether 1) the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated and 2) the consolidated business report has been prepared in accordance with the Hungarian Accounting Law and other relevant legal requirements, if any. Our opinion on the consolidated business report should include the information required according to Subsection (2) e) and f) of Section 95/B of the Hungarian Accounting Law and we are required to confirm also whether the information prescribed in Subsection (2) a)-d) and g)-h) of Section 95/B of the Hungarian Accounting Law have been made available and whether the consolidated business report includes the non-financial statement as required by Subsection (5) of Section 134 of the Hungarian Accounting Law. In our opinion, the consolidated business report of the Group, including the information required according to Subsection (2) e) and f) of Section 95/B of the Hungarian Accounting Law for 2021 is consistent, in all material respects, with the 2021 consolidated financial statements of the Group and the relevant requirements of the Hungarian Accounting Law. Since no other legal regulations prescribe for the Group further requirements with regard to its consolidated business report, we do not express opinion in this regard. A member firm of Ernst & Young Global Limited Page 5 / 8 We also confirm that the Group have made available the information required according to Subsection (2) a)-d) and g)-h) of Section 95/B of the Hungarian Accounting Law and that the consolidated business report includes the non-financial statement as required by Subsection (5) of Section 134 of the Hungarian Accounting Law. Further to the above, based on the knowledge we have obtained about the Group and its environment in the course of the audit we are required to report whether we have identified any material misstatement in the other information, and if so, the nature of the misstatement in question. We have nothing to report in this regard. When we read the sections of the annual report, which had not yet been made available to us at the date of this report, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance. Responsibilities of management and those charged with governance for the consolidated financial statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with the EU IFRSs and for the preparation in accordance with the supplementary requirements of the Hungarian Accounting Law relevant for consolidated financial statements prepared in accordance with EU IFRSs, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group’s financial reporting process. Auditor’s responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Hungarian National Auditing Standards and with applicable laws and regulations in Hungary, including also Regulation (EU) No. 537/2014 will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. A member firm of Ernst & Young Global Limited Page 6 / 8 As part of an audit in accordance with Hungarian National Auditing Standards and with applicable laws and regulations in Hungary, including also Regulation (EU) No. 537/2014, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: ► Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. ► Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. ► Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. ► Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. ► Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. ► Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied. A member firm of Ernst & Young Global Limited Page 7 / 8 From the matters communicated with those charged with governance we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. Report on other legal and regulatory requirements Reporting requirements on content of auditor’s report in compliance with Regulation (EU) No. 537/2014: Appointment and Approval of Auditor We were appointed as the statutory auditor of OTP Bank Nyrt. by the General Assembly of Shareholders of the Company on 16 April 2021. Total uninterrupted engagement period, including previous renewals (extension of the period for which we were originally appointed) and reappointments for the statutory auditor, has lasted for one year. Consistency with Additional Report to Audit Committee Our audit opinion on the consolidated financial statements expressed herein is consistent with the additional report to the audit committee of the Company, which we issued in accordance with Article 11 of the Regulation (EU) No. 537/2014 on the same date as the date of this report. Non-audit Services We declare that no prohibited non-audit services referred to in Article 5(1) of Regulation (EU) No. 537/2014 were provided by us to the Company and its controlled undertakings and we remained independent from the Group in conducting the audit. In addition to statutory audit services and services disclosed in the consolidated business report and in the consolidated financial statements, no other services were provided by us to the Company and its controlled undertakings. The engagement partner on the audit resulting in this independent auditor’s report is Kónya Zsolt. Budapest, 17 March 2022 The original Hungarian version has been signed. Kónya Zsolt Engagement partner Ernst & Young Kft. 1132 Budapest, Váci út 20. Registration No. 001165 Nagyváradiné Szépfalvi Zsuzsanna Registered auditor Chamber membership No.: 005313 A member firm of Ernst & Young Global Limited Page 8 / 8 SEPARATE FINANCIAL STATEMENTS IN ACCORDANCE WITH IFRS (2021) ANNUAL REPORT 2021 OTP BANK PLC. SEPARATE FINANCIAL STATEMENTS IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS AS ADOPTED BY THE EUROPEAN UNION FOR THE YEAR ENDED 31 DECEMBER 2021 OTP BANK PLC. CONTENTS SEPARATE STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2021 .................................... 5 SEPARATE STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 2021 ............. 6 SEPARATE STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2021 (in HUF mn) ............................................................................................................................. 7 SEPARATE STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEAR ENDED 31 DECEMBER 2021 (in HUF mn) ...................................................................................................... 8 SEPARATE STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2021 .................... 9 NOTE 1: ORGANIZATION AND BASIS OF FINANCIAL STATEMENTS ................................................ 11 1.1. 1.2. General information ........................................................................................................................... 11 Basis of accounting ............................................................................................................................ 11 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ......................................................... 13 Basis of presentation .......................................................................................................................... 13 2.1. 2.2. 2.3. 2.4. 2.5. 2.6. 2.7. 2.8. 2.9. 2.10. 2.11. 2.12. 2.13. 2.14. 2.15. 2.16. 2.17. 2.18. 2.19. 2.20. 2.21. 2.22. 2.23. 2.24. 2.25. 2.26. Foreign currency translation .............................................................................................................. 13 Consolidated financial statements ..................................................................................................... 13 Investments in subsidiaries, associated companies and other investments ........................................ 13 Securities at amortised cost................................................................................................................ 14 Financial assets at fair value through profit or loss ........................................................................... 14 Derivative financial instruments designated as a fair value or cash flow hedge ................................ 16 Offsetting ........................................................................................................................................... 16 Embedded derivatives ........................................................................................................................ 16 Securities at fair value through other comprehensive income (“FVOCI securities”) ........................ 17 Loans, placements with other banks, repo receivables and loss allowance for loan, placements and repo receivables losses ....................................................................................................................... 17 Loss allowance .................................................................................................................................. 20 Option to designate a financial asset/liability measured at fair value through profit or loss (FVTPL option) ................................................................................................................................................ 22 Sale and repurchase agreements, security lending ............................................................................. 22 Property, equipment and intangible assets ......................................................................................... 22 Inventories ......................................................................................................................................... 22 Investment properties ......................................................................................................................... 23 Financial liabilities............................................................................................................................. 23 Leases ................................................................................................................................................ 23 Share capital ...................................................................................................................................... 24 Treasury shares .................................................................................................................................. 24 Interest income, income similar to interest income and interest expense .......................................... 24 Fees and Commissions ...................................................................................................................... 24 Dividend income ................................................................................................................................ 25 Income tax ......................................................................................................................................... 25 Banking tax ........................................................................................................................................ 25 2 2.27. 2.28. 2.29. 2.30. Off-balance sheet commitments and contingent liabilities, provisions .............................................. 26 Share-based payment and employee benefits .................................................................................... 26 Separate statement of cash flows ....................................................................................................... 27 Segment reporting .............................................................................................................................. 27 2.31. NOTE 3: SIGNIFICANT ACCOUNTING ESTIMATES AND DECISIONS IN THE APPLICATION OF Comparative figures........................................................................................................................... 28 ACCOUNTING POLICIES .............................................................................................................. 29 3.1. 3.2. 3.3. 3.4. Loss allowance on financial instruments ........................................................................................... 29 Valuation of instruments without direct quotations ........................................................................... 29 Provisions .......................................................................................................................................... 29 Business models ................................................................................................................................ 30 3.4. Contractual cash-flow characteristics of financial assets ................................................................... 30 NOTE 4: COVID-19 (in HUF mn) ................................................................................................................... 31 NOTE 5: CASH, AMOUNTS DUE FROM BANKS AND BALANCES WITH THE NATIONAL BANK OF HUNGARY (in HUF mn) ................................................................................................................. 37 NOTE 6: PLACEMENTS WITH OTHER BANKS, NET OF ALLOWANCE FOR PLACEMENT LOSSES (in HUF mn) ...................................................................................................................................... 38 NOTE 7: REPO RECEIVABLES (in HUF mn) ............................................................................................... 39 NOTE 8: FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (in HUF mn) .............. 40 NOTE 9: SECURITIES AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME (in HUF mn) ..................................................................................................................................................... 41 NOTE 10: SECURITIES AT AMORTISED COST (in HUF mn) ..................................................................... 43 NOTE 11: LOANS (in HUF mn) ........................................................................................................................ 44 NOTE 12: INVESTMENTS IN SUBSIDIARIES, ASSOCIATES, JOINT VENTURES AND OTHER INVESTMENTS (in HUF mn) .......................................................................................................... 46 NOTE 13: PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS (in HUF mn) ...................................... 51 NOTE 14: INVESTMENT PROPERTIES (in HUF mn) .................................................................................... 53 NOTE 15: FAIR VALUE OF DERIVATIVE FINANCIAL ASSETS DESIGNATED AS HEDGE ACCOUNTING (in HUF mn) ........................................................................................................... 53 NOTE 16: OTHER ASSETS (in HUF mn) ......................................................................................................... 54 NOTE 17: AMOUNTS DUE TO BANKS AND DEPOSITS FROM THE NATIONAL BANK OF HUNGARY AND OTHER BANKS (in HUF mn) ................................................................................................ 55 NOTE 18: REPO LIABILITIES (in HUF mn) ................................................................................................... 55 NOTE 19: DEPOSITS FROM CUSTOMERS (in HUF mn) .............................................................................. 56 NOTE 20: LIABILITIES FROM ISSUED SECURITIES (in HUF mn) ............................................................ 56 NOTE 21: FINANCIAL LIABILITIES DESIGNATED AS FAIR VALUE THROUGH PROFIT OR LOSS (in HUF mn) ............................................................................................................................................ 60 NOTE 22: HELD FOR TRADING DERIVATIVE FINANCIAL LIABILITIES (in HUF mn) ........................ 60 NOTE 23: FAIR VALUE OF DERIVATIVE FINANCIAL LIABLITIES DESIGNATED AS HEDGE ACCOUNTING (in HUF mn) ........................................................................................................... 60 NOTE 24: OTHER LIABILITIES AND PROVISIONS (in HUF mn) .............................................................. 61 NOTE 25: SUBORDINATED BONDS AND LOANS (in HUF mn) ................................................................ 62 NOTE 26: SHARE CAPITAL (in HUF mn) ....................................................................................................... 62 NOTE 27: RETAINED EARNINGS AND RESERVES (in HUF mn) .............................................................. 63 NOTE 28: TREASURY SHARES (in HUF mn) ................................................................................................ 68 NOTE 29: INTEREST INCOME AND EXPENSES (in HUF mn) .................................................................... 69 NOTE 30: RISK COST (in HUF mn) ................................................................................................................. 70 3 NOTE 31: NET PROFIT FROM FEES AND COMMISSIONS (in HUF mn) .................................................. 70 NOTE 32: GAINS AND LOSSES (in HUF mn) ................................................................................................ 73 NOTE 33: OTHER OPERATING INCOME AND EXPENSES AND OTHER ADMINISTRATIVE EXPENSES (in HUF mn) .................................................................................................................. 74 NOTE 34: INCOME TAX (in HUF mn)............................................................................................................. 75 NOTE 35: LEASE (in HUF mn) ......................................................................................................................... 77 NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) ........................................................................ 78 36.1. 36.2. 36.3. 36.4. 36.5. 36.5.1. 36.5.2. 36.5.3. 36.5.4. 36.6. Credit risk .......................................................................................................................................... 78 Maturity analysis of assets and liabilities and liquidity risk .............................................................. 92 Net foreign currency position and foreign currency risk ................................................................... 95 Interest rate risk management ........................................................................................................... 95 Market risk ....................................................................................................................................... 102 Market risk sensitivity analysis ........................................................................................................ 102 Foreign currency sensitivity analysis ............................................................................................... 103 Interest rate sensitivity analysis ....................................................................................................... 104 Equity price sensitivity analysis ...................................................................................................... 105 Capital management ........................................................................................................................ 105 NOTE 37: TRANSFER AND RECLASSIFICATION OF FINANCIAL INSTRUMENTS (in HUF mn) ...... 107 NOTE 38: OFF-BALANCE SHEET ITEMS (in HUF mn) .............................................................................. 108 NOTE 39: SHARE-BASED PAYMENT AND EMPLOYEE BENEFIT (in HUF mn) ................................... 109 NOTE 40: RELATED PARTY TRANSACTIONS (in HUF mn) .................................................................... 114 NOTE 41: TRUST ACTIVITIES (in HUF mn) ................................................................................................ 115 NOTE 42: CONCENTRATION OF ASSETS AND LIABILITIES ................................................................. 116 NOTE 43: EARNINGS PER SHARE ............................................................................................................... 117 NOTE 44: NET GAIN OR LOSS REALISED ON FINANCIAL INSTRUMENTS (in HUF mn) ................. 118 NOTE 45: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) ................................................... 120 NOTE 46: SIGNIFICANT EVENTS DURING THE YEAR ENDED 31 DECEMBER 2021 ........................ 134 NOTE 47: SIGNIFICANT EVENTS AFTER THE REPORTING PERIOD ................................................... 136 4 OTP BANK PLC. SEPARATE STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2021 (in HUF mn) Cash, amounts due from banks and balances with the National Bank of Hungary Placements with other banks, net of allowance for placement losses Repo receivables Financial assets at fair value through profit or loss Financial assets at fair value through other comprehensive income Securities at amortised cost Loans at amortised cost Loans mandatorily measured at fair value through profit or loss Investments in subsidiaries Property and equipment Intangible assets Right of use assets Investment properties Current tax assets Derivative financial assets designated as hedge accounting relationships Other assets TOTAL ASSETS Amounts due to banks and deposits from the National Bank of Hungary and other banks Repo liabilities Deposits from customers Leasing liabilities Liabilities from issued securities Financial liabilities at fair value through profit or loss Derivative financial liabilities designated as held for trading Derivative financial liabilities designated as hedge accounting relationships Deferred tax liabilities Current tax liabilities Provisions Other liabilities Subordinated bonds and loans TOTAL LIABILITIES Share capital Retained earnings and reserves Treasury shares Note 2021 2020 Reclassified 5. 6. 7. 8. 9. 10. 11. 11. 12. 13. 13. 35. 14. 34. 15. 16. 17. 18. 19. 35. 20. 21. 22. 23. 34. 34. 24. 24. 25. 26. 27. 28. 474,945 2,567,212 33,638 246,462 641,939 3,071,038 4,032,465 662,012 1,573,008 81,817 62,161 17,231 4,328 - 17,727 224,488 579,120 1,535,884 183,364 160,483 911,950 2,007,692 3,417,760 480,937 1,548,972 77,974 57,639 13,479 1,936 593 6,817 169,794 13,710,471 11,154,394 1,051,203 86,580 9,948,532 17,932 22,153 20,133 192,261 18,690 1,507 4,776 21,527 238,437 271,776 766,977 109,612 7,895,735 14,106 28,435 25,902 99,987 3,104 3,062 1,464 19,906 203,527 304,243 11,895,507 9,476,060 28,000 1,845,836 (58,872) 28,000 1,697,133 (46,799) TOTAL SHAREHOLDERS' EQUITY 1,814,964 1,678,334 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 13,710,471 11,154,394 Budapest, 17 March 2022 Dr. Sándor Csányi Chairman and Chief Executive Officer 5 OTP BANK PLC. SEPARATE STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 2021 (in HUF mn) Interest Income: Interest income calculated using the effective interest method Income similar to interest income Interest income and similar to interest income total Interest Expense: Interest expenses total NET INTEREST INCOME Loss allowance on loan, placements and repo receivables losses Loss allowance on securities at fair value through other comprehensive income and on securities at amortised cost Provision for loan commitments and financial guarantees given Change in the fair value attributable to changes in the credit risk of loans mandatorily measured at fair value through profit of loss Risk cost total Note 29. 29. Year ended 31 December 2021 Year ended 31 December 2020 Reclassified 302,373 105,663 408,036 239,633 81,663 321,296 29. (155,491) (99,630) 252,545 221,666 6., 7., 11., 30. 9., 10., 30. 24., 30. 45.4. (38,841) (57,671) (1,484) (130) (16,255) (56,710) (1,848) (3,202) (405) (63,126) NET INTEREST INCOME AFTER RISK COST 195,835 158,540 LOSSES ARISING FROM DERECOGNITION OF FINANCIAL ASSETS MEASURED AT AMORTISED COST MODIFICATION LOSS Income from fees and commissions Expenses from fees and commissions NET PROFIT FROM FEES AND COMMISSIONS Foreign exchange losses Gains on securities, net Losses on financial instruments at fair value through profit or loss Gains on derivative instruments, net Dividend income Other operating income Other operating expenses NET OPERATING INCOME Personnel expenses Depreciation and amortization Other administrative expenses OTHER ADMINISTRATIVE EXPENSES PROFIT BEFORE INCOME TAX Income tax NET PROFIT FOR THE YEAR Earnings per share (in HUF) Basic Diluted 32. 4. 31. 31. 32. 32. 32. 32. 32. 33. 33. 33. 33. 33. 34. 43. 43. (2,700) (3,279) (7,017) (17,358) 300,803 (52,276) 248,527 (5,638) 2,104 (6,494) 3,436 99,037 11,265 (41,636) 62,074 (136,126) (40,692) (178,611) (355,429) 141,290 (15,951) 125,339 259,781 (40,750) 219,031 (4,518) 17,595 (671) 7,057 60,973 7,900 (28,064) 60,272 (118,498) (38,948) (154,165) (311,611) 105,595 (13,121) 92,474 455 455 333 333 6 OTP BANK PLC. SEPARATE STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2021 (in HUF mn) NET PROFIT FOR THE YEAR 125,339 92,474 Note Year ended 31 December 2021 Year ended 31 December 2020 Items that may be reclassified subsequently to profit or loss: Fair value adjustment of debt instruments at fair value through other comprehensive income Deferred tax related to fair value adjustment of debt instruments at fair value through other comprehensive income Gains / (Losses) on separated currency spread of financial instruments designated as hedging instrument Deferred tax related to (losses) / gains on separated currency spread of financial instruments designated as hedging instrument (Losses) / Gains on derivative financial instruments designated as cash flow hedge Deferred tax related to gains on derivative financial instruments designated as cash flow hedge Items that will not be reclassified to profit or loss: Fair value adjustment of equity instruments at fair value through other comprehensive income Deferred tax related to equity instruments at fair value through other comprehensive income 34. 34. 34. 34. Total TOTAL COMPREHENSIVE INCOME (37,163) (14,459) 3,410 1,262 1,681 (1,526) (151) 137 (6,307) (296) - 27 1,407 (3,275) (281) 310 (37,404) (17,820) 87,935 74,654 7 OTP BANK PLC. SEPARATE STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEAR ENDED 31 DECEMBER 2021 (in HUF mn) Balance as at 1 January 2020 Net profit for the period Other comprehensive income Total comprehensive income Share-based payment Payments to ICES holders Sale of treasury shares Acquisition of treasury shares Loss on treasury shares Other transaction with owners Note Share Capital Capital reserve Retained earnings and other reserves Treasury Shares Total 28,000 52 1,628,302 (2,636) 1,653,718 - - - - - - - - - - - - - - - - - - 92,474 (17,820) 74,654 3,394 (4,853) - - (4,416) (5,875) - - - - - 41,759 (85,922) - (44,163) 92,474 (17,820) 74,654 3,394 (4,853) 41,759 (85,922) (4,416) (50,038) 39. 28. 28. 28. Balance as at 31 December 2020 28,000 52 1,697,081 (46,799) 1,678,334 Balance as at 1 January 2021 Other modification Balance as at 1 January 2021 Net profit for the period Other comprehensive income Total comprehensive income Share-based payment Payments to ICES holders Increase due to termination of ICES bonds Sale of treasury shares Acquisition of treasury shares Loss on sale of treasury shares Other transaction with owners 39. 28. 28. 28. 28,000 - 28,000 - - - - - - - - - - 52 - 52 - - - - - - - - - - 1,697,081 (46,799) 1,678,334 1,034 - 1,034 1,698,115 (46,799) 1,679,368 125,339 (37,404) 87,935 3,589 (3,734) 75,422 - - - - - - 125,339 (37,404) 87,935 3,589 (3,734) 75,422 - - 264,360 264,360 (276,433) (276,433) (15,543) - 59,734 (12,073) (15,543) 47,661 Balance as at 31 December 2021 28,000 52 1,845,784 (58,872) 1,814,964 8 OTP BANK PLC. SEPARATE STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2021 (in HUF mn) OPERATING ACTIVITIES Profit before income tax 141,290 93,246 Note Year ended 31 December 2021 Year ended 31 December 2020 Net accrued interest Depreciation and amortization Loss allowance on loans and placements (Release of loss allowance) / Loss allowance on securities at fair value through other comprehensive income Impairment loss on investments in subsidiaries Loss allowance on securities at amortised cost (Release of loss allowance) / Loss allowance on other assets Provision on off-balance sheet commitments and contingent liabilities Share-based payment Unrealised losses / (gains) on fair value adjustment of financial instruments at fair value through profit or loss Unrealised losses on fair value adjustment of derivative financial instruments Gains on securities Interest expense from leasing liabilities Foreign exchange loss Gains on sale of tangible and intangible assets Net changing in assets and liabilities in operating activities Net (increase) / decrease in placements with other banks and repo receivables before allowance for placement losses Changes in held for trading securities Change in securities mandatorily measured at fair value through profit or loss Changes in derivative financial instruments at fair value through profit or loss Net increase in loans Increase in other assets, excluding advances for investments and before provisions for losses Net increase / (decrease) in amounts due to banks and deposits from the National Bank of Hungary and other banks and repo liabilities Net decrease of financial liabilities designated as fair value through profit or loss Net increase in deposits from customers Increase/(decrease) in other liabilities Net increase in the compulsory reserve established by the National Bank of Hungary Dividend income Income tax paid 13. 30. 9. 12. 10. 16. 24. 39. 6. 8. 8. 8. 11. 16. 17. 21. 19. 24. 5. 12. (2,205) 40,784 38,841 (551) 27,420 2,035 (961) 1,473 3,589 23,051 30,962 6,212 (214) 35,136 82 (34,365) 38,997 61,310 3 10,042 1,845 3,521 3,110 3,394 3,549 4,011 (6,433) (257) (4,476) 72 (879,438) (24,178) (78,996) 34,976 6,687 (7,278) (1,303) 2,895 (835,520) (499,065) (49,201) (43,471) 224,661 (363,140) (1,853) (4,219) 1,989,941 1,218,775 114,259 (17,368) (23,270) (99,037) (15,259) (10,978) (60,913) (12,950) Net cash provided by operating activities 753,433 335,837 9 OTP BANK PLC. SEPARATE STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2021 (in HUF mn) [continued] INVESTING ACTIVITIES Purchase securities at fair value through other comprehensive income Proceeds from sale of securities at fair value through other comprehensive income Change in derivative financial instruments designated as hedge accounting Increase in investments in subsidiaries Decrease in investments in subsidiaries Dividend income Increase in securities at amortised cost Redemption of securities at amortised cost Additions to property, equipment and intangible assets Disposal of property, equipment and intangible assets Net (increase) / decrease in investment properties Net (used in) / provided by cash investing activities FINANCING ACTIVITIES Leasing payments Cash received from issuance of securities Cash used for redemption of issued securities Increase in subordinated bonds and loans Decrease in subordinated bonds and loans Payments to ICES holders Increase of Treasury shares Decrease of Treasury shares Dividends paid Note Year ended 31 December 2021 Year ended 31 December 2020 9. 9. 12. 12. 10. 10. 13. 13. 14. 20. 20. 25. 25. 27. 28. 28. 27. (850,030) (1,079,151) 1,081,372 1,341 (51,456) - 98,091 (1,253,830) 214,963 (46,081) 529 (2,484) 1,652,131 (190) (32,961) 16,485 60,913 (680,089) 122,146 (68,885) 29,433 396 (807,585) 20,228 (5,136) 5,897 (9,051) 1,874 (35,518) (3,735) (276,433) 248,819 (10) (4,590) 7,119 (22,096) 773 (5,373) (4,853) (85,923) 37,344 (10) Net cash used in financing activities (73,293) (77,609) Net (decrease) / increase in cash and cash equivalents (127,445) 278,456 Cash and cash equivalents at the beginning of the year 503,087 224,631 Cash and cash equivalents at the end of the year 375,642 503,087 Interest received Interest paid 345,504 98,395 306,646 88,237 10 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 1: ORGANIZATION AND BASIS OF FINANCIAL STATEMENTS 1.1. General information OTP Bank Plc. ("Bank" or "OTP Bank") was established on 31 December 1990, when the previously State- owned company was transformed into a limited liability company. The Bank’s http://www.otpbank.hu/ registered office address is 16, Nádor Street, Budapest 1051. Internet homepage: Signatory of the separate financial statements is the Chief Executive Officer, dr. Sándor Csányi (Budapest). The Bank’s owners have the power to amend the separate financial statements after issue if applicable. These financial statements are authorised for issue on 17 March 2022 by the Board of Directors. Responsible person for the control and management of accounting services: Zoltán Tuboly (Budapest), Managing Director of Accounting and Financial Directorate, Registration Number: 177289, IFRS qualified chartered accountant. Due to Hungarian legislation audit services are statutory for OTP Bank. Disclosure information about the auditor: Ernst & Young Audit Ltd. (001165), 1132 Budapest Váci Street 20. Registered under 01-09-267553 by Budapest-Capital Regional Court, as registry court. Statutory registered auditor: Zsuzsanna Nagyváradiné Szépfalvi, registration number: 005313. Audit service fee agreed by the Annual General Meeting of the Bank for the year ended 2021 is an amount of HUF 162 million + VAT. All other fees charged by the Auditor for non-audit services during the financial year are disclosed in the consolidated financial statements of the Bank. In 1995, the shares of the Bank were introduced on the Budapest and the Luxembourg Stock Exchanges and were also traded on the SEAQ board on the London Stock Exchange and PORTAL in the USA. The structure of the Share capital by shareholders (%): Domestic and foreign private and institutional investors Employees Treasury shares Total 2021 98% 1% 1% 100% 2020 97% 1% 2% 100% The Bank’s Registered Capital consists of 280.000.010 pieces of ordinary shares with the nominal value of HUF 100 each, representing the same rights to the shareholders. The Bank provides a full range of commercial banking services through a nationwide network of 356 branches in Hungary. Number of employees Average number of employees 1.2. Basis of accounting 2021 2020 10,078 9,934 9,829 9,654 These Separate Financial Statements were prepared based on the assumption of the Management that the Bank will remain in business for the foreseeable future. The Bank will not be forced to halt operations and liquidate its assets in the near term at what may be very low fire-sale prices. The Bank maintains its accounting records and prepares their statutory accounts in accordance with the commercial, banking and fiscal regulations prevailing in Hungary. The presentation and functional currency of the Bank is the Hungarian Forint ("HUF"). The separate financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (“EU”). 11 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 1: ORGANIZATION AND BASIS OF FINANCIAL STATEMENTS [continued] 1.2.1. The effect of adopting new and revised IFRS standards effective from 1 January 2021 The following amendments to the existing standards and new interpretation issued by the International Accounting Standards Board (IASB) and adopted by the EU are effective for the current reporting period: • Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 “Interest Rate Benchmark Reform – Phase 2 adopted by EU on 13 January 2021 (effective for annual periods beginning on or after 1 January 2021) • Amendments to IFRS 4 “Insurance Contracts” – “Deferral of IFRS 9” - adopted by EU on 15 December 2020 (effective for annual periods beginning on or after 1 January 2021) • IFRS 17 “Insurance Contracts” (effective for annual periods beginning on or after 1 January 2021), • Amendments to IFRS 16 “Leases” – “Covid 19-Related Rent Concessions beyond 30 June 2021” (effective for annual periods beginning on or after 1 April 2021), The adoption of these amendments to the existing standards has not led to any material changes in these Separate Financial Statements. 1.2.2. New and revised Standards and Interpretations issued by IASB and adopted by the EU but not yet effective • Amendments to IFRS 1 “First-time Adoption of International Financial Reporting Standards”, IFRS 9 “Financial Instruments”, IAS 41 “Agriculture”– “Annual Improvements to IFRSs 2018-2020 Cycle” - adopted by EU on 28 June 2021 (effective for annual periods beginning on or after 1 January 2022), • Amendments to IFRS 3 “Business Combinations”; IAS 16 “Property, Plant and Equipment”; IAS 37 “Provisions, Contingent Liabilities and Contingent Assets” – adopted by the EU on 28 June 2021 Annual Improvements (effective fog annual periods beginning on or after 1 January 2022) • Amendments to IFRS 17 “Insurance Contracts” (effective for annual periods beginning on or after 1 January 2023), 1.2.3. Standards and Interpretations issued by IASB but not yet adopted by the EU At present, IFRS as adopted by the EU do not significantly differ from regulations adopted by the IASB except for the following new standards, amendments to the existing standards and new interpretation, which were not endorsed for use in EU as at date of publication of these financial statements: • Amendments to IAS 1 “Presentation of Financial Statements” - Classification of Liabilities as Current or Non-Current (effective for annual periods beginning on or after 1 January 2023), • Amendments to IAS 1 “Presentation of Financial Statements” and IFRS Practice Statement 2- Disclosure of Accounting policies (effective for annual periods beginning on or after 1 January 2023), • Amendments to IAS 8 “Accounting policies, Changes in Accounting Estimates and Errors” – Definition of Accounting Estimates (effective for annual periods beginning on or after 1 January 2023), • Amendments to IFRS 10 “Consolidated Financial Statements” and IAS 28 “Investments in Associates and Joint Ventures” - Sale or Contribution of Assets between an Investor and its Associate or Joint Venture and further amendments (effective date deferred indefinitely until the research project on the equity method has been concluded). • Amendments to IAS 12 “Income Taxes” – Deferred Tax related to Assets and Liabilities arising from a Single Transaction (effective for annual periods beginning on or after 1 January 2023), • Amendments to IFRS 17 “Insurance Contracts” – Initial application of IFRS 17 and IFRS 9 – Comparative Information (effective date for annual periods beginning on or after 1 January 2023) The Bank anticipates that the adoption of these new standards, amendments to the existing standards and new interpretations will have no material impact on the financial statements of the Bank in the period of initial application. 12 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Significant accounting policies applied in the preparation of the accompanying separate financial statements are summarized below: 2.1. Basis of presentation These separate financial statements have been prepared under the historical cost convention with the exception of certain financial instruments, which are recorded at fair value. Revenues and expenses are recorded in the period in which they are earned or incurred. The Bank does not offset assets and liabilities or income and expenses unless it is required or permitted by an IFRS standard. During the preparation of separate financial statements assets and liabilities, income and expenses are presented separately, except in certain cases, when one of the IFRS standards prescribes net presenting related to certain items. (See below 2.8.) The presentation of separate financial statements in conformity with IFRS requires the Management of the Bank to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as at the date of the financial statements and their reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Future changes in economic conditions, business strategies, regulatory requirements, accounting rules and other factors could result in a change in estimates that could have a material impact on future separate financial statements. 2.2. Foreign currency translation Monetary assets and liabilities denominated in foreign currencies are translated into HUF that is the presentation currency, at exchange rates quoted by the National Bank of Hungary ("NBH") as at the date of the separate financial statements. Income and expenses arising in foreign currencies are converted at the rate of exchange on the transaction date. Resulting foreign exchange gains or losses are recorded to the separate statement of profit or loss. 2.3. Consolidated financial statements These financial statements present the separate financial position and results of operations of the Bank. Consolidated financial statements are prepared by the Bank and consolidated net profit for the year and shareholders’ equity differs significantly from that presented in these separate financial statements. See Note 2.4 for the description of the method of accounting for investments in subsidiaries and associated companies in these separate financial statements. The consolidated financial statements and the separate financial statements will be published on the same date. 2.4. Investments in subsidiaries, associated companies and other investments Investments in subsidiaries comprise those investments where OTP Bank, through direct and indirect ownership interest, controls the investee. Control is achieved when the Bank has power over the investee, is exposed or has rights, to variable returns from its involvement with the investee and has the ability to use its power to affect its returns. Investments in subsidiaries are recorded at the cost of acquisition, less impairment for permanent diminution in value, when appropriate. After initial measurement investments in subsidiaries are measured at cost, in the case of foreign currency denominated investments for the measurement the Bank uses the exchange rate at the date of transaction. Impairment is determined based on the future economic benefits of the subsidiary and macroeconomic factors. OTP Bank calculates the fair value based on discounted cash flow model. The 3 year period explicit cash flow model serves as a basis for the impairment test by which the Bank defines the impairment need on investment in subsidiaries based on the strategic factors and financial data of its cash-generating units. OTP Bank in its strategic plan has taken into consideration the cautious recovery of global economic situation and outlook, the associated risks and their possible effect on the financial sector as well as the current and expected availability of wholesale funding. 13 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.5. Securities at amortised cost The Bank measures at amortized cost those securities which are held for contractual cash collecting purposes, and contractual terms of these securities give rise to cash flows that are solely payment of principal and interest on the principal amount outstanding. The Bank initially recognises these securities at fair value. Securities at amortised cost are subsequently measured using the effective interest (EIR) method and are subject to impairment. The amortisation of any discount or premium on the acquisition of a security at amortized cost is part of the amortized cost and is recognised as interest income so that the revenue recognized in each period represents a constant yield on the investment. Securities at amortized cost are accounted for on a trade date basis. Such securities comprise mainly securities issued by the Hungarian Government bonds and corporate bonds. 2.6. Financial assets at fair value through profit or loss 2.6.1. Securities held for trading Investments in securities are accounted for on a trade date basis and are initially measured at fair value. Securities held for trading are measured at subsequent reporting dates at fair value. Unrealised gains and losses on held for trading securities are recognized in profit or loss and are included in the separate statement of profit or loss for the period. The Bank holds held for trading securities within the business model to obtain short-term gains, consequently realised and unrealised gains and losses are recognized in the net operating income, while interest income is recognised in income similar to interest income. The Bank applies FIFO1 inventory valuation method for securities held for trading. Such securities consist of discounted and interest bearing Treasury bills, Hungarian Government bonds, mortgage bonds, shares in non-financial commercial companies, shares in investment funds, shares in venture capital funds and shares in financial institutions. 2.6.2. Derivative financial instruments In the normal course of business, the Bank is a party to contracts for derivative financial instruments, which represent a low initial investment compared to the notional value of the contract and their value depends on value of underlying asset and are settled in the future. The derivative financial instruments used include interest rate forward or swap agreements and currency forward or swap agreements and options. These financial instruments are used by the Bank both for trading purposes and to hedge interest rate risk and currency exposures associated with its transactions in the financial markets. Derivative financial instruments are accounted for on a trade date basis and are initially measured at fair value and at subsequent reporting dates also at fair value. Fair values are obtained from quoted market prices, discounted cash flow models and option pricing models as appropriate. OTP Bank adopts multi curve valuation approach for calculating the net present value of future cash flows – based on different curves used for determining forward rates and used for discounting purposes. It shows the best estimation of such derivative deals that are collateralised as OTP Bank has almost its entire open derivative transactions collateralised. Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognized in profit or loss and are included in the separate statement of profit or loss for the period. Each derivative deal is determined as asset when fair value is positive and as liability when fair value is negative. Certain derivative transactions, while providing effective economic hedges under risk management positions of the Bank, do not qualify for hedge accounting under the specific rules of IFRS 9 and are therefore treated as derivatives held for trading with fair value gains and losses charged directly to the separate statement of profit or loss. Foreign currency contracts Foreign currency contracts are agreements to exchange specific amounts of currencies at a specified rate of exchange, at a spot date (settlement occurs two days after the trade date) or at a forward date (settlement occurs more than two days after the trade date). The notional amount of forward contracts does not represent the actual market or credit risk associated with these contracts. Foreign currency contracts are used by the Bank for risk management and trading purposes. The Bank’s risk management foreign currency contracts were used to hedge the exchange rate fluctuations of loans and deposits denominated in foreign currency. 1 First In First Out 14 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.6.2 Derivative financial instruments [continued] Foreign exchange swaps and interest rate swaps The Bank enters into foreign-exchange swap and interest rate swap (“IRS”) transactions. The swap transaction is a complex agreement concerning the swap of certain financial instruments, which usually consists of a spot and one or more forward contracts. Interest rate swaps obligate two parties to exchange one or more payments calculated with reference to fixed or periodically reset rates of interest applied to a specific notional principal amount (the base of the interest calculation). Notional principal is the amount upon which interest rates are applied to determine the payment streams under interest rate swaps. Such notional principal amounts are often used to express the volume of these transactions but are not actually exchanged between the counterparties. The Bank’s interest rate swap contracts can be hedging or held for trading contracts. Cross-currency interest rate swaps The Bank enters into cross-currency interest rate swap (“CCIRS”) transactions which have special attributes, i.e. the parties exchange the notional amount at the beginning and also at the maturity of the transaction. A special type of these deals is the mark-to-market CCIRS agreements. At this kind of deals the parties – in accordance with the foreign exchange prices – revalue the notional amount during lifetime of the transaction. Equity and commodity swaps Equity swaps obligate two parties to exchange more payments calculated with reference periodically reset rates of interest and performance of indices. A specific notional principal amount is the base of the interest calculation. The payment of index return is calculated on the basis of current market price compared to the previous market price. In case of commodity swaps payments are calculated on the basis of the strike price of a predefined commodity compared to its average market price in a period. Forward rate agreements (“FRA”) A forward rate agreement is an agreement to settle amounts at a specified future date based on the difference between an interest rate index and an agreed upon fixed rate. Market risk arises from changes in the market value of contractual positions caused by movements in interest rates. The Bank limits its exposure to market risk by entering into generally matching or offsetting positions and by establishing and monitoring limits on unmatched positions. Credit risk is managed through approval procedures that establish specific limits for individual counter-parties. The Bank’s forward rate agreements were transacted for management of interest rate exposures. Foreign exchange options A foreign exchange option is a derivative financial instrument that gives the owner the right to exchange money denominated in one currency into another currency at a pre-agreed exchange rate at a specified future date. The transaction, for a fee, guarantees a worst-case exchange rate for the futures purchase of one currency for another. These options protect against unfavourable currency movements while preserving the ability to participate in favourable movements. 15 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.7. Derivative financial instruments designated as a fair value or cash flow hedge Changes in the fair value of derivatives that are designated and qualify as hedging instruments fair value hedges and that prove to be highly effective in relation to the hedged risk, are recorded in the separate statement of profit or loss along with the corresponding change in fair value of the hedged asset or liability that is attributable to the specific hedged risk. Changes in the fair value of the hedging instrument in fair value hedges are charged directly to the separate statement of profit or loss. The conditions of hedge accounting applied by the Bank are the following: formally designated as hedging relationship, proper hedge documentation is prepared, effectiveness test is performed and based on it the hedge is qualified as effective. Changes in fair value of derivatives that are designated and qualify as hedging instrument in cash flow hedges and that prove to be highly effective in relation to hedged risk are recognized as reserve in other comprehensive income. Amounts deferred in other comprehensive income are transferred to the separate statement of profit or loss and classified as revenue or expense in the periods during which the hedged assets and liabilities effect the separate statement of recognized and comprehensive income for the period. The ineffective element of the hedge is charged directly to the separate statement of profit or loss. The Bank terminates the hedge accounting if the hedging instrument expires or is sold, terminated, or exercised, or the hedge no longer meets the criteria for hedge accounting. In case of cash flow hedges - in line with the standard – hedge accounting is still applied as long as the underlying asset is derecognised. 2.8. Offsetting Financial assets and liabilities may be offset and the net amount is reported in the statement of financial position when the Bank has a legally enforceable right to set off the recognised amounts and the transactions are intended to be reported in the statement of financial position on a net basis. In the case of the derivative financial instruments the Bank applies offsetting and net presentation in the Statement of Financial Position when the Bank has the right and the ability to settle the assets and liabilities on a net basis. 2.9. Embedded derivatives Sometimes, a derivative may be a component of a combined or hybrid contract that includes a host contract and a derivative (the embedded derivative) affecting cash flows or otherwise modifying the characteristics of the host instrument. An embedded derivative must be separated from the host instrument and accounted for as a separate derivative if, and only if: - The economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract; - A separate financial instrument with the same terms as the embedded derivative would meet the definition of a derivative as a stand-alone instrument; and - The host instrument is not measured at fair or is measured at fair value but changes in fair value are recognised in other comprehensive income. As long as a hybrid contract contains a host that is a financial asset the general accounting rules for classification, recognition and measurement of financial assets are applicable for the whole contract and no embedded derivative is separated. Derivatives that are required to be separated are measured at fair value at initial recognition and subsequently. If the Bank is unable to measure the embedded derivative separately either at acquisition or at the end of a subsequent financial reporting period, the Group shall designate the entire hybrid contract as at fair value through profit or loss. The Bank shall assess whether an embedded derivative is required to be separated from the host contract and accounted for as a derivative when the Bank first becomes a party to the contract. 16 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.10. Securities at fair value through other comprehensive income (“FVOCI securities”) FVOCI securities are held within a business model whose objective is achieved by both collecting of contractual cash flows and selling securities. Furthermore contractual terms of FVOCI securities give rise on specified dates to cash flows that are solely payment of principal and interest on the principal amount outstanding. Debt instruments Investments in debt securities are accounted for on a trade date basis and are initially measured at fair value. Securities at fair value through other comprehensive income are measured at subsequent reporting dates at fair value. Unrealised gains and losses on FVOCI financial instruments are recognized in other comprehensive income, except for interest and foreign exchange gains/losses on monetary items, unless such FVOCI security is part of an effective hedge. Such gains and losses will be reported when realised in profit or loss for the applicable period. The Bank applies FIFO1 inventory valuation method for FVOCI securities. For debt securities at fair value through other comprehensive income the loss allowance is calculated based on expected credit loss model. The expected credit loss is accounted for against Other Comprehensive Income. FVOCI securities are remeasured at fair value based on quoted prices or values derived from cash flow models. In circumstances where the quoted market prices are not readily available, the fair value of debt securities is estimated using the present value of the future cash flows and the fair value of any unquoted equity instruments are calculated using the EPS ratio. Fair value through other comprehensive income option for equity instruments In some cases the Bank made an irrevocable election at initial recognition for certain non-trading investments in an equity instrument to present subsequent changes in fair value of these securities in other comprehensive income instead of in profit or loss. The use of the fair value option is based only on direct decision of management of the Bank. 2.11. Loans, placements with other banks, repo receivables and loss allowance for loan, placements and repo receivables losses The Bank measures Loans, placements with other banks and repo receivables at amortised cost, which are held to collect contractual cash flows, and contractual terms of these assets give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. The Bank recognises loans, which are not held for trading and do not give rise contractual cash flows that are solely payments of principal and interest on the principal amount outstanding as loans measured at fair value through profit or loss (“FVTPL loans”). Loans, placements with other banks and repo receivables are accounted at amortised cost, stated at the principal amounts outstanding including accrued interest, net of allowance for loan or placement losses, respectively. In case of the above mentioned financial assets measured at amortised cost transaction fees and charges adjust the carrying amount at initial recognition and are included in effective interest calculation. In case of FVTPL loans fees and charges are recognised when incurred in the separate statement of profit or loss. Loans, placements with other banks and repo receivables loans are derecognised when the contractual rights to the cash flows expire or they are transferred. When a financial asset is derecognised the difference of the carrying amount and the consideration received is recognised in the profit or loss. In case of the above mentioned financial assets at amortised cost gains or losses from derecognition are presented in “Gains/losses arising from derecognition of financial assets at amortised cost” line. In case of FVTPL loans gains or losses from derecognition are presented in “Net operating income”. Change in the fair value of FVTPL loans is broken down into two components and presented in the separate statement of profit or loss as follows: • Portion of the change in fair value arising from changes in credit risk are presented within “Risk cost” as “Change in the fair value attributable to changes in the credit risk of loans mandatorily measured at fair value through profit of loss”. • The remaining component of the change is presented in fair value within “Net operating income” as “Gains/(Losses) on financial instruments at fair value through profit or loss”. 1 First In First Out 17 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.11. Loans, placements with other banks, repo receivables and loss allowance for loan, placements and repo receivables losses [continued] Initially, financial assets shall be recognised at fair value which is usually equal to the transaction value in case of loans and placements. However, when the amounts are not equal, the initial fair value difference should be recognized. If the fair value of financial assets is based on a valuation technique using only inputs observable in market transactions, the Bank recognises the initial fair value difference in the Separate Statement of Profit or Loss. When the fair value of financial assets is based on models for which inputs are not observable, the difference between the transaction price and the fair value is deferred and only recognised in profit or loss when the instrument is derecognised or the inputs became observable. Initial fair value of loans lent at interest below market conditions is lower than their transaction price. Allowance for losses on loans, placements with other banks and repo receivables represent management assessment for potential losses in relation to these activities. The Bank recognises a loss allowance for expected credit losses on a financial asset at each reporting date. The loss allowance for a financial asset equals to 12-month expected credit loss or equals to the lifetime expected credit losses. The maximum period over which expected credit losses shall be measured is the maximum contractual period over which the Bank is exposed to credit risk. If the credit risk on a financial asset has not increased significantly since initial recognition then 12-month expected credit losses, otherwise (in case of significant credit risk increase) lifetime expected credit losses should be calculated. The expected credit loss is the present value of the difference between the contractual cash flows that are due to the Bank under the contract and the cash flows that the Bank expects to receive. When the contractual cash flows of a financial asset are modified and the modification does not result in the derecognition of the financial asset the Bank recalculate the gross carrying amount of the financial asset by discounting the expected future cash flows with the original effective interest rate of the asset. The difference between the carrying amount and the present value of the expected cash flows is recognised as a “Modification gain or loss” in the statement of profit or loss. Interest income and amortised cost are accounted for using the effective interest rate method. Write-offs are generally recorded after all reasonable restructuring or collection activities have taken place and the possibility of further recovery is considered to be remote. The loan is written off against the related account “Loss allowance on loan, placement and repo receivables losses” in the Statement of Profit or loss. OTP Bank applies partial or full write-off for loans based on the definitions and prescriptions of financial instruments in accordance with IFRS 9. If OTP Bank has no reasonable expectations regarding a financial asset (loan) to be recovered, it will be written off partially or fully at the time of emergence. The gross amount and loss allowance of the loans shall be written off in the same amount to the estimated maximum recovery amount while the net carrying value remains unchanged. If there are reasonable expectations of recovery for a financial asset that is written-off fully or partially, OTP Bank shall re-estimate cash flows of a financial asset and write-off reversal is applied in the financial statements. 18 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.11. Loans, placements with other banks, repo receivables and loss allowance for loan, placements and repo receivables losses [continued] Modification of contractual cash flows If the net present value of the contracted cash flows changes due to the modification of the contractual terms and it is not qualified as derecognition, modification gain or loss should be calculated and accounted for in the separate statement of profit or loss. Modification gain or loss is accounted in cases like restructuring – as defined in internal policies of the Bank – prolongation, renewal with unchanged terms, renewal with shorter terms and prescribing capital repayment rate, if it doesn’t exist or has not been earlier. The changes of net present value should be calculated on portfolio level in case of retail exposures. Each retail contract is restructured based on restructuring frameworks. The Bank has to evaluate these frameworks (and not individual contracts). The changes of net present value should be calculated individually on contract level in case of corporate portfolio. Among the possible contract amendments, the Bank considers as a derecognition and a new recognition when the discounted present value – discounted at the original effective interest rate – of the cash flows under the new terms is at least 10 per cent different from the discounted present value of the remaining cash flows. In case of derecognition and new recognition the unamortised fees of the derecognised asset should be presented as Income similar to interest income. The newly recognised financial asset is initially measured at fair value and is placed in stage 1 if the derecognised financial asset was in stage 1 or stage 2 portfolio. The newly recognised financial asset will be purchased or originated credit impaired financial asset (“POCI”) if the derecognised financial asset was in stage 3 portfolio or it was POCI. The modification gain or loss shall be calculated at each contract amendments unless they are handled as a derecognition and new recognition. In case of modification the Bank recalculates the gross carrying amount of the financial asset. To do this, the new contractual cash flows should be discounted using the financial asset’s original effective interest rate (or credit-adjusted effective interest rate for POCI financial asset). Any costs or fees incurred adjust the carrying amount of the modified financial asset are amortized over the remaining term of the modified financial asset. Purchased or originated credit impaired financial assets Purchased or originated financial assets are credit-impaired on initial recognition. A financial asset is credit- impaired when one or more events that have a detrimental impact on the estimated future cash flows of that financial asset have occurred. A purchased credit-impaired asset is likely to be acquired at a deep discount. In unusual circumstances, it may be possible that an entity originates a credit-impaired asset, for example, following a substantial modification of a distressed financial asset that resulted in the derecognition of the original financial asset. In the case of POCI financial assets, interest income is always recognized by applying the credit-adjusted effective interest rate. For POCI financial assets, in subsequent reporting periods an entity is required to recognize: - - the cumulative changes in lifetime expected credit losses since initial recognition as a loss allowance, the impairment gain or loss which is the amount of any change in lifetime expected credit losses. An impairment gain is recognized (with the parallel increase of the net amortized cost of receivable) if due to the favourable changes after initial recognition the lifetime expected credit loss estimation is becoming lower than the original estimated credit losses at initial recognition. The POCI qualification remains from initial recognition to derecognition in the Bank’s books. 19 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.12. Loss allowance Loss Allowance for loans and placements with other banks and repo receivables are recognised by the Bank based on the expected credit loss model in accordance with IFRS 9. Based on the three stage model loss allowance is recognised in amount of 12 month expected credit loss from the initial recognition. Financial assets with significantly increased credit risk or credit impaired financial assets (based on objective evidences) loss allowance is recognised in amount of lifetime expected credit loss. In case of purchased or originated credit impaired financial assets loss allowance is recognised in amount of lifetime expected credit loss since initial recognition. Impairment gain is recognised if lifetime expected credit loss for purchased or originated credit impaired financial assets at measurement date are less than the estimated credit loss at initial recognition. Loss allowance for loan and placements are determined at a level that provides coverage for individually identified credit losses. Collective impairment loss is recognised for loans with similar credit risk characteristics when it is not possible to determine the amount of the individually identified credit loss in the absence of objective evidence. The expected cash flows for loan portfolios are estimated based on historical loss experience. At subsequent measurement the Bank recognises through “Loss allowance on loan, placement and repo receivables losses” in the Statement of Profit or Loss impairment gain or loss as an amount of expected credit losses or reversal that is required to adjust the loss allowance at the reporting date to the amount that is required to be recognised in accordance with IFRS 9. If a financial asset, which previously classified in the first stage, classified subsequently in the second or third stage than loss allowance is adjusted to lifetime expected credit loss. If a financial asset, which previously classified in the second or third stages, classified subsequently in the first stage than loss allowance is adjusted to level of 12 month expected credit loss. Classification into risk classes According to the requirements of the IFRS9 standard, the Bank classifies financial assets measured at amortised cost and fair value through other comprehensive income, and loan commitments and financial guarantees into the following categories in accordance with IFRS9: Stage 1 Stage 2 Stage 3 POCI Performing Performing, but compared to the initial recognition it shows significant increase in credit risk Non-performing Purchased or originated credit impaired In the case of trade receivables, contract assets and lease receivables the Group applies the simplified approach and calculates only lifetime expected credit loss. Simplified approach is the following: • • • • • • for the past 3 years the average annual balance of receivables under simplified approach is calculated, the written-off receivables under simplified approach are determined in the past 3 years, the loss allowance ratio will be the sum of the written-off amounts divided by the sum of the average balances, historical losses are adjusted to reflect information about current conditions and reasonable forecasts of future economic conditions, the loss allowance is multiplied by the end-of-year balance and it will be the actual loss allowance on these receivables, loss allowance should be recalculated annually. 20 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.12. Loss allowance [continued] Classification into risk classes [continued] The Bank assumes that the credit risk on a financial instrument has not increased significantly since initial recognition if the financial asset is determined to have low credit risk at the reporting date. This might occur if the financial asset has a low risk of default, the borrower has a strong capacity to meet its contractual cash flow obligations in the near term and adverse changes in economic and business conditions in the longer term may, but will not necessarily, reduce the ability of the borrower to fulfil its contractual cash flow obligations. The Bank considers souvereign exposures having low credit risk. Credit risk of financial assets increases significantly at the following conditions: • • • • • • • the payment delay exceeds 30 days, it is classified as performing forborne, based on individual decision, its currency suffered a significant "shock" since the disbursement of the loan, the transaction/client rating exceeds a predefined value or falls into a determined range, or compared to the historic value it deteriorates to a predefined degree, in the case household mortgage loans, the loan-to-value ratio (“LTV”) exceeds a predefined rate, default on another loan of the retail client, if no cross-default exists, in case of corporate and municipal clients: financial difficulty (capital requirements, liquidity, impairment of asset quality), significant decrease of activity and liquidity in the market of the asset, client’s rating reflects higher risk, but better than default, collateral value drops significantly, from which the client pays the loan, o o o o o more than 50% decrease in owner’s equity due to net losses, o o negative information from Central Credit Information System: the payment delay exceeds 30 client under dissolution, days Financial assets classifies as non-performing, if the following conditions are met: • • • default, non-performing forborne exposures, in case of corporate and municipal clients: o breach of contract terms and conditions o critical financial difficulty of the client (capital requirements, liquidity, impairment of asset quality), liquidation, dissolution or debt clearing procedures against client, forced deregistration procedures from company registry, terminated loans by the Bank, in case of fraud, o o o o o negative information from Central Credit Information System: the payment delay exceeds 90 days, cessation of active markets of the financial asset, o o default of ISDA based contracts. For lifetime expected credit losses, the Bank shall estimate the risk of a default occurring on the financial instrument during its expected life. 12-month expected credit losses are a portion of the lifetime expected credit losses and represent cash flow shortfalls that will result if a default occurs in the 12 months after the reporting date (or a shorter period fi the expected life of the financial instrument is less than 12 months), weighted by the probability of that default occurring. Expected credit losses are measured in a way that reflects: • • an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes, the time value of money, and reasonable and supportable information that is available without undue cost of effort at the reporting date about past events, current conditions and forecasts of future economic conditions. 21 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.13. Option to designate a financial asset/liability measured at fair value through profit or loss (FVTPL option) The Bank may, at initial recognition, irrevocably designate a financial asset or liability as measured at fair value through profit or loss. The Bank may use FVTPL option in the following cases: - - if doing so eliminates or significantly reduces a measurement or recognition inconsistency (accounting mismatch) that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases if the group of financial liabilities or assets is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided internally on that basis to the Bank’s key management personnel. The use of the fair value option is limited only to special situations, and it can be based only on direct decision of management of the Bank. 2.14. Sale and repurchase agreements, security lending Where debt or equity securities are sold under a commitment to repurchase them at a pre-determined price, they remain on the statement of financial position and the consideration received is recorded in Other liabilities or Amounts due to banks and deposits from the National Bank of Hungary and other banks, or Deposits from customers. Conversely, debt or equity securities purchased under a commitment to resell are not recognized in the statement of financial position and the consideration paid is recorded either in Placements with other banks or Deposits from customers. Interest is accrued evenly over the life of the repurchase agreement. In the case of security lending transactions the Bank does not recognize or derecognize the securities because it is believed that the transferor retains substantially all the risks and rewards of the ownership of the securities. Only a financial liability or financial receivable is recognized for the consideration amount. 2.15. Property, equipment and intangible assets Property, equipment and intangible assets are stated at cost, less accumulated depreciation and amortization and impairment, if any. The depreciable amount (book value less residual value) of the non-current assets must be allocated over their useful lives. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the assets based on the following annual percentages: Intangible assets Software Property rights Property Office equipment and vehicles 20-33.3% 16.7-33.3% 1-2% 9-33.3% Depreciation and amortization on properties, equipment and intangible assets starts on the day when such assets are placed into service. At each balance sheet date, the Bank reviews the carrying value of its tangible and intangible assets to determine if there is any indication that those assets have suffered an impairment loss. If such indication exists, the recoverable amount of the asset is estimated to determine the extent (if any) of the impairment loss. Where it is not possible to estimate the recoverable amount of an individual asset, the Bank estimates the recoverable amount of the cash-generating unit to which the asset belongs. Where the carrying value of property, equipment, other tangible fixed assets and intangible assets is greater than the estimated recoverable amount, it is impaired immediately to the estimated recoverable amount. 2.16. Inventories The inventories shall be measured at the lower of cost and net realisable value. The cost of inventories shall comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. The Bank uses generally FIFO formulas to the measurement of inventories. Inventories shall be removed from books when they are sold, unusable or destroyed. When inventories are sold, the carrying amount of those inventories shall be recognized as an expense in the period in which the related revenue is recognized. Repossessed assets are classified as inventories. 22 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.17. Investment properties Investment properties of the Bank are land, buildings, part of buildings which are held (as the owner or as the lessee under a finance lease) to earn rentals or for capital appreciation or both, rather than for use in the production or supply of services or for administrative purposes or sale in the ordinary course of business. The Bank measures the investment properties at cost less accumulated depreciation and impairment, if any. The depreciable amount (book value less residual value) of the investment properties must be allocated over their useful lives. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the assets based on the 1-2% annual percentages. The fair value of the investment properties is established mainly by external experts. According to the opinion of the Management there is no significant difference between the fair value and the carrying value of these properties. 2.18. Financial liabilities The financial liabilities are presented within financial liabilities at fair value through profit or loss or financial liabilities measured at amortised cost. In connection to the financial liabilities at fair value through profit or loss, the Bank presents the amount of change in their fair value originated from the changes of market conditions and business environment. Financial liabilities at fair value through profit or loss are either financial liabilities held for trading or they are designated upon initial recognition as at fair value through profit or loss. In the case of financial liabilities measured at amortised cost, fees and commissions related to the origination of the financial liability are recognised through profit or loss during the maturity of the instrument. In certain cases the Bank repurchases a part of financial liabilities (mainly issued securities or subordinated bonds) and the difference between the carrying amount of the financial liability and the amount paid for it is recognised in the statement of profit or loss and included in other operating income. 2.19. Leases An agreement is a lease or contains a lease if it transfers the rights to control the use of an identified asset for a given period in exchange for compensation. Expenses related to the use of lease assets, the majority of which were previously recognised in external services costs, will be currently classified as depreciation/amortisation and interest costs. Usufruct rights are depreciated using a straight line method, while lease liabilities are settled using an effective discount rate. Recognition of lease liabilities The Bank will recognise lease liabilities related to leases which were previously classified as "operating leases" in accordance with IAS 17 Leases. These liabilities will be measured at the present value of lease payments receivable as at the date of commencement of the application of IFRS 16. Lease payments shall be discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the incremental borrowing rate. Interest rate applied by the Bank: weighted average lessee’s incremental borrowing rate: ~1,62% At their date of initial recognition, lease payments contained in the measurement of lease liabilities comprise the following types of payments for the right to use the underlying asset for the life of the lease: - - - - - fixed lease payments less any lease incentives, variable lease payments which are dependent on market indices, amounts expected to be payable by the lessee under residual value guarantees, the strike price of a purchase option, if it is reasonably certain that the option will be exercised, and payment of contractual penalties for terminating the lease, if the lease period reflects that the lessee used the option of terminating the lease. The Bank makes use of expedients with respect to short-term leases (less than 12 months) as well as in the case of leases in respect of which the underlying asset has a low value (less than HUF 1.4 million) and for which agreements it will not recognise financial liabilities nor any respective right-of-use assets. These types of lease payments will be recognised as costs using the straight-line method during the life of the lease. 23 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.20. Leases [continued] Recognition of right-of-use assets Right-of-use assets are initially measured at cost. The cost of a right-of-use asset comprises: - - - - the amount of the initial measurement of lease liabilities, any lease payments made at or before the commencement date, less any lease incentives received, any initial direct costs incurred by the lessee, estimates of costs to be incurred by the lessee as a result of an obligation to disassemble and remove an underlying asset or to carry out renovation/restoration. Right-of-use assets are presented separately in the financial statements. 2.20. Share capital Share capital is the capital determined in the Articles of Association and registered by the Budapest-Capital Regional Court. Share capital is the capital the Bank raised by issuing common stocks at the date the shares were issued. The amount of share capital has not changed over the current period. 2.21. Treasury shares Treasury shares are shares which are purchased on the stock exchange and the over-the-counter market by the Bank and are presented in the separate statement of financial position at acquisition cost as a deduction from shareholders’ equity. Gains and losses on the sale of treasury shares are recognised directly to shareholder’s equity. Derecognition of treasury shares is based on the FIFO method. 2.22. Interest income, income similar to interest income and interest expense Interest income and expenses are recognised in profit or loss in the period to which they relate, using the effective interest rate method. For exposures categorized into stage 1 and stage 2 the interest income is recognized on a gross basis. For exposures categorized into stage 3 (using effective interest rate) and for POCI (using credit-adjusted effective interest rate) the interest income is recognized on a net basis. The time-proportional income similar to interest income of derivative financial instruments calculated without using the effective interest method and the positive fair value adjustment of interest rate swaps are also included in income similar to interest income. Interest income of FVTPL loans is calculated based on interest fixed in the contract and presented in “Income similar to interest income” line. Interest from loans and deposits are accrued on a daily basis. Interest income and expense include certain transaction cost and the amortisation of any discount and premium between the initial carrying amount of an interest-bearing instrument and its amount at maturity calculated on an effective interest rate basis. All interest income and expense recognised are arising from loans, placements with other banks, repo receivables, securities at fair value through other comprehensive income, securities at amortised cost, and amounts due to banks, repo liabilities, deposits from customers, liabilities from issued securities, subordinated bonds and loans are presented under these lines of financial statements 2.23. Fees and Commissions Fees and commissions that are not involved in the amortised cost model are recognised in the Separate Statement of Profit or Loss on an accrual basis according to IFRS 15. These fees are related to deposits, cash withdrawal, security trading, bank card, etc. The Bank recognise income if performance obligations related to the certain goods or service are satisfied, performed, and control over the asset is transferred to the customer, and it is probable that consideration payable will probably flow to the entity. In case of those service, where the Bank transfer control over the asset continuously, income is recognised on accrual basis. (For more details see note 31) The Bank provides foreign exchange trading services to its customers, the profit margin achieved on these transactions is presented as Net profit from fees and commissions in the Separate Statement of Profit or Loss. 24 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.24. Dividend income Dividend income refers to any distribution of entity’s earnings to shareholders from stocks or mutual funds that is owned by the Bank. The Bank recognizes dividend income in the separate financial statements when its right to receive the payment is established. 2.25. Income tax The Bank considers corporate income tax and local business tax and the innovation contribution as income tax in Hungary. The annual taxation charge is based on the tax payable under Hungarian fiscal law, adjusted for deferred taxation. Deferred taxation is accounted for using the balance sheet liability method in respect of temporary differences between the tax bases of assets and liabilities and their carrying value for financial reporting purposes, measured at the tax rates that are expected to apply when the asset is realised or the liability is settled. Deferred tax assets and liabilities are presented in a net way in the statement of financial position. Current tax asset or current tax liability is presented related to income tax and innovation contribution separately in the statement of financial position. Deferred tax assets are recognized by the Bank for the amounts of income tax that are recoverable in future periods in respect of deductible temporary differences as well as the carry forward of unused tax losses and the carryforward of unused tax credits. The Bank recognizes a deferred tax asset for all deductible temporary differences arising from investments in subsidiaries, branches and associates, and interests in joint arrangements, to the extent that, and only to the extent that, it is probable that: - the temporary difference will reverse in the foreseeable future; and - taxable profit will be available against which the temporary difference can be utilised. The Bank considers the availability of qualifying taxable temporary differences and the probability of other future taxable profits to determine whether future taxable profits will be available. The Bank recognizes a deferred tax liability for all taxable temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint arrangements, except to the extent that both of the following conditions are satisfied: - the Bank is able to control the timing of the reversal of the temporary difference, and - it is probable that the temporary difference will not reverse in the foreseeable future. The Bank only offsets its deferred tax liabilities against deferred tax assets when: - - there is a legally enforceable right to set-off current tax liabilities against current tax assets, and the taxes are levied by the same taxation authorities on either the same taxable entity or • • different taxable entities which intend to settle current tax liabilities and assets on a net basis. 2.26. Banking tax The Bank is obliged to pay banking tax based on Act LIX of 2006. As the calculation is not based on the taxable profit (but the adjusted Assets total calculated based on the Separate Financial Statements for the second period preceding the current tax year), banking tax is not considered as income tax. Therefore, the banking tax is considered as an other administrative expense, not as income tax. 25 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.27. Off-balance sheet commitments and contingent liabilities, provisions In the ordinary course of its business, the Bank has entered into off-balance sheet commitments such as guarantees, commitments to extend credit, letters of credit and transactions with financial instruments. The provision on off-balance sheet commitments and contingent liabilities is maintained at a level adequate to absorb probable future losses which are probable and relate to present obligations. Those commitments and contingent liabilities Management determines the adequacy of the provision based upon reviews of individual items, recent loss experience, current economic conditions, the risk characteristics of the various categories of transactions and other pertinent factors. The Bank recognizes a provision for off-balance sheet commitment and contingent liabilities in accordance with IAS 37 when it has a present obligation as a result of a past event; it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and a reliable estimate can be made of the obligation. Expected credit loss model is applied for given financial guarantees and loan commitments which are under IFRS 9 the, when the provision is calculated (see more details in Note 2.12.). After initial recognition the Group subsequently measures those contracts at a higher of the amount of the loss allowance or of the amount initially recognised less the cumulative amount of income recognized in accordance with IFRS 15. 2.28. Share-based payment and employee benefits The Bank has applied the requirements of IFRS 2 Share-based Payment. The Bank issues equity-settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair value at the grant date. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the year, based on the Bank’s estimate of shares that will eventually vest. Fair value is measured by use of a binomial model. The expected life used in the model has been adjusted, based on Management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations. The Bank has applied the requirement of IAS 19 Employee Benefits. The Bank’s short-term employee benefits are wages, salaries and bonuses, premium, paid annual leave and paid sick leave and other free services (health care, reward holiday). Short-term employee benefits are expected to pay by the Bank within 12 month. These benefits are recognised as an expense and liability undiscounted in the separate financial statements. Long-term employee benefits are mostly the jubilee reward. Long-term employee benefits are recognised as an expense and liability in the separate financial statements. Liabilities are regularly remeasured. Gains or losses due to the remeasurement are recognised in the separate statement of profit or loss. 26 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.29. Separate statement of cash flows Cash flows arising from the operating, investing or financing activities are reported in the Statement of Cash- Flows of the Bank primarily on a gross basis. Net basis reporting are applied by the Bank in the following cases: ▪ when the cash flows reflect the activities of the customer rather than those of the Bank, and ▪ for items in which the turnover is quick, the amounts are large, and the maturities are short. For the purposes of reporting cash flows “Cash, due from banks and balances with the NBH” line item excluding compulsory reserve are considered as cash and cash equivalents by the Bank. This line item shows balances of HUF and foreign currency cash amounts, and sight depos from NBH and from other banks, furthermore balances of current accounts. Cash flows from hedging activities are classified in the same category as the item being hedged. The unrealised gains and losses from the translation of monetary items to the closing foreign exchange rates and the unrealised gains and losses from derivative financial instruments are presented separately net in the statement of cash flows for the monetary items which have been revaluated. 2.30. Segment reporting IFRS 8 Operating Segments requires operating segments to be identified on the basis of internal reports about components of the Bank that are regularly reviewed by the chief operating decision maker in order to allocate resources to the segments and to assess their performance. At separate level, the Management does not separate and makes decisions based on different segments; the segments are identified by the Bank only at consolidated level in line with IFRS 8 paragraph 4. At Group level the segments identified by the Bank are the business and geographical segments. The Group’s operating segments under IFRS 8 are therefore as follows: OTP Core Hungary, Russia, Ukraine, Bulgaria, Romania, Serbia, Croatia, Montenegro, Albania, Moldova, Slovenia, Merkantil Group, Asset Management subsidiaries, other subsidiaries, Corporate Centre. 27 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.31. Comparative figures Reclassification of certain local taxes The Bank has reviewed prescriptions related to local taxes, the determination of their tax base and their effects on payment obligation. As a result of the review the local business tax and innovation contribution have been reclassified to income tax in line with banking industry practice. In the financial statements prepared for the year ended 31 December 2021 the Bank presents these taxes as income tax and reclassified the financial information for comparative periods. Derecognition of financial assets at amortized cost is presented separately in the separate statement of profit or loss. Those items are to be separated from those results which previously contained them. In the separate financial position there is provision for conditional liability to be separated from other liabilities which previously contained them. All these reclassifications were necessary to improve presentation. The impact of the reclassification of comparative information is summarized in the following tables: Statement of Financial Position Line item 31 December 2021 31 December 2020 after reclassification Reclassification of amounts related to local taxes 31 December 2020 Previously presented Current tax liabilities Other liabilities TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY Statement of Profit or Loss 4,776 238,437 1,464 223,433 1,464 (1,464) - 224,897 13,710,471 11,154,394 - 11,154,394 Line item Year ended 31 December 2021 Taxes, other than income tax Other administrative expenses (81,171) (178,611) Year ended 31 December 2020 After reclassification (73,384) (154,165) Reclassification of amounts related to local taxes (12,349) (12,349) Year ended 31 December 2020 Previously presented (85,733) (166,514) OTHER ADMINISTRATIVE EXPENSES PROFIT BEFORE INCOME TAX Income tax NET PROFIT FOR THE YEAR (355,429) (311,611) (12,349) (323,960) 141,290 (15,951) 125,339 105,595 (13,121) 92,474 (12,349) 12,349 - 93,246 (772) 92,474 Amendments to the information published in the supplementary annexes concerned the following supplementary notes Note 24 33 34 Other liabilities and provisions Other operating income and expenses and other administrative expenses Income tax Name of the Note The Bank has reclassified the presentation of the detailed notes to the amended statement of financial position and statement of profit or loss line items for comparative information in accordance with the new values. These amendments have been marked “Reclassified” by the Bank. 28 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 3: SIGNIFICANT ACCOUNTING ESTIMATES AND DECISIONS IN THE APPLICATION OF ACCOUNTING POLICIES The presentation of separate financial statements in conformity with IFRS requires the Management of the Bank to make judgements about estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as at the date of the financial statements and their reported amounts of revenues and expenses during the reporting period. The estimates and associated assumptions are based on expected loss and other factors that are considered to be relevant. The estimates and underlying assumptions are reviewed on an on-going basis. Revisions to accounting estimates are recognized in the period. Actual results could differ from those estimates. Significant areas of subjective judgements include: 3.1. Loss allowance on financial instruments The Bank regularly assesses its financial instruments for impairment. Management determines the adequacy of the allowances based upon reviews of individual loans and placements, recent loss experience, current economic conditions, the risk characteristics of the various categories of loans and other pertinent factors. The use of a new, three stage model was implemented for IFRS 9 purposes. The new impairment methodology is used to classify financial instruments in order to determine whether credit risk has significantly increased since initial recognition and able to identify credit-impaired assets. For instruments with credit-impairment or significant increase of credit risk lifetime expected losses will be recognized. (For details see note 36.1.1.) 3.2. Valuation of instruments without direct quotations Financial instruments without direct quotations in an active market are valued using the valuation model technique. The models are regularly reviewed and each model is calibrated for the most recent available market data. While the models are built only on available data, their use is subject to certain assumptions and estimates (e.g. for correlations, volatilities, etc). Changes in the model assumptions may affect the reported fair value of the relevant financial instruments. IFRS 13 Fair Value Measurement seeks to increase consistency and comparability in fair value measurements and related disclosures through a 'fair value hierarchy'. The hierarchy categorises the inputs used in valuation techniques into three levels. The hierarchy gives the highest priority to (unadjusted) quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The Bank evaluates the levelling at each reporting period on an instrument-by-instrument basis and reclassifies instruments when necessary, based on the facts at the beginning of the reporting period. The objective of a fair value measurement is to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions. 3.3. Provisions Provision is recognised and measured for commitments to extend credit and for warranties arising from banking activities based on IFRS 9 Financial Instruments. Provision for these instruments is recognised based on the credit conversion factor, which shows the proportion of the undrawn credit line that will be probably drawn. Other provision is recognised and measured based on IAS 37 Provisions, Contingent Liabilities and Contingent Assets. The Bank is involved in a number of ongoing legal disputes. Based upon historical experience and expert reports, the Bank assesses the developments in these cases, and the likelihood and the amount of potential financial losses which are appropriately provided for. (See Note 24.) Other provision for off-balance sheet items includes provision for litigation, provision for retirement and expected liabilities and provision for Confirmed letter of credit. A provision is recognised by the Bank when it has a present obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. 29 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 3: SIGNIFICANT ACCOUNTING ESTIMATES AND DECISIONS IN THE APPLICATION OF ACCOUNTING POLICIES [continued] 3.4. Business models A business model refers how the Bank manages its financial instruments in order to generate cash flows. It is determined at a level that reflects how groups of financial instruments are managed rather than at an instrument level. The financial assets held by the Bank are classified into three categories depending on the business model within the financial assets are managed. • Business model whose objective is to hold financial assets in order to collect contractual cash flows. Some sales can be consistent with hold to collect business model and the Bank assesses the nature, frequency and significance of any sales occurring. The Bank does not consider the sale frequent when at least six months have elapsed between sales. The significant sales are those when the sales exceed 2% of the total hold to collect portfolio. Within this business model the Bank manages mainly loans and advances and long term securities and other financial assets. • Business model whose objective is achieved by both collecting contractual cash flows and selling financial assets. Within this business model the Bank only manages securities. • Business model whose objective is to achieve gains in a short term period. Within this business model the Bank manages securities and derivative financial instrument. If cash flows are realised in a way that is different from the expectations at the date that the Bank assessed the business model, that does not give rise to a prior error in the Bank’s financial statements nor does it change the classification of the remaining financial assets held in that business model. When, and only when the Bank changes its business model for managing financial assets it reclassifies all affected assets. Such changes are determined by the Bank’s senior management as a result of external or internal changes and must be significant to the Bank’s operations and demonstrable to external parties. The Bank shall not reclassify any financial liability. 3.4. Contractual cash-flow characteristics of financial assets Classification of a financial asset is based on the characteristics of its contractual cash flows if the financial asset is held within a business model whose objective is to hold assets to collect contractual cash flows or within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets. The Bank should determine whether the asset’s contractual cash flows are solely payments of principal and interest on the principal amount outstanding (SPPI test). Contractual cash flows that are solely payments of principal and interest on the principal amount outstanding are consistent with a basic lending arrangement. Contractual terms that introduce exposure to risks or volatility in the contractual cash flows that is unrelated to a basic lending arrangement, such as exposure to changes in equity prices or commodity prices, do not give rise to contractual cash flows that are solely payments of principal and interest on the principal amount outstanding. The Bank assesses whether contractual cash flows are solely payments of principal and interest on the principal amount outstanding for the currency in which the financial asset is denominated. Time value of money is the element of interest that provides consideration for only the passage of time. However, in some cases, the time value of money element may be modified. In such cases, the Bank assesses the modification to determine whether the contractual cash flows represent solely payments of principal and interest on the principal amount outstanding. When assessing a modified time value of money element, the objective is to determine how different the undiscounted contractual cash flows could be from undiscounted cash flows that would arise if the time value of money element was not modified (the benchmark cash flows). The benchmark instrument can be an actual or a hypothetical financial asset. If the undiscounted contractual cash flows significantly – above 2% – differ from the undiscounted benchmark cash flows, the financial asset should be subsequently measured at fair value through profit or loss. 30 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 4: COVID-19 (in HUF mn) Covid-19 has had substantial implications for the operations of the Bank during 2021. Below are some of the more important Covid-19 related events that occurred in Hungary: • Effective from 13 January 2021 the National Bank of Hungary extended the available amount for the Bond Funding for Growth scheme by HUF 750 billion to HUF 1,150 billion. At the same time it decided to increase the maximum maturity of corporate bonds that can be purchased by the central bank from 20 to 30 years. Also, the central bank’s exposure limit to a company group was revised from HUF 50 billion to HUF 70 billion. • On 4 February 2021 the Prime Minister announced an interest-free loan programme for companies in trouble in the wake of the pandemic. According to Government Resolution 1038/2021. (II. 5.) the programme will be administered by the Hungarian Development Bank, and the available amount under the programme will be HUF 100 billion. Companies can take out maximum HUF 10 million each for the purpose of covering wages and social contributions, overhead costs, general operating expenses and inventory financing. Client interest rate is 0%, the loan tenor can be up to 10 years, and the servicing of the loan will start after a 3 year grace period. The scope of eligible entities was determined in agreement with the Hungarian Chamber of Commerce and Industry. • On 1 April 2021 Moody’s rating agency upgraded the outlook on the Hungarian banking sector from negative to stable • On 6 April 2021 the NBH raised the available amount for the Funding for Growth Go! Scheme by HUF 500 billion to HUF 3,000 billion. • On 18 May 2021 the Hungarian Development Bank revealed that the interest-free, maximum HUF 10 million loan for micro- and small enterprises (the so-called interest-free restart quick loan) can be applied for by companies whose revenues in 2020 plummeted by more than 30%, irrespective of the scope of activities (certain other criteria must be met). • On 25 May 2021 the National Bank of Hungary did not touch the benchmark interest rates, but stressed that the central bank is ready to tighten monetary conditions in a proactive manner to the extent necessary in order to ensure price stability and to mitigate inflation risks. • On 9 June 2021 Viktor Orbán Prime Minister announced that their actual personal income tax payments (up to the tax burden of the average wage) will be refunded to families raising kids in early-2022 provided that the 2021 GDP growth surpasses 5.5%. • According to Government Decree No. 317/2021. (VI. 9.) released on 9 June 2021 the payment moratorium was extended with unchanged conditions until 30 September 2021. • On 9 June 2021 Viktor Orbán Prime Minister announced that once the central bank phases out its Funding for Growth scheme, the government will have to shoulder the financial burden of providing cheap (not higher than 0.5% interest rate) subsidized loans to domestic micro and small enterprises, through the Széchenyi Card programme by KAVOSZ. On 9 June László Krisán, CEO of KAVOSZ revealed the details of the Széchenyi Card GO! programme launched on 1 July 2021. • On its 22 June 2021 meeting the Monetary Council embarked on a rate hike cycle: the base rate was increased by 30 bps to 0.9%. Also, effective from 24 June 2021 the National Bank of Hungary raised the one- week deposit rate to the level of the base rate. 31 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 4: COVID-19 (in HUF mn) [continued] • The Monetary Council has started to transform the use of instruments having an effect at longer maturities. Accordingly, with the exhaustion of the HUF 3,000 billion available amount, the Funding for Growth Go! programme will be phased out. However, the central bank continues to consider the government securities purchase programme to be crucial in its set of monetary policy instruments. The central bank will continue to use the programme by maintaining a lasting presence in the market, taking a flexible approach to changing the quantity and structure of weekly securities purchases, to the extent and for the time necessary. • On 2 July 2021 the National Bank of Hungary recommended in its circular that financial institutions should abstain from charging prepayment fees in the case of full or partial prepayment of deferred interest and fee accumulated during the term of the moratorium. The central bank also recommended free of charge loan contract modification if borrowers voluntarily undertake higher monthy instalments in order to shorten the remaining maturity. • On 6 July 2021 the National Bank of Hungary announced that with the aim of boosting green mortgage lending, it decided to launch the Green Mortgage Bond Purchase Programme and the FGS Green Home Programme as the first steps of the implementation of the new Green Monetary Policy Toolkit Strategy: The strategic goal of the Green Mortgage Bond Purchase Programme is to contribute to the development of the domestic green mortgage bond market through targeted purchases and, through this, encourage green mortgage loan activities. The central bank will review the programme when the HUF 200 billion purchase volume has been reached. Additionally, the central bank also decided to re-launch the Mortgage Bond Rollover Facility for mortgage bonds without green rating. The central bank will launch the Green Home Programme in October 2021 with a total limit of HUF 200 billion as part of the Funding for Growth Scheme (FGS). As in the previous phases of the FGS, the MNB will provide refinancing operation to credit institutions at 0% interest, which will be lent to residential customers at a maximum of 2.5%, fixed interest rate until the end of the maturity period. Under the scheme, loans of up to HUF 70 million and a maximum term of 25 years can be granted for constructions or purchases of new, highly energy-efficient residential real estates. • On 23 July 2021 the European Central Bank announced that restrictions concerning dividend payments won’t be prolonged beyond the previously effective deadline of 30 September 2021. • A Government Decree was published on 23 July 2021 facilitating the VAT refund in the case of newly built houses in brownfield sites. • On 27 July 2021 the National Bank of Hungary raised the base rate by 30 bps to 1.2%, then on 29 July the one-week deposit rate was hiked to the same level, by the same magnitude. • On 30 July 2021 the results of the 2021 EU-wide stress test conducted by the European Banking Authority were revealed. The fully loaded consolidated Common Equity Tier 1 (CET1) ratio of OTP Bank Plc. would change to 16.3% under the baseline scenario and to 11.2% under the adverse scenario in 2023, compared to 14.2% as at the end of 2020. • On 12 August 2021 the National Bank of Hungary announced that its management circular has been reviewed. According to one of the amendments, the central bank extended the deadline concerning restrictions on dividend payment and treasury share purchases until the end of 2021. Credit instititions might be exempted from the dividend payment ban only if they meet certain strict conditions. • On 24 August 2021 the National Bank of Hungary raised the base rate by 30 bps to 1.5%. Additionally, the central bank decided to begin gradually withdrawing the government securities purchase programme while considering aspects of maintaining market stability. Also, the central bank increased the available amount under the Bond Funding for Growth scheme by HUF 400 billion to HUF 1,550 billion. • Pursuant to Government Decree 536/2021. (IX. 15.) published on 15 September, the Government decided to extend the debt repayment moratorium with the following conditions: • The blanket moratorium was extended by an additional month, until the end of October, in an unchanged form. 32 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 4: COVID-19 (in HUF mn) [continued] • From the beginning of November 2021 until 30 June 2022 only the eligible borrowers can participate in the moratorium provided that they submitted a request to their banks about their intention to stay. So, the extension beyond October is not automatic: borrowers had to submit a notification to their bank (opt-in). Eligible retail borrowers include private individuals whose income fell compared to the previous period, unemployed people, fostered workers, families raising children below the age of 25 or expecting a baby, and pensioners (for details see the relevant decree). Eligible companies shall fulfil the following criteria: more than 25% decline in revenues in the 18 months period preceding the submission of the request to participate, and if the company has not concluded a new subsidized loan contract since 18 March 2020. • During the term of the one-month extension until the end of October, eligible clients could submit the necessary documents to their banks in order to stay in the scheme until June 2022, so this one-month lengthening could be regarded as technical. • According to Government Decree 537/2021. (IX. 15.) published on 15 September, credit institutions shall re- calculate the interest deferred during the period spent in the moratorium in the case of overdraft loans and credit card exposures. The base for the re-calculation shall be the NBH’s statistical data for the average annualized cash loan interest rate published for February 2020. The difference between the deferred interest booked according to the original contract and the re-calculated amount shall be refunded to the borrowers by way of crediting the borrowers’ account with the due amount. • On 21 September 2021 the National Bank of Hungary hiked the base rate by 15 bps to 1.65%. Furthermore, the NBH continued to gradually withdraw the government securities purchase programme. • On 4 October 2021 the National Bank of Hungary launched the FGS Green Home Programme as part of its green monetary policy toolkit strategy. • On 19 October 2021 the National Bank of Hungary increased the base rate by 15 bps to 1.8%. • On 16 November 2021 the Monetary Council of the NBH hiked the base rate by 30 bps to 2.1%. The Deputy Governor of NBH stressed after the Monetary Council meeting that the NBH is ready to set the rate of the 1- week central bank deposit above the level of the base rate already from 18 November. Accordingly, on 18 November the NBH raised the rate of the 1-week deposit facility to 2.5%, and the central bank accepted all offers at the tender. Consequently, the 1-week deposit has become the effective rate for the banking sector determining the marginal asset yields. • On its weekly one-week deposit tender on 25 November 2021 the NBH offered an interest rate of 2.9%. • On 30 November 2021 the NBH’s Monetary Council widened the interest rate corridor and also decided to make it asymmetric. Accordingly, the lower bound of the corridor was raised by 45 bps and the upper one by 105 bps. • On 2 December 2021 the NBH hiked the rate of the 1-week central bank deposit by 20 bps to 3.1%. 33 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 4: COVID-19 (in HUF mn) [continued] • On 9 December 2021 the NBH hiked the rate of the 1-week central bank deposit by 20 bps to 3.3%. • On 14 December 2021 the NBH’s Monetary Council raised the base rate by 30 bps to 2.4% and made a decision to phase out both the Bond Funding for Growth programme and the government bond purchase programme. • On 16 December 2021 the NBH hiked the rate of the 1-week central bank deposit by 30 bps to 3.6%. • Mr. Viktor Orbán Prime Minister announced on 22 December 2021 that the government will introduce an interest rate cap for certain retail mortgage loans (for example whose pricing is linked to a reference rate, but the legislation does not apply to those with longer fixation periods) for the period between 1 January and 30 June 2022. Accordingly, the affected mortgages’ reference rate cannot be higher than the relevant reference rate as at 27 October 2021. Furthermore, banks had to inform their borrowers about the interest rate risk and offer amendments to the contract until 31 January 2022. Details were laid down by Government Decree 782/2021 (XII. 24.) and Decree 1/2022 (I. 3.) by the Prime Minister’s Office. • On 23 December 2021 the NBH hiked the rate of the 1-week central bank deposit by 20 bps to 3.8%. • In its release published on 27 December 2021 the NBH said that from 1 January 2022 Hungarian credit institutions can pay dividends and buy back shares with shareholder remuneration purposes again. Thus, the NBH did not extend these restrictions in line with the similar step taken by the ECB at the end of September. • On 30 December 2021 the NBH hiked the rate of the 1-week central bank deposit by 20 bps to 4.0%. • Against the initially planned 2 pps social security contribution cut effective from July 2022, the government reduced employers’ taxes by 4 pps already from 1 January 2022 (the 1.5% vocational training contribution was abolished and the social contribution taxes were cut by 2.5 pps). • On 25 January 2022 the NBH hiked the base rate by 50 bps to 2.9%. • On 27 January 2022 the NBH hiked the rate of the 1-week central bank deposit by 30 bps to 4.3%. • On 15 February 2022 the CSO revealed the final GDP growth figures: accordingly, in 4Q 2021 the quarterly expansion of 2.1% was stronger than expected, lifting the annual growth rate to 7.1% in 2021 as a whole (seasonally and working day adjusted). Mr. Mihály Varga (Minister of Finance) announced that the government expects 5.9% growth for 2022. 34 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 4: COVID-19 (in HUF mn) [continued] Interest rate cap For the period between 1 January and 30 June 2022 the government introduced an interest rate cap for variable- rate retail mortgage loans, and with its decision announced on 18 February, for housing purposes financial leasing contracts, too. Accordingly, the affected exposures’ reference rate cannot be higher than the relevant reference rate as at 27 October 2021. The modification loss related to the interest rate cap for variable rate mortgage loans announced on 22 December 2021 was recognized in the Bank’s 2021 financial accounts. The extension of the interest rate cap to housing purposes financial leasing contracts does not have a significant negative effect. Moratorium one-off effect In Hungary the first phase of the moratorium on loan payments was effective from 19 March 2020 to 31 December 2020. At the end of 2020 the moratorium was extended in unchanged form for the period between 1 January 2021 and 30 June 2021. Furthermore, according to Government Decree No. 317/2021. (VI. 9.) released on 9 June 2021 the payment moratorium was extended with unchanged conditions until 30 September 2021. Pursuant to Government Decree 536/2021. (IX. 15.) published on 15 September, the Government decided to extend the debt repayment moratorium: the blanket moratorium was extended by an additional month, until the end of October, in an unchanged form. Furthermore, from the beginning of November 2021 until 30 June 2022 only the eligible borrowers can participate in the moratorium provided that they submitted a request to their banks about their intention to stay. During the term of the moratorium OTP Bank accrues the unpaid interest in its statement of recognized income, amongst the revenues. At the same time, due to the fact that interest cannot be charged on the unpaid interest, and the unpaid interest will be repaid later, in the course of 2020 and 2021 altogether HUF 43.3 billion after tax loss emerged in Hungary and Serbia altogether. Within that amount there was a -HUF 1.7 billion (after tax) negative impact booked in December 2020 in relation to the Serbian deferral scheme, as the original interest calculation method was changed by the local regulator (originally the compound interest method was allowed by the law in Serbia, but charging interest on deferred interest was later retroactively disallowed by the regulator). Loan volumes under the Hungarian payment holiday followed a declining trend till the end of October 2021, then from November the participation dropped materially due to the changes to the structure. At the end of 2021 the total household and corporate exposures remaining under the moratorium comprised HUF 245 billion at OTP Core and Merkantil Group, which made up 4.1% of the total gross loan portfolio of those two entities. Participation in COVID moratorium as at 31 December 2021 OTP Bank 113,639 2.3% Current volume in moratorium Current participation ratio Participation in COVID moratorium as at 31 December 2021 OTP Bank 1,059,428 26.2% Current volume in moratorium Current participation ratio 35 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 4: COVID-19 (in HUF mn) [continued] Financial assets modified during the year ended 31 December 2021 related to covid moratorium Modification due to prolongation of deadline of covid moratoria till 30 September Gross carrying amount before modification Modification loss due to covid moratoria Gross carrying amount after modification Loss allowance before modification Net amortised cost after modification Modification due to prolongation of deadline of covid moratoria till 31 October Gross carrying amount before modification Modification loss due to covid moratoria Gross carrying amount after modification Loss allowance before modification Net amortised cost after modification 668,312 (5,284) 663,028 (55,180) 607,848 665,620 (1,292) 664,328 (58,412) 605,916 In case of credit card and overdraft loans interest charged during the moratoria period should be refunded to the debtors in amount determined as a difference between the charged interest and a premoratoria personal loan interest at 11,99%. The Bank has managed this government measure as loan agreement modification in the financial statements. Gross carrying amount before modification Modification loss due to covid moratoria Gross carrying amount after modification Loss allowance before modification Net amortised cost after modification Modification due to prolongation of deadline of covid moratoria till 30 June 2022 Gross carrying amount before modification Modification loss due to covid moratoria Gross carrying amount after modification Loss allowance before modification Net amortised cost after modification 57,892 (1,983) 55,909 (9,234) 46,675 82,438 (1,614) 80,824 (23,516) 57,308 On 24 December 2021 new regulation was issued on fixing of retail loan product’s interest, under that interest rates of mortgage loans with variable interest shall be fixed at reference rates of 27 October 2021, predictably till 30 June 2022. Gross carrying amount before modification Modification loss due to covid moratoria Gross carrying amount after modification Loss allowance before modification Net amortised cost after modification 67,108 (703) 66,405 (1,625) 64,780 36 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 5: CASH, AMOUNTS DUE FROM BANKS AND BALANCES WITH THE NATIONAL BANK OF HUNGARY (in HUF mn) Cash on hand: In HUF In foreign currency Amounts due from banks and balances with National Bank of Hungary: Within one year: In HUF In foreign currency Loss allowance Subtotal Average amount of compulsory reserve Total Rate of the compulsory reserve 2021 2020 82,839 21,182 104,021 81,512 289,596 371,108 107,523 18,899 126,422 204,942 247,756 452,698 (185) - 474,944 579,120 99,303 76,033 375,641 503,087 1% 1% The Bank shall deposit compulsory reserve in a determined percent of its liabilities at NBH. Liabilities considered in compulsory reserve calculation are as follows: a) deposits and loans, b) debt instruments, c) repo transactions. The amount of the compulsory reserve is the multiplication of the daily average of the liabilities considered in the compulsory reserve calculation and compulsory reserve rate, which are determined by the NBH in a specific decree. The Bank is required to complete compulsory reserve requirements in average in the second month after the reserve calculation period, requirements shall be completed once a month on the last calendar day. The Bank complies with the compulsory reserve requirements by the deposit of the adequate amount of cash as the calculated compulsory reserve on the bank account at NBH in monthly average. An analysis of the change in the loss allowance on placement losses is as follows: 2021 2020 Balance as at 1 January Loss allowance Closing balance - 185 185 - - - 37 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 6: PLACEMENTS WITH OTHER BANKS, NET OF ALLOWANCE FOR PLACEMENT LOSSES (in HUF mn) Within one year: In HUF In foreign currency Over one year In HUF In foreign currency Total placements Loss allowance on placement losses Total An analysis of the change in the loss allowance on placement losses is as follows: Balance as at 1 January Loss allowance Release of loss allowance Use of loss allowance FX movement Closing balance 2021 2020 1,388,709 372,361 1,761,070 747,871 65,761 813,632 905,241 329,633 1,234,874 267,291 39,538 306,829 2,574,702 1,541,703 (7,490) (5,819) 2,567,212 1,535,884 2021 2020 5,819 20,524 (18,911) (2) 60 7,490 3,592 12,548 (10,497) - 176 5,819 Interest conditions of placements with other banks (%): Placements with other banks in HUF Placements with other banks in foreign currency Average interest of placements with other banks 2021 2020 0% - 5.9% (0.59%) - 29% 1.63% 0% - 3.84% (0.76%) - 29% 0.78% 38 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 7: REPO RECEIVABLES (in HUF mn) Within one year: In HUF Total gross amount Loss allowance on repo receivables Total repo receivables An analysis of the change in the loss allowance on repo receivables is as follows: Balance as at 1 January Loss allowance Release of loss allowance Closing balance Interest conditions of repo receivables (%): Repo receivables in HUF Average interest of repo receivables 2021 2020 33,710 33,710 183,656 183,656 33,710 183,656 (72) (292) 33,638 183,364 2021 2020 292 449 (669) 72 6 362 (76) 292 2021 2020 2%-3.2% 0.29% (0.1%) - 0.9% 0.09% 39 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 8: FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (in HUF mn) 2021 2020 Held for trading securities: Government bonds Other non-interest bearing securities Hungarian government discounted Treasury Bills Corporate shares and investments Mortgage bonds Other securities Subtotal Securities mandatorily measured at fair value through profit or loss Shares in investment funds Bonds Shares Subtotal Held for trading derivative financial instruments: Foreign currency swaps Interest rate swaps CCIRS and mark-to-market CCIRS swaps Other derivative transactions Subtotal Total 30,827 1,134 869 599 116 2,088 35,633 25,126 - 2,935 28,061 38,811 59,097 11,649 73,211 182,768 6,031 1,964 1,233 426 - 2,075 11,729 23,818 5,342 2,776 31,936 41,852 34,256 7,359 33,351 116,818 246,462 160,483 Interest conditions and the remaining maturities of securities held for trading are as follows: Within one year: variable interest fixed interest Over one year: variable interest fixed interest Non-interest bearing securities Total Securities held for trading denominated in HUF Securities held for trading denominated in foreign currency Securities held for trading total Government bonds denominated in HUF Government bonds denominated in foreign currency Government securities total 2021 111 4,163 4,274 1,544 28,083 29,627 1,732 2020 78 2,319 2,397 1,355 5,587 6,942 2,390 35,633 11,729 81% 19% 100% 83% 17% 100% 71% 29% 100% 68% 32% 100% Interest rates on securities held for trading in HUF Interest rates on securities held for trading in foreign currency Average interest on securities held for trading 0%-6.75% 0%-5.75% 1.17% 0.5%-6.75% 0.5%-6.375% 0.63% 40 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 8: FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (in HUF mn) [continued] Interest conditions and the remaining maturities of securities mandatorily measured at fair value through profit or loss are as follows: Within one year: variable interest Over one year: variable interest Non-interest bearing securities Total Securities mandatorily measured at fair value through profit or loss denominated in HUF Securities mandatorily measured at fair value through profit or loss denominated in foreign currency Securities mandatorily measured at fair value through profit or loss total Interest rates on securities mandatorily measured at fair value through profit or loss Average interest on securities mandatorily measured at fair value through profit or loss 2021 2020 - - 28 5,314 28,061 26,594 28,061 31,936 67% 33% 58% 42% 100% 100% - - 2.49% 2.49% NOTE 9: SECURITIES AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME (in HUF mn) 2021 2020 Securities at fair value through other comprehensive income Government bonds Mortgage bonds Interest bearing treasury bills Other securities listed securities in HUF in foreign currency -non-listed securities in HUF in foreign currency Subtotal Non-trading equity instruments -non-listed securities in HUF in foreign currency 278,876 217,941 63,115 64,870 43,759 2,896 40,863 21,111 15,487 5,624 624,802 17,137 528 16,609 17,137 488,459 332,667 9,957 65,136 42,776 2,968 39,808 22,360 16,782 5,578 896,219 15,731 528 15,203 15,731 Securities at fair value through other comprehensive income total 641,939 911,950 41 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 9: SECURITIES AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME (in HUF mn) [continued] Detailed information of the non-trading equity instruments to be measured at fair value through other comprehensive income: Name Garantiqa Hage / Közvil / Pénzügykut OBS VISA A Preferred Currency HUF HUF EUR USD 2021 392 136 13,221 3,388 2020 392 136 12,081 3,122 Interest conditions and the remaining maturities of FVOCI securities can be analysed as follows: Within one year: variable interest fixed interest Over one year: variable interest fixed interest Non-interest bearing securities Total FVOCI securities denominated in HUF FVOCI securities denominated in foreign currency FVOCI securities total 2021 2020 1,089 66,970 68,059 71,344 485,398 556,742 3,779 123,481 127,260 101,555 667,404 768,959 17,138 15,731 641,939 911,950 73% 27% 100% 83% 17% 100% Interest rates on FVOCI securities denominated in HUF Interest rates on FVOCI securities denominated in foreign currency 1.25%-11% 0.5%-11% 0%-16% 0.625%-7.25% Average interest on FVOCI securities 2.85% 2.17% Certain fixed-rate mortgage bonds and other securities are hedged against interest rate risk. (See Note 45.4.) Net gain / (loss) reclassified from other comprehensive income to statement of profit or loss Fair value of the hedged securities: Government bonds 2021 2020 (26,440) (2,008) 201,530 201,530 399,441 399,441 During the year ended 31 December 2021 and 2020 the Bank didn’t sell any of equity instruments designated to measure at fair value through other comprehensive income. 42 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 10: SECURITIES AT AMORTISED COST (in HUF mn) Government bonds Other bonds Mortgage bonds Subtotal Loss allowance Total 2021 2020 2,863,259 190,155 24,309 3,077,723 1,947,821 63,159 - 2,010,980 (6,685) (3,288) 3,071,038 2,007,692 Interest conditions and the remaining maturities of securities at amortised cost can be analysed as follows: 2020 2021 Within one year: variable interest fixed interest Over one year: variable interest fixed interest Total 8,101 305,694 313,795 5,122 2,758,806 2,763,928 - 57,746 57,746 - 1,953,234 1,953,234 3,077,723 2,010,980 The distribution of the securities at amortised cost by currency (%): Securities at amortised cost denominated in HUF Securities at amortised cost denominated in foreign currency Securities at amortised cost total Interest rates on securities at amortised cost Average interest on securities at amortised cost denominated in HUF 2021 83% 17% 100% 0.1%-12.75% 2.84% 2020 99% 1% 100% 0.5%-7% 2.42% An analysis of change in the loss allowance on securities at amortised cost: Balance as at 1 January Reclassification Balance as at 1 January Loss allowance Release of loss allowance FX movement Closing balance 2021 2020 3,288 1,281 4,569 4,404 (2,370) 82 6,685 1,443 - 1,443 4,820 (2,977) 2 3,288 43 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 11: LOANS (in HUF mn) Loans measured at fair value through profit or loss Within one year Over one year 2021 2020 32,091 629,921 25,732 455,205 Loans measured at fair value through profit or loss total 662,012 480,937 Loans measured at fair value through profit or loss are mandatorily measured at fair value through profit or loss. Loans measured at amortised cost, net of allowance for loan losses Within one year Over one year Loans at amortised cost gross total 2021 2020 2,125,908 2,062,114 4,188,022 1,793,352 1,748,078 3,541,430 Loss allowance on loan losses (155,557) (123,670) Loans at amortised cost total 4,032,465 3,417,760 An analysis of the loan portfolio by currency (%): In HUF In foreign currency Total 2021 62% 38% 100% 2020 61% 39% 100% Interest rates of the loan portfolio mandatorily measured at fair value through profit or loss are as follows (%): Loans denominated in HUF Average interest on loans denominated in HUF 2021 2020 1.5% - 9.85% 4.56% 1.5% - 9.85% 4.20% Interest rates of the loan portfolio measured at amortised cost are as follows (%): Loans denominated in HUF Loans denominated in foreign currency 2021 2020 0%-37.5% (0.59%)-13% 0%-37.5% (0.50%)-13% Average interest on loans denominated in HUF Average interest on loans denominated in foreign currency 6.64% 1.48% 6.41% 2.24% 44 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 11: LOANS (in HUF mn) [continued] For an analysis of the loan portfolio by type please see Note 36.1. An analysis of the change in the loss allowance on loans at amortised cost is as follows: Balance as at 1 January Reclassification Balance as at 1 January Loss allowance Release of loss allowance Use of loss allowance Partial write-off FX movement Closing balance 2021 2020 123,670 (1,281) 122,389 221,084 (180,291) (6,951) (1,733) 1,059 155,557 72,066 - 72,066 213,618 (156,383) (6,228) (2,797) 3,394 123,670 The Bank sells non-performing loans without recourse at estimated fair value to a wholly owned subsidiary, OTP Factoring Ltd. 45 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 12: INVESTMENTS IN SUBSIDIARIES, ASSOCIATES, JOINT VENTURES AND OTHER INVESTMENTS (in HUF mn) Investments in subsidiaries: Controlling interest Other Subtotal Impairment loss Total 2021 2020 2,006,178 16,086 2,022,264 1,965,197 8,938 1,974,135 (449,256) (425,163) 1,573,008 1,548,972 Other investments contain certain securities accounted at cost. These instruments do not have a quoted market price in an active market and whose fair value cannot be reliably measured. Significant subsidiaries Investments in companies in which the Bank has a controlling interest (direct) are detailed below. All companies are incorporated in Hungary unless indicated otherwise: 2021 2020 % Held (direct/indirect) Gross book value % Held (direct/indirect) Gross book value OTP Bank JSC (Ukraine) DSK Bank EAD (Bulgaria) OTP banka Srbija akcionarsko drustvo Novi Sad (Serbia) OTP banka Hrvatska d.d. (Croatia) OTP Bank Romania S.A. (Romania) OTP Mortgage Bank Ltd. SKB Banka d.d. Ljubljana (Slovenia) JSC "OTP Bank" (Russia) Crnogorska komercijalna banka a.d. (Montenegro) LLC Alliance Reserve (Russia) Air-Invest Llc. OTP Holding Malta Ltd. Balansz Private Open-end Investment Fund Bank Center No. 1. Ltd. OTP Factoring Ltd. OTP banka Srbija a.d. (Serbia) Other Total 100% 100% 100% 100% 100% 100% 100.00% 98% 100% 100% 100% 100% 100% 100% 100% - 311,390 280,692 262,759 205,349 167,764 154,294 107,689 74,337 72,784 50,074 39,248 32,359 29,150 26,063 25,411 - 166,815 2,006,178 100% 100% 100% 100% 100% 100% 100% 98% 100% 100% 100% 100% 100% 100% 100% 100% 311,390 280,692 131,164 205,349 133,987 154,294 107,689 74,335 72,784 50,074 36,748 32,359 29,150 26,063 25,411 127,140 166,568 1,965,197 46 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 12: INVESTMENTS IN SUBSIDIARIES, ASSOCIATES, JOINT VENTURES AND OTHER INVESTMENTS (in HUF mn) [continued] An analysis of the change in the impairment loss is as follows: Balance as at 1 January Impairment loss for the period Reversal of impairment loss Use of impairment loss Closing balance 2021 2020 425,163 59,132 (31,712) (3,327) 449,256 427,770 10,052 (10) (12,649) 425,163 The Bank decided that the recoverable amount is determined based on fair value less cost of disposal. The Bank prepared impairment tests of the subsidiaries based on two different net present value calculation methods that show the same result; however they represent different economical logics. On one hand is the discount cash flow method (“DCF”) that calculates the value of the subsidiaries by discounting their expected cash flow; on the other hand the economic value added (“EVA”) method estimates the value of the subsidiaries from the initial invested capital and the present value of the economic profit that the companies are expected to generate in the future. Applying the EVA method was more practically than DCF method because it gives a more realistic picture about how the explicit period and the residual value can contribute to the value of the company. The Bank, in its strategic plan, has taken into consideration the effects of the present global economic situation, the cautious recovery of economic situation and outlook, the associated risks and their possible effect on the financial sector as well as the current and expected availability of wholesale funding. An analysis of the impairment loss by significant subsidiaries is as follows: OTP Bank JSC (Ukraine) OTP Bank Romania S.A. (Romania) OTP Mortgage Bank Ltd. OTP banka Srbija a.d. (Serbia) OTP Life Annuity Ltd. Air-Invest Ltd. Monicomp Ltd. Crnogorska komercijalna banka a.d. (Montenegro) Balansz Private Open-end Investment Fund OTP Real Estate Ltd. R.E. Four d.o.o. (Serbia) OTP Buildings s.r.o (Romania) Total 2021 207,397 77,962 65,096 43,477 10,969 10,491 8,632 6,697 5,566 5,557 3,763 - 445,607 2020 207,397 38,416 65,096 53,383 10,969 10,491 - 23,324 - 5,557 3,763 3,327 421,723 Dividend income from significant subsidiaries and shares held-for-trading and shares measured at fair value through other comprehensive income is as follows: OTP Factoring Ltd. OTP Bank JSC (Ukraine) OTP banka dioničko društvo (Croatia) Inga Kettő Llc. OTP Holding Malta Ltd. OTP Real Estate Investment Fund Management Ltd. Monicomp Ltd. Other Subtotal Dividend from shares held-for-trading Dividend from shares fair value through other comprehensive income Total 2021 44,000 12,853 12,244 11,000 5,531 3,500 1,173 4,741 95,042 3,844 151 99,037 2020 45,463 - - - 4,823 4,000 3,800 2,827 60,913 8 52 60,973 47 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 12: INVESTMENTS IN SUBSIDIARIES, ASSOCIATES, JOINT VENTURES AND OTHER INVESTMENTS (in HUF mn) [continued] Significant associates and joint ventures The main figures of the Bank’s indirectly owned associates and joint ventures at cost1: Carrying amount Ownership of OTP Bank Profit after tax Country / Headquarter Activity As at 31 December 2021 List of associated entities OTP Kockázati Fund I. OTP-DayOne Magvető Fund D-ÉG Thermoset Ltd. 'u.l.' Company for Cash Services AD Edrone spółka z ograniczoną odpowiedzialnością Graboplast Closed Co. Plc. NovaKid Inc. Banzai Cloud Closed Co. Plc. ClodeCool Ltd. Pepita.hu Closed Co. Plc. Seon Holdings Ltd. Starschema Ltd. VCC Live Group Closed Co. Plc. Virtual Solutaion Ltd. Yieldigo s.r.o. Szallas.hu Closed Co. Plc.2 Cursor Insight LTD Fabetker Ltd. OneSoil Ag. Packhelp Spółka Akcyjna 526 288 - 392 779 700 2,006 374 1,770 516 4,756 3,944 1,672 - 76 8,809 146 1 318 2,160 44.12% 22.00% 46.99% 25.00% 17.34% 7.00% 4.17% 17.42% 20.15% 34.00% 23.86% 36.19% 49.56% 8.33% 1.97% 51.19% 6.75% 20.48% 3.72% 1.00% 21.69% 21.69% 14.54% (52) Hungary /Budapest 13 Hungary /Budapest Trusts, funds and similar financial entities Trusts, funds and similar financial entities - Hungary / Dunaújváros Wholesale of hardware, plumbing and heating equipment and supplies (183) Bulgaria / Sofia Other financial service activities, exc. insurance and pension funding (293) Poland / Krakow n.a. Hungary / Győr (4,621) USA / San Francisco n.a. Hungary /Budapest 1 Hungary /Budapest (132) Hungary / Szeghalom Computer programming activities Manufacture of builders’ ware of plastic Online kids English learning platform operator Computer programming activities Other education n.e.c. Retail sale via mail order houses or via Internet Computer programming activities Computer consultancy activities Computer programming activities Computer programming activities (168) Czech Republic/Prague Computer programming activities 1,278 Hungary / Miskolc (247) UK / London (4) UK / London n.a. Hungary /Budapest (203) Hungary /Budapest n.a. Hungary /Budapest 132 Hungary / Nádudvar (1,058) Switzerland / Zurich (3,038) Poland / Warsaw Web portals Computer programming activities Manufacture of concrete products for construction purposes Computer programming activities Manufacture of corrugated paper and paperboard and of containers of paper and paperboard PHOENIX PLAY Invest closed Co. Plc. ALGORITHMIQ Invest Closed Co. Plc. NGY Propertiers Investment SRL 3,081 8,996 12,331 (1) Hungary /Budapest 792 Hungary /Budapest (22,567) Romania / Bucharest Activities of holding companies Activities of holding companies Renting and operating of own or leased real estate 1 Based on unaudited financial statements. 2 The Group does not control the entity even though it holds more than half of the voting rights. 48 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 12: INVESTMENTS IN SUBSIDIARIES, ASSOCIATES, JOINT VENTURES AND OTHER INVESTMENTS (in HUF mn) [continued] Significant associates and joint ventures [continued] As at 31 December 2020 List of associated entities OTP Kockázati Fund I. OTP-DayOne Magvető Fund D-ÉG Thermoset Ltd. 'u.l.' Company for Cash Services AD Edrone spółka z ograniczoną odpowiedzialnością Graboplasr Closed Co. Plc. NovaKid Inc. Banzai Cloud Closed Co. Plc. ClodeCool Ltd. Pepita.hu Closed Co. Plc. Seon Holdings Ltd. Starschema Ltd. Tresorit S.A. VCC Live Group Closed Co. Plc. Virtual Solutaion Ltd. Yieldigo s.r.o. Szallas.hu Closed Co. Plc.1 Carrying amount Ownership of OTP Bank Profit after tax Country / Headquarter Activity 531 674 - 392 497 711 497 1,008 1,797 575 378 1,310 1,501 1,599 72 79 7,456 44.12% 22.00% 46.99% 25.00% 17.34% 7.00% 4.17% 17.42% 20.15% 34.00% 23.86% 36.19% 7.77% 49.56% 8.33% 1.97% 51.19% (2) Hungary /Budapest (37) Hungary /Budapest - Hungary / Dunaújváros (254) Bulgaria / Sofia Trusts, funds and similar financial entities Trusts, funds and similar financial entities Wholesale of hardware, plumbing and heating equipment and supplies Other financial service activities, except insurance and pension funding n.e.c. (79) Poland / Krakow (1,349) Hungary / Győr (398) USA / San Francisco 13,430 Hungary /Budapest 132 Hungary /Budapest 3 Hungary / Szeghalom 37 UK / London Computer programming activities Manufacture of builders’ ware of plastic Online kids English learning platform operator Computer programming activities Other education n.e.c. Retail sale via mail order houses or via Internet Computer programming activities 454 Hungary /Budapest Computer consultancy activities 232 Luxembourg/Luxembourg Activities of holding companies (58) Hungary /Budapest (86) Hungary /Budapest 103 Czech Republic / Prague 595 Hungary / Miskolc Computer programming activities Computer programming activities Computer programming activities Web portals 1 The Group does not control the entity even though it holds more than half of the voting rights. 49 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 12: INVESTMENTS IN SUBSIDIARIES, ASSOCIATES, JOINT VENTURES AND OTHER INVESTMENTS (in HUF mn) [continued] Significant event related to investments The Romanian Court of Registration registered a capital increase at OTP Bank Romania SA, the Romanian subsidiary of OTP Bank. Accordingly, the registered capital of the Romanian subsidiary of OTP Bank was increased to RON 2,079,253,200 from RON 1,829,253,120. TP Bank signed a share sale and purchase agreement on purchasing 100% shareholding of Nova KBM d.d. and its subsidiaries, which are 80% owned by funds managed by affiliates of Apollo Global Management, Inc. and 20% by EBRD. With a market share of 20.5% by total assets as of December 2020, Nova KBM d.d. is the 2nd largest bank in the Slovenian banking market and as a universal bank it has been active in the retail and corporate segments as well. Serbian Court of Registration registered a capital increase at OTP banka Srbija a.d. Novi Sad, the Serbian subsidiary of OTP Bank. Accordingly, the registered capital of the Serbian subsidiary of OTP Bank was increased to RSD 56,830,752,260 from RSD 55,330,780,140. OTP Bank signed a non-binding Memorandum of Agreement regarding the potential acquisition of the majority stake of Ipoteka Bank and its subsidiaries with the Ministry of Finance of the Republic of Uzbekistan. Ipoteka Bank is the fifth largest bank in Uzbekistan, with a market share of 8.5% based on total assets at the end of July 2021, with more than 1.2 million retail customers and a large corporate clientele. OTP Bank signed an acquisition agreement with Alpha International Holdings Single Member S.A. on purchasing 100% shareholding of Alpha Bank SH.A., the Albanian subsidiary of the Greek Alpha Bank S.A. The purchase price has been agreed at Euro 55 million. 50 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 13: PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS (in HUF mn) For the year ended 31 December 2021 Intangible assets Property Office equipment and vehicles Vehicles Construction in progress Right of use assets Total Cost Balance as at 1 January Additions Disposals Balance as at 31 December Depreciation and Amortization Balance as at 1 January Charge for the year Disposals Balance as at 31 December Net book value Balance as at 1 January Balance as at 31 December 164,875 52,130 (28,152) 188,853 107,236 23,032 (3,576) 126,692 72,277 4,074 (1,845) 74,506 25,789 3,284 (757) 28,316 93,878 13,434 (3,843) 103,469 71,899 9,190 (3,685) 77,404 57,639 62,161 46,488 46,190 21,979 26,065 160 87 (48) 199 74 25 (37) 62 86 137 9,421 20,394 (20,390) 9,425 - - - - 22,443 8,675 - 31,118 8,964 5,161 (238) 13,887 363,054 98,794 (54,278) 407,570 213,962 40,692 (8,293) 246,361 9,421 9,425 13,479 17,231 149,092 161,209 51 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 13: PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS (in HUF mn) [continued] For the year ended 31 December 2020 Intangible assets Property Office equipment and vehicles Vehicles Construction in progress Right of use assets Total Cost Balance as at 1 January Additions Disposals Balance as at 31 December Depreciation and Amortization Balance as at 1 January Charge for the year Disposals Balance as at 31 December Net book value Balance as at 1 January Balance as at 31 December 139,026 54,651 (28,802) 164,875 85,744 21,492 - 107,236 69,380 3,858 (961) 72,277 22,948 3,192 (351) 25,789 87,235 10,766 (4,123) 93,878 66,506 9,495 (4,102) 71,899 53,282 57,639 46,432 46,488 20,729 21,979 126 35 (1) 160 56 19 (1) 74 70 86 10,523 13,556 (14,658) 9,421 17,827 4,764 (148) 22,443 324,117 87,630 (48,693) 363,054 - - - - 4,220 4,750 (6) 8,964 179,474 38,948 (4,460) 213,962 10,523 9,421 13,607 13,479 144,643 149,092 The Bank has no intangible assets with indefinite useful life. 52 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 14: INVESTMENT PROPERTIES (in HUF mn) For the year ended 31 December 2021 and 2020, respectively Cost Balance as at 1 January Additions result from subsequent expenditure Disposals Balance as at 31 December Depreciation and Amortization Balance as at 1 January Charge for the period Disposals Balance as at 31 December Net book value Balance as at 1 January Balance as at 31 December 2021 2020 2,577 3,061 2,640 (204) 5,013 38 (522) 2,577 641 92 (48) 685 680 51 (90) 641 1,936 4,328 2,381 1,936 According to the opinion of the Management there is no significant difference between the fair value and the carrying value of these properties. Income and Expenses Rental income Depreciation 2021 6 92 2020 6 49 NOTE 15: FAIR VALUE OF DERIVATIVE FINANCIAL ASSETS DESIGNATED AS HEDGE ACCOUNTING (in HUF mn) Positive fair value of derivative financial assets designated as hedge accounting: Interest rate swaps designated as fair value hedge CCIRS designated as fair value hedge Interest rate swaps designated as cash flow hedge Total 2021 2020 13,276 5,471 (1,020) 17,727 637 6,180 - 6,817 53 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 16: OTHER ASSETS1 (in HUF mn) Other financial assets Receivables from OTP Employee Stock Ownership Program (OTP ESOP) Prepayments and accrued income Receivables from investment services Stock exchange deposit Trade receivables Receivables from card operations Accrued day one gain of loans provided at below-market interest Receivables from suppliers Other Loss allowance Other financial assets total Other non-financial assets Prepayments and accrued income Receivable related to Hungarian Government subsidies Other Provision for impairment on other assets Other non-financial assets total 2021 2020 84,304 16,391 16,074 11,643 10,519 10,423 - 5,812 3,729 158,895 (5,148) 153,747 44,411 14,281 12,563 71,255 (514) 70,741 53,338 14,721 9,472 9,667 9,731 8,453 14,465 5,885 9,375 135,107 (7,928) 127,179 17,732 10,622 14,743 43,097 (482) 42,615 Total 224,488 169,794 An analysis of the movement in the loss allowance on other financial assets is as follows: Balance as at 1 January Charge for the period Release of loss allowance Use of loss allowance FX movement Balance as at 31 December 2021 2020 7,928 3,888 (5,972) (707) 11 5,148 5,646 6,663 (3,971) (537) 127 7,928 An analysis of the movement in the loss allowance on other non-financial assets is as follows: Balance as at 1 January Charge for the period Release of provision FX movement Balance as at 31 December 2021 2020 482 86 (74) 20 514 464 81 (67) 4 482 1 Other assets are expected to be recovered or settled no more than twelve months after the reporting period. 54 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 17: AMOUNTS DUE TO BANKS AND DEPOSITS FROM THE NATIONAL BANK OF HUNGARY AND OTHER BANKS (in HUF mn) Within one year: In HUF In foreign currency Over one year: In HUF In foreign currency Subtotal Total 2021 2020 354,647 81,550 436,197 588,161 26,845 615,006 1,051,203 172,799 41,643 214,442 457,882 94,653 552,535 766,977 1,051,203 766,977 Interest rates on amounts due to banks and deposits from the NBH and other banks are as follows (%): Within one year: In HUF In foreign currency Over one year: In HUF In foreign currency 2021 2020 (2.4%) - 4.5% (2.4%) - 8.5% 0%-20% (0.56%)-0.26% (2.4%) - 1.3% (2.4%) - 1.5% (2.4%)-1.43% 2.4%)-4.84% Average interest on amounts due to banks in HUF Average interest on amounts due to banks in foreign currency 1.26% 1.14% 0.72% 1.42% NOTE 18: REPO LIABILITIES (in HUF mn) Within one year: In HUF Over one year: In HUF In foreign currency Subtotal Total Interest rates on repo liabilities are as follows (%): Within one year: In HUF Over one year: In foreign currency Average interest on repo liabilities in HUF Average interest on repo liabilities in foreign currency 2021 2020 49,726 49,726 - 36,854 36,854 86,580 - - 73 109,539 109,612 109,612 86,580 109,612 2021 2020 1.5% - 2.8% - (0.35%) 0.63%-3.85% 11.67% 0.67% 1.21% 1.05% 55 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 19: DEPOSITS FROM CUSTOMERS (in HUF mn) Within one year: In HUF In foreign currency Over one year: In HUF Subtotal Interest rates on deposits from customers are as follows (%): Within one year in HUF Over one year in HUF In foreign currency 2021 2020 7,823,118 2,079,643 9,902,761 45,771 45,771 6,412,897 1,438,255 7,851,152 44,583 44,583 9,948,532 7,895,735 2021 (2.48%)-7.96% 0.01%-2.4% (0.6%)-17.2% 2020 (4.58%)-7.96% 0.01%-0.4% (0.58%)-15.5% Average interest on deposits from customers in HUF Average interest on deposits from customers in foreign currency 0.16% 0.01% (0.07%) (0.04%) An analysis of deposits from customers by type, not including accrued interest, is as follows: Retail deposits Household deposits Corporate deposits Deposits to medium and large corporates Municipality deposits Total 2021 2020 4,475,933 4,475,933 5,472,599 4,639,198 833,401 45% 45% 55% 47% 8% 9,948,532 100% 3,840,950 3,840,950 4,054,785 3,301,434 753,351 49% 49% 51% 42% 10% 7,895,735 100% NOTE 20: LIABILITIES FROM ISSUED SECURITIES (in HUF mn) Within one year: In HUF In foreign currency Over one year: In HUF Total Interest rates on liabilities from issued securities are as follows (%): Issued securities denominated in HUF Issued securities denominated in foreign currency 2021 2020 12,048 - 12,048 10,105 10,105 11,115 1,356 12,471 15,964 15,964 22,153 28,435 2021 0%-1.7% - 2020 0%-1.7% 0.01%-1.11% Average interest on issued securities denominated in HUF Average interest on issued securities denominated in foreign currency 4.9% - 1.03% 1.12% 56 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 20: LIABILITIES FROM ISSUED SECURITIES (in HUF mn) [continued] Term Note Program in the value of HUF 200 billion for the year of 2021/2022 On 28 May 2021 the Bank initiated term note program in the value of HUF 200 billion with the intention of issuing registered dematerialized bonds in public. The NBH approved on 8 July 2021 the prospectus of Term Note Program. The prospectus is valid for 12 months following the disclosure. The Issuer can initiate to introduce the bonds issued under the program to the Hungarian and to other stock exchanges without any obligations. Term Note Program in the value of HUF 200 billion for the year of 2020/2021 On 21 April 2020 the Bank initiated term note program in the value of HUF 200 billion with the intention of issuing registered dematerialized bonds in public. The NBH approved on 9 July 2020 the prospectus of Term Note Program and the disclosure as at 10 July 2020. The prospectus is valid for 12 months following the disclosure. The Issuer can initiate to introduce the bonds issued under the program to the Hungarian and to other stock exchanges without any obligations. Hedge accounting Certain issued structured securities are hedged by the Bank with interest rate swaps (“IRS”) which exchange the fixed and floating interest rate with the interest rate of the securities between the parties at a notional amount that equals the nominal amount of the hedged securities. These are considered as fair value hedge relationships as they cover the interest rate risk arising from the coupons of the hedged securities. OTP Bank does not intend to be exposed to the risk embedded in the structured bonds, consequently as part of interest rate swap transaction the structured interest payments are swapped to floating interest rate. This hedging relationship meets all of the following hedge effectiveness requirements: • • • there is an economic relationship between the hedged item and the hedging instrument the effect of credit risk does not dominate the value changes that result from that economic relationship the hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the Bank actually hedges and the quantity of the hedging instrument that the Bank actually uses to hedge that quantity of hedged item The cash-flows of the fixed rate securities issued by the Bank are exposed to the changes in the HUF/EUR foreign exchange rate and the volatility of the quoted interest rates of EUR and HUF. The interest rate risk and foreign exchange risk related to these securities are hedged with EUR and HUF IRS transactions, where the fixed interests were swapped to payments linked to 3 month HUF BUBOR and EURIBOR, resulting in a decrease in the interest rate and foreign exchange exposure of issued securities. 57 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 20: LIABILITIES FROM ISSUED SECURITIES (in HUF mn) [continued] Issued securities denominated in HUF as at 31 December 2021 Name Date of issuance Maturity Nominal value in HUF million Amortised cost in HUF million Interest conditions Hedged 1 OTP_DK_22/II 2 OTPRF2022A 3 OTP_DK_25/3 4 OTPRF2022B 5 OTP_DK_22/I 6 OTP_DK_23/II 7 OTPRF2023A 8 OTPRF2022E 9 OTP_DK_24/3 10 OTPRF2022F 11 OTP_DK_27/II 12 OTP_DK_23/I 13 OTP_DK_26/II 14 OTP_DK_24/II 15 OTP_DK_28/I 16 OTP_DK_25/II 17 OTPX2022B 18 OTP_DK_24/I 19 OTP_DK_26/I 20 OTPX2023A 21 OTPX2024B 22 OTP_DK_29/I 23 OTPRF2022D 24 OTPX2022C 25 OTPX2022D 26 OTPX2024A 27 OTPX2024C 28 OTPX2023B 29 OTPRF2022C 30 OTPX2022A 31 OTP_DK_25/I 32 OTP_DK_27/I 33 OTP_DK_30/I Other 29/05/2020 22/03/2012 31/05/2021 22/03/2012 15/12/2018 29/05/2020 22/03/2013 29/10/2012 31/05/2021 28/12/2012 31/05/2021 15/12/2018 31/05/2021 29/05/2020 31/05/2021 29/05/2020 18/07/2012 30/05/2019 29/05/2020 22/03/2013 10/10/2014 31/05/2021 28/06/2012 29/10/2012 28/12/2012 18/06/2014 15/12/2014 28/06/2013 28/06/2012 22/03/2012 30/05/2019 29/05/2020 31/05/2021 31/05/2022 23/03/2022 31/05/2025 23/03/2022 31/05/2022 31/05/2023 24/03/2023 31/10/2022 31/05/2024 28/12/2022 31/05/2027 31/05/2023 31/05/2026 31/05/2024 31/05/2028 31/05/2025 18/07/2022 31/05/2024 31/05/2026 24/03/2023 16/10/2024 31/05/2029 28/06/2022 28/10/2022 27/12/2022 21/06/2024 20/12/2024 26/06/2023 28/06/2022 23/03/2022 31/05/2025 31/05/2027 31/05/2030 3,173 2,321 1,216 934 993 997 899 862 883 708 795 717 707 592 669 592 164 426 392 312 295 403 286 177 238 241 242 198 209 175 104 95 104 211 3,164 2,513 1,138 1,011 985 981 977 933 848 773 703 694 644 573 572 564 549 400 366 366 336 332 324 317 290 277 275 272 266 236 94 87 82 211 discount indexed 1.70 hedged discount indexed 1.70 hedged discount discount indexed 1.70 hedged indexed 1.70 hedged discount indexed 1.70 hedged discount discount discount discount discount discount indexed 1.70 hedged discount discount indexed 1.70 hedged indexed 0.70 hedged discount indexed 1.70 hedged indexed 1.70 hedged indexed 1.70 hedged indexed 1.30 hedged indexed 0.60 hedged indexed 0.60 hedged indexed 1.70 hedged indexed - hedged discount discount discount indexed Subtotal issued securities in HUF Total 21,330 21,330 22,153 22,153 58 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 20: LIABILITIES FROM ISSUED SECURITIES (in HUF mn) [continued] Issued securities denominated in foreign currency as at 31 December 2020 Name Date of issuance Maturity Currency Nominal value in FX million Nominal value in HUF million Amortised cost in FX million Amortised cost in HUF million Interest conditions (in % actual) hedged 1 OTP_VK1_21/1 2 OTP_VK1_21/2 20/02/2020 02/04/2020 20/02/2021 02/04/2021 3 OTP_VK1_21/3 4 OTP_VK1_21/4 14/05/2020 18/06/2020 14/05/2021 18/06/2021 USD USD USD USD 1.39 1.24 1.18 0.74 414 370 351 221 1.39 1.24 1.18 0.74 414 variable 0.01 370 variable 0.01 351 variable 0.01 221 variable 0.01 Subtotal issued securities in foreign currency 4.55 1,356 4.55 1,356 Issued securities denominated in HUF as at 31 December 2020 Name Date of issuance Maturity Nominal value in HUF million Amortised cost in HUF million Interest conditions Hedged 1 OTP_DK_21/I 2 OTP_DK_22/II 3 OTPRF2021B 4 OTPRF2021A 5 OTPRF2022A 6 OTP_DK_23/II 7 OTP_DK_22/I 8 OTPRF2022B 9 OTPRF2023A 10 OTPRF2022E 11 OTP_DK_23/I 12 OTPRF2022F 13 OTP_DK_24/II 14 OTP_DK_25/II 15 OTPRF2021C 16 OTPX2022B 17 OTP_DK_24/I 18 OTPRF2021D 19 OTPX2021B 20 OTP_DK_26/I 21 OTPX2023A 22 OTPX2021D 23 OTPX2022D 24 OTPX2024B 25 OTPRF2022D 26 OTPX2021A 27 OTPX2024A 28 OTPX2022C 29 OTPX2024C 30 OTPX2023B 31 OTPX2022A 32 OTPRF2022C 33 OTPX2021C 34 OTP_DK_25/I 35 OTP_DK_27/I 36 OTPRF2021E 37 Other 15/12/2018 29/05/2020 20/10/2011 05/07/2011 22/03/2012 29/05/2020 15/12/2018 22/03/2012 22/03/2013 29/10/2012 15/12/2018 28/12/2012 29/05/2020 29/05/2020 21/12/2011 18/07/2012 30/05/2019 21/12/2011 17/06/2011 29/05/2020 22/03/2013 21/12/2011 28/12/2012 10/10/2014 28/06/2012 01/04/2011 18/06/2014 29/10/2012 15/12/2014 28/06/2013 22/03/2012 28/06/2012 19/09/2011 30/05/2019 29/05/2020 21/12/2011 31/05/2021 31/05/2022 25/10/2021 13/07/2021 23/03/2022 31/05/2023 31/05/2022 23/03/2022 24/03/2023 31/10/2022 31/05/2023 28/12/2022 31/05/2024 31/05/2025 30/12/2021 18/07/2022 31/05/2024 30/12/2021 21/06/2021 31/05/2026 24/03/2023 27/12/2021 27/12/2022 16/10/2024 28/06/2022 01/04/2021 21/06/2024 28/10/2022 20/12/2024 26/06/2023 23/03/2022 28/06/2022 24/09/2021 31/05/2025 31/05/2027 30/12/2021 3,520 3,175 2,894 2,607 2,065 997 993 831 787 761 717 623 592 592 527 172 426 372 245 392 324 259 248 295 260 183 241 201 242 198 201 190 231 104 95 76 213 3,501 3,133 2,954 2,807 1,920 970 965 772 740 715 679 592 566 555 544 440 390 381 370 361 327 325 299 284 251 246 237 233 232 225 214 196 192 91 85 74 213 discount discount - hedged indexed indexed - hedged indexed 1.70 hedged discount discount indexed 1.70 hedged indexed 1.70 hedged indexed 1.70 hedged discount indexed 1.70 hedged discount discount - hedged indexed indexed 1.70 hedged discount indexed indexed discount indexed 1.70 hedged indexed - hedged indexed 1.70 hedged indexed 0.70 hedged indexed 1.70 hedged indexed - hedged indexed 1.30 hedged indexed 1.70 hedged indexed 0.60 hedged indexed 0.60 hedged indexed - hedged indexed 1.70 hedged - hedged indexed discount discount indexed - hedged - hedged - hedged Subtotal issued securities in HUF Total 26,849 28,205 27,079 28,435 59 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 21: FINANCIAL LIABILITIES DESIGNATED AS FAIR VALUE THROUGH PROFIT OR LOSS (in HUF mn) Within one year: In HUF Over one year: In HUF Total Contractual amount outstanding 2021 1,784 1,784 18,349 18,349 2020 2,010 2,010 23,892 23,892 20,133 25,902 21,479 23,332 Interest rates on financial liabilities designated as fair value through profit or loss are as follows (%): Within one year: In HUF Over one year: In HUF 2021 2020 0.46%-2.46% 0.51% - 2.5% 0.01%-2.9% 0% - 2.5% Average interest on amounts due to banks in HUF 2.15% 2.46% Certain MFB refinanced loan receivables are categorised as fair value through profit or loss based on SPPI test. Related refinancing loans at the liability side are categorised as fair value through profit or loss based on fair value option due to accounting mismatch as provided by the IFRS 9 standard. NOTE 22: HELD FOR TRADING DERIVATIVE FINANCIAL LIABILITIES (in HUF mn) Negative fair value of held for trading derivative financial liabilities by deal types: Interest rate swaps Foreign currency swaps CCIRS and mark-to-market CCIRS Other derivative contracts Total 2021 2020 78,066 45,884 7,786 60,525 192,261 28,812 34,327 7,285 29,563 99,987 NOTE 23: FAIR VALUE OF DERIVATIVE FINANCIAL LIABLITIES DESIGNATED AS HEDGE ACCOUNTING (in HUF mn) Fair value of derivative financial liabilities designated as hedge accounting is detailed as follows: IRS designated as fair value hedge CCIRS designated as fair value hedge IRS designated as cash flow hedge Total 2021 2020 5,747 5,325 7,618 18,690 5,266 5,865 (8,027) 3,104 60 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 24: OTHER LIABILITIES1 AND PROVISIONS (in HUF mn) Other financial liabilities Liabilities from investment services Accrued expenses Accounts payable Liabilities due to short positions Liabilities from customer's credit card payments Accrued day one gain of loan liabilities at below-market interest Other Other financial liabilities total Other non-financial liabilities Technical accounts Current income tax payable Social contribution Accrued expenses Other Other non-financial liabilities total 2021 87,582 27,546 18,754 16,904 14,574 - 11,383 176,743 41,186 10,080 4,516 3,062 2,850 61,694 2020 Reclassified 62,490 15,473 24,121 9,131 11,195 14,391 13,249 150,050 37,304 8,216 3,746 2,902 1,309 53,477 Other liabilities total 238,437 203,527 The provision on other liabilities, off-balance sheet commitments and contingent liabilities are detailed as follows: Provision for losses on other off-balance sheet commitments and contingent liabilities Provisions in accordance with IFRS 9 Provision for litigation Provision for retirement pension and severance pay Provision on other long-term employee benefits Provision on other liabilities Provisions in accordance with IAS 37 Total 2021 2020 17,768 17,768 259 975 - 2,525 3,759 21,527 17,490 17,490 199 1,300 723 194 2,416 19,906 Movements in the provision for losses on commitments and contingent liabilities in accordance with IFRS 9 can be summarized as follows: Opening balance Provision for the period Release of provision for the period FX revaluation Closing balance 2021 2020 17,490 47,626 (47,496) 148 17,768 14,288 56,863 (54,044) 383 17,490 Movements in the provision for losses on commitments and contingent liabilities in accordance with IAS 37 can be summarized as follows: Opening balance Provision for the period Release of provision Use of provision Closing balance 2021 2,416 14,286 (11,608) (1,335) 3,759 2020 2,508 20,970 (21,062) - 2,416 1 Other liabilities are expected to be recovered or settled no more than twelve months after the reporting period. 61 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 25: SUBORDINATED BONDS AND LOANS (in HUF mn) Within one year In foreign currency Over one year: In foreign currency Total Interest rates on subordinated bonds and loans are as follows (%): 2021 2020 2,841 2,972 268,935 301,271 271,776 304,243 2021 2020 Subordinated bonds and loans denominated in foreign currency 2.5%-2.9% 2.5%-2.9% Average interest on subordinated bonds and loans denominated in foreign currency 2.74% 2.85% Subordinated loans and bonds are detailed as follows as at 31 December 2021: Type Nominal value Date of issuance Date of maturity Issue price Interest conditions Subordinated bond EUR 231 million 7 November 2006 Perpetual 99.375% Subordinated bond EUR 500 million 15 July 2019 15 July 2029 99.738% Three-month EURIBOR + 3%, (payable quarterly) variable Fixed 2.875% annual in the first 5 years and callable after 5 years, variable after year 5 (payable annually) calculated as a sum of the initial margin (320 basis point) and the 5 year mid- swap rate prevailing at the and of the 5 year. Current interest rate 2.428% 2.875% NOTE 26: SHARE CAPITAL (in HUF mn) Authorized, issued and fully paid: Ordinary shares 2021 2020 28,000 28,000 The nominal value of the shares is HUF 100 per shares. All of the shares are ordinary shares representing the same rights to the shareholders. Furthermore there are no restrictions on the distribution of dividends and the repayment of capital. 62 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 27: RETAINED EARNINGS AND RESERVES (in HUF mn) Based on the instructions of Act C of 2000 on accounting (“Act on Accounting”) financial statements of the Bank are prepared in accordance with IFRS as issued by the IASB as adopted by the EU. In 2021, the Bank did not pay dividend based on the earlier NBH warnings issued due to covid moratoria. In 2022 dividend of HUF 119 billion from the profit of the years 2019 and 2020 and HUF 1 billion from the profit of the year 2021 (totally HUF 120 billion) are expected to be proposed by the Management, which means HUF 425,89 (for the year 2019 and 2020) and HUF 3,57 (for the year 2021) dividend per share payable to shareholders. In the opinion of the Management dividend is still considered to be payable, which will be decided on the Bank’s Board meeting in March taken in consideration the Russian-Ukrainian conflict. Based on paragraph 114/B of Act on Accounting Equity Correlation Table is prepared and disclosed as a part of the explanatory notes for the reporting date by the Bank. On 19 October 2006 the Bank sold 14.5 million Treasury shares owned by OTP Group through an issue of Income Certificates Exchangeable for Shares ("ICES"). Within the transaction 10 million shares owned by OTP Bank and 4.5 million OTP shares owned by OTP Fund Management Ltd. were sold during the underwriting period of ICES on the weighted average market price (HUF 7,080) of the Budapest Stock Exchange. The shares have been purchased by Opus Securities S.A. ("OPUS"), which issued an exchangeable bond with a total face value of EUR 514,274,000 backed by those shares. The exchangeable bonds have been sold at a 32% premium over the selling price of the shares. The EUR denominated exchangeable bonds were perpetual and the investors could exercise the conversion right between year 6 and 10. The bonds carry a fixed coupon of 3.95% during the first 10 years thereafter the Issuer had the right to redeem the bonds at face value. Following the year 10, the bonds carry a coupon of 3 month EURIBOR +3%. OTP Bank had discretional right to cancel the payments. The interest payable was non-cumulative. Due to the conditions described above, ICES was accounted as an equity instrument and therefore any payment was accounted as equity distribution paid to ICES holders. On 14 September 2021 the Bank claimed to terminate the subordinated swap agreement related to ICES transaction as at 29 October 2021, and to exercise its option for repurchasing approximately 14.5 million OTP ordinary shares held by Opus at market price based on the agreement. On the same day the Bank recognised liability due to Opus as a reduction of EUR 514 million in the shareholder’s equity. Treasury shares were repurchased on 29 October 2021 on a price HUF 18.118 and on the same day the swap transaction was financially settled. As a result of the closure of the subordinated swap agreement the Bank’s shareholder’s equity increased by HUF 75.422 million as follows: Recognition of liability against shareholder’s equity Payment of price for treasury shares by Opus Tax effect accounted in retained earnings in HUF mn 179,767 equity decrease 262,648 equity increase 7,459 equity decrease Approximately 12 million treasury shares were sold to OTP SECOP I. (‘OTP Special Employee Stock Ownership Program’) and OTP SECOP II. Equity correlation table shall contain the opening and closing balances of the shareholder’s equity in accordance with IFRS, furthermore deducted from this the opening and closing balances of the specified equity elements. Equity correlation table shall contain also untied retained earnings available for the payment of dividends, covering retained earnings from the last financial year for which accounts have been adopted comprising net profit for the period of that financial year minus cumulative unrealized gains claimed in connection with any increase in the fair value of investment properties, as provided in IAS 40 - Investment Property, reduced by the cumulative income tax accounted for under IAS 12 - Income Taxes. 63 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 27: RETAINED EARNINGS AND RESERVES (in HUF mn) [continued] Share capital Share capital is the portion of the Bank’s equity that has been obtained by the issue of shares in the corporation to a shareholder, usually for cash. Share-based payment reserve Share-based payment reserve represents the increase in the equity due to the goods or services were received by the Bank in an equity-settled share-based payment transaction, valued at the fair value of the goods or services received. Retained earnings Profit of previous years generated by the Bank that are not distributed to shareholders as dividends. Put option reserve OTP Bank Plc. and MOL Plc. entered into a share swap agreement in 16 April 2009, whereby OTP has changed 24,000,000 OTP ordinary shares for 5,010,501 „A series” MOL shares. The final maturity of the share swap agreement is 11 July 2022, until which any party can initiate cash or physical settlement of the transaction. Put option reserve represents the written put option over OTP ordinary shares were accounted as a deduction from equity at the date of OTP-MOL share swap transaction. Other comprehensive income Other comprehensive income comprises items of income and expense (including reclassification adjustments) that are not recognised in profit or loss as required or permitted by other IFRSs. General reserve The Bank shall place ten per cent of the after-tax profit of the year into general reserve prescribed by the Act CCXXXVII of 2013 on Credit Institutions and Financial Enterprises. The Bank is allowed to use general reserves only to cover operating losses arising from their activities. Tied-up reserve The tied-up reserve shall consist of sums tied up from the capital reserve and from the retained earnings. 64 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 27: RETAINED EARNINGS AND RESERVES (in HUF mn) [continued] The equity correlation table of the Bank based on paragraph 114/B of Act on Accounting as at 31 December 2021: 31 December 2021 Closing balance Share Capital Capital reserve Share-based payment reserve Retained earnings and reserves Option reserve Treasury Shares Revaluation reserve Tied-up reserve Net profit for the year Total Components of Shareholder’s equity in accordance with IFRS Unused portion of reserve for developments Other comprehensive income Option reserve Treasury shares Share based payments Net profit for the year General reserve Components of Shareholder’s equity in accordance with paragraph 114/B of Act on Accounting 28,000 52 46,162 1,855,090 (55,468) (58,872) - - - - - - - - - (497) - - (55,468) (58,872) 46,162 - - - - - (46,162) - - (5,078) - - - (125,339) (117,905) - 55,468 - - - - - - - 58,872 - - - - - - 497 - 5,078 - - - - - - - - - 117,905 - - - - - - 125,339 - 1,814,964 - - - - - - - 28,000 (68,126) - 1,606,271 - - 5,078 118,402 125,339 1,814,964 65 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 27: RETAINED EARNINGS AND RESERVES (in HUF mn) [continued] The equity correlation table of the Bank based on paragraph 114/B of Act on Accounting as at 1 January 2021: 1 January 2021 Opening balance Share Capital Capital reserve Share-based payment reserve Retained earnings and reserves Option reserve Treasury Shares Revaluation reserve Tied-up reserve Net profit for the year Total Components of Shareholder’s equity in accordance with IFRS Unused portion of reserve for developments Other comprehensive income Portion of supplementary payment recognised as an asset Option reserve Treasury shares Share based payments Net profit for the year General reserve Components of Shareholder’s equity in accordance with paragraph 114/B of Act on Accounting 28,000 52 42,573 1,709,976 (55,468) (46,799) - - - - - - - - - - - - - - (55,468) (46,799) 42,573 - - - - (42,573) - - (998) (44,356) - - - - (92,474) (105,371) - - - 55,468 - - - - - - - - 46,799 - - - - - 44,356 - - - - - - - 998 - - - - - - 105,371 - - - - - - - 92,474 - 1,678,334 - - - - - - - - 28,000 (59,642) - 1,466,777 - - 44,356 106,369 92,474 1,678,334 66 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 27: RETAINED EARNINGS AND RESERVES (in HUF mn) [continued] Calculated untied retained earnings in accordance with paragraph 114/B of Act on Accounting Retained earnings Net profit for the year Untied retained earnings Items of retained earnings and other reserves Retained earnings Capital reserve Option reserve Other reserves Fair value reserve of financial instruments measured at fair value through other comprehensive income Share-based payment reserve Fair value reserve of derivative financial instruments designated as cash-flow hedge Net profit for the period Retained earnings and other reserves 2021 2020 1,606,271 125,339 1,466,777 92,474 1,731,610 1,559,251 2021 1,606,770 52 (55,468) 117,903 8,646 46,162 (3,568) 125,339 1,845,836 2020 1,465,037 52 (55,468) 105,370 44,356 42,573 2,739 92,474 1,697,133 Fair value adjustment of securities at fair value through other comprehensive income Balance as at 1 January Change of fair value adjustment Deferred tax related to change of fair value adjustment Other transfer to retained earnings Deferred tax related to other transfer to retained earnings Transfer to p/l due to derecognition Deferred tax related to accumulated transfer to p/l Closing balance 2021 36,441 (34,484) 2,801 (5,070) 457 - - 145 Expected credit loss on securities at fair value through other comprehensive income Balance as at 1 January Increase of loss allowance Release of loss allowance FX movement Closing balance 2021 1,714 1,103 (1,654) 11 1,174 Fair value changes of equity instruments as at fair value through other comprehensive income Balance as at 1 January Change of fair value correction Deferred tax related to change of fair value correction Transfer to retained earnings Closing balance 2021 6,201 1,407 (281) - 7,327 2020 51,011 (22,069) 1,973 - - 6,073 (547) 36,441 2020 1,702 795 (783) - 1,714 2020 10,262 (3,276) 310 (1,095) 6,201 67 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 28: TREASURY SHARES (in HUF mn) Nominal value (ordinary shares) Carrying value at acquisition cost 2021 2020 325 58,872 433 46,799 The changes in the carrying value of treasury shares are due to repurchase and sale transactions on market authorised by the General Assembly. Change in number of shares: Number of shares as at 1 January Additions Disposals Number of shares at the end of the period Change in carrying value: Balance as at 1 January Additions Disposals Closing Balance Face value of treasury shares held by OTP Group members 2021 2020 4,331,169 16,251,451 (17,332,636) 3,249,984 320,165 8,296,388 (4,285,384) 4,331,169 2021 2020 46,799 276,433 (264,360) 58,872 2021 766 2,636 85,922 (41,759) 46,799 2020 1,959 68 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 29: INTEREST INCOME AND EXPENSES (in HUF mn) Interest income accounted for using the effective interest rate method from / on Loans at amortised cost FVOCI securities Securities at amortised cost Placements with other banks Financial liabilities Amounts due from banks and balances with National Bank of Hungary Repo receivables Subtotal Income similar to interest income Loans mandatorily measured at fair value through profit or loss Swap and forward deals related to Placements with other banks Swap and forward deals related to Loans at amortised cost Swap and forward deals related to FVOCI securities Other Subtotal Interest income total Interest expense due to / from / on Amounts due to banks and deposits from the National Bank of Hungary and other banks Deposits from customers Leasing liabilities Liabilities from issued securities Subordinated bonds and loans Other Financial assets Repo liabilities Subtotal 2021 2020 168,388 21,456 61,085 33,544 3,337 14,245 318 302,373 26,045 68,975 11,487 (850) 6 105,663 143,652 29,095 48,654 12,248 1,544 4,391 49 239,633 15,094 56,341 14,011 (3,789) 6 81,663 408,036 321,296 107,928 33,403 214 377 7,890 92 2,193 3,394 155,491 67,747 19,598 257 414 8,327 49 1,622 1,616 99,630 69 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 30: RISK COST (in HUF mn) Loss allowance of loans at amortised cost Loss allowance Release of loss allowance Loss allowance of sight deposits and placements with other banks Loss allowance Release of loss allowance Loss allowance of placements with other banks Loss allowance Release of loss allowance Loss allowance of FVOCI securities Loss allowance Release of loss allowance Loss allowance of securities at amortised cost Loss allowance Release of loss allowance Provision on loan commitments and financial guarantees Provision for the period Release of provision 2021 2020 218,534 (181,270) 37,264 211,543 (156,385) 55,158 20,709 (18,912) 1,797 12,724 (10,497) 2,227 449 (669) (220) 1,103 (1,654) (551) 4,404 (2,369) 2,035 362 (76) 286 2,119 (2,116) 3 4,822 (2,977) 1,845 47,626 (47,496) 130 57,246 (54,044) 3,202 Change in the fair value attributable to changes in the credit risk of loans mandatorily measured at fair value through profit of loss 16,255 405 Risk cost total 56,710 63,126 NOTE 31: NET PROFIT FROM FEES AND COMMISSIONS (in HUF mn) Income from fees and commissions: Fees and commissions related to lending Deposit and account maintenance fees and commissions Fees and commission related to the issued bank cards Fees and commissions related to security trading Fx margin Fees and commissions paid by OTP Mortgage Bank Ltd. Net insurance fee income Other Fees and commissions from contracts with customers 2021 2020 12,164 11,141 123,800 89,243 28,227 16,155 11,187 8,481 11,546 288,639 106,341 77,115 25,414 6,159 8,725 7,155 17,731 248,640 Total Income from fees and commissions: 300,803 259,781 Contract balances Receivables, which are included in ‘other assets’ Loss allowance 2021 2020 16,391 196 7,625 (103) 70 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 31: NET PROFIT FROM FEES AND COMMISSIONS (in HUF mn) [continued] Performance obligations and revenue recognition policies: Fee type Deposit and account maintenance fees and commissions Nature and timing of satisfaction of performance obligations, and the significant payment terms The Bank provides a number of account management services for both retail and corporate customers in which they charge a fee. Fees related to these services can be typically account transaction fees (money transfer fees, direct debit fees, money standing order fees, etc.), internet banking fees (e.g. OTP Direct fee), account control fees (e.g. sms fee), or other fees for occasional services (account statement fees, other administration fees, etc.). Fees for ongoing account management services are charged to the customer’s account on a monthly basis. The fees are commonly fix amounts that can be vary per account package and customer category. recognition Revenue under IFRS 15 Fees for ongoing account management services are charged on a monthly basis during the period when they are provided. when Transaction-based fees are the charged transaction takes places or charged monthly at the end of the month. transfer In the case of the transaction based fees where the services include money the the fee transaction takes place. The rate of the fee is typically determined in a certain % of the transaction amount. In case of other transaction-based fees (e.g. SMS fee), the fee is settled monthly. is charged when In case of occasional services the Bank basically charges the fees when the services are used by the customer. The fees can be fixed fees or they can be set in %. The rates are reviewed by the Bank regularly. Fees and commission related to the issued bank cards The Bank provides a variety of bank cards to its customers, for which different fees are charged. The fees are basically charged in connection with the issuance of cards and the related card transactions. Fees for ongoing services are charged on a monthly basis during the period when they are provided. The annual fees of the cards are charged in advance in a fixed amount. The amount of the annual card fee depends on the type of card. of fees case transaction-based In cash withdrawal/payment fee, merchant fee, interchange fee, etc.), the settlement of the fees will take place immediately after the transaction or on a monthly basis. The fee is typically determined in % of the transaction with a fixed minimum amount. (e.g. For all other cases where the Bank provides a continuous service to the customers (e.g. card closing fee), the fees are charged monthly. The fee is calculated in a fix amount. The rates are reviewed by the Bank regularly. when Transaction-based fees are charged the transaction takes places or charged monthly at the end of the month. 71 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 31: NET PROFIT FROM FEES AND COMMISSIONS (in HUF mn) [continued] Performance obligations and revenue recognition policies: [continued] Fee type Fees and commissions related to security account management services Nature and timing of satisfaction of performance obligations, and the significant payment terms The Bank provides its clients with security account management services. Fees will be charged for account management and transactions on accounts. Account management fees are typically charged quarterly or annually. The amount is determined in%, based on the stocks of securities managed by the clients on the account in a given period. Fees for transactions on the securities account are charged immediately after the transaction. They are determined in%, based on the transaction amount. Fees for complex services provided to clients (e.g. portfolio management or custody) are typically charged monthly or annually. The fees are fixed monthly amounts and in some cases a bonus fee are charged. Fees and commissions paid by OTP Mortgage Bank Ltd. The Bank provides a number of services to its subsidiaries, in connection with fees are charged. These fees typically include services related to various warranties and guarantees, credit account management, agency activities, and marketing activities. The credit account management fee granted to OTP Mortgage Bank is settled on a monthly basis. It has a fixed part that is based on the number of the managed credit accounts, and a variable one determined by the profit split method. The fees for the guarantee services provided by the Bank are charged monthly. The fee is determined by% and based on the stock being guaranteed. Fees for agent services are charged monthly. The rate is %, based on the products sold during the period. recognition Revenue under IFRS 15 Fees for ongoing services are charged quarterly or annually during the period when they are provided. The fees are accrued monthly. Transaction-based fees are the charged transaction takes places. when Fees for ongoing services are charged on a monthly basis during the period when they are provided. Transaction-based fees are charged the transaction takes places. when Net insurance fee income Due to the fact that the Bank does not provide insurance services to its clients, only acts as an agent, the fee income charged to the customers and fees payable to the insurance company are presented net in the fee income. Fees for ongoing services are charged on a monthly basis during the period when they are provided. Other In addition, agency fee charged for the sale of insurance contracts is also recorded in this line. The fee is charged on a monthly basis and determined in %. Fees that are not significant in the Banks total income are included in Other fees category. Such fees are safe lease, special procedure fee, account rent fee, adlak service fee, fee of a copy of document, etc. Other fees may include charges for continuous services or for ad hoc administration services. Continuous fees are charged monthly (e.g., safe lease fees) at the beginning of the period, typically at a fixed rate. Fees for ad hoc services are charged immediately after the service obligation had been met, typically also in a fixed amount. Fees for ongoing services are charged on a monthly basis during the period when they are provided. Fees for ad hoc services are charged when the transaction takes places. 72 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 31: NET PROFIT FROM FEES AND COMMISSIONS (in HUF mn) [continued] Other fees and commissions related to issued bank cards Insurance fees Fees and commissions related to lending Fees and commissions related to security trading Fees and commissions relating to deposits Trust activities related to securities Postal fees Money market transaction fees and commissions Other Total NOTE 32: GAINS AND LOSSES (in HUF mn) 2021 39,835 771 5,011 618 2,610 1,652 224 265 1,290 52,276 2020 31,701 758 3,432 1,584 1,355 566 202 91 1,061 40,750 248,527 219,031 2021 2020 Losses arising from derecognition of financial assets measured at amortised cost Gain from loans Loss from loans Gain from securities Loss from securities Other Losses arising from derecognition of financial assets measured at amortised 93 (818) 968 (2,520) (423) 894 (4,533) 360 - - cost (2,700) (3,279) Additional information to Gains or losses from operating income: Foreign exchange losses Loss from foreign exchange Margin gains Margin losses Total Gains on derivative instruments, net Gains on FX spot, swap and option deals Losses from FX spot, swap and option deals Fees received related to option deals Fees paid related to option deals Gains on commodity deals Losses from commodity deals Gains on futures transactions Losses from futures transactions Losses from credit valuation adjustment related to FX spot, swap and option deals held for trading Losses from credit valuation adjustment related to commodity deals held for trading Total Losses on financial instruments at fair value through profit or loss Gains on securities mandatorily measured at fair value through profit or loss Gains on loans mandatorily measured at fair value through profit or loss Losses on loans mandatorily measured at fair value through profit or loss Gains on financial liabilities designated at fair value through profit or loss Losses on financial liabilities designated at fair value through profit or loss Total 2021 (5,875) 3,597 (3,360) (5,638) 2021 41,224 (34,716) 2,203 (2,830) 91,487 (91,474) 580 (208) (2,643) (187) 3,436 2021 2,285 12,069 (24,760) 4,353 (438) (6,491) 2020 (5,302) 2,592 (1,808) (4,518) 2020 53,171 (46,329) 17,983 (17,912) 22,122 (22,123) 1,555 (1,410) - - 7,057 2020 2,725 2,328 (4,453) 2,443 (3,713) (670) 73 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 32: GAINS AND LOSSES (in HUF mn) [continued] Additional information to Gains or losses from operating income: [continued] Gains on securities, net Interest income from held for trading securities Gains on held for trading securities Losses on held for trading securities Gains on FVOCI securities Losses on FVOCI securities Gains on derecognition of investments in subsidiaries Losses on derecognition of investments in subsidiaries Gains/losses from other securities Total Dividend income Distribution from investments in subsidiaries Distribution from held for trading securities Distribution from FVOCI equity instruments Total Total gains and losses from operating income (without other operating 2021 277 8,018 (3,646) 2,138 (6,797) 1,311 (1,963) 2,766 2,104 2021 95,042 3,844 151 99,037 92,445 2020 368 5,948 (3,697) 6,639 (566) 23,028 (16,485) 2,360 17,595 2020 60,913 8 52 60,973 80,436 income) NOTE 33: OTHER OPERATING INCOME AND EXPENSES AND OTHER ADMINISTRATIVE EXPENSES (in HUF mn) Other operating income: Intermediary and other services Derecognition of financial liabilities at amortised cost Non-repayable assets received Income from lease of tangible assets Gains on derecognition of deposits Gains on discount from advertising agency fees Income from written off receivables Gains on sale of receivables Gains on transactions related to property activities Gains on IT services provided to subsidiaries Other operating income from OTP Employee Stock Ownership Program (OTP ESOP) Gains on sale of tangible assets Other Total Net other operating expenses: 2021 2,272 2,290 1,174 1,009 281 182 281 - 239 940 2,234 (81) 444 11,265 2020 2,677 710 26 749 710 171 206 377 266 - 236 150 1,772 7,900 2021 2020 Release of loss allowance on other assets Non-repayable assets contributed Release of provision for off-balance sheet commitments and contingent liabilities Financial support for sport association and organization of public utility Losses on other assets Loss allowance on investments in subsidiaries Other Total other operating expenses 961 (862) (1,343) (10,960) - (27,420) (2,012) (41,636) (3,521) (4,055) 92 (7,999) (697) (10,042) (1,842) (28,064) 74 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 33: OTHER OPERATING INCOME AND EXPENSES AND OTHER ADMINISTRATIVE EXPENSES (in HUF mn) [continued] Other administrative expenses: Personnel expenses: Wages Taxes related to personnel expenses Other personnel expenses Subtotal Depreciation and amortization Other administrative expenses: Taxes, other than income tax1 Services Fees payable to authorities and other fees Administration expenses, including rental fees Professional fees Advertising Subtotal Total NOTE 34: INCOME TAX (in HUF mn) 2021 2020 Reclassified 105,176 16,709 14,241 136,126 89,705 16,308 12,485 118,498 40,692 38,948 81,171 57,290 17,362 7,439 6,714 8,635 178,611 73,384 41,590 13,769 15,517 2,500 7,405 154,165 355,429 311,611 The Bank is presently liable for income tax at a rate of 9% of taxable income, local taxes at a rate of 2.3% of taxable revenue. A breakdown of the income tax expense is: Current tax expense Deferred tax expense/(benefit) Total A reconciliation of the deferred tax liability is as follows: Balance as at 1 January Deferred tax (expense)/ benefit Tax effect of fair value adjustment of FVOCI securities and ICES recognised in comprehensive income Closing balance 2021 2020 Reclassified 14,528 1,423 15,951 14,198 (1,077) 13,121 2021 2020 (3,062) (1,423) 2,978 (1,507) (5,875) 1,077 1,736 (3,062) 1 Special tax of financial institutions was paid by OTP Bank in the amount of HUF 13.1 and 11.6 billion for the for the year ended 31 December 2021 and 2020, recognized as an expense thus decreased the corporate tax base. For the year ended 31 December 2021 financial transaction duty was paid by the Bank in the amount of HUF 68 billion. 75 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 34: INCOME TAX (in HUF mn) [continued] A breakdown of the deferred tax liability is as follows: Unused tax allowance Provision for untaken leave Provision for termination benefits and jubilee Amounts unenforceable by tax law Deferred tax asset Fair value adjustment of held for trading and securities at fair value through other comprehensive income Difference in depreciation and amortization Provision for developments Amounts unenforceable by tax law Deferred tax liabilities 2021 2020 - 282 644 - 926 (1,312) (1,076) (45) - (2,433) 1,321 - - 247 1,568 (4,199) (329) - (102) (4,630) Net deferred tax assets/(liabilities) (1,507) (3,062) A reconciliation of the income tax (income) / expense is as follows: Profit before income tax Income tax at statutory tax rate (9%) A reconciliation of effective tax rate as follows: Share-based payment Deferred use of tax allowance Dividend income Use of tax Amounts unenforceable by tax law Change due to accounting policy (Visa) Use of tax losses Deferred tax asset due to unused tax allowance Other Income tax Effective tax rate (as presented in the separate statement of financial position) Current tax assets Current tax liabilities Net tax liabilities 2021 2020 141,290 12,717 93,246 8,392 323 90 (8,787) (3,461) (847) - - - 1,618 1,653 1.2% 2021 - 4,776 (4,776) 305 - (5,488) (2,023) (38) 69 (167) (1,039) 761 772 0.8% 2020 593 1,464 (871) 76 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 35: LEASE (in HUF mn) The Bank as a lessee: Amounts recognised in profit and loss Interest expense on lease liabilities Expense relating to short-term leases Expense relating to variable lease payments not included in the measurement of lease liabilities Leasing liabilities by maturities: Within one year Over one year Total 2021 214 2,143 1,271 2021 4,868 13,064 17,932 An analysis of movement in the carrying amount of right-of-use assets by category is as follows: Gross carrying amount Balance as at 1 January 2020 Additions due to new contracts Derecognition due to matured contracts Change due to revaluation and modification Balance as at 31 December 2020 Additions due to new contracts Derecognition due to matured contracts Change due to revaluation and modification Balance as at 31 December 2021 Depreciation Balance as at 1 January Depreciation charge Derecognition due to matured contracts Balance as at 31 December 2021 Depreciation charge Derecognition due to matured contracts Balance as at 31 December 2021 Net carrying amount Balance as at 31 December 2020 Balance as at 31 December 2021 Right-of-use of real estate 17,790 3,707 (18) 927 22,406 5,788 (263) 3,150 31,081 4,214 4,744 (6) 8,952 5,155 (238) 13,869 13,454 17,212 Right-of-use of machinery and equipment 37 - - - 37 - - - 37 6 - 12 6 - 18 25 19 2020 257 2,128 1,084 2020 4,423 9,683 14,106 Total 17,827 3,707 (18) 927 22,443 5,788 (263) 3,150 31,118 4,220 4,750 (6) 8,964 5,161 (238) 13,887 13,479 17,231 77 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Financial instruments may result in certain risks to the Bank. The most significant risks the Bank faces include: 36.1. Credit risk The Bank takes on exposure to credit risk which is the risk that a counter-party will be unable to pay amounts in full when due. The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or banks of borrowers, and to geographical areas and loan types. Such risks are monitored on a periodical basis and subject to an annual or more frequent review. The exposure to any borrower including banks and brokers is further restricted by sublimit covering on- and off-balance sheet exposures and daily delivery risk limits in relation to trading items such as forward foreign exchange contracts. Actual exposures against limits are monitored daily. Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing these lending limits when appropriate. Exposure to credit risk is partly managed obtaining collateral, corporate and personal guarantees. 36.1.1. Financial instruments by stages Defining the expected credit loss on individual and collective basis On individual basis: Individually assessed are the non-retail or micro- and small enterprise exposure of significant amount on a stand- alone basis: • exposure in stage 3, • exposure in workout management • purchased or originated credit-impaired instruments which are in accordance with the conditions mentioned above The calculation of impairment must be prepared and approved by the risk management functional areas. The calculation, all relevant factors (amortised cost, original and current EIR, contracted and expected cash flows (from business and/or collateral) for the individual periods of the entire lifecycle, other essential information enforced during the valuation) and the criteria thereof (including the factors underlying the classification as stage 3) must be documented individually. The expected credit loss of the exposure equals the difference of the receivable's AC (gross book value) on the valuation date and the present value of the receivable's expected cash flows discounted to the valuation date by the exposure's original effective interest rate (EIR) (calculated at the initial recognition, or in the case of variable rate, recalculated due to the last interest rate change). The estimation of the expected future cash flows should be forward looking, it must also contain the effects of the possible change of macroeconomic outlook. At least two scenarios must be used for the estimation of the expected cash flow. At least one scenarios should anticipate that realised cash flows will be significantly different from the contractual cash flows. Probability weights must be allocated to the individual scenarios. The estimation must reflect the probability of the occurrence and non-occurrence of the credit loss, even if the most probable result is the non-occurrence of the loss. On collective basis: The following exposures are subject to collective assessment: retail exposure irrespective of the amount, • • micro and small enterprise exposures irrespective of the amount, • all other exposure which are insignificant on a stand-alone basis and not part of the workout management, • exposure which are not in stage 3, significant on a stand-alone basis, • purchased or originated credit-impaired instruments which are in accordance with the conditions mentioned above. 78 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.1. Credit risk [continued] 36.1.1. Financial instruments by stages [continued] In the collective impairment methodology credit risk and the change of credit risk can be correctly captured by understanding the risk characteristics of the portfolio. In order to achieve this the main risk drivers shall be identified and used to form homogeneous segments having similar risk characteristics. The segmentation is expected to stay stable from month to month however a regular (at least yearly) revision of the segmentation process should be set up to capture the change of risk characteristics. The segmentation must be performed separately for each parameter, since in each case different factors may have relevance. The Bank's Headquarters Group Reserve Committee stipulates the guidelines related to the collective impairment methodology at group level. In addition, it has right of agreement in respect of the risk parameters (PD -probability of default, LGD - loss given default, EAD – exposure at default) and segmentation criteria proposed by the group members. The review of the parameters must be performed at least annually and the results should be approved by the Group Reserve Committee. Local Risk Managements is responsible for parameter estimations and updates, macroeconomic scenarios are calculated by OTP Bank Headquarters for each subsidiary and each parameter. Based on the consensus proposal of Local Risk Management and OTP Bank Headquarters, the Group Reserve Committee decides on the modification of parameters (all parameters for impairment calculation). The impairment parameters should be backtested at least annually. The expected loss calculation should be forward looking, including forecasts of future economic conditions. This may be achieved by applying 3-5 different macroeconomic scenarios, which may be integrated in the PD, LGD and EAD parameters. 79 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.1. Credit risk [continued] 36.1.1. Financial instruments by stages [continued] Gross carrying amount and accumulated loss allowance of financial assets at amortized cost and fair value through other comprehensive income by IFRS 9 stages as at 31 December 2021: Gross carrying amount / Notional amount Loss allowance Carrying amount/ Exposure Stage 1 Stage 2 Stage 3 Purchased or originated credit impaired Total Stage 1 Stage 2 Stage 3 Purchased or originated credit impaired Write-off Total 474,945 475,130 - - - 475,130 185 - - - 185 - Cash, amounts due from banks and balances with the National Bank of Hungary Placements with other banks, net of allowance for placement losses Repo receivables Retail consumer loans Mortgage loans Municipal loans Corporate loans Loans at amortised cost FVOCI securities Securities at amortised cost Other financial assets Total as at 31 December 2021 Loan commitments Financial guarantees Factoring loan commitments Bill of credit - - 2,573,226 33,710 33,254 39,220 1,346 70,311 2,567,212 33,638 598,699 81,471 71,328 3,280,967 4,032,465 641,939 3,071,038 153,748 1,476 - 488,639 139,193 33,687 8,377 - 2,909,439 384,223 66,915 3,501,643 563,982 108,979 - - 735 10,974,985 10,409,322 616,169 111,190 - 3,064,500 13,223 119,174 38,964 641,939 1,665,288 1,500,977 423,267 30,380 1,615,196 56,838 1,491,470 14,883 5,847 - 412,692 30,381 4,996 244 5,133 - Loan commitments and financial guarantees total 3,619,912 3,549,739 77,568 10,373 - - 3 2,724 - 10,691 13,418 - - 23 13,441 - - - - - - - 25 223 309 106 6,014 72 83,575 71,657 2,574,702 33,710 1,476 - 661,522 11,168 27,597 24,056 1,503 - 3,371,268 17,945 39,260 31,528 4,188,022 29,361 67,272 57,087 - - 598 11,150,122 44,384 70,915 59,161 641,939 3,077,723 158,896 - 803 2,840 1,174 5,882 1,696 1,677,030 1,506,597 423,672 30,381 5,620 4,820 228 1 3,968 749 32 - 2,154 51 145 - 3,637,680 10,669 4,749 2,350 - - 2 267 - 1,568 1,837 - - 14 1,851 - - - - - 7,490 72 62,823 2,104 329 90,301 155,557 1,174 6,685 5,148 176,311 11,742 5,620 405 1 17,768 - - - - - 21,838 21,838 - - - 21,838 - - - - - 80 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.1. Credit risk [continued] 36.1.1. Financial instruments by stages [continued] Gross carrying amount and accumulated loss allowance of financial assets at amortized cost and fair value through other comprehensive income by IFRS 9 stages as at 31 December 2020: Gross carrying amount / Notional amount Loss allowance Assets measured at amortised cost and FVOCI as at 31 December 2020 Carrying amount/ Exposure Stage 1 Stage 2 Stage 3 Purchased or originated credit impaired Total Stage 1 Stage 2 Stage 3 Purchased or originated credit impaired Write-off Total 579,120 579,120 - - - 579,120 - - - - - - Cash, amounts due from banks and balances with the National Bank of Hungary Placements with other banks, net of allowance for placement losses Repo receivables Retail consumer loans Mortgage loans Municipal loans Corporate loans Loans at amortised cost FVOCI securities Securities at amortised cost Other financial assets Total as at 31 December 2020 Loan commitments Financial guarantees Factoring loan commitments Bill of credit 1,535,884 183,364 531,115 95,762 86,061 2,704,822 3,417,760 911,950 2,007,692 127,179 8,762,949 1,540,240 183,656 456,034 29,857 72,406 2 - 98,027 58,609 15,564 2,361,979 380,458 2,920,276 552,658 - - 40,452 8,239,713 593,112 911,950 2,010,980 93,491 1,429,732 1,412,663 304,993 5,026 1,369,379 1,409,766 299,908 5,039 69,998 8,609 3,551 - 1,461 - 10,632 6,602 43 37,177 54,454 - - 1,133 57,048 1,683 161 1,810 - Loan commitments and financial guarantees total 3,152,414 3,084,092 82,158 3,654 - - 5 2,909 - 11,128 14,042 - - 31 14,073 - - - - - 1,541,703 183,656 564,698 97,977 88,013 2,790,742 3,541,430 911,950 2,010,980 135,107 8,903,946 1,441,060 1,418,536 305,269 5,039 4,356 292 5,945 20 227 16,314 22,506 1,714 3,288 2,407 34,563 5,442 5,087 175 13 2 - 20,866 688 1,709 43,034 66,297 - - 4,504 70,803 5,047 738 35 - 1,461 - 6,770 1,313 16 25,127 33,226 - - 996 35,683 839 48 66 - 3,169,904 10,717 5,820 953 - - 2 194 - 1,445 1,641 - - 21 1,662 - - - - - 5,819 292 33,583 2,215 1,952 85,920 123,670 1,714 3,288 7,928 142,711 11,328 5,873 276 13 17,490 - - - - - 25,720 25,720 - - - 25,720 - - - - - 81 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.1. Credit risk [continued] 36.1.1. Financial instruments by stages [continued] Changes in the Loss allowance of financial assets at amortised cost and fair value through other comprehensive income by IFRS 9 stages Loans at amortised cost Loss allowance as at 1 January 2020 Transfer to Stage 1 Transfer to Stage 2 Transfer to Stage 3 Net remeasurement of loss allowance New financial assets originated or purchased Financial assets derecognised (other than write-offs) Unwind of discount Write-offs Loss allowance as at 31 December 2020 Modification Loss allowance as at 31 December 2020 Transfer to Stage 1 Transfer to Stage 2 Transfer to Stage 3 Net remeasurement of loss allowance New financial assets originated or purchased Financial assets derecognised (other than write-offs) Unwind of discount Write-offs Loss allowance as at 31 December 2021 Stage 1 26,777 633 (4,374) (188) (2,736) 11,393 (8,975) - (24) 22,506 - 22,506 12,289 (1,867) (369) (10,705) 15,197 (7,638) - (52) 29,361 Stage 2 18,678 (612) 5,682 (1,683) 40,164 7,498 (3,354) - (76) 66,297 (1,281) 65,016 (11,919) 3,241 (5,636) 18,125 6,326 (7,540) - (341) 67,272 Stage 3 25,841 (21) (1,308) 1,871 9,196 2,918 (3,717) 1,613 (3,167) 33,226 - 33,226 (370) (1,374) 6,005 20,779 4,292 (5,323) 947 (1,095) 57,087 Total POCI 72,066 770 - - - - - - 47,463 839 45 21,854 (11) (16,057) 1,830 217 (219) (3,486) 1,641 123,670 (1,281) 1,641 122,389 - - - 28,420 25,816 (16) (20,517) 956 (1,507) 1,837 155,557 - - - 221 1 9 (19) - 82 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.1. Credit risk [continued] 36.1.1. Financial instruments by stages [continued] Changes in the Loss allowance of financial assets at amortised cost and fair value through other comprehensive income by IFRS 9 stages [continued] Loan commitments and financial guarantees Provision as at 1 January 2020 Transfer to Stage 1 Transfer to Stage 2 Transfer to Stage 3 Net remeasurement of loss allowance New financial assets originated or purchased Decrease Provision as at 31 December 2020 Transfer to Stage 1 Transfer to Stage 2 Transfer to Stage 3 Net remeasurement of loss allowance New financial assets originated or purchased Decrease Loss allowance as at 31 December 2021 Stage 1 11,564 142 (501) (9) (939) 2,843 (2,383) 10,717 2,910 (200) (21) (4,628) 3,215 (1,324) 10,669 Stage 2 1,077 (125) 522 (28) 3,651 796 (73) 5,820 (2,840) 322 (109) 1,371 904 (719) 4,749 Placements with other banks, net of allowance for placement losses Loss allowance as at 1 January 2020 Net remeasurement of loss allowance New financial assets originated or purchased Financial assets derecognised (other than write-offs) Loss allowance as at 31 December 2020 Net remeasurement of loss allowance New financial assets originated or purchased Financial assets derecognised (other than write-offs) Loss allowance as at 31 December 2021 Stage 1 3,590 515 2,321 (2,070) 4,356 (303) 4,566 (2,605) 6,014 Stage 2 2 - - - 2 - - (2) - Stage 3 1,647 (17) (21) 37 (642) 67 (118) 953 (70) (122) 130 1,500 98 (139) 2,350 Stage 3 - - 1,461 - 1,461 15 - - 1,476 Total 14,288 - - - 2,070 3,706 (2,574) 17,490 - - - (1,757) 4,217 (2,182) 17,768 Total 3,592 515 3,782 (2,070) 5,819 (288) 4,566 (2,607) 7,490 83 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.1. Credit risk [continued] 36.1.1. Financial instruments by stages [continued] Changes in the Loss allowance of financial assets at amortised cost and fair value through other comprehensive income by IFRS 9 stages [continued] Repo Receivables Loss allowance as at 1 January 2020 New financial assets originated or purchased Financial assets derecognised (other than write-offs) Loss allowance as at 31 December 2020 New financial assets originated or purchased Financial assets derecognised (other than write-offs) Loss allowance as at 31 December 2021 Securities at amortised cost Loss allowance as at 1 January 2020 Net remeasurement of loss allowance New financial assets originated or purchased Financial assets derecognised (other than write-offs) Loss allowance as at 31 December 2020 Modification Loss allowance as at 31 December 2020 Net remeasurement of loss allowance New financial assets originated or purchased Financial assets derecognised (other than write-offs) Loss allowance as at 31 December 2021 FVOCI Securities Stage 1 Total 6 362 (76) 292 449 (669) 72 6 362 (76) 292 449 (669) 72 Stage 1 Stage 2 Total 1,443 1,334 595 (84) 3,288 - 3,288 898 1,761 (65) 5,882 - - - - - 1,281 1,281 (478) - - 803 1,443 1,334 595 (84) 3,288 1,281 4,569 420 1,761 (65) 6,685 Loss allowance as at 1 January 2020 Net remeasurement of loss allowance New financial assets originated or purchased Financial assets derecognised (other than write-offs) Loss allowance as at 31 December 2020 Net remeasurement of loss allowance New financial assets originated or purchased Financial assets derecognised (other than write-offs) Loss allowance as at 31 December 2021 Stage 1 Total 1,702 286 509 (783) 1,714 (483) 348 (405) 1,174 1,702 286 509 (783) 1,714 (483) 348 (405) 1,174 84 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.1. Credit risk [continued] 36.1.1. Financial instruments by stages [continued] Loan portfolio by internal ratings Internal rating grade High grade (1-4) Medium grade (5-7) Low grade (8-9) Non performing Total Internal rating grade High grade (1-4) Medium grade (5-7) Low grade (8-9) Non performing Total Stage1 1,930,488 1,459,861 111,294 - 3,501,643 Gross carrying amount POCI Stage3 - 224 - 10,522 253 - 108,979 2,419 108,979 13,418 Stage2 215,519 238,767 109,696 - 563,982 Total 2,146,231 1,709,150 221,243 111,398 4,188,022 Stage1 11,870 15,929 1,562 - 29,361 Accumulated loss allowance POCI Stage3 Stage2 21,906 24,853 20,513 - 67,272 - - - 57,087 57,087 4 1,234 12 587 1,837 Total 33,780 42,016 22,087 57,674 155,557 Loan portfolio by countries An analysis of carrying amount of the non-qualified and qualified gross loan portfolio by country is as follows: Country Hungary Malta Serbia Romania France Bulgaria Russia Slovakia Other Loans, placements with other banks and repo receivables at amortised cost total Hungary Other Loans at fair value total Loans, placements with other banks and repo receivables total 31 December 2021 31 December 2020 Gross loan and placements with other banks portfolio Loss allowance Gross loan and placements with other banks portfolio Loss allowance 5,039,601 792,943 148,599 113,517 112,810 105,899 85,420 76,373 321,272 (130,588) (2,556) (2,048) (3,695) (321) (11,786) (961) (263) (10,901) 3,797,729 759,425 - 40,143 38,876 102,067 124 73,808 454,617 (99,295) (3,985) - (4,220) (8) (9,158) (5) (207) (12,903) 6,796,434 (163,119) 5,266,789 (129,781) 662,008 4 662,012 - - - 480,933 4 480,937 - - - 7,458,446 (163,119) 5,747,726 (129,781) 85 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.1. Credit risk [continued] Loan portfolio classification by economic activities Loans at amortised cost by economic activities Retail Agriculture, forestry and fishing Manufacturing, mining and quarrying and other industry Construction Wholesale and retail trade, transportation and storage accommodation and food service activities Information and communication Financial and insurance activities Real estate activities Professional, scientific, technical, administration Total 36.1.2. Collaterals 31 December 2021 Loss Gross allowance amount 63,843 4,976 7,249 4,919 18,490 1,136 9,444 13,143 3,109 472 28,776 155,557 708,355 177,202 320,990 172,441 657,273 23,072 211,292 305,100 136,876 72,027 1,403,394 4,188,022 31 December 2020 Loss Gross allowance amount 34,289 2,074 6,765 3,626 16,813 681 11,338 13,595 1,979 672 31,838 123,670 647,323 152,152 241,763 136,353 506,561 19,846 147,849 291,475 105,159 70,640 1,222,309 3,541,430 The collateral value held by the Bank by collateral types is as follows (total collateral value). The collaterals cover loans as well as off-balance sheet exposures. Types of collateral Mortgages Guarantees and warranties Deposit from this: Cash Securities Other Total 2021 1,602,913 1,554,921 229,041 80,598 148,443 387 3,387,262 2020 1,450,951 1,074,420 191,268 62,469 128,799 563 2,717,202 The collateral value held by the Bank by collateral types is as follows (to the extent of the exposures). The collaterals cover loans as well as off-balance sheet exposures. Types of collateral Mortgage Guarantees and warranties Deposit from this: Cash Securities Other Total 2021 753,222 1,196,385 106,620 12,756 93,864 305 2,056,532 2020 687,688 836,874 94,397 8,204 86,193 423 1,619,382 The coverage level of loan portfolio to the extent of the exposures increased from 31.86% to 30.41% as at 2021, while the coverage to the total collateral value decreased from 53.46% to 50.09%. 86 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.1. Credit risk [continued] The collateral value (total collateral value) held by the Bank related to impaired loan portfolio (Stage 3 and POCI loans) is as follows: For the year ended 31 December 2021 Retail consumer loans Mortgage loans Corporate loans Total For the year ended 31 December 2020 Retail consumer loans Mortgage loans Municipal loans Corporate loans Total 36.1.3. Restructured loans Consumer loans Mortgage loans Corporate loans SME loans Municipal loans Total Restructured portfolio definition Gross carrying amount Loss allowance Carrying amount Collateral value 33,690 11,101 77,606 122,397 (24,058) (1,770) (33,096) (58,924) 9,632 9,331 44,510 63,473 387 39,263 56,960 96,610 Gross carrying amount Loss allowance Carrying amount Collateral value 10,637 9,511 43 48,305 68,496 (6,772) (1,507) (16) (26,572) (34,867) 3,865 8,004 27 21,733 33,629 128 32,302 104 46,210 78,744 31 December 2021 31 December 2020 Gross portfolio Loss allowance Gross portfolio Loss allowance 118,094 36,413 193,571 33,388 - 381,466 (21,816) (266) (25,865) (4,487) - (52,434) 5,399 2,156 27,963 6,295 41 41,854 (2,575) (68) (8,283) (1,278) (16) (12,220) The forborne definition used by the Group is based on EU regulation 2015/227. Restructuring (forbearance) is a modification of the contract – initiated by either the client or the bank – that provides a concession or allowance towards the client in respect to the client’s current or future financial difficulties. The table of restructured loans contains exposures classified as performing forborne. An exposure is considered performing forborne if the conditions of the non-performing status are not met at the time of the restructuring, or the exposure fulfilled the requirements of the minimum one year cure period as non-performing forborne. The significant increase of the performing forborne loan volume is due to the forborne classification rules set by the MNB executive circulars of 21 January 2021 and 25 November 2021 for loans participating in phase 2 and phase 3 of the moratoria. The loan volume classified as performing forborne exclusively due to moratoria participation is HUF 290 billion. For the affected portfolios the earliest possible exit from the forborne status is 6 months after the exit from moratorium for retail and 2 years after the exit from moratorium for corporate exposures. 87 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.1. Credit risk [continued] Financial instruments by rating categories1 Held-for-trading securities as at 31 December 2021 Government bonds Other bonds Other non-interest bearing securities Hungarian government discounted Treasury Bills Shares Mortgage bonds Total Held-for-trading securities 31 December 2020 A1 A2 A3 B1 Aa3 Ba2 Baa1 Baa2 Baa3 N/A Total - 16 - - - - - 485 - - - - 35 49 59 - - 49 75 520 - - - - - 6 - 6 - - - - 19 - 19 3,634 - - - 2 - 3,636 - - - - 12 - 12 26,024 1,348 - 869 24 16 28,281 1,153 97 - - 83 - 1,333 - 158 1,134 - 310 100 1,702 30,827 2,088 1,134 869 599 116 35,633 Other non-interest bearing securities Government bonds Mortgage bonds Hungarian government discounted Treasury Bills Hungarian government interest bearing Treasury Bills Shares Other bonds Total A2 A3 B1 Ba2 Ba3 - - - - - 36 - 36 - - - - - 33 495 528 - - - - - 5 - 5 - - - - - 7 - 7 - 465 - - - - - 465 Baa1 - - - Baa2 Baa3 N/A Total - 1,964 1,964 - 6,031 - - - - 5,566 - - - - 45 - 45 - 1,233 - 1,233 - 36 998 - - - 257 426 7 582 2,075 - 7 7,833 2,803 11,729 Securities mandatorily measured at fair value through profit or loss as at 31 December 2021 Government bonds Mortgage bonds Total 1 Moody’s ratings N/A 25,126 2,935 28,061 Total 25,126 2,935 28,061 88 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.1. Credit risk [continued] Financial instruments by rating categories1 Securities mandatorily measured at fair value through profit or loss as at 31 December 2020 Government bonds Mortgage bonds Shares Total FVOCI securities as at 31 December 2021 Government bonds Mortgage bonds Other bonds Hungarian Treasury Bills Non-treading equity instruments Total FVOCI securities as at 31 December 2020 Mortgage bonds Government bonds Hungarian interest bearing Treasury Bills Shares Other bonds Total 1 Moody’s ratings N/A Total 23,818 5,342 2,776 31,936 23,818 5,342 2,776 31,936 A1 740 47,568 - - - 48,308 A2 2,471 - - - - 2,471 A3 - - 2,896 - - 2,896 Ba1 15,209 - 4,001 - - 19,210 Ba2 Baa1 Baa2 Baa3 N/A Total 6,784 - - - - 6,784 5,032 - - - - 5,032 182,439 156,027 1,622 63,115 - 403,203 66,201 - 37,606 - - 103,807 - 14,346 18,745 - 17,137 50,228 278,876 217,941 64,870 63,115 17,137 641,939 A2 63,577 - 226 7,391 - - - - - 4,815 63,803 12,206 A3 Ba1 Ba3 Baa2 Baa3 N/A - - 250,673 - - - - - 3,958 1,620 8,582 15,055 252,293 4,624 15,055 - - - 461,163 9,957 - 18,417 - - - 15,731 37,961 16,782 509,081 50,930 Total 332,667 488,459 9,957 15,731 65,136 911,950 89 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.1. Credit risk [continued] Financial instruments by rating categories1 Securities at amortised cost as at 31 December 2021 Aaa 185,261 - - 185,261 Government bonds Corporate bonds Mortgage bonds Total A1 9,002 - 12,992 21,994 - 8,210 - 8,210 A2 Ba1 18,871 - - 18,871 Ba2 12,663 - - 12,663 Baa1 25,986 7,343 - 33,329 Baa2 2,550,824 3,682 - - Baa3 55,256 14,780 - 70,036 N/A - 154,886 11,282 166,168 Total 2,857,863 188,901 24,274 3,071,038 Securities at amortised cost as at 31 December 2020 Baa3 1,941,855 Ba2 2,816 - 2,816 N/A Total - 1,944,671 63,021 1,956,434 48,442 2,007,692 14,579 48,442 Government bonds Mortgage bonds Total 1 Moody’s ratings 90 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.1. Credit risk [continued] An analysis of securities (held for trading, mandatorily FVTPL, FVOCI and amortised cost) in a country breakdown is as follows: 2021 2020 Country Gross carrying amount Loss allowance Hungary United States of America Portugal Spain Russia Romania Croatia Luxembourg Other Securities at amortised cost total Hungary Russia Croatia Serbia Spain Luxembourg Other FVOCI securities total Austria United States of America Other Non-trading equity instruments designated to measure at fair value through other comprehensive income Hungary Serbia Russia Germany Luxembourg Other Held for trading securities total Hungary Luxembourg United States of America Portugal Securities mandatorily measured at fair value through profit or loss Securities total Gross carrying amount 1,986,362 1,069 - - 2,757 - - 20,792 - 2,010,980 761,472 29,697 - - - 85,006 20,044 896,219 3,122 12,079 530 15,731 8,613 465 808 410 771 662 11,729 18,470 10,428 2,776 262 Loss allowance (3,194) (4) - - (3) - - (87) - (3,288) - - - - - - - - - - - - - - - - - - - - - - - 2,709,786 194,518 36,268 33,659 32,901 22,527 18,917 - 29,147 3,077,723 517,462 65,275 15,209 6,784 5,032 - 15,040 624,802 13,223 3,388 526 17,137 29,814 3,634 1,278 420 - 487 35,633 18,807 5,542 2,935 777 (5,823) (149) (177) (178) (46) (126) (46) - (140) (6,685) - - - - - - - - - - - - - - - - - - - - - - - 28,061 3,783,356 - (6,685) 31,936 2,966,595 - (3,288) 91 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.2. Maturity analysis of assets and liabilities and liquidity risk Liquidity risk is a measure of the extent to which the Bank may be required to raise funds to meet its commitments associated with financial instruments. The Bank maintains its liquidity profiles in accordance with regulations laid down by the NBH. The essential aspect of the liquidity risk management strategy is to identify all relevant systemic and idiosyncratic sources of liquidity risk and to measure the probability and severity of such events. During liquidity risk management the Bank considers the effect of liquidity risk events caused by reasons arising in the bank business line (deposit withdrawal), the national economy (exchange rate shock, yield curve shock) and the global financial system (capital market shock). In line with the Bank’s risk management policy liquidity risks are measured and managed on multiply hierarchy levels and applying integrated unified VaR based methodology. The basic requirement is that the Bank must keep high quality liquidity reserves by means it can fulfil all liabilities when they fall due without material additional costs. The liquidity reserves can be divided into two parts. There are separate decentralized liquid asset portfolios at subsidiary level and a centralized flexible liquidity pool at Group level. The reserves at subsidiary levels are held to cover the relevant shocks of the subsidiaries which may arise in local currencies (deposit withdrawal, local capital market shock, unexpected business expansion), while the centralized liquidity pool is held to cover the OTP Bank’s separate shocks (deposit-, yield curve- and exchange rate shocks) and all group member’s potential shocks that may arise in foreign currencies (deposit withdrawal, capital market shock). The recalculation of shocks is made at least quarterly while the recalibration of shock measurement models and review of the risk management methodology is an annual process. The monitoring of liquidity reserves for both centralized and decentralized liquid asset portfolio has been built into the daily reporting process. Due to the balance sheet adjustment process (deleveraging) experienced in the last few years, the liquidity reserves of the Bank increased significantly while the liquidity risk exposure has decreased considerably. Currently the (over)coverage of risk liquidity risk exposure by high quality liquid assets is at all-time record highs. There were no material changes in the liquidity risk management process for the year ended 31 December 2021. The following tables provide an analysis of assets and liabilities about the non-discounted cash flow into relevant maturity groupings based on the remaining period from the balance sheet date to the contractual maturity date. It is presented under the most prudent consideration of maturity dates where options or repayment schedules allow for early repayment possibilities. The contractual amounts disclosed in the maturity analyses are the contractual undiscounted cash flows like gross finance lease obligations (before deducting finance charges); prices specified in forward agreements to purchase financial assets for cash; net amounts for pay-floating/receive-fixed interest rate swaps for which net cash flows are exchanged; contractual amounts to be exchanged in a derivative financial instrument for which gross cash flows are exchanged; gross loan commitments. Such undiscounted cash flows differ from the amount included in the statement of financial position because the amount in that statement is based on discounted cash flows. When the amount payable is not fixed, the amount disclosed is determined by reference to the conditions existing at the end of the reporting period. For example, when the amount payable varies with changes in an index, the amount disclosed may be based on the level of the index at the end of the period. 92 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.2. Maturity analysis of assets and liabilities and liquidity risk [continued] As at 31 December 2021 Within one year and over 3 months Within 5 years and over one year Within 3 months Over 5 years Without maturity Cash, amounts due from banks and balances with the National Bank of Hungary 475,130 - - - Placements with other banks, net of allowance for placement losses Repo receivables 1,176,184 585,499 609,182 204,493 33,710 - - - - - - Financial assets at fair value through profit or loss Securities at fair value through other 908 3,709 19,804 10,259 29,794 Total 475,130 2,575,358 33,710 64,474 comprehensive income 16,329 58,446 358,805 199,854 17,138 650,572 Loans at amortised cost Loans mandatorily measured at fair value through profit or loss Securities at amortised cost Investments in subsidiaries, associates and other investments Other financial assets TOTAL ASSETS Amounts due to banks and deposits from the 1,327,629 873,169 1,377,885 726,016 16,516 15,575 121,104 553,569 28,514 308,921 1,792,058 938,902 - - - 4,304,699 706,764 3,068,395 - - 157,669 1,227 - - - 1,573,008 1,573,008 - - 158,896 3,232,589 1,846,546 4,278,838 2,633,093 1,619,940 13,611,006 National Bank of Hungary and other banks 297,779 138,418 506,233 108,773 Deposits from customers Repo liabilities Liabilities from issued securities Subordinated bonds and loans Financial liabilities at fair value through profit or loss Leasing liabilities Other financial liabilities TOTAL LIABILITIES 9,844,911 57,851 33,112 12,658 49,726 - 36,854 - 5,258 2,841 531 1,078 193,315 6,812 8,812 2,065 - - 269,698 1,253 3,791 5,337 4,422 13,927 9,356 3,707 876 - 10,395,439 213,462 599,665 410,828 - - - - - - - - - 1,051,203 9,948,532 86,580 22,947 272,539 20,133 17,932 199,528 11,619,394 NET POSITION1 Receivables from derivative financial instruments -7,162,850 1,633,084 3,679,173 2,222,265 1,619,940 1,991,612 classified as held for trading 4,573,312 1,957,498 339,869 135,728 Liabilities from derivative financial instruments classified as held for trading (4,581,312) (1,951,622) (328,607) (132,345) Net position of derivative financial instruments classified as held for trading (8,000) 5,876 11,262 3,383 Receivables from derivative financial instruments designated as hedge accounting 5,693 37,436 580,280 16,195 Liabilities from derivative financial instruments designated as hedge accounting (7,658) (46,925) (595,692) (16,417) Net position of derivative financial instruments designated as hedging accounting (1,965) (9,489) (15,412) (222) Net position of derivative financial instruments total (9,965) (3,613) (4,150) 3,161 Commitments to extend credit Confirmed letters of credit Factoring loan commitment Bank guarantees Off-balance sheet commitments 1,677,030 30,381 423,673 133,460 2,264,544 - - - - - - - - - 189,747 189,747 247,886 247,886 936,824 936,824 - - - - - - - - - - - - 7,006,407 (6,993,886) 12,521 639,604 (666,692) (27,088) (14,567) 1,677,030 30,381 423,673 1,507,917 3,639,001 1 Analysis for net position of assets and liabilities are calculated in accordance with IFRS 7, therefore certain financial instruments are presented in the earliest period in which the Bank could be required to pay. On-demand deposits are presented in the earliest (within 3 month) period category, however based on Management’s discretion the Bank has appropriate liquidity reserves as maintenance and management of liquidity risk. 93 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.2. Maturity analysis of assets and liabilities and liquidity risk [continued] comprehensive income 14,453 111,117 402,797 305,507 15,731 849,605 National Bank of Hungary and other banks 152,633 62,871 492,291 Deposits from customers 7,716,000 131,890 30,628 As at 31 December 2020 Cash, amounts due from banks and balances with the National Bank of Hungary Placements with other banks, net of allowance for placement losses Repo receivables Financial assets at fair value through profit or loss Securities at fair value through other Loans at amortised cost Loans mandatorily measured at fair value through profit or loss Securities at amortised cost Investment properties Investments in subsidiaries, associates and other investments Other financial assets TOTAL ASSETS Amounts due to banks and deposits from the Repo liabilities Liabilities from issued securities Subordinated bonds and loans Financial liabilities at fair value through profit or loss Leasing liabilities Other financial liabilities TOTAL LIABILITIES NET POSITION1 Receivables from derivative financial instruments classified as held for trading Liabilities from derivative financial instruments classified as held for trading Net position of derivative financial instruments classified as held for trading Receivables from derivative financial instruments designated as hedge accounting Liabilities from derivative financial instruments designated as hedge accounting Net position of derivative financial instruments designated as hedging accounting Net position of derivative financial instruments total Within 3 months Within one year and over 3 months Within 5 years and over one year Over 5 years Without maturity 579,120 578,907 183,656 1,401 - - - 656,143 273,834 33,027 - - - 1,151 3,576 9,042 22,121 37,291 1,134,542 728,410 1,132,083 645,980 11,674 85,000 383,775 37,950 1,354,479 559,171 - - - - - - 1,936 1,936 - 1,548,972 1,548,972 - - 135,109 133,832 1,277 2,660,496 1,547,722 3,251,769 1,936,502 1,588,760 10,985,249 14,850 19,735 - - - 636 2,972 3,159 1,073 161,652 73,574 14,115 - 487 - 109,612 11,835 15,256 - 1,421 3,350 4,877 - 302,182 6,115 7,213 1,417 15,207 2,470 - 160,910 3,156,604 552,687 270,557 (88,685) (3,774,109) (490,468) (226,529) 72,225 (617,505) 62,219 44,028 183 7,286 168,912 173,109 (40,485) (114,512) (472,245) (88,720) (40,302) (107,226) (303,333) 84,389 31,923 (724,731) (241,114) 128,417 Total 579,120 1,541,911 183,656 - - - - - - 3,641,015 495,299 1,971,335 - - - - - - - - - 781,369 7,892,633 109,612 28,214 305,154 25,902 14,106 167,946 9,324,936 - - - - - - - - - - - - 4,140,758 (4,579,791) (439,033) 349,490 (715,962) (366,472) (805,505) 1,441,060 5,039 305,269 1,419,543 3,170,911 8,038,125 216,244 662,532 408,035 (5,377,629) 1,331,478 2,589,237 1,528,467 1,588,760 1,660,313 Commitments to extend credit Confirmed letters of credit Factoring loan commitment Bank guarantees Off-balance sheet commitments 1,441,060 5,039 305,269 115,485 1,866,853 - - - - - - - - - 136,569 136,569 305,714 305,714 861,775 861,775 1 Analysis for net position of assets and liabilities are calculated in accordance with IFRS 7, therefore certain financial instruments are presented in the earliest period in which the Bank could be required to pay. On-demand deposits are presented in the earliest (within 3 month) period category, however based on Management’s discretion the Bank has appropriate liquidity reserves as maintenance and management of liquidity risk. 94 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.3. Net foreign currency position and foreign currency risk As at 31 December 2021 Assets Liabilities Derivative financial instruments Net position As at 31 December 2020 Assets Liabilities Derivative financial instruments Net position EUR USD 486,225 2,448,729 (296,903) (2,121,543) (321,377) (197,080) 5,809 (7,758) CHF 14,989 (42,590) 27,953 352 Total Others 290,504 3,240,447 (59,350) (2,520,386) (719,593) (229,089) 468 2,065 USD EUR 1,929,758 174,993 (291,985) (1,623,605) (350,237) 116,987 (44,084) (5) CHF 17,509 (35,701) 18,614 422 Others Total 2,374,137 251,877 (105,346) (2,056,637) (360,844) (146,208) (43,344) 323 The table above provides an analysis of the Bank’s main foreign currency exposures. The remaining foreign currencies are shown within ‘Others’. The Bank monitors its foreign exchange position for compliance with the regulatory requirements of the NBH and its own limit system established in respect of limits on open positions. The measurement of the Bank’s open its currency position involves monitoring the VaR limit on the foreign exchange exposure of the Bank. In the table Derivative financial instruments are stated at fair value. 36.4. Interest rate risk management Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest rates. The length of time for which the rate of interest is fixed on a financial instrument, therefore, indicates to what extent it is exposed to interest rate risk. The majority of the Bank's interest bearing assets and liabilities are structured to match either short-term assets and short-term liabilities, or long-term assets and liabilities with repricing opportunities within one year, or long- term assets and corresponding liabilities where repricing is performed simultaneously. In addition, the significant spread existing between the different types of interest bearing assets and liabilities enables the Bank to benefit from a high level of flexibility in adjusting for its interest rate matching and interest rate risk exposure. The following table presents the interest repricing dates of the Bank. Variable yield assets and liabilities have been reported in accordance with their next repricing date. Fixed income assets and liabilities have been reported in accordance with their maturity. 95 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.4. Interest rate risk management [continued] As at 31 December 2021 ASSETS Cash, amounts due from banks and balances with the National Bank of Hungary fixed interest non-interest-bearing Placements with other banks fixed interest variable interest non-interest-bearing Repo receivables fixed interest Securities held for trading fixed interest variable interest non-interest-bearing Securities mandatorily measured at fair value through profit or loss non-interest-bearing Securities at fair value through other comprehensive income fixed interest variable interest non-interest-bearing within 1 month within 3 months over 1 month within 1 year over 3 months within 2 years over 1 year over 2 years Non-interest -bearing Total HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency Total 31,228 31,228 - 1,353,059 774,315 578,744 - 33,638 33,638 1,237 32 1,205 - - - 50,774 2,437 48,337 - 289,008 289,008 - - - - 127,852 148,091 34,420 449 93,432 147,642 - - - - - - - - - - - - 165,940 31,821 156,755 2,446 9,185 29,375 - - - - - - - - - - - - - - - - 664 487 177 - - - 22,420 6,897 15,523 - - 2,481 - 2,208 273 - - - - - - - - 65,666 - 57,092 - 8,574 - - - - - - - - 79,243 76,105 79,243 76,105 - - - - - - - - 1,242 1,242 - - 360 360 - - - - - - - - 29,677 499,636 29,677 499,636 - - - - - - - - 3,508 3,508 - - 22,931 22,931 - - - 133,053 - - - 133,053 21,655 - 21,655 164,281 31,228 133,053 27,178 24,416 - 27,178 - - - 24,416 - - - - 1,478 1,478 - - 1,200 - - 1,200 4,194 2,133,128 - 1,352,951 755,761 - 24,416 4,194 33,638 - 33,638 - 532 - - 532 28,873 26,018 1,655 1,200 310,663 289,008 21,655 434,084 327,273 102,617 4,194 - - 6,760 6,228 - 532 474,944 320,236 154,708 2,567,212 1,680,224 858,378 28,610 33,638 33,638 35,633 32,246 1,655 1,732 - - - - - - - - - 18,807 - 18,807 9,254 9,254 18,807 18,807 9,254 9,254 28,061 28,061 432 40,185 432 40,185 - - - - 39,228 289,634 39,228 289,634 - - - - 116,463 116,463 - - 528 - - 528 16,609 - - 16,609 469,207 396,245 72,434 528 172,732 156,123 - 16,609 641,939 552,368 72,434 17,137 96 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.4. Interest rate risk management [continued] As at 31 December 2021 ASSETS [continued] Loans measured at amortised cost fixed interest variable interest non-interest-bearing - Loans mandatorily measured at fair value through profit or loss variable interest Securities at amortised cost fixed interest variable interest Other financial assets non-interest-bearing Derivative financial instruments fixed interest variable interest non-interest-bearing 19,371 19,371 - - - - - 1,507,306 1,400,852 106,454 - within 1 month within 3 months over 1 month within 1 year over 3 months within 2 years over 1 year over 2 years Non-interest -bearing Total Total HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency 639,477 339,611 424,299 1,161,425 53,018 126,963 185,264 10,912 829,049 89,993 121,277 51,177 2,252,384 1,780,081 4,032,465 295 286 894 9,746 13,723 57,602 183,818 10,912 819,629 89,993 639,182 339,325 423,405 1,151,679 39,295 69,361 1,446 - - - 7,609 - 7,609 - - - 136 136 - - - - - - - - - 829 829 - - - - 755 755 - - - - 9,420 - 640,921 640,921 4,811 304,051 1,069 215,615 - 304,051 1,069 215,615 343 2,044,502 343 2,044,502 4,811 - - - - - - - - - - - - - - - - - - - - 1,018,359 168,539 1,186,898 - 1,112,748 1,560,365 2,673,113 - - 121,277 51,177 121,277 51,177 172,454 - - 493,038 493,038 - - - - - - - - 662,012 662,012 - - 662,012 662,012 - 2,564,168 506,870 3,071,038 - 2,564,168 494,450 3,058,618 - - 12,420 12,420 - 133,896 - 133,896 19,852 133,896 19,852 133,896 19,852 19,852 153,748 153,748 1,256,601 395,623 936,093 675,976 863,692 10,760 57,437 183,617 54,913 181,095 675,035 2,954,377 3,843,771 6,798,148 1,133,429 188,144 551,308 570,718 861,983 10,760 57,378 183,617 54,913 123,172 207,479 384,785 105,258 - - - - 1,709 - - - 59 - - - - - - 2,354,091 2,659,011 5,013,102 - 419,191 509,725 928,916 - - 181,095 675,035 181,095 675,035 856,130 97 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.4. Interest rate risk management [continued] As at 31 December 2021 LIABILITIES Amounts due to banks and deposits with the National Bank of Hungary and other banks fixed interest variable interest non-interest-bearing Financial liabilities designated to measure at fair value through profit or loss variable interest Repo liabilities fixed interest Deposits from customers fixed interest variable interest non-interest-bearing Liabilities from issued securities fixed interest variable interest Subordinated bonds and loans variable interest Leasing liabilities fixed interest variable interest Other financial liabilities non-interest-bearing Derivative financial instruments fixed interest variable interest non-interest-bearing within 1 month within 3 months over 1 month within 1 year over 3 months within 2 years over 1 year over 2 years Non-interest -bearing Total HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency Total 151,809 106,028 45,781 - 95,432 22,624 72,808 - 12,344 12,344 - - 10,405 52,872 10,405 52,872 - - - - 577 224,479 577 224,479 - - - - 1,140 1,140 - - 471,620 471,620 - - 20,133 20,133 49,726 49,726 7,628,098 496,069 7,132,029 - 865 212 653 - - 192 108 84 - - - - 36,854 36,854 - - - - 2,039,650 197,780 131,836 197,780 - - 1,907,814 - - - - - - - - - 18,468 30,063 18,468 30,063 - - - - - - - 8,514 - 8,514 - - 380 25 355 - - - - 236 72 164 - - - - - 85,551 85,551 522 34 488 - - 4,696 4,147 549 - - 1,004 538 466 - - - - - - 11,066 11,066 - - - - - 186,225 186,225 2,535 123 2,412 - - - - - - - - - - 1,676 1,676 - - - 1,362 717 645 - - - - - - - - - - - - - - - 1,321 144 1,177 - - - - - - - - - - 6,402 6,402 - - - 4,838 2,118 2,720 - - - 29,684 - - - - - 29,684 - - - - - - - - - 12,948 - - - - - 12,948 - - - - - - - - 5,542 485 5,057 - - - - - - 156,012 - 156,012 841 - - 841 942,808 867,343 45,781 29,684 108,395 34,746 72,808 841 1,051,203 902,089 118,589 30,525 - - - - 20,133 20,133 49,726 49,726 10,459 7,868,889 - 723,912 - 7,132,029 12,948 10,459 - - - - - - - - 38,499 38,499 22,153 12,437 9,716 - - 7,632 3,553 4,079 156,012 156,012 - - 36,854 36,854 2,079,643 161,370 1,907,814 10,459 20,133 20,133 86,580 86,580 9,948,532 885,282 9,039,843 23,407 - - - 271,776 271,776 10,300 811 9,489 38,499 38,499 22,153 12,437 9,716 271,776 271,776 17,932 4,364 13,568 194,511 194,511 840,797 728,548 112,249 - 2,004,808 220,053 1,814,645 151,791 68,262 - 190,163 - 1,083,211 709,776 579,843 525,835 503,368 183,941 - - 870,457 12,937 868,689 12,360 577 - 1,768 - 54,862 54,789 73 - 96,350 96,350 - - 73,700 411,167 - 73,700 - - - 411,167 430,486 2,291,080 - 1,514,884 365,029 - 411,167 430,486 4,517,524 3,391,666 695,372 430,486 6,808,604 4,906,550 1,060,401 841,653 NET POSITION (5,055,530) (2,156,443) 552,306 1,070,112 335,431 1,781 288,590 83,782 3,931,080 703,821 4,461 318,023 56,338 21,076 77,414 98 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.4. Interest rate risk management [continued] As at 31 December 2020 within 1 month within 3 months over 1 month within 1 year over 3 months within 2 years over 1 year over 2 years Non-interest -bearing Total Total ASSETS HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency Cash, amounts due from banks and balances with the National Bank of Hungary fixed interest non-interest-bearing Placements with other banks fixed interest variable interest non-interest-bearing Repo receivables fixed interest Securities held for trading fixed interest variable interest non-interest-bearing Securities mandatorily measured at fair value through profit or loss variable interest non-interest-bearing Securities at fair value through 144,030 144,030 - 783,024 220,175 562,849 - 183,364 183,364 1,260 354 906 - - - - 239,960 239,960 - - - - - - - - - - - - - - - - - - - - - - - 168,435 26,695 312,465 266,655 579,120 - - - 144,030 239,960 383,990 - 168,435 26,695 168,435 26,695 195,130 80,732 177,155 189,231 43,239 64,447 23,378 3,629 122,035 27,080 19,194 2,740 1,168,025 367,859 1,535,884 17,719 15,106 179,174 13,934 64,447 23,378 3,629 122,035 27,080 63,013 162,049 10,057 29,305 - - - 526 - 526 - 5,342 5,342 - - - - 287 287 - - - - - - - - - - - - - - - - - - - - - - - - - - - 567 567 608 608 465 1,250 465 1,250 298 298 2,983 2,983 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 394,628 292,049 686,677 - 754,203 73,070 827,273 - - 19,194 2,740 19,194 2,740 21,934 - - - - - 183,364 - 183,364 1,095 1,926 464 - - - - 8,314 5,482 906 1,926 464 1,926 1,095 - - - - 3,415 2,425 526 464 183,364 183,364 11,729 7,907 1,432 2,390 - 18,470 8,124 18,470 13,466 31,936 - - - - - 18,470 8,124 18,470 5,342 8,124 5,342 26,594 other comprehensive income 79,240 fixed interest variable interest non-interest-bearing 600 78,640 - 5,717 16,218 5,717 673 - 15,545 - - - 111,153 - 100,003 - 11,150 - - 10,223 3,533 19,578 551,328 10,223 3,533 19,578 551,328 - - - - - - - - 99,229 99,229 - - 528 15,203 762,000 149,950 911,950 - - - 656,137 134,747 790,884 - 105,335 - 105,335 528 15,203 528 15,203 15,731 99 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.4. Interest rate risk management [continued] As at 31 December 2020 ASSETS [continued] within 1 month within 3 months over 1 month within 1 year over 3 months within 2 years over 1 year over 2 years Non-interest - bearing Total Total HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency Loans measured at amortised cost 555,311 252,682 391,295 1,112,003 54,263 66,998 45,539 15,984 709,929 56,172 125,861 31,723 1,882,198 1,535,562 3,417,760 2,769 8,967 1,285 74,088 11,731 8,970 33,604 15,984 700,585 56,172 fixed interest variable interest non-interest-bearing Loans mandatorily measured at fair value through profit or loss variable interest Securities at amortised cost fixed interest Other financial assets non-interest-bearing 552,542 243,715 390,010 1,037,915 42,532 58,028 11,935 - 24,870 24,870 - - - - - - - - - - - - 59 59 - - - - - - - - 334 334 1,065 38,112 1,065 38,112 - - - - - - - - 368 368 - 393,442 - 393,442 - - - - Derivative financial instruments 936,413 706,442 880,140 378,405 557,115 419,548 26,738 fixed interest variable interest non-interest-bearing 920,404 16,010 - 567,652 658,754 183,228 559,258 387,941 26,799 138,790 221,387 195,178 (2,143) 31,607 (61) - - - - - - - - - - 9,344 - 455,306 455,306 - - - 1,092 1,551,614 1,092 1,551,614 22,367 22,367 - - - 749,974 164,181 914,155 - 1,006,363 1,339,658 2,346,021 - 125,861 31,723 125,861 31,723 157,584 - - - - - - 480,937 480,937 - - 480,937 480,937 - 1,983,168 24,524 2,007,692 - 1,983,168 24,524 2,007,692 - - 7,333 7,333 - - - - 39,765 40,012 (247) - - 112,055 15,124 112,055 15,124 127,179 - 112,055 15,124 112,055 15,124 127,179 101,640 733,551 248,095 3,173,724 1,861,463 5,035,187 101,640 - - - - 2,205,227 1,247,793 3,453,020 - 234,945 365,575 600,520 - 733,551 248,095 733,551 248,095 981,646 100 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.4. Interest rate risk management [continued] As at 31 December 2020 LIABILITIES Amounts due to banks and deposits with the National Bank of Hungary and other banks fixed interest variable interest non-interest-bearing Financial liabilities designated to measure at fair value through profit or loss fixed interest variable interest Repo liabilities variable interest Deposits from customers fixed interest variable interest non-interest-bearing Liabilities from issued securities fixed interest variable interest Subordinated bonds and loans variable interest Leasing liabilities fixed interest variable interest Other financial liabilities non-interest-bearing Derivative financial instruments fixed interest variable interest non-interest-bearing within 1 month within 3 months over 1 month within 1 year over 3 months within 2 years over 1 year over 2 years Non-interest -bearing Total HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency HUF foreign currency Total 106,883 36,937 69,946 - 25,902 79 25,823 - - 6,211,090 325,464 5,885,626 - 3,090 213 2,877 - - 149 103 46 - - 1,264,723 1,111,371 153,351 - 86,885 15,136 71,749 - 12,008 12,008 - - 40,429 8,569 31,860 - 3,363 3,363 - - 7,491 39,270 1,490 39,270 - 6,001 - - - - - - 467,479 467,479 - - - - - - 1,678 - - 1,678 1,491 630,681 - 559,057 69,946 - 1,678 1,491 136,296 25,195 109,610 1,491 766,977 584,252 179,556 3,169 - - - - - - - - - - 1,404,362 133,886 116,385 133,886 - - 11,691 - 11,691 - - 260 69 191 - - 383,260 1,035,481 376,748 648,762 6,512 386,719 - 1,287,977 - 221 - 221 - - 187 11 176 - - - - - - - - - - - - - 15,540 101,496 15,540 101,496 - - - - 4,502 414 3,500 - 1,002 414 - 120,153 - 120,153 1,267 477 528 40 739 437 - - - - 206,796 479,506 188,722 481,293 (1,787) - 18,074 - - - - 109,612 109,612 13,367 13,367 - - 721 - 721 184,090 184,090 2,082 170 1,912 - - 492,403 469,699 22,704 - - - - - - 227 227 - - 4,098 4,098 - - - 1,333 707 626 - - 9,453 9,514 (61) - - - - - - - - - - - - - - - 1,233 65 1,168 - - 24,907 24,907 - - - - - - - - - - - 3,698 3,698 - - - 5,747 2,796 2,951 - - 49,757 50,004 (247) - - - - - - - - - - - - 10,782 - - - - - 10,782 - - - - - - - - - - - 1,371 - 37 - 1,334 - 138,508 - 138,508 89,983 724,945 - 89,802 - 181 - 724,945 - - - - - 25,902 79 25,823 - - 4,985 6,457,481 - 561,073 - 5,885,626 10,782 27,079 11,509 15,570 - - 8,756 4,203 4,553 29,032 138,508 29,032 138,508 253,430 3,563,865 - 2,300,945 - 537,975 253,430 724,945 4,985 - - - - - - - - 145,292 - - - 109,612 109,612 25,902 79 25,823 109,612 109,612 1,438,254 7,895,735 706,365 1,287,977 7,173,603 15,767 28,435 11,509 16,926 304,243 304,243 14,106 4,526 9,580 167,540 167,540 1,450,778 5,014,643 1,149,878 3,450,822 585,446 978,374 4,985 1,356 - 1,356 304,243 304,243 5,350 323 5,027 29,032 29,032 47,471 253,430 NET POSITION (4,904,324) (583,514) 271,828 1,297,462 214,690 (248,085) 439,867 21,774 2,906,279 216,230 304,108 59,231 (767,552) 763,097 (4,455) 101 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.5. Market risk The Bank takes on exposure to market risks. Market risks arise from open positions in interest rate, currency and equity products, all of which are exposed to general and specific market movements. The Bank applies a Value- at-Risk ("VaR") methodology to estimate the market risk of positions held and the maximum losses expected, based upon a number of assumptions for various changes in market conditions. The Management Board sets limits on the value of risk that may be accepted, which is monitored on a daily basis. (Analysis of liquidity risk, foreign currency risk and interest rate risk is detailed in Notes 36.2, 36.3 and 36.4 respectively.) 36.5.1. Market risk sensitivity analysis The VaR risk measure estimates the potential loss in pre-tax profit over a given holding period for a specified confidence level. The VaR methodology is a statistically defined, probability-based approach that takes into account market volatilities as well as risk diversification by recognizing offsetting positions and correlations between products and markets. Risks can be measured consistently across all markets and products, and risk measures can be aggregated to arrive at a single risk number. The one-day 99% VaR number used by the Group reflects the 99% probability that the daily loss will not exceed the reported VaR. VaR methodologies are employed to calculate daily risk numbers include the historical and variance-covariance approach. The diversification effect has not been validated among the various market risk types when capital calculation happens. The VaR of the trading portfolio can be summarized as follows (in HUF mn): Historical VaR (99%, one-day) by risk type Average 2021 2020 Foreign exchange Interest rate Equity instruments Diversification Total VaR exposure 1,560 135 20 - 1,715 1,507 77 141 - 1,725 While VaR captures the OTP’s daily exposure to currency and interest rate risk, sensitivity analysis evaluates the impact of a reasonably possible change in interest or foreign currency rates over a year. The longer time frame of sensitivity analysis complements VaR and helps the OTP to assess its market risk exposures. Details of sensitivity analysis for foreign currency risk are set out in Note 36.5.2., for interest rate risk in Note 36.5.3., and for equity price sensitivity analysis in Note 36.5.4. 102 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 35: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.5. Market risk [continued] 36.5.2. Foreign currency sensitivity analysis The Bank changed its methodology of foreign currency sensitivity analysis and has been using a historical VaR calculation since 31 March 2021. The former Monte Carlo simulation represented the Group’s sensitivity to the rise and fall in the HUF exchange rate against EUR, over a 3 months period. The sensitivity analysis included only outstanding foreign currency denominated monetary items as strategic open positions related to foreign activities. In line with the Management's intention, the former EUR -310 million strategic open position was fully closed as of 31 March 2021. Since the closing of the strategic open position, the Group has been using a historical VaR calculation with 1 day holding period. The analysis includes the same net open foreign exchange position as used under the internal capital adequacy assessment process (ICAAP). The VaR methodology is a statistically defined, probability-based approach that takes into account market volatilities as well as risk diversification by recognizing offsetting positions and correlations between products and markets. Additionally, the Bank determines the foreign currency risk of assets evaluated through the Other Comprehensive Income (OCI), which includes securities valuated on FVOCI and the foreign currency translation reserves. The following table shows the result of the foreign currency sensitivity analysis. Numbers below indicate the expected daily profit or loss of the portfolio beside the given confidence level. Probability 1% 5% 25% 50% 25% 5% 1% Effects to the P&L in 3 months period 2020 2021 In HUF billion In HUF billion (178) (119) (39) 2 49 126 187 (274) (151) (44) 4 57 157 197 Notes: (1) Historical VaR simulation is based on the empirical distribution of the historical exchange rate movements between 31 December 2020 and 31 December 2021. 103 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 35: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.5. Market risk [continued] 36.5.3. Interest rate sensitivity analysis The sensitivity analyses below have been determined based on the exposure to interest rates for both derivatives and non-derivative instruments at the balance sheet date. The analysis is prepared assuming the amount of assets and liabilities outstanding at the balance sheet date was outstanding for the whole year. The analysis was prepared by assuming only adverse interest rate changes. The main assumptions were as follows: ● Floating rate assets and liabilities were repriced to the modelled benchmark yields at the repricing dates assuming the unchanged margin compared to the last repricing. ● Fixed rate assets and liabilities were repriced at the contractual maturity date. ● As for liabilities with discretionary repricing feature by the Bank were assumed to be repriced with two-weeks delay, assuming no change in the margin compared to the last repricing date. ● Deposits with an interest rate lower than 0.3% even at high market rates were assumed to be unchanged for the whole period. The sensitivity of interest income to changes in BUBOR was analysed by assuming two interest rate path scenarios: (1) HUF base rate and BUBOR increases gradually by 100 bps over the next year (probable scenario) (2) HUF base rate and BUBOR decreases gradually by 50 bps over the next year (alternative scenario) The net interest income in a one year period after 1 January 2022 would be increased by HUF 1,238 million (probable scenario) and decreased by HUF 919 million (alternative scenario) as a result of these simulation. The same simulation indicated HUF 1,476 million (probable scenario) and HUF 6,420 million (alternative scenario) decrease in the Net interest income in a one year period after 1 January 2021. This effect is counterbalanced by capital gains HUF -619 million (or probable scenario), HUF 322 million (for alternative scenario) as at 31 December 2021 and (HUF 584 million for probable scenario, HUF 2,329 million for alternative scenario as at 31 December 2020) on the government bond portfolio held for hedging (economic). Furthermore, the effects of an instant 10bps parallel shift of the HUF, EUR and USD yield-curves on net interest income over a one-year period and on the market value of the hedge government bond portfolio booked against capital was analysed. The results can be summarized as follows (in HUF million): 2021 2020 Description Effects to the net interest income (one-year period) HUF (0.1%) parallel shift HUF 0.1% parallel shift EUR (0.1%) parallel shift USD (0.1%) parallel shift Total (25) (40) (483) (23) (546) Effects to the net interest income (one- year period) 64 (64) - - (64) Effects to the net interest income (one-year period) (1,991) 1,715 (676) (165) (2,832) Effects to the net interest income (one-year period) 389 389 - - 389 104 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.5. Market risk [continued] 36.5.4. Equity price sensitivity analysis The following table shows the effect of the equity price sensitivity. The Bank uses VaR calculation with 1 day holding period and a 99% confidence level. The VaR methodology is a statistically defined, probability-based approach that takes into account market volatilities as well as risk diversification by recognizing offsetting positions and correlations between products and markets. The daily loss will not exceed the reported VaR number with 99% of probability. The stress test assumes the largest price movement of the last year and calculates with it as the adverse direction. These scenarios show the loss of the portfolio when all prices change with the maximum amount of the last year. Description VaR (99%, one day, million HUF) Stress test (million HUF) 2021 12 (21) 2020 141 (233) 36.6. Capital management Capital management The primary objective of the capital management of the Bank is to ensure the prudent operation, the entire compliance with the prescriptions of the regulator for a persistent business operation and maximising the shareholder value, accompanied by an optimal financing structure. The capital management of the Bank includes the management and evaluation of the shareholders` equity available for hedging risks, other types of funds to be recorded in the equity and all material risks to be covered by the capital. The basis of the capital management of the Bank in the short run is the continuous monitoring of its capital position, in the long run the strategic and the business planning, which includes the monitoring and forecast of the capital position of the Bank. The Bank maintains the capital adequacy required by the regulatory bodies and the planned risk taking mainly by means of ensuring and developing its profitability. In case the planned risk level of the Bank exceeded its Core and Supplementary capital, the Bank ensures the prudent operation by occasional measures. A further tool in the capital management of the Bank is the dividend policy, and the transactions performed with the treasury shares. Capital adequacy The Capital Requirements Directive package (CRDIV/CRR) transposes the global standards on banking regulation (commonly known as the Basel III agreement) into the EU legal framework. The rules are applied from 1 January 2014. They set stronger prudential requirements for institutions, requiring them to keep sufficient capital reserves and liquidity. This framework makes institutions in the EU more solid and strengthens their capacity to adequately manage the risks linked to their activities, and absorb any losses they may incur in doing business. The Bank has entirely complied with the regulatory capital requirements in 2021 as well as in 2020. The Bank’s capital adequacy calculation is in line with IFRS and based on Basel III as at 31 December 2021 and 2020. The Bank uses the standard method for determining the regulatory capital requirements of the credit risk and market risk while in case of the operational risk the Advanced Measurement Approach (AMA). 105 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 36: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 36.6. Capital management [continued] Capital adequacy [continued]1 The calculation of the Capital Adequacy ratio as at 31 December 2021 and 2020 is as follows: Core capital (Tier 1) Primary core capital (CET1) Supplementary capital (Tier 2) Regulatory capital Credit risk capital requirement Market risk capital requirement Operational risk capital requirement Total eligible regulatory capital Surplus capital CET 1 ratio Capital adequacy ratio Basel III: Common equity Tier 1 capital (CET1): 2021 Basel III 2020 Basel III 1,747,480 1,747,480 264,396 1,598,295 1,598,295 295,795 2,011,876 1,894,090 603,253 7,519 31,629 642,401 1,369,475 21.76% 25.05% 526,283 11,550 27,597 565,430 1,328,660 22.61% 26.80% Issued capital, Capital reserve, useable part of Tied-up reserve, General reserve, Profit reserve, Profit for the year, Treasury shares, Intangible assets, deductions due to investments, adjustments due to temporary disposals Tier 2 capital: Subsidiary loan capital, Subordinated loan capital, deductions due to repurchased loan capital and Subordinated loan capital issued by the OTP Bank, adjustments due to temporary disposals. 1 The dividend amount planned to pay out after the profit of financial year 2019, 2020 and 2021 is also deducted from CET 1 capital. 106 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 37: TRANSFER AND RECLASSIFICATION OF FINANCIAL INSTRUMENTS (in HUF mn) Reclassification from securities held-for-trading to securities measured at fair value through other comprehensive income As at 31 December 2021 Date of reclassification Reason Type of securities Nominal value at reclassification Fair value at the date of reclassification EIR at the date of reclassification Interest income 1 September 2018 Change in business model retail hungarian government bonds 1,069 1,087 2%-3% 38 During the year 2018, securities issued by the Hungarian Government with the nominal value of HUF 66.506 million were transferred from the trading portfolio to the securities measured at fair value through other comprehensive income, of which HUF 1,087 million remaining amount was presented as at 31 December 2021. The Bank has previously held retail government bonds in the portfolio measured at fair value through other comprehensive income. During 2018 the Bank changed the business model of the retail government bonds to manage all on the basis of a single business model aimed at collecting the future contractual cash flows and/or selling them. In 2018, the terms and conditions of sale of retail government bonds and the pricing environment have changed significantly, as a result of which the Bank is no longer able to maintain its sole trading intent with these securities that the Bank applied earlier. Furthermore there is an option-agreement between the Bank and the Government Debt Management Agency (“GDMA”) that GDMA will buy back this portfolio therefore it has been reclassified. Financial assets transferred but not derecognised 2021 2020 Transferred assets Associated liabilities Transferred assets Associated liabilities Carrying amount Financial assets at amortised cost Debt securities Total: Total: 88,181 88,181 86,580 86,580 125,244 125,244 109,612 109,612 88,181 86,580 125,244 109,612 As at 31 December 2021 and 2020, the Bank had obligation from repurchase agreements about HUF 87 billion and HUF 110 billion respectively. Securities sold temporarily under repurchase agreements will continue to be recognized in the Statement of Financial Position of the Bank in the appropriate securities category. The related liability is measured at amortized cost in the Statement of Financial Position as ’Amounts due to banks and deposits from the National Bank of Hungary and other banks’. Under these repurchase agreements only Hungarian and foreign government bonds were transferred. 107 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 38: OFF-BALANCE SHEET ITEMS (in HUF mn) In the normal course of business, the Bank becomes a party to various financial transactions that are not reflected on the statement of financial position and are referred to as off-balance sheet financial instruments. The following represents notional amounts of these off-balance sheet financial instruments, unless stated otherwise. Contingent liabilities and commitments Loan commitments Guarantees arising from banking activities from this: Payment undertaking liabilities (related to issue of mortgage bonds) of OTP Mortgage Bank Factoring loan commitments Confirmed letters of credit Contingent liabilities and commitments total in accordance with IFRS 9 Legal disputes (disputed value) Contingent liabilities related to payments from shares in venture capital fund Other Contingent liabilities and commitments total in accordance with IAS 37 Total Legal disputes 2021 2020 1,677,030 1,507,917 746,476 423,673 30,381 3,639,001 3,204 47,550 408 51,162 3,690,163 1,441,060 1,419,543 683,736 305,269 5,039 3,170,911 4,720 32,712 602 38,034 3,208,945 At the balance sheet date the Bank was involved in various claims and legal proceedings of a nature considered normal to its business. The level of these claims and legal proceedings corresponds to the level of claims and legal proceedings in previous years. The Bank believes that the various asserted claims and litigations in which it is involved will not materially affect its financial position, future operating results or cash flows, although no assurance can be given with respect to the ultimate outcome of any such claim or litigation. Provision due to legal disputes was HUF 259 million and HUF 199 million as at 2021 and 2020, respectively. (See Note 24.) Commitments to extend credit, guarantees and letter of credit The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit, which represent irrevocable assurances that the Bank will make payments in the event that a customer cannot meet its obligations to third parties, carry the same credit risk as loans. Documentary and commercial letters of credit, which are written undertakings by the Bank on behalf of a customer authorising a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions, are collateralised by the underlying shipments of goods to which they relate and therefore carry less risk than a direct borrowing. Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments since most commitments to extend credit are contingent upon customers maintaining specific credit standards. Guarantees, irrevocable letters of credit and undrawn loan commitments are subject to similar credit risk monitoring and credit policies as utilised in the extension of loans. The Management of the Bank believes the market risk associated with guarantees, irrevocable letters of credit and undrawn loan commitments are minimal. 108 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 38: OFF-BALANCE SHEET ITEMS (in HUF mn) [continued] Guarantees, payment undertakings arising from banking activities Payment undertaking is a promise by the Bank to assume responsibility for the debt obligation of a borrower if that borrower defaults until a determined amount and until a determined date, in case of fulfilling conditions, without checking the underlying transactions. The guarantee’s liability is joint and primary with the principal, in case of payment undertaking, while the Bank assumes the obligation derived from guarantee independently by the conditions established by the Bank. A guarantee is most typically required when the ability of the primary obligor or principal to perform its obligations under a contract is in question, or when there is some public or private interest which requires protection from the consequences of the principal's default or delinquency. A contract of guarantee is subject to the statute of frauds (or its equivalent local laws) and is only enforceable if recorded in writing and signed by the surety and the principal. If the surety is required to pay or perform due to the principal's failure to do so, the law will usually give the surety a right of subrogation, allowing the surety to use the surety's contractual rights to recover the cost of making payment or performing on the principal's behalf, even in the absence of an express agreement to that effect between the surety and the principal. Contingent liabilities related to OTP Mortgage Bank Ltd. Under a syndication agreement with its wholly owned subsidiary, OTP Mortgage Bank Ltd., the Bank had guaranteed, in return for an annual fee, to purchase all mortgage loans held by OTP Mortgage Bank Ltd. that become non-performing. The repurchase guarantee contract of non-performing loans between OTP Mortgage Bank Ltd. and OTP Bank Plc. was modified in 2010. According to the arrangement the repurchase guarantee was cancelled and OTP Bank Plc. gives bail to the loans originated or purchased by the Bank. NOTE 39: SHARE-BASED PAYMENT AND EMPLOYEE BENEFIT (in HUF mn) Previously approved option program required a modification thanks to the introduction of the Bank Group Policy on Payments accepted in resolution of Annual General Meeting regarding to the amendment of CRD III. Directives and Act on Credit Institutions and Financial Enterprises. Key management personnel affected by the Bank Group Policy receive compensation based on performance assessment generally in the form of cash bonus and equity shares in a ratio of 50-50%. Assignment is based on OTP shares, furthermore performance based payments are deferred in accordance with the rules of Credit Institutions Act. OTP Bank ensures the share-based payment part for the management personnel of OTP Group members. During implementation of the Remuneration Policy of the Group it became apparent that in case of certain foreign subsidiaries it is not possible to ensure the originally determined share-based payment because of legal reasons – incompatible with relevant EU-directives –, therefore a decision was made to cancel the share-based payment in affected countries, and virtual share based payment – cash payment fixed to share price - was made from 2017. In case of foreign subsidiaries virtual share based payment was made uniformly from 2021 (in case of payments related to 2021). The quantity of usable shares for individuals calculated for settlement of share-based payment shall be determined as the ratio of the amount of share-based payment and share price determined by Supervisory Board. The value of the share-based payment at the performance assessment is determined within 10 days by Supervisory Board based on the average of the three previous trade day’s middle rate of OTP Bank’s equity shares fixed on the Budapest Stock Exchange. At the same time the conditions of discounted share-based payment are determined, and share-based payment shall contain maximum HUF 6,000 discount at the assessment date, and earnings for the shares at the payment date is maximum HUF 12,000. Employee benefits are all forms of consideration given by an entity in exchange for service rendered by employees or for the termination of employment. IAS 19 Employee Benefits shall be applied in accounting for all employee benefits, except those to which IFRS 2 Share-based Payment applies. Short-term employee benefits are employee benefits (other than termination benefits) that are expected to be settled wholly before twelve months after the end of the annual reporting period in which the employees render the related service. Post-employment benefits are employee benefits (other than termination and short-term employee benefits) that are payable after the completion of employment. Post-employment benefit plans are formal or informal arrangements under which an entity provides post-employment benefits for one or more employees. Post-employment benefit plans are classified as either defined contribution plans or defined benefit plans, depending on the economic substance of the plan as derived from its principal terms and conditions. 109 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 39: SHARE-BASED PAYMENT AND EMPLOYEE BENEFIT (in HUF mn) [continued] Termination benefits are employee benefits provided in exchange for the termination of an employee’s employment as a result of either: an entity’s decision to terminate an employee’s employment before the normal retirement date or an employee’s decision to accept an offer of benefits in exchange for the termination of employment. Other long-term employee benefits are all employee benefits other than short-term employee benefits, postemployment benefits and termination benefits. The parameters for the share-based payment relating to ongoing years 2016-2020 by Supervisory Board for periods of each year as follows: Share purchasing at a discounted price Year Exercise price Maximum earnings per share Price of remuneration exchanged to share Share purchasing at a discounted price Exercise price Maximum earnings per share Price of remuneration exchanged to share Share purchasing at a discounted price Exercise price Maximum earnings per share Price of remuneration exchanged to share 2017 2018 2019 2020 2021 2022 2023 2024 2025 for the year 2016 2,500 3,000 3,500 4,000 - - - - - 7,200 7,200 7,200 7,200 - - - - - 9,200 9,200 9,200 9,200 - - - - - - 8,064 8,064 8,064 8,064 8,064 - - - HUF per share for the year 2017 for the year 2018 - 3,000 3,500 4,000 4,000 4,000 - - - - 10,064 10,064 10,064 10,064 10,064 - - - - - 10,413 10,413 10,413 10,913 10,913 10,913 10,913 - - 4,000 4,000 4,000 4,000 4,000 4,000 4,000 - - 12,413 12,413 12,413 12,413 12,413 12,413 12,413 Share purchasing at a discounted price Price of remuneration exchanged to share Share purchasing at a discounted price Price of remuneration exchanged to share Year Exercise price Maximum earnings per share Exercise price Maximum earnings per share for the year 2019 for the year 2020 HUF per share 2020 2021 2022 2023 2024 2025 2026 2027 9,553 9,553 9,553 9,553 9,553 9,553 9,553 - 4,000 4,000 4,000 4,000 4,000 4,000 4,000 - 11,553 11,553 11,553 11,553 11,553 11,553 11,553 - - 12,644 12,644 13,644 13,644 13,644 13,644 13,644 - 9,000 8,000 8,000 8,000 8,000 8,000 8,000 - 16,644 16,644 16,644 16,644 16,644 16,644 16,644 Relevant factors considered during measurement of fair value related to share-based payment as follows: Year 2017 2018 2019 2020 2021 Reference price Assumed volatility 9,200 10,064 12,413 11,553 16,644 21.3% 26.0% 19.2% 33.6% 28.6% 1Y 0.1% 0.2% 0.2% 0.6% 1.0% Risk-free interest rate (HUF) 4Y 1.0% 1.3% 1.1% 0.6% 1.9% 5Y 1.3% 1.6% 1.3% 0.8% 2.0% 3Y 0.7% 1.0% 0.9% 0.5% 1.8% 2Y 0.5% 0.6% 0.7% 0.4% 1.6% 6Y 1.3% 1.9% 1.4% 0.9% 2.1% 7Y 1.3% 2.1% 1.6% 1.0% 2.1% Év 2017 2018 2019 2020 2021 1Y 219 219 252 219 371 Expected dividends (HUF/Share) 6Y 4Y 2Y 5Y 3Y 219 219 290 252 321 252 219 333 290 357 290 219 383 333 393 334 219 440 383 432 384 219 507 440 475 Pricing model 7Y 442 Binomial 219 Binomial 583 Binomial 507 Binomial 523 Binomial 110 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 39: SHARE-BASED PAYMENT AND EMPLOYEE BENEFIT (in HUF mn) [continued] Based on parameters accepted by Supervisory Board, relating to the year 2016 effective pieces are follows As at 31 December 2021: Approved pieces of shares Exercised until 31 December 2021 Weighted average share price at the date of exercise (in HUF) Expired pieces Exercisable at 31 December 2021 Share-purchasing period started in 2017 Remuneration exchanged to share provided in 2017 Share-purchasing period started in 2018 Remuneration exchanged to share provided in 2018 Share-purchasing period started in 2019 Remuneration exchanged to share provided in 2019 Share-purchasing period starting in 2020 Remuneration exchanged to share applying in 2020 147,984 147,984 4,288 4,288 321,528 321,528 8,241 8,241 161,446 161,446 4,033 4,033 166,231 166,231 4,303 4,303 9,544 9,194 10,387 10,098 12,415 11,813 13,629 11,897 - - - - - - - - - - - - - - - - Based on parameters accepted by Supervisory Board, relating to the year 2017 effective pieces are follows As at 31 December 2021: Approved pieces of shares Exercised until 31 December 2021 Weighted average share price at the date of exercise (in HUF) Expired pieces Exercisable at 31 December 2021 Share-purchasing period started in 2018 Remuneration exchanged to share provided in 2018 Share-purchasing period started in 2019 Remuneration exchanged to share provided in 2019 Share-purchasing period starting in 2020 Remuneration exchanged to share applying in 2020 Share-purchasing period starting in 2021 Remuneration exchanged to share applying in 2021 Share-purchasing period starting in 2022 Remuneration exchanged to share applying in 2022 108,243 11,926 212,282 26,538 101,571 11,584 109,460 11,531 - - 108,243 11,926 212,282 26,538 101,565 11,584 106,719 11,531 - - 11,005 10,098 12,096 11,813 12,084 11,897 16,441 16,477 - - - - - - 6 - - - - - - - - - - - 2,741 - 42,820 3,003 111 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 39: SHARE-BASED PAYMENT AND EMPLOYEE BENEFIT (in HUF mn) [continued] Based on parameters accepted by Supervisory Board, relating to the year 2018 effective pieces are follows As at 31 December 2021: Approved pieces of shares Exercised until 31 December 2021 Weighted average share price at the date of exercise (in HUF) Expired pieces Exercisable at 31 December 2021 Share-purchasing period started in 2019 Remuneration exchanged to share provided in 2019 Share-purchasing period starting in 2020 Remuneration exchanged to share applying in 2020 Share-purchasing period starting in 2021 Remuneration exchanged to share applying in 2021 Share-purchasing period starting in 2022 Remuneration exchanged to share applying in 2022 Share-purchasing period starting in 2023 Remuneration exchanged to share applying in 2023 Remuneration exchanged to share applying in 2024 Remuneration exchanged to share applying in 2025 82,854 17,017 82,854 17,017 150,230 150,230 33,024 73,799 14,618 33,024 73,799 14,618 - - - - - - - - - - - - 13,843 11,829 14,294 11,897 16,314 16,468 - - - - - - - - - - - - - - - - - - - - - - - - 99,341 17,042 45,155 4,114 864 432 Based on parameters accepted by Supervisory Board, relating to the year 2019 effective pieces are follows As at 31 December 2021: Approved pieces of shares Exercised until 31 December 2021 Weighted average share price at the date of exercise (in HUF) 91,403 22,806 201,273 30,834 91,403 22,806 192,577 30,834 12,218 11,897 16,523 17,618 - - - - - - - - - - - - - - - - - - - - - - - - Share-purchasing period started in 2020 Remuneration exchanged to share provided in 2020 Share-purchasing period starting in 2021 Remuneration exchanged to share applying in 2021 Share-purchasing period starting in 2022 Remuneration exchanged to share applying in 2022 Share-purchasing period starting in 2023 Remuneration exchanged to share applying in 2023 Share-purchasing period starting in 2024 Remuneration exchanged to share applying in 2024 Remuneration exchanged to share applying in 2025 Remuneration exchanged to share applying in 2026 Expired pieces Exercisable at 31 December 2021 - - - - - - - - - - - - - - 8,696 - 109,567 15,554 125,771 18,025 44,421 6,279 1,000 500 112 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 39: SHARE-BASED PAYMENT AND EMPLOYEE BENEFIT (in HUF mn) [continued] Based on parameters accepted by Supervisory Board, relating to the year 2020 effective pieces are follows As at 31 December 2021: Approved pieces of shares Exercised until 31 December 2021 Weighted average share price at the date of exercise (in HUF) 41,098 17,881 8,184 17,881 18,471 17,498 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Expired pieces Exercisable at 31 December 2021 - - - - - - - - - - - - 32,914 - 82,826 19,390 47,826 9,292 51,002 9,518 13,080 3,443 680 680 Share-purchasing period started in 2021 Remuneration exchanged to share provided in 2021 Share-purchasing period starting in 2022 Remuneration exchanged to share applying in 2022 Share-purchasing period starting in 2023 Remuneration exchanged to share applying in 2023 Share-purchasing period starting in 2024 Remuneration exchanged to share applying in 2024 Share-purchasing period starting in 2025 Remuneration exchanged to share applying in 2025 Remuneration exchanged to share applying in 2026 Remuneration exchanged to share applying in 2027 Effective pieces relating to the periods starting in 2022-2027 settled during valuation of performance of year 2017-2020, can be modified based on risk assessment and personal changes. In connection with the share-based compensation for Board of Directors and connecting compensation, shares given as a part of payments detailed above and for the year 2021 based on performance assessment accounted as equity-settled share based transactions HUF 3,589 million was recognized as expense for the year ended 31 December 2021. 113 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 40: RELATED PARTY TRANSACTIONS (in HUF mn) Outstanding balances and transactions with related parties are summarized below in aggregate: Statement of financial position 2021 2020 Associated companies and other companies Other related parties Associated companies and other companies Other related parties Cash, amounts due from banks and balances with the National Bank of Hungary 1,675 - 7,301 Placements with other banks, net of allowance for placement losses Held for trading securities Securities mandatorily measured at fair value through profit or loss Held for trading derivative financial instruments: Financial assets at fair value through other comprehensive income Securities at amortised cost Loans at amortised cost Loans mandatorily measured at fair value through profit or loss Right of use assets Derivative financial assets designated as hedge accounting 1,557,437 16 - 19,397 156,162 - 960,288 - 5,713 - 1,177,504 526 - - - 5,342 21,587 596 - 250,673 - 105,503 834,555 - 6,567 9 - relationships Other assets Total Assets Amounts due to banks and deposits from the National Bank of Hungary and other banks Repo liabilities Deposits from customers Leasing liabilities Liabilities from issued securities Derivative financial liabilities designated as held for trading Derivative financial liabilities designated as hedge accounting relationships Other liabilities Total Liabilities Off balance sheet items Guarantees Loan commitments Factoring loan commitments Total Statement of Profit or Loss (9) 101,569 2,802,248 - 5 - 67,077 106,113 2,371,132 (115,042) (36,854) (263,139) (5,926) (12,232) (5,344) - (151,254) - - (27,174) (249,410) (6,736) (11,299) (9,957) - - - (61) (4,599) (443,197) - (551) - (7,014) (27,725) (435,670) (921,818) (85,810) (1,475) (1,009,103) - (870,892) (96,032) (37) (44,812) (966,961) (44,812) - - (37,051) - (37,051) Interest Income Interest Expense Risk cost (Losses)/Gains arising from derecognition of financial assets measured at amortised cost Income from fees and commissions Expenses from fees and commissions Other administrative expenses 2021 2020 42,706 (11,449) 904 39,193 (11,186) (1,925) (2,198) 33,128 (2,859) (7,570) 914 28,951 (1,971) (8,465) 114 - - - - - - 590 92,889 10 - - 557 94,046 - - (4,027) - - - - (400) (4,427) OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 40: RELATED PARTY TRANSACTIONS (in HUF mn) [continued] Related party transactions with key management The compensation of key management, such as the members of the Board of Directors, the members of the Supervisory Board and the employees involved in the decision-making process in accordance with the compensation categories defined in IAS 24 Related Party Disclosures, is summarised below: Short-term employee benefits Share-based payment Long-term employee benefits (on the basis of IAS 19) Total 2021 2,957 2,740 246 5,943 2020 2,923 2,619 278 5,820 2021 2021 Loans provided to companies owned by the Management (in the normal course of business) Commitments to extend credit and bank guarantees 105,503 44,812 92,889 37,051 An analysis of payment to Executives related to their activity in Board of Directors and Supervisory Board is as follows (in HUF mn): Members of Board of Directors Members of Supervisory Board Total 2021 1,489 173 1,662 2020 969 57 1,026 In the normal course of business, OTP Bank enters into other transactions with its subsidiaries, the amounts and volumes of which are not significant to these financial statements taken as a whole. NOTE 41: TRUST ACTIVITIES (in HUF mn) The Bank acts as a trustee for certain loans granted by companies or employers to their employees, mainly for housing purposes. The ultimate risk for these loans rests with the party advancing the funds. As these loans and related funds are not considered to be assets or liabilities of the Bank, they have been excluded from the accompanying separate statement of financial position. 2021 2020 Loans managed by the Bank as a trustee 27,532 28,055 115 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 42: CONCENTRATION OF ASSETS AND LIABILITIES In the percentage of the total assets Receivables from, or securities issued by the Hungarian Government or the NBH Securities issued by the OTP Mortgage Bank Ltd. Loans at amortised cost 2021 2020 22.79% 1.77% 6.51% 22.69% 2.24% 6.48% There were no other significant concentrations of the assets or liabilities of the Bank as at 31 December 2021 or 31 December 2020. OTP Bank continuously provides the Authority with reports on the extent of dependency on large depositors as well as the exposure of the largest 50 depositors towards OTP Bank. Further to this obligatory reporting to the Authority. OTP Bank pays particular attention on the exposure of its largest partners and cares for maintaining a closer relationship with these partners in order to secure the stability of the level of deposits. The organisational unit of OTP Bank in charge of partner-risk management analyses the largest partners on a constant basis and sets limits on OTP Bank’s and the Group’s exposure separately partner-by-partner. If necessary, it modifies partner-limits in due course thereby reducing the room for manoeuvring of the Treasury and other business areas. The Bank’s internal regulation (Limit-management regulation) controls risk management which related to exposures of clients. Bank makes a difference between clients or clients who are economically connected with each other, partners, partners operating in the same geographical region or in the same economic sector, exposures from customers. Limit-management regulation includes a specific range provisions system used by Bank to control risk exposures. This regulation has to be used by the Bank for its business (lending) risk-taking activity in both the retail and corporate sector. To specify credit risk limits, the Bank strives their clients get an acceptable margin of risk based on their financial situation. In the Bank limit system a lower level decision-making delegation has to be provided. If an OTP group member takes risk against a client or group of clients (either inside the local economy or outside), the client will be qualified as a group level risk and these limits will be specified at group level. The validity period of this policy is 12 months. The limit shall be reviewed prior to the expiry date but at least once a year based on the relevant information required to limit calculations. The maximum credit exposure to any client or counterparty among Loans at amortised cost was HUF 893 billion and HUF 722 billion as at 31 December 2021 and 31 December 2020 respectively, before taking into account collateral or other credit enhancements. 116 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 43: EARNINGS PER SHARE Earnings per share attributable to the Bank’s ordinary shares are determined by dividing Net profit for the year attributable to ordinary shareholders, after the deduction of declared preference dividends, by the weighted average number of ordinary shares outstanding during the year. Dilutive potential ordinary shares are deemed to have been converted into ordinary shares. Net profit for the year attributable to ordinary shareholders (in HUF mn) Weighted average number of ordinary shares outstanding during the year for calculating basic EPS (number of share) Basic Earnings per share (in HUF) Separate net profit for the year attributable to ordinary shareholders (in HUF mn) Modified weighted average number of ordinary shares outstanding during the year for calculating diluted EPS (number of share) Diluted Earnings per share (in HUF) Weighted average number of ordinary shares Average number of Treasury shares Weighted average number of ordinary shares outstanding during the year for calculating basic EPS Dilutive effect of options issued in accordance with the Remuneration Policy / Management Option Program and convertible into ordinary shares1 The modified weighted average number of ordinary shares outstanding 2021 2020 125,339 92,474 275,523,535 455 277,301,936 333 125,339 92,474 275,538,262 455 277,310,069 333 2021 2020 280,000,010 (4,476,475) 280,000,010 (2,698,074) 275,523,535 277,301,936 14,727 8,133 during the year for calculating diluted EPS 275,538,262 277,310,069 The ICES bonds could potentially dilute basic EPS in the future, but were not included in the calculation of diluted EPS because they are antidilutive for the period presented. 1 In 2021 and 2020 dilutive effect is in connection with the Remuneration Policy. 117 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 44: NET GAIN OR LOSS REALISED ON FINANCIAL INSTRUMENTS (in HUF mn) Year ended 31 December 2021 Net interest income and expense Net non- interest gain and loss Loss allowance Other comprehensive income Financial assets measured at amortised cost Cash, amounts due from banks and balances with the National Bank of Hungary 14,124 - - Placements with other banks, net of allowance for placement losses Repo receivables Loans at amortised cost Securities at amortised cost Financial assets measured at amortised cost total Financial assets measured at fair value Securities held for trading Securities at fair value through other comprehensive income Loans mandatorily measured at fair value through profit or loss Financial assets measured at fair value total Financial liabilities measured at amortised cost Amounts due to banks and deposits from the National Bank of Hungary and other banks Repo liabilities Deposits from customers Leasing liabilities Liabilities from issued securities Subordinated bonds and loans Financial liabilities measured at amortised cost total - - - - - - - 31,981 315 167,882 61,085 275,387 - - 13,591 (1,552) 12,039 1,797 (220) 37,264 2,035 40,876 277 6,657 - 21,456 (4,659)1 (551) (35,756) 26,045 47,778 (8,671) (6,673) 16,255 15,704 - (35,756) (11,177) (2,860) (10,162) (214) (1,166) (7,890) - - 170,598 - - - (33,469) 170,598 - - - - - - - - - - - - - - - - - - Financial liabilities designated to measure at fair value through profit or loss (493) 3,916 Derivative financial instruments2 (36,295) 3,436 Total 252,908 183,316 56,580 (35,756) 1 For the year ended 31 December 2021 HUF (4,659) million net non-interest gain on securities at fair value through other comprehensive income was transferred from other comprehensive income to profit or loss. 2 Gains/losses from derivative financial instruments recognised in net interest income as Income similar to interest income. 118 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 44: NET GAIN OR LOSS REALISED ON FINANCIAL INSTRUMENTS (in HUF mn) [continued] Year ended 31 December 2020 Net interest income and expense Net non- interest gain and loss Loss allowance Other comprehensive income Financial assets measured at amortised cost Cash, amounts due from banks and balances with the National Bank of Hungary 4,369 - - Placements with other banks, net of allowance for placement losses Repo receivables Loans at amortised cost Securities at amortised cost 10,650 49 143,650 48,654 - - 23,298 360 2,227 286 55,444 1,845 Financial assets measured at amortised cost total 207,372 23,658 59,802 Financial assets measured at fair value Securities held for trading Securities at fair value through other comprehensive income Loans mandatorily measured at fair value through profit or loss Financial assets measured at fair value total Financial liabilities measured at amortised cost Amounts due to banks and deposits from the National Bank of Hungary and other banks Repo liabilities Deposits from customers Leasing liabilities Liabilities from issued securities Subordinated bonds and loans Financial liabilities measured at amortised cost total 368 2,251 29,095 6,0731 15,094 44,557 2,125 10,449 (9,862) (1,476) (3,985) (244) (598) (8,327) - - 216,512 - - - (24,492) 216,512 Financial liabilities designated to measure at fair value through profit or loss (307) 1,270 Derivative financial instruments2 (5,053) 5,818 - 3 - 3 - - - - - - - - - - - - - - - - (17,734) - (17,734) - - - - - - - - - Total 222,077 257,707 59,805 (17,734) 1 For the year ended 31 December 2020 HUF 6,073 million net non-interest gain on securities at fair value through other comprehensive income was transferred from other comprehensive income to profit or loss. 2 Gains/losses from derivative financial instruments recognised in net interest income as Income similar to interest income. 119 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 45: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) In determining the fair value of a financial asset or liability the Bank in the case of instruments that are quoted on an active market uses the market price. In most cases market price is not publicly available so the Bank has to make assumptions or use valuation techniques to determine the fair value of a financial instrument. See Note 45. d) for more information about fair value classes applied for financial assets and liabilities measured at fair value in these financial statements. To provide a reliable estimate of the fair value of those financial instrument that are originally measured at amortised cost, the Bank used the discounted cash flow analysis (loans, placements with other banks, amounts due to banks, deposits from customers). The fair value of issued securities and subordinated bonds is based on quoted prices (e,g, Reuters), Cash and amounts due from banks and balances with the National Bank of Hungary represent amounts available immediately thus the fair value equals to the cost. The assumptions used when calculating the fair value of financial assets and liabilities when using valuation technique are the following: • • • • the discount rates are the risk free rates related to the denomination currency adjusted by the appropriate risk premium as of the end of the reporting period, the contractual cash flows are considered for the performing loans and for the non-performing loans, the amortised cost less impairment is considered as fair value, the future cash flows for floating interest rate instruments are estimated from the yield curves as of the end of the reporting period, the fair value of the deposit which can be due in demand cannot be lower than the amount payable on demand. For classes of assets and liabilities not measured at fair value in the statement of financial position, the income approach was used to convert future cash flows to a single current amount. Fair value of current assets is equal to carrying amount, fair value of liabilities from issued securities and other bond-type classes of assets and liabilities not measured at fair value measured based on Reuters market rates and, fair value of other classes not measured at fair value of the statement of financial position are measured using the discounted cash flow method. Fair value of loans, net of allowance for loan losses measured using discount rate adjustment technique, the discount rate is derived from observed rates of return for comparable assets or liabilities that are traded in the market. Fair value measurements – in relation to instruments measured not at fair value – are categorized in level 3 of the fair value hierarchy. 120 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 45: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] a) Fair value of financial assets and liabilities Cash, amounts due from banks and balances with the National Bank of Hungary Placements with other banks, net of allowance for placement losses Repo receivables Financial assets at fair value through profit or loss Held for trading securities Derivative financial instruments classified as held for trading Securities mandatorily measured at fair value through profit or loss Securities at fair value through other comprehensive income Securities at amortised cost Loans at amortised cost Loans mandatorily measured at fair value through profit or loss Derivative financial assets designated as hedge accounting relationships Other financial assets FINANCIAL ASSETS TOTAL Amounts due to banks, deposits from the National Bank of Hungary and other banks Repo liabilities Deposits from customers Leasing liabilities Liabilities from issued securities Financial liabilities at fair value through profit or loss Derivative financial liabilities designated as held for trading Derivative financial liabilities designated as hedge accounting relationships Subordinated bonds and loans Other financial liabilities FINANCIAL LIABILITIES TOTAL b) Derivative financial instruments 31 December 2021 31 December 2020 Carrying amount Fair value Carrying amount Fair value 474,945 474,945 579,120 579,120 2,567,212 33,638 246,462 35,633 2,548,809 33,707 246,462 35,633 1,535,884 183,364 160,483 11,729 1,550,747 183,664 160,483 11,729 182,768 182,768 116,818 116,818 28,061 28,061 31,936 31,936 641,939 3,071,038 4,032,465 641,939 2,877,380 3,576,519 911,950 2,007,692 3,417,760 911,950 2,085,881 3,178,368 662,012 662,012 480,937 480,937 17,727 153,747 11,901,185 17,727 153,747 11,233,248 6,817 127,179 9,411,186 6,817 127,179 9,265,147 1,051,203 86,580 9,948,532 17,932 22,153 20,133 958,463 86,543 9,946,444 17,928 21,006 20,133 766,977 109,612 7,895,735 14,106 28,435 25,902 754,573 111,548 7,895,211 14,105 31,588 25,902 192,261 192,261 99,987 99,987 18,690 271,776 194,511 11,823,771 18,690 278,151 194,511 11,734,130 3,104 304,243 167,540 9,415,641 3,104 295,218 167,540 9,398,776 OTP Bank regularly enters into hedging transactions in order to decrease its financial risks. However some economically hedging transaction do not meet the criteria to account for hedge accounting, therefore these transactions were accounted as derivatives held for trading. Net investment hedge in foreign operations is not applicable in separate financial statements. The assessment of the hedge effectiveness (both for fair value hedges and cash flow hedges) to determine the economic relationship between the hedged item and the hedging instrument is accomplished with prospective scenario analysis via different rate shift scenarios of the relevant risk factor(s) of the hedged risk component(s). The fair value change of the hedged item and the hedging instrument is compared in the different scenarios. Economic relationship is justified if the change of the fair value of the hedged item and the hedging instrument are in the opposite direction and the absolute changes are similar amounts. The hedge ratio is determined as the ratio of the notional of the hedged item and the notional of the hedging instrument. The sources of hedge ineffectiveness are the not hedged risk components (e,g, change of cross currency basis spreads in case of interest rate risk hedges), slight differences in maturity dates and interest payment dates in case of fair value hedges, and differences between the carrying amount of the hedged item and the carrying amount of the hedging instrument in case of FX hedges (e,g, caused by interest rate risk components in the fair value of the hedging instrument). 121 NOTE 45: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 b) Derivative financial instruments [continued] Fair value of derivative financial instruments1 The Bank has the following held for trading derivatives and derivatives designated as hedge accounting: Held for trading derivative financial instruments Interest rate derivatives Interest rate swaps Cross currency interest rate swaps OTC options Total interest rate derivatives (OTC derivatives) From this: Interest rate derivatives cleared by NBH Foreign exchange derivatives Foreign exchange swaps Foreign exchange forward OTC options Foreign exchange spot conversion Total foreign exchange derivatives (OTC derivatives) From this: Foreign exchange derivatives cleared by NBH 31 December 2021 31 December 2020 Before netting Assets Liabilities Netting After netting Before netting Assets Liabilities Assets Liabilities Netting After netting Assets Liabilities 54,251 7,207 479 61,937 1,276 36,896 8,854 804 175 46,729 3,447 (53,720) (7,618) (479) (61,817) - 40,783 - - 40,783 - 13,468 7,207 479 21,154 1,276 (12,937) (7,618) (479) (21,034) - 30,216 7,315 356 37,887 5 (40,639) (6,819) (180) (246) (47,884) (1,480) - - - - - - 36,896 8,854 804 175 46,729 3,447 (40,639) (6,819) (180) (246) (47,884) (1,480) 39,644 6,990 3,909 619 51,162 5,211 (28,474) (7,285) (356) (36,115) (72) (30,374) (9,869) (3,836) (704) (44,783) (1,852) 8,984 - - 8,984 - 21,232 7,315 356 28,903 5 - - - - - - 39,644 6,990 3,909 619 51,162 5,211 (19,490) (7,285) (356) (27,131) (72) (30,374) (9,869) (3,836) (704) (44,783) (1,852) 1 Certain derivative financial assets and liabilities are offset and the net amount is presented in accordance with IAS 32 in the Statement of Financial Position. The Bank has the ability and the intention to settle those instruments on a net basis, which are settled through the same clearing house. 122 NOTE 45: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 b) Derivative financial instruments [continued]1 Fair value of derivative financial instruments [continued] Equity stock and index derivatives Commodity Swaps Equity swaps OTC derivatives Exchange traded futures and options Total equity stock and index derivatives Derivatives held for risk management not designated in hedges Interest rate swaps Foreign exchange swaps Forward Cross currency interest rate swaps Total derivatives held for risk management not designated in 31 December 2021 31 December 2020 Before netting Assets Liabilities Netting After netting Before netting Assets Liabilities Assets Liabilities Netting After netting Assets Liabilities 52,197 10,538 62,735 164 62,899 51,311 1,915 - 4,442 (52,166) (357) (52,523) (278) (52,801) (70,811) (5,245) - (168) - - - - - 5,682 - - - 52,197 10,538 62,735 164 62,899 45,629 1,915 - 4,442 (52,166) (357) (52,523) (278) (52,801) (65,129) (5,245) - (168) 13,999 7,071 21,070 379 21,449 25,760 2,208 28 44 (12,901) (560) (13,461) (1,262) (14,723) - - - - - (22,058) (3,953) (75) - 12,736 - - - 13,999 7,071 21,070 379 21,449 13,024 2,208 28 44 (12,901) (560) (13,461) (1,262) (14,723) (9,322) (3,953) (75) - hedges 57,668 (76,224) 5,682 51,986 (70,542) 28,040 (26,086) 12,736 15,304 (13,350) From this: Total derivatives cleared by NBH held for risk management Total Held for trading derivative financial instruments Derivative financial instruments designated as hedge accounting relationships Derivatives designated in cash flow hedges Interest rate swaps Total derivatives designated in cash flow hedges Derivatives designated in fair value hedges Interest rate swaps Cross currency interest rate swaps Total derivatives designated in fair value hedges From this: Total derivatives cleared by NBH held for hedging Total derivatives held for risk management (OTC derivatives) 35,226 229,233 (497) (238,726) - 46,465 35,226 182,768 (497) (192,261) 759 138,538 (6,269) (121,707) - 21,720 759 116,818 (6,269) (99,987) - - (8,638) (8,638) 1,020 1,020 (1,020) (1,020) (7,618) (7,618) 8,027 8,027 25,407 5,471 30,878 - 30,878 (17,878) (5,325) (23,203) (2,249) (31,841) 12,131 - 12,131 - 13,151 13,276 5,471 18,747 - 17,727 (5,747) (5,325) (11,072) (2,249) (18,690) 2,432 6,180 8,612 - 16,639 - - (7,061) (5,865) (12,926) (1,691) (12,926) 8,027 8,027 1,795 - 1,795 - 9,822 - - 637 6,180 6,817 - 6,817 8,027 8,027 (5,266) (5,865) (11,131) (1,691) (3,104) 1 Certain derivative financial assets and liabilities are offset and the net amount is presented in accordance with IAS 32 in the Statement of Financial Position. The Bank has the ability and the intention to settle those instruments on a net basis, which are settled through the same clearing house. 123 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 45: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] c) Hedge accounting Interest rate risk management is centralized at OTP Group. Interest rate risk exposures in major currencies are managed at HQ on consolidated level. Although risk exposures in local currencies are managed at subsidiary level, the respective decisions are subject to HQ approval. Interest rate risk is measured by simulating NII and EVE under different stress and plan scenarios, the established risk limits are described in „OTP Bank’s Group-Level Regulations on the Management of Liquidity Risk and Interest Rate Risk of Banking Book”. The interest rate risk management activity aims to stabilize NII within the approved risk limits. The risk management objective of these hedge relationships is to mitigate the risk of clean fair value (i.e. excluding accrued interest) change of MIRS loans due to the change of interest rate reference indexes (BUBOR, EURIBOR, LIBOR, etc.) of the respective currency. 124 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 45: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] c) Hedge accounting [continued] Amount, timing and uncertainty of future cash flows - hedging instruments as at 31 December 2021 (amounts in million currency) 31 December 2021 Type of hedge Type of risk Type of instrument Within one month Within three months and over one month Within one year and over three months Within five years and over one year More than five years Total Fair Value Hedge Interest rate risk Fair Value Hedge FX & IR risk Fair Value Hedge FX risk Fair Value Hedge Other Cash flow Hedge Interest rate risk Interest rate swap HUF Notional Average Interest Rate (%) EUR Notional Average Interest Rate (%) USD Notional Average Interest Rate (%) JPY Notional Average Interest Rate (%) Cross currency interest rate swap EUR/HUF Notional Average Interest Rate (%) Average FX Rate Cross currency interest rate swap EUR/HUF Notional Average FX Rate RON/HUF Notional Average FX Rate RUB/HUF Notional Average FX Rate JPY/HUF Notional Average FX Rate USD/HUF Notional Average FX Rate Interest rate swap HUF Notional Interest rate swap HUF Notional Average FX Rate - - - - - - - - - - - - - - - - - - - - - - - - 2,000 1.09% - - - - - - 1 (1.68%) 310.29 -6 354.22 - - - - - - - - 900 0.49% 1 0.23% - - - - 2 (1.67%) 310.26 35 356.94 200 66.21 - - - - (3) 323.77 (52,474) 1.65% 111 0.24% 119 2.54% 4,500 0.22% 42,950 1.31% 50 0.05% 47 4.18% (6,624) 162 166 4,500 - - 12 (1.69%) 310.01 12 (1.82%) 307.81 27 572 355.93 2,225 73.08 11,200 4.15 4,500 2.79 306 323.77 601 2,425 11,200 4,500 303 - - - - - - - - - - 3,345 1,823 3,093 - 8,261 - - - - 7,819 1.80 28,027 2.46 35,846 125 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 45: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] c) Hedge accounting [continued] Amount, timing and uncertainty of future cash flows - hedging instruments as at 31 December 2020 (amounts in million currency) 31 December 2020 Type of hedge Type of risk Type of instrument Within one month Within three months and over one month Within one year and over three months Within five years and over one year More than five years Total Fair Value Hedge Interest rate risk Fair Value Hedge FX & IR risk Fair Value Hedge FX risk Fair Value Hedge Other Cash flow Hedge Interest rate risk Interest rate swap HUF Notional Average Interest Rate (%) EUR Notional Average Interest Rate (%) USD Notional Average Interest Rate (%) RUB Notional Average Interest Rate (%) Cross currency interest rate swap EUR/HUF Notional Average Interest Rate (%) Average FX Rate Cross currency interest rate swap EUR/HUF Notional Average FX Rate RON/HUF Notional Average FX Rate RUB/HUF Notional Average FX Rate Interest rate swap HUF Notional Interest rate swap HUF Notional Average FX Rate - - 15 (0.11%) - - - - - - - - - - - - - - - - - - 60,000 1.31% 5 0.09% 21 2.00% - - (89,622) 1.06% 102 0.24% 171 2.38% 2,100 7.38% 173,810 144,188 1.35% 10 0.22% 29 2.35% 132 221 2,100 - - 2 (1.60%) 310.82 12 (1.63%) 310.14 14 (1.67%) 308.15 28 1 360.19 92 354.92 123 360.47 - - - - - - - - 613 356.03 1,550 72.60 4,100 4.46 829 1,550 4,100 - - - - - - (183) 6,940 8,342 - 15,099 - - - - 12,194 1.77 28,027 2.46 40,221 126 - - - - - - - OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 45: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] c) Hedge accounting [continued] Derivative financial instruments designated as hedge accounting as follows: Type of instrument Type of risk Fair value hedge Nominal amount of the hedging instrument Carrying amount of the hedging instrument for the year ended 31 December 2021 Before netting Assets Liabilities Netting After netting Assets Liabilities Line item in the statement of financial position where the hedging instrument is located Changes in fair value used for calculating hedge ineffectiveness for the year ended 31 December 2021 Interest rate swap Interest rate risk 409,595 23,976 (17,878) 12,131 11,845 (5,747) management Derivative assets (liabilities) held for risk Cross-currency swap FX & IR risk 8,175 - (2,249) Cross-currency swap FX risk 566,936 5,471 (3,076) Interest rate swap Other Cash flow hedge 8,261 1,431 - Derivative assets (liabilities) held for risk - (2,249) management Derivative assets (liabilities) held for risk 5,471 (3,076) management Derivative assets (liabilities) held for risk 1,431 - management - - - Derivative assets (liabilities) held for risk Interest rate swap Interest rate risk 35,846 - (8,638) 1,020 (1,020) (7,618) management 6,494 4 (1,687) 3 (101) 31 December 2021 Type of risk Carrying amount of the hedged item Accumulated amount of fair value hedge adjustments on the hedged item included in the carrying amount of the hedged item Line item in the statement of financial position in which the hedged item is included Assets Liabilities Assets Liabilities Fair value hedges - Loans - Loans - Government bonds - Government bonds - Government bonds - Other securities - Loans - Loans - Government bonds - Government bonds - Other securities Fair value hedges total Interest rate risk 57,176 - Interest rate risk Interest rate risk Interest rate risk Interest rate risk Interest rate risk FX & IR risk FX risk FX risk FX risk Other risk - 13,921 142,649 - 152,830 - 42,008 10,595 458,312 12,811 98,668 - 846,321 - - - - - - - 8,261 150,910 637 - 1,230 22,457 - 318 611 - - - - 25,253 - Loans Amounts due to banks and deposits from the National (16,858) - Bank of Hungary and other banks Securities at amortised cost Securities at fair value through other comprehensive - - - - - - - (161) (17,019) income Financial assets at fair value through profit or loss Securities at fair value through other comprehensive income Loans Loans Securities at amortised cost Securities at fair value through other comprehensive income Liabilities from issued securities 127 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 45: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] c) Hedge accounting [continued] Derivative financial instruments designated as hedge accounting as follows: For the year ended 31 December 2021 OCI related to cash flow hedges as follows: Type of risk Interest rate risk Carrying amount of the hedged item Assets Liabilities Cash flow hedge reserve Year ended 2021 Line item in the statement of financial position in which the hedged item is included 35,965 - 3,568 Loans at amortised cost For the year ended 31 December 2020 OCI related to cash flow hedges as follows: Type of risk Interest rate risk Carrying amount of the hedged item Assets Liabilities Cash flow hedge reserve Year ended 2021 Line item in the statement of financial position in which the hedged item is included 40,221 - (2,739) Loans at amortised cost For the year ended 31 December 2021 change in basis swap spread recognised in OCI related to fair value hedges as follows: Type of risk Carrying amount of the hedged item FX risk FX risk Assets 458,312 12,811 471,123 Liabilities - - - Items recognised in other comprehensive income Year ended 2021 Change in the items recognized in other comprehensive income Year ended 2021 Line item in the statement of financial position in which the hedged item is included (1,032) 64 (968) (1,681) Loans at amortised cost FVOCI securities - (1,681) For the year ended 31 December 2020 change in basis swap spread recognised in OCI related to fair value hedges as follows: Type of risk FX risk Carrying amount of the hedged item Assets 303,572 303,572 Liabilities - - Items recognised in other comprehensive income Year ended 2021 Change in the items recognized in other comprehensive income Year ended 2021 Line item in the statement of financial position in which the hedged item is included 713 713 - Loans at amortised cost - 128 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 45: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] c) Hedge accounting [continued] Derivative financial instruments designated as hedge accounting as follows: Type of instrument Type of risk Fair value hedge Nominal amount of the hedging instrument Carrying amount of the hedging instrument for the year ended 31 December 2020 Before netting Assets Liabilities Netting After netting Assets Liabilities Line item in the statement of financial position where the hedging instrument is located Changes in fair value used for calculating hedge ineffectiveness for the year ended 31 December 2020 Interest rate swap Interest rate risk 468,574 1,900 (7,062) 1,795 105 (5,267) management Derivative assets (liabilities) held for risk Cross-currency swap FX & IR risk 8,874 - (1,408) Cross-currency swap FX risk 438,401 6,182 (4,456) Interest rate swap Other 16,224 530 Cash flow hedge Interest rate swap Interest rate risk 40,221 8,027 - - Derivative assets (liabilities) held for risk - (1,408) management Derivative assets (liabilities) held for risk 6,182 (4,456) management Derivative assets (liabilities) held for risk 530 - management - - - 8,027 - 8,027 management Derivative assets (liabilities) held for risk 31 December 2020 Type of risk Carrying amount of the hedged item Accumulated amount of fair value hedge adjustments on the hedged item included in the carrying amount of the hedged item Assets Liabilities Assets Liabilities Line item in the statement of financial position in which the hedged item is included Fair value hedges - Loans - Loans Interest rate risk 35,256 - 1,679 Interest rate risk - 100,299 - Government bonds Interest rate risk 8,678 - Government bonds Interest rate risk 269,838 - Other securities Interest rate risk - Loans - Loans - Other securities FX & IR risk FX risk Other risk 47,560 10,378 303,572 - 15,032 - - - - - - (106) 2,518 781 284 - - Fair value hedges total 675,282 115,331 5,156 - (235) Loans Loans Securities at amortised cost Securities at fair value through other comprehensive income Securities at fair value through other comprehensive income Loans Loans Liabilities from issued securities - - - - - (528) (763) (370) (36) (809) 2 - (85) 129 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 45: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] c) Hedge accounting [continued] 31 December 2021 Type of instrument Type of risk Change in the value of the hedging instrument recognised in cash flow hedge reserve Hedge ineffectiveness recognised in profit or loss Line item in profit or loss that includes hedge ineffectiveness Interest rate swap Interest rate risk 6,307 Interest Income from Placements with other banks, net of allowance for placement losses (101) For the year ended 31 December 2021 an amount HUF 171 million reclassified from cash flow hedge reserve to profit or loss due to termination of hedging relationship. 31 December 2020 Type of instrument Type of risk Change in the value of the hedging instrument recognised in cash flow hedge reserve Hedge ineffectiveness recognised in profit or loss Line item in profit or loss that includes hedge ineffectiveness Interest rate swap Interest rate risk d) Fair value classes 296 Interest Income from Placements with other banks, net of allowance for placement losses (85) Methods and significant assumptions used to determine fair value of the different classes of financial instruments: - Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities; - Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly or indirectly, Fair value measurements – in relation with instruments measured not at fair value – are categorized in level 2; - Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). The following table shows an analysis of financial instruments recorded at fair value by level of the fair value hierarchy: 31 December 2021 Total Level 1 Level 2 Level 3 Loans at fair value through other comprehensive income Financial assets at fair value through profit or loss from this: securities held for trading from this: positive FVA of derivative financial instruments 662,012 246,462 35,633 - 37,537 18,566 - 662,012 19,424 - 189,501 17,067 designated as held for trading 182,768 164 172,434 10,170 from this: securities mandatorily measured at fair value through profit or loss Securities at fair value through other comprehensive income Positive fair value of derivative financial instruments designated as hedge accounting Financial assets measured at fair value total Financial liabilities at fair value through profit or loss Negative fair value of derivative financial instruments classified as held for trading Short position Negative fair value of derivative financial instruments designated as hedge accounting Financial liabilities measured at fair value total 28,061 641,939 18,807 315,147 - 326,792 9,254 - 17,727 1,568,140 - 352,684 17,727 - 534,020 681,436 20,133 - - 20,133 192,261 16,904 278 16,904 191,983 - - - 18,690 247,988 - 17,182 18,690 210,673 - 20,133 130 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 45: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] d) Fair value classes [continued] As at 31 December 2020 Total Level 1 Level 2 Level 3 Loans at fair value through other comprehensive income Financial assets at fair value through profit or loss from this: securities held for trading from this: positive FVA of derivative financial instruments 480,937 160,483 11,729 - 34,643 10,453 - 480,937 14,710 - 111,130 1,276 designated as held for trading 116,818 378 109,854 6,586 from this: securities mandatorily measured at fair value through profit or loss Securities at fair value through other comprehensive income Positive fair value of derivative financial instruments designated as hedge accounting Financial assets measured at fair value total Financial liabilities at fair value through profit or loss Negative fair value of derivative financial instruments classified as held for trading Short position Negative fair value of derivative financial instruments designated as hedge accounting Financial liabilities measured at fair value total 31,936 911,950 23,812 426,566 - 485,384 8,124 - 6,817 1,560,187 - 461,209 6,817 - 603,331 495,647 25,902 - - 25,902 99,987 9,131 1,263 9,131 98,724 - - - 3,104 138,124 - 10,394 3,104 101,828 - 25,902 Valuation techniques and sensitivity analysis on Level 3 instruments Sensitivity analysis is performed on products with significant unobservable inputs (Level 3) to generate a range of reasonably possible alternative valuations. The sensitivity methodologies applied take account of the nature of the valuation techniques used, as well as the availability and reliability of observable proxy and historical date and the impact of using alternative models. The calculation is based on range or spread data of reliable reference source or a scenario based on relevant market analysis alongside the impact of using alternative models. Sensitivities are calculated without reflecting the impact of any diversification in the portfolio. Unobservable inputs used in measuring fair value Type of financial instrument Valuation technique Significant unobservable input Range of estimates for unobservable input Market approach Discount applied due to VISA C shares combined with expert judgement Discounted cash flow MFB refinancing loans model Subsidised personal loans model Discounted cash flow Discounted cash flow illiquidity and litigation Probability of default Probability of default Subsidised personal loans model Operational costs Subsidised personal loans model Demography Discounted cash flow +/-12% +/- 20% +/- 20% +/- 20% Change in the cash flow estimation +/- 5% 131 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 45: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] d) Fair value classes [continued] The effect of unobservable inputs on fair value measurement Although the Bank believes that its estimates of fair value are appropriate, the use of different methodologies or assumptions could lead to different measurements of fair value. For fair value measurements in Level 3 changing the assumptions used to reasonably possible alternative assumptions would have the following effects. 31 December 2021 VISA C shares MFB refinancing loans Subsidised personal loans Subsidised personal loans Subsidised personal loans 31 December 2020 VISA C shares MFB refinancing loans Subsidised personal loans Subsidised personal loans Subsidised personal loans Unobservable inputs Illiquidity Probability of default Probability of default Operational costs Demography Unobservable inputs Illiquidity Probability of default Probability of default Operational costs Demography Fair values Effect on profit and loss Favourable Unfavourable Favourable Unfavourable (405) 3,339 2,529 405 19,218 18,972 123 (123) 639,006 647,291 635,484 631,855 623,933 635,387 3,590 11,875 68 (3,561) (11,483) (29) Fair values Effect on profit and loss Favourable Unfavourable Favourable Unfavourable (374) 3,150 2,402 374 24,876 24,690 93 (93) 452,781 464,974 451,419 447,647 436,194 448,987 2,579 14,772 1,217 (2,555) (14,008) (1,215) The favourable and unfavourable effects of using reasonably possible alternative assumptions for the valuation of Visa C shares have been calculated by modifying the discount rate used for the valuation by +/-12% as being the best estimates of the management as at 31 December 2021 and 2020 respectively. In the case of MFB refinancing loans and subsidised personal loans the Bank calculated the favourable and unfavourable effects of using reasonably possible alternative assumptions by modifying the rates of probability of default by +/- 20% as one of the most significant unobservable input. In case of subsidised personal loans operational cost and factors related to demography are considered as unobservable inputs to the applied fair value calculation model in addition to credit risk. The Bank calculated the favourable and unfavourable effects of using reasonably possible alternative assumptions by modifying the rates of operational costs by +/- 20% as one of the most significant unobservable input. In case of subsidised personal loans cash flow estimation are based on assumption related to the future number of childbirths performed by the debtors. According to the current assumptions 15% of the debtors will not fulfill the conditions of the subsidy determined by the government after 5 years (“breach of conditions”), thereby debtors will be obliged to pay back advanced interest subsidy given in advance. Furthermore, in this case subsidised loans are converted to loans provided based on market conditions. Loans are prepaid by the government as part of the subsidy after the second and the third childbirth following the signatory of the loan contract. The Bank calculated the favourable and unfavourable effects of using reasonably possible alternative assumptions by modifying the demographical assumption of breach of conditions by +/- 5% as one of the most significant unobservable input in the cash flow estimation. 132 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 45: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] d) Fair value classes [continued] The effect of unobservable inputs on fair value measurement [continued] Reconciliation of the opening and closing balances of Level 3 instruments for the year ended 31 December 2021 Opening balance Issuance/ Disbursement Change in FVA due to credit risk Change in FVA due to market factors Settlement Closing balance Loans mandatorily measured at fair value through profit or loss Securities mandatorily measured at fair value through profit or loss Derivative financial instruments designated as held for trading Financial liabilities at fair value through profit or loss Total 480,937 227,324 (16,255) (12,692) (17,302) 662,012 8,124 390 6,586 - - - 740 3,584 - - 9,254 10,170 (25,902) 469,745 - 227,714 - (16,255) (3,916) (12,284) 9,685 (7,617) (20,133) 661,303 Reconciliation of the opening and closing balances of Level 3 instruments for the year ended 31 December 2020 Opening balance Issuance/ Disbursement Change in FVA due to credit risk Change in FVA due to market factors Reclassification Settlement Closing balance Loans mandatorily measured at fair value through profit or loss Securities mandatorily measured at fair value through profit or loss Securities at fair value through other comprehensive income Derivative financial instruments designated as held for trading Financial liabilities at fair value through profit or loss Total 238,538 257,055 (405) (2,125) - (12,126) 480,937 23 5,188 (2,935) 8,124 4,644 1,204 4,735 4,227 - - - - - (28,861) 223,283 - 258,259 - (405) 1,270 1,980 453 (5,188) 2,359 - - - - - - 6,586 1,689 (25,902) (13,372) 469,745 133 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 46: SIGNIFICANT EVENTS DURING THE YEAR ENDED 31 DECEMBER 2021 1) Capital increase in OTP Bank Romania 2) Acquisition at Slovenia 3) Capital increase in OTP Bank Srbija 4) Potential acquisition of Uzbek Ipoteka Bank 5) Acquisition of Alpha Banka See details about the event above in Note 11. 6) Discontinuance of international arbitration proceedings On 30th June 2021 OTP Bank Plc. has jointly with the Republic of Croatia requested the discontinuance of the international arbitration proceedings - registered on 16th October 2020 relating to mandatory exchange of FX loans and FX based consumer loans - from the Centre for Settlement of Investment Disputes (ICSID), due to the fact that the parties have resolved their disputes by way of mutual consent. The ICSID Secretary has on 30th June 2021 acknowledged receipt of the joint claim of the contending parties relating the discontinuance of the proceedings. According to the request of the parties, ICSID shall also formerly confirmed the termination of the litigation during 2021. 7) Termination of ICES bond See details about the event above in Note 27. 8) Resolutions made at OTP Bank’s Extraordinary General Meeting The Extraordinary General Meeting hold on 15 October, 2021 resolved that, the Bank shall sell its treasury shares on the stock exchange to those two Special Employee Stock Ownership Program organizations being established by the Bank employees (“OTP SECOP I.” and “OTP SECOP II.”). The Extraordinary General Meeting decided that if additional SECOP organisations will be initiated, those will be given one-off support on a yearly basis, under defined conditions, defined extent and in specified manner. 9) Interest benchmark reform OTP Bank was actively involved in industry efforts supporting transition to IBOR alternatives. The bank has taken extensive steps to prepare for the discontinuation of IBORs and worked closely with clients to ensure awareness and support transition activities. As the transition is complex, time-consuming process and relevant for the whole Group, the management of Bank has evaluated the impacts of the interest rate benchmarks reform, preparing itself for the transition through a dedicated internal group-wide project. As LIBOR’s five currencies (USD, GBP, EUR, JPY and CHF) and EONIA will be replaced by Risk Free Rates – which are different in nature compared to IBOR rates – OTP Group has implemented the relevant rates into the IT systems, and reached out the clients. The Bank’s priority was to ensure that the Bank can continue to offer clients the products and services they need, while also supporting them in the transition to the new alternative Risk Free Rates. 134 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 46: SIGNIFICANT EVENTS DURING THE YEAR ENDED 31 DECEMBER 2021 [continued] 9) Interest benchmark reform During the IBOR reform the Bank identified several risks at the beginning of 2021, which the project had to manage and monitor closely. These risks include but are not limited to the following: ▪ The abolution of LIBOR affected several transactions that may require automated IT solutions, ▪ The new reference rates are different in nature from LIBOR that cause difficulties to settle the value ▪ differences with the customers, It was necessary to implement new processes not to develop LIBOR based products, and to develop a strategy for removing or modifying the affected products handled by the Bank, ▪ After termination of LIBOR, the Bank has to act under the "Fallback clauses", the clauses that regulate the replacement of the reference interest rates in the contract and the use of an alternative interest as a reference. The content of these clauses needs to be clearly defined and checked from a business point of view, ie which reference interest rate will be applied instead of LIBOR for the given contract and whether it is commercially appropriate. In defining the fallback clauses, efforts had to be made to provide a viable alternative to the termination of LIBOR that would not result in a business loss for the Bank. ▪ Legal risks related to the termination of LIBOR. Such risks can arise when Fallback clauses are not included in the contracts, or the law governing the contract doesn’t contain a statutory reference rate. In these cases the contracts can be cancelled due to impossibility or the termination by either party. ▪ Missing of contractual interest rates can result in settlement disputes, compensation cases or litigation. ▪ Business risks of the termination of LIBOR. The most significant of these are o the law governing the contract can set the applicable interest rate that can be result in a business loss for the Bank, o business loss due to negative customer experience, o operational risk, when several unique contracts must be handled in a short time Terminating interest rates () LIBOR USD* (1 week and 2 months settings), FedFund Rate LIBOR GBP LIBOR JPY LIBOR EUR LIBOR CHF** EONIA * The following USD LIBOR settings will be terminated after June 30, 2023: overnight and 1, 3, 6 and 12 Months. The affected USD LIBOR contracts will be handled on an ongoing basis until the remaining USD LIBOR settings’ cessation date. **In the case of CHF LIBOR, OTP Bank acts in accordance with the implementing regulation of the European Commission (https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=PI_COM:C(2021)7488&from=EN). Alternative Reference Rates SOFR SONIA TONA EURIBOR SARON €STR Amounts effected by IBOR reform as at 31 December 2021 Reference rate Type of the contract Nominal value of the contract Pieces of contracts USD LIBOR USD LIBOR USD LIBOR Other LIBOR Other LIBOR Other LIBOR Other LIBOR Total Loan Deposit Derivatives Loan Deposit Derivatives Bonds (assets) 49.116 3.579 802.854 1.166 25.864 25.464 13.162 921.205 12 7 190 42 98 4 3 356 The above LIBOR-based amounts outstanding as at 31 December 2021 will be managed at the first interest period in 2022 therefore they do not cause a risk to the Bank or to the customers. 135 OTP BANK PLC. NOTES TO SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 47: SIGNIFICANT EVENTS AFTER THE REPORTING PERIOD In the second half of February 2022 the military conflict between Russia and Ukraine escalated. It is difficult to quantify the effect of the Ukrainian-Russian conflict regarding the Ukrainian and the Russian operations, the possible scenarios are covering a wide range of spectrum. According to the worst possible scenario, the Bank may lose its control over its investments, which under extreme conditions could result in the full write-off of the invested amount. These Consolidated Financial Statements do not contain any write-offs as possible consequences of the Ukrainian-Russian conflict, the Group recognizes it as not adjusting, post balance sheet event. Ukraine OTP Group’s Ukrainian operation incorporates the Ukrainian bank, as well as the leasing and factoring companies. The country-consolidated Ukrainian total assets represented HUF 984 billion at the end of 2021 (3.6% of total consolidated assets), while net loans comprised HUF 614 billion (3.9% of consolidated net loans) and shareholders’ equity HUF 160 billion (5.3% of the consolidated total equity). At the end of 2021 the book value of the capital investment in the Ukrainian subsidiaries comprised HUF 105 billion; there was no goodwill at all, it was already written down entirely in 2014. The gross intragroup funding towards the Ukrainian operation represented HUF 72 billion, and taking into account the Ukrainian deposits placed with the HQ, i.e. the net group funding represented HUF 29 billion equivalent. According to the 28 February 2022 figures, the gross funding amounted to HUF 75 billion equivalent and the net intragroup funding stood at HUF 9 billion equivalent. The Ukrainian RWA (“risk-weighted asset”) was HUF 230 billion by the end of 2021 (2.9% of the total RWA). The maximum capital effect on the potential write-off of the Ukrainian operation, taking into account the equity, the intragroup funding and the Ukrainian risk weighted assets, is estimated at 148 bps on the CET1 ratio, according to year-end figures. Russia The total assets of the Group’s Russian operation represented HUF 800 billion at the end of 2021 (2.9% of consolidated total assets), while net loans comprised HUF 621 billion (3.9% of consolidated net loans) and shareholders’ equity HUF 241 billion (7.9% of consolidated total equity). At the end of 2021 the book value of the capital investment in the Russian subsidiaries comprised directly HUF 74 billion and indirectly HUF 50 billion. The gross intragroup funding towards the Russian operation represented HUF 73 billion, and taking into account the Russian deposits placed with the Headquarter, i.e. the net group funding represented HUF 14 billion equivalent. On 28 February 2022 the gross intragroup funding reached HUF 52 billion equivalent, which equalled the net figure because there was no deposit placement by the Russian operation at other Group members. The Russian RWA was HUF 276.6 billion by the end of 2021 (3.4% of the total RWA). The capital maximum effect on the potential write-off of the Russian operation, taking into account the equity, the intragroup funding and the Russian risk weighted assets, is estimated at 173 bps on the CET1 ratio, according to year-end figures. Although the impact of the Russian-Ukrainian conflict on the Group’s Russian and Ukrainian operations is currently difficult to quantify, and as such uncertain, based on the current estimation of the Bank’s Management the Ukrainian-Russian conflict does not have considerably negative impact on the business activity, financial position, efficiency, liquidity and capital position of OTP Bank. Even after the recognition of the potential losses and write-offs outlined above, the Group's capital adequacy remains above the expected regulatory level. There is no sign of significant uncertainties having been arisen regarding carrying out its business as a going concern. The Bank’s Management is monitoring the situation of the Ukrainian-Russian conflict continuously and will take the necessary steps in order to moderate the business risk. 136 CONSOLIDATED FINANCIAL STATEMENTS IN ACCORDANCE WITH IFRS (2021) ANNUAL REPORT 2021 OTP BANK PLC CONSOLIDATED FINANCIAL STATEMENTS IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS AS ADOPTED BY THE EUROPEAN UNION AND INDEPENDENT AUDITORS’ REPORT FOR THE YEAR ENDED 31 DECEMBER 2021 Table of Contents CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2021 ............................................................................................................................................. 4 CONSOLIDATED STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 2021 .......................................................................................................................... 5 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2021 ..................................................................................................... 6 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2021 .............................................................................................................. 7 CONSOLIDATED STATEMENT OF CASH-FLOWS FOR THE YEAR ENDED 31 DECEMBER 2021 .......................................................................................................................... 8 1.1. General information 1.2. Basis of Accounting NOTE 1: ORGANIZATION AND BASIS OF CONSOLIDATED FINANCIAL STATEMENTS ................ 10 10 10 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ......................................................... 12 12 13 14 14 15 15 17 17 18 18 2.1. Basis of Presentation 2.2. Foreign currency translation 2.3. Principles of consolidation 2.4. Accounting for acquisitions 2.5. Securities at amortized cost 2.6. Financial assets at fair value through profit or loss 2.7. Hedge accounting 2.8. Offsetting 2.9. Embedded derivatives 2.10. Securities at fair value through other comprehensive income 2.11. Loans, placements with other banks, repo receivables and loss allowance for loan and placements and repo receivable losses 2.12. Modified assets 2.13. Purchased or originated credit impaired financial assets 2.14. Loss allowance 2.15. Sale and repurchase agreements, security lending 2.16. Associates and other investments 2.17. Property and equipment, Intangible assets 2.18. Inventories 2.19. Government grants and government assistance 2.20. Financial liabilities 2.21. Leases 2.22. Investment properties 2.23. Share capital 2.24. Treasury shares 2.25. Non-current assets held-for-sale and discontinued operations 2.26. Interest income and income similar to interest income and interest expense 2.27. Fees and Commissions 2.28. Profit from associates 19 20 21 21 24 24 24 25 25 25 26 27 28 28 28 28 29 29 2.29. Income tax 2.30. Banking tax 2.31. Off-balance sheet commitments and contingent liabilities 2.32. Share-based payment 2.33. Employee benefits 2.34. Biological assets and agricultural produce 2.35. Consolidated Statement of Cash-flows 2.36. Segment reporting 2.37. Comparative balances 29 30 30 30 31 31 31 32 32 NOTE 3: SIGNIFICANT ACCOUNTING ESTIMATES AND DECISIONS IN THE APPLICATION OF ACCOUNTING POLICIES ......................................................................................................... 34 34 34 34 35 35 35 NOTE 4: IMPACT OF CORONA VIRUS ( COVID-19) ................................................................................ 36 3.1. Loss allowances on financial instruments exposed to credit risk 3.2. Valuation of instruments without direct quotations 3.3. Provisions 3.4. Impairment on goodwill 3.5. Business model 3.6. Contractual cash-flow characteristics of financial assets NOTE 5: CASH, AMOUNTS DUE FROM BANKS AND BALANCES WITH THE NATIONAL BANKS (in HUF mn) ........................................................................................................................ 44 NOTE 6: PLACEMENTS WITH OTHER BANKS, NET OF LOSS ALLOWANCE FOR PLACEMENTS (in HUF mn) ............................................................................................................ 44 NOTE 7: REPO RECEIVABLES (in HUF mn) ................................................................................................ 45 NOTE 8: FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (in HUF mn) ............. 46 NOTE 9: SECURITIES AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME (in HUF mn) ............................................................................................................................................ 49 NOTE 10: SECURITIES AT AMORTIZED COST (in HUF mn) ..................................................................... 51 NOTE 11: LOANS AT AMORTIZED COST AND AT FAIR VALUE (in HUF mn) ...................................... 53 NOTE 12: A SSOCIATES AND OTHER INVESTMENTS (in HUF mn) ........................................................ 55 NOTE 13: PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS (in HUF mn) ....................................... 56 NOTE 14: INVESTMENT PROPERTIES (in HUF mn) .................................................................................... 63 NOTE 15: DERIVATIVE FINANCIAL ASSETS DESIGNATED AS HEDGE ACCOUNTING (in HUF mn) ..................................................................................................................................................... 64 NOTE 16: OTHER ASSETS (in HUF mn) ......................................................................................................... 64 NOTE 17: AMOUNTS DUE TO BANKS, THE NATIONAL GOVERNMENTS, DEPOSITS FROM THE NATIONAL BANKS AND OTHER BANKS (in HUF mn) .................................................... 66 NOTE 18: REPO LIABILITIES (in HUF mn) .................................................................................................... 66 NOTE 19: FINANCIAL LIABILITIES DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS (in HUF mn) ............................................................................................................................ 67 NOTE 20: DEPOSITS FROM CUSTOMERS (in HUF mn) .............................................................................. 68 NOTE 21: LIABILITIES FROM ISSUED SECURITIES (in HUF mn) ............................................................ 69 NOTE 22: DERIVATIVE FINANCIAL LIABILITIES HELD FOR TRADING (in HUF mn) ......................... 73 NOTE 23: DERIVATIVE FINANCIAL LIABILITIES DESIGNATED AS HEDGE ACCOUNTING (in HUF mn) ............................................................................................................................................ 73 NOTE 24: PROVISIONS AND OTHER LIABILITIES (in HUF mn) ............................................................... 74 NOTE 25: SUBORDINATED BONDS AND LOANS (in HUF mn) ................................................................. 76 NOTE 26: SHARE CAPITAL (in HUF mn) ....................................................................................................... 77 NOTE 27: RETAINED EARNINGS AND RESERVES (in HUF mn) .............................................................. 77 NOTE 28: TREASURY SHARES (in HUF mn) ................................................................................................. 81 NOTE 29: NON-CONTROLLING INTEREST (in HUF mn) ........................................................................... 81 NOTE 30: INTEREST INCOME, INCOME SIMILAR TO INTEREST INCOME AND EXPENSE (in HUF mn) ............................................................................................................................................ 82 NOTE 31: LOSS ALLOWANCES / IMPAIRMENT / PROVISIONS (in HUF mn) ......................................... 83 NOTE 32: NET PROFIT FROM FEES AND COMMISSIONS (in HUF mn) ................................................... 84 NOTE 33: GAIN AND LOSSES BY TRANSACTIONS (in HUF mn) ............................................................. 86 NOTE 34: OTHER OPERATING INCOME AND EXPENSES AND OTHER ADMINISTRATIVE EXPENSES (in HUF mn) .................................................................................................................. 87 NOTE 35: INCOME TAXES (in HUF mn) ........................................................................................................ 89 NOTE 36: LEASES (in HUF mn) ...................................................................................................................... 92 NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) ........................................................................ 95 95 112 117 117 126 129 NOTE 38: RECLASSIFICATION AND TRANSFER OF FINANCIAL INSTRUMENTS (in HUF mn) ...... 131 NOTE 39: OFF-BALANCE SHEET ITEMS AND DERIVATIVE FINANCIAL INSTRUMENTS (in 37.1. Credit risk 37.2. Maturity analysis of assets, liabilities and liquidity risk 37.3. Net foreign currency position and foreign currency risk 37.4. Interest rate risk management 37.5. Market risk 37.6. Capital management HUF mn) .......................................................................................................................................... 132 NOTE 40: SHARE-BASED PAYMENTS AND EMPLOYEE BENEFITS (in HUF mn) ............................... 133 NOTE 41: RELATED PARTY TRANSACTIONS (in HUF mn) .................................................................... 139 NOTE 42: SIGNIFICANT SUBSIDIARIES AND ASSOCIATES (in HUF mn) ............................................ 141 NOTE 43: TRUST ACTIVITIES (in HUF mn) ................................................................................................ 144 NOTE 44: CONCENTRATION OF ASSETS AND LIABILITIES ................................................................. 144 NOTE 45: EARNINGS PER SHARE (in HUF mn) ......................................................................................... 145 NOTE 46: NET GAIN OR LOSS REALIZED ON FINANCIAL INSTRUMENTS (in HUF mn) .................. 146 NOTE 47: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) ................................................... 148 NOTE 48: SEGMENT REPORTING BY BUSINESS AND GEOGRAPHICAL SEGMENTS (in HUF mn) ................................................................................................................................................... 168 NOTE 49: DISCONTINUED OPERATIONS (in HUF mn)............................................................................. 174 NOTE 50: SIGNIFICANT EVENTS DURING THE YEAR ENDED 31 DECEMBER 2021 ........................ 175 NOTE 51: POST BALANCE SHEET EVENTS .............................................................................................. 178 OTP BANK PLC CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2021 (in HUF mn) Note 2021 2020 Reclassified Cash, amounts due from banks and balances with the National Banks Placements with other banks, net of loss allowance for placements Repo receivables Financial assets at fair value through profit or loss Securities at fair value through other comprehensive income Securities at amortized cost Loans at amortized cost Loans mandatorily at fair value through profit or loss Finance lease receivables Associates and other investments Property and equipment Intangible assets and goodwill Right-of-use assets Investment properties Derivative financial assets designated as hedge accounting Deferred tax assets Current income tax receivables Other assets Assets classified as held for sale / discontinued operations TOTAL ASSETS Amounts due to banks, the National Governments, deposits from the National Banks and other banks Repo liabilities Financial liabilities designated at fair value through profit or loss Deposits from customers Liabilities from issued securities Derivative financial liabilities held for trading Derivative financial liabilities designated as hedge accounting Leasing liabilities Deferred tax liabilities Current income tax payable Provisions Other liabilities Subordinated bonds and loans Liabilities directly associated with assets classified as held for sale / discontinued operations TOTAL LIABILITIES Share capital Retained earnings and reserves Treasury shares Total equity attributable to the parent Total equity attributable to non-controlling interest TOTAL SHAREHOLDERS' EQUITY 5. 6. 7. 8. 9. 10. 11. 11. 35. 12. 13. 13. 35. 14. 15. 35. 35. 16. 49. 17. 18. 19. 20. 21. 22. 23. 36. 35. 35. 24. 24. 25. 49. 26. 27. 28. 29. 2,556,035 1,584,861 61,052 341,397 2,224,510 3,891,335 13,493,183 1,068,111 1,182,628 67,222 411,136 248,631 50,726 29,882 18,757 15,109 29,978 276,785 2,046 2,432,312 1,148,743 190,849 234,007 2,136,709 2,624,920 11,674,842 802,605 1,051,140 52,443 322,766 239,004 46,283 38,601 6,820 22,317 39,171 266,239 6,070 27,553,384 23,335,841 1,567,348 79,047 41,184 21,068,644 436,325 202,716 11,228 53,286 24,045 36,581 119,799 598,081 278,334 1,185,315 117,991 34,131 17,890,863 464,213 104,823 11,341 48,451 25,990 29,528 116,467 489,426 274,704 - 5,486 24,516,618 20,798,729 28,000 3,109,509 (106,941) 3,030,568 6,198 3,036,766 28,000 2,629,076 (124,080) 2,532,996 4,116 2,537,112 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 27,553,384 23,335,841 Budapest, 17 March, 2022 The accompanying Notes to Consolidated Financial Statements on pages 10 to 179 form an integral part of these Consolidated Financial Statements prepared in accordance with International Financial Reporting Standards as adopted by EU. 4 Dr. Sándor Csányi Chairman and Chief Executive Officer OTP BANK PLC CONSOLIDATED STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 2021 (in HUF mn) Note 2021 CONTINUING OPERATIONS Interest income calculated using the effective interest method Income similar to interest income Interest income and income similar to interest income Interest expense NET INTEREST INCOME Loss allowance on loans, placements and on repo receivables Change in the fair value attributable to changes in the credit risk of loans mandatorily measured at fair value through profit of loss Loss allowance on securities at fair value through other comprehensive income and on securities at amortized cost Provision for commitments and guarantees given Release of impairment of assets subject to operating lease and of investment properties Risk cost total NET INTEREST INCOME AFTER RISK COST Gain from derecognition of financial assets at amortized cost Modification loss Income from fees and commissions Expense from fees and commissions Net profit from fees and commissions Foreign exchange result, net Gains on securities, net Fair value adjustment on financial instruments measured at fair value through profit or loss Gain on derivative instruments, net Profit from associates Other operating income Other operating expenses Net operating income Personnel expenses Depreciation and amortization Goodwill impairment Other general expenses Other administrative expenses PROFIT BEFORE INCOME TAX Income tax expense NET PROFIT FOR THE YEAR FROM CONTINUING OPERATIONS From this, attributable to: Non-controlling interest Owners of the company DISCONTINUED OPERATIONS Gain from disposal of subsidiary classified as held for sale Gain from discontinued operations PROFIT FROM CONTINUING AND DISCOUNTINUED OPERATION Earnings per share (in HUF) From continuing operations Basic Diluted From continuing and discontinued operations Basic Diluted 30. 30. 31. 31. 31. 31. 31. 33. 4. 32. 32. 33. 33. 33. 33. 8., 9. 34. 34. 34. 13. 13. 34. 35. 29. 49. 49. 45. 45. 45. 45. 2020 Reclassified 841,901 135,986 977,887 (195,216) 782,671 (172,520) 922,539 194,920 1,117,459 (243,149) 874,310 (27,721) (16,289) (3,262) (3,974) (99) 438 (47,645) 826,665 1,885 (13,672) 554,113 (111,939) 442,174 (4,075) 5,560 (532) 6,798 15,648 81,328 (85,732) 18,995 (340,684) (94,996) - (311,932) (747,612) 528,435 (72,123) 456,312 836 455,476 - 116 (7,309) (8,662) 878 (190,875) 591,796 3,380 (29,773) 486,529 (88,896) 397,633 7,864 7,465 4,843 11,340 527 33,461 (39,447) 26,053 (308,642) (92,761) - (289,722) (691,125) 297,964 (43,918) 254,046 220 253,826 199 5,391 456,428 259,636 1,738 1,738 1,738 1,738 982 982 1,004 1,003 The accompanying Notes to Consolidated Financial Statements on pages 10 to 179 form an integral part of these Consolidated Financial Statements prepared in accordance with International Financial Reporting Standards as adopted by EU. 5 OTP BANK PLC CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2021 (in HUF mn) Note 2021 2020 NET PROFIT FOR THE YEAR Items that may be reclassified subsequently to profit or loss: Fair value adjustment of securities at fair value through other comprehensive income Deferred tax related to fair value adjustment of securities at fair value through other comprehensive income Derivative financial instruments designated as cash flow hedge Net investment hedge in foreign operations Deferred tax related to net investment hedge in foreign operations Foreign currency translation difference Items that will not be reclassified subsequently to profit or loss: Fair value changes of equity instruments at fair value through other comprehensive income Deferred tax related to equity instruments at fair value through other comprehensive income Change of actuarial loss related to employee benefits Deferred tax related to change of actuarial loss related to employee benefits Subtotal TOTAL COMPREHENSIVE INCOME From this, attributable to: Non-controlling interest Owners of the company 27. 27. 27. 27. 27. 27. 27. 27. 27. 27. 456,428 259,636 (50,789) (3,175) 3,526 918 - - - 61,729 (2) (9,440) 849 68,593 2,747 (2,890) (361) 53 (11) 383 143 1 16,894 55,380 473,322 315,016 1,041 472,281 (223) 315,239 The accompanying Notes to Consolidated Financial Statements on pages 10 to 179 form an integral part of these Consolidated Financial Statements prepared in accordance with International Financial Reporting Standards as adopted by EU. 6 OTP BANK PLC CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2021 (in HUF mn) Note Share capital Capital reserve Retained earnings and other reserves1 Treasury shares Total attributable to shareholders Non-controlling interest Total Balance as at 1 January 2020 Net profit for the period Other Comprehensive Income Total comprehensive income Purchasing of non-controlling interest Decrease due to discontinued operation Share-based payment Sale of Treasury shares Treasury shares - loss on sale Treasury shares - acquisition Payments to ICES holders Balance as at 31 December 2020 Balance as at 1 January 2021 Net profit for the period Other Comprehensive Income Total comprehensive income Increase due to business combination Share-based payment Adjustment of previous years' reserves Sale of Treasury shares Treasury shares - loss on sale Treasury shares - acquisition Payments to ICES holders Increase due to termination of ICES Balance as at 31 December 2021 28,000 - - - - - - - - - 28,000 28,000 - - - - - - - - - - - 28,000 49. 40. 28. 28. 28. 27. 40. 28. 28. 28. 27. 27. 52 - - - - - - - - - 52 52 - - - - - - - - - - - 52 2,319,211 259,416 55,823 315,239 - - 3,394 - (3,967) - (4,853) 2,629,024 2,629,024 455,592 16,689 472,281 - 3,589 1,034 - (27,800) - (3,734) 35,063 3,109,457 (60,931) - - - - - - 22,773 - (85,922) - (124,080) (124,080) - - - - - - 293,572 - (276,433) - - (106,941) 2,286,332 259,416 55,823 315,239 - - 3,394 22,773 (3,967) (85,922) (4,853) 2,532,996 2,532,996 455,592 16,689 472,281 - 3,589 1,034 293,572 (27,800) (276,433) (3,734) 35,063 3,030,568 4,956 220 (443) (223) (382) (235) - - - - - 4,116 4,116 836 205 1,041 1,041 - - - - - - - 6,198 2,291,288 259,636 55,380 315,016 (382) (235) 3,394 22,773 (3,967) (85,922) (4,853) 2,537,112 2,537,112 456,428 16,894 473,322 1,041 3,589 1,034 293,572 (27,800) (276,433) (3,734) 35,063 3,036,766 1 See details in Note 27, where the Retained earnings and other reserves category contains the capital reserve, share-based payment reserve and option reserve. The accompanying Notes to Consolidated Financial Statements on pages 10 to 179 form an integral part of these Consolidated Financial Statements prepared in accordance with International Financial Reporting Standards as adopted by EU. 7 OTP BANK PLC CONSOLIDATED STATEMENT OF CASH-FLOWS FOR THE YEAR ENDED 31 DECEMBER 2021 (in HUF mn) OPERATING ACTIVITIES Note 2021 2020 Net profit for the period (attributable to the owners of the company) Net accrued interest Dividend income Depreciation and amortization Loss allowance on securities Loss allowance on loans and placements, amounts due from banks and on repo receivables Loss allowance / (Release of loss allowance)on investments Release of loss allowance on investment properties Impairment on tangible and intangible assets Loss allowance on other assets Provision on off-balance sheet commitments and contingent liabilities Share-based payment Unrealized losses on fair value change of financial instrumentum at fair value through profit or loss Non-realized foreign exchange loss / (gain) Loss / (Gain) from sale of tangible and intangible assets Unrealized losses / (gains) on fair value change of derivative financial instruments Gain on discontinued operations Net changes in assets and liabilities in operating activities Net (increase) / decrease in securities at fair value through profit or loss Net (increase) / decrease in compulsory reserves at the National Banks Increase in placement with other banks, before loss allowance for placements Net increase in loans at amortized cost before loss allowance for loans and in loans at fair value Net increase in other assets before loss allowance Net increase in amounts due to banks, the National Governments, deposits from the National Banks and other banks and repo liabilities Net increase in financial liabilities designated at fair value through profit or loss Net increase in deposits from customers Cash payments for the interest portion of the lease liability Net increase in other liabilities Income tax paid Net Cash Provided by Operating Activities 27. 13. 9.,10. 5., 6., 7., 11. 12. 14. 13. 16. 24. 40. 33. 33. 13. 33. 49. 8. 5. 6. 11. 16. 455,592 14,854 (15,648) 100,321 3,974 27,721 6,640 (243) 2,772 1,986 10,856 3,589 11,404 22,258 129 18,982 (116) 259,416 (9,040) (527) 98,385 7,309 251,440 (381) (741) 51 7,416 14,792 3,394 762 (6,820) (637) (25,068) (5,391) (126,364) 23,928 (96,936) 17,839 (307,731) (903,119) (2,206,183) (1,473,258) (17,930) (86,868) 17., 18. 299,138 470,671 19. 20. 36. 24. 35. 1,315 3,125,494 (935) 186,319 (47,876) 1,473,382 4,647 2,306,621 (1,592) 61,684 (37,729) 977,184 The accompanying Notes to Consolidated Financial Statements on pages 10 to 179 form an integral part of these Consolidated Financial Statements prepared in accordance with International Financial Reporting Standards as adopted by EU. 8 OTP BANK PLC CONSOLIDATED STATEMENT OF CASH-FLOWS FOR THE YEAR ENDED 31 DECEMBER 2021 (in HUF mn) [continued] Note 2021 2020 INVESTING ACTIVITIES Purchase of securities at fair value through other comprehensive income Proceeds from sale of securities at fair value through other comprehensive income Purchase of investments Proceeds from sale of investments Dividends received Purchase of securities at amortized cost Redemption of securities at amortized cost Purchase of property, equipment and intangible assets Proceeds from disposals of property, equipment and intangible assets Purchase of investment properties Proceeds from sale of investment properties Net change in cash and cash equivalents from discontinued operation Net cash paid for acquisition Net Cash Used in Investing Activities FINANCING ACTIVITIES Cash received from issuance of securities Cash used for redemption of issued securities Cash payments for the principal portion of the lease liability Cash received from issuance of subordinated bonds and loans Cash used for redemption of subordinated bonds and loans Payments to ICES holders Sale of Treasury shares Purchase of Treasury shares Dividends paid Net Cash Provided by / (Used in) Financing Activities TOTAL NET CASH (USED IN) / PROVIDED BY Cash and cash equivalents at the beginning of the period Foreign currency translation Net change in cash and cash equivalent Adjustment due to discontinued operation Cash and cash equivalents at the end of the period 9. 9. 12. 12. 27. 10. 10. 13. 13. 14. 14. 49. 21. 21. 36. 25. 25. 27. 28. 28. 27. 5. 5. (2,342,772) (1,864,934) 2,217,702 (32,626) 11,207 15,648 (6,249,137) 4,997,215 (300,715) 119,661 (134) 7,983 116 - (1,555,852) 76,728 (106,350) (14,149) 2,676 - 71,688 293,572 (276,433) (10) 47,722 2,162,682 (33,494) 2,382 399 (6,655,496) 6,022,703 (136,130) 68,625 (574) 10,416 5,544 - (417,877) 149,105 (78,597) (16,856) 773 (2,600) (4,853) 18,806 (85,922) (10) (20,154) (34,748) 539,153 1,674,777 61,533 (34,748) 2 1,049,737 69,036 539,153 16,851 1,701,564 1,674,777 The accompanying Notes to Consolidated Financial Statements on pages 10 to 179 form an integral part of these Consolidated Financial Statements prepared in accordance with International Financial Reporting Standards as adopted by EU. 9 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 1: ORGANIZATION AND BASIS OF CONSOLIDATED FINANCIAL STATEMENTS 1.1. General information OTP Bank Plc. (the “Bank” or “OTP Bank”) was established on 31 December 1990, when the previously State- owned company was transformed into a public liability company. The Bank’s registered office address is 16, Nador Street, Budapest 1051. Due to Hungarian legislation audit services are a statutory requirement for OTP Bank. Disclosure information about the auditor: Ernst & Young Audit Ltd. (001165), 1132 Budapest Váci Street 20. Registered under 01-09- 267553 by Budapest-Capital Regional Court, as registry court. Statutory registered auditor: Zsuzsanna Nagyváradiné Szépfalvi, registration number: 005313. These Consolidated Financial Statements were approved by the Board of Directors and authorised for issue on 17 March 2022. The Bank’s owners have the power to amend the Consolidated Financial Statements after issue if applicable. In 1995, the shares of the Bank were introduced on the Budapest and the Luxembourg Stock Exchanges and were also traded on the SEAQ board on the London Stock Exchange and on PORTAL in the USA. The structure of the Share capital by shareholders (%): Domestic and foreign private and institutional investors Employees Treasury shares Total 2021 2020 97% 1% 2% 100% 97% 1% 2% 100% The Bank’s Registered Capital consists of 280.000.010 pieces of ordinary shares with the nominal value of HUF 100 each, representing the same rights to the shareholders. The Bank and its subsidiaries (“Entities of the Group“, together the “Group” or “OTP Group”) provide a full range of commercial banking services through a wide network of 1,455 branches in the following countries Hungary, Bulgaria, Serbia, Croatia, Russia, Romania, Ukraine, Albania, Montenegro, Moldova and Slovenia, as well as provides other services in the Netherlands, Cyprus and Malta. The number of the active employees without long-term breaks, and with part-time employees taken into account proportionately, and the average number of active employees on monthly basis at the Group: The number of employees at the Group The average number of employees at the Group 1.2. Basis of Accounting 2021 37,866 37,890 2020 38,626 39,943 These Consolidated Financial Statements were prepared based on the assumptions of the Management that the Bank will remain in business for the foreseeable future and that the Bank will not be forced to halt operations and liquidate its assets in the near term at what may be very low fire-sale prices. The Entities of the Group maintain their accounting records and prepare their statutory accounts in accordance with the commercial, banking and fiscal regulations prevailing in Hungary and in case of foreign subsidiaries in accordance with the commercial, banking and fiscal regulations of the country in which they are domiciled. The Bank’s functional currency is the Hungarian Forint (“HUF”). It is also presentation currency for the Group. The financial statements of the subsidiaries used during the preparation of Consolidated Financial Statements of the Group have the same reporting period – starting from 1 January ending as at 31 December – like the reporting period of the Group. 10 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 1: ORGANIZATION AND BASIS OF CONSOLIDATED FINANCIAL STATEMENTS [continued] 1.2. Basis of Accounting [continued] Due to the fact that the Bank is listed on international and national stock exchanges, the Bank is obliged to present its financial statements in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (the “EU”). Certain adjustments have been made to the Entities’ statutory accounts in order to present the Consolidated Financial Statements of the Group in accordance with all standards and interpretations approved by the International Accounting Standards Board (“IASB”). These Consolidated Financial Statements have been prepared in accordance with IFRS as adopted by the EU. 1.2.1. The effect of adopting new and revised International Financial Reporting Standards effective from 1 January 2021 The following amendments to the existing standards and new interpretation issued by the International Accounting Standards Board (IASB) and adopted by the EU are effective for the current reporting period: - Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 “Interest Rate Benchmark Reform – Phase 2 adopted by EU on 13 January 2021 (effective for annual periods beginning on or after 1 January 2021), - Amendments to IFRS 4 “Insurance Contracts” – “Deferral of IFRS 9” adopted by EU on 15 December 2020 (effective for annual periods beginning on or after 1 January 2021), - IFRS 17 “Insurance Contracts” (effective for annual periods beginning on or after 1 January 2021), - Amendments to IFRS 16 “Leases” – “Covid 19-Related Rent Concessions beyond 30 June 2021” (effective for annual periods beginning on or after 1 April 2021). The adoption of these amendments to the existing standards has not led to any material changes in the Group’s Consolidated Financial Statements. 1.2.2. New and revised Standards and Interpretations issued by IASB and adopted by the EU but not yet effective At the date of authorization of these financial statements there are new standards, amendments to the existing standards nor interpretations which are issued by IASB and adopted by the EU which are not yet effective: - Amendments to IFRS 1 “First-time Adoption of International Financial Reporting Standards”, IFRS 9 “Financial Instruments”, IAS 41 “Agriculture”– “Annual Improvements to IFRSs 2018-2020 Cycle” - adopted by EU on 28 June 2021 (effective for annual periods beginning on or after 1 January 2022), - Amendments to IFRS 3 “Business Combinations”; IAS 16 “Property, Plant and Equipment”; IAS 37 “Provisions, Contingent Liabilities and Contingent Assets” - adopted by the EU on 28 June 2021 Annual Improvements (effective for annual periods beginning on or after 1 January 2022), - Amendments to IFRS 17 “Insurance Contracts” (effective for annual periods beginning on or after 1 January 2023). The Group does not adopt these new standards and amendments to existing standards before their effective date. The Group anticipates that the adoption of these new standards, amendments to the existing standards and new interpretations will have no material impact on the Consolidated Financial Statements of the Group in the period of initial application. 11 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 1: ORGANIZATION AND BASIS OF CONSOLIDATED FINANCIAL STATEMENTS [continued] 1.2. Basis of Accounting [continued] 1.2.3. Standards and Interpretations issued by IASB, but not yet adopted by the EU At present, IFRS as adopted by the EU do not significantly differ from regulations adopted by the International Accounting Standards Board (IASB) except for the following new standards, amendments to the existing standards and new interpretation, which were not endorsed for use in EU as at the publication of these Consolidated Financial Statements: - Amendments to IAS 1 “Presentation of Financial Statements” - Classification of Liabilities as Current or Non-Current (effective for annual periods beginning on or after 1 January 2023), - Amendments to IAS 1 “Presentation of Financial Statements” and IFRS Practice Statement 2 – Disclosure of Accounting policies (effective for annual periods beginning on or after 1 January 2023), - Amendments to IAS 8 “Accounting policies, Changes in Accounting Estimates and Errors” – Definition of Accounting Estimates (effective for annual periods beginning on or after 1 January 2023), - Amendments to IFRS 10 “Consolidated Financial Statements” and IAS 28 “Investments in Associates and Joint Ventures” – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture and further amendments (effective date deferred indefinitely until the research project on the equity method has been concluded), Amendments to IAS 12 “Income Taxes” – Deferred Tax related to Assets and Liabilities arising from a Single Transaction (effective for annual periods beginning on or after 1 January 2023), Amendments to IFRS 17 “Insurance Contracts” – Initial application of IFRS 17 and IFRS 9 – Comparative Information (effective date for annual periods beginning on or after 1 January 2023). - - The Group anticipates that the adoption of these new standards, amendments to the existing Standards and new interpretations will have no significant impact on the Consolidated Financial Statements of the Group in the period of initial application. NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Significant accounting policies applied in the preparation of the accompanying Consolidated Financial Statements are summarized below: 2.1. Basis of Presentation These Consolidated Financial Statements have been prepared under the historical cost convention with the exception of certain financial instruments, which are recorded at fair value. Revenues and expenses are recorded in the period in which they are earned or incurred. The Group does not offset assets and liabilities or income and expenses unless it is required or permitted by an IFRS standard. During the preparation of Consolidated Financial Statements assets and liabilities, income and expenses are presented separately, except in certain cases, when one of the IFRS standards prescribes net presenting related to certain items (see note 2.8. below). The presentation of Consolidated Financial Statements in conformity with IFRS as adopted by the EU requires the Management of the Group to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and their reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Future changes in economic conditions, business strategies, regulatory requirements, accounting rules and other factors could result in a change in estimates that could have a material impact on future financial statements. 12 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.2. Foreign currency translation In preparing the financial statements of each individual group entity, transactions in currencies other than the entity's functional currencies are translated into functional currencies at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the exchange rates quoted by the National Bank of Hungary (“NBH”), or if there is no official rate, at exchange rates quoted by OTP Bank as at the date of the Consolidated Financial Statements. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences on monetary items are recognized in profit or loss in the period in which they arise except for: - exchange differences on foreign currency borrowings relating to assets under construction for future productive use, which are included in the cost of those assets when they are regarded as an adjustment to interest costs on those foreign currency borrowings; - exchange differences on transactions entered into in order to hedge certain foreign currency risks (see note 2.7. below for hedging accounting policies); and - exchange differences on monetary items receivable from or payable to a foreign operation for which settlement is neither planned nor likely to occur (therefore forming part of the net investment in the foreign operation), which are recognized initially in Other Comprehensive Income and reclassified from equity to profit or loss on repayment of the monetary items. For the purposes of presenting Consolidated Financial Statements, the assets and liabilities of the Group's foreign operations are translated into HUF using exchange rates prevailing at the end of each reporting period. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the dates of the transactions are used. Exchange differences arising, if any, are recognized in Other Comprehensive Income and accumulated in equity (attributed to non-controlling interests as appropriate). On the disposal of a foreign operation (i.e. a disposal of the Group's entire interest in a foreign operation, or a disposal involving loss of control over a subsidiary that includes a foreign operation, a disposal involving loss of joint control over a jointly controlled entity that includes a foreign operation, or a disposal involving loss of significant influence over an associate that includes a foreign operation), all of the exchange differences accumulated in equity in respect of that operation attributable to the owners of the Group are reclassified to profit or loss. In addition, in relation to a partial disposal of a subsidiary that does not result in the Group losing control over the subsidiary, the proportionate share of accumulated exchange differences are re-attributed to non-controlling interests and are not recognized in profit or loss. Goodwill and fair value adjustments on identifiable assets and liabilities acquired arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the rate of exchange prevailing at the end of each reporting period. Exchange differences arising are recognized in Other Comprehensive Income and accumulated in equity. 13 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.3. Principles of consolidation As the ultimate parent, OTP Bank is preparing Consolidated Financial Statements of the Group. These Consolidated Financial Statements combine the assets, liabilities, equity, income, expenses and cash flows of the Bank and of those subsidiaries of the Bank in which the Bank exercises control. All intra-group transactions are consolidated fully on a line-by-line basis while under equity method other consolidation rules are applied. Determination of the entities which are involved into the consolidation procedures based on the determination of the Group’s Control over another entity. Control exists when the Bank has power over the investee, is able to use this power and is exposed or has right to variable returns. Consolidation of a subsidiary should begin from the date when the Group obtains control and cease when the Group loses control. Therefore, income and expenses of a subsidiary should be included in the Consolidated Financial Statements from the date the Group gains control of the subsidiary until the date when the Group ceases to have control of the subsidiary. The list of the major fully consolidated subsidiaries, the percentage of issued capital owned by the Bank and the description of their activities is provided in Note 42. 2.4. Accounting for acquisitions Business combinations are accounted for using the acquisition method. Any goodwill arising on acquisition is recognized in the Consolidated Statement of Financial Position and accounted for as indicated below. The acquisition date is the date on which the acquirer effectively obtains control over the acquiree. Before this date, it should be presented as Advance for investments within Other assets. Goodwill, which represents the residual cost of the acquisition after obtaining the control over the acquiree in the fair value of the identifiable assets acquired and liabilities assumed is held as an intangible asset and recorded at cost less any accumulated impairment losses in the Consolidated Financial Statements. The Group tests goodwill for impairment by comparing its recoverable amount with its carrying amount, and recognising any excess of the carrying amount over the recoverable amount an impairment loss. The recoverable amount of goodwill is the higher of its fair value less costs of disposal and its value in use. If the Group loses control of a subsidiary, derecognizes the assets (including any goodwill) and liabilities of the subsidiary at their carrying amounts at the date when control is lost and recognizes any difference as a gain or loss on the sale attributable to the parent in the Consolidated Statement of Profit or Loss on Net income from discontinued operations. Goodwill acquired in a business combination is tested for impairment annually or more frequently if events or changes in circumstances indicate. The goodwill is allocated to the cash-generating units that are expected to benefit from the synergies of the combinations. The Group calculates the fair value of identified assets and liabilities assumed on discounted cash-flow model. The 3 year period explicit cash-flow model serves as a basis for the impairment test by which the Group defines the impairment need on goodwill based on the strategic factors and financial data of its cash-generating units. The Group, in its strategic plan, has taken into consideration the effects of the present global economic situation, the present economic growth and outlook, the associated risks and their possible effect on the financial sector as well as the current and expected availability of wholesale funding. Negative goodwill (gain from bargain purchase), when the interest of the acquirer in the net fair value of the acquired identifiable net assets exceeds the cost of the business combination, is recognized immediately in the Consolidated Statement of Profit or Loss as “Other income”. 14 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.5. Securities at amortized cost The Group measures at amortized cost those securities which are held for contractual cash collecting purposes, and contractual terms of these securities give rise to cash flows that are solely payment of principal and interest on the principal amount outstanding. The Group initially recognizes these securities at fair value. Securities at amortized cost are subsequently measured using the effective interest (“EIR”) method and are subject to impairment. The amortisation of any discount or premium on the acquisition of a security at amortized cost is part of the amortized cost and is recognized as interest income so that the revenue recognized in each period represents a constant yield on the investment. Securities at amortized cost are accounted for on a trade date basis. The Group applies the FIFO1 inventory valuation method for securities at amortized cost. Such securities comprise mainly securities issued by the Hungarian and foreign Governments, corporate bonds, mortgage bonds and discounted treasury bills. 2.6. Financial assets at fair value through profit or loss 2.6.1. Securities held for trading Investments in securities are accounted for on a trade date basis and are initially measured at fair value. Securities held for trading are measured at subsequent reporting dates at fair value, so unrealized gains and losses on held for trading securities are recognized in profit or loss and included in the Consolidated Statement of Profit or Loss for the period. The Group holds held for trading securities within the business model to obtain short-term gains, consequently realized and unrealized gains and losses are recognized in the net operating income, while interest income is recognized in income similar to interest income. The Group applies the FIFO inventory valuation method for securities held for trading. Such securities consist of equity instruments, shares in investment funds, Hungarian and foreign government bonds, corporate bonds, discounted treasury bills, mortgage bonds and other securities. 2.6.2. Financial assets designated as fair value through profit or loss The Group may - at initial recognition - irrevocable designate a financial asset as measured at fair value through profit or loss that would otherwise be measured at fair value through other comprehensive income or at amortized cost. The Group may use fair value designation only in the following cases: - if the classification eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases (‘accounting mismatch’) The use of the fair value designation is based only on direct decision of management of the Group. 2.6.3. Derivative financial instruments In the normal course of business, the Group is a party to contracts for derivative financial instruments, which represent a low initial investment compared to the notional value of the contract and their value depends on value of underlying asset and are settled in the future. The derivative financial instruments used include interest rate forward or swap agreements and currency forward or swap agreements and options. These financial instruments are used by the Group both for trading purposes and to hedge interest rate risk and currency exposures associated with its transactions in the financial markets. Derivative financial instruments are accounted for on a trade date basis and are initially measured at fair value and at subsequent reporting dates also at fair value. Fair values are obtained from quoted market prices, discounted cash-flow models and option pricing models as appropriate. The Group adopts a multi curve valuation approach for calculating the net present value of future cash-flows – based on different curves used for determining forward rates and used for discounting purposes. It shows the best estimation of such derivative deals that are collateralised as the Group has almost all of its open derivative transactions collateralised. Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognized in profit or loss and are included in the Consolidated Statement of Profit or Loss for the period. Each derivative deal is determined as asset when fair value is positive and as liability when fair value is negative. 1 First In First Out 15 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.6. Financial assets at fair value through profit or loss [continued] 2.6.3. Derivative financial instruments [continued] Certain derivative transactions, while providing effective economic hedges under the risk management policy of the Group, do not qualify for hedge accounting under the specific rules of IFRS 9 and are therefore treated as derivatives held for trading with fair value gains and losses charged directly to the Consolidated Statement of Profit or Loss. Foreign currency contracts Foreign currency contracts are agreements to exchange specific amounts of currencies at a specified rate of exchange, at a spot date (settlement occurs two days after the trade date) or at a forward date (settlement occurs more than two days after the trade date). The notional amount of these forward contracts does not represent the actual market or credit risk associated with these contracts. Foreign currency contracts are used by the Group for risk management and trading purposes. The risk management foreign currency contracts of the Group were used to hedge the exchange rate fluctuations of loans and deposits to credit institutions denominated in foreign currency. Foreign exchange swaps and interest rate swaps The Group enters into foreign exchange swap and interest rate swap (“IRS”) transactions. The swap transaction is an agreement concerning the swap of certain financial instruments, which usually consists of spot and one or more forward contracts. IRS transactions oblige two parties to exchange one or more payments calculated with reference to fixed or periodically reset rates of interest applied to a specific notional principal amount (the base of the interest calculation). Notional principal is the amount upon which interest rates are applied to determine the payment streams under IRS transactions. Such notional principal amounts often are used to express the volume of these transactions but are not actually exchanged between the counterparties. IRS transactions are used by the Group for risk management and trading purposes. Cross-currency interest rate swaps The Group enters into cross-currency interest rate swap (CCIRS) transactions which have special attributes, i.e. the parties exchange the notional amount at the beginning and also at the maturity of the transaction. A special type of these deals is the mark-to-market CCIRS agreements. For these kind of transactions the parties – in accordance with the foreign exchange prices – revalue the notional amount during lifetime of the transaction. Equity and commodity swaps Equity swaps obligate two parties to exchange more payments calculated with reference to periodically reset rates of interest and performance of indices. A specific notional principal amount is the base of the interest calculation. The payment of index return is calculated on the basis of current market price compared to the previous market price. In case of commodity swaps payments are calculated on the basis of the strike price of a predefined commodity compared to its average market price in a period. Forward rate agreements (FRA) A forward rate agreement is an agreement to settle amounts at a specified future date based on the difference between an interest rate index and an agreed upon fixed rate. Market risk arises from changes in the market value of contractual positions caused by movements in interest rates. The Group limits its exposure to market risk by entering into generally matching or offsetting positions and by establishing and monitoring limits on unmatched positions. Credit risk is managed through approval procedures that establish specific limits for individual counterparties. The Group’s forward rate agreements were transacted for management of interest rate exposures and have been accounted for at mark-to-market fair value. 16 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.6. Financial assets at fair value through profit or loss [continued] 2.6.3 Derivative financial instruments [continued] Foreign exchange options A foreign exchange option is a derivative financial instrument that gives the owner the right to exchange money denominated in one currency into another currency at a pre-agreed exchange rate at a specified future date. The transaction, for a fee, guarantees a worst-case exchange rate for the futures purchase of one currency for another. These options protect against unfavourable currency movements while preserving the ability to participate in favourable movements. 2.7. Hedge accounting Derivative financial instruments designated as a fair-value hedge Changes in the fair value of derivatives that are designated and qualify as hedging instruments in fair value hedges and that prove to be highly effective in relation to the hedged risk, are recorded in the Consolidated Statement of Profit or Loss along with the corresponding change in fair value of the hedged asset or liability that is attributable to the specific hedged risk. Changes in the fair value of hedging instrument in fair value hedges is charged directly to the Consolidated Statement of Profit or Loss. The conditions of hedge accounting applied by the Bank are the following: formally designated as hedge relationship, proper hedge documentation is prepared, effectiveness test is performed and based on it the hedge is qualified as effective. The Group implemented hedge accounting rules prescribed by IFRS 9 in 2018. Derivative financial instruments designated as cash flow hedge Changes in the fair value of derivatives that are designated and qualify as hedging instrument in cash-flow hedges and that prove to be highly effective in relation to the hedged risk are recognized in their effective portion as reserve in Other Comprehensive Income. The ineffective element of the changes in fair value of hedging instrument is charged directly to the Consolidated Statement of Profit or Loss. The Group terminates the hedge relationship if the hedging instrument expires or is sold, terminated or exercised, or the hedge no longer meets the criteria for hedge accounting. In the case of cash-flow hedges – in line with the standard -hedge accounting is still applied by the Group as long as the underlying asset is derecognized. Net investment hedge in foreign operations Hedges of a net investment in a foreign operation, including a hedge of a monetary item that is accounted for as part of the net investment, shall be accounted for similarly to cash flow hedges. On the disposal of a foreign operation, the cumulative value of any gains and losses recognized in Other Comprehensive Income is transferred to the Consolidated Statement of Profit or Loss. 2.8. Offsetting Financial assets and liabilities are offset and the net amount is reported in the Consolidated Statement of Financial Position when the Group has a legally enforceable right to set off the recognized amounts and the transactions are intended to be reported in the Consolidated Statement of Financial Position on a net basis. In case of the derivative financial instruments the Group applies offsetting and net presentation in the Consolidated Statement of Financial Position when the Group has the right and the ability to settle these assets and liabilities on a net basis. 17 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.9. Embedded derivatives Sometimes, a derivative may be a component of a combined or hybrid contracts that includes a host contract and a derivative (the embedded derivative) affecting cash-flows or otherwise modifying the characteristics of the host instrument. An embedded derivative must be separated from the host instrument and accounted for as a separate derivative if, and only if: The economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract; A separate financial instrument with the same terms as the embedded derivative would meet the definition of a derivative as a stand-alone instrument; and The host instrument is not measured at fair value or is measured at fair value but changes in fair value are recognized in Other Comprehensive Income. As long as a hybrid contract contains a host that is a financial asset the general accounting rules for classification, recognition and measurement of financial assets are applicable for the whole contract and no embedded derivative is separated. Derivatives that are required to be separated are measured at fair value at initial recognition and subsequently.If the Group is unable to measure the embedded derivative separately either at acquisition or at the end of a subsequent financial reporting period, the Group shall designate the entire hybrid contract as at fair value through profit or loss. The Group shall assess whether an embedded derivative is required to be separated from the host contract and accounted for as a derivative when the Bank first becomes a party to the contract. 2.10. Securities at fair value through other comprehensive income Securities at fair value through other comprehensive income are held within a business model whose objective is achieved by both collecting of contractual cash flows and selling securities. Furthermore, the contractual terms of these securities give rise on specified dates to cash flows that are solely payment of principal and interest on the principal amount outstanding. Debt instruments Investments in debt securities are accounted for on a trade date basis and are initially measured at fair value. Securities at fair value through other comprehensive income are measured at subsequent reporting dates at fair value. Unrealized gains and losses on securities at fair value through other comprehensive income are recognized directly in Other Comprehensive Income, except for interest and foreign exchange gains/losses on monetary items, unless such financial asset at fair value through other comprehensive income is part of an effective hedge. Such gains and losses are reported when realized in Consolidated Statement of Profit or Loss for the applicable period. The Group applies the FIFO1 inventory valuation method for securities at fair value through other comprehensive income. For debt securities at fair value through other comprehensive income the loss allowance is calculated based on expected credit loss model. The expected credit loss is accounted for against Other Comprehensive Income. Securities at fair value through other comprehensive income are remeasured at fair value based on quoted prices or amounts derived from cash-flow models. In circumstances where the quoted market prices are not readily available, the fair value of debt securities is estimated using the present value of future cash-flows and the fair value of any unquoted equity instruments are calculated using the EPS ratio. Such securities consist of Hungarian and foreign government bonds, corporate bonds, mortgage bonds, discounted and interest bearing Treasury bills, securities issued by the NBH and other securities. 1 First In First Out 18 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.10. Securities at fair value through other comprehensive income [continued] Fair value through other comprehensive income option for equity instruments The Group has elected to present in the Statement of Other Comprehensive Income changes of fair value of those equity instruments which are neither held for trading nor recognized under IFRS 3. In some cases, the Group made an irrevocable election at initial recognition for certain equity instruments to present subsequent changes in fair value of these securities in the consolidated other comprehensive income instead of in profit or loss. The use of the fair value option is based only on direct decision of management of the Group. 2.11. Loans, placements with other banks, repo receivables and loss allowance for loan and placements and repo receivable losses The Group measures at amortized cost those Loans and placements with other banks and repo receivables, which are held to collect contractual cash flows, and contractual terms of these assets give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. These loans are recognized as Loans at amortized cost in the Consolidated Statement of Financial Position. The Group recognizes those financial assets which are not held for trading and do not give rise to contractual cash flows that are solely payments of principal and interest on the principal amount outstanding as loans measured at fair value through profit or loss. These loans are recognized as Loans mandatorily at fair value through profit or loss in the Consolidated Statement of Financial Position. Those Loans and placements with other banks and repo receivables that are accounted at amortized cost, stated at the principal amounts outstanding (including accrued interest), net of allowance for loan or placement losses, respectively. In case of the above mentioned financial assets measured at amortised cost transaction fees and charges adjust the carrying amount at initial recognition and are included in effective interest calculation. In case of loans at fair value through profit or loss fees and charges are recognised when incurred in the Consolidated Statement of Profit or Loss. Loans and placements with other banks and repo receivables are derecognized when the contractual rights to the cash-flows expire or they are transferred. When a financial asset is derecognized the difference of the carrying amount and the consideration received is recognized in the profit or loss in case of financial assets at amortised cost the gains or losses from derecognition are presented in “Gains/losses from derecognition of financial assets at amortised cost” line while in case of loans at fair value through profit or loss the gains or losses from derecognition are presented in “Net operating income”. Change in the fair value of loans at fair value through profit or loss is broken down into two components and presented in the Consolidated Statement of Profit or Loss as follows: • Portion of the change in fair value arising from changes in credit risk are presented within “Risk cost” as “Change in the fair value attributable to changes in the credit risk of loans mandatorily measured at fair value through profit of loss”. • The remaining component of the change is presented in fair value within “Net operating income” as “Fair value adjustment on financial instruments measured at fair value through profit or loss”. Initially financial assets shall be recognized at fair value which is usually equal to transaction value in case of loans and placements. However, when the amounts are not equal, the initial fair value difference should be recognized. If the fair value of financial assets is based on a valuation technique using only inputs observable in market transactions, the Group recognizes the initial fair value difference in the Consolidated Statement of Profit or Loss. When the fair value of financial assets is based on models for which inputs are not observable, the difference between the transaction price and the fair value is deferred and only recognized in profit or loss when the instrument is derecognized or the inputs became observable. Initial fair value of loans lent at interest below market conditions is lower than their transaction price. 19 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.11. Loans, placements with other banks, repo receivables and loss allowance for loan and placements and repo receivable losses [continued] The Group recognizes a loss allowance for expected credit losses on a financial asset at each reporting date. The loss allowance for a financial asset equals to 12-month expected credit loss or equals to the lifetime expected credit losses. The maximum period over which expected credit losses shall be measured is the maximum contractual period over which the Group is exposed to credit risk. If the credit risk on a financial asset has not increased significantly since initial recognition then 12-month expected credit losses, otherwise (in case of significant credit risk increase) lifetime expected credit losses should be calculated. The expected credit loss is the present value of the difference between the contractual cash flows that are due to the Group under the contract and the cash flows that the Group expects to receive. When the contractual cash flows of a financial asset are modified and the modification does not result in the derecognition of the financial asset the Group recalculates the gross carrying amount of the financial asset by discounting the expected future cash flows with the original effective interest rate of the asset. The difference between the carrying amount and the present value of the expected cash flows is recognized as a modification gain or loss in the profit or loss. Interest and amortized cost are accounted using effective interest rate method. Write-offs are generally recorded after all reasonable restructuring or collection activities have taken place and the possibility of further recovery is considered to be remote. The loan is written off against the related account “Gain / (Loss) from derecognition of financial assets at amortized cost” in the Consolidated Statement of Profit or Loss. The Group applies partial or full write-off for loans based on the definitions and prescriptions of financial instruments in accordance with IFRS 9. If the Group has no reasonable expectations regarding a financial asset (loan) to be recovered, it will be written off partially or fully at the time of emergence. The gross amount and loss allowance of the loans shall be written off in the same amount to the estimated maximum recovery amount while the net carrying value remains unchanged. In those cases when on the previously partially or fully written-off loans or placements, which perhaps were derecognized from the books no having been reasonable expectations but later recoveries could be determined then reversal of written-off will be booked in the Consolidated Statement of Profit or Loss on “Income from recoveries of written-off, but legally existing loan” line in Risk cost. 2.12. Modified assets If the net present value of the contracted cash flows changes due to the modification of the contractual terms and it is not qualified as derecognition, modification gain or loss should be calculated and accounted for in the Consolidated Statement of Profit or Loss. Modification gain or loss is accounted in cases like restructuring – as defined in guidelines of the Group – prolongation, renewal with unchanged terms, renewal with shorter terms and prescribing capital repayment rate, if it doesn’t exist or has not been earlier. The changes of net present value should be calculated on portfolio level in case of retail exposures. Each retail contract is restructured based on restructuring frameworks. The Group has to evaluate these frameworks (and not individual contracts). The changes of net present value should be calculated individually on contract level in case of corporate portfolio. Among the possible contract amendments, the Group considers as a derecognition and a new recognition when the discounted present value – discounted at the original effective interest rate – of the cash flows under the new terms is at least 10 per cent different from the discounted present value of the remaining cash flows. In case of derecognition and new recognition the unamortized fees of the derecognized asset should be presented as Income similar to interest income. The newly recognized financial asset is initially measured at fair value and is placed in stage 1 if the derecognized financial asset was in stage 1 or stage 2 portfolio. The newly recognized financial asset will be purchased or originated credit impaired financial asset (“POCI”) if the derecognized financial asset was in stage 3 portfolio or it was POCI. 20 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.12. Modified assets [continued] The modification gain or loss shall be calculated at each contract amendments unless they are handled as a derecognition and new recognition. In case of modification the Group recalculates the gross carrying amount of the financial asset. To do this, the new contractual cash flows should be discounted using the financial asset’s original effective interest rate (or credit-adjusted effective interest rate for POCI financial asset). Any costs or fees incurred adjust the carrying amount of the modified financial asset are amortized over the remaining term of the modified financial asset. 2.13. Purchased or originated credit impaired financial assets Purchased or originated financial assets are credit-impaired on initial recognition. A financial asset is credit- impaired when one or more events that have a detrimental impact on the estimated future cash flows of that financial asset have occurred. A purchased credit-impaired asset is likely to be acquired at a deep discount. In unusual circumstances, it may be possible that an entity originates a credit-impaired asset, for example, following a substantial modification of a distressed financial asset that resulted in the derecogniton of the original financial asset. In the case of POCI financial assets, interest income is always recognized by applying the credit-adjusted effective interest rate. For POCI financial assets, in subsequent reporting periods an entity is required to recognize: - - the cumulative changes in lifetime expected credit losses since initial recognition as a loss allowance, the impairment gain or loss which is the amount of any change in lifetime expected credit losses. An impairment gain is recognized (with the parallel increase of the net amortized cost of receivable) if due to the favourable changes after initial recognition the lifetime expected credit loss estimation is becoming lower than the original estimated credit losses at initial recognition. The POCI qualification remains from initial recognition to derecognition in the Group’s books. 2.14. Loss allowance A loss allowance for loans and placements with other banks and repo receivables is recognized by the Group based on the expected credit loss model in accordance with IFRS 9. Based on the three stage model the recognized loss allowance equals to 12-month expected credit loss from the initial recognition. On financial assets with significantly increased credit risk or credit impaired financial assets (based on objective evidences) the recognized loss allowance is the lifetime expected credit loss. In the case of purchased or originated credit impaired financial assets, a loss allowance is recognized in the amount of the lifetime expected credit loss since initial recognition. The impairment gain in the Consolidated Statement of Profit or Loss is recognized if lifetime expected credit loss for purchased or originated credit impaired financial assets at measurement date are less than the estimated credit loss at initial recognition. A loss allowance for loans and placements with other banks and repo receivables represents Management’s assessment for potential losses in relation to these activities. Loss allowance for loan and placements are determined at a level that provides coverage for individually identified credit losses. For loans for which it is not possible to determine the amount of the individually identified credit loss in the absence of objective evidence, a collective impairment loss is recognized. With this, the Group reduces the carrying amount of financial asset portfolios with similar credit risk characteristics to the amount expected to be recovered based on historical loss experience. At subsequent measurement the Group recognizes an impairment gain or loss through “Impairment gain on POCI loans” in the Consolidated Statement of Profit or Loss as part of “Risk cost” line as an amount of expected credit losses or reversal which is required to adjust the loss allowance at the reporting date to the amount that is required to be recognized in accordance with IFRS 9. 21 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.14. Loss allowance [continued] If a financial asset, for which previously there were no indicators of significant increase in credit risk (i.e. classified in Stage 1) is subsequently classified in Stage 2 or Stage 3 then loss allowance is adjusted to lifetime expected credit loss. If a financial asset, which was previously classified in Stage 2 or Stage 3 is subsequently classified in Stage 1 then the loss allowance is adjusted to the level of 12 month expected credit loss. Classification into risk classes According to the requirements of the IFRS9 the Group classifies the financial assets measured at amortized cost, at fair value through other comprehensive income and loan commitments and financial guarantees into the following stages: - Stage 1 – performing financial instruments without significant increase in credit risk since initial recognition - Stage 2 – performing financial instruments with significant increase in credit risk since initial recognition but not credit-impaired - Stage 3 – non-performing, credit-impaired financial instruments - POCI – purchased or originated credit impaired In the case of trade receivables and contract assets the Group applies the simplified approach and calculates only lifetime expected credit loss. The simplified approach is the following: - - - for the past 3 years the average annual balance of receivables under simplified approach is calculated, the written-off receivables under simplified approach are determined in the past 3 years, historical losses are adjusted to reflect information about current conditions and reasonable forecasts of future economic conditions, the loss allowance ratio is the sum of the written-off amounts divided by the sum of the average balances, the loss allowance is multiplied by the end-of-year balance and it is the actual loss allowance on these receivables, loss allowance should be recalculated annually. - - - The Group assumes that the credit risk on a financial instrument has not increased significantly since initial recognition if the financial asset is determined to have low credit risk at the reporting date. This might occur if the financial asset has a low risk of default, the borrower has a strong capacity to meet its contractual cash flow obligations in the near term and adverse changes in economic and business conditions in the longer term may, but will not necessarily, reduce the ability of the borrower to fulfil its contractual cash flow obligations. The Group considers souvereign exposures as having low credit risk. Stage 1: financial instruments for which the events and conditions specified in respect of Stage 2 and Stage 3 do not exist on the reporting date. A client or loan must be qualified as default if one or both the following two conditions occur: The client delays more than 90 days. This is considered a hard trigger. There is reasonable probability that the client will not pay all of its obligation. This condition is examined on the basis of probability criteria of default. The subject of default qualification is that exposure (on-balance and off-balance) which originates credit risk (so originated from loan commitments, risk-taking contracts). A financial instruments shows significant increase in credit risk, and is allocated to Stage 2, if in respect of which any of the following triggers exist on the reporting date, without fulfilling any of the conditions for the allocation to the non-performing stage (stage 3): the payment delay exceeds 30 days, it is classified as performing forborne, based on individual decision, its currency suffered a significant "shock" since the disbursement of the loan, the transaction/client rating exceeds a predefined value or falls into a determined range, or compared to the historic value it deteriorates to a predefined degree, 22 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.14. Loss allowance [continued] Classification into risk classes [continued] in the case retail mortgage loans, the loan-to-value ratio exceeds a predefined rate, default on another loan of the retail client, if no cross-default exists, monitoring classification of corporate and municipal clients above different thresholds defined on group - financial difficulties at the debtor (capital adequacy, liquidity, deterioration of the instrument quality), - significant decrease of the liquidity or the activity on the active market of the financial instrument can be observed, the rating of the client reflects high risk but it is better than the default one, - - significantly decrease in the value of the recovery from which the debtor would disburse the loan, - clients under liquidation. A financial instrument is non-performing and it is allocated to Stage 3 when any of the following events or conditions exists on the reporting date: default (based on the group level default definition), classified as non-performing forborne (based on the group level forborne definition), the monitoring classification of corporate and municipal clients above different thresholds defined on group level (including but not limited to): - - breaching of contracts, significant financial difficulties of the debtor (like capital adequacy, liquidity, deterioration of the instrument quality), bankruptcy, liquidation, debt settlement processes against debtor, forced strike-off started against debtor, termination of loan contract by the bank, occurrence of fraud event, termination of the active market of the financial instrument. - - - - - - If the exposure is no longer considered as credit impaired, the Group allocates this exposure to Stage 2. When loss allowance is calculated at exposures categorized into stages the following process is needed by stages: Stage 1 (performing): loss allowance at an amount equal to 12-month expected credit loss should be recognized, Stage 2 (significant increase in credit risk): loss allowance at an amount equal to lifetime expected credit loss should be recognized, Stage 3 (non-performing): loss allowance at an amount equal to lifetime expected credit loss should be recognized. For lifetime expected credit losses, an entity shall estimate the risk of a default occurring on the financial instrument during its expected life. 12-month expected credit losses are a portion of the lifetime expected credit losses and represent the lifetime cash shortfalls that will result if a default occurs in the 12 months after the reporting date (or a shorter period if the expected life of a financial instrument is less than 12 months), weighted by the probability of that default occurring. An entity shall measure expected credit losses of a financial instrument in a way that reflects: - - - an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes the time value of money and reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions. 23 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.15. Sale and repurchase agreements, security lending Where debt or equity securities are sold under a commitment to repurchase them at a pre-determined price, they remain on the Consolidated Statement of Financial Position and the consideration received is recorded in Other liabilities or Amounts due to banks, the National Governments, deposits from the National Banks and other banks. Conversely, debt or equity securities purchased under a commitment to resell are not recognized in the Consolidated Statement of Financial Position and the consideration paid is recorded either in Placements with other banks or Deposits from customers. Interest is accrued based on the effective interest method evenly over the life of the repurchase agreement. In the case of security lending transactions the Group does not recognize or derecognize the securities because believes that the transferor retains substantially all the risks and rewards of the ownership of the securities. Only a financial liability or financial receivable is recognized for the consideration amount. 2.16. Associates and other investments Companies where the Bank has the ability to exercise significant influence are accounted for using the equity method. Subsidiaries and associated companies that were not accounted for using the equity method and other investments where the Bank does not hold a significant interest are recorded according to IFRS 9. When an investment in an associate is held indirectly through an entity that is a venture capital fund, the Group elects to measure these investments in the associate at fair value through profit or loss in accordance with IFRS 9. Under the equity method, the investment is initially recognized at cost, and the carrying amount is adjusted subsequently for: - - the Group’s share of the post-acquisition profits or losses of the investee, which are recognized in the Group’s Consolidated Statement of Profit or Loss; and the distributions received from the investee, which reduce the carrying amount of the investment. The Group’s share of the profits or losses of the investee, or other changes in the investee’s equity, is determined on the basis of its proportionate ownership interest. The Group recognizes its share of the investee’s income and losses based on the percentage of the equity interest owned by the Group. Gains and losses on the sale of investments are determined on the basis of the specific identification of the cost of each investment. 2.17. Property and equipment, Intangible assets Property and equipment and Intangible assets are measured at cost, less accumulated depreciation and amortization and impairment, if any. Internally generated intangibles, excluding capitalized development costs, are not capitalized – the related expenditures are accounted as cost in the period in which they are incurred. Development costs are capitalized only when the technical and commercial feasibility of the asset has been clearly demonstrated, the Group has the intent and ability to complete the intangible asset and either use it or sell it and be able to demonstrate how the asset will generate future economic benefits. Amortization of these type of assets begins when development is complete and the asset is available for use. During the period of development, the asset is tested for impairment annually. The Group lists mainly self-developed softwares among internally generated intangible assets. The depreciable amount (book value less residual value) of the non-current assets must be allocated over the useful lives. Depreciation and amortization are computed usually by using the straight-line method over the estimated useful lives of the assets based on the following annual percentages: Intangible assets Software Property right Property Machinery and office equipment Vehicle Annual percentages Useful life period (years) 6.3% - 50.0% 16.7% - 33.3% 1.0% - 50.0% 3.3% - 63.0% 3.0% - 33.3% 2 – 15 3 – 6 2 – 100 1.5 – 30 3 – 33 24 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.17. Property and equipment, Intangible assets [continued] Depreciation and amortization on Property and equipment and Intangible assets commence on the day such assets are ready to use. At each balance sheet date, the Group reviews the carrying value of its Property and equipment and Intangible assets to determine if there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated to determine the extent (if any) of the impairment loss. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Where the carrying value of Property and equipment and Intangible assets is greater than the estimated recoverable amount, it is impaired immediately to the estimated recoverable amount. The Group may conclude contracts for purchasing property, equipment and intangible assets, where the purchase price is settled in foreign currency. By entering into such agreements, firm commitment in foreign currency due on a specified future date arises at the Group. Reducing the foreign currency risk caused by firm commitment, forward foreign currency contracts may be concluded to ensure the amount payable in foreign currency on a specified future date on one hand and to eliminate the foreign currency risk arising until settlement date of the contract on the other hand. In the case of an effective hedge the realized profit or loss of the hedging instrument is stated as the part of the cost of the hedged asset as it has arisen until recognizing the asset. 2.18. Inventories Inventories are measured at the lower of cost and net realisable value. The cost of inventories comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. The Group uses generally FIFO formulas to the measurement of inventories. Inventories are removed from books when they are sold, unusable or destroyed. When inventories are sold, the carrying amount of those inventories are recognized as an expense in the period in which the related revenue is recognized. Repossessed assets are classified as inventories. The Group's policy is to sell repossessed assets and not to use them for its internal operations. 2.19. Government grants and government assistance The Group recognise government grants only when there is a reasonable assurance that the grant will be received, and all attached conditions will be complied with. The Group presents grants relating to assets as deferred income in the Consolidated Statement of Financial Position, which is recognized in profit or loss on a systematic basis over the useful life of the asset. Grants related to an expense item are recorded as an other operating income in those periods when the related costs were recognized. 2.20. Financial liabilities The financial liabilities are presented within these lines in the Consolidated Financial Statements: Financial liabilities designated at fair value through profit or loss - Amount due to banks, the National Governments, deposits from the National Banks and other banks - Repo liabilities - - Deposits from customers - Liabilities from issued securities - Derivative financial liabilities held for trading - Derivative financial liabilities designated as hedge accounting - Other financial liabilities 25 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.20. Financial liabilities [continued] At initial recognition, the Group measures financial liabilities at fair value plus or minus – in the case of a financial liability not at fair value through profit or loss – transaction costs that are directly attributable to the acquisition or issue of the financial liability. Usually, the initial fair value of financial liabilities equals to transaction value. However, when the amounts are not equal, the initial fair value difference should be recognized. If the fair value of financial liabilities is based on a valuation technique using only inputs observable in market transactions, the Group recognizes the initial fair value difference in the Consolidated Statement of Profit or Loss. When the fair value of financial liabilities is based on models for which inputs are not observable, the difference between the transaction price and the fair value is deferred and only recognized in profit or loss when the instrument is derecognized or the inputs became observable. Financial liabilities at fair value through profit or loss are either financial liabilities held for trading or they are designated upon initial recognition as at fair value through profit or loss. In connection to the derivative financial liabilities measured at fair value through profit or loss, the Group presents the amount of change in their fair value originated from the changes of market conditions and business environment. The Group designated some financial liabilities upon initial recognition to measure at fair value through profit or loss. This classification eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases (“accounting mismatch”). The changes in fair value of these liabilities are recognized in profit or loss, except the fair value changes attributable to credit risk which are recognized among other comprehensive income. In the case of financial liabilities measured at amortized cost fees and commissions related to the origination of the financial liability are recognized through profit or loss during the maturity of the instrument using effective interest method. In certain cases the Group repurchases a part of financial liabilities (mainly issued securities or subordinated bonds) and the difference between the carrying amount of the financial liability and the amount paid for it is recognized in the net profit or loss for the period and included in other operating income. 2.21. Leases The Group as a lessor Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Lease classification is made at the inception date and is reassessed only if there is a lease modification. Finance leases At the commencement date, a lessor derecognizes the assets held under a finance lease in the Consolidated Statement of Financial Position and present them as a receivable at an amount equal to the net investment in the lease. The lessor shall use the interest rate implicit in the lease to measure the net investment in the lease. Direct costs such as commissions are included in the initial measurement of the finance lease receivables. The Group as a lessor recognizes finance income over the lease term, based on a pattern reflecting a constant periodic rate of return on the Group’s net investment in the lease. The Group applies the lease payments relating to the period against the gross investment in the lease to reduce both the principal and the unearned finance income. The Group applies the derecognition and impairment requirements in IFRS 9 to the net investment in the lease. 26 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.21. Leases [continued] Operating leases The Group as a lessor recognizes lease payments from operating leases as income on either a straight-line basis or another systematic basis. Costs, including depreciation, incurred in earning the lease income are recognized as an expense. Initial direct costs incurred in obtaining an operating lease are added to the carrying amount of the underlying asset and recognized as an expense over the lease term on the same basis as the lease income. The depreciation policy for depreciable underlying assets subject to operating leases is consistent with the Group’s normal depreciation policy for similar assets. The Group accounts for a modification to an operating lease as a new lease from the effective date of the modification, considering any prepaid or accrued lease payments relating to the original lease as part of the lease payments for the new lease. The Group as a lessee The Group recognizes a right-of-use asset and a lease liability at the commencement of the lease term except for short-term leases and leases, where the underlying asset is of low value (less than USD 5,000). For these leases, the Group recognizes the lease payments as an expense on either a straight-line basis over the lease term or another systematic basis if that basis is more representative of the pattern of the lessee’s benefit. Deferred tax implication if the Group is lessee: At the inception of the lease, there is no net lease asset or liability, no tax base and, therefore, no temporary difference. Subsequently, as depreciation on the right-of-use asset initially exceeds the rate at which the debt reduces, a net liability arises resulting in a deductible temporary difference on which a deferred tax asset should be recognized if recoverable. Assuming that the lease liability is not repaid in advance, the total discounted cash outflows should equal the total rental payments deductible for income tax purposes. Right-of-use asset The right-of-use assets are presented separately in the Consolidated Statement of Financial Position and initially measured at cost, subsequently the Group applies the cost model and these assets are depreciated on a straight line basis from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. If the lease transfers ownership of the underlying asset to the Group by the end of the lease term or if the cost of the right-of-use asset reflects that the Group will exercise a purchase option, the right-of- use asset are depreciated from the commencement date to the end of the useful life of the underlying asset. Lease liability At the commencement date, the lease liability is measured at the present value of the lease payments that are not paid at that date discounted by using the rate implicit in the lease, or if this cannot be determined, by using the incremental borrowing rate of the Group.Variable lease payments that do not depend on an index or a rate but e.g. on revenues or usage are recognized as an expense. The Group always separates the non-lease components of the lease contracts and accounts them as an expense. Lease payments must be included in the measurement of the lease liability without value added taxes. Non-deductible VAT is recognized as other expense. The lease liability is remeasured in the event of a reassessment of the lease liability or lease modification 2.22. Investment properties Investment properties of the Group are land, buildings, part of buildings which held (as the owner or as the lessee under a finance lease) to earn rentals or for capital appreciation or both, rather than for use in the production or supply of services or for administrative purposes or sale in the ordinary course of business. The Group measures the investment properties at cost less accumulated depreciation and impairment, if any. The depreciable amount (book value less residual value) of the investment properties must be allocated over their useful lives. The depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets. The Group discloses the fair value of the investment properties in Note 14 established mainly by external experts. 27 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.23. Share capital Share capital is the capital determined in the Articles of Association and registered by the Budapest-Capital Regional Court. Share capital is the capital the Bank raised by issuing common stocks at the date the shares were issued. The amount of share capital has not changed over the current period. 2.24. Treasury shares Treasury shares are shares which are purchased on the stock exchange and the over-the-counter market by the Bank and its subsidiaries and are presented in the Consolidated Statement of Financial Position at cost as a deduction from Consolidated Shareholders’ Equity. Gains and losses on the sale of treasury shares are credited or charged directly to shareholder’s equity. Derecognition of treasury shares is based on the FIFO method. 2.25. Non-current assets held-for-sale and discontinued operations The Group classifies a non-current asset (or disposal group) as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. The Group does not account for a non-current asset that has been temporarily taken out of use as if it had been abandoned. The Group measures a non-current asset (or disposal group) classified as held for sale at the lower of its carrying amount and fair value less costs to sell. When the sale is expected to occur beyond one year, the Group measures the costs to sell at their present value. Any increase in the present value of the costs to sell that arises from the passage of time shall be presented in profit or loss. Immediately before the initial classification of the asset (or disposal group) as held for sale, the carrying amounts of the asset (or all the assets and liabilities in the group) are measured in accordance with applicable IFRS. The Group does not depreciate (or amortize) a non-current asset while it is classified as held for sale or while it is part of a disposal group classified as held for sale. Interest and other expenses attributable to the liabilities of a disposal group classified as held for sale shall continue to be recognized. If the Group has classified an asset (or disposal group) as held for sale, but the criteria for that are no longer met, the Group ceases to classify the asset (or disposal group) as held for sale. The Group measures a non-current asset that ceases to be classified as held for sale (or ceases to be included in a disposal group classified as held for sale) at the lower of: - its carrying amount before the asset (or disposal group) was classified as held for sale, adjusted for any depreciation, amortisation or revaluations that would have been recognized had the asset (or disposal group) not been classified as held for sale, and - its recoverable amount at the date of the subsequent decision not to sell. The Group presents a non-current asset classified as held for sale and the assets of a disposal group classified as held for sale separately from other assets in the Consolidated Statement of Financial Position. The liabilities of a disposal group classified as held for sale is presented separately from other liabilities in the Consolidated Statement of Financial Position. Those assets and liabilities shall not be offset and presented as a single amount. The major classes of assets and liabilities classified as held for sale are separately disclosed in the Notes. The Group presents separately any cumulative income or expense recognized in other comprehensive income relating to a non-current asset (or disposal group) classified as held for sale. Results from discontinued operations are reported separately in the Consolidated Statement of Profit or Loss as result from discontinued operations. 2.26. Interest income and income similar to interest income and interest expense Interest income and expense are recognized in profit or loss in the period to which they relate, using the effective interest rate method. For exposures categorized into Stage 1 and Stage 2 the interest income is recognized on a gross basis. For exposures categorized into Stage 3 (using effective interest rate) and for POCI (using credit-adjusted effective interest rate) the interest income is recognized on a net basis. The time-proportional income similar to interest income of derivative financial instruments is calculated without using the effective interest method and the positive fair value adjustment of interest rate swaps are included in income similar to interest income. 28 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.26. Interest income and income similar to interest income and interest expense [continued] Interest income of loans at fair value through profit or loss is calculated based on interest fixed in the contract and presented in “Income similar to interest income” line. Interest from loans and deposits are accrued on a daily basis. Interest income and expense include certain transaction costs and the amortisation of any discount or premium between the initial carrying amount of an interest-bearing instrument and its amount at maturity calculated on an effective interest rate basis. All interest income and expense recognized are arising from loans, placements with other banks, repo receivables, securities at fair value through other comprehensive income, securities at amortized cost and amounts due to banks, repo liabilities, deposits from customers, liabilities from issued securities, subordinated bonds and loans are presented under these lines of Consolidated Financial Statements. 2.27. Fees and Commissions Fees and commissions that are not involved in the amortized cost model are recognized in the Consolidated Statement of Profit or Loss on an accrual basis according to IFRS 15 Revenue from contracts with customers (see more details in Note 32). These fees are related to deposits, cash withdrawals, security trading, bank card etc. The Group recognizes income if performance obligations related to the certain goods or services are satisfied, performed, and control over the asset is transferred to the customer, and it is probable that consideration payable will probably flow to the entity. In case of those services, where the Group transfers control over the asset continuously, income is recognised on accrual basis. The Group provides foreign exchange trading services to its customers, the profit margin achieved on these transactions is presented as Net profit from fees and commissions in the Consolidated Statement of Profit or Loss. 2.28. Profit from associates Profit from associates refers to any distribution of an entity earnings to shareholders from stocks or mutual funds that is owned by the Group. The Group recognizes profit from associates in the Consolidated Financial Statements when its right to receive payment is established. 2.29. Income tax The Group considers corporate income tax as current tax according to IAS 12. The Group also considers local business tax and the innovation contribution as income tax in Hungary. The annual taxation charge is based on the tax payable under fiscal regulations prevailing in the country where the company is incorporated, adjusted for deferred taxation. Deferred taxation is accounted for using the balance sheet liability method in respect of temporary differences between the tax bases of assets and liabilities and their carrying value for financial reporting purposes, measured at the tax rates that apply to the future period when the asset is expected to be realized or the liability is settled. Current tax asset or current tax liability is presented related to income tax and innovation contribution separately in the Consolidated Statement of Financial Position. Deferred tax assets are recognized by the Group for the amounts of income taxes that are recoverable in future periods in respect of deductible temporary differences as well as the carryforward of unused tax losses and the carryforward of unused tax credits. The Group recognizes a deferred tax asset for all deductible temporary differences arising from investments in subsidiaries, branches and associates, and interests in joint arrangements, to the extent that, and only to the extent that, it is probable that: - the temporary difference will reverse in the foreseeable future; and - taxable profit will be available against which the temporary difference can be utilised. 29 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.29. Income tax [continued] The Group considers the availability of qualifying taxable temporary differences and the probability of other future taxable profits to determine whether future taxable profits will be available according to IAS 12. The Group recognizes a deferred tax liability for all taxable temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint arrangements, except to the extent that both of the following conditions are satisfied: the Bank is able to control the timing of the reversal of the temporary difference, and - - it is probable that the temporary difference will not reverse in the foreseeable future. The Group only offsets its deferred tax liabilities against deferred tax assets when: - - there is a legally enforceable right to set-off current tax liabilities against current tax assets, and the taxes are levied by the same taxation authorities on either the same taxable entity or different taxable entities which intend to settle current tax liabilities and assets on a net basis. 2.30. Banking tax The Bank and some of its subsidiaries are obliged to pay banking tax based on Act LIX of 2006. As the calculation is not based on the taxable profit but on the adjusted total assets as reported in the Separate Financial Statements of the Bank and its entities for the second period preceding the current tax year, therefore, the banking tax is considered as an other administrative expense, not as income tax. 2.31. Off-balance sheet commitments and contingent liabilities In the ordinary course of its business, the Group enters into off-balance sheet commitments such as guarantees, letters of credit, commitments to extend credit and transactions with financial instruments. The provision for off- balance sheet commitments and contingent liabilities is maintained at a level adequate to absorb future cash outflows which are probable and relate to present obligations. In the case of commitments and contingent liabilities, the Management determines the adequacy of the loss allowance based upon reviews of individual items, recent loss experience, current economic conditions, the risk characteristics of the various categories of transactions and other pertinent factors. The Group recognizes provision for off-balance sheet commitment and contingent liabilities in accordance with IAS 37 when it has a present obligation as a result of a past event; it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and a reliable estimate can be made of the obligation. For financial guarantees and loan commitments given which are under IFRS 9 the expected credit loss model is applied when the provision is calculated (see more details in Note 2.14.). After initial recognition the Group subsequently measures those contracts at a higher of the amount of the loss allowance or of the amount initially recognised less the cumulative amount of income recognized in accordance with IFRS 15. 2.32. Share-based payment The Group has applied the requirements of IFRS 2 Share-based Payment. The Group issues equity-settled share-based payment to certain employees. Equity-settled share-based payment is measured at fair value at the grant date. The fair value determined at the grant date of the equity-settled share- based payment is expensed on a straight-line basis over the year, based on the Group’s estimate of shares that will eventually vest. Share-based payment is recorded in Consolidated Statement of Profit or Loss as Personnel expenses. Fair value is measured by use of a binomial model. The expected life used in the model has been adjusted, based on Management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations. 30 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.33. Employee benefits The Group has applied the requirement of IAS 19 Employee Benefits. These benefits are recognised as an expense and liability undiscounted in the Consolidated Financial Statements. Liabilities are regularly remeasured. Gains or losses due to the remeasurement are recognised in the Consolidated Statement of Profit or Loss. Short-term employee benefits are employee benefits (other than termination benefits) that are expected to be settled wholly before twelve months after the end of the annual reporting period in which the employees render the related service. These can be wages, salaries and bonuses, premium, paid annual leave and paid sick leave and other free services (health care, reward holiday). Long-term employee benefits are mostly the jubilee reward. Post-employment benefits are employee benefits (other than termination and short-term employee benefits) that are payable after the completion of employment. Post-employment benefit plans are formal or informal arrangements under which an entity provides post-employment benefits for one or more employees. Post- employment benefit plans are classified as either defined contribution plans or defined benefit plans, depending on the economic substance of the plan as derived from its principal terms and conditions. Defined benefit plan is post‑employment benefit plans other than defined contribution plan. The Group's net obligation is calculated by estimating the amount of employee's future benefit based on their servicies for the current and prior periods. The future value of benefit is being discounted to present value. Termination benefits are employee benefits provided in exchange for the termination of an employee’s employment as a result of either: an entity’s decision to terminate an employee’s employment before the normal retirement date or an employee’s decision to accept an offer of benefits in exchange for the termination of employment. Other long-term employee benefits are all employee benefits other than short-term employee benefits, postemployment benefits and termination benefits. 2.34. Biological assets and agricultural produce The Group recognises a biological asset or agricultural produce according to IAS 41 only when it controls the asset as a result of past events, it is probable that future economic benefits will flow and the fair value or the cost can be measured reliably. Biological assets are measured on initial recognition and at subsequent periods at fair value less estimated costs to sell, unless fair value cannot be reliably measured. Agricultural produce is measured at fair value less estimated costs to sell at the point of harvest. The gain on initial recognition of biological assets at fair value less costs to sell, and changes in fair value less costs to sell of biological assets during a period are included in profit or loss for the period in which it arises as other operating income. 2.35. Consolidated Statement of Cash-flows Cash flows arising from the operating, investing or financing activities are reported in the Statement of Cash- Flows of the Group primarily on a gross basis. Net basis reporting are applied by the Group in the following cases: - when the cash flows reflect the activities of the customer rather than those of the Group, and - for items in which the turnover is quick, the amounts are large, and the maturities are short. For the purposes of reporting Consolidated Statement of Cash-flows, cash and cash equivalents include cash, due from banks and balances with the National Banks, excluding the compulsory reserve established by the National Banks. This line item shows balances of HUF and foreign currency cash amounts, and sight deposit from NBH and from other banks, furthermore balances of current accounts. Consolidated cash-flows from hedging activities are classified in the same category as the item being hedged. The unrealized gains and losses from the translation of monetary items to the closing foreign exchange rates and unrealized gains and losses from derivative financial instruments are presented net as operating activity separately in the Consolidated Statement of Cash-flows for the monetary items which have been revaluated. 31 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] 2.36. Segment reporting IFRS 8 Operating Segments requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the chief operating decision maker in order to allocate resources to the segments and to assess their performance. Based on the above, the segments identified by the Group are the business and geographical segments. The Group’s operating segments under IFRS 8 are therefore as follows: OTP Core Hungary, Russia, Ukraine, Bulgaria, Romania, Serbia, Croatia, Montenegro, Albania, Moldova, Slovenia, Merkantil Group, Asset Management subsidiaries, Other subsidiaries, Corporate Center. 2.37. Comparative balances Reclassification of certain business tax, innovation contribution and other lines in the Consolidated Statement of Profit or Loss The Goup has reviewed prescriptions related to business tax and innovation contribution, the determination of their tax base and their effects on payment obligation. As a result of the review the local business tax and innovation contribution have been reclassified to income tax in line with banking industry practice. In these Consolidated Financial Statements prepared for the year ended 31 December 2021 the Group presents these taxes as income tax and reclassified the financial information for comparative periods. There are other lines in the Consolidated Statement of Profit or Loss which are presented on separate lines like: derecognition of financial assets at amortized cost, modification loss and net result on derivative instruments, in the Consolidated Statement of Financial Position there is provision for conditional liability to be separated from those items, results which previously contained them. While gains on securities mandatorily at fair value through profi or loss was presented previously among Gains on securities now it is presented among Fair value adjustment on financial instruments at fair value through profit or loss. All these reclassifications were necessary to improve presentation. The Group has reclassified the presentation of the detailed notes to the amended Consolidated Statement of Financial Position and Consolidated Statement of Profit or Loss line items for comparative information in accordance with the new values. These amendments have been marked “Reclassified” by the Group. Amendments to the information published in the supplementary annexes concerned the following supplementary notes: - Note 16 Other assets - Note 24 Other liabilities - Note 31 Loss allowances / impairment / provisions - Note 33 Gains and losses by transactions - Note 35 Income tax Except as described above these Consolidated Financial Statements are prepared in accordance with the same accounting policies in all respects as the Consolidated Financial Statements prepared in accordance with IFRS as adopted by the European Union for the year ended 31 December 2020. Line item 2021 2020 Revised presentation Reclassification of business tax and innovation contribution Reclassification of provisions 2020 As previously presented Current income tax receivables Other assets Further assets items TOTAL ASSETS Current income tax payable Provisions Other liabilities Further liability items TOTAL LIABILITIES 29,978 276,785 27,246,621 27,553,384 36,581 119,799 598,081 23,762,157 24,516,618 39,171 266,239 23,030,431 23,335,841 29,528 116,467 489,426 20,163,308 20,798,729 235 (235) - - 1,844 - (1,844) - - - - - - - 116,467 (116,467) - - 38,936 266,474 23,030,431 23,335,841 27,684 - 607,737 20,163,308 20,798,729 32 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [continued] OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 2.37. Comparative balances [continued] Line item 2021 2020 Revised presentation Reclassification of business tax and innovation contribution Reclassification of amounts related to derivative instruments Reclassification of gains on securities mandatorily at fair value through profi or loss Reclassification of amounts related to modification losses Reclassification of amounts related to derecognition of financial assets at amortized cost 2020 As previously presented Interest income calculated using the effective interest method Income similar to interest income Interest income and income similar to interest income Interest expense Loss allowance on loans, placements 922,539 194,920 1,117,459 (243,149) 841,901 135,986 977,887 (195,216) and on repo receivables (27,721) (172,520) Change in the fair value attributable to changes in the credit risk of loans mandatorily measured at fair value through profit of loss Further risk cost items Risk cost total NET INTEREST INCOME AFTER RISK COST Gain from derecognition of financial assets at amortized cost Modification loss Net profit from fees and commissions Foreign exchange gains, net Gains on securities, net Fair value adjustment on financial instruments at fair value through profit or loss Gain on derivative instruments, net Further non-operating items Net operating income Other general expenses Further administrative expenses Other administrative expenses Profit before income tax Income tax expense Net profit for the year (16,289) (3,635) (47,645) (3,262) (15,093) (190,875) 826,665 591,796 1,885 (13,672) 442,174 (4,075) 5,560 (532) 6,798 11,244 18,995 (340,684) (406,928) (747,612) 528,435 (72,123) 456,312 3,380 (29,773) 397,633 7,864 7,465 4,843 11,340 (5,459) 26,053 (308,642) (382,483) (691,125) 297,964 (43,918) 254,046 - - - - - - - - - - - - - - - - - - - 16,542 16,542 16,542 (16,542) - - - - - - - - - - - - - (11,340) - - 11,340 - - - - - - - - - - - - - - - - - - - - - (7,239) 7,239 - - - - - - - - - - - - - - - - - 841,901 135,986 977,887 (195,216) 29,773 (1,978) (200,315) - - 29,773 29,773 - (29,773) - - - - - - - - - - - - - - - (1,978) (3,262) (15,093) (218,670) (1,978) 564,001 3,380 - - - (1,402) - - - (1,402) - - - - - - - - 397,633 19,204 16,106 (2,396) (5,459) 27,455 (308,642) (399,025) (707,667) 281,422 (27,376) 254,046 33 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 3: SIGNIFICANT ACCOUNTING ESTIMATES AND DECISIONS IN THE APPLICATION OF ACCOUNTING POLICIES The presentation of financial statements in conformity with IFRS as adopted by EU requires the Management of the Group to make judgement about estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as at the date of the financial statements and their reported amounts of revenues and expenses during the reporting period. The estimates and associated assumptions are based on the expected loss and other factors that are considered to be relevant. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period. Actual results could differ from those estimates. Significant areas of subjective judgement include: 3.1. Loss allowances on financial instruments exposed to credit risk The Group regularly assesses its financial instruments portfolio for loss allowance. Management determines the adequacy of the loss allowances based upon reviews of individual loans and placements, recent loss experience, current economic conditions, the risk characteristics of the various categories of loans and other pertinent factors. The use of the three stage model was implemented for IFRS 9 purposes. The impairment methodology is used to classify financial instruments in order to determine whether credit risk has significantly increased since initial recognition and to identify the credit-impaired assets. For instruments with credit-impairment or significant increase of credit risk lifetime expected losses are recognized (see more details in Note 37.1.) 3.2. Valuation of instruments without direct quotations Financial instruments without direct quotations in an active market are valued using the valuation model technique. The models are regularly reviewed and each model is calibrated for the most recent available market data. While the models are built only on available data, their use is subject to certain assumptions and estimates (e.g. correlations, volatilities, etc.). Changes in the model assumptions may affect the reported fair value of the relevant financial instruments. IFRS 13 Fair Value Measurement seeks to increase the consistency and comparability in fair value measurements and related disclosures through a 'fair value hierarchy'. The hierarchy categorises the inputs used in valuation techniques into three levels. The hierarchy gives the highest priority to (unadjusted) quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The Group evaluates the levelling at each reporting period on an instrument-by-instrument basis and reclassifies instruments when necessary, based on the facts at the beginning of the reporting period. The objective of a fair value measurement is to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions. 3.3. Provisions Provision is recognized and measured for commitments to extend credit and for warranties arising from banking activities based on IFRS 9 Financial Instruments. Provision for these instruments is recognized based on the credit conversion factor, which shows the proportion of the undrawn credit line that will probably be drawn. Other provisions are recognized and measured based on IAS 37 Provisions, Contingent Liabilities and Contingent Assets. The Group is involved in a number of ongoing legal disputes. Based upon historical experience and expert reports, the Group assesses the developments in these cases, and the likelihood and the amount of potential financial losses which are appropriately provided for. (See Note 24.) Other provision includes provision for litigation, provision for retirement and expected liabilities and provision for confirmed letter of credit. A provision is recognized by the Group when it has a present obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. 34 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 3: SIGNIFICANT ACCOUNTING ESTIMATES AND DECISIONS IN THE APPLICATION OF ACCOUNTING POLICIES [continued] 3.4. Impairment on goodwill Goodwill acquired in a business combination is tested for impairment annually or more frequently when there is an indication that the unit might be impaired, in accordance with IAS 36 “Impairment of assets”. The Group calculates the fair value based on discounted cash-flow model. The 3 year period explicit cash-flow model serves as a basis for the impairment test by which the Group defines the impairment need on goodwill based on the strategic factors and financial data of its cash-generating units. In the calculation of the goodwill impairment, also the expectations about possible variations in the amount or timing of those future cash-flows, the time value of money, represented by the current market risk-free rate of interest and other factors are reflected. 3.5. Business model A business model refers to how the Group manages its financial instruments in order to generate cash flows. It is determined at a level that reflects how groups of financial instruments are managed rather than at an instrument level. The financial assets held by the Group are classified into three categories depending on the business model within the financial assets are managed. Business model whose objective is to hold financial assets in order to collect contractual cash flows. Some sales can be consistent with hold to collect business model and the Group assesses the nature, frequency and significance of any sales occurring. The Group does not consider the sale frequent when at least six months have elapsed between sales. The significant sales are those when the sales exceed 2% of the total hold to collect portfolio. Within this business model the Group manages mainly loans and advances and long term securities and other financial assets. Business model whose objective is achieved by both collecting contractual cash flows and selling financial assets. Within this business model the Group only manages securities. Business model whose objective is to achieve gains in a short term period. Within this business model the Group manages securities and derivative financial instrument. If cash flows are realised in a way that is different from the expectations at the date that the Bank/Group assessed the business model, that does not give rise to a prior error in the Group’s financial statements nor does it change the classification of the remaining financial assets held in that business model. When, and only when the Group changes its business model for managing financial assets it reclassifies all affected assets. Such changes are determined by the Group’s senior management as a result of external or internal changes and must be significant to the Group’s operations and demonstrable to external parties. The Group shall not reclassify any financial liability. 3.6. Contractual cash-flow characteristics of financial assets Classification of a financial asset is based on the characteristics of its contractual cash flows if the financial asset is held within a business model whose objective is to hold assets to collect contractual cash flows or within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets. The Group should determine whether the asset’s contractual cash flows are solely payments of principal and interest on the principal amount outstanding (SPPI test). Contractual cash flows that are solely payments of principal and interest on the principal amount outstanding are consistent with a basic lending arrangement. Contractual terms that introduce exposure to risks or volatility in the contractual cash flows that is unrelated to a basic lending arrangement, such as exposure to changes in equity prices or commodity prices, do not give rise to contractual cash flows that are solely payments of principal and interest on the principal amount outstanding. The Group assesses whether contractual cash flows are solely payments of principal and interest on the principal amount outstanding for the currency in which the financial asset is denominated. 35 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 3: SIGNIFICANT ACCOUNTING ESTIMATES AND DECISIONS IN THE APPLICATION OF ACCOUNTING POLICIES [continued] 3.6. Contractual cash-flow characteristics of financial assets [continued] The time value of money is the element of interest that provides consideration for only the passage of time. However, in some cases, the time value of money element may be modified. In such cases, the Group assesses the modification to determine whether the contractual cash flows represent solely payments of principal and interest on the principal amount outstanding. When assessing a modified time value of money element, the objective is to determine how different the undiscounted contractual cash flows could be from undiscounted cash flows that would arise if the time value of money element was not modified (the benchmark cash flows). The benchmark instrument can be an actual or a hypothetical financial asset. If the undiscounted contractual cash flows significantly – above 2% – differ from the undiscounted benchmark cash flows, the financial asset should be subsequently measured at fair value through profit or loss. NOTE 4: IMPACT OF CORONA VIRUS (COVID-19) Risks relating to the impact of COVID-19 pandemic The COVID-19 pandemic has had, and continues to have, a material impact on businesses around the world and the economic environment. There are a number of factors associated with the COVID-19 pandemic and its impact on global economies that could have a material adverse effect on (among other things) the profitability, capital and liquidity of financial institutions such as the OTP Group. The COVID-19 pandemic has caused disruption to the OTP Group’s customers, suppliers and staff. A number of jurisdictions in which the OTP Group operates have implemented severe restrictions on the movement of their respective populations, with a resultant significant impact on economic activity in those jurisdictions. These restrictions are being determined by the governments of individual jurisdictions and impacts (including the timing of implementation and any subsequent lifting of restrictions) may vary from jurisdiction to jurisdiction. It remains unclear how this will evolve through 2020 and the OTP Group continues to monitor the situation closely. However, the OTP Group's ability to conduct business may be adversely affected by disruptions to its infrastructure, business processes and technology services, resulting from the unavailability of staff due to illness or the failure of third parties to supply services. This may cause significant customer detriment, costs to reimburse losses incurred by the OTP Group’s customers, and reputational damage. Furthermore, the OTP Group relies on models to support a broad range of business and risk management activities, including informing business decisions and strategies, measuring and limiting risk, valuing exposures, conducting stress testing and assessing capital adequacy. Models are, by their nature, imperfect and incomplete representations of reality because they rely on assumptions and inputs, and as such assumptions may later potentially prove to be incorrect, this can affect the accuracy of their outputs. This may be exacerbated when dealing with unprecedented scenarios, such as the COVID-19 pandemic, due to the lack of reliable historical reference points and data. Any and all such events mentioned above could have a material adverse effect on the OTP Group’s business, financial condition, results of operations, prospects, liquidity, capital position and credit ratings, as well as on the OTP Group’s customers, employees and suppliers. Summary of economic policy measures made in response to the pandemic and other important developments, as well as post-balance sheet events In the section below, the measures and developments which have been made since the beginning of 2021, and – in OTP Bank’s view – are relevant and have materially influenced / can materially influence the operation of the Group members. OTP Bank excludes any liability for the completeness and accuracy of the measures presented herein. 36 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 4: IMPACT OF CORONA VIRUS (COVID-19) [continued] Summary of economic policy measures made in response to the pandemic and other important developments, as well as post-balance sheet events [continued] Hungary Effective from 13 January 2021 the National Bank of Hungary („NBH”) extended the available amount for the Bond Funding for Growth scheme by HUF 750 billion to HUF 1,150 billion. At the same time it decided to increase the maximum maturity of corporate bonds that can be purchased by the central bank from 20 to 30 years. Also, the NBH’s exposure limit to a specific group was revised from HUF 50 billion to HUF 70 billion. On 4 February 2021, the Prime Minister announced an interest-free loan programme for companies in trouble in the wake of the pandemic. According to Government Resolution 1038/2021. (II. 5.) the programme will be administered by the Hungarian Development Bank, and the available amount under the programme will be HUF 100 billion. Companies can take out maximum HUF 10 million each for the purpose of covering wages and social contributions, overhead costs, general operating expenses and inventory financing. The client interest rate is 0%, the loan tenor can be up to 10 years, and the servicing of the loan will start after a 3 year grace period. The scope of eligible entities was determined in agreement with the Hungarian Chamber of Commerce and Industry. On 1 April 2021, Moody’s rating agency upgraded the outlook on the Hungarian banking sector from negative to stable. On 6 April 2021, the NBH raised the available amount for the Funding for Growth Go! Scheme by HUF 500 billion to HUF 3,000 billion. On 18 May 2021, the Hungarian Development Bank revealed that the interest-free, maximum HUF 10 million loan for micro- and small enterprises (the so-called interest-free restart quick loan) can be applied for by companies whose revenues in 2020 plummeted by more than 30%, irrespective of the scope of activities (certain other criteria must be met). On 25 May 2021, the National Bank of Hungary did not touch the benchmark interest rates, but stressed that the central bank is ready to tighten monetary conditions in a proactive manner to the extent necessary in order to ensure price stability and to mitigate inflation risks. On 9 June 2021, Viktor Orbán Prime Minister announced that their actual personal income tax payments (up to the tax burden of the average wage) will be refunded to families raising kids in early-2022 provided that the 2021 GDP growth surpasses 5.5%. According to Government Decree No. 317/2021. (VI. 9.) released on 9 June 2021 the payment moratorium was extended with unchanged conditions until 30 September 2021. On 9 June 2021, Viktor Orbán Prime Minister announced that once the central bank phases out its Funding for Growth scheme, the government will have to shoulder the financial burden of providing cheap (not higher than 0.5% interest rate) subsidized loans to domestic micro and small enterprises, through the Széchenyi Card programme by KAVOSZ. On 9 June László Krisán, CEO of KAVOSZ revealed the details of the Széchenyi Card GO! programme launched on 1 July 2021. On its 22 June 2021 meeting the Monetary Council embarked on a rate hike cycle: the base rate was increased by 30 bps to 0.9%. Also, effective from 24 June 2021 the National Bank of Hungary raised the one- week deposit rate to the level of the base rate. The Monetary Council has started to transform the use of instruments having an effect at longer maturities. Accordingly, with the exhaustion of the HUF 3,000 billion available amount, the Funding for Growth Go! programme will be phased out. However, the central bank continues to consider the government securities purchase programme to be crucial in its set of monetary policy instruments. The central bank will continue to use the programme by maintaining a lasting presence in the market, taking a flexible approach to changing the quantity and structure of weekly securities purchases, to the extent and for the time necessary. On 2 July 2021, the National Bank of Hungary recommended in its circular that financial institutions should abstain from charging prepayment fees in the case of full or partial prepayment of deferred interest and fee accumulated during the term of the moratorium. The central bank also recommended free of charge loan contract modification if borrowers voluntarily undertake higher monthly instalments in order to shorten the remaining maturity. 37 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 4: IMPACT OF CORONA VIRUS (COVID-19) [continued] Summary of economic policy measures made in response to the pandemic and other important developments, as well as post-balance sheet events [continued] Hungary [continued] On 6 July 2021, the National Bank of Hungary announced that with the aim of boosting green mortgage lending, it decided to launch the Green Mortgage Bond Purchase Programme and the FGS Green Home Programme as the first steps of the implementation of the new Green Monetary Policy Toolkit Strategy: o The strategic goal of the Green Mortgage Bond Purchase Programme is to contribute to the development of the domestic green mortgage bond market through targeted purchases and, through this, encourage green mortgage loan activities. The central bank will review the programme when the HUF 200 billion purchase volume has been reached. Additionally, the central bank also decided to re- launch the Mortgage Bond Rollover Facility for mortgage bonds without green rating. o The National Bank of Hungary will launch the Green Home Programme in October 2021 with a total limit of HUF 200 billion as part of the Funding for Growth Scheme (FGS). As in the previous phases of the FGS, the NBH will provide refinancing operation to credit institutions at 0% interest, which will be lent to residential customers at a maximum of 2.5%, fixed interest rate until the end of the maturity period. Under the scheme, loans of up to HUF 70 million and a maximum term of 25 years can be granted for constructions or purchases of new, highly energy-efficient residential real estates. On 23 July 2021, the European Central Bank announced that restrictions concerning dividend payments won’t be prolonged beyond the previously effective deadline of 30 September 2021. A Government Decree was published on 23 July 2021 facilitating the VAT refund in the case of newly built houses in brownfield sites. On 27 July 2021, the National Bank of Hungary raised the base rate by 30 bps to 1.2%, then on 29 July the one-week deposit rate was hiked to the same level, by the same magnitude. On 30 July 2021, the results of the 2021 EU-wide stress test conducted by the European Banking Authority were revealed. The fully loaded consolidated Common Equity Tier 1 („CET1”) ratio of OTP Bank Plc. would change to 16.3% under the baseline scenario and to 11.2% under the adverse scenario in 2023, compared to 14.2% (fully loaded „CET1”) as at the end of 2020. On 12 August 2021, the National Bank of Hungary announced that its management circular has been reviewed. According to one of the amendments, the central bank extended the deadline concerning restrictions on dividend payment and treasury share purchases until the end of 2021. Credit institutions might be exempted from the dividend payment ban only if they meet certain strict conditions. On 24 August 2021, the National Bank of Hungary raised the base rate by 30 bps to 1.5%. Additionally, the central bank decided to begin gradually withdrawing the government securities purchase programme while considering aspects of maintaining market stability. Also, the central bank increased the available amount under the Bond Funding for Growth scheme by HUF 400 billion to HUF 1,550 billion. Pursuant to Government Decree 536/2021. (IX. 15.) published on 15 September, the Government decided to extend the debt repayment moratorium with the following conditions: o The blanket moratorium was extended by an additional month, until the end of October, in an unchanged form. o From the beginning of November 2021 until 30 June 2022 only the eligible borrowers can participate in the moratorium provided that they submitted a request to their banks about their intention to stay. So, the extension beyond October is not automatic: borrowers had to submit a notification to their bank (opt-in). Eligible retail borrowers include private individuals whose income fell compared to the previous period, unemployed people, fostered workers, families raising children below the age of 25 or expecting a baby, and pensioners (for details see the relevant decree). Eligible companies shall fulfil the following criteria: more than 25% decline in revenues in the 18 months period preceding the submission of the request to participate, and if the company has not concluded a new subsidized loan contract since 18 March 2020. During the term of the one-month extension until the end of October, eligible clients could submit the necessary documents to their banks in order to stay in the scheme until June 2022, so this one-month lengthening could be regarded as technical. According to Government Decree 537/2021. (IX. 15.) published on 15 September, credit institutions shall re- calculate the interest deferred during the period spent in the moratorium in the case of overdraft loans and credit card exposures. The base for the re-calculation shall be the NBH’s statistical data for the average annualized cash loan interest rate published for February 2020. The difference between the deferred interest booked according to the original contract and the re-calculated amount shall be refunded to the borrowers by way of crediting the borrowers’ account with the due amount. 38 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 4: IMPACT OF CORONA VIRUS (COVID-19) [continued] Summary of economic policy measures made in response to the pandemic and other important developments, as well as post-balance sheet events [continued] Hungary [continued] On 21 September 2021, the National Bank of Hungary hiked the base rate by 15 bps to 1.65%. Furthermore, the NBH continued to gradually withdraw the government securities purchase programme. On 4 October 2021, the National Bank of Hungary launched the FGS Green Home Programme as part of its green monetary policy toolkit strategy. On 5 October 2021, OTP Mortgage Bank issued green covered bonds in the amount of HUF 90 billion. On 19 October 2021, the National Bank of Hungary increased the base rate by 15 bps to 1.8%. On 16 November 2021, the Monetary Council of the NBH hiked the base rate by 30 bps to 2.1%. The Deputy Governor of NBH stressed after the Monetary Council meeting that the NBH is ready to set the rate of the 1- week central bank deposit above the level of the base rate already from 18 November. Accordingly, on 18 November the NBH raised the rate of the 1-week deposit facility to 2.5%, and the central bank accepted all offers at the tender. Consequently, the 1-week deposit has become the effective rate for the banking sector determining the marginal asset yields. On its weekly one-week deposit tender on 25 November 2021 the NBH offered an interest rate of 2.9%. On 30 November 2021, the NBH’s Monetary Council widened the interest rate corridor and also decided to make it asymmetric. Accordingly, the lower bound of the corridor was raised by 45 bps and the upper one by 105 bps. On 2 December 2021, the NBH hiked the rate of the 1-week central bank deposit by 20 bps to 3.1%. On 9 December 2021, the NBH hiked the rate of the 1-week central bank deposit by 20 bps to 3.3%. On 14 December 2021, the NBH’s Monetary Council raised the base rate by 30 bps to 2.4% and made a decision to phase out both the Bond Funding for Growth programme and the government bond purchase programme. On 16 December 2021, the NBH hiked the rate of the 1-week central bank deposit by 30 bps to 3.6%. Mr. Viktor Orbán Prime Minister announced on 22 December 2021 that the government will introduce an interest rate cap for certain retail mortgage loans (for example whose pricing is linked to a reference rate, but the legislation does not apply to those with longer fixation periods) for the period between 1 January and 30 June 2022. Accordingly, the affected mortgages’ reference rate cannot be higher than the relevant reference rate as at 27 October 2021. Furthermore, banks had to inform their borrowers about the interest rate risk and offer amendments to the contract until 31 January 2022. Details were laid down by Government Decree 782/2021 (XII. 24.) and Decree 1/2022 (I. 3.) by the Prime Minister’s Office. On 23 December 2021, the NBH hiked the rate of the 1-week central bank deposit by 20 bps to 3.8%. In its release published on 27 December 2021 the NBH said that from 1 January 2022 Hungarian credit institutions can pay dividends and buy back shares with shareholder remuneration purposes again. Thus, the NBH did not extend these restrictions in line with the similar step taken by the ECB at the end of September. On 30 December 2021, the NBH hiked the rate of the 1-week central bank deposit by 20 bps to 4.0%. Against the initially planned 2 pps social security contribution cut effective from July 2022, the government reduced employers’ taxes by 4 pps already from 1 January 2022 (the 1.5% vocational training contribution was abolished and the social contribution taxes were cut by 2.5 pps). On 25 January 2022, the NBH hiked the base rate by 50 bps to 2.9%. On 27 January 2022, the NBH hiked the rate of the 1-week central bank deposit by 30 bps to 4.3%. On 15 February 2022, the CSO revealed the final GDP growth figures: accordingly, in 4Q 2021 the quarterly expansion of 2.1% was stronger than expected, lifting the annual growth rate to 7.1% in 2021 as a whole (seasonally and working day adjusted). Mr. Mihály Varga (Minister of Finance) announced that the government expects 5.9% growth for 2022. 39 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 4: IMPACT OF CORONA VIRUS (COVID-19) [continued] Summary of economic policy measures made in response to the pandemic and other important developments, as well as post-balance sheet events [continued] Bulgaria On 19 February 2021, Fitch rating agency affirmed the credit rating of Bulgaria at ‘BBB’, while changing the outlook from stable to positive. The parliamentary elections held on 4 April 2021 were won by the GERB party led by Mr. Boyko Borisov, the previous prime minister. Serbia On 12 March 2021, the credit rating of Serbia was upgraded by Moody’s from ’Ba3’ to ’Ba2’. The outlook is stable. At the end of April 2021 the integration process of the two Serbian banks was successfully completed, thus the merger process came to an end from all legal, operational and organizational point of view. Slovenia On 2 February 2022, the Slovenian Parliament passed a law requiring banks to compensate customers for losses arising from FX rate depreciation of more than 10% in the case of CHF mortgages disbursed between 2004 and 2010. The law came into force 15 days after its Parliamentary approval, and under the law banks have 60 days to notify their customers about the reimbursement and the recalculated new instalments. SKB Banka intends to file a constitutional objection against the law, and plans to submit the appeal to the local Constitutional Court after the law’s entry into force. A provision is expected to be made in March 2022 for the potential negative impact. Romania On 15 January 2021, the National Bank of Romania decided to reduce the key interest rate by 25 bps to 1.25%. On 16 April 2021, Standard & Poor’s changed outlook on the country’s „BBB-" credit rating from negative to stable. On 5 October 2021, the central bank increased the reference rate by 25 bps to 1.5%. The National Bank of Romania raised the key interest rate by 25 bps on 10 January 2022, and by further 50 bps on 10 February 2022 to 2.5%. Ukraine • On 4 March 2021, the Ukrainian central bank increased the base rate by 50 bps to 6.5%. • On 15 April 2021, the Ukrainian central bank increased the base by 100 bps to 7.5%. • On 23 July 2021 the National Bank of Ukraine increased the base rate by 50 bps to 8%. • On 6 August 2021, Fitch Ratings changed outlook on the country’s „B" credit rating from stable to positive. • On 9 September 2021, the National Bank of Ukraine raised the base rate by 50 bps to 8.5%. • On 20 January 2022, the National Bank of Ukraine raised its key interest rate by 1 pp to 10%. Russia • On 20 January 2021, the Central Bank of Russia published its 2021-2022 road map for regulating consumer lending, as a result loosening measures taken in 2020 to facilitate lending will be reversed through higher risk weights being introduced. • On 19 March 2021, the Russian central bank hiked the base rate from 4.25% to 4.5%. • On 23 April 2021, the Russian central bank hiked the base rate from 4.5% to 5%. • On 23 July 2021, the Central Bank of Russia hiked the base rate by 100 bps, to 6.5%. • On 30 July 2021, the Central Bank of Russia announced that the risk weight of local currency denominated unsecured consumer loans granted after 1 October will be increased. • On 10 September 2021, the Russian national bank hiked the base rate by 25 bps to 6.75%. • On 22 October 2021, the Russian central bank raised the base rate by 75 bps to 7.5%. • On 11 February 2022, CBR hiked the base rate by 100 bps to 9.5%. 40 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 4: IMPACT OF CORONA VIRUS (COVID-19) [continued] Interest rate cap For the period between 1 January and 30 June 2022 the government introduced an interest rate cap for variable- rate retail mortgage loans, and with its decision announced on 18 February, for housing purposes financial leasing contracts, too. Accordingly, the affected exposures’ reference rate cannot be higher than the relevant reference rate as at 27 October 2021. The modification loss related to the interest rate cap for variable rate mortgage loans announced on 22 December 2021 was recognized in the Bank’s 2021 financial accounts. The extension of the interest rate cap to housing purposes financial leasing contracts does not have a significant negative effect. Moratorium, one-off effect In Hungary the first phase of the moratorium on loan payments was effective from 19 March 2020 to 31 December 2020. At the end of 2020 the moratorium was extended in unchanged form for the period between 1 January 2021 and 30 June 2021. Furthermore, according to Government Decree No. 317/2021. (VI. 9.) released on 9 June 2021 the payment moratorium was extended with unchanged conditions until 30 September 2021. Pursuant to Government Decree 536/2021. (IX. 15.) published on 15 September, the Government decided to extend the debt repayment moratorium: the blanket moratorium was extended by an additional month, until the end of October, in an unchanged form. Furthermore, from the beginning of November 2021 until 30 June 2022 only the eligible borrowers can participate in the moratorium provided that they submitted a request to their banks about their intention to stay. During the term of the moratorium OTP Bank accrues the unpaid interest in its statement of recognized income, amongst the revenues. At the same time, due to the fact that interest cannot be charged on the unpaid interest, and the unpaid interest will be repaid later, in the course of 2020 and 2021 altogether HUF 43.3 billion after tax loss emerged in Hungary and Serbia altogether. Within that amount there was a -HUF 1.7 billion (after tax) negative impact booked in December 2020 in relation to the Serbian deferral scheme, as the original interest calculation method was changed by the local regulator (originally the compound interest method was allowed by the law in Serbia, but charging interest on deferred interest was later retroactively disallowed by the regulator). Loan volumes under the Hungarian payment holiday followed a declining trend till the end of October 2021, then from November the participation dropped materially due to the changes to the structure. At the end of 2021 the total household and corporate exposures remaining under the moratorium comprised HUF 245 billion at OTP Core and Merkantil Group, which made up 4.1% of the total gross loan portfolio of those two entities. The following table below shows the volume of loans in moratorium as at 31 December 2021 in OTP Group and the ratio of these loans of the portfolio by countries: OTP Core Merkantil Group OTP banka Srbija Group (Serbia) DSK Group (Bulgaria) SKB Banka d.d. Ljubljana (Slovenia) OTP banka d.d. (Croatia) Crnogorska komercijalna banka Group (Montenegro) JSC “OTP Bank” (Russia) Total Current volume in moratorium (million LCY) 237,027 8,281 Current volume in moratorium (million HUF) 237,027 8,281 276 2 0.02 55 0.08 269 868 342 7 2,722 28 1,170 Gross loans (million HUF) Current participation ratio 5,549,019 440,621 1,715,347 2,922,886 984,605 1,811,376 4.27% 1.88% 0.05% 0.01% 0.001% 0.15% 366,369 753,373 0.01% 0.16% 250,445 14,543,596 41 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 4: IMPACT OF CORONA VIRUS (COVID-19) [continued] The following table below shows the volume of loans in moratorium as at 31 December 2020 in OTP Group and the ratio of these loans of the portfolio by countries: OTP Core OTP banka d.d. (Croatia) Merkantil Group SKB Banka d.d. Ljubljana (Slovenia) OTP Bank Romania S.A. (Romania) DSK Group (Bulgaria) Crnogorska komercijalna banka Group (Montenegro) JSC “OTP Bank” (Russia) Total Current volume in moratorium (million LCY) 1,760,231 3,372 120,379 Current volume in moratorium (million HUF) 1,760,231 163,052 120,379 Gross loans (million HUF) Current participation ratio 4,631,974 1,642,170 416,987 54,835 909,439 40,853 11,190 861,393 2,634,870 38.00% 9.93% 28.87% 6.03% 4.74% 0.42% 4,589 2,907 362,067 597,849 1.27% 0.49% 2,158,036 12,056,749 150 545 60 13 734 Financial assets modified during the period related to moratorium in the Group for the year ended 31 December 2021 (in HUF mn) Modification due to prolongation of deadline of covid moratoria until 30 September: Gross carrying amount before modification Loss allowance before modification Net amortised cost before modification Modification loss due to covid moratoria Net amortised cost after modification Group 1,175,230 (66,066) 1,109,164 (6,620) 1,102,544 Modification due to prolongation of deadline of covid moratoria until 31 October: Gross carrying amount before modification Loss allowance before modification Net amortised cost before modification Modification loss due to covid moratoria Net amortised cost after modification Group 1,166,115 (69,415) 1,096,700 (2,104) 1,094,596 In the case of credit card and overdraft loans interest charged during the moratoria period should be refunded to the debtors in amount determined as a difference between the charged interest and a premoratoria personal loan interest at 11,99%. The Bank has managed this government measure as loan agreement modification in the financial statements. Gross carrying amount before modification Loss allowance before modification Net amortised cost before modification Modification loss due to covid moratoria Net amortised cost after modification 57,892 (9,234) 48,658 (1,983) 46,675 42 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 4: IMPACT OF CORONA VIRUS (COVID-19) [continued] Financial assets modified during the period related to moratorium in the Group for the year ended 31 December 2021 (in HUF mn) [continued] Modification due to prolongation of deadline of covid moratoria until 30 June 2022: Gross carrying amount before modification Loss allowance before modification Net amortised cost before modification Modification loss due to covid moratoria Net amortised cost after modification Group 113,728 (25,428) 88,300 (2,838) 85,462 Modification due to temporarily fixing of loan with variable interest rate: On 24 December 2021 new regulation was issued on fixing of retail loan product’s interest, under that interest rates of mortgage loans with variable interest shall be fixed at reference rates of 27 October 2021, predictably till 30 June 2022. Gross carrying amount before modification Loss allowance before modification Net amortised cost before modification Modification loss due to covid moratoria Net amortised cost after modification Group 321,323 (9,317) 312,006 (3,397) 308,609 Financial assets modified during the period related to moratorium in the Group for the year ended 31 December 2020 (in HUF mn): Gross carrying amount before modification Loss allowance before modification Net amortized cost before modification Modification loss due to covid moratorium Net amortized cost after modification Hungary Serbia 1,119,943 (61,445) 1,058,498 (26,774) 1,031,724 53,080 (9,881) 43,199 (239) 42,960 43 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 5: CASH, AMOUNTS DUE FROM BANKS AND BALANCES WITH THE NATIONAL BANKS (in HUF mn) Cash on hand In HUF In foreign currency Amounts due from banks and balances with the National Banks Within one year In HUF In foreign currency Over one year In HUF In foreign currency Impairment on amounts due from bank and balances with the National Banks Total Compulsory reserve set by the National Banks1 Cash and cash equivalents 2021 2020 87,489 409,045 496,534 113,492 372,972 486,464 2021 2020 83,540 1,977,069 2,060,609 - - - 208,074 1,675,628 1,883,702 - 62,146 62,146 (1,108) - 2,556,035 2,432,312 (854,474) (757,535) 1,701,561 1,674,777 NOTE 6: PLACEMENTS WITH OTHER BANKS, NET OF LOSS ALLOWANCE FOR PLACEMENTS (in HUF mn) Within one year In HUF In foreign currency Over one year In HUF In foreign currency 2021 2020 851,053 523,205 1,374,258 162,774 50,823 213,597 251,206 729,249 980,455 136,418 33,359 169,777 Loss allowance on placements (2,994) (1,489) Total 1,584,861 1,148,743 1 Foreign subsidiary banks within the Group have to comply with country specific regulation of local National Banks. Each country within the Group has its own regulation for compulsory reserve calculation and maintenance. Based on that banks are obliged to place compulsory reserve at their National Bank in a specified percentage of their liabilities considered in compulsory reserve calculation. 44 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 6: PLACEMENTS WITH OTHER BANKS, NET OF LOSS ALLOWANCE FOR PLACEMENTS (in HUF mn) [continued] An analysis of the change in the loss allowance on placements with other banks is as follows: Balance as at 1 January Loss allowance for the period Release of loss allowance for the period Use of loss allowance for the period Foreign currency translation difference Closing balance Interest conditions of placements with other banks: Interest rates on placements with other banks denominated in HUF Interest rates on placements with other banks denominated in foreign currency Average interest rates on placements with other banks (%) NOTE 7: REPO RECEIVABLES (in HUF mn) Within one year In HUF In foreign currency 2021 2020 1,489 25,133 (23,613) (112) 97 2,994 478 16,476 (15,629) - 164 1,489 2021 2020 (1.50)% - 5.90% 0.00% - 3.84% (5.00)% - 29.00% (17.33)% - 5.50% 2021 1.52% 2021 33,710 27,632 61,342 2020 0.93% 2020 183,656 7,485 191,141 Loss allowance on repo receivables (290) (292) Total 61,052 190,849 An analysis of the change in the loss allowance on repo receivables is as follows: Balance as at 1 January Loss allowance for the period Release of loss allowance for the period Foreign currency translation difference Closing balance 2021 292 1,112 (1,124) 10 290 2020 62 362 (125) (7) 292 45 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 7: REPO RECEIVABLES (in HUF mn) [continued] Interest conditions of repo receivables (%): Interest rates on repo receivables denominated in HUF Interest rates on repo receivables denominated in foreign currency 2021 2020 3.04% - 3.20 % (0.10)% - 0.90% (0.58)% - 9.62% (0.55)% - 4.15% NOTE 8: FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (in HUF mn) Securities held for trading Government bonds Equity instruments and fund units Corporate bonds Discounted Treasury bills Mortgage bonds Other interest bearing securities Other non-interest bearing securities Non-trading securities mandatorily at fair value through profit or loss Equity instruments, shares and open-ended fund units Bonds Debt securities designated at fair value through profit or loss Total Positive fair value of derivative financial assets held for trading Foreign exchange swaps held for trading Interest rate swaps held for trading Commodity swaps CCIRS and mark-to-market CCIRS held -for trading 1 Foreign exchange forward contracts held for trading Held-for-trading option contracts Held-for-trading forward security agreement Other derivative transactions held for trading2 Total 2021 97,531 1,173 740 923 101 1,347 1,695 103,510 44,894 8,509 53,403 2020 38,036 3,740 - 12,721 - 2,075 - 56,572 46,063 11,514 57,577 - 2,235 156,913 116,384 2021 38,728 59,504 51,523 11,758 10,790 1,285 - 10,896 184,484 2020 42,646 36,922 9,695 7,359 8,730 4,268 22 7,981 117,623 Total 341,397 234,007 1 CCIRS: Cross Currency Interest Rate Swaps (See Note 2.6.3.) 2 Other category includes: equity swaps, option and index futures. 46 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 8: FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (in HUF mn) [continued] An analysis of securities held for trading portfolio by currency (%): Denominated in HUF Denominated in foreign currency Total An analysis of government bond portfolio by currency (%): Denominated in HUF Denominated in foreign currency Total Interest conditions of held for trading securities (%): Interest rates on securities held for trading denominated in HUF Interest rates on securities held for trading denominated in foreign currency 2021 2020 30.46% 69.54% 100.0% 19.75% 80.25% 100.0% 2021 2020 28.31% 71.69% 100.00% 16.92% 83.08% 100.00% 2021 2020 0.00% - 6.75% 0.50% - 7.00% 0.00% - 9.57% 0.38% - 6.38% Interest conditions and the remaining maturities of securities held for trading can be analysed as follows: Within one year With variable interest With fixed interest Over one year With variable interest With fixed interest Non-interest bearing securities Total 2021 111 44,011 44,122 1,544 54,976 56,520 2,868 103,510 2020 78 17,147 17,225 1,370 34,237 35,607 3,740 56,572 47 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 8: FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (in HUF mn) [continued] Interest conditions and the remaining maturities of non-trading securities mandatorily measured at fair value through profit or loss are as follows: Over one year With variable interest With fixed interest Non-interest bearing securities Total Profit from associates from shares measured at fair value through profit or loss 2021 - - - 53,403 53,403 2021 3,893 2020 - 5,492 5,492 52,085 57,577 2020 75 An analysis of non-trading securities mandatorily measured at fair value through profit or loss portfolio by currency (%): Denominated in HUF Denominated in foreign currency Total 2021 2020 57.11% 42.89% 100.00% 57.10% 42.90% 100.0% 2021 2020 Interest rates on non-trading securities mandatorily measured at fair value through profit or loss 0.00% - 0.00% 0.00% - 2.50% 48 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 9: SECURITIES AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME (in HUF mn) Securities at fair value through other comprehensive income Government bonds Corporate bonds Listed securities: In HUF In foreign currency Non-listed securities: In HUF In foreign currency Mortgage bonds Discounted Treasury bills Interest bearing treasury bills Securities issued by the National Bank of Hungary Other securities Total Non-trading equity instruments to be measured at fair value through other comprehensive income Listed securities: In HUF In foreign currency Non-listed securities: In HUF In foreign currency 2021 2020 1,765,172 88,519 1,855,134 81,620 2,896 51,882 54,778 15,487 18,254 33,741 63,072 96,625 63,115 109,774 3,257 2,189,534 2,968 52,633 55,601 16,782 9,237 26,019 88,272 76,358 - - - 2,101,384 2021 2020 - 8,416 8,416 403 26,157 26,560 34,976 - 4,931 4,931 539 29,855 30,394 35,325 Total 2,224,510 2,136,709 An analysis of securities at fair value through other comprehensive income by currency (%): Denominated in HUF Denominated in foreign currency Total 2021 2020 32.74% 67.26% 100.00% 36.62% 63.38% 100.0% 49 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 9: SECURITIES AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME (in HUF mn) [continued] Detailed information of the non-trading equity instruments to be measured at fair value through other comprehensive income: Strategic investments closely related to banking actitvity Fair value Dividend income from instruments held at the reporting date Other strategic investments Fair value Dividend income from instruments held at the reporting date Total Total fair values Dividend income from instruments held at the reporting date 2021 29,320 438 5,656 29 34,976 467 2020 27,502 180 7,823 43 35,325 223 During the year ended 31 December 2021 the Group sold HUF 65 million equity instruments designated to measure at fair value through other comprehensive income while during the year ended 31 December 2020 there wasn’t any sale transaction. An analysis of government bonds by currency (%): Denominated in HUF Denominated in foreign currency Total 2021 2020 24.29% 75.71% 100.00% 35.83% 64.17% 100.0% Interest conditions of the security portfolio at fair value through other comprehensive income are as follows (%): Interest rates on securities at fair value through other comprehensive income denominated in HUF 1.25% - 7.00% 0.50% - 7.50% 2021 2020 Interest rates on securities at fair value through other comprehensive income denominated in foreign currency 0.00% - 17.25% 0.00% - 18.00% Average interest rates securities at fair value through other comprehensive income denominated in HUF (%) Average interest rates on securities at fair value through other comprehensive income denominated in foreign currency (%) 2021 2.00% 2020 1.63% 2.51% 2.31% 50 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 9: SECURITIES AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME (in HUF mn) [continued] Interest conditions and the remaining maturities of securities at fair value through other comprehensive income can be analysed as follows: Within one year With variable interest With fixed interest Over one year With variable interest With fixed interest Non-interest bearing securities Total Certain securities are hedged against interest rate risk. See Note 37.4. NOTE 10: SECURITIES AT AMORTIZED COST (in HUF mn) Government bonds Corporate bonds Discounted Treasury bills Mortgage bonds Other securities 2021 2020 1,091 522,939 524,030 51,211 1,614,293 1,665,504 4,780 346,928 351,708 62,068 1,687,608 1,749,676 34,976 35,325 2,224,510 2,136,709 2021 2020 3,651,508 172,526 15,705 24,356 36,353 3,900,448 2,545,476 74,632 10,469 - - 2,630,577 Loss allowance on securities at amortized cost (9,113) (5,657) Total 3,891,335 2,624,920 51 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 10: SECURITIES AT AMORTIZED COST (in HUF mn) [continued] Interest conditions and the remaining maturities of securities at amortized cost can be analysed as follows: Within one year With variable interest With fixed interest Over one year With variable interest With fixed interest 2021 2020 8,101 480,296 488,397 5,122 3,406,929 3,412,051 - 156,532 156,532 - 2,474,045 2,474,045 Total 3,900,448 2,630,577 An analysis of securities at amortized cost by currency (%): Denominated in HUF Denominated in foreign currency Total Interest conditions of securities at amortized cost (%): Interest rates of securities at amortized cost with variable interest Interest rates of securities at amortized cost with fixed interest Average interest rates on securities at amortized cost (%) 2021 2020 75.42% 24.58% 100.00% 86.86% 13.14% 100.00% 2021 1.20% - 2.08% 2020 - 0.00% - 9.00% 0.50% - 7.00% 2021 2.46% 2020 3.07% An analysis of the change in the loss allowance on securities at amortized cost is as follows: Balance as at 1 January Opening change due to modification Balance as at 1 January after modification Loss allowance for the period Release of loss allowance Use of loss allowance Foreign currency translation difference Closing balance 2021 5,657 1,281 6,938 6,634 (3,621) (992) 154 9,113 2020 2,739 - 2,739 6,863 (4,061) 12 104 5,657 52 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 11: LOANS AT AMORTIZED COST AND AT FAIR VALUE (in HUF mn) Loans at amortized cost Within one year In HUF In foreign currency Over one year In HUF In foreign currency 2021 2020 1,243,635 2,901,682 4,145,317 2,359,485 7,840,375 10,199,860 1,154,223 2,445,006 3,599,229 2,002,814 6,902,342 8,905,156 14,345,177 12,504,385 Loss allowance on loans (851,994) (829,543) Total 13,493,183 11,674,842 An analysis of the gross loan portfolio at amortized cost by currency (%): In HUF In foreign currency Total Interest rates of the loan portfolio at amortized cost are as follows: Within one year In HUF In foreign currency Over one year In HUF In foreign currency Average interest rates on loans at amortized cost denominated in HUF (%) Average interest rates on loans at amortized cost denominated in foreign currency (%) 2021 2020 25.12% 74.88% 100.00% 25.25% 74.75% 100.0% 2021 2020 0.00% - 52.00%1 0.00% - 47.70%1 (0.59)% - 90.00%2 (0.50)% - 90.00%2 0.00% - 38.70%1 0.00% - 37.45%1 (0.59)% - 90.00%2 (0.50)% - 60.00%2 2021 6.49% 4.85% 2020 6.00% 5.53% The amount of those loans which were written-off in the current year but they are still subject to enforcement activity to be collected is still going on were HUF 104,940 million and HUF 94,197 million as at 31 December 2021 and 2020 respectively. 1 The highest interest rate relates to HUF loans within one year is overdraft loan, over one year is car loan. 2 The highest interest rate relates to loans in foreign currency regarding POS services in Russia. 53 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 11: LOANS AT AMORTIZED COST AND AT FAIR VALUE (in HUF mn) [continued] An analysis of the change in the loss allowance on loans is as follows: 2021 2020 Balance as at 1 January Opening change due to modification Balance as at 1 January after modification Loss allowance for the period Release of loss allowance Loss allowance in the current period from this: effect of change in parameters used for loss allowance calculation Use of loss allowance Partial write-off 1 Unwinding Foreign currency translation difference Closing balance Movement in loss allowance on loans and placements is summarized as below: Loss allowance on placements and gains from write-off and sale of placements Loss allowance on loans and gains from write-off and sale of loans Total 2 Loans mandatorily at fair value through profit or loss 829,543 (1,281) 828,262 546,284 (464,888) 81,396 (60,531) (66,784) (17,936) 345 26,711 851,994 2021 1,664 34,776 36,440 684,319 - 684,319 650,165 (382,800) 267,365 126,002 (100,711) (12,503) (8,927) 829,543 2020 851 162,733 163,584 Within one year In HUF In foreign currency Over one year In HUF In foreign currency 2021 2020 61,537 - 61,537 1,006,293 281 1,006,574 48,770 - 48,770 750,211 3,624 753,835 Total 1,068,111 802,605 1 See details in Note 2.11. 2 See details in Note 31. 54 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 11: LOANS AT AMORTIZED COST AND AT FAIR VALUE (in HUF mn) [continued] An analysis of the loan portfolio mandatorily at fair value through profit or loss by currency (%): In HUF In foreign currency Total 2021 2020 99.17% 0.83% 100.00% 99.55% 0.45% 100.00% Interest rates of the loan portfolio mandatorily at fair value through profit or loss are as follows (%): Interest rates on loans denominated in HUF Interest rates on loans denominated in foreign currency 2021 2020 1.21% - 10.83% 0.77% - 12.83% 4.00% - 4.00% 2.50% - 7.89% Average interest rates on loan portfolio at fair value through profit or loss denominated in HUF (%) Average interest rates on loan portfolio at fair value through profit or loss denominated in foreign currency (%) NOTE 12: ASSOCIATES AND OTHER INVESTMENTS (in HUF mn) Investments Investments in associates (non-listed) Other investments (non-listed) Impairment on investments Total An analysis of the change in the impairment on investments is as follows: Balance as at 1 January Impairment for the period Release of impairment for the period Modification due to merge Reclassification to securities at fair value through other comprehensive income Foreign currency translation difference Closing balance 2021 4.17% 1.82% 2021 42,409 37,327 79,736 2020 1.32% 0.00% 2020 14,149 44,158 58,307 (12,514) (5,864) 67,222 52,443 2021 5,864 7,266 (626) 28 - (18) 12,514 2020 8,816 43 (424) - (2,654) 83 5,864 55 NOTE 13: PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS (in HUF mn) OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 For the year ended 31 December 2021 Cost Intangible assets Goodwill Property Machinery and office equipment Vehicle Construction in progress Total Tangible assets subject to operating lease Balance as at 1 January Additions Foreign currency translation differences Disposals Closing balance 364,495 90,887 101,393 - 4,656 (52,035) 408,003 4,247 105,640 285,506 28,684 3,609 (12,877) 304,922 212,105 37,266 3,237 (8,877) 243,731 23,893 19,135 163 (1,939) 41,252 Depreciation and amortization Intangible assets Property Machinery and office equipment Vehicle Tangible assets subject to operating lease 28,926 13,427 1,039,721 300,715 422 (11,942) 30,833 16,470 (154,868) 1,202,038 23,403 111,316 136 (67,198) 67,657 Total Balance as at 1 January Charge for the period Foreign currency translation differences Disposals Closing balance Impairment 224,180 44,973 77,753 9,219 3,263 (10,109) 262,307 1,266 (4,531) 83,707 155,292 22,753 2,394 (7,301) 173,138 6,241 1,986 102 (1,141) 7,188 10,279 4,212 262 (5,260) 9,493 473,745 83,143 7,287 (28,342) 535,833 Intangible assets Property Machinery and office equipment Tangible assets subject to operating lease Total Balance as at 1 January Impairment for the period Release of impairment for the period Foreign currency translation differences Use of impairment Closing balance 2,704 5 (4) 2,705 1,122 2,967 55 (591) 3,553 42 - 6 (5) 43 338 9 (204) (1) (5) 137 4,206 2,976 (204) 65 (605) 6,438 56 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 13: PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS (in HUF mn) [continued] For the year ended 31 December 2021 [continued] Intangible assets Goodwill Property Machinery and office equipment Vehicle Construction in progress Total Tangible assets subject to operating lease Carrying value Balance as at 1 January Closing balance 137,611 142,991 101,393 105,640 206,631 217,662 56,771 70,550 17,652 34,064 23,403 67,657 18,309 21,203 561,770 659,767 Fair values - - 247,754 70,258 34,063 - 21,339 373,414 Carrying amount of the temporarily idle properties was HUF 3,057 million and HUF 4,211 million as at 31 December 2021 and 2020 respectively. There were no restrictions on title and properties, plants or equipment pledged as security for liabilities as at 31 December 2021 and 2020. As at 31 December 2021 and 2020 the amount of contractual commitments for the acquisition of tangible and intangible assets was HUF 1,595 million and HUF 200 million, respectively. Impairment for the propertied in the currenct period was needed as a result of the valuation performed by using the comparative value method (market analogy method) with direct comparison to the market price of other similar properties. Actual market transactions were used based on the 6-month period prior to the valuation date where the market price of the analogous property is adjusted by an expert coefficient for market adaptation (“ECMA”). Usually this range is from -25% to +25%, and reflects the availability of sufficient market information for similar items but at these properties ECMA exceeded this range where the circumstances were exceptional although by decision of the appraiser it was used only for unique properties with characteristics similar to the appraised ones, for which no sufficient market analogues are available. The price was adjusted by coefficients reflecting the area, location, size and structure of the property, as well as a weighing factor reflecting the weight of the selected market analogies in the determined fair value. An analysis of the intangible assets for the year ended 31 December 2021 is as follows: Intangible assets Self- developed Purchased Total Gross values Accumulated amortization Impairment Carrying value 12,700 (5,017) - 7,683 395,303 (257,290) (2,705) 135,308 408,003 (262,307) (2,705) 142,991 57 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 13: PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS (in HUF mn) [continued] For the year ended 31 December 2021 [continued] Carrying value of the investment and goodwill allocated to the appropriate cash generating units Subsidiaries Carrying amounts of the subsidiary in HUF million Goodwill values in HUF million Goodwill values in million functional currency Type of functional currency Consolidated ownership interest With ownership adjusted company value in HUF million Applied long term grow rate Applied long term discount rate DSK Bank EAD (Bulgaria) OTP banka d.d. (Croatia) JSC “OTP Bank” (Russia) POK-DSK Rodina a.d. (Bulgaria) George Consult (Croatia) 280,692 43,138 28,541 HUF 77 BGN 99.91% 832,445 3.00% 7.90% 205,349 21,421 58 EUR 100.00% 361,995 2.69% 8.83% 124,411 40,866 9,395 RUB 1,680 11 11 HUF 225 612,357 204 105,640 4 HRK 97.92% 99.85% 76.00% 187,552 1.89% 15.44% 15,299 171 3.00% 2.69% 7.90% 8.83% 58 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 13: PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS (in HUF mn) [continued] For the year ended 31 December 2021 [continued] The Bank decided that the recoverable amount of goodwill is determined based on fair value less cost of disposal. In the fair value hierarchy goodwill is categorized into level 3. When the Bank prepares goodwill impairment tests of the subsidiaries, the two methods which are used based on discounted cash-flow calculation that shows the same result; however they represent different economical logics. Based on the internal regulation of the Bank as at 31 December 2021 impairment test was prepared where a three-year cash-flow model was applied with an explicit period between 2022-2024. The basis for the estimation was the financial preliminary estimations for December 2021, and based on the prepared medium-term (2022- 2024) forecasts. When the Bank prepared the calculations for the period 2022-2024, it considered the actual worldwide economic situations, the expected economic growth for the following years, their possible effects on the financial sector, the plans for growing which result from these, and the expected changes of the mentioned factors. Present value calculation with the FCF method The Bank calculated the expected cash-flow for the given period based on the expected after tax profit of the companies. The calculation is highly sensitive to the level of discount rate and growth rate used. As discount factor the Bank uses a zero coupon yield curve derived by the Headquarter Asse-Liability Management department. This zero coupon curve is estimated for each related countries, based on the countries’ issued bonds and segmented by the issuances’ currencies. The Bank calculated risk premiums on the basis of information from the country risk premiums that are published by Aswath Damodaran – New York STERN University, according to the Bank’s assumption the risk free interest rate includes the country-dependent risks in an implicit way. When the subsidiary owns subordinated debt, the discount rate is calculated as a weighted average of the expected return on equity presented previously and the subordinated debt’s interest rate. At the end of the calculation, the value of subordinated debt is being subtracted from the valuations’ result. The growth rate in the explicit period is the growth rate of the profit after tax adjusted by the interest rate of the cash and subordinated loans. The supposed growth rates for the periods of residual values reflect the long-term economic expectations in case of every country. The values of the subsidiaries in the FCF method were then calculated as the sum of the discounted cash-flows of the explicit period, the present value of the terminal values and the initial free capital assuming an effective capital structure. Summary of the impairment test for the year ended 31 December 2021 Based on the valuations of the subsidiaries as at 31 December 2021 no goodwill impairment was needed to be recorded by the Group. 59 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 13: PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS (in HUF mn) [continued] For the year ended 31 December 2020 Cost Intangible assets Goodwill Property Machinery and office equipment Vehicle Construction in progress Total Tangible assets subject to operating lease Balance as at 1 January Additions Foreign currency translation differences Disposals Reclassified as held-for-sale Closing balance 320,749 92,313 111,687 1,413 7,769 (56,183) (153) 364,495 (5,319) (6,388) - 101,393 279,538 7,342 12,987 (14,361) - 285,506 192,369 27,533 4,094 (11,737) (154) 212,105 23,079 2,208 215 (1,609) - 23,893 22,717 36,835 538 (36,687) - 23,403 31,799 6,586 2,602 (12,061) - 28,926 981,938 174,230 22,886 (139,026) (307) 1,039,721 Depreciation and amortization Intangible assets Property Machinery and office equipment Vehicle Tangible assets subject to operating lease Total Balance as at 1 January Charge for the period Foreign currency translation differences Disposals Reclassified as held-for-sale Closing balance 183,026 44,115 71,085 8,981 3,875 (6,733) (103) 224,180 2,540 (4,853) - 77,753 139,813 22,195 2,681 (9,302) (95) 155,292 5,508 1,570 150 (987) - 6,241 10,889 5,064 1,113 (6,787) - 10,279 410,321 81,925 10,359 (28,662) (198) 473,745 60 NOTE 13: PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS (in HUF mn) [continued] OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 For the year ended 31 December 2020 [continued] Impairment Intangible assets Goodwill Property Machinery and office equipment Tangible assets subject to operating lease Total Balance as at 1 January Impairment for the period Release of impairment for the period Foreign currency translation differences Use of impairment Closing balance 803 2,328 - 85 (512) 2,704 6,388 - - - (6,388) - - 1,601 - 129 (608) 1,122 1,337 - - 5 (1,300) 42 440 - (137) 35 - 338 8,968 3,929 (137) 254 (8,808) 4,206 Intangible assets Goodwill Property Machinery and office equipment Vehicle Construction in progress Total Tangible assets subject to operating lease Carrying value Balance as at 1 January Closing balance 136,920 137,611 105,299 101,393 208,453 206,631 51,219 56,771 17,571 17,652 22,717 23,403 20,470 18,309 562,649 561,770 Fair values - - 217,161 57,614 16,962 - 18,309 310,046 An analysis of the intangible assets for the year ended 31 December 2020 is as follows: Intangible assets Self- developed Purchased Total Gross values Accumulated amortization Impairment Carrying value 8,117 (3,675) - 4,442 356,378 (220,505) (2,704) 133,169 364,495 (224,180) (2,704) 137,611 61 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 13: PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS (in HUF mn) [continued] For the year ended 31 December 2020 [continued] Carrying value of the investment and goodwill allocated to the appropriate cash generating units Subsidiaries Carrying amounts of the subsidiary in HUF million Goodwill values in HUF million Goodwill values in million functional currency Type of functional currency Consolidated ownership interest With ownership adjusted company value in HUF million Applied long term grow rate Applied long term discount rate DSK Bank EAD (Bulgaria) OTP banka d.d. (Croatia) JSC “OTP Bank” (Russia) POK-DSK Rodina a.d. (Bulgaria) 280,692 42,984 28,541 HUF 77 BGN 99.91% 717,318 3.00% 8.13% 205,349 21,196 58 EUR 100.00% 336,403 2.69% 9.37% 124,410 37,202 9,395 RUB 943 611,394 11 101,393 11 HUF 97.91% 99.75% 173,315 1.89% 13.26% 941 3.00% 8.13% Summary of the impairment test for the year ended 31 December 2020 Based on the valuations of the subsidiaries as at 31 December 2020 no goodwill impairment was needed to be recorded by the Group. 62 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 14: INVESTMENT PROPERTIES (in HUF mn) An analysis of the change in gross values of investment properties is as follows: Gross values Balance as at 1 January Increase due to transfer from inventories or owner-occupied properties Increase from purchase Increase due to transfer from held-for-sale properties Transfer to held-for-sale properties Transfer to inventories or owner-occupied properties Disposal due to sale Foreign currency translation difference Closing balance The applied depreciation and amortization rates were as follows: 2021 54,154 3,425 134 - (66) (2,858) (14,993) 445 40,241 2020 53,906 6,896 574 86 (118) (936) (8,725) 2,471 54,154 2021 2020 Depreciation and amortization rates 1.00% - 20.00% 1.00% - 20.00% An analysis of the movement in the depreciation and amortization on investment properties is as follows: Depreciation and amortization Balance as at 1 January Additions due to transfer from inventories or owner-occupied properties Charge for the period Transfer to inventories or owner-occupied properties Disposal due to sale Foreign currency translation difference Closing balance 2021 11,383 1,296 1,113 (236) (4,577) 132 9,111 An analysis of the movement in the impairment on investment properties is as follows: Impairment Balance as at 1 January Impairment for the period Release of impairment for the period Use of impairment Additions due to transfer from inventories or owner-occupied properties Foreign currency translation difference Closing balance Carrying values Balance as at 1 January Closing balance Fair values 2021 4,170 54 (297) (2,726) - 47 1,248 2021 38,601 29,882 34,257 2020 8,352 1,657 908 (10) (322) 798 11,383 2020 3,994 178 (919) - 587 330 4,170 2020 41,560 38,601 37,842 63 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 14: INVESTMENT PROPERTIES (in HUF mn) [continued] The Group chose the cost model for measuring investment properties but estimates and reviews the fair value of the investment properties by external experts, these investment properties would have been presented on level 3 in the fair value hierarchy if the Group didn’t apply cost method for these recognition. Income and expenses Rental income Direct operating expenses of investment properties – income generating Direct operating expenses of investment properties – non income generating 2021 2,621 318 14 2020 2,520 455 8 NOTE 15: DERIVATIVE FINANCIAL ASSETS DESIGNATED AS HEDGE ACCOUNTING (in HUF mn) Positive fair value of derivative financial assets designated as fair value hedge CCIRS and mark-to-market CCIRS designated as fair value hedge Interest rate swaps designated as fair value hedge Total NOTE 16: OTHER ASSETS1 (in HUF mn) Other financial assets Receivables from card operations Prepayments and accrued income on other financial assets Trade receivables Receivables from investment services Other advances Stock exchange deals Giro clearing accounts Receivables due from pension funds and investment funds Receivables from leasing activities Advances for securities and investments Accrued day one gain of loans provided at below-market interest Other financial assets Loss allowance on other financial assets Total 2021 2020 5,471 13,286 18,757 6,179 641 6,820 2021 27,820 27,778 24,951 15,077 21,043 12,255 2,635 3,250 363 525 - 17,019 (16,800) 135,916 2020 Reclassified 24,816 23,521 17,039 10,716 26,806 10,632 2,441 8,323 431 774 14,465 19,057 (18,459) 140,562 1 Other assets are expected to be recovered or settled no more than twelve months after the reporting period. 64 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 16: OTHER ASSETS1 (in HUF mn) [continued] Other non-financial assets Prepayments and accrued income on other non-financial assets Receivables, subsidies from the State, Government Settlement and suspense accounts Biological assets and agricultural produce Other non-financial assets Impairment on other non-financial assets Total Other assets (under IAS 2) Inventories Repossessed real estate Repossessed other non-financial assets Write-down of the assets measured under IAS 2 Total Total other assets 2021 46,418 15,800 14,974 5,193 15,495 (4,413) 93,467 2021 43,843 6,354 1,069 (3,864) 47,402 2020 Reclassified 19,307 11,767 16,355 - 11,513 (4,699) 54,243 2020 Reclassified 66,748 9,706 2,034 (7,054) 71,434 276,785 266,239 An analysis of the movement in the loss allowance on other financial assets is as follows: Balance as at 1 January Loss allowance for the period Release of allowance for the period Use of loss allowance Foreign currency translation difference Closing balance 2021 2020 18,459 8,569 (6,903) (3,767) 442 16,800 14,617 10,057 (4,755) (1,607) 147 18,459 An analysis of the movement in the impairment on other non-financial assets is as follows: Balance as at 1 January Transfer due to separation of assets under IAS 2 Impairment for the period Release of impairment for the period Use of impairment Foreign currency translation difference Closing balance 2021 4,699 - 949 (653) (751) 169 4,413 2020 Reclassified 11,871 (7,419) 1,358 (522) (516) (73) 4,699 1 Other assets are expected to be recovered or settled no more than twelve months after the reporting period. 65 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 17: AMOUNTS DUE TO BANKS, THE NATIONAL GOVERNMENTS, DEPOSITS FROM THE NATIONAL BANKS AND OTHER BANKS (in HUF mn) Within one year In HUF In foreign currency Over one year In HUF In foreign currency 2021 2020 277,397 225,398 502,795 900,948 163,605 1,064,553 132,182 117,672 249,854 741,772 193,689 935,461 Total 1,567,348 1,185,315 Interest rates on amounts due to banks, the National Governments, deposits from the National Banks and other banks are as follows: Within one year In HUF In foreign currency Over one year In HUF In foreign currency 2021 2020 (2.04)% - 4.66% (2.40)% - 17.60%1 0.00% - 20.00% (0.56)% - 5.00% (2.40)% - 4.66% (2.40)% - 2.73% (2.40)% - 12.00%2 (2,40)% - 17.60%2 Average interest rates on amounts due to banks, the National Governments, deposits from the National Banks and other banks denominated in HUF Average interest rates on amounts due to banks, the National Governments, deposits from the National Banks and other banks denominated in in foreign currency NOTE 18: REPO LIABILITIES (in HUF mn) Within one year In HUF In foreign currency Over one year In HUF In foreign currency Total 2021 2020 1.20% 1.00% 1.49% 2.11% 2021 49,726 29,321 79,047 - - - 2020 - 8,379 8,379 - 109,612 109,612 79,047 117,991 1 The highest interest rate for due to banks relate to loans taken from EBRD in Ukraine. 66 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 18: REPO LIABILITIES (in HUF mn) [continued] Interest rates on repo liabilities are as follows: Interest rates on repo liabilities denominated in HUF (%) Interest rates on repo liabilities 2021 0.00% - 2.80% 2020 - denominated in foreign currency (%) (0.95)% - 0.00% 0.00% - 3.85% NOTE 19: FINANCIAL LIABILITIES DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS (in HUF mn) Within one year In HUF In foreign currency Over one year In HUF In foreign currency Total Contractual amount outstanding 2021 2020 1,784 - 1,784 39,400 - 39,400 41,184 21,479 2,010 - 2,010 29,886 2,235 32,121 34,131 23,332 Interest conditions of financial liabilities designated at fair value through profit or loss can be analysed as follows: Interest rates on financial liabilities designated at fair value denominated in HUF within one year Interest rates on financial liabilities designated at fair value denominated in HUF over one year 2021 2020 0.46% - 2.46% 0.51% - 2.50% 0.01% - 2.90% 0.00% - 2.50% Certain MFB (“Hungarian Development Bank”) refinanced loan receivables are categorised as fair value through profit or loss based on SPPI test. Related refinancing loans at the liability side are categorised as fair value through profit or loss based on fair value option due to accounting mismatch as provided by the IFRS 9 standard. The Group controls capital funds where it does not hold the 100% of the owner rights. The related non- controlling interest is treated as financial liability designated at fair value through profit or loss as it is not considered equity under IAS 32. 67 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 20: DEPOSITS FROM CUSTOMERS (in HUF mn) Within one year In HUF In foreign currency Over one year In HUF In foreign currency 2021 2020 7,829,595 12,758,360 20,587,955 293,606 187,083 480,689 6,383,882 10,990,543 17,374,425 327,165 189,273 516,438 Total 21,068,644 17,890,863 Interest rates on deposits from customers are as follows: Within one year In HUF In foreign currency Over one year In HUF In foreign currency Average interest rates on deposits from customers denominated in HUF Average interest rates on deposits from customers denominated in foreign currency 2021 2020 (2.48)% - 7.96% (1.01)% - 17.20%1 (4,58)% - 7.96% (0.58)% - 16.50% 0.01% - 3.00% 0.01% - 3.00% 0.00% - 8.90% 0.00% - 7.75% 2021 0.18% 0.34% 2020 0.10% 0.49% An analysis of deposits from customers by type is as follows: Retail deposits Corporate deposits Municipality deposits Total 2021 2020 11,982,784 8,093,206 992,654 21,068,644 56.88% 38.41% 4.71% 100.00% 10,695,792 6,298,143 896,928 17,890,863 59.78% 35.20% 5.01% 100.00% 1 The highest interest rate regarding foreign currency deposits for the current year relate to treasury deposit in Turkish lira in Hungary, in the previous year relate to individually agreed deposits in Ukraine. 68 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 21: LIABILITIES FROM ISSUED SECURITIES (in HUF mn) With original maturity Within one year In HUF In foreign currency Over one year In HUF In foreign currency 2021 2020 9,332 13 9,345 426,929 51 426,980 130,676 1,366 132,042 332,125 46 332,171 Total 436,325 464,213 Interest rates on liabilities from issued securities are as follows: Issued securities denominated in HUF Issued securities denominated in foreign currency 0.60% - 4.26% 0.74% - 5.00% 0.00% - 2.50% 0.01% - 1.11% 2021 2020 Average interest rates on issued securities denominated in HUF Average interest rates on issued securities denominated in foreign currency 2021 2.20% 0.25% 2020 1.83% 1.32% 69 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 21: LIABILITIES FROM ISSUED SECURITIES (in HUF mn) [continued] Issued securities denominated in HUF as at 31 December 2021 (in HUF mn) Name Date of issue Maturity Nominal value (in HUF mn) Amortized cost (in HUF mn) Interest conditions Hedged (actual interest rate in % p.a.) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 OTPX2022A OTPX2022B OTPX2022C OTPX2022D OTPX2023A OTPX2023B OTPX2024A OTPX2024B OTPX2024C OTPRF2022A OTPRF2022B OTPRF2022C OTPRF2022D OTPRF2022E OTPRF2022F OTPRF2023A OJB2023_I OJB2024_A OJB2024_C OJB2024_II OJB2025_II OJB2027_I OJB2031_I Other 22/03/2012 18/07/2012 29/10/2012 28/12/2012 22/03/2013 28/06/2013 18/06/2014 10/10/2014 15/12/2014 22/03/2012 22/03/2012 28/06/2012 28/06/2012 29/10/2012 28/12/2012 22/03/2013 05/04/2018 17/09/2018 24/02/2020 10/10/2018 03/02/2020 23/07/2020 18/08/2021 23/03/2022 18/07/2022 28/10/2022 27/12/2022 24/03/2023 26/06/2023 21/06/2024 16/10/2024 20/12/2024 23/03/2022 23/03/2022 28/06/2022 28/06/2022 31/10/2022 28/12/2022 24/03/2023 24/11/2023 20/05/2024 24/10/2024 24/10/2024 26/11/2025 27/10/2027 22/10/2031 175 164 177 238 312 198 241 295 242 2,321 934 209 286 862 708 899 44,120 57,067 80,125 96,800 22,550 76,850 82,000 211 236 549 317 290 366 272 277 336 275 2,513 1011 266 324 933 773 977 42,300 57,010 79,972 89,138 20,003 67,257 70,655 211 indexed indexed indexed indexed indexed indexed indexed indexed indexed indexed indexed indexed indexed indexed indexed indexed 1.75 4.26 3.95 2.50 1.50 1.25 2.50 - 1.70 1.70 1.70 1.70 0.60 1.30 0.70 0.60 1.70 1.70 1.70 1.70 1.70 1.70 1.70 fix floating floating fix fix fix fix hedged hedged hedged hedged hedged hedged hedged hedged hedged hedged hedged hedged hedged hedged hedged hedged hedged Total issued securities in HUF 467,984 436,261 Issued securities denominated in foreign currency are promissory notes issued by JSC “OTP Bank” (Russia) in the amount of HUF 64 million as at 31 December 2021. 70 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 21: LIABILITIES FROM ISSUED SECURITIES (in HUF mn) [continued] Issued securities denominated in HUF as at 31 December 2020 (in HUF mn) Name Date of issue Maturity Nominal value (in HUF mn) Amortized cost (in HUF mn) Interest conditions Hedged (actual interest rate in % p.a.) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 OTPX2021A OTPX2021B OTPX2021C OTPX2021D OTPX2022A OTPX2022B OTPX2022C OTPX2022D OTPX2023A OTPX2023B OTPX2024A OTPX2024B OTPX2024C OTPRF2021A OTPRF2021B OTPRF2021C OTPRF2021D OTPRF2021E OTPRF2022A OTPRF2022B OTPRF2022C OTPRF2022D OTPRF2022E OTPRF2022F OTPRF2023A OJB2021_I OJB2023_I OJB2024_A OJB2024_C OJB2024_II OJB2025_II OJB2027_I Other 01/04/2011 17/06/2011 19/09/2011 21/12/2011 22/03/2012 18/07/2012 29/10/2012 28/12/2012 22/03/2013 28/06/2013 18/06/2014 10/10/2014 15/12/2014 05/07/2011 20/10/2011 21/12/2011 21/12/2011 21/12/2011 22/03/2012 22/03/2012 28/06/2012 28/06/2012 29/10/2012 28/12/2012 22/03/2013 15/02/2017 05/04/2018 17/09/2018 24/02/2020 10/10/2018 03/02/2020 23/07/2020 01/04/2021 21/06/2021 24/09/2021 27/12/2021 23/03/2022 18/07/2022 28/10/2022 27/12/2022 24/03/2023 26/06/2023 21/06/2024 16/10/2024 20/12/2024 13/07/2021 25/10/2021 30/12/2021 30/12/2021 30/12/2021 23/03/2022 23/03/2022 28/06/2022 28/06/2022 31/10/2022 28/12/2022 24/03/2023 27/10/2021 24/11/2023 20/05/2024 24/10/2024 24/10/2024 26/11/2025 27/10/2027 Total issued securities in HUF 183 245 231 259 201 172 201 248 324 198 241 295 242 2,607 2,894 527 372 76 2,065 831 190 260 761 623 787 114,000 44,120 46,771 64,379 96,800 17,650 65,800 213 464,766 246 370 192 325 214 440 233 299 327 225 237 284 232 2,807 2,954 544 381 74 1,920 772 196 251 715 592 740 113,732 44,623 46,639 64,175 95,645 17,499 64,705 213 462,801 indexed indexed indexed indexed indexed indexed indexed indexed indexed indexed indexed indexed indexed indexed indexed indexed indexed indexed indexed indexed indexed indexed indexed indexed indexed 2.00 1.75 1.35 1.05 2.50 1.50 1.25 NaN NaN NaN NaN NaN 1.70 1.70 1.70 1.70 0.60 1.30 0.70 0.60 NaN NaN NaN NaN NaN 1.70 1.70 1.70 1.70 1.70 1.70 1.70 fix fix floating floating fix fix fix hedged hedged hedged hedged hedged hedged hedged hedged hedged hedged hedged hedged hedged hedged hedged hedged hedged hedged hedged hedged hedged hedged hedged hedged hedged hedged 71 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 21: LIABILITIES FROM ISSUED SECURITIES (in HUF mn) [continued] Issued securities denominated in foreign currency as at 31 December 2020 (in HUF mn) Name Date of issue Maturity Type of FX Nominal value Amortized cost (FX mn) (HUF mn) (FX mn) (HUF mn) 1 2 3 4 5 20/02/2020 02/04/2020 14/05/2020 18/06/2020 OTP_VK1_21/1 OTP_VK1_21/2 OTP_VK1_21/3 OTP_VK1_21/4 Other 1 Total issued securities in FX 20/02/2021 02/04/2021 14/05/2021 18/06/2021 USD USD USD USD 1.39 1.24 1.18 0.74 12 414 370 351 221 47 1.39 1.24 1.18 0.74 14 414 370 351 221 56 16.55 1,403 18.55 1,412 Total issued securities 464,213 Interest conditions (actual interest rate in % p.a.) 1.1 0.1 0.01 1.1 floating floating floating floating Hedge accounting Certain issued structured securities are hedged by the Bank with interest rate swaps (“IRS”) which exchange the fixed and floating interest rate with the interest rate of the securities between the parties at a notional amount that equals the nominal amount of the hedged securities. These are considered as fair value hedge relationships as they cover the interest rate risk arising from the coupons of the hedged securities. OTP Bank does not intend to be exposed to the risk embedded in the structured bonds, consequently as part of interest rate swap transaction the structured interest payments are swapped to floating interest rate. This hedging relationship meets all of the following hedge effectiveness requirements: • • • there is an economic relationship between the hedged item and the hedging instrument the effect of credit risk does not dominate the value changes that result from that economic relationship the hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the Bank actually hedges and the quantity of the hedging instrument that the Bank actually uses to hedge that quantity of hedged item The cash-flows of the fixed rate securities issued by the Bank are exposed to the changes in the HUF/EUR foreign exchange rate and the volatility of the quoted interest rates of EUR and HUF. The interest rate risk and foreign exchange risk related to these securities are hedged with EUR and HUF IRS transactions, where the fixed interests were swapped to payments linked to 3 month HUF BUBOR and EURIBOR, resulting in a decrease in the interest rate and foreign exchange exposure of issued securities. Term Note Program in the value of HUF 200 billion for the year of 2021/2022 On 28 May 2021 the Bank initiated term note program in the value of HUF 200 billion with the intention of issuing registered dematerialized bonds in public. On 8 July 2021, the National Bank of Hungary approved the prospectus of Term Note Program and the disclosure as at 9 July 2021. The prospectus is valid for 12 months following the disclosure. The Issuer can initiate to introduce the bonds issued under the program to the Hungarian and to other stock exchanges without any obligations. Term Note Program in the value of HUF 200 billion for the year of 2020/2021 On 21 April 2020 the Bank initiated term note program in the value of HUF 200 billion with the intention of issuing registered dematerialized bonds in public. On 9 July 2020, the National Bank of Hungary approved the prospectus of Term Note Program and the disclosure as at 10 July 2020. The prospectus is valid for 12 months following the disclosure. The Issuer can initiate to introduce the bonds issued under the program to the Hungarian and to other stock exchanges without any obligations. 1 Other category includes promissory notes issued by JSC “OTP Bank” (Russia) in the amount of HUF 56 million as at 31 December 2020. 72 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 22: DERIVATIVE FINANCIAL LIABILITIES HELD FOR TRADING (in HUF mn) Negative fair value of derivative financial liabilities held for trading by type of contracts Foreign exchange swaps held for trading Commodity swaps Interest rate swaps held for trading Foreign exchange forward contracts held-for-trading CCIRS and mark-to-market CCIRS held for trading Held for trading option contracts Held-for-trading forward security agreement Other derivative transactions held for trading 1 Total 2021 46,380 51,508 87,945 7,738 7,789 479 13 864 202,716 2020 39,103 8,269 32,960 10,750 7,419 3,843 116 2,363 104,823 NOTE 23: DERIVATIVE FINANCIAL LIABILITIES DESIGNATED AS HEDGE ACCOUNTING (in HUF mn) Negative fair value of derivative financial liabilities designated as hedge accounting by type of contracts CCIRS and mark-to-market CCIRS designated as fair value hedge Interest rate swaps designated as fair value hedge Total 2021 5,451 5,777 11,228 2020 6,007 5,334 11,341 1 Other category includes: fx spot, equity swaps, options and index futures. 73 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 24: PROVISIONS AND OTHER LIABILITIES1 (in HUF mn) Other financial liabilities Liabilities connected to Cafeteria benefits Liabilities from investment services Accrued expenses on other financial liabilities Liabilities from card transactions Accounts payable Liabilities due to short positions Giro clearing accounts Advances received from customers Liabilities from wages and other salary related payments Loans from government Accrued day one gain of loan liabilities at below-market interest Dividend payable Other financial liabilities Subtotal Other non-financial liabilities Clearing and giro settlement accounts Liabilities from social security contributions Accrued expenses on other non-financial liabilities Liabilities related to housing loans Insurance technical reserve Other non-financial liabilities Subtotal Total 2021 2020 Reclassified 114,867 92,612 58,247 31,484 46,243 16,904 14,830 11,903 13,092 5,851 - 135 79,603 485,771 2021 48,715 11,853 13,029 11,428 3,416 23,869 112,310 121,711 62,667 42,212 20,402 41,460 9,131 14,589 11,259 17,784 3,435 14,391 119 48,526 407,686 2020 Reclassified 38,912 7,423 6,997 8,868 4,545 14,995 81,740 598,081 489,426 1 Other liabilities are expected to be recovered or settled no more than twelve months after the reporting period. Besides the total other liabilities mentioned above, which are expected to be recovered or settled more than twelve months after the reporting period are the following: accrued contractual liabilities, compulsory pension reserve, loans from government and liabilities from preferential dividend shares. 74 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 24: PROVISIONS AND OTHER LIABILITIES1 (in HUF mn) [continued] The provisions are detailed as follows: Commitments and guarantees given Total provision according to IFRS 9 Pending legal issues and tax litigation Pensions and other retirement benefit obligations Other long-term employee benefits Restructuring Provision due to CHF loans conversion at foreign subsidiaries Other provision Total provision according to IAS 37 2021 51,990 51,990 35,354 9,308 910 1,801 1,285 19,151 67,809 2020 54,810 54,810 34,894 10,975 2,396 1,531 1,949 9,912 61,657 Total 119,799 116,467 The movements of provisions according to IFRS 9 can be summarized as follows: Balance as at 1 January Provision for the period Release of provision for the period Use of provision Transfer Foreign currency translation differences Closing balance 2021 2020 54,810 28,869 (28,770) (7) (4,426) 1,514 51,990 48,662 98,703 (90,041) (2,276) - (238) 54,810 The movements of provisions according to IAS 37 can be summarized as follows: Balance as at 1 January Provision for the period Release of provision for the period Use of provision Change due to actuarial gains or losses related to employee benefits Unwinding of the discounted amount Transfer Foreign currency translation differences Closing balance 2021 2020 61,657 37,924 (27,167) (10,953) (42) 7 4,426 1,957 67,809 55,772 23,381 (17,251) (4,501) (144) - - 4,400 61,657 1 Other liabilities are expected to be recovered or settled no more than twelve months after the reporting period. Besides the total other liabilities mentioned above, which are expected to be recovered or settled more than twelve months after the reporting period are the following: accrued contractual liabilities, compulsory pension reserve, loans from government and liabilities from preferential dividend shares. 75 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 25: SUBORDINATED BONDS AND LOANS (in HUF mn) Within one year In HUF In foreign currency Over one year In HUF In foreign currency 2021 - 2,841 2,841 - 275,493 275,493 2020 - 2,843 2,843 - 271,861 271,861 Total 278,334 274,704 Types of subordinated bonds and loans are as follows: Debt securities issued Loan received Total Interest rates on subordinated bonds and loans are as follows: Denominated in HUF Denominated in foreign currency Average interest rates on subordinated bonds and loans 2021 2020 6,558 271,776 278,334 269,566 5,138 274,704 2021 2020 - 2.50% - 5.00% - 2.50% - 5.00% 2021 2.75% 2020 2.94% Subordinated bonds and loans can be detailed as follows: Type Nominal value Date of issuance Date of maturity Issue price Interest conditions Interest rate as at 31 December 2021 Subordinated bond EUR 231 million 07/11/2006 Perpetual 99.375% Three-month EURIBOR + 3%, variable after year 10 (payable quarterly) 2.428% Subordinated bond EUR 500 million 15/07/2019 15/07/2029 99.738% Subordinated loan USD 17.0 million 05/06/2018 30/06/2025 100.00% Fixed 2.875% annual in the first 5 years and callable after 5 years, starting from year 6 fix coupon (payable annually) is calculated as a sum of the initial margin (320 basis point) and the 5 year mid-swap rate prevailing at the end of the 5 year. Bullet repayment, once at the end of the loan agreement 2.875% 5.00% 76 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 26: SHARE CAPITAL (in HUF mn) Authorized, issued and fully paid: Ordinary shares 2021 28,000 2020 28,000 The nominal value of the shares is HUF 100 per shares. All of the shares are ordinary shares representing the same rights to the shareholders. Furthermore there are no restrictions on the distribution of dividends and the repayment of capital. NOTE 27: RETAINED EARNINGS AND RESERVES1 (in HUF mn) In 2021, the Bank did not pay dividend based on the earlier NBH warnings issued due to covid moratoria. In 2022 dividend of HUF 119 billion from the profit of years 2019 and 2020 and HUF 1 billion from the profit of year 2021 (totally HUF 120 billion) are expected to be proposed by the Management, which means HUF 425,89 (for the year 2019 and 2020) and HUF 3,57 (for the year 2021) dividend per share payable to shareholders, respectively. In the opinion of the Management dividend is still considered to be payable, which will be decided on the Bank’s Board meeting in March taken in consideration the Russian-Ukrainian conflict. The retained earnings and reserves according to IFRS contains the retained earnings (HUF 841,261 million and HUF 744,802 million) and reserves (HUF 2,265,262 million and HUF 1,884,274 million) as at 31 December 2021 and 31 December 2020 respectively. The reserves include mainly the option reserve, other reserves, the fair value adjustment of financial instruments at fair value through other comprehensive income, share-based payment reserve, fair value of hedge transactions, additional reserves of Income Certificates Exchangeable for Shares (“ICES”), changes in equity accumulated in the previous years at the subsidiaries and due to consolidation as well as translation of foreign exchange differences. In the Consolidated Financial Statements the Group recognizes the non-monetary items at historical cost. The difference between the historical cost of the non-monetary items in forint amount and the translated foreign currencies into the presentation currency using the exchange rate at the balance sheet date, is presented in the shareholders’ equity as a translation difference. The accumulated amounts of exchange differences were HUF 58,164 million and HUF (3,369) million as at 31 December 2021 and 2020, respectively. On 19 October 2006, the Bank sold 14.5 million Treasury shares owned by the Group through an issue of ICES. Within the transaction 10 million shares owned by OTP Bank, and a further 4.5 million shares owned by the Group were sold during the underwriting period of ICES on the weighted average market price (HUF 7,080) of the Budapest Stock Exchange. The shares have been purchased by Opus Securities S.A. (“OPUS”), which issued an exchangeable bond with a total face value of EUR 514,274,000 backed by those shares. The exchangeable bonds have been sold at a 32% premium over the selling price of the shares. The EUR denominated exchangeable bonds were perpetual and the investors could have exercised the conversion right between years 6 and 10. The bonds carried a fixed coupon of 3.95% during the first 10 years, and thereafter the Issuer had the right to redeem the bonds at face value. Following year 10, the bonds carried a coupon of 3 month EURIBOR +3%. OTP Bank had a discretional right to cancel the interest payments. The interest payable was non- cumulative. Due to the conditions described above, ICES was accounted as an equity instrument and therefore any payment was accounted as equity distribution paid to ICES holders. On 14 September 2021 the Bank decided to terminate the subordinated swap agreement related to ICES transaction as at 29 October 2021, and to exercise its option for repurchasing approximately 14.5 million OTP ordinary shares held by Opus at market price based on the swap agreement. On the same day, the Bank recognised liability due to Opus as a reduction of EUR 514 million in the shareholder’s equity. Treasury shares were repurchased on 29 October 2021 on a price HUF 18,118 and on the same day the swap transaction was financially settled. As a result of the closure of the subordinated swap agreement the Bank’s shareholder’s equity increased by HUF 75,421 million, the Group’s shareholders’ equity increased by HUF 35,063 million. Approximately 12 million pieces of treasury shares were sold to OTP SECOP I. (“OTP Special Employee Stock Ownership Program”) and OTP SECOP II. 1 See more details in the Consolidated Statement of Comprehensive Income and in the Consolidated statement of Changes in equity on page 6 and 7. 77 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 27: RETAINED EARNINGS AND RESERVES1 (in HUF mn) [continued] Share capital Share capital is the portion of the Bank’s equity that has been obtained by the issue of shares in the corporation to a shareholder, usually for cash. Retained earnings Profit of previous years generated by the Group that are not distributed to shareholders as dividends. Other reserves The other reserves contain separated reserves due to statutory provisions. Option reserve OTP Bank Plc. and MOL Plc. entered into a share swap agreement in 16 April 2009, whereby OTP has changed 24,000,000 OTP ordinary shares for 5,010,501 „A series” MOL shares. The final maturity of the share swap agreement is 11 July 2022, until which any party can initiate cash or physical settlement of the transaction. Option reserve represents the written put option over OTP ordinary shares were accounted as a deduction from equity at the date of OTP-MOL share swap transaction. Share-based payment reserve Share-based payment reserve represents the increase in the equity due to the goods or services were received by the Bank in an equity-settled share-based payment transaction, valued at the fair value of the goods or services received (see details in Note 40). Other comprehensive income Other comprehensive income comprises items of income and expense (including reclassification adjustments) that are not recognized in profit or loss as required or permitted by other IFRSs. Net investment hedge in foreign operations Reserve presented as net investment hedge in foreign operations in the sharholders’ equity is related to DSK Bank EAD, OTP banka d.d. and Crnogorska komercijalna banka a.d. Extra reserves The result of ICES bond issuance was presented as extra reserve, any payment to the owner of the ICES was booked as decreaseing item in the extra reserve in the consolidation books until the termination of the subordinated swap agreement related to ICES transaction as it was detailed above in this note when the whole extra reserve presented here was transferred to retained earnings. 1 See more details in the Consolidated Statement of Comprehensive Income and in the Consolidated statement of Changes in equity on page 6 and 7. 78 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 27: RETAINED EARNINGS AND RESERVES1 (in HUF mn) [continued] Changes in equity accumulated in the previous year at the subsidiaries and due to consolidation The accumulated changes at the subsidiaries contain the accumulated gains and losses of the subsidiaries from the first day when they were included in the consolidation process. The changes due to consolidation contain the effect on the result of the eliminations in the consolidation process of the previous years. Retained earnings Capital reserve Option reserve Other reserves Actuarial loss related to employee defined benefits Fair value of financial instruments measured at fair value through other comprehensive income Share-based payment reserve Fair value of derivative financial instruments designated as cash-flow hedge Net investment hedge in foreign operations Extra reserves Net profit for the period Changes in equity accumulated in the previous year at the subsidiaries and due to consolidation Foreign currency translation differences Retained earnings and other reserves Fair value adjustment of securities at fair value through other comprehensive income Balance as at 1 January Change of fair value Deferred tax related to change of fair value Transfer to profit or loss due to reclassification to FVTPL securities Other transfer to retained earnings Deferred tax related to other transfer to retained earnings Transfer to profit or loss due to derecognition Deferred tax related to transfer to proft or loss Foreign currency translation difference Closing balance Expected credit loss on securities at fair value through other comprehensive income Balance as at 1 January Increase of loss allowance Release of loss allowance Decrease due to sale, derecognition Foreign currency translation difference Closing balance 2021 2020 844,343 52 (55,468) 129,208 (471) 11,690 46,162 - (27,405) - 455,592 744,802 52 (55,468) 93,569 (513) 61,396 42,573 - (27,405) 89,935 259,416 1,647,642 58,164 3,109,509 1,424,088 (3,369) 2,629,076 2021 2020 43,958 (49,621) 3,035 - (5,070) 457 (2,547) 491 1,644 (7,653) 2021 6,984 4,414 (3,453) (1,749) 514 6,710 50,272 (10,897) 1,403 (144) - - 3,329 (472) 467 43,958 2020 2,927 6,303 (1,441) (724) (81) 6,984 1 See more details in the Consolidated Statement of Comprehensive Income and in the Consolidated statement of Changes in equity on page 6 and 7. 79 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 27: RETAINED EARNINGS AND RESERVES1 (in HUF mn) [continued] Fair value changes of equity instruments as at fair value through other comprehensive income Balance as at 1 January Change of fair value Deferred tax related to change of fair value Transfer to retained earnings due to derecognition Foreign currency translation difference Closing balance Net investment hedge in foreign operations Balance as at 1 January Change of fair value on hedging item Deferred tax related to change of fair value Closing balance Actuarial loss related to employee benefits Balance as at 1 January Change of actuarial loss related to employee benefits Deferred tax related to change of actuarial loss related to employee benefits Foreign currency translation difference Closing balance 2021 2020 10,454 2,465 (361) (207) 282 12,633 15,115 (3,336) 363 (1,746) 58 10,454 2021 2020 (27,405) - - (27,405) (18,814) (9,440) 849 (27,405) 2021 (513) 98 (11) (45) (471) 2020 (640) 126 1 - (513) Foreign currency translation difference 2021 2020 Balance as at 1 January Change of foreign currency translation Closing balance (3,369) 61,533 58,164 (72,404) 69,035 (3,369) 1 See more details in the Consolidated Statement of Comprehensive Income and in the Consolidated statement of Changes in equity on page 6 and 7. 80 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 28: TREASURY SHARES (in HUF mn) Nominal value (Ordinary shares) Carrying value at acquisition cost 2021 2020 1,091 106,941 2,392 124,080 The changes in the carrying value of treasury shares are due to repurchase and sale transactions on market authorised by the General Assembly. Change in number of shares: Number of shares as at 1 January Additions Disposals Closing number of shares Change in carrying value: Balance as at 1 January Additions Disposals Closing balance 2021 2020 23,924,900 16,251,451 (29,269,470) 10,906,881 17,779,845 8,296,388 (2,151,333) 23,924,900 2021 2020 124,080 276,433 (293,572) 106,941 60,931 85,922 (22,773) 124,080 NOTE 29: NON-CONTROLLING INTEREST (in HUF mn) Balance as at 1 January Increase due to business combination Non-controlling interest included in net profit for the period Purchase of non-controlling interest Decrease due to discontinued operation Foreign currency translation difference Closing balance 2021 4,116 1,041 836 - - 205 6,198 2020 4,956 - 221 (382) (235) (444) 4,116 The non-controlling interest is not significant in respect of the whole OTP Group. 81 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 30: INTEREST INCOME, INCOME SIMILAR TO INTEREST INCOME AND EXPENSE (in HUF mn) 2021 2020 Interest income calculated using the effective interest method from / on loans securities at amortized cost finance lease receivables securities at fair value through other comprehensive income banks and balances with the National Banks placements with other banks liabilities (negative interest expense) repo receivables Subtotal Income similar to interest income from swap deals related to placements with other banks loans mandatorily at fair value through profit or loss swap deals related to credit institutions rental income non-trading securities mandatorily at fair value through profit or loss Subtotal Total interest income and incomes similar to interest income Interest expense due to / from / on swaps related to banks, National Governments and to deposits from the National Banks deposits from customers swaps related to deposits from customers banks, National Governments and on deposits from the National Banks issued securities subordinated and supplementary bonds and loans financial assets (negative interest income) depreciation of assets subject to operating lease and investment properties leases repo liabilities other Total interest expense 692,432 79,602 59,084 49,473 16,527 20,922 3,672 827 922,539 128,519 40,131 15,557 8,964 1,749 194,920 658,579 69,905 54,046 44,782 5,103 7,572 1,628 286 841,901 78,577 28,251 20,322 8,363 473 135,986 1,117,459 977,887 2021 2020 116,895 50,645 23,860 17,467 9,822 7,598 7,275 5,325 1,556 2,299 407 243,149 82,301 53,196 17,226 13,785 7,750 7,718 5,014 5,624 1,623 653 326 195,216 82 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 31: LOSS ALLOWANCES / IMPAIRMENT / PROVISIONS (in HUF mn) Loss allowance on loans Loss allowance for the period Release of loss allowance Income from loan recoveries Change in the fair value attributable to changes in the credit risk of loans mandatorily measured at fair value through profit of loss Loss allowance on finance lease Release of loss allowance on finance lease Loss allowance on due from banks, balances with National Banks, on placements and on repo receivables Allowance for the period Release of allowance Loss allowance on securities at fair value through other comprehensive income and on securities at amortized cost Allowance for the period Release of allowance Release of impairment of intangible, tangible assets subject to operating lease and of investment properties Impairment for the period Release of impairment Provision for commitments and guarantees given Provision for the period Release of provision 2021 546,284 (475,067) (51,876) 2020 Reclassified 650,165 (390,102) (98,300) 16,289 20,694 (14,918) 41,406 27,341 (24,737) 2,604 11,048 (7,074) 3,974 63 (501) (438) 28,869 (28,770) 99 3,262 23,807 (13,835) 174,997 16,476 (15,691) 785 13,166 (5,857) 7,309 178 (1,056) (878) 98,703 (90,041) 8,662 Loss allowances / Impairment and provisions 47,645 190,875 83 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 32: NET PROFIT FROM FEES AND COMMISSIONS (in HUF mn) Income from fees and commissions 2021 2020 Fees and commissions related to lending1 36,999 33,233 Deposit and account maintenance fees and commissions Fees and commissions related to the issued bank cards Currency exchange gains and losses Fees related to cash withdrawal Fees and commissions related to security trading Fees and commissions related to fund management Insurance fee income Other Fees and commissions from contracts with customers 198,145 173,578 99,766 47,843 46,143 30,224 23,553 16,974 54,466 517,114 83,474 46,290 39,120 25,830 28,800 13,603 42,601 453,296 Total 554,113 486,529 Fee type Deposit and account maintenance fees and commissions and fees related to cash withdrawal Nature and timing of obligation settlement, and the significant payment terms Revenue recognition under IFRS 15 Fees for ongoing account management services are charged on a monthly basis during the period when they are provided. fees Transaction-based are charged when the transaction takes place or charged monthly at the end of the month. The Group provides a number of account management services for both retail and corporate customers in which they charge a fee. Fees related to these services can be typically account transaction fees (money transfer fees, direct debit fees, money standing order fees, etc.), internet banking fees (e.g. OTP Direct fee), account control fees (e.g. sms fee), or other fees for occasional services (account statement fees, other administration fees, etc.). Fees for ongoing account management services are charged to the customer’s account on a monthly basis. The fees are commonly fixed amounts that can be vary per account package and customer category. In the case of the transaction based fees where the services include money transfer the fee is charged when the transaction takes place. The rate of the fee is typically determined in a certain % of the transaction amount. In the case of other transaction-based fees (e.g. SMS fee), the fee is settled monthly. In the case of occasional services the Group basically charges the fees when the services are used by the customer. The fees can be fixed fees or they can be set in %. The rates are reviewed by the Group regularly. 1 Such kinds of fees and commissions related to lending which aren’t included in the effective interest rate calculation due to their nature. 84 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 32: NET PROFIT FROM FEES AND COMMISSIONS (in HUF mn) [continued] Fee type Fees and commission related to the issued bank cards Fees and commissions related to security account management services Fees and commissions related to fund management Net insurance fee income Other Nature and timing of obligation settlement, and the significant payment terms Revenue recognition under IFRS 15 The Group provides a variety of bank cards to its customers, for which different fees are charged. The fees are basically charged in connection with the issuance of cards and the related card transactions. The annual fees of the cards are charged in advance in a fixed amount. The amount of the annual card fee depends on the type of card. In case of transaction-based fees (e.g. cash withdrawal/payment fee, merchant fee, interchange fee, etc.), the settlement of the fees will take place immediately after the transaction or on a monthly basis. The fee is typically determined in % of the transaction with a fixed minimum amount. For all other cases where the Group provides a continuous service to the customers (e.g. card closing fee), the fees are charged monthly. The fee is calculated in a fix amount. The rates are reviewed by the Group regularly. The Group provides its clients security account management services. Fees will be charged for account management and transactions on accounts. Account management fees are typically charged quarterly or annually. The amount is determined in %, based on the stocks of securities managed by the clients on the account in a given period. Fees for the securities account are charged immediately after the transaction. They are determined in %, based on the transaction amount. Fees for complex services provided to clients (e.g. portfolio management or custody) are typically charged monthly or annually. The fees are fixed monthly amounts and in some cases a bonus fee are charged. Fees from fund management services provided to investment funds and from portfolio management provided to insurance companies, funds. The fee income are calculated on the basis of net asset value of the portfolio and by the fee rates determined in the contracts about portfolio management. transactions on Due to the fact that the Group rarely provides insurance services to its clients, only acts as an agent, the fee income charged to the customers and fees payable to the insurance company are presented net in the fee income. In addition, agency fee charged for the sale of insurance contracts is also recorded in this line. The fee is charged on a monthly basis and determined in %. Fees for ongoing services are charged on a monthly basis during the period when they are provided. Transaction-based fees are charged when the transaction takes place or charged monthly at the end of the month. Fees for ongoing services are charged quarterly or the annually period when they are provided. The fees are accrued monthly. during Transaction-based are charged when transaction takes place. fees the Fees for ongoing services are charged usually on monthly (mutual funds) or semi-annually (venture capital funds) during the period when they are provided but accrued monthly. Fees for ongoing services are charged on a monthly basis during the period when they are provided. Fees that are not significant in the Group total income are included in Other fees category. Such fees are safe lease, special procedure fee, account rent fee, fee of a copy of document, etc. Other fees may include charges for continuous services or for ad hoc administration services. Continuous fees are charged monthly (e.g., safe lease fees) at the beginning of the period, typically at a fixed rate. Fees for ad hoc services are charged immediately after the service obligation were met, usually in a fixed amount. Fees for ongoing services are charged on a monthly basis during the period when they are provided. Fees for ad hoc services the are charged when transaction takes place. 85 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 32: NET PROFIT FROM FEES AND COMMISSIONS (in HUF mn) [continued] Expense from fees and commissions 2021 2020 Fees and commissions related to issued bank cards Interchange fees Fees and commissions paid on loans Fees and commissions related to deposits Cash withdrawal transaction fees Fees and commissions related to security trading Insurance fees Fees and commissions related to collection of loans Postal fees Money market transaction fees and commissions Other Total 42,662 22,831 9,502 7,467 4,063 3,730 1,413 830 590 281 18,570 111,939 32,487 18,958 6,974 7,000 3,696 3,776 1,036 1,447 714 113 12,695 88,896 Net profit from fees and commissions 442,174 397,633 NOTE 33: GAIN AND LOSSES BY TRANSACTIONS (in HUF mn) Gains and losses by transactions Gain by transactions Loss by transactions Gain from sale of loans, placements, finance lease Gain by transactions Loss by transactions Gain from derecognition of securities at amortized cost Gain from derecognition of financial assets at amortized cost, net 2021 2020 Reclassified 5,662 (4,808) 854 3,552 (2,521) 1,031 1,885 6,479 (4,501) 1,978 1,402 - 1,402 3,380 Foreign exchange result consists revaluation difference from converting assets and liabilities in foreign currencies into the presentation currency of the consolidation financial statements. Gains and losses by transactions 2021 2020 Reclassified Gain by transactions Loss by transactions Fx gain on securities at fair value through profit or loss Gain by transactions Loss by transactions Fx gain on derecognition of investment in subsidiaries, associates Gain by transactions Loss by transactions Fx (loss) / gain on securities at fair value through other comprehensive income Gain by transactions Loss by transactions Fx gain on other securities Gains on securities, net 9,553 (4,537) 5,016 2,405 (1,889) 516 10,505 (13,092) (2,587) 2,847 (232) 2,615 5,560 4,855 (2,110) 2,745 - - - 8,831 (6,506) 2,325 10,486 (8,091) 2,395 7,465 86 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 33: GAINS AND LOSSES (in HUF mn) [continued] Gains and losses by transactions 2021 2020 Reclassified Gain by transactions Loss by transactions Gain on non-trading securities mandatorily at fair value through profit or loss Gain by transactions Loss by transactions Loss on loans mandatorily at fair value through profit or loss (adjustment resulting from change in market factors) Gain by transactions Loss by transactions Gain/ (Loss) on financial assets and liabilities designated at fair value through profit or loss Fair value adjustment on financial instruments measured at fair value through profit or loss Gains and losses by transactions Gain by transactions Loss by transactions Gain from fx swap, swap and option deals Gain by transactions Loss by transactions (Loss) / Gain from option deals Gain by transactions Loss by transactions Loss from commodities deals Gain by transactions Loss by transactions (Loss) / Gain from futures deals Gain on derivative instruments, net 5,835 (1,023) 4,812 36,591 (44,346) (7,755) 2,868 (457) 2,411 (532) 2021 74,582 (64,034) 10,548 2,684 (3,005) (321) 94,639 (95,794) (1,155) 745 (3,019) (2,274) 6,798 14,781 (7,542) 7,239 999 (2,125) (1,126) - (1,270) (1,270) 4,843 2020 Reclassified 63,574 (52,890) 10,684 619 (50) 569 5,237 (5,264) (27) 155 (41) 114 11,340 NOTE 34: OTHER OPERATING INCOME AND EXPENSES AND OTHER ADMINISTRATIVE EXPENSES (in HUF mn) Other operating income Income from agricultural activity Income from tourism activity Gains on transactions related to property activities Rental income Income from computer programming Fair value adjustment of biological assets and agricultural produce Income from real estate management Gains on transactions related to insurance activity Non-repayable assets received Negative goodwill due to acquisition Other income from non-financial activities Total 2021 42,526 8,588 6,424 2,132 1,113 (2,551) - 657 165 31 22,243 81,328 2020 - - 3,631 1,835 1,529 - 1,092 721 65 7,504 17,084 33,461 87 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 34: OTHER OPERATING INCOME AND EXPENSES AND OTHER ADMINISTRATIVE EXPENSES (in HUF mn) [continued] Other operating expenses Expense related to agricultural activity Provision for off-balance sheet commitments and contingent liabilities Financial support for sport association and organization of public utility Expenses related to tourism activity Loss allowance and loan losses on other financial assets Expenses from losses due to foreign currency loan conversion at foreign subsidiaries Impairment / (Release of impairment) on investments1 Non-repayable assets contributed Impairment on tangible and intangible assets (Release of impairment) / Impairment, loan losses on other non-financial assets and assets measured under IAS 2 Release of provision due to foreign currency loan conversion at foreign subsidiaries Other Other expenses from non-financial activities Other costs Total Other administrative expenses Personnel expenses Wages Taxes related to personnel expenses Other personnel expenses Subtotal 2021 30,392 11,395 11,111 7,928 2,624 949 6,640 881 2,967 (638) (638) 12,121 5,613 6,508 85,732 2021 2020 - 6,336 12,080 6,036 224 (381) 688 51 1,537 (206) 13,082 5,576 7,506 39,447 2020 271,497 44,049 25,138 340,684 242,970 42,576 23,096 308,642 Depreciation, amortization of tangible, intangible assets, right-of-use assets and goodwill impairment2 94,996 92,761 Other general expenses Taxes, other than income tax3 Services Professional fees Fees payable to authorities and other fees Advertising Administration expenses Rental fees Subtotal Total 93,678 113,400 21,775 44,113 19,457 14,662 4,847 84,317 105,384 17,583 44,542 17,913 15,100 4,883 311,932 289,722 747,612 691,125 1 See details in Note 12. 2 See details in Note 13 and Note 36. 3 Special tax of financial institutions was paid by the Group in the amount of HUF 19,652 million for the year 2021 and HUF 17,665 million for the year 2020, recognized as an expense thus decreased the corporate tax base. For the year ended 31 December 2021 financial transaction duty was paid by the Bank in the amount of HUF 68 billion while for the year ended 31 December 2020 the same dutiy was HUF 60 billion. 88 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 34: OTHER OPERATING INCOME AND EXPENSES AND OTHER ADMINISTRATIVE EXPENSES (in HUF mn) [continued] The table below contains the detailing of the fees for audit and non-audit services: Ernst & Young Audit Ltd. OTP – annual audit – separate financial statements OTP – annual audit – consolidated financial statements Other audit services based on statutory provisions to OTP Group members Other services providing assurance Other non-audit services Total Ernst & Young Network Audit based on statutory provisions Other services providing assurance Tax consulting services Other non-audit services Total 2021 In thousand EUR 458 659 1,050 1,575 316 4,058 2021 In thousand EUR 1,788 - 29 209 2,026 NOTE 35: INCOME TAXES (in HUF mn) The Group is presently liable for income tax at rates between 9% and 35% of taxable income. Deferred tax is calculated at the income tax rate of 9% in Hungary and Montenegro, 10% in Bulgaria, 12% in Moldova, 12.5% in Cyprus, 15% in Serbia and Albania, 16% in Romania, 18% in Ukraine and Croatia, 19% in Slovenia, 20% in Russia, 25.5% in the Netherlands and 35% in Malta. The breakdown of the income tax expense is: Current tax expense Deferred tax expense Total A reconciliation of the net deferred tax asset/liability is as follows: Balance as at 1 January Deferred tax expense in profit or loss Deferred tax receivable related to items recognized directly in equity and in Comprehensive Income Due to merge of subsidiary Due to acquisition of subsidiary Foreign currency translation difference Closing balance 2021 65,692 6,431 72,123 2021 (3,673) (6,431) 1,294 - (737) 611 (8,936) 2020 Reclassified 42,085 1,833 43,918 2020 (2,652) (1,833) 3,555 (919) - (1,824) (3,673) 89 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 35: INCOME TAXES (in HUF mn) [continued] A breakdown of the deferred tax assets are as follows: Loss allowance on granted loans Provision for off-balance sheet commitments and contingent liabilities, derivative financial instruments Securities at amortized cost Difference in depreciation of tangible assets Fair value adjustment of non-trading instruments mandatorily at fair value though profit or loss Fair value adjustment of derivative financial instruments Provision on other financial, non-financial liabilities Difference in accounting for leases Fair value adjustment of securities at fair value through other comprehensive income Unused tax allowance Loss allowance / impairment on other financial, non-financial assets Tax accrual caused by negative taxable income Loss allowance on investment (goodwill) Fair value adjustment of securities at fair value through profit or loss Amounts unenforceable by tax law Other Deferred tax asset A breakdown of the deferred tax liabilities are as follows: Difference in depreciation of tangible assets Fair value adjustment of securities at fair value through other comprehensive income Fair value adjustment of securities at fair value through profit or loss Loss allowance on investment (goodwill) Fair value adjustment of non-trading instruments mandatorily at fair value though profit or loss Securities at amortized cost Provision for off-balance sheet commitments and contingent liabilities, derivative financial instruments Loss allowance on granted loans Interbank placements and receivables Fair value adjustment of derivative financial instruments Amounts unenforceable by tax law Loss allowance / impairment on other financial, non-financial assets Repurchase agreement and security lending Provision on other financial, non-financial liabilities Other Deferred tax liabilities 2021 8,244 7,688 9 3,636 256 992 1,073 999 202 - 2,427 152 77 95 - 4,198 30,048 2021 (10,245) (6,569) (2,781) (1,142) - (210) (559) (944) (491) (214) - (2,261) - (1,875) (11,693) (38,984) 2020 9,048 6,469 4,394 3,323 2,053 1,302 1,091 801 - 1,552 1,824 237 71 9 247 5,238 37,659 2020 (8,115) (2,779) (9,053) (769) (233) - (630) (450) (322) (317) (102) (82) (1) (1) (18,478) (41,332) 90 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 35: INCOME TAXES (in HUF mn) [continued] A breakdown of the deferred tax liabilities are as follows [continued] Net deferred tax liability (amounts presented in the consolidated statement of financial position) Deferred tax assets Deferred tax liabilities 2021 2020 (8,936) (3,673) 15,109 (24,045) 22,317 (25,990) Among deferred tax assets the tax accruals are included the following accruals by entities: Tax accrual caused by negative taxable income Merkantil Bank Ltd. OTP Real Estate Leasing Ltd. Nagisz Ltd. 2021 40 55 57 152 2020 181 56 - 237 A reconciliation of the income tax income / expense is as follows: Profit before income tax Income tax expense at statutory tax rates Income tax adjustments due to permanent differences are as follows: Deferred use of tax allowance Tax effect of transaction costs related to share-based payment recognized directly in shareholders' equity Correction on tax basis due to change of accounting policy Permanent differences from unused tax losses Amounts unenforceable by tax law Use of tax allowance in the current year Other Income tax expense Effective tax rate Business tax and innovation contribution Total income tax expense Net current tax (liability) / asset (amounts presented in the consolidated statement of financial position) Current income tax receivables Current income tax payable Date until it can be used 31/12/2030 31/12/2030 31/12/2030 2020 Reclassified 297,964 36,847 (1,039) 305 230 (167) (38) (2,023) (6,739) 27,376 9.19% 16,542 43,918 2020 9,643 2021 528,435 68,823 (8) 323 - (103) (846) (4,036) (11,250) 52,903 10.01% 19,220 72,123 2021 (6,603) 29,978 (36,581) 39,171 (29,528) 91 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 36: LEASES (in HUF mn) The Group as a lessee: Right-of-use assets by class of underlying assets as at 31 December 2021: 2021 Property Office equipment and vehicles Total Depreciation expense of right-of-use assets Additions to right-of-use assets Carrying amount of right-of-use assets at the end of the reporting period 15,710 13,915 50,265 355 245 461 16,065 14,160 50,726 Right-of-use assets by class of underlying assets as at 31 December 2020: 2020 Property Office equipment and vehicles Total Depreciation expense of right-of-use assets Additions to right-of-use assets Carrying amount of right-of-use assets at the end of the reporting period 15,933 17,999 45,642 514 250 641 16,447 18,249 46,283 The total cash outflow for leases was HUF 19,663 million as at 31 December 2021 and HUF 23,028 million as at 31 December 2020. The Group mainly leases real estate, a significant part of its right-of-use assets are related to branch offices, a smaller part to office buildings and office space. Leasing liabilities by maturities: Within one year Over one year Total Lease liabilities by payments: Arising from fixed lease payments Arising from variable lease payments Total 2021 11,761 41,525 53,286 2021 36,047 17,239 53,286 2020 10,937 37,514 48,451 2020 35,018 13,433 48,451 On 31 December 2021 and 2020 HUF 123 million and HUF 126 million is the lease payment respectively to be paid in the future due to leases not yet commenced to which the Group is committed. The future lease payment not taken into account would be HUF 4,041 million arising from extension options if they had been taken into account. The most typical indexes/rates on which the variable lease payments depend are: Consumer Price Index, Inflation Rate, BUBOR, EURIBOR. 92 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 36: LEASES (in HUF mn) [continued] The Group as a lessee: Amounts recognised in profit and loss Interest expense on lease liabilities Expense relating to short-term leases Expense relating to leases of low value assets Expense relating to variable lease payments not included in the measurement of lease liabilities Income from subleasing right-of-use assets Gains or losses arising from sale and leaseback transactions The Group as a lessor: 2021 1,556 3,885 694 - 11 - 2020 1,623 3,857 721 2 405 - The Group’s leasing activities are most significant in Hungary, Bulgaria, Slovenia, Ukraine and Croatia. The main activity of the leasing companies is finance leasing. About half of the underlying assets are passenger cars, besides this the Group leases mainly agricultural machinery, commercial vehicles, vessels and construction machinery. The Group manages the risk associated with the rights held in the underlying assets by, inter alia, buy-back agreements, determining the residual values on level lower than future market values and registering pledge on the underlying asset. The Group as a lessor, finance lease: Amounts receivable under finance leases 2021 2020 In less than 1 year Between 1 and 2 years Between 2 and 3 years Between 3 and 4 years Between 4 and 5 years More than 5 years Total receivables from undiscounted lease payments Unguaranteed residual values Gross investment in the lease Less: unearned finance income Present value of minimum lease payments receivable Loss allowance Net investment in the lease 469,646 332,360 241,217 159,306 90,548 60,000 1,353,077 692 1,353,769 (141,138) 1,212,631 (30,003) 1,182,628 410,639 298,354 211,257 127,052 71,428 44,473 1,163,203 796 1,163,999 (88,257) 1,075,742 (24,602) 1,051,140 An analysis of the change in the gross values on finance receivables is as follows: Balance as at 1 January Additions due to new contracts Additions due to interest income and amortized fees Decrease due to write-off Decrease due to repossession of the asset Decrease due to sale Decrease due to early repayment Decrease due to regular lease payment Foreign currency translation difference Closing balance 2021 2020 1,075,742 656,055 64,168 (543) (3,174) (3,864) (59,246) (530,157) 13,650 1,212,631 982,853 372,664 54,110 (349) (4,422) (3,924) (52,703) (328,357) 55,870 1,075,742 93 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 36: LEASES (in HUF mn) [continued] The Group as a lessor [continued]: The Group as a lessor, finance lease [continued]: An analysis of the change in the loss allowance on finance receivables is as follows: 2021 2020 Balance as at 1 January Loss allowance for the period Release of loss allowance Use of loss allowance Partial write-off Decrease due to sale Foreign currency translation difference Closing balance Result from finance leases Selling profit or loss Finance income on the net investment in the lease Income relating to variable lease payments not included in the measurement of the net investment in the lease The Group as a lessor, operating lease: Amounts receivable under operating leases In less than 1 year Between 1 and 2 years Between 2 and 3 years Between 3 and 4 years Between 4 and 5 years More than 5 years Total receivables from undiscounted lease payments Result from operating leases Lease income Therein lease income relating to variable lease payments that do not depend on an index or a rate 24,602 20,694 (14,918) (257) - (513) 395 30,003 2021 325 59,084 - 2021 10,383 5,172 3,527 2,704 2,019 904 24,709 2021 10,791 - 13,590 23,807 (13,240) (21) (50) - 516 24,602 2020 249 54,046 - 2020 11,285 8,634 4,856 2,692 1,653 20 29,140 2020 9,861 - 94 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Financial instruments may result in certain risks to the Group. The most significant risks the Group faces include: 37.1. Credit risk The Group takes on exposure to credit risk which is the risk that a counter-party will be unable to pay amounts in full when due. The Group structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or banks of borrowers, and to geographical areas and loan types. Such risks are monitored on a periodical basis and are subject to an annual or more frequent review. The exposure to any borrower including banks and brokers is further restricted by sub-limits covering on and off-balance sheet exposures and daily delivery risk limits in relation to trading items such as forward foreign exchange contracts. Actual exposures against limits are monitored daily. Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and principal repayment obligations and by changing these lending limits when appropriate. Exposure to credit risk is managed by obtaining collateral, corporate and personal guarantees. Defining the expected credit loss on individual and collective basis On individual basis: Individually assessed are the non-retail or non- micro- and small enterprise exposure of significant amount on a stand-alone basis: exposure in stage 3, exposure in workout management purchased or originated credit-impaired instruments which are in accordance with the conditions mentioned above The calculation of impairment must be prepared and approved by the risk management functional areas. The calculation, all relevant factors (amortized cost, original and current EIR, contracted and expected cash flows (from business and/or collateral) for the individual periods of the entire lifecycle, other essential information enforced during the valuation) and the criteria thereof (including the factors underlying the classification as stage 3) must be documented individually. The expected credit loss of the exposure equals the difference of the items’ AC (gross book value) on the valuation date and the present value of the receivable's expected cash flows discounted to the valuation date by the exposure's original effective interest rate (EIR) (calculated at the initial recognition, or in the case of variable rate, recalculated due to the last interest rate change). The estimation of the expected future cash flows should be forward looking, it must also contain the effects of the possible change of macroeconomic outlook. At least two scenarios must be used for the estimation of the expected cash flow. It should be at least one scenario in which the entity anticipates that realized cash flows will be significantly different from the contractual cash flows. Probability weights must be allocated to the individual scenarios. The estimation must reflect the probability of the occurrence and non-occurrence of the credit loss, even if the most probable result is the non-occurrence of the loss. 95 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.1. Credit risk [continued] Defining the expected credit loss on individual and collective basis [continued] On collective basis: The following exposures are subject to collective assessment: retail exposure irrespective of the amount, micro and small enterprise exposures irrespective of the amount, all other exposure which are insignificant on a stand-alone basis and not part of the workout management, exposure which are not in stage 3, significant on a stand-alone basis, purchased or originated credit-impaired instruments which are in accordance with the conditions mentioned above. In the collective impairment methodology credit risk and the change of credit risk can be correctly captured by understanding the risk characteristics of the portfolio. In order to achieve this the main risk drivers shall be identified and used to form homogeneous segments having similar risk characteristics. The segmentation is expected to stay stable from month to month, however a regular (at least yearly) revision of the segmentation process should be set up to capture the change of risk characteristics. The segmentation must be performed separately for each parameter, since in each case different factors may have relevance. The Bank's Headquarter Group Reserve Committee stipulates the guidelines related to the collective impairment methodology at group level. In addition, it has right of agreement in respect of the risk parameters (PD - probability of default, LGD - loss given default, EAD – exposure at default) and segmentation criteria proposed by the group members. The review of the parameters must be performed at least annually and the results should be approved by the Group Reserve Committee. Local Risk Managements are responsible for parameter estimations / updates, macroeconomic scenarios are calculated by OTP Bank Headquarter for each subsidiary and each parameter. Based on the consensus proposal of Local Risk Management and OTP Bank Headquarter, the Group Reserve Committee decides on the modification of parameters (all parameters for impairment calculation). At least on a yearly basis the impairment parameters should be back tested as well. The expected loss calculation should be forward looking, including forecasts of future economic conditions. This may be achieved by applying 3-5 different macroeconomic scenarios, which may be integrated in the PD, LGD and EAD parameters. 96 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.1. Credit risk [continued] 37.1.1. Financial instruments by stages Gross carrying amount and accumulated loss allowance of financial assets at amortized cost and of interest bearing securities at fair value through other comprehensive income and financial commitments and provision on them by stages as at 31 December 2021: 2021 Carrying amount / Exposure Gross carrying amount / Notinal value Accumulated loss allowance / Provision Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total Placements with other banks Repo receivables Mortgage loans Loans to medium and large corporates Consumer loans Loans to micro and small enterprises Car-finance loans Municipal loans Loans at amortized cost Finance lease receivable Interest bearing securities at fair value through other comprehensive income 1 Securities at amortized cost Financial assets total Loan commitments given Financial guarantees given Other commitments given Financial liabilities total 1,584,861 61,052 3,822,426 1,587,827 61,342 3,173,491 5,294,170 2,963,112 4,680,180 2,585,014 - - 559,939 657,586 422,975 500,991 446,341 466,143 13,493,183 1,182,628 412,247 370,790 444,944 11,666,666 959,361 76,131 79,965 23,890 1,820,486 210,955 2,189,534 3,891,335 22,402,593 3,776,768 913,038 1,174,462 5,864,268 2,187,835 3,879,749 20,342,780 3,665,153 887,585 1,127,354 1,699 20,699 2,053,839 128,603 35,648 44,064 5,680,092 208,315 28 - 178,066 158,773 356,485 54,458 9,675 816 758,273 41,944 - - 800,245 14,805 4,568 8,260 27,633 - - 57,988 1,587,855 61,342 3,969,484 24,117 12,856 5,520,656 3,377,330 2,339 2,452 - 99,752 371 545,175 462,882 469,650 14,345,177 1,212,631 - - 100,123 211 7 - 218 2,189,534 3,900,448 23,296,987 3,808,772 927,808 1,179,678 5,916,258 2,966 290 10,450 51,724 49,104 4,751 2,988 1,372 120,389 4,432 6,566 7,789 142,432 20,539 11,814 3,170 35,523 - - 25,590 69,724 84,158 9,707 4,978 1,475 195,632 11,140 144 1,324 208,240 7,482 1,408 1,140 10,030 28 - 84,937 98,017 274,098 28,351 6,508 660 492,571 14,243 - - 506,842 3,961 1,542 906 6,409 - - 26,081 7,021 6,858 1,375 2,067 - 43,402 188 - - 43,590 22 6 - 28 2,994 290 147,058 226,486 414,218 44,184 16,541 3,507 851,994 30,003 6,710 9,113 901,104 32,004 14,770 5,216 51,990 1 Interest bearing securities at fair value through other comprehensive income are recognized in the Consolidated statement of financial position as at fair value (see in Note 9). Loss allowances for securities at fair value through other comprehensive income that are in Stage 1 and / or in Stage 2 is recognized in the Other comprehensive income. It is included in the accumulated loss allowance of this table showed above. 97 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.1. Credit risk [continued] 37.1.1. Financial instruments by stages [continued] Gross carrying amount and accumulated loss allowance of financial assets at amortized cost and of interest bearing securities at fair value through other comprehensive income and financial commitments and provision on them by stages as at 31 December 2020: 2020 Carrying amount / Exposure Gross carrying amount / Notinal value Accumulated loss allowance / Provision Stage 1 Stage 2 Stage 3 POCI Total Stage 1 Stage 2 Stage 3 POCI Total Placements with other banks Repo receivables Mortgage loans Loans to medium and large corporates Consumer loans Loans to micro and small enterprises Car-finance loans Municipal loans Loans at amortized cost Finance lease receivable Interest bearing securities at fair value through other comprehensive income 1 Securities at amortized cost Financial assets total Loan commitments given Financial guarantees given Other commitments given Financial liabilities total 1,148,743 190,849 3,311,651 1,150,113 191,141 2,729,387 4,342,003 2,689,621 3,758,377 2,317,004 1 - 522,312 604,480 397,170 521,578 362,425 447,564 11,674,842 1,051,140 391,810 292,973 445,039 9,934,590 857,452 141,197 71,576 5,501 1,742,236 183,719 2,101,384 2,624,920 18,791,878 3,151,051 796,961 954,544 4,902,556 2,099,713 2,629,778 16,862,787 3,034,782 777,513 931,515 1,671 - 1,927,627 141,527 28,646 28,214 4,743,810 198,387 118 - 174,137 167,402 318,448 34,721 8,370 616 703,694 33,606 - 799 738,217 5,827 5,065 4,277 15,169 - - 70,809 1,150,232 191,141 3,496,645 31,744 13,988 4,562,003 3,046,610 4,105 3,219 - 123,865 965 571,833 376,138 451,156 12,504,385 1,075,742 - - 124,830 - - - - 2,101,384 2,630,577 19,653,461 3,182,136 811,224 964,006 4,957,366 1,377 292 10,486 43,544 42,050 5,671 1,732 2,668 106,151 4,141 6,856 4,858 123,675 19,914 10,044 7,339 37,297 1 - 29,970 67,479 75,111 17,982 3,746 653 194,941 8,103 128 - 203,173 8,632 1,450 973 11,055 111 - 101,972 98,800 232,138 24,654 5,735 271 463,570 12,188 - 799 476,668 2,539 2,769 1,150 6,458 - - 42,566 10,177 7,690 1,948 2,500 - 64,881 170 - - 65,051 - - - - 1,489 292 184,994 220,000 356,989 50,255 13,713 3,592 829,543 24,602 6,984 5,657 868,567 31,085 14,263 9,462 54,810 1 Interest bearing securities at fair value through other comprehensive income are recognized in the Consolidated statement of financial position as at fair value (see in Note 9). Loss allowances for securities at fair value through other comprehensive income that are in Stage 1 and / or in Stage 2 is recognized in the Other comprehensive income. It is included in the accumulated loss allowance of this table showed above. 98 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.1. Credit risk [continued] 37.1.2. Movement table of loss allowance / provision on financial instruments Movement of loss allowance on financial assets at amortized cost and on interest bearing securities at fair value through other comprehensive income and of provision of financial commitments as at 31 December 2021: 2021 Opening balance Modi- fication Increases due to origination and acquisition Decreases due to derecognition Transfers between stages (net) Changes due to change in credit risk (net) Changes due to modifications without derecognition (net) Decrease in loss allowance account due to write-offs Other adjustments Closing balance Stage 1 Placements with other banks Repo receivables Loans at amortized cost Finance lease receivables Interest bearing securities at fair value through other comprehensive income and securities at amortized cost Stage 2 Placements with other banks Repo receivables Loans at amortized cost Finance lease receivables Interest bearing securities at fair value through other comprehensive income and securities at amortized cost Stage 3 Placements with other banks Repo receivables Loans at amortized cost Finance lease receivables Interest bearing securities at fair value through other comprehensive income and securities at amortized cost Loss allowance on financial assets subtotal 123,675 1,377 292 106,151 4,141 11,714 203,173 1 - 194,941 8,103 - - - - - - - - - (1,281) - 128 1,281 476,668 111 - 463,570 12,188 799 803,516 - - - - - - - 141,894 24,635 667 109,970 2,643 3,979 29,705 - - 26,947 2,696 62 19,133 - - 17,649 1,484 (37,619) (4,383) - (29,761) (255) (3,220) (21,813) - - (21,200) (613) - (44,871) - - (43,539) (1,332) (103,930) - - (91,303) (12,106) (521) 9,826 - - 3,766 5,539 521 94,104 - - 87,537 6,567 - - 190,732 (104,303) - - 25,663 (18,854) (669) 33,215 10,426 1,545 (27,800) - - (23,004) (4,229) (567) 21,425 46 - 25,360 (3,981) - 19,288 (4,885) - - (4,442) (443) - 8,202 - - 8,550 (348) - 8,856 - - 9,852 (996) (102) - - (102) - - (498) (1) - (497) - (69,523) (240) - (67,453) (1,022) (2,264) 191 - (3,339) 26 858 7,445 - - 7,410 (8) 43 1,050 111 - (405) 1,335 142,432 2,966 290 120,389 4,432 14,355 208,240 - - 195,632 11,140 1,468 506,842 28 - 492,571 14,243 - 12,173 (808) (70,123) 9 6,231 - 857,514 99 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.1. Credit risk [continued] 37.1.2. Movement table of loss allowance / provision on financial instruments [continued] Movement of loss allowance on financial assets at amortized cost and on interest bearing securities at fair value through other comprehensive income and of provision of financial commitments as at 31 December 2021 [continued]: 2021 Opening balance Modi- fication Increases due to origination and acquisition Decreases due to derecognition Transfers between stages (net) Changes due to change in credit risk (net) Changes due to modifications without derecognition (net) Decrease in loss allowance account due to write-offs Other adjustments Closing balance POCI Placements with other banks Repo receivables Loans at amortized cost Finance lease receivables Interest bearing securities at fair value through other comprehensive income and securities at amortized cost Loss allowance on financial assets total Loan commitments and financial guarantees given - stage 1 Loan commitments and financial guarantees given - stage 2 Loan commitments and financial guarantees given - stage 3 Loan commitments and financial guarantees given - poci Provision on financial liabilities total 65,051 - - 64,881 170 - 868,567 37,297 11,055 6,458 - 54,810 - - - - - - - - - - - - - - - - - - (2,929) (2,929) - - - - 190,652 (90,565) - - - - - - - (17,138) 6,004 - (23,142) - (129) (129) - - - (4,370) (4,370) - - - 3,105 1,424 - 1,663 18 43,590 - - 43,402 188 - 2,150 - 12,044 - - (74,493) (7,251) - 901,104 23,514 (5,522) 1,446 (20,069) (1,031) 3,804 (791) (2,173) (2,216) 932 (1,337) 727 31 28,281 (4) (7,654) - - 196 3 (22,086) 436 (65) (1) (661) - - - - - (112) 35,523 (85) 10,030 (502) 6,409 (1) (700) 28 51,990 100 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.1. Credit risk [continued] 37.1.2. Movement table of loss allowance / provision on financial instruments [continued] Movement of loss allowance on financial assets at amortized cost and on interest bearing securities at fair value through other comprehensive income and of provision of financial commitments as at 31 December 2020: 2020 Opening balance Increases due to origination and acquisition Decreases due to derecognition Transfers between stages (net) Changes due to change in credit risk (net) Changes due to modifications without derecognition (net) Decrease in loss allowance account due to write-offs Other adjustments Closing balance Stage 1 Placements with other banks Repo receivables Loans at amortized cost Finance lease receivables Interest bearing securities at fair value through other comprehensive income and securities at amortized cost Stage 2 Placements with other banks Repo receivables Loans at amortized cost Finance lease receivables Interest bearing securities at fair value through other comprehensive income and securities at amortized cost Stage 3 Placements with other banks Repo receivables Loans at amortized cost Finance lease receivables Interest bearing securities at fair value through other comprehensive income and securities at amortized cost 119,180 451 62 109,921 3,805 4,941 68,778 5 - 66,390 2,383 - 464,313 22 - 456,246 7,320 141,735 10,430 306 125,137 1,884 3,978 57,383 - - 53,445 3,938 - 119,894 - - 117,198 2,696 (42,569) (263) - (40,604) (739) (963) (15,678) - - (15,537) (141) - (99,345) - - (98,810) (535) (185,201) - - (183,599) (1,602) - 83,013 - - 81,777 1,236 - 99,117 - - 98,813 304 725 - - - Loss allowance on financial assets subtotal 652,271 319,012 (157,592) (3,071) 84,111 (12,805) (76) 92,372 1,034 3,586 3,297 - - 2,802 367 128 (15,385) 45 - (15,913) 483 - 72,023 (4,294) - - (4,132) (162) - 6,130 - - 6,208 (78) - 364 - - 373 (9) (56) - - (55) (1) - (98) - - (98) - - (92,476) - - (92,226) (250) 10,769 3,564 - 7,111 (78) 172 348 (4) - (46) 398 - 186 44 - (2,111) 2,179 123,675 1,377 292 106,151 4,141 11,714 203,173 1 - 194,941 8,103 128 476,668 111 - 463,570 12,188 - 2,200 - (92,630) 74 11,303 799 803,516 101 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.1. Credit risk [continued] 37.1.2. Movement table of loss allowance / provision on financial instruments [continued] Movement of loss allowance on financial assets at amortized cost and on interest bearing securities at fair value through other comprehensive income and of provision of financial commitments as at 31 December 2020 [continued]: 2020 Opening balance Increases due to origination and acquisition Decreases due to derecognition Transfers between stages (net) Changes due to change in credit risk (net) Changes due to modifications without derecognition (net) Decrease in loss allowance account due to write-offs Other adjustments Closing balance POCI Placements with other banks Repo receivables Loans at amortized cost Finance lease receivables Interest bearing securities at fair value through other comprehensive income and securities at amortized cost 51,844 - - 51,762 82 16,933 - - 16,933 - (11,752) - - (11,752) - 3,071 - - 3,009 62 1,527 - - 1,501 26 489 - - 489 - (735) - - (735) - 3,674 - - 3,674 - 65,051 - - 64,881 170 Loss allowance on financial assets total 704,115 335,945 (169,344) Loan commitments and financial guarantees - - - - - - 73,550 - 2,689 - (93,365) - 14,977 - 868,567 given - stage 1 36,497 20,712 (2,118) (900) (15,344) (453) (1,785) 688 37,297 Loan commitments and financial guarantees given - stage 2 2,728 3,984 (458) Loan commitments and financial guarantees given - stage 3 Provision on financial liabilities total 7,508 46,733 1,071 25,767 (570) (3,146) 351 549 - 4,474 (3,545) (14,415) 237 257 41 - - (1,785) (261) 11,055 1,188 1,615 6,458 54,810 102 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.1. Credit risk [continued] 37.1.3. Loan portfolio by internal ratings 2021 Internal rating grade Stage 1 Gross carrying amount Stage 3 Stage 2 POCI Total Low risk grade (1-4) Medium risk grade (5-7) High risk grade (8-9) Non performing Total loans at amortized cost 7,644,341 4,692,656 289,030 - 631,138 869,200 526,928 4,175 - - - 800,217 2,921 46,708 2,563 47,931 8,278,400 5,608,564 818,521 852,323 and finance lease receivable 12,626,027 2,031,441 800,217 100,123 15,557,808 2021 Internal rating grade Stage 1 Accumulated loss allowance Stage 3 Stage 2 POCI Low risk grade (1-4) Medium risk grade (5-7) High risk grade (8-9) Non performing Total loans at amortized cost 52,654 57,421 14,746 - 42,988 81,894 78,111 3,779 - - - 506,814 129 13,009 375 30,077 Total 95,771 152,324 93,232 540,670 and finance lease receivable 124,821 206,772 506,814 43,590 881,997 103 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.1.4. Loan portfolio by countries An analysis of the non-qualified and qualified gross loan portfolio by country is as follows: 2020 2021 Country Hungary Bulgaria Croatia Serbia Romania Slovenia Russia Ukraine Montenegro France Albania Moldova Germany Belgium Austria Slovakia The Netherlands Switzerland United Kingdom United States of America Luxembourg Poland Italy Ireland Cyprus Denmark Czech Republic Canada Australia Greece Turkey Spain Israel Bosnia and Herzegovina Sweden Norway Saudi Arabia United Arab Emirates Egypt Kazakhstan Iceland Latvia Other1 Total Loss allowance Gross amount of loan, finance lease receivable at amortized cost, placement with other banks and repo receivable portfolio Gross amount of loan, finance lease receivable at amortized cost, placement with other banks and repo receivable portfolio Loss allowance 5,528,516 2,972,390 1,826,233 1,729,147 1,076,696 981,307 812,070 684,030 385,342 182,850 233,391 166,720 84,164 80,434 40,426 80,117 36,858 80,611 21,209 106,347 33,251 19,203 10,558 5,375 8,646 339 899 4,823 3,164 1,808 1,810 1,095 1,174 467 810 334 239 532 582 209 1 46 2,782 17,207,005 215,911 206,233 101,067 47,085 57,665 16,244 137,920 52,678 24,930 725 10,551 5,025 675 328 201 319 622 1,701 1,763 419 1,271 239 239 106 562 16 12 16 10 192 95 25 15 76 63 23 9 30 15 15 - 26 164 885,281 4,513,208 2,722,998 1,663,534 1,557,129 915,030 905,881 626,269 449,503 376,351 231,122 185,711 132,163 151,101 49,401 54,009 74,614 31,144 61,804 21,692 70,901 25,062 2,006 25,614 14,053 16,890 5,817 902 17,026 3,649 989 1,567 996 455 795 536 7,525 424 388 78 193 56 34 2,880 14,921,500 209,216 202,018 101,640 48,429 52,016 14,022 133,293 50,393 23,440 645 8,243 4,586 485 119 58 225 497 615 1,282 67 46 119 164 211 3,102 15 9 5 1 141 93 55 5 248 54 39 7 31 6 8 56 20 202 855,926 1 Other category as at 31 December 2021 mainly includes e.g.: Georgia, Japan, Saudi Arabia, Macedonia, Portugal, China, Brazil, Lithuania, Republic of South- Africa, Algeria, Armenia, Belorussia, Finland, Tunisia, Morocco, South-Korea, Jordan, India, Iran, Estonia, Nigeria, Malta, Syria, Vietnam, Republic of Pakistan, Kyrgyzstan and other countries. 104 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.1. Credit risk [continued] 37.1.4. Loan portfolio by countries [continued] Country Hungary Croatia Bosnia-Herzegovina Total 2021 2020 Loans at fair value 1,067,830 281 - 1,068,111 798,981 1,089 2,535 802,605 37.1.5. Loan portfolio classification by economic activities Gross loan at amortized cost and finance lease receivable portfolio by economic activities Retail Agriculture, forestry and fishing Manufacturing, mining and quarrying and other industry Construction Wholesale and retail trade, transportation and storage accommodation and food service activities Information and communication Financial and insurance activities Real estate activities Professional, scientific, technical, administration and support service activities Public administration, defence, education, human health and social work activities Other services Total gross loans and finance lease receivable 2021 2020 7,392,496 607,122 1,721,170 593,682 2,474,616 195,561 268,748 562,227 6,575,162 508,175 1,436,038 481,402 2,133,063 155,055 217,982 524,665 440,381 370,454 416,634 885,171 15,557,808 401,932 776,199 13,580,127 105 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.1. Credit risk [continued] 37.1.5. Loan portfolio classification by economic activities [continued] Loss allowance on loans at amortized cost and finance lease receivable by economic activities Retail Agriculture, forestry and fishing Manufacturing, mining and quarrying and other industry Construction Wholesale and retail trade, transportation and storage accommodation and food service activities Information and communication Financial and insurance activities Real estate activities Professional, scientific, technical, administration and support service activities Public administration, defence, education, human health and social work activities Other services Total loss allowance on loans and finance lease receivable 37.1.6. Collateral 2021 523,065 17,547 60,054 19,382 92,934 4,880 12,798 20,783 10,789 4,310 115,455 881,997 2020 493,759 15,013 57,804 18,170 84,141 4,457 14,773 24,058 11,245 4,821 125,904 854,145 The values of collateral received and held by the Group by type are as follows (total collateral). The collateral covers loans as well as off-balance sheet exposures. Types of collateral 2021 2020 Mortgages Guarantees and warranties Guarantees of state or organizations owned by state Assignments (revenue or other receivables) Securities Cash deposits Other Total 13,367,891 1,296,415 1,070,479 422,030 237,076 187,934 2,211,671 18,793,496 12,346,773 178,139 731,529 486,670 156,857 163,489 2,159,894 16,223,351 The values of collateral received and held by the Group by type are as follows (to the extent of the exposures). The collaterals cover loans as well as off-balance sheet exposures. Types of collateral 2021 2020 Mortgages Guarantees of state or organizations owned by state Guarantees and warranties Assignments (revenue or other receivables) Securities Cash deposits Other Total 6,479,871 832,432 799,775 290,066 156,715 76,338 1,295,740 9,930,937 5,902,854 190,700 984,532 344,716 115,269 67,158 1,244,771 8,850,000 106 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.1. Credit risk [continued] 37.1.6. Collateral [continued] The coverage level of the loan portfolio (total collateral) increased by 2.74% and the coverage level to the extent of the exposures was almost the same as at 31 December 2021. The values of collateral given and held by the Group according to which financial asset is recognized as collateral are as follows: Financial assets as collaterals recognized in the consolidated statement of financial position Cash, amounts due from banks and balances with the National Banks Placements with other banks Repo receivables Securities at fair value through other comprehensive income Securities at amortized cost Loans at amortized cost Finance lease receivables Other financial assets Total 37.1.7. Restructured loans 2021 2020 15,791 9,590 35,826 16,546 42,233 1,089,614 32,553 - 1,242,153 - 830 - 54,948 11,071 - 12,561 3,443 82,853 Retail mortgage loans Loans to medium and large corporations Retail consumer loans Loans to micro and small enterprises Municipal Other loans Total 2021 2020 Gross portfolio Loss allowance Gross portfolio Loss allowance 269,700 276,796 149,469 57,403 75 27,092 780,535 (8,779) (44,197) (32,850) (7,668) (8) (2,555) (96,057) 15,159 58,271 31,108 11,782 41 4,412 120,773 (2,754) (12,260) (14,714) (1,237) (16) (791) (31,772) The forborne definition used by the Group is based on EU 2015/227 regulation. Restructuring (forbearance) is a modification of the contract – initiated by either the client or the bank – that provides a concession or allowance towards the client in respect to the client’s current or future financial difficulties. The table of restructured loans contains exposures classified as performing forborne. An exposure is considered performing forborne if the conditions of the non-performing status are not met at the time of the restructuring, or the exposure fulfilled the requirements of the minimum one-year cure period as non-performing forborne. The significant increase of the performing forborne loan volume is due to the forborne classification rules set by the NBH executive circulars of 21 January 2021 and 25 November 2021 for loans participating in phase 2 and phase 3 of the moratoria. The loan volume classified as performing forborne exclusively due to moratoria participation is in the Group: HUF 544 bn (in OTP Core: HUF 503 bn, in OTP Bank: HUF 290 bn, in OTP Mortgage Bank Ltd.: HUF 208 bn, in OTP Building Society Ltd.: HUF 5 bn). For the affected portfolios the earliest possible exit from the forborne status is 6 months after the exit from moratorium for retail and 2 years after the exit from moratorium for corporate exposures. 107 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.1. Credit risk [continued] 37.1.8. Financial instruments by rating categories1 Securities held for trading as at fair value through profit or loss as at 31 December 2021 2021 Aaa Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 B1 B3 Not rated Total Government bonds Equity instruments and fund units Corporate bonds Discounted Treasury bills Mortgage bonds Other interest bearing securities Other non-interest bearing securities Total - 569 - - - - 561 1,130 - 19 - - - - - 19 - 49 - - - - - 49 16 59 - - - - - 75 - 35 485 - - - - 520 18,747 12 - - - - - 18,759 26,024 24 - 869 - 1,347 - 28,264 11,282 83 97 - - - - 11,462 10,156 - - - - - 31,306 2 - - - - - 10,156 - 31,308 - 6 - - - - 6 - - - 54 - - - 54 - 315 158 - 101 - 97,531 1,173 740 923 101 1,347 1,134 1,708 1,695 103,510 Non-trading securities mandatorily at fair value through profit or loss as at 31 December 2021 2021 Aa3 Baa3 Ba1 Not rated Total Non-trading equity instruments mandatorily at fair value through profit or loss Non-trading debt instruments mandatorily at fair value through profit or loss Total - - 7,811 37,083 44,894 3,498 3,498 1,043 1,043 56 7,867 3,912 40,995 8,509 53,403 1 Moody’s ratings 108 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.1. Credit risk [continued] 37.1.8. Financial instruments by rating categories1 [continued] Securities at fair value through other comprehensive income as at 31 December 2021 2021 Aaa Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B3 Caa1 Government bonds Corporate bonds Mortgage bonds Discounted Treasury bills National Bank of Hungary bonds Interest bearing treasury bills Other securities Non-trading 21,728 - - - 7,849 - - - - - - - - - - - - - - - 17,808 - 47,568 - 28,492 - - - 99,425 2,896 - - 203,172 - - - 495,231 6,152 - 44,924 372,198 44,606 - - 188,395 4,144 - 51,701 162,477 12,630 - - - - - - 76,732 - - - 91,487 - - - 178 - - - Not rated - 18,091 15,504 - Total 1,765,172 88,519 63,072 96,625 - - - - - - - - - - - - - 63,115 - - - - - - - - - - 109,774 - - - - - - - - - - - - - 3,257 109,774 63,115 3,257 equity instruments Total - 21,728 - 7,849 6,112 6,112 349 65,725 - 28,492 - 102,321 - 203,172 - 609,422 305 417,109 - 244,240 - 175,107 - 109,774 - 76,732 - 91,487 - 178 28,210 65,062 34,976 2,224,510 Securities at amortized cost as at 31 December2021 2021 Aaa Aa2 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 B1 B3 Government bonds Corporate bonds Discounted Treasury bills Mortgage bonds Other securities Total 185,261 - - - 298 185,559 45,392 - - - - 45,392 20,043 - - 12,992 - 33,035 - - - - 8,210 8,210 31,892 - - - - 31,892 172,502 - - - 7,343 179,845 2,858,111 - 6 - 3,682 2,861,799 174,929 32,013 - 47 - 206,989 26,544 - - - - 26,544 12,617 - - - - 12,617 25,587 - - - - 25,587 91,423 - 15,696 - - 107,119 1 Moody’s ratings Not rated - 138,862 - 11,282 16,603 166,747 Total 3,644,301 170,875 15,702 24,321 36,136 3,891,335 109 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.1. Credit risk [continued] 37.1.8. Financial instruments by rating categories1 [continued] Securities held for trading as at fair value through profit or loss as at 31 December 2020 2020 Aaa A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 Government bonds Discounted Treasury bills Equity instruments and fund units Other interest bearing securities Total - - 535 - 535 - - 36 - 36 - - 33 495 528 9,138 - 45 - 9,183 2,155 - 7 - 2,162 5,734 1,233 36 998 8,001 7,247 - - - 7,247 - - 7 - 7 13,762 11,428 - - 25,190 Not rated Total - - 5 - 5 - 60 3,036 582 3,678 38,036 12,721 3,740 2,075 56,572 Non-trading securities mandatorily at fair value through profit or loss as at 31 December 2020 2020 Aa3 A1 Baa3 Not rated Total Non-trading equity instruments mandatorily at fair value through profit or loss Non-trading debt instruments mandatorily at fair value through profit or loss Debt securities designated at fair value through profit or loss Total 1 Moody’s ratings - 2,794 - 2,794 - - - 46,063 46,063 1,457 7,263 11,514 2,235 2,235 - 1,457 - 53,326 2,235 59,812 110 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.1. Credit risk [continued] 37.1.8. Financial instruments by rating categories1 [continued] Securities at fair value through other comprehensive income as at 31 December 2020 2020 Aaa Aa2 Aa3 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B3 Caa1 C Government bonds Mortgage bonds Corporate bonds Discounted Treasury bills Non-trading equity instruments Total 20,639 - - - - 20,639 8,215 - - - - 8,215 - - - - 37,195 63,577 - - 120,112 - 4,815 - 192,994 - - - - - 2,336 - 959,133 - 39,179 9,957 182,685 - 4,997 66,401 - - 979 - 200,478 - 12,532 - 18,166 - - - 69,248 - - - 3,875 3,875 - 100,772 - 124,927 47 193,041 - 2,336 898 1,009,167 - 254,083 - 979 - 213,010 - 18,166 - 69,248 145 - - - - 145 Not rated - 24,695 16,782 - Total 1,855,134 88,272 81,620 76,358 46,124 - - - - 46,124 30,505 71,982 35,325 2,136,709 Securities at amortized cost as at 31 December 2020 2020 Aa2 A1 A3 Baa1 Baa3 Ba1 Ba3 B1 B3 Government bonds Corporate bonds Discounted Treasury bills Total 45,975 - - 45,975 10,939 - - 10,939 38,987 - - 38,987 38,573 - - 38,573 2,306,821 14,605 - 2,321,426 9,922 10,517 - 20,439 4,147 - - 4,147 9,961 - - 9,961 74,743 - 10,358 85,101 Not rated - 49,372 - 49,372 Total 2,540,068 74,494 10,358 2,624,920 1 Moody’s ratings 111 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.2. Maturity analysis of assets, liabilities and liquidity risk Liquidity risk is a measure of the extent to which the Group may be required to raise funds to meet its commitments associated with financial instruments. The Group maintains its liquidity profiles in accordance with regulations prescribed by the NBH. The essential aspect of the liquidity risk management strategy is to identify all relevant systemic and idiosyncratic sources of liquidity risk and to measure the probability and severity of such events. During liquidity risk management the Group considers the effect of liquidity risk events caused by reasons arising in the bank business line (deposit withdrawal), the national economy (exchange rate shock yield curve shock) and the global financial system (capital market shock). In line with the Group’s risk management policy liquidity risks are measured and managed on multiply hierarchy levels and applying integrated unified VaR based methodology. The basic requirement is that the Group must keep high quality liquidity reserves which means it can fulfill all liabilities when they fall due without material additional costs. The liquidity reserves can be divided in two parts. There are separate decentralized liquid asset portfolios at subsidiary level and a centralized flexible liquidity pool at a Group level. The reserves at subsidiary levels are held to cover the relevant shocks of the subsidiaries which may arise in local currencies (deposit withdrawal, local capital market shock, unexpected business expansion), while the centralized liquidity pool is held to cover the Bank’s separate shocks (deposit-, yield curve- and exchange rate shocks) and all group member’s potential shocks that may arise in foreign currencies (deposit withdrawal, capital market shock). The recalculation of shocks is made at least quarterly while the recalibration of shock measurement models and review of the risk management methodology is an annual process. The monitoring of liquidity reserves for both centralized and decentralized liquid asset portfolio has been built into the daily reporting process. Due to the balance sheet adjustment process (deleveraging) experienced in the last few years, the liquidity reserves of the Group increased significantly while the liquidity risk exposure has decreased considerably. Currently the (over)coverage of potential liquidity risk exposure by high quality liquid assets is high. There were no material changes in the liquidity risk management process for the year ended 31 December 2021. The contractual amounts disclosed in the maturity analyses are the contractual undiscounted cash-flows like gross finance lease obligations (before deducting finance charges); prices specified in forward agreements to purchase financial assets for cash; net amounts for pay-floating/receive-fixed interest rate swaps for which net cash-flows are exchanged; contractual amounts to be exchanged in a derivative financial instrument for which gross cash-flows are exchanged; gross loan commitments. Such undiscounted cash-flows differ from the amount included in the Consolidated Statement of Financial Position because the amount in that statement is based on discounted cash-flows. When the amount payable is not fixed, the amount disclosed is determined by reference to the conditions existing at the end of the reporting period. For example, when the amount payable varies with changes in an index, the amount disclosed may be based on the level of the index at the end of the period. The following tables provide an analysis of assets and liabilities about the non-discounted cash-flow into relevant maturity groupings based on the remaining period from the balance sheet date to the contractual maturity date. It is presented under the most prudent consideration of maturity dates where options or repayment schedules allow for early repayment possibilities. 112 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.2. Maturity analysis of assets, liabilities and liquidity risk [continued] 2021 Within 3 months Within one year and over 3 months Within 5 years and over one year Over 5 years Without maturity Total Cash, amounts due from banks and balances with the National Banks Placements with other banks, net of loss allowance for placements Repo receivables Trading securities at fair value through profit or loss Non-trading instruments mandatorily at fair value through profit or loss Securities at fair value through other comprehensive income Securities at amortized cost Loans at amortized cost Finance lease receivable Loans measured at fair value through profit or loss Associates and other investments Other financial assets1 TOTAL ASSETS Amounts due to banks, the National Governments, deposits from the National Banks and other banks Repo liabilities Financial liabilities designated at fair value through profit or loss Deposits from customers Liabilities from issued securities Leasing liabilities Other financial liabilities1 Subordinated bonds and loans TOTAL LIABILITIES NET POSITION 2,557,092 1,314,523 61,373 29,714 - 295,977 34,190 1,827,131 124,074 30,164 - 130,133 6,404,371 332,330 79,045 530 19,593,347 6,702 3,060 465,022 2,886 51 61,455 - 21,975 - 249,131 482,530 2,599,854 307,745 31,662 - 3,244 3,757,647 173,171 - 1,253 997,565 2,664 9,058 26,311 - - 145,180 - 37,345 9,769 1,114,027 2,146,652 5,897,202 770,154 221,069 - 6,265 10,347,663 704,505 2 4,421 336,246 303,223 27,307 10,312 7,495 20,482,922 1,210,022 1,393,511 - 67,764 - 13,530 19 544,167 1,202,747 4,742,146 48,636 835,014 - 3,270 7,457,293 366,025 - 34,980 148,580 159,139 15,530 674 269,698 994,626 - - - 1,738 43,615 40,798 - 136,975 - - 79,736 9,804 312,666 - - - - - - 6,235 - 6,235 2,557,143 1,588,922 61,373 104,302 53,403 2,244,100 3,866,119 15,203,308 1,250,609 1,117,909 79,736 152,716 28,279,640 1,576,031 79,047 41,184 21,075,738 471,728 54,955 508,554 280,079 24,087,316 (14,078,551)2 2,547,625 8,954,152 6,462,667 298,142 4,184,035 1 Without derivative financial instruments 2 Analysis for net position of assets and liabilities are calculated in accordance with IFRS 7, therefore certain financial instruments are presented in the earliest period in which the Group could be required to pay. On-demand deposits are presented in the earliest (within 3 month) period category, however based on the Management’s discretion the Group has appropriate liquidity reserves as maintenance and management of liquidity risk. 113 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.2. Maturity analysis of assets, liabilities and liquidity risk [continued] 2021 Within 3 months Within one year and over 3 months Within 5 years and over one year Over 5 years Without maturity Total Receivables from derivative financial instruments held for trading Liabilities from derivative financial instruments held for trading 4,396,050 (4,349,598) 1,993,311 (1,991,763) 302,924 (296,648) 151,959 (146,398) Net position of financial instruments held for trading Receivables from derivative financial instruments designated as hedge accounting Liabilities from derivative financial instruments designated as hedge accounting Net position of financial instruments designated as hedge accounting Net position of derivative financial instruments total Commitments to extend credit Bank guarantees Confirmed letters of credit Factoring loan commitment Off-balance sheet commitments 46,452 5,693 1,548 37,815 6,276 5,561 580,489 16,195 (7,765) (47,374) (595,938) (16,417) (2,072) 44,380 3,749,199 532,445 61,124 464,341 4,807,109 (9,559) (8,011) 234,503 347,448 2,937 - 584,888 (15,449) (9,173) 74,915 307,030 853 - 382,798 (222) 5,339 6,385 106,918 163 - 113,466 - - - - - - - - - - - - 6,844,244 (6,784,407) 59,837 640,192 (667,494) (27,302) 32,535 4,065,002 1,293,841 65,077 464,341 5,888,261 114 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.2. Maturity analysis of assets, liabilities and liquidity risk [continued] 2020 Within 3 months Within one year and over 3 months Within 5 years and over one year Over 5 years Without maturity Total Cash, amounts due from banks and balances with the National Banks Placements with other banks, net of loss allowance for placements Repo receivables Trading securities at fair value through profit or loss Non-trading instruments mandatorily at fair value through profit or loss Debt securities designated at fair value through profit or loss Securities at fair value through other comprehensive income Securities at amortized cost Loans at amortized cost Finance lease receivable Loans measured at fair value through profit or loss Associates and other investments Other financial assets 1 TOTAL ASSETS Amounts due to banks, the National Governments, deposits from the National Banks and other banks Repo liabilities Financial liabilities designated at fair value through profit or loss Deposits from customers Liabilities from issued securities Leasing liabilities Other financial liabilities 1 Subordinated bonds and loans TOTAL LIABILITIES NET POSITION 2,370,130 902,977 191,143 14,546 28 2,235 136,746 121,993 1,720,314 127,856 24,352 - 134,672 5,746,992 165,619 8,379 3,159 15,065,456 1,971 2,859 374,525 2,843 36 77,646 - 16,163 - - 278,017 47,251 2,130,394 274,143 25,193 - 3,520 2,852,363 86,991 - 1,421 2,300,365 130,445 8,163 19,447 - 41,471 134,780 - 15,093 - - 984,596 1,577,822 5,190,401 659,682 159,934 - 4,551 8,768,330 695,707 109,612 8,350 305,074 269,133 27,776 3,239 6,838 15,624,811 2,546,832 1,425,729 20,675 34,502 - 8,032 9,590 - 644,612 819,600 4,219,165 42,439 607,274 - 1,902 6,407,791 254,897 - 21,201 221,028 65,841 11,169 89 267,083 841,308 - 635 - 777 42,879 - 31,688 - - - - 58,307 14,376 148,662 - - - - - - 10,496 - 10,496 2,432,312 1,150,540 191,143 54,611 52,497 2,235 2,075,659 2,566,666 13,260,274 1,104,120 816,753 58,307 159,021 23,924,138 1,203,214 117,991 34,131 17,891,923 467,390 49,967 407,796 276,764 20,449,176 (9,877,819)2 305,531 7,342,601 5,566,483 138,166 3,474,962 1 Without derivative financial instruments 2 Analysis for net position of assets and liabilities are calculated in accordance with IFRS 7, therefore certain financial instruments are presented in the earliest period in which the Group could be required to pay. On-demand deposits are presented in the earliest (within 3 month) period category, however based on the Management’s discretion the Group has appropriate liquidity reserves as maintenance and management of liquidity risk. 115 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.2. Maturity analysis of assets, liabilities and liquidity risk [continued] 2020 Within 3 months Within one year and over 3 months Within 5 years and over one year Over 5 years Without maturity Total Receivables from derivative financial instruments held for trading Liabilities from derivative financial instruments held for trading Net position of financial instruments held for trading Receivables from derivative financial instruments designated as hedge accounting Liabilities from derivative financial instruments designated as hedge accounting Net position of financial instruments designated as hedge accounting Net position of derivative financial instruments total Commitments to extend credit Bank guarantees Confirmed letters of credit Factoring loan commitment Off-balance sheet commitments 594,663 (473,510) 121,153 3,080,660 (3,302,801) (222,141) 532,012 (441,330) 90,682 246,922 (200,525) 46,397 186 8,082 169,339 173,109 (41,382) (118,914) (468,378) (88,720) (41,196) 79,957 2,375,279 225,440 13,670 305,269 2,919,658 (110,832) (332,973) 609,431 280,625 8,916 - 898,972 (299,039) (208,357) 350,195 416,293 1,476 - 767,964 84,389 130,786 85,813 137,739 11,377 - 234,929 - (31) (31) - - - (31) - 99,602 276 - 99,878 4,454,257 (4,418,197) 36,060 350,716 (717,394) (366,678) (330,618) 3,420,718 1,159,699 35,715 305,269 4,921,401 116 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.3. Net foreign currency position and foreign currency risk 2021 USD EUR CHF Egyéb Total Assets Liabilities Derivative financial instruments Net position 1,163,960 (1,013,972) 7,661,460 (6,769,472) 88,639 (107,902) 7,677,060 (5,971,941) 16,591,119 (13,863,287) (186,774) (36,786) (371,225) 520,763 32,021 12,758 (101,951) 1,603,168 (627,929) 2,099,903 2020 USD EUR CHF Egyéb Total Assets Liabilities Derivative financial instruments Net position 717,819 (878,916) 7,003,090 (5,926,666) 73,344 (87,551) 6,435,309 (5,195,693) 14,229,562 (12,088,826) 259,993 98,896 (921,666) 154,758 32,905 18,698 (147,436) 1,092,180 (776,204) 1,364,532 The table above provides an analysis of the main foreign currency exposures of the Group that arise in the non- functional currency of the entities constituting the Group. The remaining foreign currencies are shown within ‘Others’. ‘Others’ category contains mainly foreign currencies in RON, RSD, HRK, UAH, RUB, BGN, ALL and MDL. The Group monitors its foreign exchange position for compliance with the regulatory requirements of the National Banks and its own limit system established in respect of limits on open positions. The measurement of the open foreign currency position of the Group involves monitoring the “VaR” limit on the foreign exchange exposure of the Group. The derivative financial instruments detailed in the table above are presented at fair value. 37.4. Interest rate risk management Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest rates. The length of time for which the rate of interest is fixed on a financial instrument, therefore, indicates to what extent it is exposed to interest rate risk. The majority of the interest bearing assets and liabilities of the Group are structured to match either short-term assets and short-term liabilities, or long-term assets and liabilities with repricing opportunities within one year, or long-term assets and corresponding liabilities where repricing is performed simultaneously. In addition, the significant spread existing between the different types of interest bearing assets and liabilities enables the Group to benefit from a high level of flexibility in adjusting for its interest rate matching and interest rate risk exposure. The following table presents the interest repricing dates of the Group. Variable yield assets and liabilities have been reported in accordance with their next repricing date. Fixed income assets and liabilities have been reported in accordance with their maturity. 117 Within 1 month Over 1 month and Within 3 months Over 3 months and Within 12 months Over 1 year and Within 2 years Over 2 years Non-interest-bearing Total Total HUF Currency HUF Currency HUF Currency HUF Currency HUF Currency HUF Currency HUF Currency - - - - 6,697 6,697 - - - - - - 12,423 12,423 133,248 - 1,503,880 - 170,960 36,376 2,385,075 721,012 2,556,035 757,388 - - - - 1,336 160,183 161,519 133,248 1,503,880 133,248 1,503,880 1,637,128 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.4. Interest rate risk management [continued] As at 31 Deceember 2021 ASSETS Cash, amounts due from banks and balances with the National Banks fixed rate variable rate non-interest-bearing Placements with other banks, net of allowance for placements losses fixed rate variable rate non-interest-bearing Repo receivables fixed rate variable rate non-interest-bearing Trading instruments at fair value through profit or loss fixed rate variable rate non-interest-bearing Non-trading instruments mandatorily at fair value through profit or loss fixed rate variable rate non-interest-bearing 37,712 36,376 1,336 - 435,888 271,734 164,154 - 33,638 33,638 - - 1,237 32 1,205 - - - - - 821,501 661,318 160,183 - - - - - 28,183 28,183 - - - - - - 360,795 67,304 109,822 30,509 134,382 449 226,413 66,855 - 21,535 21,535 - - 7,034 7,034 - - - - - - - - - - - 664 487 177 - - - - - 96,918 12,904 - 5,828 5,828 - - 26,796 26,796 - - - - - - 1,007 29,502 - - - - - 2,506 2,233 273 - - - - - 12,391 12,391 - - 50,770 50,238 532 - - - - - 49,632 49,632 27,234 27,234 - - - - - - - - - - - - 405,437 254,065 151,372 - - - - - 17,202 17,202 - - - - - - 16,960 16,960 360 360 6,634 6,634 25,036 25,036 13,415 13,415 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 24,415 5,853 1,013,185 571,676 1,584,861 - - - - 24,415 5,853 - - - - 1,770 - - 1,770 51 - - 51 1,098 - - 1,098 576,887 411,883 24,415 33,638 33,638 - - 31,573 28,148 1,655 1,770 325,974 239,849 5,853 27,414 27,363 - 51 71,937 70,839 - 1,098 902,861 651,732 30,268 61,052 61,001 - 51 103,510 98,987 1,655 2,868 28,074 25,329 28,074 25,329 53,403 - - - - - - - - - - 28,074 25,329 28,074 25,329 53,403 118 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.4. Interest rate risk management [continued] As at 31 Deceember 2021 [continued] ASSETS [continued] Securities at fair value through other comprehensive income fixed rate variable rate non-interest-bearing Securities at amortized cost fixed rate variable rate non-interest-bearing Loans at amortized cost, net of allowance for loan losses fixed rate variable rate non-interest-bearing Finance lease receivables fixed rate variable rate non-interest-bearing Loans mandatorily at fair value through profit or loss fixed rate variable rate non-interest-bearing Fair value adjustment of derivative financial instruments fixed rate variable rate non-interest-bearing Other financial assets fixed rate variable rate non-interest-bearing Within 1 month Over 1 month and Within 3 months Over 3 months and Within 12 months Over 1 year and Within 2 years Over 2 years Non-interest-bearing Total Total HUF Currency HUF Currency HUF Currency HUF Currency HUF Currency HUF Currency HUF Currency 205,473 157,136 48,337 - 117 - 117 - 291,988 291,987 1 - 124,634 117,026 7,608 - 22,420 6,897 15,523 - - - - - 92,258 92,258 - - 24,325 19,513 4,812 - 97,202 88,628 8,574 - 365,576 365,576 - - 202,157 202,157 40,289 40,289 177,681 177,681 - - - - - - 362,610 395,460 (32,850) - 697,456 684,739 12,717 (353) - - 35,329 - - - (353) 35,329 28,559 28,559 264,200 264,200 56,712 56,712 2,305,098 2,305,098 722,114 722,114 - - - - - - - - - - - - - - - - - - 727,641 688,410 39,584 (353) 2,934,991 2,934,874 117 - 1,496,869 1,448,822 2,224,510 2,137,232 12,718 35,329 956,344 943,924 12,420 - 52,302 34,976 3,891,335 3,878,798 12,537 - 800,665 5,419,263 534,858 1,525,057 51,410 1,029,075 2,075 260,668 749,255 4,390,188 532,783 1,264,389 - 117,384 6,555 110,829 - 27,185 2 27,183 - - 304,444 118,251 186,193 - 281 - 281 - - 16,580 440 16,140 - 11,172 - 11,172 - - 131,417 8,408 123,009 - - - - - 60,259 16,048 44,211 - 5,736 5,736 - - 73,893 - 73,893 - 1,516,897 1,409,585 1,249,024 1,125,415 395,951 188,029 937,234 551,410 680,161 574,143 107,312 123,609 207,922 385,824 106,018 - 3,395 3,393 2 - - 13,864 4,860 9,004 - - 1,261 1,155 106 - - 19 13 6 - - - - - - 1,431,981 264,434 410,199 1,636,001 1,180,170 121,187 109,109 3,417,404 10,075,779 13,493,183 683,927 187,209 748,054 77,225 - 161,672 37,140 124,532 - - - - - 863,886 862,177 1,709 - 212 12 200 - - 20,288 20,288 - - 29,473 - 29,473 - 10,760 10,760 - - - - - - 374,260 35,939 - 88,194 40,715 47,479 - - - - - 57,580 57,521 59 - - - - - 942,294 693,707 - 197,583 188,967 8,616 - 926,107 - 926,107 - 835,327 344,843 - - - 121,187 137,387 64,125 73,262 - - - - - - - - - - - - - - - 1,199,036 3,183,257 4,382,293 2,097,181 6,783,413 8,880,594 109,109 1,943 - - 1,943 121,187 357,571 221,986 135,585 - 109,109 825,057 268,639 554,475 1,943 230,296 1,182,628 490,625 690,060 1,943 - - - - 1,067,830 2 1,067,828 - 281 - 281 - 1,068,111 2 1,068,109 - 221,053 221,053 17,693 17,681 181,110 - 672,531 - 3,005,932 2,403,570 - - - - - - 12 - 128 103 25 - - - 181,110 672,531 49,086 - - 67,951 - - 421,252 181,110 53,742 4,548 108 49,086 67,951 49,086 3,797,948 2,614,204 511,213 672,531 82,174 4,988 9,235 67,951 6,803,880 5,017,774 932,465 853,641 135,916 9,536 9,343 117,037 119 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.4. Interest rate risk management [continued] As at 31 Deceember 2021 [continued] LIABILITIES Amounts due to banks, the Hungarian Government, deposits from the National Bank of Hungary and other banks fixed rate variable rate non-interest-bearing Repo liabilities fixed rate variable rate non-interest-bearing Financial liabilities designated at fair value through profit or loss fixed rate variable rate non-interest-bearing Deposits from customers fixed rate variable rate non-interest-bearing Liabilities from issued securities fixed rate variable rate non-interest-bearing Within 1 month Over 1 month and Within 3 months Over 3 months and Within 12 months Over 1 year and Within 2 years Over 2 years Non-interest-bearing Total Total HUF Currency HUF Currency HUF Currency HUF Currency HUF Currency HUF Currency HUF Currency 26,401 26,356 45 616,005 615,961 44 35,951 13,474 1,178,345 - - - - 35,951 13,474 103,123 58,913 44,210 - 49,726 49,726 - - 20,133 - 20,133 - 200,292 103,240 97,052 - 29,321 29,321 - - - - - - 41,404 12,367 29,037 56,912 23,208 33,704 - - - - - - - - - - - - - - - - - - 26,730 26,730 - - - - - - - - - - 79,200 52,310 26,890 - - - - - - - - - 355,132 355,132 - - - - - - - - - - 7,533,566 463,512 10,675,265 4,039,568 198,955 198,955 456,849 456,849 7,070,054 6,635,697 - 864 211 653 - - - - - - - - 8,514 - 8,514 - - - - - - - 94,140 92,653 1,487 - 170,732 - 170,732 - 735,911 735,911 31,975 31,975 - - - - - - - - - - - - 12,724 12,724 - - - - - - - - - - - - - - - - - - - 248,209 248,209 120,403 120,403 - - 256,151 256,151 - - - - - - - - - - - - - - - - - 75,104 74,680 424 - 51 51 - - - - - - 21,051 - - 21,051 16,356 - - 1,069,103 73,291 35,951 49,726 49,726 - - 41,184 - 20,133 21,051 - - - - - - - - 389,003 217,838 157,691 13,474 29,321 29,321 - - - - - - 1,567,348 1,286,941 230,982 49,425 79,047 79,047 - - 41,184 - 20,133 21,051 881,911 - 8,123,201 1,035,304 12,945,443 5,427,411 21,068,644 6,462,715 - 7,071,541 6,636,121 13,707,662 16,356 881,911 - - - - 13 - - 13 16,356 436,261 256,362 179,899 - 881,911 64 51 - 13 898,267 436,325 256,413 179,899 13 120 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.4. Interest rate risk management [continued] As at 31 Deceember 2021 [continued] LIABILITIES [continued] Fair value adjustment of derivative financial instruments fixed rate variable rate non-interest-bearing Leasing liabilities fixed rate variable rate non-interest-bearing Other financial liabilities fixed rate variable rate non-interest-bearing Subordinated bonds and loans fixed rate variable rate non-interest-bearing Within 1 month Over 1 month and Within 3 months Over 3 months and Within 12 months Over 1 year and Within 2 years Over 2 years Non-interest-bearing Total Total HUF Currency HUF Currency HUF Currency HUF Currency HUF Currency HUF Currency HUF Currency 941,607 721,374 220,233 1,905,033 1,714,718 220,057 151,795 1,084,185 579,964 709,948 526,007 190,315 68,262 504,221 183,941 870,647 868,848 1,799 - 916 830 86 - 117,189 117,185 4 - - - - - - 7,401 6,948 453 - 50,063 50,046 17 - - - - - - 353 72 281 - 2,518 907 1,611 - - - - - - 1,076 435 641 - 672 564 108 - 85,551 - 85,551 - - 483 7 476 - - - - - - - - - - 5,359 1,757 3,602 - 479 211 268 - 186,225 - 186,225 - 12,943 12,398 545 - 892 319 573 - - - - - - - - - 54,920 54,847 73 - 4,534 2,582 1,952 - 133 133 - - - - - - 96,381 96,558 (177) - 1,011 1,011 - - - - - - - - - - 77,044 77,044 - - 24,823 17,403 7,420 - 103 67 36 - 6,514 6,514 - - 453,672 - - 388,146 - 2,434,608 1,508,132 4,379,975 3,295,421 6,814,583 4,803,553 453,672 388,146 - 472,804 453,672 696,408 1,169,212 388,146 841,818 - - - - 173,503 - - 6,438 - - 6,438 141,111 - - 3,655 2,239 1,416 - 293,210 118,092 1,615 173,503 141,111 173,503 - - - - 44 - - 44 - - - - 49,631 29,125 14,068 6,438 192,561 51,021 429 141,111 278,334 6,514 271,776 44 53,286 31,364 15,484 6,438 485,771 169,113 2,044 314,614 278,334 6,514 271,776 44 Net position (5,587,533) (4,253,012) 578,409 1,195,694 313,809 890,767 278,494 669,788 4,861,168 2,556,377 (161,996) 991,937 282,351 2,051,551 2,333,902 121 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.4. Interest rate risk management [continued] As at 31 December 2020 ASSETS Cash, amounts due from banks and balances with the National Banks fixed rate variable rate non-interest-bearing Placements with other banks, net of allowance for placements losses fixed rate variable rate non-interest-bearing Repo receivables fixed rate variable rate non-interest-bearing Trading instruments at fair value through profit or loss fixed rate variable rate non-interest-bearing Non-trading instruments mandatorily at fair value through profit or loss fixed rate variable rate non-interest-bearing Financial assets designated at fair value through profit or loss fixed rate variable rate non-interest-bearing Within 1 month Over 1 month and Within 3 months Over 3 months and Within 12 months Over 1 year and Within 2 years Over 2 years Non-interest-bearing Total Total HUF Currency HUF Currency HUF Currency HUF Currency HUF Currency HUF Currency HUF Currency 150,707 149,701 1,006 - 240,397 220,155 20,242 - 183,364 183,364 - - 1,261 355 906 - - - - - - - - - 777,104 679,634 97,470 - 339,537 197,680 141,857 - 7,485 7,485 - - 9,247 8,721 526 - 4,487 4,459 28 - - - - - 1 - 1 - 104 104 - - - - - - 287 287 - - - - - - - - - - 4,647 4,647 2,008 2,008 - - - - 14,793 14,793 - - - - - - 103,038 102,080 958 - - - - - 665 665 194,919 194,919 2,003 2,003 - - - - - - - - - - - - - - - - - - 9,277 9,277 - - 5 5 - - - - - - 9,013 9,013 614 614 14,644 14,644 1,280 1,280 2,753 2,753 - - 1,006 1,006 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 124,478 - 124,478 - - - - - 5,270 5,254 16 - - - - - - - - - 21,056 21,056 168,850 - 1,283,869 - 321,566 151,709 2,110,746 729,407 2,432,312 881,116 - - 7,633 5,750 1,883 - - - - - 8,463 8,463 - - - - - - 2,235 - 2,235 - - - 1,007 97,470 98,477 168,850 1,283,869 168,850 1,283,869 1,452,719 19,253 116,711 386,900 761,843 1,148,743 - - - - 222,927 144,720 19,253 116,711 19,253 - - - - 2,473 - - 2,473 - - - - 183,364 183,364 - - 1,267 - - 1,267 11,185 7,790 922 2,473 30,674 21,410 30,674 - - - - - - 500,434 144,698 116,711 7,485 7,485 - - 45,387 43,594 526 1,267 26,903 5,465 28 723,361 289,418 135,964 190,849 190,849 - - 56,572 51,384 1,448 3,740 57,577 5,465 28 30,674 21,410 30,674 21,410 52,084 - - - - - - - - - - - - 2,235 - 2,235 - 2,235 - 2,235 - 122 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.4. Interest rate risk management [continued] As at 31 December 2020 [continued] ASSETS [continued] Securities at fair value through other comprehensive income fixed rate variable rate non-interest-bearing Securities at amortized cost fixed rate variable rate non-interest-bearing Loans at amortized cost, net of allowance for loan losses fixed rate variable rate non-interest-bearing Finance lease receivables fixed rate variable rate non-interest-bearing Loans mandatorily at fair value through profit or loss fixed rate variable rate non-interest-bearing Fair value adjustment of derivative financial instruments fixed rate variable rate non-interest-bearing Other financial assets fixed rate variable rate non-interest-bearing 47,073 600 46,473 - - - - - 656,665 68,714 587,951 - 285,219 167,083 118,136 - 24,871 - 24,871 - 945,704 929,702 16,002 - 10,221 10,221 - - Within 1 month Over 1 month and Within 3 months Over 3 months and Within 12 months Over 1 year and Within 2 years Over 2 years Non-interest-bearing Total Total HUF Currency HUF Currency HUF Currency HUF Currency HUF Currency HUF Currency HUF Currency 11,706 11,706 - - 79,401 79,401 - - 673 673 - - - - - - 95,897 83,363 12,534 - 21,055 21,055 - - 4,758,061 340,558 1,115,958 854,962 2,048 3,903,099 338,510 - 281,683 113,778 167,905 - 1,159 70 1,089 - - 34,926 8,141 26,785 - 68 - 68 - 264,431 851,527 - 134,848 6,117 128,731 - 141 141 - - 118,558 117,558 1,000 - 37,771 37,771 - - 52,487 13,026 39,461 - 18 18 - - 498 - 498 - 183,940 183,940 49,095 49,095 200,651 200,631 567,675 567,675 - - - - 20 - - - 4,574 4,574 398,158 398,158 40,066 40,066 1,844,129 1,837,731 - - - - - - 6,398 - 826,116 819,295 6,821 - 199,766 199,766 - - 536 - - 536 - - - - 34,789 - - 34,789 - - - - 783,610 735,601 47,473 536 2,280,058 2,273,660 6,398 - 1,353,099 1,298,935 2,136,709 2,034,536 19,375 34,789 344,862 344,862 - - 66,848 35,325 2,624,920 2,618,522 6,398 - 998,326 488,106 510,220 - 134,266 26,854 107,412 - 634 634 - - 49,217 36,198 13,019 - - - - - 710 - 710 - 349,978 1,723,813 1,442,688 125,865 61,226 2,948,605 8,726,237 11,674,842 772,219 951,594 - 806,553 636,135 - - - 125,865 5,685 103,954 41,005 62,949 - 1,473 1,473 - - - - - - - - - - - - 61,226 1,445 - - 1,445 - - - - 892,205 2,702,324 3,594,529 1,930,535 5,962,687 7,893,222 125,865 325,848 175,242 150,606 - 798,980 - 798,980 - 61,226 725,292 212,790 511,057 1,445 187,091 1,051,140 388,032 661,663 1,445 3,625 2,536 1,089 - 802,605 2,536 800,069 - 699,341 561,503 880,168 658,754 137,838 221,414 378,971 183,337 195,634 557,280 559,388 (2,108) 416,304 387,848 28,456 26,776 26,799 (23) - 16,335 10,982 5,353 - - 155 - 155 - - 16 14 2 - - - - - - - 270 19 251 - - - - - - 97,805 97,487 318 742,345 - - 245,973 - 3,192,516 2,215,133 - - 47 - 47 - 742,345 245,973 50,991 - - 62,527 - - 50,991 62,527 235,038 742,345 61,367 10,221 155 50,991 1,843,478 1,235,259 362,246 245,973 79,195 11,015 5,653 62,527 5,035,994 3,450,392 597,284 988,318 140,562 21,236 5,808 113,518 123 288,272 61,706 - 69,096 25,036 44,060 - 218 218 - - 5,084 5,084 - - - - - - - 5,685 - 772,833 - 772,833 - 40,243 40,490 (247) - - - - - OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.4. Interest rate risk management [continued] As at 31 December 2020 [continued] LIABILITIES Amounts due to banks, the Hungarian Government, deposits from the National Bank of Hungary and other banks fixed rate variable rate non-interest-bearing Repo liabilities fixed rate variable rate non-interest-bearing Financial liabilities designated at fair value through profit or loss fixed rate variable rate non-interest-bearing Deposits from customers fixed rate variable rate non-interest-bearing Liabilities from issued securities fixed rate variable rate non-interest-bearing Within 1 month Over 1 month and Within 3 months Over 3 months and Within 12 months Over 1 year and Within 2 years Over 2 years Non-interest-bearing Total Total HUF Currency HUF Currency HUF Currency HUF Currency HUF Currency HUF Currency HUF Currency 75,420 6,185 69,235 - - - - - 25,902 79 25,823 - 72,092 41,403 30,689 - 2,019 2,019 - - - - - - 12,005 12,005 - - - - - - - - - - 109,125 78,467 30,658 - 6,360 6,360 - - - - - - 3,741 3,422 319 - - - - - 5,994 5,994 - - 78,752 17,551 61,201 - 109,612 - 109,612 - - - - - 39,270 39,270 13,770 13,770 - - - - - - - - - - - - - - - - - - - - 6,143,610 413,308 8,390,678 2,873,541 101,521 101,521 633,365 633,233 142,203 142,203 880,099 879,857 68,741 68,741 171,992 171,989 239,805 239,805 5,730,302 5,517,137 - 3,090 213 2,877 - - 221 - 221 - - - 11,691 - 11,691 - 132 - 414 - 414 - - - 223,762 111,565 112,197 - 242 - 721 - 721 - - - 46,451 46,451 - - 3 - - - - - - - 177,807 177,807 - - 114 - - 114 - - - - - - - - 742,198 735,267 6,931 27,016 24,708 2,308 - - - - - - - - - - - - - - 2,235 - 2,235 - 502,668 502,658 10 - 46 46 - - - - - - - - - - 11,812 - - 11,812 872,748 796,149 76,485 114 312,567 175,899 124,856 11,812 117,991 8,379 1,185,315 972,048 201,341 11,926 117,991 8,379 109,612 109,612 - - - - - - 31,896 6,073 25,823 - 2,235 - 2,235 - 34,131 6,073 28,058 - 15,169 - - 601,012 - 6,711,049 965,578 11,179,814 5,061,278 17,890,863 6,026,856 - 5,730,302 5,517,524 11,247,826 15,169 601,012 - - - - 10 - - 10 15,169 462,801 336,036 126,765 - 601,012 1,412 46 1,356 10 616,181 464,213 336,082 128,121 10 124 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.4. Interest rate risk management [continued] As at 31 December 2020 [continued] LIABILITIES [continued] Fair value adjustment of derivative financial instruments fixed rate variable rate non-interest-bearing Leasing liabilities fixed rate variable rate non-interest-bearing Other financial liabilities fixed rate variable rate non-interest-bearing Subordinated bonds and loans fixed rate variable rate non-interest-bearing Within 1 month Over 1 month and Within 3 months Over 3 months and Within 12 months Over 1 year and Within 2 years Over 2 years Non-interest-bearing Total Total HUF Currency HUF Currency HUF Currency HUF Currency HUF Currency HUF Currency HUF Currency 1,264,893 1,111,465 153,428 385,359 376,893 1,035,006 648,487 208,880 189,185 479,592 481,603 8,466 386,519 19,695 (2,011) 492,998 469,867 23,131 - 1,131 1,085 46 - 4,091 4,072 19 - - - - - - 6,748 6,572 176 - 30,795 30,762 33 - - - - - - 465 401 64 - 512 - 512 - - - - - - 739 322 417 - 234 228 6 - 84,833 - 84,833 - - 536 536 - - - - - - - - - - - 6,823 4,911 1,912 - 333 148 185 - 184,090 - 184,090 - 9,260 9,321 (61) - 467 467 - - - - - - - - - - 24,904 24,904 - - 5,388 4,219 1,169 - 417 417 - - - - - - 48,555 48,802 (247) - 1,213 433 780 - - - - - - - - - 90,112 89,931 181 732,937 - - 255,219 - 3,570,243 2,299,678 - - 732,937 255,219 19,644 18,310 1,334 - 255 87 168 - - - - 261,223 - - 5,297 - - 5,297 92,042 - - 537,628 732,937 3,812 2,922 890 - 265,826 4,072 531 - 261,223 92,042 261,223 5,781 5,684 97 - - - - - - - - - - - - - 1,457,472 1,150,780 51,473 255,219 5,027,715 3,450,458 589,101 988,156 44,639 34,334 5,008 5,297 124,076 31,642 392 92,042 274,704 5,684 269,020 - 48,451 37,256 5,898 5,297 389,902 35,714 923 353,265 274,704 5,684 269,020 - Net position (4,972,655) (1,902,366) 95,740 820,640 (85,929) 209,242 363,050 460,657 3,874,548 2,063,479 131,544 863,825 (593,702) 2,515,477 1,921,775 125 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.5. Market risk The Group takes on exposure to market risks. Market risks arise from open positions in interest rate, currency and equity products, all of which are exposed to general and specific market movements. The Group applies a ‘Value-at-Risk’ (VaR) methodology to estimate the market risk of positions held and the maximum losses expected, based upon a number of assumptions for various changes in market conditions. The Management Board sets limits on the value of risk that may be accepted, which is monitored on a daily basis. (Analysis of liquidity risk, foreign currency risk and interest rate risk is detailed in Notes 37.2., 37.3. and 37.4., respectively.) 37.5.1. Market Risk sensitivity analysis The VaR risk measure estimates the potential loss in pre-tax profit over a given holding period for a specified confidence level. The VaR methodology is a statistically defined, probability-based approach that takes into account market volatilities as well as risk diversification by recognizing offsetting positions and correlations between products and markets. Risks can be measured consistently across all markets and products, and risk measures can be aggregated to arrive at a single risk number. The one-day 99% VaR number used by the Group reflects the 99% probability that the daily loss will not exceed the reported VaR. VaR methodologies are employed to calculate daily risk numbers include the historical and variance-covariance approach. The diversification effect has not been validated among the various market risk types when capital calculation happens. In addition to these two methodologies, Monte Carlo simulations are applied to the various portfolios on a monthly basis to determine potential future exposure. The VaR of the trading portfolio can be summarized as follows (in HUF mn): Historical VaR (99%, one-day) by risk type Foreign exchange Interest rate Equity instruments Diversification Total VaR exposure Average VaR 2021 1,691 212 20 - 1,923 2020 1,530 146 141 - 1,817 The table above shows the VaR figures by asset classes. Since processes driving the value of the major asset classes are not independent (for example the depreciation of HUF against the EUR mostly coincide with the increase of the yields of Hungarian Government Bonds), a diversification impact emerges, so the overall VaR is less than the sum of the VaR of each individual asset class. While VaR captures the Group’s daily exposure to currency and interest rate risk, sensitivity analysis evaluates the impact of a reasonably possible change in interest or foreign currency rates over a year. The longer time frame of sensitivity analysis complements VaR and helps the Group to assess its market risk exposures. Details of sensitivity analysis for foreign currency risk are set out in Note 37.5.2., for interest rate risk in Note 37.5.3., and for equity price sensitivity analysis in Note 37.5.4. 126 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.5. Market risk [continued] 37.5.2. Foreign currency sensitivity analysis The Bank changed its methodology of foreign currency sensitivity analysis and has been using a historical VaR calculation since 31 March 2021. The former Monte Carlo simulation represented the Group’s sensitivity to the rise and fall in the HUF exchange rate against EUR, over a 3 months period. The sensitivity analysis included only outstanding foreign currency denominated monetary items as strategic open positions related to foreign activities. In line with the Management's intention, the former EUR (310) million strategic open position was fully closed as at 31 March 2021. Since the closing of the strategic open position, the Group has been using a historical VaR calculation with a 1 day holding period. The analysis includes the same net open foreign exchange position as used under the internal capital adequacy assessment process (ICAAP). The VaR methodology is a statistically defined, probability- based approach that takes into account market volatilities as well as risk diversification by recognizing offsetting positions and correlations between products and markets. Additionally, the Bank determines the foreign currency risk of assets evaluated through the Other Comprehensive Income, which includes securities valuated on fair value through other comprehensive income and the foreign currency translation reserves. The following table shows the result of the foreign currency sensitivity analysis. The numbers below indicate the expected daily profit or loss of the portfolio beside the given confidence level. Probability Effects to the consolidated statement of profit or loss Effects to the consolidated statement of other comprehensive income In HUF million In HUF million In HUF million In HUF million 1% 5% 25% 50% 25% 5% 1% 2021 (194) (132) (50) (1) 53 142 221 2020 (522) (388) (173) (14) 111 352 696 2021 (1,707) (1,038) (398) 98 531 1,215 1,509 2020 (5,239) (2,261) (896) (227) 584 1,918 2,981 Note: (1) Historical VaR simulation is based on the empirical distribution of the historical exchange rate movements between 31 December 2021 and 31December 2020. 37.5.3. Interest rate sensitivity analysis The sensitivity analyses below have been determined based on the exposure to interest rates for both derivatives and non-derivative instruments at the balance sheet date. The analysis is prepared assuming the amount of assets and liabilities outstanding at the balance sheet date was outstanding for the whole year. The analysis was prepared by assuming only adverse interest rate changes. The main assumptions were as follows: Floating rate assets and liabilities were repriced to the modelled benchmark yields at the repricing dates assuming the unchanged margin compared to the last repricing. Fixed rate assets and liabilities were repriced at the contractual maturity date. As for liabilities with discretionary repricing feature by the Bank were assumed to be repriced with two- weeks delay, assuming no change in the margin compared to the last repricing date. Deposits with an interest rate lower than 0.3% even at high market rates were assumed to be unchanged for the whole period. 127 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.5. Market risk [continued] 37.5.3. Interest rate sensitivity analysis [continued] The sensitivity of interest income to changes in BUBOR was analysed by assuming two interest rate path scenarios: (1) HUF base rate and BUBOR increases gradually by 100 bps over the next year (probable scenario) (2) HUF base rate and BUBOR decreases gradually by 50 bps over the next year (alternative scenario) The net interest income in a one year period after 1 January 2022 would be increased by HUF 1,487 million (probable scenario) and decreased by HUF 1,025 million (alternative scenario) as a result of these simulation. A similar simulation indicated HUF 1,301 million (probable scenario) and HUF 5,732 million (alternative scenario) decrease in the Net interest income in a one year period after 1 January 2021. This effect is counterbalanced by capital gains HUF (619) million (for probable scenario), HUF 322 million (for alternative scenario) as at 31 December 2021 and (HUF 584 million for probable scenario, HUF 2,329 million for alternative scenario as at 31 Decmeber 2020) on the government bond portfolio held for hedging (economic). Furthermore, the effects of an instant 10bps parallel shift of the HUF, EUR and USD yield-curves on net interest income over a one-year period and on the market value of the hedge government bond portfolio booked against capital was analysed. The results can be summarized as follows (in HUF million): Description Effects to the net interest income (one- year period) 2021 Effects to capital (Price change of government bonds at fair value through other comprehensive income) Effects to the net interest income (one- year period) 2020 Effects to capital (Price change of government bonds at fair value through other comprehensive income) HUF (0.1%) parallel shift EUR (0.1%) parallel shift USD (0.1%) parallel shift Total (105) (1,989) (257) (2,351) 64 - - 64 (1,809) (2,179) (497) (4,485) 389 - - 389 37.5.4. Equity price sensitivity analysis The following table shows the effect of the equity price sensitivity. The Group uses VaR calculation with 1 day holding period and a 99% confidence level. The VaR methodology is a statistically defined, probability-based approach that takes into account market volatilities as well as risk diversification by recognizing offsetting positions and correlations between products and markets. The daily loss will not exceed the reported VaR number with 99% of probability. The stress test assumes the largest price movement of the last year and calculates with it as the adverse direction. These scenarios show the loss of the portfolio when all prices change with the maximum amount of the last year. Description VaR (99%, one day, HUF million) Stress test (HUF million) 2021 12 (21) 2020 141 (233) 128 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.6. Capital management Capital management The primary objective of the capital management of the Group is to ensure the prudent operation, the entire compliance with the prescriptions of the regulator for a persistent business operation and maximising the shareholder value, accompanied by an optimal financing structure. The capital management of the Group members includes the management and evaluation of the shareholders` equity available for hedging risks, other types of funds to be recorded in the equity and all material risks to be covered by the capital. The basis of the capital management of the Group members in the short run is the continuous monitoring of their capital position, in the long run the strategic and the business planning, which includes the monitoring and forecast of the capital position. The Group members maintain the capital adequacy required by the regulatory bodies and the planned risk taking mainly by means of ensuring and developing their profitability. In the event that the planned risk level of a Group member exceeded its Core and the previously raised Supplementary capital, it ensures the prudent operation by occasional measures. A further tool in the capital management of the Bank is the dividend policy, and the transactions performed with the treasury shares. Capital adequacy The Capital Requirements Directive package (CRDIV/CRR) transposes the new global standards on banking regulation (known as the Basel III agreement) into the EU legal framework. The new rules are applied from 1 January 2014. They set stronger prudential requirements for institutions, requiring them to keep sufficient capital reserves and liquidity. This new framework makes institutions in the EU more solid and strengthens their capacity to adequately manage the risks linked to their activities, and absorb any losses they may incur in doing business. The capital adequacy of the Group is supervised based on the financial statements data prepared in accordance with IFRS applying the current directives, rulings and indicators from 1 January 2014. The Group uses the standard method for determining the regulatory capital requirements of the credit risk and market risk, and parallel to that, the base indicator method and the advanced method (“AMA”) in case of the operational risk. For international comparison purposes, the Group calculated the Regulatory capital based on IFRS data as adopted by the EU, and the consolidated Capital adequacy ratio based on this in accordance with the regulations of Basel III. The Capital adequacy ratio of the Group (IFRS) was 19.1%, the Regulatory capital was HUF 3,191,765 million and the Total regulatory capital requirement was HUF 1,335,305 million as at 31 December 2021. The same ratios calculated as at 31 December 2020 were the following: 17.7%, HUF 2,669,806 million and HUF 1,203,751 million. 129 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 37: FINANCIAL RISK MANAGEMENT (in HUF mn) [continued] 37.6. Capital management [continued] Capital adequacy [continued] Calculation on IFRS basis (in HUF million) 2021 2020 Core capital (Tier 1) = Common Equity Tier 1 (CET 1) Issued capital Reserves1 Fair value adjustments Other capital components Non-controlling interests Treasury shares Goodwill and other intangible assets Other adjustments Additional Tier 1 (AT1) Supplementary capital (Tier 2) Subordinated bonds and loans Other issued capital components Components recognized in T2 capital issued by subsidiaries Regulatory capital Credit risk capital requirement Market risk capital requirement Operational risk capital requirement Total requirement regulatory capital Surplus capital CET 1 ratio Tier 1 ratio Capital adequacy ratio 2,926,882 2,316,118 28,000 2,896,118 (15,715) 104,326 1,996 (121,941) (183,440) 217,538 264,883 264,397 - 486 3,191,765 1,199,423 13,440 122,442 1,335,305 1,856,460 17.50% 17.50% 19.10% 28,000 2,342,166 33,991 39,204 1,795 (145,939) (174,997) 191,898 - 353,688 263,439 89,935 314 2,669,806 1,071,163 19,170 113,418 1,203,751 1,466,055 15.40% 15.40% 17.70% Basel III The components of the Common Equity Tier 1 capital (CET 1) are the following: Issued capital, Reserves (Profit reserves, Other reserves, Changes in the equity of subsidiaries, Net Profit for the year, Changes due to consolidation) Fair value adjustments, Other capital components, (Revaluation reserves, Share based payments, Cash-flow hedges, Net investment hedge in foreign operations), Non-controlling interest, Treasury shares, Goodwill and other Intangible assets, other adjustments (due to prudential filters, due to deferred tax receivables, due to temporary regulations). Supplementary capital (Tier 2): Subordinated loan capital, Supplementary loan capital, Other issued capital components, Components recognized in T2 capital issued by subsidiaries. For regulatory compliance the capital adequacy ratios according to regulatory scope of consolidation are relevant. The Pillar3 Disclosure of OTP Group contains the capital adequacy ratios calculated under regulatory scope of consolidation. The Group has entirely complied with the regulatory capital requirements in 2021 as well as in 2020. 1 The dividend amount planned to pay out after the profit of financial years 2019 , 2020 and 2021 is also deducted from reserves. 130 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 38: RECLASSIFICATION AND TRANSFER OF FINANCIAL INSTRUMENTS (in HUF mn) Reclassification from securities held for trading to securities at fair value through other comprehensive income: As at 31 December 2021 Date of reclassification Reason for reclassification Type of securities Nominal value at reclassification Fair value at the date of reclassification EIR at the date of reclassification Interest income 1 September 2018 Change in business model Retail Hungarian government bonds 1,069 1,087 2%-3% 38 During 2018, securities issued by the Hungarian Government with the nominal value of HUF 66,506 million were transferred from the trading portfolio to the securities at fair value through other comprehensive income of which HUF 1,087 million remaining amount was presented as at 31 December 2021. The Bank has previously held retail government bonds in the portfolio at fair value through other comprehensive income. During 2018, the Bank changed the business model of the retail government bonds to manage all on the basis of a single business model aimed at collecting the future contractual cash flows and/or selling them. In 2018, the terms and conditions of sale of retail government bonds and the pricing environment have changed significantly, as a result of which the Bank is no longer able to maintain its sole trading intent with these securities that the Bank applied earlier. Furthermore, there is an option-agreement between the Bank and the Government Debt Management Agency (“GDMA”) that GDMA will buy back this portfolio therefore it has been reclassified. Financial assets transferred but not derecognized Transferred assets Associated liabilities Transferred assets Associated liabilities Carrying amount 2021 Carrying amount 2020 Financial assets at fair value through other comprehensive income Debt securities Total Financial assets at amortized cost Debt securities Loans and advances Total Total 52,371 52,371 92,765 833 93,598 45,484 45,484 48,176 48,176 44,287 44,287 90,986 1,056 92,042 136,316 1,171 137,487 119,789 - 119,789 145,969 137,526 185,663 164,076 As at 31 December 2021 and 2020, the Group had an obligation from repurchase agreements (repo liability) of HUF 79,045 million and HUF 109,612 million respectively. Securities sold temporarily under repurchase agreements will continue to be recognized in the Consolidated Statement of Financial Position of the Group in the appropriate securities category. The related liability is measured at amortized cost in the Consolidated Statement of Financial Position as “Amounts due to the National Governments, to the National Banks and other banks and repo liabilities”. Financial assets transferred, derecognized with continuing involvement Financial assets which would have been derecognized but would be represented the continuing involvement are not recognized in the Consolidated Statement of Financial Position as at 31 December 2021 or 2020. 131 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 39: OFF-BALANCE SHEET ITEMS AND DERIVATIVE FINANCIAL INSTRUMENTS (in HUF mn) In the normal course of business, the Group becomes a party to various financial transactions that are not reflected on the Consolidated statement of financial position and are referred to as off-balance sheet financial instruments. The following represent notional amounts of these off-balance sheet financial instruments, unless stated otherwise. Contingent liabilities 2021 2020 Commitments to extend credit Guarantees arising from banking activities Factoring loan commitment Confirmed letters of credit Other Contingent liabilities and commitments total in accordance with IFRS 9 Legal disputes (disputed value) Other Contingent liabilities and commitments total in accordance with IAS 37 Total Legal disputes 4,065,002 1,293,841 464,341 65,077 27,997 3,420,718 1,159,699 305,269 35,715 35,965 5,916,258 4,957,366 75,453 5,410 53,486 22,164 80,863 5,997,121 75,650 5,033,016 At the balance sheet date the Group was involved in various claims and legal proceedings of a nature considered normal to its business. The level of these claims and legal proceedings corresponds to the level of claims and legal proceedings in previous years. The Group believes that the various asserted claims and litigations in which it is involved will not materially affect its financial position, future operating results or cash-flows, although no assurance can be given with respect to the ultimate outcome of any such claim or litigation. Provisions due to legal disputes were HUF 35,354 million as at 31 December 2021 and HUF 34,894 million as at 31 December 2020, respectively. (See Note 24.) Commitments to extend credit, guarantees and letters of credit The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit, which represent irrevocable assurances that the Group will make payments in the event that a customer cannot meet its obligations to third parties, carry the same credit risk as loans. Documentary and commercial letters of credit, which are written undertakings by the Group on behalf of a customer authorising a third party to draw drafts on the Group up to a stipulated amount under specific terms and conditions, are collateralised by the underlying shipments of goods to which they relate and therefore carry less risk than a direct borrowing. Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Group is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments since most commitments to extend credit are contingent upon customers maintaining specific credit standards. Guarantees, irrevocable letters of credit and undrawn loan commitments are subject to similar credit risk monitoring and credit policies as utilised in the extension of loans. The Management of the Group believes the market risk associated with guarantees, irrevocable letters of credit and undrawn loan commitments are minimal. 132 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 39: OFF-BALANCE SHEET ITEMS AND DERIVATIVE FINANCIAL INSTRUMENTS (in HUF mn) [continued] Guarantees, payment undertakings arising from banking activities Payment undertaking is a promise by the Group to assume responsibility for the debt obligation of a borrower if that borrower defaults until a determined amount, until a determined date, in case of fulfilling conditions, without checking the underlying transactions. The guarantee’s liability is joint and primary with the principal, in case of payment undertaking, while the Group assumes the obligation derived from guarantee independently by the conditions established by the Group. A guarantee is most typically required when the ability of the primary obligor or principal to perform its obligations under a contract is in question, or when there is some public or private interest which requires protection from the consequences of the principal's default or delinquency. A contract of guarantee is subject to the statute of frauds (or its equivalent local laws) and is only enforceable if recorded in writing and signed by the surety and the principal. If the surety is required to pay or perform due to the principal's failure to do so, the law will usually give the surety a right of subrogation, allowing the surety to use the surety's contractual rights to recover the cost of making payment or performing on the principal's behalf, even in the absence of an express agreement to that effect between the surety and the principal. Derivatives The Group maintains strict control limits on net open derivative positions, i.e. the difference between purchase and sale contracts, by both amount and term. At any time the amount subject to credit risk is limited to the current fair value of instruments that are favourable to the Group (i.e. assets), which in relation to derivatives is only a small fraction of the contract or notional values used to express the volume of instruments outstanding. This credit risk exposure is managed as part of the overall lending limits with customers, together with potential exposures from market movements. Collateral or other security is not usually obtained for credit risk exposures on these instruments, except for trading with clients, where the Group in most of the cases requires margin deposits. NOTE 40: SHARE-BASED PAYMENTS AND EMPLOYEE BENEFITS (in HUF mn) Previously approved option program required a modification thanks to the introduction of the Bank Group Policy on Payments accepted in resolution of Annual General Meeting regarding to the amendment of CRD III. Directives and Act on Credit Institutions and Financial Enterprises. Key management personnel affected by the Bank Group Policy receive compensation based on performance assessment generally in the form of cash bonus and equity shares in a ratio of 50-50%. Assignment is based on OTP shares, furthermore performance based payments are deferred in accordance with the rules of Credit Institutions Act. The Bank ensures the share-based payment part for the management personnel of the Group members. During implementation of the Remuneration Policy of the Group appeared that in case of certain foreign subsidiaries it is not possible to ensure the originally determined share-based payment because of legal reasons – incompatible with relevant EU-directives –, therefore a decision was made to cancel the share-based payment in affected countries, and virtual share based payment – cash payment fixed to share price - was made from 2017. In case of foreign subsidiaries virtual share based payment was made uniformly from 2021 (in the case of payments related to 2021). The quantity of usable shares for individuals calculated for settlement of share-based payment shall be determined as the ratio of the amount of share-based payment and share price determined by Supervisory Board1. The value of the share-based payment at the performance assessment is determined within 10 days by Supervisory Board based on the average of the three previous trade day’s middle rate of OTP Bank’s equity shares fixed on the Budapest Stock Exchange. At the same time the conditions of discounted share-based payment are determined, and share-based payment shall contain maximum HUF 6,000 discount at the assessment date, and earnings for the shares at the payment date is maximum HUF 12,000. Employee benefits are all forms of consideration given by an entity in exchange for service rendered by employees or for the termination of employment. IAS 19 Employee Benefits shall be applied in accounting for all employee benefits, except those to which IFRS 2 Share-based Payment applies. 1 Until the end of 2014 Board of Directors 133 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 40: SHARE-BASED PAYMENTS AND EMPLOYEE BENEFITS (in HUF mn) [continued] The parameters for the share-based payment relating to ongoing years 2016-2020 by the Supervisory Board for periods of each year as follows: Share purchasing at a discounted price Year Exercise price Maximum earnings Price of remuneration exchanged to share Share purchasing at a discounted price Exercise price Maximum earnings Price of remuneration exchanged to share Share purchasing at a discounted price Exercis e price Maximum earnings Price of remuneration exchanged to share 2017 2018 2019 2020 2021 2022 2023 2024 2025 7,200 7,200 7,200 7,200 - - - - - for the year 2016 2,500 3,000 3,500 4,000 - - - - - 9,200 9,200 9,200 9,200 - - - - - - 8,064 8,064 8,064 8,064 8,064 - - - HUF per share for the year 2017 for the year 2018 - 3,000 3,500 4,000 4,000 4,000 - - - - 10,064 10,064 10,064 10,064 10,064 - - - - - 10,413 10,413 10,413 10,913 10,913 10,913 10,913 - - 4,000 4,000 4,000 4,000 4,000 4,000 4,000 - - 12,413 12,413 12,413 12,413 12,413 12,413 12,413 Year Share purchasing at a discounted price Exercise price Maximum earnings Price of remuneration exchanged to share Share purchasing at a discounted price Exercise price Maximum earnings Price of remuneration exchanged to share for the year 2019 for the year 2020 HUF per share 2020 2021 2022 2023 2024 2025 2026 2027 9,553 9,553 9,553 9,553 9,553 9,553 9,553 - 4,000 4,000 4,000 4,000 4,000 4,000 4,000 - 11,553 11,553 11,553 11,553 11,553 11,553 11,553 - - 12,644 12,644 13,644 13,644 13,644 13,644 13,644 - 9,000 8,000 8,000 8,000 8,000 8,000 8,000 - 16,644 16,644 16,644 16,644 16,644 16,644 16,644 Relevant factors considered during measurement of fair value related to share-based payment as follows: Year 2017 2018 2019 2020 2021 Reference price 9,200 10,064 12,413 11,553 16,644 Assumed volatility 21.3% 26.0% 19.2% 33.6% 28.6% 1-year 0.1% 0.2% 0.2% 0.6% 1.0% 2-year 0.5% 0.6% 0.7% 0.4% 1.6% Risk-free interest rate (HUF) 4-year 3-year 1.0% 0.7% 1.3% 1.0% 1.1% 0.9% 0.6% 0.5% 1.9% 1.8% 5-year 1.3% 1.6% 1.3% 0.8% 2.0% 6-year 1.3% 1.9% 1.4% 0.9% 2.1% 7-year 1.3% 2.1% 1.6% 1.0% 2.1% Year Expected dividends (HUF/Share) 1 -year 2-year 219 219 252 219 371 219 219 290 252 321 3-year 4-year 290 219 383 333 393 252 219 333 290 357 5-year 334 219 440 383 432 6-year 384 219 507 440 475 7-year 442 219 583 507 523 2017 2018 2019 2020 2021 Pricing model Binomial Binomial Binomial Binomial Binomial 134 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 40: SHARE-BASED PAYMENTS AND EMPLOYEE BENEFITS (in HUF mn) [continued] Based on parameters accepted by Supervisory Board relating to the year 2016 effective pieces are as follows as at 31 December 2021: Approved pieces of shares Exercised until 31 December 2021 Weighted average share price at the date of exercise (in HUF) Expired pieces Exercisable as at 31 December 2021 Share purchasing period started in 2017 Remuneration exchanged to share provided in 2017 Share purchasing period started in 2018 Remuneration exchanged to share provided in 2018 Share purchasing period started in 2019 Remuneration exchanged to share provided in 2019 Share purchasing period started in 2020 Remuneration exchanged to share provided in 2020 147,984 147,984 4,288 4,288 321,528 321,528 8,241 8,241 161,446 161,446 4,033 4,033 166,231 166,231 4,303 4,303 9,544 9,194 10,387 10,098 12,415 11,813 13,629 11,897 - - - - - - - - - - - - - - - - Based on parameters accepted by Supervisory Board relating to the year 2017 effective pieces are as follows as at 31 December 2021: Approved pieces of shares Exercised until 31 December 2021 Weighted average share price at the date of exercise (in HUF) Expired pieces Exercisable as at 31 December 2021 Share purchasing period started in 2018 Remuneration exchanged to share provided in 2018 Share purchasing period started in 2019 Remuneration exchanged to share provided in 2019 Share purchasing period started in 2020 Remuneration exchanged to share provided in 2020 Share purchasing period started in 2021 Remuneration exchanged to share provided in 2021 Share purchasing period starting in 2022 Remuneration exchanged to share applying in 2022 108,243 108,243 11,926 11,926 212,282 212,282 26,538 26,538 101,571 101,565 11,584 11,584 109,460 106,719 11,531 11,531 - - - - 11,005 10,098 12,096 11,813 12,084 11,897 16,441 16,477 - - - - - - 6 - - - - - - - - - - - 2,741 - 42,820 3,003 135 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 40: SHARE-BASED PAYMENTS AND EMPLOYEE BENEFITS (in HUF mn) [continued] Based on parameters accepted by Supervisory Board relating to the year 2018 effective pieces are as follows as at 31 December 2021: Approved pieces of shares Exercised until 31 December 2021 Weighted average share price at the date of exercise (in HUF) Expired pieces Exercisable as at 31 December 2021 Share purchasing period started in 2019 Remuneration exchanged to share provided in 2019 Share purchasing period started in 2020 Remuneration exchanged to share provided in 2020 Share purchasing period started in 2021 Remuneration exchanged to share provided in 2021 Share purchasing period starting in 2022 Remuneration exchanged to share applying in 2022 Share purchasing period starting in 2023 Remuneration exchanged to share applying in 2023 Remuneration exchanged to share applying in 2024 Remuneration exchanged to share applying in 2025 82,854 17,017 82,854 17,017 150,230 150,230 33,024 73,799 14,618 33,024 73,799 14,618 - - - - - - - - - - - - 13,843 11,829 14,294 11,897 16,314 16,468 - - - - - - - - - - - - - - - - - - - - - - - - 99,341 17,042 45,155 4,114 864 432 Based on parameters accepted by Supervisory Board relating to the year 2019 effective pieces are as follows as at 31 December 2021: Approved pieces of shares Exercised until 31 December 2021 Weighted average share price at the date of exercise (in HUF) Expired pieces Exercisable as at 31 December 2021 Share purchasing period started in 2020 Remuneration exchanged to share provided in 2020 Share purchasing period started in 2021 Remuneration exchanged to share provided in 2021 Share purchasing period starting in 2022 Remuneration exchanged to share applying in 2022 Share purchasing period starting in 2023 Remuneration exchanged to share applying in 2023 Share purchasing period starting in 2024 Remuneration exchanged to share applying in 2024 Remuneration exchanged to share applying in 2025 Remuneration exchanged to share applying in 2026 91,403 22,806 91,403 22,806 201,273 192,577 30,834 30,834 - - - - - - - - - - - - - - - - 12,218 11,897 16,523 17,618 - - - - - - - - - - - - - - - - - - - - - - 8,696 - 109,567 15,554 125,771 18,025 44,421 6,279 1,000 500 136 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 40: SHARE-BASED PAYMENTS AND EMPLOYEE BENEFITS (in HUF mn) [continued] Based on parameters accepted by Supervisory Board relating to the year 2020 effective pieces are as follows as at 31 December 2021: Approved pieces of shares Exercised until 31 December 2021 Weighted average share price at the date of exercise (in HUF) Expired pieces Exercisable as at 31 December 2021 Share purchasing period started in 2021 Remuneration exchanged to share provided in 2021 Share purchasing period starting in 2022 Remuneration exchanged to share applying in 2022 Share purchasing period starting in 2023 Remuneration exchanged to share applying in 2023 Share purchasing period starting in 2024 Remuneration exchanged to share applying in 2024 Share purchasing period starting in 2025 Remuneration exchanged to share applying in 2025 Remuneration exchanged to share applying in 2026 Remuneration exchanged to share applying in 2027 41,098 17,881 8,194 17,881 18,471 17,498 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 32,914 - 82,826 19,390 47,826 9,292 51,002 9,518 13,080 3,443 680 680 Effective pieces relating to the periods starting in 2022-2027 settled during valuation of performance of year 2017-2020, can be modified based on risk assessment and personal changes. In connection with the share-based compensation for Board of Directors and connecting compensation, shares given as a part of payments detailed above and for the year 2021 based on performance assessment accounted as equity-settled share based transactions, HUF 3,589 million and HUF 3,394 million was recognized as expense for the year ended 31 December 2021 and 2020 respectively. Defined benefit plan Defined benefit plan is post‑employment benefit plans other than defined contribution plan. The Group's net obligation is calculated by estimating the amount of employee's future benefit based on their servicies for the current and prior periods. The future value of benefit is being discounted to present value. The Group has small number of plans and mainly in Bulgaria, Serbia, Montenegro, Croatia and Slovenia. These plans are providing retirement benefits upon pension age as lump-sum payment based either on fixed amounts or certain months of salary. These plans are unfunded consequently there are no significant plan assets associated with these plans. 137 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 40: SHARE-BASED PAYMENTS AND EMPLOYEE BENEFITS (in HUF mn) [continued] Defined benefit plan [continued] The movements of defined benefit obligation can be summarized as follows: Balance as at 1 January Current service cost Interest cost Actuarial gains from changes in demographic assumptions Actuarial gains from changes in financial assumptions Benefits paid Past service cost Other increases Closing balance Amounts recognized in profit and loss Current service cost Net interest expense Past service cost Actuarial losses Other cost Total Actuarial assumptions Discount rate Future salary increases 2021 5,022 457 61 (6) (122) (225) (164) 241 5,264 2021 457 61 (164) (78) 44 320 2020 4,809 402 66 (14) (203) (261) (274) 497 5,022 2020 402 66 (274) 14 - 208 2021 2020 0.35% - 4.50% 0.46%-3.00% 0.75% - 8.00% 0.40%-5.00% Since plan asset is not recognized in the Consolidated Financial Statements, the effect of the asset ceiling, the effect of changes in foreign exchange rates and the return on plan assets, excluding amounts included in interest accounts are also not recognized and therefore not presented. Based on the current information of not presenting plan assets the expected contributions to the plan for the next annual reporting period are also without value. OTP Group made an insignificant amount of contribution to the defined benefit plans during 2021 and 2020. 138 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 41: RELATED PARTY TRANSACTIONS (in HUF mn) The compensation of key management personnel, such as the members of the Board of Directors, members of the Supervisory Board, key employees of the Bank and its major subsidiaries involved in the decision-making process in accordance with the compensation categories defined in IAS 24 Related Party Disclosures, is summarised below: Compensations Short-term employee benefits Share-based payment Other long-term employee benefits Termination benefits Post-employment benefits Total 2021 8,881 3,110 743 - 112 12,846 2020 8,901 2,619 827 472 - 12,819 Share based compensations to the members of the Board of Directors, Supervisory Board or key employees of the Bank and its major subsidiaries are detailed in Note 40 Share-based payments. An analysis of payment to executives of the Group related to their activity in Board of Directors and Supervisory Board is as follows: Members of Board of Directors Members of Supervisory Board Total 2021 3,023 283 3,306 2020 2,502 204 2,706 139 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 41: RELATED PARTY TRANSACTIONS (in HUF mn) [continued] Connections with related party (key management personnel and their close family member and companies) by which line of the consolidated statement of financial position and off- balance sheet is presented: Assets Securities Loans at amortized cost (gross value) Loss allowance on loans at amortized cost Loans at fair value through profit or loss Total assets Liabilities Deposits from customers and loan liabilities Total liabilities Off-balance sheet items Undrawn line of credit Bank Guarantee Total off-balance sheet items Other related parties 596 111,529 (3,197) 108 109,036 39,872 39,872 Other related parties 30,369 6,220 36,589 2021 Associated companies Other companies Total Other related parties 725 104,795 (4,530) 102 101,092 - 1,798 (6) - 1,792 596 115,155 (3,872) 108 111,987 2,732 2,732 46,884 46,884 29,186 29,186 2020 Associated companies Other companies Total - 1,169 (646) - 523 80 80 - 16,414 (19) - 16,395 725 122,378 (5,195) 102 118,010 6,541 6,541 35,807 35,807 - 1,828 (669) - 1,159 4,280 4,280 2021 Associated companies Other companies Total 1,913 - 1,913 1,176 551 1,727 33,458 6,771 40,229 Other related parties 24,932 6,641 31,573 2020 Associated companies Other companies Total 350 - 350 2,314 1,337 3,651 27,596 7,978 35,574 In the normal course of business, the Bank enters into other transactions with its unconsolidated subsidiaries of the Group, the amounts and volumes of which are not significant to these Consolidated Financial Statements taken as a whole. Related party transactions were made on terms equivalent to those that prevail in arm’s length transactions and such terms can be substantiated. 140 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 42: SIGNIFICANT SUBSIDIARIES AND ASSOCIATES (in HUF mn) The control is established when the Group has the right and exposure over the variable positive yield of the investee but the same time put up with the consequences of the negative returns and the Group by its decisions is able to influence the extent of the yields. The Group primarily considering the following factors in the process of determining the existing of the control: - investigation of the decision making mechanism of the entity, - authority of the Board of Directors, Supervisory Board and General meeting based on the deed of association, - existence of investments with preferential voting rights. If the control can’t be obviously determined then it should be supposed that the control does not exist. Significant influence is presumed by the Group to exist – unless the contrary case is proven – when the Group holds 20% or more of the voting power of an investee but does not have a control. Investments in companies in which the Bank has a controlling interest are detailed below. They are fully consolidated companies and incorporated in Hungary unless otherwise stated. The Group considers a subsidiary significant when it is a financial institution or when the subsidiary contributes to the Groups’ total balance sheet with higher amount. The Bank considers the subsidiaries as cash generating units. Name DSK Bank EAD (Bulgaria) OTP Bank JSC (Ukraine) JSC “OTP Bank” (Russia) OTP banka d.d. (Croatia) OTP Bank Romania S.A. (Romania) OTP banka Srbija a.d. Novi Sad (previously: Vojvodjanska banka a.d. Novi Sad) (Serbia) Crnogorska komercijalna banka a.d. (Montenegro) Banka OTP Albania SH.A. (Albania) OTP Bank S.A. (previously: Mobiasbanca - OTP Group S.A.) (Moldova) SKB Banka d.d. Ljubljana (Slovenia) OTP Financing Malta Company Ltd. (Malta) OTP Financing Netherlands B.V. (the Netherlands) OTP Holding Ltd. (Cyprus) OTP Financing Cyprus Ltd. (Cyprus) OTP Factoring Ltd. OTP Mortgage Bank Ltd. OTP Real Estate Ltd. Merkantil Bank Ltd. OTP Building Society Ltd. OTP Fund Management Ltd. Bank Center No. 1. Ltd. Inga Kettő Ltd. OTP Funds Servicing and Consulting Ltd. OTP Real Estate Leasing Ltd. Ownership (Direct and Indirect) Activity 2021 2020 99.91% 100.00% 97.92% 100.00% 100.00% 99.91% commercial banking services 100.00% commercial banking services 97.91% commercial banking services 100.00% commercial banking services 100.00% commercial banking services 100.00% 100.00% commercial banking services 100.00% 100.00% 100.00% commercial banking services 100.00% commercial banking services 98.26% 100.00% 98.26% commercial banking services 100.00% commercial banking services 100.00% 100.00% refinancing activities 100.00% 100.00% - 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% refinancing activities refinancing activities refinancing activities 100.00% 100.00% 100.00% 100.00% work-out 100.00% mortgage lending 100.00% real estate management and development 100.00% finance lease 100.00% housing savings and loan 100.00% 100.00% 100.00% property management fund management real estate lease 100.00% 100.00% 100.00% 100.00% fund services real estate leasing 141 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 42: SIGNIFICANT SUBSIDIARIES AND ASSOCIATES (in HUF mn) [continued] Significant associates and joint ventures Summarized financial and non-financial information of associates and joint ventures which are not significant on Group level and are accounted according to IAS 28 or accounted on cost is as follows: As at 31 December 2021 List of associated entities OTP Kockázati Fund I. OTP-DayOne Magvető Fund D-ÉG Thermoset Ltd. 'u.l.' Company for Cash Services AD Edrone spółka z ograniczoną odpowiedzialnością Graboplasr Closed Co. Plc. NovaKid Inc. Banzai Cloud Closed Co. Plc. ClodeCool Ltd. Papita.hu Closed Co. Plc. Seon Holdings Ltd. Starschema Ltd. VCC Live Group Closed Co. Plc. Virtual Solutaion Ltd. Yieldigo s.r.o. Szallas.hu Closed Co. Plc. Cursor Insight LTD Fabetker Ltd. OneSoil Ag. Packhelp Spółka Akcyjna Carrying amount Ownership of OTP Bank Profit after tax Country / Headquarter Activity 526 288 - 392 779 700 2,006 374 1,770 516 4,756 3,944 1,672 - 76 8,809 146 1 318 2,160 44.12% 22.00% 46.99% 25.00% 17.34% 7.00% 4.17% 17.42% 20.15% 34.00% 23.86% 36.19% 49.56% 8.33% 1.97% 51.19%1 6.75% 20.48% 3.72% 1.00% (52) Hungary /Budapest 13 Hungary /Budapest Trusts, funds and similar financial entities Trusts, funds and similar financial entities - Hungary / Dunaújváros Wholesale of hardware, plumbing and heating equipment and supplies (183) Bulgaria / Sofia Other financial service activities, exc. insurance and pension funding (293) Poland / Krakow n.a. Hungary / Győr (4,621) USA / San Francisco n.a. Hungary /Budapest 1 Hungary /Budapest (132) Hungary / Szeghalom Computer programming activities Manufacture of builders’ ware of plastic Online kids English learning platform operator Computer programming activities Other education n.e.c. Retail sale via mail order houses or via Internet (4) UK / London Computer programming activities n.a. Hungary /Budapest Computer consultancy activities (203) Hungary /Budapest n.a. Hungary /Budapest Computer programming activities Computer programming activities (168) Czech Republic/Prague Computer programming activities 1,278 Hungary / Miskolc (247) UK / London Web portals Computer programming activities 132 Hungary / Nádudvar (1,058) Switzerland / Zurich (3,038) Poland / Warsaw Manufacture of concrete products for construction purposes Computer programming activities Manufacture of corrugated paper and paperboard and of containers of paper and paperboard 1 The Group does not control the entity even though it holds more than half of the voting rights. 142 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 42: SIGNIFICANT SUBSIDIARIES AND ASSOCIATES (in HUF mn) [continued] Significant associates and joint ventures [continued] The Group made significant investments into associates during 2021. Venture capital funds under the control of the Group obtained ownership interest in Phoenix Play Invest Co.Plc., in Algorithmiq Invest Closed Co. Plc. and in NGY Propertiers Investment SRL. As at 31 December 2021 [continued] List of associated entities Carrying amount Ownership of OTP Bank Profit after tax Country / Headquarter Activity Phoenix Play Invest closed Co. Plc. Algorithmiq Invest Closed Co. Plc. NGY Propertiers Investment SRL 3,081 8,996 12,331 21.69% 21.69% 14.54% (1) Hungary /Budapest 792 Hungary /Budapest (22,567) Romania / Bucharest Activities of holding companies Activities of holding companies Renting and operating of own or leased real estate As at 31 December 2020 List of associated entities OTP Kockázati Fund I. OTP-DayOne Magvető Fund D-ÉG Thermoset Ltd. 'u.l.' Company for Cash Services AD Edrone spółka z ograniczoną odpowiedzialnością Graboplasr Closed Co. Plc. NovaKid Inc. Banzai Cloud Closed Co. Plc. ClodeCool Ltd. Pepita.hu Closed Co. Plc. Seon Holdings Ltd. Starschema Ltd. Tresorit S.A. VCC Live Group Closed Co. Plc. Virtual Solutaion Ltd. Yieldigo s.r.o. Szallas.hu Closed Co. Plc.1 Carrying amount Ownership of OTP Bank Profit after tax Country / Headquarter Activity 531 674 - 392 497 711 497 1,008 1,797 575 378 1,310 1,501 1,599 72 79 7,456 44.12% 22.00% 46.99% (2) Hungary /Budapest (37) Hungary /Budapest Trusts, funds and similar financial entities Trusts, funds and similar financial entities - Hungary / Dunaújváros Wholesale of hardware, plumbing and heating 25.00% (254) Bulgaria / Sofia Other financial service activities, equipment and supplies except insurance and pension funding n.e.c. 17.34% 7.00% 4.17% 17.42% 20.15% 34.00% 23.86% 36.19% 7.77% 49.56% 8.33% 1.97% 51.19% (79) Poland / Krakow (1,349) Hungary / Győr (398) USA / San Francisco 13,430 Hungary /Budapest 132 Hungary /Budapest 3 Hungary / Szeghalom 37 UK / London Computer programming activities Manufacture of builders’ ware of plastic Online kids English learning platform operator Computer programming activities Other education n.e.c. Retail sale via mail order houses or via Internet Computer programming activities 454 Hungary /Budapest Computer consultancy activities 232 Luxembourg/Luxembourg Activities of holding companies (58) Hungary /Budapest (86) Hungary /Budapest 103 Czech Republic / Prague 595 Hungary / Miskolc Computer programming activities Computer programming activities Computer programming activities Web portals 1 The Group does not control the entity even though it holds more than half of the voting rights. 143 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 43: TRUST ACTIVITIES (in HUF mn) The Bank acts as a trustee for certain loans granted by companies or employers to their employees, mainly for housing purposes. The ultimate risk for these loans rests with the party advancing the funds. As these loans and related funds are not considered to be assets or liabilities of the Group, they have been excluded from the accompanying Consolidated statement of financial position. The amount of loans managed by the Group as a trustee 36,517 36,811 2021 2020 NOTE 44: CONCENTRATION OF ASSETS AND LIABILITIES In the percentage of the total assets Receivables from, or securities issued by the Hungarian Government or the NBH 2021 2020 15.87% 14.45% There were no other significant concentrations of the assets or liabilities of the Group either as at 31 December 2021 or 2020 respectively. The Group continuously provides the NBH with reports on the extent of dependency on large depositors as well as the exposure of the biggest 50 depositors towards the Group. Further to this obligatory reporting to the NBH, the Group pays particular attention on the exposure of its largest partners and cares for maintaining a closer relationship with these partners in order to secure the stability of the level of deposits. The organisational unit of the Bank in charge of partner-risk management analyses the biggest partners on a constant basis and sets limits on the Bank’s and the Group’s exposure separately partner-by-partner. If necessary, it modifies partner-limits in due course thereby reducing the room for manoeuvring of the Treasury and other business areas. The Bank’s internal regulation (Limit-management regulation) controls risk management related to exposures of clients. The Bank makes a difference between clients or clients who are economically connected with each other, partners, partners operating in the same geographical region or in the same economic sector, exposures from customers. Limit-management regulation includes a specific range provision system used by the Bank to control risk exposures. This regulation has to be used by the Bank for its business (lending) risk-taking activity both in retail and corporate sector. To specify credit risk limits Group strives their clients get an acceptable margin of risk based on their financial situation. In the Group limit system has to be provided a lower level decision-making delegation. If a Group member takes risk against a client or group of clients (either inside the local economy or outside), the client will be qualified as a group level risk and these limits will be specified at group level. The validity period of this policy is 12 months. The limit shall be reviewed prior to the expiry date but at least once a year - based on the relevant information required to limit calculations. 144 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 45: EARNINGS PER SHARE (in HUF mn) Consolidated Earnings per share attributable to the ordinary shares of the Group are determined by dividing consolidated Net profit for the year attributable to ordinary shareholders, after the deduction of declared preference dividends, by the weighted average number of ordinary shares outstanding during the year. Dilutive potential ordinary shares are deemed to have been converted into ordinary shares. Earnings per share from continuing and discontinued operations Consolidated net profit for the period attributable to ordinary shareholders (in HUF mn) Weighted average number of ordinary shares outstanding during the year for calculating basic EPS (number of share) Basic Earnings per share (in HUF) Consolidated net profit for the period attributable to ordinary shareholders (in HUF mn) Modified weighted average number of ordinary shares outstanding during the year for calculating diluted EPS (number of share) 2021 2020 455,592 259,416 262,017,836 1,738 258,461,554 1,004 455,592 259,416 262,094,958 258,543,088 Diluted Earnings per share (in HUF) 1,738 1,003 Earnings per share from continuing operations 2021 2020 Consolidated net profit for the period attributable to ordinary shareholders (in HUF mn) Weighted average number of ordinary shares outstanding during the year for calculating basic EPS (number of share) Basic Earnings per share (in HUF) Consolidated net profit for the period attributable to ordinary shareholders (in HUF mn) Modified weighted average number of ordinary shares outstanding during the year for calculating diluted EPS (number of share) Diluted Earnings per share (in HUF) Earnings per share from discontinued operations Consolidated net profit for the period attributable to ordinary shareholders (in HUF mn) Weighted average number of ordinary shares outstanding during the year for calculating basic EPS (number of share) Basic Earnings per share (in HUF) Consolidated net profit for the period attributable to ordinary shareholders (in HUF mn) Modified weighted average number of ordinary shares outstanding during the year for calculating diluted EPS (number of share) 455,476 253,826 262,017,836 1,738 258,461,554 982 455,476 253,826 262,094,958 258,543,088 1,738 2021 982 2020 116 5,590 262,017,836 - 258,461,554 22 116 5,590 262,094,958 258,543,088 Diluted Earnings per share (in HUF) - 22 145 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 45: EARNINGS PER SHARE (in HUF mn) [continued] Weighted average number of ordinary shares Average number of Treasury shares Weighted average number of ordinary shares outstanding 2021 2020 280,000,010 17,982,174 280,000,010 21,538,456 during the year for calculating basic EPS 262,017,836 258,461,554 Dilutive effects of options issued in accordance with the remuneration policy and convertible into ordinary shares1 The modified weighted average number of ordinary shares outstanding during the year for calculating diluted EPS 77,122 81,534 262,094,958 258,543,088 NOTE 46: NET GAIN OR LOSS REALIZED ON FINANCIAL INSTRUMENTS (in HUF mn) 2021 Net interest / similar to interest gain and loss Net non- interest gain and loss Loss allowance Other Compre- hensive Income Cash, amounts due from banks and balances with the National Banks Placements with other banks, net of loss allowance for placements Repo receivables Trading securities at fair value through profit or loss Non-trading instruments mandatorily at fair value through profit or loss Securities at fair value through other comprehensive income Securities at amortized cost Loans at amortized cost Finance lease receivables Loans mandatorily at fair value through profit or loss Other financial assets Derivative financial instruments Total result on financial assets Amounts due to banks, the National Governments, deposits from the National Banks and other banks Repo liabilities Financial liabilities designated at fair value through profit or loss Deposits from customers Liabilities from issued securities Leasing liabilities Subordinated bonds and loans Total result on financial liabilities Total result on financial instruments 16,527 24,594 827 - - (952) - - 5,016 (1,664) 12 - 1,749 4,812 - - - - - - 49,473 79,602 692,432 59,084 40,131 3,6393 3,3212 971,379 (25,235) (2,299) 493 (51,052) (9,822) (1,556) (7,598) (97,069) 874,310 (2,587)2 1,031 26,354 - 4,459 - 9,412 48,497 (961) (3,013) (32,159) (5,776) (16,289) 438 - (60,364) (44,877) - - - - - - (44,877) - - - - - - (3,916) 267,033 - - - 263,117 311,614 - - - - - - (60,364) - - - - - - (44,877) 1 Both in the year 2022 and in the year 2021 the dilutive effect is in connection with the Remuneration Policy and the Management Option Program. 2 For the year of 2021 HUF (2,587) million net non-interest gain on securities at fair value through other comprehensive income was transferred from other comprehensive income to profit or loss. 3 Gains from other financial assets and derivative financial instruments recognized in net interest income as Income similar to interest income. 146 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 46: NET GAIN OR LOSS REALIZED ON FINANCIAL INSTRUMENTS (in HUF mn) [continued] 2020 Net interest / similar to interest gain and loss Net non- interest gain and loss Loss allowance Other Compre- hensive Income Cash, amounts due from banks and balances with the National Banks Placements with other banks, net of loss allowance for placements Repo receivables Trading securities at fair value through profit or loss Non-trading instruments mandatorily at fair value through profit or loss Securities at fair value through other comprehensive income Securities at amortized cost Loans at amortized cost Finance lease receivables Loans mandatorily at fair value through profit or loss Other financial assets Derivative financial instruments Total result on financial assets Amounts due to banks, the National Governments, deposits from the National Banks and other banks Repo liabilities Financial liabilities designated at fair value through profit or loss Deposits from customers Liabilities from issued securities Leasing liabilities Subordinated bonds and loans Total result on financial liabilities Total result on financial instruments 5,103 9,200 286 - - - - - 2,745 (851) 62 - 473 7,239 - 44,782 69,905 658,579 54,046 28,251 2,7392 (628)2 872,736 (18,492) (653) (307) (53,522) (7,750) (1,623) (7,718) (90,065) 782,671 2,3251 1,402 26,254 - 2,125 - 13,734 55,824 (4,507) (2,802) (189,554) (9,972) (3,262) 878 - (210,008) - - - - 1,270 234,030 - - - 235,300 291,124 - - - - - - (210,008) - - - - - (6,931) - - - - - - (6,931) - - - - - - - - (6,931) 1 For the year 2020 HUF 2,325 million net non-interest gain on securities at fair value through other comprehensive income was transferred from other comprehensive income to profit or loss. 2 Gains from other financial assets and derivative financial instruments recognized in net interest income as Income similar to interest income. 147 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 47: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) In determining the fair value of a financial asset or liability the Group uses the market price in the case of instruments that are quoted on an active market. In most cases market price is not publicly available so the Group has to make assumptions or use valuation techniques to determine the fair value of a financial instrument. See Note 47. d) for more information about fair value classes applied for financial assets and liabilities measured at fair value in these financial statements. To provide a reliable estimate of the fair value of those financial instrument that are originally measured at amortized cost, the Group used the discounted cash-flow analyses (loans, placements with other banks, repo receivables, amounts due to banks, repo liabilities, deposits from customers). The fair value of issued securities and subordinated bonds is based on quoted prices (e.g. Reuters). Cash and amounts due from banks and balances with the National Banks represent amounts available immediately thus the fair value equals to the cost. The assumptions used when calculating the fair value of financial assets and liabilities when using valuation technique are the following: the discount rates are the risk free rates related to the denomination currency adjusted by the appropriate risk premium as of the end of the reporting period, the contractual cash-flows are considered for the performing loans and for the non-performing loans, the amortized cost less impairment is considered as fair value, the future cash-flows for floating interest rate instruments are estimated from the yield curves as of the end of the reporting period, the fair value of the deposit which can be due in demand cannot be lower than the amount payable on demand. Classes of assets and liabilities not measured at fair value in the Consolidated Statement of Financial Position, the income approach was used to convert future cash-flows to a single current amount. Fair value of current assets is equal to carrying amount, fair value of liabilities from issued securities and other bond-type classes of assets and liabilities not measured at fair value measured based on Reuters market rates, and the fair value of other classes not measured at fair value of the Consolidated Statement of Financial Position is measured at discounted cash-flow method. Fair value of loans, net of loss allowance for loans measured at discount rate adjustment technique, the discount rate is derived from observed rates of return for comparable assets or liabilities that are traded in the market. Fair value measurements – in relation to instruments measured not at fair value – are mainly categorized in level 3 of the fair value hierarchy. 148 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 47: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] a) Fair value of financial assets and liabilities Cash, amounts due from banks and balances with the National Banks Placements with other banks, net of loss allowance for placements Repo receivables Financial assets at fair value through profit or loss Trading securities at fair value through profit or loss Fair value of derivative financial assets held for trading Non-trading instruments mandatorily at fair value through profit or loss Financial assets designated at fair value through profit or loss Securities at fair value through other comprehensive income Securities at amortized cost Loans at amortized cost1 Finance lease receivables Loans measured at fair value through profit or loss Derivative financial assets designated as hedge accounting Other financial assets Financial assets total Amounts due to the National Governments, to the National Banks and other banks Repo liabilities Financial liabilities designated at fair value through profit or loss Deposits from customers Liabilities from issued securities Held for trading derivative financial liabilities Derivative financial liabilities designated as hedge accounting Leasing liabilities Other financial liabilities Subordinated bonds and loans Financial liabilities total 1 Higher discount rate due to the lower yield environment resulted in higher fair value comparing to the carrying values. 2021 Carrying amount Fair value 2020 Fair value Carrying amount 2,556,035 1,584,861 61,052 341,397 103,510 184,484 53,403 - 2,224,510 3,891,335 13,493,183 1,182,628 1,068,111 18,757 135,916 26,557,785 1,567,348 79,047 41,184 21,068,644 436,325 202,716 11,228 53,286 485,771 278,334 24,223,883 2,556,035 1,566,458 61,121 341,397 103,510 184,484 53,403 - 2,224,510 3,645,046 13,106,425 1,183,089 1,068,111 18,757 135,916 25,906,865 1,446,036 79,010 41,184 21,002,125 400,071 202,716 11,228 53,447 485,771 284,709 24,006,297 2,432,312 1,148,743 190,849 234,007 56,572 117,623 57,577 2,235 2,136,709 2,624,920 11,674,842 1,051,140 802,605 6,820 140,562 22,443,509 1,185,315 117,991 34,131 17,890,863 464,213 104,823 11,341 48,451 389,902 274,704 20,521,734 2,432,312 1,150,081 191,149 234,007 56,572 117,623 57,577 2,235 2,136,709 2,384,933 12,303,182 1,070,528 802,605 6,820 140,562 22,852,888 1,172,036 119,927 34,131 17,905,676 529,723 104,823 11,341 48,451 389,902 265,679 20,581,689 149 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 47: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] b) Fair value of derivative instruments The Group regularly enters into hedging transactions in order to decrease its financial risks. However some economically hedging transaction do not meet the criteria to qualify as hedge accounting, therefore these transactions were accounted for as derivatives held for trading. The assessment of the hedge effectiveness (both for fair value hedges and cash flow hedges) to determine the economic relationship between the hedged item and the hedging instrument is accomplished with prospective scenario analysis via different rate shift scenarios of the relevant risk factor(s) of the hedged risk component(s). The fair value change of the hedged item and the hedging instrument is compared in the different scenarios. Economic relationship is justified if the change of the fair value of the hedged item and the hedging instrument are in the opposite direction and the absolute changes are similar amounts. The hedge ratio is determined as the ratio of the notional of the hedged item and the notional of the hedging instrument. The sources of hedge ineffectiveness are the not hedged risk components (e.g. change of cross currency basis spreads in case of interest rate risk hedges), slight differences in maturity dates and interest payment dates in case of fair value hedges, and differences between the carrying amount of the hedged item and the carrying amount of the hedging instrument in case of FX hedges (e.g. caused by interest rate risk components in the fair value of the hedging instrument). The summary of the derivatives held for trading and derivatives designated as hedge accounting of the Group are as follows: 150 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 47: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] b) Fair value of derivative instruments [continued] Held for trading derivative financial instruments Interest rate derivatives Interest rate swaps Cross currency interest rate swaps OTC options Forward rate agreement Total interest rate derivatives (OTC derivatives) Foreign exchange derivatives Foreign exchange swaps Foreign exchange forward contracts OTC options Foreign exchange spot conversion Total foreign exchange derivatives (OTC derivatives) Equity stock and index derivatives Commodity Swaps Equity swaps OTC derivatives total Exchange traded futures and options Total equity stock and index derivatives Derivatives held for risk management not designated in hedge Interest rate swaps Foreign exchange swaps Foreign exchange spot Forward contracts Cross currency interest rate swaps Total derivatives held for risk Before netting Assets Liabilities 2021 Netting After netting Before netting Assets Liabilities Assets Liabilities 2020 Netting After netting Assets Liabilities 58,512 7,316 484 - 66,312 37,638 10,790 801 187 (56,070) (7,621) (299) - (63,990) (42,272) (7,738) (180) (242) 49,416 (50,432) 51,523 10,538 62,061 171 62,232 47,457 1,090 - - 4,442 (51,508) (357) (51,865) (278) (52,143) (78,340) (4,108) - - (168) 40,783 - - - 40,783 - - - - - - - - - - 5,682 - - - - 17,729 7,316 484 - 25,529 37,638 10,790 801 187 (15,287) (7,621) (299) - (23,207) (42,272) (7,738) (180) (242) 33,963 7,315 359 - 41,637 41,838 8,689 3,909 553 (33,736) (7,419) (8) - (41,163) (35,537) (10,750) (3,835) (657) 49,416 (50,432) 54,989 (50,779) 51,523 10,538 62,061 171 62,232 41,775 1,090 - - 4,442 (51,508) (357) (51,865) (278) (52,143) (72,658) (4,108) - - (168) 9,695 7,071 16,766 379 17,145 24,679 808 - 41 44 (8,269) (560) (8,829) (1,262) (10,091) (20,944) (3,566) - - - 8,984 - - - 8,984 - - - - - - - - - - 12,736 - - - - 24,979 7,315 359 - 32,653 41,838 8,689 3,909 553 (24,752) (7,419) (8) - (32,179) (35,537) (10,750) (3,835) (657) 54,989 (50,779) 9,695 7,071 16,766 379 17,145 11,943 808 - 41 44 (8,269) (560) (8,829) (1,262) (10,091) (8,208) (3,566) - - - management not designated in hedge 52,989 (82,616) 5,682 47,307 (76,934) 25,572 (24,510) 12,736 12,836 (11,774) Total held for trading derivative financial instruments 230,949 (249,181) 46,465 184,484 (202,716) 139,343 (126,543) 21,720 117,623 (104,823) 151 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 47: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] b) Fair value of derivative instruments [continued] Derivative financial instruments designated as hedge accounting Derivatives designated in cash flow hedges Interest rate swaps Total derivatives designated in cash flow hedges Derivatives designated in fair value hedges Interest rate swaps Cross currency interest rate swaps Foreign exchange swaps Total derivatives designated in fair value hedges Total derivatives held for risk management Before netting Assets Liabilities 2021 Netting After netting Before netting Assets Liabilities Assets Liabilities 2020 Netting After netting Assets Liabilities 1,020 1,020 (1,020) (1,020) 1,020 1,020 - - - - 25,417 5,471 - 30,888 (17,908) (5,451) - (23,359) 12,131 - - 12,131 13,286 5,471 - 18,757 (5,777) (5,451) - (11,228) 8,027 8,027 2,436 6,179 - 8,615 (8,027) (8,027) (7,129) (6,007) - (13,136) 8,027 8,027 1,795 - - 1,795 - - 641 6,179 - 6,820 - - (5,334) (6,007) - (11,341) (OTC derivatives) 31,908 (24,379) 13,151 18,757 (11,228) 16,642 (21,163) 9,822 6,820 (11,341) c) Types of hedge accounting Interest rate risk management is centralized at the Group. Interest rate risk exposures in major currencies are managed at OTP Headquarter on a consolidated level. Although risk exposures in local currencies are managed at subsidiary level, the respective decisions are subject to Headquarter ALCO approval. Interest rate risk is measured by simulating NII and EVE under different stress and plan scenarios, the established risk limits are described in „OTP Bank’s Group-Level Regulations on the Management of Liquidity Risk and Interest Rate Risk of Banking Book”. The interest rate risk management activity aims to stabilize NII within the approved risk limits The risk management objective of these hedge relationships is to mitigate the risk of clean fair value (i.e. excluding accrued interest) change of MIRS loans due to the change of interest rate reference indices (BUBOR, EURIBOR, LIBOR, etc.) of the respective currency. The ineffective part of fair value hedge accounting is presented on Interest income / Interest expense in the Consolidated Statement of Profit or Loss. 152 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 47: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] c) Types of hedge accounting [continued] Amount, timing and uncertainty of future cash flows – hedging instruments as at 31 December 2021 (in fx million) Type of hedge Type of risk Type of instrument Within one month Within three months and over one month Within one year and over three months Within five years and over one year More than five years Total Fair Value Hedge Interest rate risk Interest rate swap HUF Notional Average Interest Rate (%) EUR Notional Average Interest Rate (%) USD Notional Average Interest Rate (%) JPY Notional Average Interest Rate (%) Cross currency interest rate swap EUR/HUF Notional Average Interest Rate (%) Average FX Rate Fair Value Hedge Foreign exchange & Interest rate risk - - - - - - - - 2,000 1.09% - - - - - - 900 0.49% 1 0.23% - - - - (52,474) 1.65% 111 0.24% 119 2.54% 4,500 0.22% 42,950 1.31% 50 0.05% 47 4.18% - - (6,624) 162 166 4,500 - (1.64)% 310.41 1 (1.68)% 310.29 2 (1.67%) 310.26 12 (1.69%) 310.01 12 (1.82%) 307.81 27 153 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 47: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] c) Types of hedge accounting [continued] Amount, timing and uncertainty of future cash flows – hedging instruments as at 31 December 2021 (in fx million) [continued] Type of hedge Type of risk Type of instrument Within one month Within three months and over one month Within one year and over three months Within five years and over one year More than five years Total Fair Value Hedge Foreign exchange risk Cross currency interest rate swap EUR/HUF Notional Average FX Rate RON/HUF Notional Average FX Rate RUB/HUF Notional Average FX Rate JPY/HUF Notional Average FX Rate USD/HUF Notional Average FX Rate Other Interest rate swap HUF Notional - 363.88 (6) 354.22 35 356.94 200 66.21 - - - - - - - - - - - - - - - - - - - - 323.77 (3) 323.77 3,345 1,823 3,093 572 355.93 2,225 73.08 11,200 4.15 4,500 2.79 306 323.77 - - - - - - - - - - - 601 2,425 11,200 4,500 303 8,261 154 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 47: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] c) Types of hedge accounting [continued] Amount, timing and uncertainty of future cash flows – hedging instruments as at 31 December 2020 (in fx million) Type of hedge Type of risk Type of instrument Within one month Within three months and over one month Within one year and over three months Within five years and over one year More than five years Total Fair Value Hedge Interest rate risk Interest rate swap HUF Notional Average Interest Rate (%) EUR Notional Average Interest Rate (%) USD Notional Average Interest Rate (%) RUB Notional Average Interest Rate (%) Cross currency interest rate swap EUR/HUF Notional Average Interest Rate (%) Average FX Rate Fair Value Hedge Foreign exchange & Interest rate risk - - 15 (0.11)% - - - - - - - - - - - - 60,000 1.31% 5 0.09% 21 2.00% - - (89,622) 1.06% 173,810 1.35% 144,188 102 0.24% 171 2.38% 2,100 7.38% 10 0.22% 29 2.35% - - 132 221 2,100 - (1.55)% 311.08 - (1.59)% 310.95 2 (1.60)% 310.82 12 (1.63)% 310.14 14 (1.67)% 308.15 28 155 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 47: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] c) Types of hedge accounting [continued] Amount, timing and uncertainty of future cash flows – hedging instruments as at 31 December 2020 (in fx million) [continued] Type of hedge Type of risk Type of instrument Within one month Within three months and over one month Within one year and over three months Within five years and over one year More than five years Total Fair Value Hedge Foreign exchange risk Cross currency interest rate swap EUR/HUF Notional Average FX Rate RON/HUF Notional Average FX Rate RUB/HUF Notional Average FX Rate Other Interest rate swap HUF Notional 1 360.19 92 354.92 123 360.47 - - - - - - - - 613 356.03 1,550 72.60 4,100 4.46 (183) 6,940 8,342 - - - - - - - - - - - - 829 1,550 4,100 15,099 156 NOTE 47: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 c) Types of hedge accounting [continued] As at 31 December 2021 is as follows: Type of hedge Type of instrument Type of risk Nominal amount of the hedging instrument Carrying amount of the hedging instrument as at 31 December 2021 Line item in the consolidated statement of financial position where the hedging instrument is located Changes in fair value used for calculating hedge ineffectiveness for the year ended as at 31 December 2021 Before netting Netting After netting Assets Liabilities Assets Liabilities Fair value hedge Interest rate swap Interest rate risk 409,595 23,986 (17,908) 12,131 11,855 (5,777) Derivative financial instruments 6,494 designated as hedge accounting Cross- currency swap FX & IR risk 8,175 - (2,375) Cross- currency swap Interest rate swap FX risk 566,936 5,471 (3,076) Other 8,261 1,431 - - - - - (2,375) Derivative financial instruments 4 designated as hedge accounting 5,471 (3,076) Derivative financial instruments (1,687) designated as hedge accounting 1,431 - Derivative financial instruments designated as hedge accounting Fair value hedges total 992,967 30,888 (23,359) 12,131 18,757 (11,228) 3 4,814 157 NOTE 47: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 c) Types of hedge accounting [continued] As at 31 December 2020 is as follows: Type of hedge Type of instrument Type of risk Nominal amount of the hedging instrument Carrying amount of the hedging instrument as at 31 December 2020 Line item in the consolidated statement of financial position where the hedging instrument is located Changes in fair value used for calculating hedge ineffectiveness for the year ended as at 31 December 2020 Before netting Netting After netting Assets Liabilities Assets Liabilities Fair value hedge Interest rate swap Interest rate risk 468,574 1,839 (7,065) 1,795 44 (5,270) Derivative financial instruments Cross-currency swap FX & IR risk 8,874 - (1,615) Cross-currency swap Interest rate swap FX risk 438,401 6,246 (4,456) Other 16,224 530 - designated as hedge accounting - - - - (1,615) Derivative financial instruments designated as hedge accounting 6,246 (4,456) Derivative financial instruments designated as hedge accounting 530 - Derivative financial instruments designated as hedge accounting Fair value hedges total 932,073 8,615 (13,136) 1,795 6,820 (11,341) (370) (36) (809) 2 (1,213) 158 NOTE 47: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 c) Types of hedge accounting [continued] As at 31 December 2021 is as follows: Type of hedge Type of risk Carrying amount of the hedged item as at 31 December 2021 Accumulated amount of fair value hedge adjustments on the hedged item included in the carrying amount of the hedged item for the year ended 31 December 2021 Assets Liabilities Assets Liabilities Line item in the consolidated statement of financial position in which the hedged item is included Fair value hedges - Loans - Loans Interest rate risk 57,176 - Interest rate risk - 142,649 - Government bonds - Government bonds Interest rate risk Interest rate risk - Other securities Interest rate risk - Loans - Loans - Government bonds - Government bonds - Other securities Fair value hedges total Foreign exchange & Interest rate risk Foreign exchange risk Foreign exchange risk Foreign exchange risk Other risk 13,921 152,830 42,008 101,934 458,312 12,811 98,668 - 937,660 637 - (1,230) (22,457) 318 611 - - - - - - - - - 8,261 150,910 - - (22,121) - Loans (16,858) Amounts due to banks, the National Governments, deposits from the National Banks and other banks - Securities at amortized cost - Securities at fair value through other comprehensive income - Securities at fair value through other comprehensive income (1,114) Loans - Loans - Securities at fair value through other comprehensive income - Securities at amortized cost (161) Liabilities from issued securities (18,133) 159 NOTE 47: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 c) Types of hedge accounting [continued] As at 31 December 2020 is as follows: Type of hedge Type of risk Fair value hedges - Loans - Loans - Government bonds - Government bonds Interest rate risk Interest rate risk Interest rate risk Interest rate risk - Other securities - Loans - Loans - Other securities Fair value hedges total Interest rate risk Foreign exchange & Interest rate risk Foreign exchange risk Other risk Carrying amount of the hedged item as at 31 December 2020 Accumulated amount of fair value hedge adjustments on the hedged item included in the carrying amount of the hedged item for the year ended 31 December 2020 Line item in the consolidated statement of financial position in which the hedged item is included Assets Liabilities Assets Liabilities 35,256 - 8,678 269,838 47,560 96,972 303,572 - - 100,299 - - - - - 15,032 1,679 - (106) 2,518 781 284 - - - Loans (235) Loans - Securities at amortized cost - Securities at fair value through other comprehensive income - Securities at fair value through other comprehensive income (1,634) Loans - Loans (528) Liabilities from issued securities 761,876 115,331 5,156 (2,397) 160 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 47: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] c) Types of hedge accounting [continued] Change in basis swap spread recognised in the consolidated other comprehensive income related fair value hedges as follows: Type of risk Carrying amount of the hedged item FX risk FX risk Assets Liabilities 458,312 12,811 471,123 - - - Type of risk Carrying amount of the hedged item Items recognised in the consolidated other comprehensive income for the year 2021 Change in the items recognized in other comprehensive income for the year 2021 Line item in the consolidated statement of financial position in which the hedged item is included (1,032) 64 (968) (1,681) Loans at amortised cost Securities at fair value through other comprehensive income - (1,681) Items recognised in the consolidated other comprehensive income for the year 2020 Change in the items recognized in other comprehensive income for the year 2020 Line item in the consolidated statement of financial position in which the hedged item is included FX risk Assets Liabilities 303,572 303,572 - - 713 713 - Loans at amortised cost - On Group level there weren’t any cash-flow hedges for the year ended 31 December 2021 and 2020. According to the strategic direction designated by the Management Committee, a decision was made about closing in accounting meaning the former EUR 310 million strategic open position which was presented at the end of 2019 in the Consolidated Financial Statements, so at the end of 2020 regarding net investment hedges for foreign subsidiaries there aren’t any disclosure requirements to be presented. 161 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 47: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] d) Fair value levels Methods and significant assumptions used to determine fair value of the different levels of financial instruments: - Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities; - Level 2: inputs other than quoted prices included within Level 1, that are observable for the asset or liability either directly or indirectly. Fair value measurements – in relation with instruments measured not at fair value – are categorized in level 2; - Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). The following table shows an analysis of financial instruments recorded at fair value by level of the fair value hierarchy: 2021 Total Level 1 Level 2 Level 3 Financial assets at fair value through profit or loss Trading securities at fair value through profit or loss Positive fair value of derivative financial assets held for trading Non-trading instruments mandatorily at fair value through profit or loss Securities at fair value through other comprehensive income Loans mandatorily measured at fair value through profit or loss Positive fair value of derivative financial assets designated as fair value hedge Financial assets measured at fair value total Financial liabilities designated at fair value through profit or loss Negative fair value of held-for-trading derivative financial liabilities Negative fair value of derivative financial liabilities designated as fair value hedge Financial liabilities measured at fair value total 341,397 103,510 90,877 58,727 227,153 23,367 44,777 6 184,484 171 174,143 10,170 53,403 31,979 8,233 2,224,510 910,324 1,250,833 13,1911 63,3532 1,068,111 281 - 1,067,830 18,757 3,652,775 - 1,001,482 18,757 1,496,743 - 1,154,550 41,184 - - 41,184 202,716 278 202,438 - 11,228 255,128 - 278 11,228 213,666 - 41,184 1 The portfolio includes Visa C shares. 2 The portfolio includes mainly HUF 55,476 million Ukrainian government bonds. 162 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 47: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] d) Fair value levels [continued] 2020 Total Level 1 Level 2 Level 3 Financial assets at fair value through profit or loss 234,007 62,472 149,504 22,031 Trading securities at fair value through profit or loss Positive fair value of derivative financial assets held for trading Non-trading instruments mandatorily at fair value through profit or loss Financial assets designated at fair value through profit or loss Securities at fair value through other comprehensive income Loans mandatorily measured at fair value through profit or loss Positive fair value of derivative financial assets designated as fair value hedge Financial assets measured at fair value total Financial liabilities designated at fair value through profit or loss Negative fair value of held-for-trading derivative financial liabilities Negative fair value of derivative financial liabilities designated as fair value hedge Financial liabilities measured at fair value total 56,572 30,333 26,227 12 117,623 388 110,649 6,586 57,577 31,751 10,393 15,4331 2,235 - 2,235 - 2,136,709 1,137,821 941,982 56,9062 802,605 1,089 2,535 798,981 6,820 3,180,141 - 1,201,382 6,820 1,100,841 - 877,918 34,131 - 2,235 31,896 104,823 1,386 103,437 - 11,341 150,295 - 1,386 11,341 117,013 - 31,896 1 The portfolio includes mainly Visa C shares. 2 The portfolio includes mainly HUF 46,124 million Albanian government bonds. 163 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 47: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] d) Fair value levels [continued] Movements in Level 3 financial instruments measured at fair value The following table shows a reconciliation of the opening and closing amount of Level 3 financial assets and liabilities which are recorded at fair value: 2021 Opening balance Purchase (+) Issuance /Disbursement (+) Settlement / Close (-) Sale (-) FVA (+/-) Transfer (+/-) Fx effect / Revaluation Other Closing balance Trading securities at fair value through profit or loss Positive fair value of derivative financial assets held for trading Nont-trading securities mandatorily at fair value through profit or loss Securities at fair value through other comprehensive income Loans mandatorily measured at fair value through profit or loss Financial assets measured at fair value total Financial liabilities designated at fair value through profit or loss Financial liabilities designated at fair value total 12 6,586 15,433 - - - - - 390 - - - - - - 3,584 - - - - (6) - 6 10,170 (4,501) 640 (57) 256 1,030 13,191 56,906 81,795 - (5,544) (2,018) (91) (69,636) 1,813 128 63,353 798,981 - 333,931 (41,038) - (24,044)1 - - - 1,067,830 877,918 81,795 334,321 (46,582) (6,519) (19,911) (69,693) 2,069 1,152 1,154,550 31,896 31,896 - - - - (7,223) (7,223) - - 1,454 1,454 - - - - 15,057 41,184 15,057 41,184 1 FVA change for the current year consists of HUF 16,289 million adjustment resulting from risk factors and HUF 7,755 million adjustment resulting from market factors. 164 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 47: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] d) Fair value levels [continued] Movements in Level 3 financial instruments measured at fair value [continued] The following table shows a reconciliation of the opening and closing amount of Level 3 financial assets and liabilities which are recorded at fair value: 2020 Opening balance Purchase (+) Issuance /Disbursement (+) Settlement / Close (-) Sale (-) FVA (+/-) Transfer (+/-) Fx effect / Revaluation Other Closing balance Trading securities at fair value through profit or loss Positive fair value of derivative financial assets held for trading Nont-trading securities mandatorily at fair value through profit or loss Securities at fair value through other comprehensive income Loans mandatorily measured at fair value through profit or loss Financial assets measured at fair value total Financial liabilities designated at fair value through profit or loss Financial liabilities designated fair value total - 4,227 8,155 - - - - - - - 1,204 (5,043) - - - - 2,359 12 - - - (862) 9,961 2,018 59,695 11,076 - (9,398) (162) 1,637 (10,812) 4,870 493,207 - 333,908 (21,397) - (6,737) - - 565,284 11,076 335,112 (35,838) (162) (3,603) (839) 6,888 - - - - - - 12 6,586 15,433 56,906 798,981 877,918 28,861 28,861 - - (1,689) (1,689) - - - - (1,270) (1,270) - - - - 5,994 31,896 5,994 31,896 165 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 47: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] d) Fair value levels [continued] Valuation techniques and sensitivity analysis on Level 3 instruments Sensitivity analysis is performed on products with significant unobservable inputs (Level 3) to generate a range of reasonably possible alternative valuations. The sensitivity methodologies applied take account of the nature of the valuation techniques used, as well as the availability and reliability of observable proxy and historical date and the impact of using alternative models. The calculation is based on a range or spread data of reliable reference source or a scenario based on relevant market analysis alongside the impact of using alternative models. Sensitivities are calculated without reflecting the impact of any diversification in the portfolio. Unobservable inputs used in measuring fair value Type of financial instrument Valuation technique Significant unobservable input Range of estimates VISA C shares Market approach combined with expert judgement. Discount applied due to illiquidity and litigation. MFB refinancing loans Subsidised personal loans Subsidised personal loans Subsidised personal loans Discounted cash flow model Probability of default Discounted cash flow model Probability of default Discounted cash flow model Operational costs Discounted cash flow model Demography for unobservable input +12% / (12%) +/- 20% +/- 20% +/- 20% Change in the cash flow estimation The effect of unobservable inputs on fair value measurement Although the Group believes that its estimates of fair value are appropriate, the use of different methodologies or assumptions could lead to different measurements of fair value. For fair value measurements in Level 3 changing the assumptions used to reasonably possible alternative assumptions would have the following effects. 2021 Unobservable inputs Fair values Effect on profit and loss Favourable Unfavourable Favourable Unfavourable VISA C shares Loans mandatorily at fair value throuhg profit or loss Loans mandatorily at fair value throuhg profit or loss Subsidised personal loans Subsidised personal loans Subsidised personal loans MFB refinancing loans Total Illiquidity 6,704 5,079 813 (813) Probability of default 406,362 405,266 549 (547) Operational costs Probability of default Operational costs Demography Probability of default 412,868 639,007 647,292 635,484 19,218 2,766,935 399,020 631,856 623,934 635,387 18,972 2,719,514 7,054 3,590 11,875 68 123 24,072 (6,794) (3,561) (11,483) (29) (123) (23,350) 166 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 47: FAIR VALUE OF FINANCIAL INSTRUMENTS (in HUF mn) [continued] d) Fair value levels [continued] The effect of unobservable inputs on fair value measurement [continued] 2020 Unobservable inputs Fair values Effect on profit and loss Favourable Unfavourable Favourable Unfavourable VISA C shares Loans mandatorily at fair value throuhg profit or loss Loans mandatorily at fair value throuhg profit or loss Subsidised personal loans Subsidised personal loans Subsidised personal loans MFB refinancing loans Total Illiquidity 6,324 4,821 751 (751) Probability of default 319,857 316,251 1,813 (1,793) Operational costs Probability of default Operational costs Demography Probability of default 324,845 452,782 464,974 451,419 24,876 2,045,077 311,525 447,647 436,194 448,987 24,690 1,990,115 6,801 2,579 14,772 1,217 93 28,026 (6,519) (2,555) (14,008) (1,215) (93) (26,934) The favourable and unfavourable effects of using reasonably possible alternative assumptions for the valuation of Visa C shares have been calculated by modifying the discount rate used for the valuation by +/-12% as being the best estimates of the management as at 31 December 2021 and 2020 respectively. In the case of Hungarian Development Bank (“MFB”) refinancing loans and subsidised personal loans the Bank calculated the favourable and unfavourable effects of using reasonably possible alternative assumptions by modifying the rates of probability of default by +/- 20% as one of the most significant unobservable input. In case of subsidised personal loans operational cost and factors related to demography are considered as unobservable inputs to the applied fair value calculation model. The Bank calculated the favourable and unfavourable effects of using reasonably possible alternative assumptions by modifying the rates of operational costs by +/- 20% as one of the most significant unobservable inputs. Cash flow estimation are based on assumption related to the future number of childbirths performed by the debtors. According to the current assumptions 15% of the debtors will not fulfill the conditions of the subsidy determined by the government after 5 years (“breach of conditions”), thereby debtors will be obliged to pay back the interest subsidy given before. Furthermore, in this case subsidised loans are converted to loans provided based on market conditions. Loans are prepaid by the government as part of the subsidy after the second and the third childbirth following the signatory of the loan contract. The Bank calculated the favourable and unfavourable effects of using reasonably possible alternative assumptions by modifying the demographical assumption of breach of conditions by +/- 5% as the most significant unobservable input in the cash flow estimation. 167 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 48: SEGMENT REPORTING BY BUSINESS AND GEOGRAPHICAL SEGMENTS (in HUF mn) The Group distinguishes business and geographical segments. The report on the base of the business and geographical segments is reported below. The operations in the Slovakian segment and the Croatian insurance operation were discontinued. The segment information reported on the next pages does not include any amounts for these discontinued operations neither for this period nor for the previous year, which are described in more details in Note 49. The reportable segments of the Group on the base of IFRS 8 are as the follows: OTP Core Hungary, Russia, Ukraine, Bulgaria, Romania, Serbia, Croatia, Montenegro, Albania, Moldova, Slovenia, Merkantil Group, Asset Management subsidiaries, Other subsidiaries and Corporate Center. OTP Core is an economic unit for measuring the result of core business activity of the Group in Hungary. Financials for OTP Core are calculated from the partially Consolidated Financial Statements of the companies engaged in the Group’s underlying banking operation in Hungary. These companies include OTP Bank Hungary Plc., OTP Mortgage Bank Ltd., OTP Building Society Ltd., OTP Factoring Ltd., OTP Financial Point Ltd., and companies providing intragroup financing. The Bank Employee Stock Ownership Plan Organization was included from the fourth quarter of 2016; OTP Card Factory Ltd., OTP Facility Management Llc., Monicomp Ltd. and OTP Real Estate Lease Ltd. were included from the first quarter of 2017 (from the first quarter of 2019 OTP Real Estate Lease Ltd. was eliminated from OTP Core); OTP Mobile Service Llc., OTP Ingatlanpont Llc. were included from the first quarter of 2019, OTP eBIZ Ltd from the first quarter of 2020 and OTP Home Solutions Ltd. was included from the second quarter of 2021. The consolidated accounting results of these companies are segmented into OTP Core and Corporate Centre. The latter is a virtual entity. Within the Group, the Corporate Centre acts as a virtual entity established by the equity investment of OTP Core for managing the wholesale financing activity for all the subsidiaries within the Group but outside OTP Core. Therefore the balance sheet of the Corporate Centre is funded by the equity and intragroup lending received from OTP Core, the intragroup lending received from other subsidiaries, and the subordinated debt and senior notes arranged by OTP under its running EMTN program. From this funding pool, the Corporate Centre is to provide intragroup lending to, and hold equity stakes in OTP subsidiaries outside OTP Core. Main subsidiaries financed by Corporate Centre are as follows: Hungarians: Merkantil Bank Ltd, Merkantil Leasing Ltd, OTP Fund Management Ltd, OTP Real Estate Fund Management Ltd, OTP Life Annuity Ltd; foreigners: banks, leasing companies, factoring companies. The results of OTP Factoring Ukraine LLC, OTP Factoring SRL, OTP Factoring Bulgaria LLC, OTP Factoring Serbia d.o.o., and OTP Debt Collection d.o.o. (formerly known as: OTP Factoring Montenegro d.o.o.) are included into the foreign banks segment. From the first quarter of 2019 Expressbank AD and its subsidiaries, OTP Leasing EOOD and Express Factoring EOOD (altogether: Express Group) were included into the Bulgarian operation, so from the first quarter of 2019 the statement of recognized income and balance sheet of DSK Leasing AD was included into this segment too. The Bulgarian Expressbank AD merged with its parent DSK Bank AD in April 2020. The Serbian segment, OTP banka Srbija AD Beograd and Vojvodjanska Banka a.d. Novi Sad includes from the first quarter of 2019 the statements of profit or loss and financial positions of OTP Lizing d.o.o, OTP Services d.o.o. and from the third quarter of 2019 the financial position of the newly acquired OTP banka Srbija AD Beograd and from the fourth quarter of 2019 its statement of profit or loss too. OTP banka Srbija a.d. merged with its parent bank in April 2021. The Montenegrin segment, Crnogorska Komercijalna Banka a.d. and Podgoricka banka a.d. includes from the third quarter of 2019 the statement of profit or loss and financial position of the newly acquired Podgoricka banka a.d. In December 2020 Podgoricka banka a.d. merged into Crnogorska Komercijalna Banka a.d. In the first quarter of 2019 the Albanian, and from the second half of year 2019 the Moldovan and Slovenian segments were included as new segments in the consolidated segment report. The activities of the other subsidiaries are out of the leasing and fund management and factoring activity, such as: OTP Real Estate Ltd., OTP Life Annuity Ltd, OTP Funds Servicing and Consulting Ltd., OTP Building s.r.o., OTP Real Slovensko s.r.o. 168 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 48: SEGMENT REPORTING BY BUSINESS AND GEOGRAPHICAL SEGMENTS (in HUF mn) [continued] The reportable business and geographical segments of the Group are those components where: - - - - separated income and ex penses, assets and liabilities can be identified and assignable to the segments, transactions between the different segments were eliminated, the main decisive board of the Group regularly controls the operating results, separated financial information is available. Adjustments Goodwill / investment impairment and their tax saving effect: As at 31 December 2021 HUF 39,546 million impairment was booked on the investment in OTP Bank Romania S.A. on which HUF 3,559 million positive tax effect was recognized, HUF 9,906 million impairment release was booked on OTP Banka Srbija a.d. on which HUF 892 million negative tax effect was recognized, 16,628 million impairment release was booked on Crnogorska komercjalna banka a.d. on which HUF 1,496 million negative tax effect was recognized, 8,463 million impairment was booked on Monicomp Ltd. on which HUF 763 million positive tax effect was recognized. As at 31 December 2020 HUF 9,841 million impairment was booked on the investment in OTP Bank Romania S.A. on which HUF 886 million positive tax effect was recognized. Special tax on financial institutions (after income tax): Special tax on financial institutions includes the special tax paid by the Hungarian financial institutions, the net present value effect of the one-off additional banking tax payable into the pandemic fund in 2020 (the payments are deductible from future banking taxes), the banking tax paid by the Romanian bank, subsidiary of OTP Group and as well as for 2020 the Slovakian banking levy. Besides, it also contained for 2020 the Slovakian Deposit Protection Fund contributions being introduced again in 2014, and the contribution into the Resolution Fund in Slovakia, too. Effect of acquisitions (after income tax): The following main items appear on this line: the negative goodwill related to acquisitions which improves the accounting result, integration costs of the newly acquired banks and other direct effects due to the acquisitions (such as customer base value amortisation) and effects related to the sale of the Slovakian bank for the end of 2020. Explanation to the segments in the following table below: 2; 3; 8: The segments distinguished by geographical basis contain banks in that country and sometimes other financial institutions (like leasing or factoring companies) or other companies. The incomes mainly arises from providing financial services like: collecting deposits, granting loans, leasing and treasury activities, payment and investment services and other financial services. 16: Merkantil Group, is responsible for Hungarian leasing activities, originates its income from providing leasing services (financing cars and production equipment). 17: Incomes arising in this segment is mainly fee income of fund management companies in Hungary, Bulgaria, Romania, Ukraine based on capital in investment funds or assets in funds. 18: The activities of other Hungarian and foreign subsidiaries are very divergent so the incomes can be also originated from different sources. The main part of the income in this segment comes from the activities of OTP Funds Servicing and Consulting, OTP Real Estate and the investments of OTP Real Estate Fund Management and Portfolion Funds. 19: Net interest income of Corporate Center includes interest expense on received resources and interest income on assets exposed. 169 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 48: SEGMENT REPORTING BY BUSINESS AND GEOGRAPHICAL SEGMENTS (in HUF mn) [continued] Information regarding the Group’s reportable segments is presented below: As at 31 December 2021 Main components of the consolidated statement of profit or loss in HUF million OTP Group - in the consolidated statement of profit or loss - structure of accounting reports Adjustments on the accounting in Recognized Income OTP Group - in the consolidated statement of profit or loss - structure of management reports OTP CORE (Hungary) Foreign banks in EU subtotal (without adjustments) DSK Bank AD (Bulgaria) OTP banka d.d. (Croatia) SKB Banka d.d. (Slovenia) OTP Bank Romania S.A. (Romania) a b 1=a+b; 1= 2+3+8+15+19+20 2 3=4+…+7 4 5 6 7 Net profit for the year from continued and discontinued operations Net profit for the year from discontinued operations Net profit for the year from continued opearations Adjustments (total) Dividends and net cash transfers (after income tax) Goodwill /investment impairment (after income tax) Bank tax on financial institutions (after income tax) Effect of acquisition (after income tax) Expected one-off negative effect of the debt repayment moratorium in Hungary (after income tax) Result of the treasury share swap agreement at OTP Core (after income tax) Consolidated adjusted net profit for the year Profit before income tax Adjusted operating profit Adjusted total income Adjusted net interest income Adjusted net profit from fees and commissions Adjusted other net non-interest income Adjusted other administrative expenses Personnel expenses Depreciation and amortization Other general expenses Gains from derecognition of financial assets at amortized cost Modification loss Total risk costs Adjusted loss allowance on loan and placement losses (without the effect of revaluation of FX) Other impairment (adjustment) Adjusted impairment under IAS 36 Income tax Total Assets1 Total Liabilities ( ) used at: provisions, impairment and expenses 456,428 116 456,312 456,312 528,435 597,770 1,345,382 874,310 442,174 28,898 (747,612) (340,684) (94,996) (311,932) 1,885 (13,672) (57,548) (47,645) (9,903) (9,903) (72,123) 27,551,338 24,516,618 (40,475) 729 1,909 (18,893) (15,506) (15,040) 6,326 44,071 62,899 61,589 (33,290) 9,702 (116,626) 73,634 94,879 483 22,180 72,216 (1) 10,131 (8,820) 7,809 (16,629) 437 (18,828) - - 456,428 116 456,312 (40,475) 729 1,909 (18,893) (15,506) (15,040) 6,326 500,383 591,334 659,359 1,312,092 884,012 325,548 102,532 (652,733) (340,201) (72,816) (239,716) 1,884 (3,541) (66,368) (39,836) (26,532) (9,466) (90,951) 213,378 253,972 256,151 545,185 369,309 150,578 25,298 (289,034) (143,234) (36,926) (108,874) (1,598) (3,397) 2,816 4,910 (2,094) 70 (40,594) 131,309 152,663 178,192 356,257 237,745 90,092 28,420 (178,065) (91,350) (16,383) (70,332) 1,814 (14) (27,329) (23,973) (3,356) (3,001) (21,354) 76,789 85,243 106,240 178,470 112,869 54,508 11,093 (72,230) (34,284) (7,160) (30,786) 1,893 - (22,890) (20,831) (2,059) (2,401) (8,454) 33,446 41,064 43,421 88,735 60,933 18,183 9,619 (45,314) (23,111) (4,392) (17,811) 1,449 - (3,806) 318 (4,124) (135) (7,618) 16,822 20,660 19,595 42,354 27,673 13,258 1,423 (22,759) (13,015) (1,350) (8,394) - (14) 1,079 1,833 (754) - (3,838) 4,252 5,696 8,936 46,698 36,270 4,143 6,285 (37,762) (20,940) (3,481) (13,341) (1,528) - (1,712) (5,293) 3,581 (465) (1,444) 27,551,338 24,516,618 14,205,354 12,195,467 10,075,267 8,680,440 4,627,132 3,927,757 2,576,445 2,225,422 1,433,206 1,253,691 1,438,484 1,273,570 1 Relating to the discontinued operations the assets were HUF 2,046 million. 170 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 48: SEGMENT REPORTING BY BUSINESS AND GEOGRAPHICAL SEGMENTS (in HUF mn) [continued] Information regarding the Group’s reportable segments is presented below [continued]: As at 31 December 2021 [continued] Main components of the consolidated statement of profit or loss in HUF million [continued] Foreign banks not in EU subtotal (without adjustments) OTP banka Srbija a.d. (Serbia) OTP Bank JSC (Ukraine) JSC "OTP Bank" (Russia) and Touch Bank Crnogorska komercijalna banka a.d. (Montenegro) Banka OTP Albania SHA (Albania) OTP Bank S.A. (Moldova) Non-banking subsidiaries subtotal Merkantil Group (Hungary) Asset Management subsidiaries Other subsidiaries Corporate Centre Eliminations and adjustments 8=9+…+14 9 10 11 12 13 14 15=16+17+18 16 17 18 19 20 Net profit for the year from continued and discontinued operations Net profit for the year from discontinued operations Net profit for the year from continued opearations Adjustments (total) Dividends and net cash transfers (after income tax) Goodwill /investment impairment (after income tax) Bank tax on financial institutions (after income tax) Effect of acquisition (after income tax) Expected one-off negative effect of the debt repayment moratorium in Hungary (after income tax) Result of the treasury share swap agreement at OTP Core (after income tax) Consolidated adjusted net profit for the year Profit before income tax Adjusted operating profit Adjusted total income Adjusted net interest income Adjusted net profit from fees and commissions Adjusted other net non-interest income Adjusted other administrative expenses Personnel expenses Depreciation and amortization Other general expenses Gains from derecognition of financial assets at amortized cost Modification loss Total risk costs Adjusted loss allowance on loan and placement losses (without the effect of revaluation of FX) Other impairment (adjustment) Adjusted impairment under IAS 36 Income tax Total Assets1 Total Liabilities ( ) used at: provisions, impairment and expenses 124,272 148,419 183,171 335,934 252,782 63,699 19,453 (152,763) (85,606) (13,966) (53,191) 1,862 (130) 32,104 35,714 40,754 83,493 62,497 14,410 6,586 (42,739) (22,569) (2,820) (17,350) 554 - (36,484) (5,594) (21,918) (14,566) (274) (24,147) (941) (4,653) (245) (3,610) 5,183,118 4,316,145 2,224,715 1,918,085 39,025 47,267 54,761 83,567 62,051 14,494 7,022 (28,806) (16,580) (2,131) (10,095) 916 (130) (8,280) (6,613) (1,667) (3) (8,242) 983,557 823,801 37,624 47,314 62,368 118,158 91,364 25,728 1,066 (55,790) (33,773) (6,263) (15,754) 467 - (15,521) (13,542) (1,979) 24 (9,690) 799,965 559,241 4,139 4,956 10,240 22,046 16,553 4,880 613 (11,806) (5,805) (1,461) (4,540) (31) - (5,253) 677 (5,930) (51) (817) 513,522 431,495 5,521 6,507 7,212 13,398 10,619 1,843 936 (6,186) (2,794) (559) (2,833) (33) - (672) (847) 175 1 (986) 5,859 6,661 7,836 15,272 9,698 2,344 3,230 (7,436) (4,085) (732) (2,619) (11) - 24,573 27,831 43,040 85,568 22,019 26,456 37,093 (42,528) (20,628) (5,160) (16,740) (193) - (1,164) (15,016) (652) (512) - (802) (2,900) (12,116) (6,260) (3,258) 350,848 315,713 310,511 267,810 1,322,717 972,287 7,998 8,916 11,961 23,291 20,680 116 2,495 (11,330) (4,654) (1,428) (5,248) (193) - (2,852) (2,900) 48 179 (918) 782,222 722,976 6,321 7,138 7,141 11,064 4 10,786 274 (3,923) (2,443) (231) (1,249) - - (3) - (3) (14) (817) 27,753 12,610 10,254 11,777 23,938 51,213 1,335 15,554 34,324 (27,275) (13,531) (3,501) (10,243) - - 2,887 3,000 240 1,260 1,260 - - (1,020) (95) (2) (923) - - (12,161) 2,760 - (12,161) (6,425) (1,523) - 2,760 - (113) 3,964 5,449 (1,435) (12,112) 897 (5,277) (7,732) 10,677 712 (380) 10,345 (1) - 6,885 4,045 2,840 (1) (1,485) 512,742 236,701 3,109,369 1,693,363 (6,344,487) (3,341,084) 1 Relating to the discontinued operations the assets were HUF 2,046 million. 171 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 48: SEGMENT REPORTING BY BUSINESS AND GEOGRAPHICAL SEGMENTS (in HUF mn) [continued] Information regarding the Group’s reportable segments is presented below [continued]: As at 31 December 2020 Main components of the consolidated statement of profit or loss in HUF million OTP Group - in the consolidated statement of profit or loss - structure of accounting reports Adjustments on the accounting in Recognized Income OTP Group - in the consolidated statement of profit or loss - structure of management reports OTP CORE (Hungary) Foreign banks in EU subtotal (without adjustments) DSK Group including Expressbank AD (Bulgaria) OTP banka Hrvatska d.d. (Croatia) SKB Banka (Slovenia) OTP Bank Romania S.A. (Romania) a b 1=a+b; 1= 2+3+8+15+19+20 2 3=4+…+7 4 5 6 7 Net profit for the year from continued and discontinued operations Net profit for the year from discontinued operations Net profit for the year from continued opearations Adjustments (total) Dividends and net cash transfers (after income tax) Goodwill /investment impairment (after income tax) Bank tax on financial institutions (after income tax) Effect of acquisition (after income tax) Impact of fines imposed by the Hungarian Competition Authority (after income tax) Expected one-off negative effect of the debt re- payment moratorium in Hungary (after income tax) Result of the treasury share swap agreement at OTP Core (after income tax) Consolidated adjusted net profit for the year Profit before income tax Adjusted operating profit Adjusted total income Adjusted net interest income Adjusted net profit from fees and commissions Adjusted other net non-interest income Adjusted other administrative expenses Personnel expenses Depreciation and amortization Other general expenses Gains from derecognition of financial assets at amortized cost Modification loss Total risk costs Adjusted loss allowance on loan and placement losses (without the effect of revaluation of FX) Other impairment (adjustment) Adjusted impairment under IAS 36 Income tax Total Assets1 Total Liabilities2 ( ) used at: provisions, impairment and expenses 259,636 5,590 254,046 254,046 297,964 516,439 1,207,564 782,671 397,633 27,260 (691,125) (308,642) (92,761) (289,722) 3,380 (29,773) (192,082) (190,875) (1,207) (1,207) (43,918) 23,329,771 20,793,243 (53,860) 213 886 (17,365) (12,441) 749 (28,262) 2,360 57,072 71,230 37,538 (37,646) 5,408 (104,523) 61,469 75,184 (3,853) 22,475 56,562 62 29,543 4,087 32,454 (28,367) 720 (14,158) - - 1 Relating to the discontinued operations the assets were HUF 6,070 million. 2 Relating to the discontinued operations the liabilities were HUF 5,486 million. 259,636 5,590 254,046 (53,860) 213 886 (17,365) (12,441) 749 (28,262) 2,360 311,118 369,194 553,977 1,169,918 788,079 293,110 88,729 (615,941) (312,495) (70,286) (233,160) 3,442 (230) (187,995) (158,421) (29,574) (487) (58,076) 23,329,771 20,793,243 156,273 189,373 197,720 453,635 286,448 130,470 36,717 (255,915) (125,949) (35,935) (94,031) (669) - (7,678) 2,374 (10,052) (30) (33,100) 11,492,949 9,726,310 69,777 78,603 161,700 335,709 230,280 76,486 28,943 (174,009) (85,252) (16,447) (72,310) 2,790 (20) (85,867) (78,450) (7,417) (441) (8,826) 9,125,249 7,883,344 42,735 46,442 89,774 166,667 111,239 45,453 9,975 (76,893) (34,033) (8,385) (34,475) 1,778 - (45,110) (44,875) (235) (278) (3,707) 15,466 18,237 40,329 84,907 58,199 16,093 10,615 (44,578) (21,772) (4,098) (18,708) 637 - (22,729) (19,491) (3,238) (9) (2,771) 10,126 12,565 19,787 40,388 28,103 11,127 1,158 (20,601) (12,060) (1,296) (7,245) 482 (20) (7,684) (6,244) (1,440) - (2,439) 1,450 1,359 11,810 43,747 32,739 3,813 7,195 (31,937) (17,387) (2,668) (11,882) (107) - (10,344) (7,840) (2,504) (154) 91 4,283,625 3,663,247 2,325,669 1,997,504 1,353,772 1,187,648 1,162,183 1,034,945 172 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 48: SEGMENT REPORTING BY BUSINESS AND GEOGRAPHICAL SEGMENTS (in HUF mn) [continued] Information regarding the Group’s reportable segments is presented below [continued]: As at 31 December 2020 [continued] Main components of the consolidated statement of profit or loss in HUF million [continued] Foreign banks not in EU subtotal (without adjustments) Vojvodjanska banka a.d. + OTP Banka Srbija AD. Beograd (Szerbia) OTP Bank JSC (Ukraine) JSC "OTP Bank" (Russia) and Touch Bank Crnogorska komercijalna banka a.d. + Podgorička banka AD (Montenegro) Banka OTP Albania SHA (Albania) Mobiasbanca - OTP Group S.A. (Moldova) Non-banking subsidiaries subtotal Merkantil Bank (Hungary) Asset Management subsidiaries Other subsidiaries Corporate Centre Eliminations and adjustments 8=9+…+14 9 10 11 12 13 14 15=16+17+18 16 17 18 19 20 Net profit for the year from continued and discontinued operations Net profit for the year from discontinued operations Net profit for the year from continued opearations Adjustments (total) Dividends and net cash transfers (after income tax) Goodwill /investment impairment (after income tax) Bank tax on financial institutions (after income tax) Effect of acquisition (after income tax) Impact of fines imposed by the Hungarian Competition Authority (after income tax) Expected one-off negative effect of the debt re- payment moratorium in Hungary (after income tax) Result of the treasury share swap agreement at OTP Core (after income tax) Consolidated adjusted net profit for the year Profit before income tax Adjusted operating profit Adjusted total income Adjusted net interest income Adjusted net profit from fees and commissions Adjusted other net non-interest income Adjusted other administrative expenses Personnel expenses Depreciation and amortization Other general expenses Gains from derecognition of financial assets at amortized cost Modification loss Total risk costs Adjusted loss allowance on loan and placement losses (without the effect of revaluation of FX) Other impairment (adjustment) Adjusted impairment under IAS 36 Income tax Total Assets1 Total Liabilities2 61,048 74,113 164,960 317,872 243,868 58,670 15,334 (152,912) (83,401) (13,054) (56,457) 1,298 (210) 7,739 8,896 35,899 79,001 59,514 14,766 4,721 (43,102) (21,652) (3,181) (18,269) 440 - 26,815 32,300 42,030 67,385 48,581 13,540 5,264 (25,355) (14,535) (1,362) (9,458) 921 (210) 18,205 23,297 65,068 123,198 99,872 22,503 823 (58,130) (34,139) (5,855) (18,136) 1,888 - (91,935) (27,443) (10,441) (43,659) (78,260) (13,675) (989) (13,065) (22,170) (5,273) (251) (1,157) 4,484,527 3,768,384 2,052,332 1,779,286 (6,286) (4,155) (39) (5,485) 729,012 611,941 (41,160) (2,499) 79 (5,092) 688,980 505,578 3,413 3,715 8,352 22,095 17,188 4,446 461 (13,743) (6,681) (1,479) (5,583) (894) - (3,743) 1,656 2,145 5,904 11,597 9,824 1,278 495 (5,693) (2,565) (475) (2,653) (304) - (3,455) 3,220 3,760 7,707 14,596 8,889 2,137 3,570 (6,889) (3,829) (702) (2,358) (753) - (3,194) (3,434) (2,515) (2,695) (309) (457) (302) (940) (301) (489) (499) (20) (540) 25,792 28,445 28,889 59,158 19,020 25,212 14,926 (30,269) (12,418) (3,110) (14,741) (38) - (406) (1,487) 1,081 549 (2,653) 477,676 401,119 286,606 257,826 249,921 212,634 1,118,927 842,473 7,623 8,579 10,279 21,283 17,688 40 3,555 (11,004) (4,297) (1,666) (5,041) (38) - (1,662) (1,491) (171) (79) (956) 667,120 614,566 9,824 10,749 10,765 15,248 5 14,883 360 (4,483) (2,853) (197) (1,433) - - (16) - (16) - (925) 8,345 9,117 7,845 22,627 1,327 10,289 11,011 (14,782) (5,268) (1,247) (8,267) - - 1,272 4 1,268 628 (772) (569) (526) (526) 419 419 - - (945) (91) (2) (852) - - - - - - (43) (1,203) (814) 1,234 3,125 8,044 2,272 (7,191) (1,891) (5,384) (1,738) 5,231 61 - (2,109) (2,598) 489 424 (389) 35,584 17,052 416,223 210,855 2,865,511 1,504,289 (5,757,392) (2,931,557) 1 Relating to the discontinued operations the assets were HUF 6,070 million. 2 Relating to the discontinued operations the liabilities were HUF 5,486 million. 173 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 49: DISCONTINUED OPERATIONS (in HUF mn) The Serbian Pevec d.o.o. Beograd company as the investment of OTP Factoring Ltd. was classified as asset held- for-sale by the Group as at 31 December, 2021. This investment was not revalued in the Consolidated Financial Statements. Classification as asset held-for-sale was needed due to the purchase agreement had been concluded already in 2021 for the real estates in the ownership of Pevec. In 2022, the purchase price was paid out and the transfer of ownership happened. The purchase price of the real estate was EUR 9,928,667, the estimated value of those real estates which weren’t sold was defined in the amount of EUR 300,000 according to their present condition by a value assessment in January 2021. Assets classified as held-for-sale Equity instrument as at fair value through other comprehensive income 2021 2,046 - 2020 - 2,046 On 31 December 2020, the Group classifies the operations of its Croatian subsidiary, OTP Osiguranje d.d. as disposal groups classified as held-for-sale. The classification was needed because there is intention for the sale. These operations, which are expected to be sold within 12 months, have been classified as a discontinued operation, so the assets, liabilities of these discontinued operations and their losses are presented separately in both the Consolidated Statement of Financial Position and Consolidated Statement of Profit or Loss. The major classes of assets and liabilities comprising the operations classified as held for sale are as follows: 2020 2021 Cash, amounts due from banks and balances with the National Banks Placements with other banks, net of loss allowance for placements, net of repo receivables Non-trading instruments mandatorily at fair value through profit or loss Securities at fair value through other comprehensive income Securities at amortized cost Tangible assets on net value Right-of-use assets on net value Other assets on net value Non-current assets and disposal group classified as held-for-sale Leasing liabilities Other liabilities Disposal group liabilities classified as held-for-sale Income Expense Profit before income tax Income tax expense of OTP Osiguranje d.d. Gain from non-current assets and disposal group classified as held-fo-sale - - - - - - - - - - 2021 - - - - - 2 244 1,188 3,410 1,031 92 42 61 6,070 44 5,442 5,486 2020 1,548 (1,334) 214 (15) 199 The Croatian insurance company cash-flow contributed to the Group’s operating activity with HUF 431 million, to the Group’s investing activity with HUF 327 million, and in respect of the Group’s financing activity with HUF 232 million which were modified by the eliminations during the consolidation by HUF (988) million as at 31 December 2020. 174 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 49: DISCONTINUED OPERATIONS (in HUF mn) [continued] The financial transaction regarding the sale of the Slovakian subsidiary was closed, presented in those Consolidated Financial Statements for the end of 2020 as discontinued operations. The results of the discontinued operations, which have been included in the profit for the previous year, were as follows: Income Expense Profit before income tax Income tax expense of OTP Banka Slovensko a.s. Realized gain of the sale of OTP Banka Slovensko a.s. Income tax effect of the discontinued operation Gain from sale of the Slovakian subsidiary 2021 - - - - - - - 2020 15,503 (17,216) (1,713) (142) 7,887 (641) 5,391 The Slovakian subsidiary bank cash-flow contributed to the Group’s operating activity with HUF (8,231) million, to the Group’s investing activity with HUF (9,653) million, and in respect of the Group’s financing activity with HUF 86,281 million which were modified by the eliminations during the consolidation by HUF (67,767) million as at 31 December 2020. NOTE 50: SIGNIFICANT EVENTS DURING THE YEAR ENDED 31 DECEMBER 2021 1) Term Note Program See details in Note 21. 2) Purchase of new bank in Albania On 6 December 2021, OTP Bank signed an acquisition agreement with Alpha International Holdings Single Member S.A. on purchasing 100% shareholding of Alpha Bank SH.A., the Albanian subsidiary of the Greek Alpha Bank S.A. The purchase price has been agreed at Euro 55 million. With a total asset-based market share of almost 5%, Alpha Bank is the 8th largest bank on the Albanian banking market, and as a universal bank it has been active in the retail and corporate segment as well. The financial closing of the transaction is expected by the end of the second quarter of 2022 subject to obtaining all the necessary regulatory approvals 3) Potential acquisition of majority stake in Uzbek Ipoteka Bank On 29 September 2021, OTP Bank signed a non-binding Memorandum of Agreement regarding the potential acquisition of the majority stake of Ipoteka Bank and its subsidiaries with the Ministry of Finance of the Republic of Uzbekistan. Ipoteka Bank is the fifth largest bank in Uzbekistan, with a market share of 8.5% based on total assets at the end of July 2021, with more than 1.2 million retail customers and a large corporate clientele. 4) Purchase of new bank in Slovenia On 31 May 2021, OTP Bank signed a share sale and purchase agreement on purchasing 100% shareholding of Nova KBM d.d. and its subsidiaries, which are 80% owned by funds managed by affiliates of Apollo Global Management, Inc. and 20% by EBRD. With a market share of 20.5% by total assets as of December 2020, Nova KBM d.d. is the 2nd largest bank in the Slovenian banking market and as a universal bank it has been active in the retail and corporate segments as well. The financial closing of the transaction is estimated in the second quarter of 2022 subject to obtaining all the necessary regulatory approvals. 175 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 50: SIGNIFICANT EVENTS DURING THE YEAR ENDED 31 DECEMBER 2021 [continued] 5) Closure of the sale of OTP Osiguranje d.d. On 31 August 2021, the Croatian OTP Osiguranje d.d transaction was financially closed, as a result of which Groupama Biztosító Zrt. has acquired 100% ownership of the insurance company from OTP Banka d.d., the Croatian subsidiary of OTP Bank. 6) The discontinuance of the international arbitration proceedings On 30 June 2021, OTP Bank Plc. has jointly with the Republic of Croatia requested the discontinuance of the international arbitration proceedings - registered on 16th October 2020 relating to mandatory exchange of FX loans and FX based consumer loans - from the Centre for Settlement of Investment Disputes (ICSID), due to the fact that the parties have resolved their disputes by way of mutual consent. The ICSID Secretary has on 30 June 2021 acknowledged receipt of the joint claim of the contending parties relating the discontinuance of the proceedings. According to the request of the parties, ICSID formerly confirmed the termination of the litigation during 2021. 7) Termination of ICES bonds and repurchase of OTP shares See details in Note 27. 8) Resolutions made at OTP Bank’s Extraordinary General Meeting The Extraordinary General Meeting hold on 15 October, 2021 resolved that, the Bank had sold its treasury shares on the stock exchange to those two Special Employee Stock Ownership Program organizations having been established by the Bank employees (“OTP SECOP I.” and “OTP SECOP II.”). The Extraordinary General Meeting decided that if additional SECOP organisations would be initiated, those would be given one-off support on a yearly basis, under defined conditions, defined extent and in specified manner. 9) Interest benchmark reform The Group was actively involved in industry efforts supporting transition to IBOR alternatives. The Group has taken extensive steps to prepare for the discontinuation of IBORs and worked closely with clients to ensure awareness and support transition activities. As the transition is complex, time-consuming process and relevant for the whole Group, the management of Group has evaluated the impacts of the interest rate benchmarks reform, preparing itself for the transition through a dedicated internal group-wide project. As LIBOR’s five currencies (USD, GBP, EUR, JPY and CHF) and EONIA will be replaced by Risk Free Rates – which are different in nature compared to IBOR rates – OTP Group has implemented the relevant rates into the IT systems, and reached out the clients. The Group’s priority was to ensure that the Group can continue to offer clients the products and services they need, while also supporting them in the transition to the new alternative Risk Free Rates. During the IBOR reform the Group identified several risks at the beginning of 2021, which the project had to manage and monitor closely. These risks include but are not limited to the following: The abolution of LIBOR affected several transactions that may require automated IT solitions, The new reference rates are different in nature from LIBOR that cause difficulties to settle the value differencies with the customers, It was necessary to implement new processes not to develop LIBOR based products, and to develop a strategy for removing or modifying the affected products handled by the Group, 176 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 50: SIGNIFICANT EVENTS DURING THE YEAR ENDED 31 DECEMBER 2021 [continued] 9) Interest benchmark reform [continued] After the termination of LIBOR, the Group has to act under the "Fallback clauses", the clauses that regulate the replacement of the reference interest rates in the contract and the use of an alternative interest as a reference. The content of these clauses needs to be clearly defined and checked from a business point of view, ie which reference interest rate will be applied instead of LIBOR for the given contract and whether it is commercially appropriate. In defining the fallback clauses, efforts had to be made to provide a viable alternative to the termination of LIBOR that would not result in a business loss for the Group. Legal risks related to the termination of LIBOR. Such risks can arise when Fallback clauses are not included in the contracts, or the law governing the contract doesn’t contain a statutory reference rate. In these cases the contracts can be cancelled due to impossibility or the termination by either party. Missing of contractual interest rates can result in settlement disputes, compensation cases or litigation. Business risks of the termination of LIBOR. The most significant of these are: the law governing the contract can set the applicable interest rate that can be result in a bussiness loss for the Group, obussiness loss due to negative customer experience, ooperational risk, when several unique contracts must be handled in a short time. Terminating interest rates () Alternative Reference Rates LIBOR USD* (1 week and 2 months settings), FedFund Rate LIBOR GBP LIBOR JPY LIBOR EUR LIBOR CHF** EONIA * The following USD LIBOR settings will be terminated after June 30, 2023: overnight and 1, 3, 6 and 12 Months. The affected USD LIBOR contracts will be handled on an ongoing basis until the remaining USD LIBOR settings’ cessation date. **In the case of CHF LIBOR, OTP Bank acts in accordance with the implementing regulation of the European Commission (https://eur- lex.europa.eu/legal-content/EN/TXT/PDF/?uri=PI_COM:C(2021)7488&from=EN). SOFR SONIA TONA EURIBOR SARON €STR Amounts effected by IBOR reform as at 31 December 2021 Reference rate Type of the contract Nominal value of the contract Pieces of contracts USD LIBOR USD LIBOR USD LIBOR Other LIBOR Other LIBOR Other LIBOR Other LIBOR Total Loan Deposit Derivatives Loan Deposit Derivatives Bonds (assets) 158,747 13,851 699,066 75,060 25,864 25,464 13,162 1,011,214 2,747 27 170 3,853 98 4 3 6,902 The above LIBOR-based amounts outstanding as at 31 December 2021 will be managed at the first interest period in 2022 therefore they do not cause a risk to he Bank or to the customers 177 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 51: POST BALANCE SHEET EVENTS 1) Decision in Slovenia about distribution of foreign exchange risk concerning loan agreement in Swiss francs On 2 February 2022, the Slovenian Parliament passed the "Law on limitation and distribution of foreign exchange risk between creditors and borrowers concerning loan agreements in Swiss francs" (the "Law"). The Law affects all loan agreements denominated in Swiss francs between 28 June 2004 and 31 December 2010. The law sets a currency cap that is activated by more than 10% change of the exchange rate between the CHF and EUR from the day of drawing of the loan. During the period of validity of the currency cap, the value of instalments and other payments is equal to the amount at which the currency cap limit was established. The law requires creditors to calculate the remaining debt, prepare a new annuity plan and prepare a draft contract on the regulation of mutual relations. In the event of overpayment, the lender is obliged to reimburse the borrower the default interest, which runs from the date of occurrence of the overpayment to the date of payment of the overpayment. 2) Ukrainian-Russian conflict In the second half of February 2022 the military conflict between Russia and Ukraine escalated It is difficult to quantify the effect of the Ukrainian-Russian conflict regarding the Ukrainian and the Russian operations, the possible scenarios are covering a wide range of spectrum. According to the worst possible scenario, the Bank may lose its control over its investments, which under extreme conditions could result in the full write-off of the invested amount. These Consolidated Financial Statements do not contain any write-offs as possible consequences of the Ukrainian-Russian conflict, the Group recognizes it as not adjusting, post balance sheet event. Ukraine OTP Group’s Ukrainian operation incorporates the Ukrainian bank, as well as the leasing and factoring companies. The country-consolidated Ukrainian total assets represented HUF 984 billion at the end of 2021 (3.6% of total consolidated assets), while net loans comprised HUF 614 billion (3.9% of consolidated net loans) and shareholders’ equity HUF 160 billion (5.3% of the consolidated total equity). At the end of 2021 the book value of the capital investment in the Ukrainian subsidiaries comprised HUF 105 billion; there was no goodwill at all, it was already written down entirely in 2014. The gross intragroup funding towards the Ukrainian operation represented HUF 72 billion, and taking into account the Ukrainian deposits placed with the HQ, i.e. the net group funding represented HUF 29 billion equivalent. According to the 28 February 2022 figures, the gross funding amounted to HUF 75 billion equivalent and the net intragroup funding stood at HUF 9 billion equivalent. The Ukrainian sub-consolidated RWA (“risk-weighted asset”) was HUF 1,115 billion by the end of 2021 (6.7% of the total consolidated RWA). The consolidated maximum capital effect on the potential write-off of the Ukrainian operation, taking into account the equity, the intragroup funding and the Ukrainian risk weighted assets, is estimated at 27 bps on the consolidated CET1 ratio, according to year-end figures. The Ukrainian operation posted HUF 39.0 billion adjusted profit in 2021 which represented 7.9% of OTP Group’s adjusted annual profit. Russia The total assets of the Group’s Russian operation represented HUF 800 billion at the end of 2021 (2.9% of consolidated total assets), while net loans comprised HUF 621 billion (3.9% of consolidated net loans) and shareholders’ equity HUF 241 billion (7.9% of consolidated total equity). At the end of 2021 the book value of the capital investment in the Russian subsidiaries comprised directly HUF 74 billion and indirectly HUF 50 billion. The gross intragroup funding towards the Russian operation represented HUF 73 billion, and taking into account the Russian deposits placed with the Headquarter, i.e. the net group funding represented HUF 14 billion equivalent. On 28 February 2022 the gross intragroup funding reached HUF 52 billion equivalent, which equalled the net figure because there was no deposit placement by the Russian operation at other Group members. The Russian sub-consolidated RWA was HUF 822 billion by the end of 2021 (4.9% of the total consolidated RWA). 178 OTP BANK PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 51: POST BALANCE SHEET EVENTS [continued] 2) Ukrainian-Russian conflict [continued] Russia [continued] The consolidated capital maximum effect on the potential write-off of the Russian operation, taking into account the equity, the intragroup funding and the Russian risk weighted assets, is estimated at 116 bps on the consolidated CET1 ratio, according to year-end figures. The Russian operation posted HUF 37.6 billion adjusted profit in 2021 which represented 7.9% of OTP Group’s adjusted annual profit. Although the impact of the Russian-Ukrainian conflict on the Group’s Russian and Ukrainian operations is currently difficult to quantify, and as such uncertain, based on the current estimation of the Bank’s Management the Ukrainian-Russian conflict does not have considerably negative impact on the business activity, financial position, efficiency, liquidity and capital position of OTP Bank. Even after the recognition of the potential losses and write-offs outlined above, the Group's capital adequacy remains above the expected regulatory level. There is no sign of significant uncertainties having been arisen regarding carrying out its business as a going concern. The Bank’s Management is monitoring the situation of the Ukrainian-Russian conflict continuously and will take the necessary steps in order to moderate the business risk. 179 OTHER INFORMATIONS ANNUAL REPORT 2021 OTP BANK OTHER INFORMATIONS OWNERSHIP STRUCTURE OF OTP BANK PLC. Description of owner Domestic institution/company Foreign institution/company Domestic individual Foreign individual Employees, senior officers Treasury shares2 Government held owner International Development Institutions Other3 TOTAL 1 January 2021 31 December 2021 Total equity Ownership share 20.93% 71.60% 4.79% 0.11% 0.85% 1.55% 0.08% 0.04% 0.04% 100.00% Voting rights1 21.26% 72.73% 4.87% 0.12% 0.87% 0.00% 0.08% 0.04% 0.04% 100.00% Quantity 58,605,628 200,480,153 13,424,090 319,346 2,393,390 4,334,140 219,800 108,981 114,482 280,000,010 Ownership share Voting rights 1 26.66% 66.69% 4.57% 0.11% 0.69% 1.16% 0.07% 0.04% 0.00% 100.00% 26.97% 67.47% 4.63% 0.12% 0.70% 0.00% 0.07% 0.04% 0.00% 100.00% Quantity 74,637,180 186,733,858 12,805,389 319,712 1,941,018 3,251,484 188,326 120,871 2,172 280,000,010 1 Voting rights in the General Meeting of the Issuer for participation in decision-making. 2 Treasury shares do not include the OTP shares held by ESOP (OTP Bank Employee Stock Ownership Plan Organization). Pursuant to Act V of 2013 on the Civil Code, OTP shares held by the ESOP are not classified as treasury shares, but the ESOP must be consolidated in accordance with IFRS 10 Consolidated Financial Statements standard. On 31 December 2021 ESOP owned 7,656,897 OTP shares. 3 Non-identified shareholders according to the shareholders’ registry. NUMBER OF TREASURY SHARES HELD IN THE YEAR UNDER REVIEW (2021) OTP Bank Subsidiaries TOTAL 1 January 4,334,140 0 4,334,140 31 March 4,330,609 0 4,330,609 30 June 1,120,786 0 1,120,786 30 September 1,077,322 0 1,077,322 31 December 3,251,484 0 3,251,484 SHAREHOLDERS WITH OVER/AROUND 5% STAKE AS AT 31 DECEMBER 2021 Name Nationality1 Activity2 MOL (Hungarian Oil and Gas Company Plc.) KAFIJAT Group KAFIJAT Ltd. MGTR Alliance Ltd. Groupama Group Groupama Gan Vie SA Groupama Biztosító Ltd. D D D D F/D F D C C C C C C C Number of shares 24,000,000 19,661,409 9,839,918 9,836,491 14,311,769 14,140,000 171,769 Ownership3 Voting rights3,4 Notes5 8.57% 7.02% 3.51% 3.51% 5.11% 5.05% 0.06% 8.67% 7.10% 3.56% 3.55% 5.17% 5.11% 0.06% - - - - - - - 1 Domestic (D), Foreign (F). 2 Custodian (CU), Public Institution (PU), International Development Institutions (ID), Institutional (I), Company (C), Private (PR), Employee or senior officer (E). 3 Rounded to two decimals. 4 Voting rights in the General Meeting of the Issuer for participation in decision-making. 5 Eg: professional investor, financial investor, etc. Senior officers, strategic employees and their shareholding of OTP shares as at 31 December 2021 Type1 Name Position IT IT IT IT IT IT IT IT IT IT IT FB FB FB FB FB FB SP SP dr. Sándor Csányi 2 Chairman and CEO Deputy Chairman Tamás Erdei member Gabriella Balogh member Mihály Baumstark member, Deputy CEO Péter Csányi member dr. István Gresa member, Deputy CEO Antal Kovács György Nagy 3 member dr. Márton Gellért Vági member member dr. József Vörös member, Deputy CEO László Wolf Chairman Tibor Tolnay Deputy Chairman dr. Gábor Horváth member Klára Bella member dr. Tamás Gudra member András Michnai member Olivier Péqueux Deputy CEO László Bencsik Deputy CEO György Kiss-Haypál TOTAL No. of shares held by management: 1 Employee in strategic position (SP), Board Member (IT), Supervisory Board Member (FB) 2 Number of OTP shares owned by Dr. Sándor Csányi directly or indirectly: 4,080,034 3 Number of OTP shares owned by György Nagy directly or indirectly: 600,000 Commencement date of the term 15/05/1992 27/04/2012 16/04/2021 29/04/1999 16/04/2021 27/04/2012 15/04/2016 16/04/2021 16/04/2021 15/05/1992 15/04/2016 15/05/1992 19/05/1995 12/04/2019 16/04/2021 25/04/2008 13/04/2018 Expiration/termination of the term 2026 2026 2026 2026 2026 2026 2026 2026 2026 2026 2026 2023 2023 2023 2023 2023 2023 Number of shares 293,907 32,285 1,393 44,000 1 173,258 79,244 0 0 171,114 532,143 54 0 344 0 100 0 10,038 3,137 1,341,018 ANNUAL REPORT 2021 OTP BANK Board of Directors Executive members: Dr. Sándor Csányi Chairman of the BoD Chairman & CEO OTHER INFORMATIONS He graduated from the College of Finance and Accounting in 1974 with a bachelor’s degree in business administration and in 1980 from the Karl Marx University of Economic Sciences (now: Corvinus University) with a master in economics and finance, where he also obtained his doctorate in finance between 1981-1983. He is a chartered auditor – certified in 1982 at the Ministry of Finance. After graduation he worked at the Tax Revenue Directorate and then at the Secretariat (Bank Supervision Section) of the Ministry of Finance. Between 1983 and 1986, he was a departmental head at the Ministry of Agriculture and Food Industry. From 1986 to 1989 he worked as a senior head of department at Hungarian Credit Bank (MHB). He was Deputy CEO of K&H Bank from 1989 to 1992. He has been the Chairman & CEO of OTP Bank Plc. since 1992. He is Vice Chairman of the Board of Directors of MOL Plc. and Co-Chairman of the Chinese- Hungarian Business Council. He is one of the largest investors in agriculture and food industry in the CEE region through Bonafarm Group and KITE generating aggregated annual revenue of EUR 2 billion with over 9.000 employees and with 40.000 hectares cultivated land in total. Bonafarm Group is vertically integrated whereby agriculture companies produce the raw materials for food processors. He has significant investments in real estate through his minority holding in Gránit Pólus and Limedale (portfolio of USD 1 bn), in VC (Bonitás Venture Capital Fund) and asset management (CSAM in Singapore). He has been the President of the Hungarian Football Association (MLSZ) since 2010, and a member of the UEFA Executive Committee since March 2015; and the Vice President of the UEFA Executive Committee since 2019. Since 2017 he has been a member of the FIFA Council and the Vice President of the FIFA Council since 2018. Within UEFA he is also the Chairman of the UEFA National Team Competition Committee, a member of the UEFA Finance Committee and the UEFA Professional Football Strategy Council. He has been the owner of Pick Szeged Handball Club since 2011. He has been the Honorary Vice President of the International Judo Federation since 2008. Since 1995 he has been the Vice President of the Board of Trustees of the International Children’s Safety Service, and since 2003 he has been the Chairman of the Board of Trustees of the Prima Primissima Foundation. In 2005, he established the Csányi Foundation for Children from his own assets. Since 2009, he has been a member of the Board of Trustees of the Media Union for Social Awareness Formation Foundations. Since 2020, he has been the Chairman of the Board of Trustees of the Pro Sopron University Foundation. In 2021, he became Chairman of the Board of Trustees of the Foundation for the Hungarian Agricultural and Life Sciences University (MATE). As of 31 December 2021 he held 293,907 ordinary OTP shares (while the total number of OTP shares held by him directly and indirectly was 4,080,034). Péter Csányi member of the BoD Deputy CEO Digital Division He graduated from City University London in 2006 with a bachelor’s degree in economics, then in 2007 with a master’s degree in finance from the IE Business School in Madrid. In 2015, he received the Master of Business Administration (MBA) diploma from Kellogg School of Management in the USA. ANNUAL REPORT 2021 OTP BANK OTHER INFORMATIONS He began his career in 2006 at Merrill Lynch’s London office as an intern and he was working on corporate finance projects for financial institutions. From 2007 to 2011, he worked at Deutsche Bank's London office, first as an analyst and later as an associate in the field of corporate finance (for Central and Eastern European corporate customers). From 2011-2016, he worked for McKinsey & Company Inc. as an associate mostly working on banking related projects. He joined OTP Bank in 2016 as Managing Director of the Digital Sales and Development Directorate. After the agile transformation at the Bank, he became responsible for the management of the Omnichannel Tribe from 2019. In addition, since January 2021, he has been the head of the Daily Banking Tribe. From March 2021, he is the Deputy CEO of OTP Bank, the head of the IT Division (As of 1 May 2021 Digital Division). From 2020 he has been Chairman of the Supervisory Board of OTP banka d.d. in Croatia. He is also a member of the OTP Mobil Kft. Supervisory Board and the head of the Digitization Working Group of the Hungarian Banking Association. He is member of the Mastercard European Advisory Board. He has been a member of OTP Bank's Board of Directors since 16 April 2021. As of 31 December 2021 he held 1 ordinary OTP share. Antal György Kovács member of the BoD Deputy CEO Retail Division He graduated from the Karl Marx University of Economic Sciences with a degree in economics. He began his professional career in 1990 at the Nagyatád branch of K&H Bank, where he worked as a branch manager between 1993 and 1995. He has been working at OTP Bank Plc. since 1995, first as a county director and from 1998 as the executive director of OTP Bank’s South Transdanubian Region. Since 1 July 2007 he has been OTP Bank’s Deputy CEO. He has received additional training at the International Training Centre for Bankers and on various courses held by the World Trade Institute. Between April 2007 and April 2012 he was Chairman of the Supervisory Board of OTP banka Hrvatska d.d. He has been Chairman of the Supervisory Board of OTP Bank Romania SA since 12 December 2012. He has been Chairman of the Board of Directors of OTP Mortgage Bank Ltd. and OTP Building Society Ltd. since 24 April 2014. He is Chairman of the Supervisory Board of OTP Fund Management and OTP Home Solutions Ltd. He was a member of OTP Bank’s Supervisory Board to 14 April 2016. from 2004 He has been a member of OTP Bank's Board of Directors since 15 April 2016. As of 31 December 2021 he held 79,244 ordinary OTP shares. ANNUAL REPORT 2021 OTP BANK László Wolf member of the BoD Deputy CEO Commercial Banking Division OTHER INFORMATIONS He graduated from the Karl Marx University of Economic Sciences in 1983. After graduation, he worked at the Bank Relations Department of the National Bank of Hungary for 8 years, and then he was head of Treasury at BNP-KH-Dresdner Bank between 1991 and 1993. From April 1993 he was managing director of OTP Bank’s Treasury Directorate, and since 1994 he has been Deputy CEO of the Commercial Banking Division. Member of DSK Bank’s Supervisory Board. He has been Chairman of the Board of Directors of OTP banka Srbija since 10 December 2010. He has been a member of OTP Bank's Board of Directors since 15 April 2016. As of 31 December 2021 he held 532,143 ordinary OTP shares. Non-executive members: Gabriella Balogh member of the BoD MSc Economics, specialization in marketing She graduated as organizing chemical engineer from the University of Veszprém in 1993 and as marketing economist from the University of Economics, Budapest in 1997. She worked as a marketing associate between 1993 and 1998, as director of the Marketing Department from 1998 to 2005 and as managing director of the Marketing and Sales Directorate between 2005 and 2008 at OTP Bank Plc. She has been managing director of GoodStep Consulting Kft. since 2008. She fulfilled group management tasks as a Board of Directors member at the Central European Media and Publishing Company between 2010 and 2017. She has been co-owner and Board of Directors member of Net Media Plc. since 2016. She is Presidium member and Chairwoman of the Marketing and Media Board of the Hungarian Football Association. She has been a member of OTP Bank's Board of Directors since 16 April 2021. As of 31 December 2021 she held 1,393 ordinary OTP shares. Mihály Baumstark member of the BoD BSc Agricultural Business Administration, MSc Economics He graduated with a degree in agricultural business administration at Gödöllő University of Agriculture (1973), and went on to do a masters in economics at the Karl Marx University of Economic Science (1981). He was employed by the Ministry of Agriculture and Food Industry between 1978 and 1989. When he left the Ministry he was Deputy head of the Investment Policy Department. Then he was managing director of Hubertus Bt., and from 1999 to 2011 he was deputy CEO and then Chairman & CEO of Villányi Winery Ltd. (now Csányi Winery Ltd.). He is currently retired. ANNUAL REPORT 2021 OTP BANK OTHER INFORMATIONS He was a member of OTP Bank’s Supervisory Board from 1992 to 1999, and has been a non- executive member of OTP Bank’s Board of Directors since 1999. He has been Chairman of OTP Bank's Ethics Committee since 2010, as well as a member of its Remuneration Committee since 2011. He was the member of the Nomination Committee between 2014 and 2020. As of 31 December 2021 he held 44,000 ordinary OTP shares. Dr. Tibor Bíró1 College Associate Professor He graduated from the College of Finance and Accountancy (1974) and from the Karl Marx University of Economics (1978) with a degree in business administration. He has been a certified auditor and chartered accountant since 1986. He was the Head of the Financial Department of the City Council of Tatabánya from 1978 to 1982. From 1982, he was a professor at the College of Finance and Accounting, and between 1990 and 2013 head of department at the Budapest Business School. Since his retirement in 2015, he has been a visiting lecturer, and working actively in his auditing and consulting company. From 2000 onwards, for a period of ten years, he was a member of the Presidium of the Budapest branch of the Chamber of Hungarian Auditors, and also worked as a member of the Chamber’s Education Committee for five years. He was a non-executive member of OTP Bank’s Board of Directors from 1992. He was a member of OTP Bank's Remuneration Committee from 2009, and he was the chairman of the Nomination Committee between 2014 and 2020. Tamás György Erdei Deputy Chairman of the BoD BSc Business Administration He graduated in 1978 with a degree from the College of Finance and Accounting. He began his professional career at OTP, in a variety of administrative roles (his last position was branch manager), before going on to work at the Ministry of Finance in the area of bank supervision. From 1983 he was employed by the Hungarian Foreign Trade Bank (today MKB), where he gradually worked his way up through the ranks. In 1985 he became managing director, in 1990 he was appointed Deputy CEO, then in 1994 he became CEO, and from 1997 until the end of March 2012 he was Chairman & CEO. Between 1997 and 2008, and between 2009 and 2011, he was the elected president of the Hungarian Banking Association. He is the Chairman of the Supervisory Board of the International Children’s Safety Service. He has been a member of OTP Bank’s Board of Directors since 27 April 2012. He has been the Chairman of OTP Bank's Risk Assumption and Risk Management Committee, and he was a member of the Nomination Committee between 2014 and 2020. He has been the Deputy Chairman of the Board of Directors of OTP Bank Plc. since April 2019 and the Chairman of the Work-out Committee since October 2019. He has been Chairman of the Board of Directors at OTP Factoring Ltd. since December 2019. As of 31 December 2021 he held 32,285 ordinary OTP shares. 1 His mandate expired on 16 April 2021. ANNUAL REPORT 2021 OTP BANK OTHER INFORMATIONS Dr. István Gresa member of the BoD PhD Business Administration and Economics He graduated from the College of Finance and Accountancy in 1974 and received a degree in economics from the Karl Marx University of Economic Sciences in 1980. He earned a PhD from the University of Economic Sciences in 1983. He has worked in the banking sector since 1989. Between 1989 and 1993 he was branch manager of Budapest Bank’s Zalaegerszeg branch. From 1993 he was director of OTP Bank’s Zala County Directorate, and from 1998 he was the managing director of the Bank’s West Transdanubian Region. From 1 March 2006 until 14 April 2016 – when he retired – he was Deputy CEO of the Credit Approval and Risk Management Division. He was Chairman of the Board of Directors at OTP Factoring Ltd. between 2006 and 2017. He has been a member of OTP Bank’s Board of Directors since 27 April 2012. As of 31 December 2020 he held 173,258 ordinary OTP shares. Dr. Antal Pongrácz2 PhD Economics He graduated from the Karl Marx University of Economic Sciences in 1969 and earned a PhD in 1971. From 1969 he worked as an analyst at the Petrochemical Investment Company, then as a group manager at the Revenue Directorate until 1975. From 1976 he held various executive positions at the Ministry of Finance. After that, he was the first Deputy Chairman of the State Office for Youth and Sports. Between 1988 and 1990 he was the first Deputy CEO of OTP Bank. Between 1991 and 1994 he was CEO, and then Chairman & CEO, of the European Commercial Bank Rt. Between 1994 and 1998 he was Chairman & CEO of Szerencsejáték Rt, then in 1998-99 he served as CEO of Hungarian flagship carrier, Malév. Since 2001 he has been managing director of OTP Bank’s Staff Division and more recently – up until his retirement on 14 April 2016 – Deputy CEO. 1992-1999: Chairman of the Supervisory Board of Gemenc Zrt., 2002-2010: Chairman of the Board of Directors, 1999-2007: Chairman of the Supervisory Board of British American Tobacco (BAT), 2002-2008: Chairman of the Board of Directors of Casinos Hungary. Between 2007-2012, he was Chairman of OTP Bank Romania’s Supervisory Board. He was Chairman of the Supervisory Board of OTP banka Hrvatska d.d. from 12 April 2012, and was Chairman of the Supervisory Board of Splitska banka from 2 May 2017 until its successful integration (on 30 November 2018). He was a member of OTP Bank’s Board of Directors from 2002. He was Deputy Chairman of OTP Bank’s Board of Directors from 9 June 2009 to 14 April 2016. 2 His mandate expired on 16 April 2021. ANNUAL REPORT 2021 OTP BANK Dr. László Utassy3 Chairman & CEO Merkantil Bank Zrt. OTHER INFORMATIONS He graduated from the Faculty of Law of Eötvös Loránd University in Budapest in 1978. He held various positions at the State Insurance Company between 1978 and 1995 and then went on to work at ÁB-Aegon Rt. He was Chairman & CEO of OTP Garancia Insurance from 1996 to 2008. He was managing director of OTP Bank between 2009 and 2010. Since 1 January 2011 he has been Chairman & CEO of Merkantil Bank Ltd. He was a member of OTP Bank’s Board of Directors from 2001. He was a member of OTP Bank's Risk Assumption and Risk Management Committee from 2014. He has been Chairman of the Board of Directors of OTP Real Estate Leasing Ltd. since 28 November 2019. György Nagy member of the BoD Msc International Economics He graduated from the Department of International Foreign Economics of University of International Relations (Moscow) in 1989. He was a founding owner of Wallis Holding (founded in 1990) and he managed the Wallis Group as CEO until 2000. He founded Westbay Holding Kft. in 2004, the company’s portfolio includes several successful investments. He has been the Chairman of the Hungarian Shooting Federation since 2012, Presidium member of the European Shooting Confederation (ESC) since 2013 and Council member of the International Shooting Sport Federation (ISSF) since 2019 and he was elected the Vice President of ESC in 2021. He has been a member of OTP Bank's Board of Directors since 16 April 2021. As of 31 December 2021 he held no ordinary OTP shares (while the total number of OTP shares held by him directly and indirectly was 600,000). Dr. Márton Gellért Vági member of the BoD General Secretary Hungarian Football Association He graduated in 1987 from the department of foreign economics at the Karl Marx University of Economic Science From 1987 to 2000 he was lecturer at University of Economic Science of Budapest (today Corvinus University of Budapest) and from 1994 onwards associate professor and head of department. He has a university doctorate and a PhD in economics. He has authored or co-authored more than 80 studies, essays and books. Between 2000 and 2006 he worked at the State Holding and Privatisation Co. (ÁPV Zrt.), as managing director, Deputy CEO and then CEO. Between 2006 and 2010 he was Chairman of the National Development Agency. Since 2010 he has been general secretary of the Hungarian Football Association. In various periods between 2000 and 2010, he was the Chairman of the Board of Directors of Magyar Villamos Művek, Paks Nuclear Power Plant and the National Textbook Publishing House. Between 3 His mandate expired on 16 April 2021. ANNUAL REPORT 2021 OTP BANK OTHER INFORMATIONS 2002 and 2010, he was a member of the Board of Directors of Földhitel és Jelzálogbank Nyrt., and the Chairman of the Board of Directors for 4 years He has been a member of UEFA’s HatTrick Financial Assistance Committee since 2011. He has been a member of FIFA’s Financial Committee since 2017. He was a member of OTP Bank’s Supervisory Board between 2011-2021.He was a member of OTP Bank’s Audit Committee between 2014-2021. He was a member of OTP Bank’s Nomination Committee between 2020-2021. He has been a member of OTP Bank's Board of Directors since 16 April 2021. As of 31 December 2021 he held no ordinary OTP shares. Dr. József Zoltán Vörös member of the BoD Professor emeritus, academician University of Pécs He earned a degree in economics from the Karl Marx University of Economic Sciences in 1974. In 1984 he earned a PhD in economics from the Hungarian Academy of Sciences, and a Doctor of Science degree in 1993. He has been a member of the Hungarian Academy of Sciences since 2013. Between 1990 and 1993 he was the dean of the Faculty of Business and Economics, Janus Pannonius University (JPTE) in Pécs. In 1993 he attended a course in management for senior executives at Harvard University. From 1994 he was a professor at JPTE, from 2021 he has been professor emeritus. He was the senior Vice Rector of the University from 2004-2007, between 2007 and 2011 he was Chairman of the Economic Council of the University of Pécs. He has been a non-executive member of OTP Bank’s Board of Directors since 1992. He has been Chairman of OTP Bank's Remuneration Committee since 2009, and member of its Risk Assumption and Risk Management Committee since 2014. Supervisory Board Independent members: Tibor Tolnay Chairman of the SB He graduated from Budapest University of Technology as a qualified civil engineering in 1978, and in 1983 he obtained a degree in economic engineering. In 1993 he finished his studies as specialized economist at Budapest University of Economics. From 1989 to 1994, he was Director of State Construction Company No. 21. From 1994 to 2015 he was Chairman & CEO of the already privatized Magyar Építő Joint Stock Company. He has been the managing director of Érték Ltd. since 1994. Since 2020 he has been the managing director of Fenyves Garden Ltd. From 2018 to 2021 he was President of the National Association of Entrepreneurs and Employers, since 2021 co-President. Since 1992 he has been a member of OTP Bank's Supervisory Board, and Chairman of the Supervisory Board since 1999. He was a member and Deputy Chairman of OTP Bank’s Audit Committee between 2007 and 2011, and has been again since 2014. He has been the Chairman of OTP Bank’s Nomination Committee since 2020. As of 31 December 2021 he held 54 ordinary OTP shares. ANNUAL REPORT 2021 OTP BANK Dr. József Gábor Horváth Deputy Chairman of the SB Lawyer OTHER INFORMATIONS He earned a degree in law from Eötvös Loránd University in Budapest in 1980. From 1983 he worked for the Hungarian State Development Bank He has been a lawyer since 1986, and since 1990 has run his own law firm, which specialises in corporate finance and corporate governance. He has been a member of the Supervisory Board of OTP Bank since 1995, and was a member of MOL Plc.’s Board of Directors between 1999 and 2014. He has been Deputy Chairman of OTP Bank's Supervisory Board since 2007. He was Chairman of OTP Bank's Audit Committee between 2007 and 2011, and has been again since 2014. He has been a member of OTP Bank’s Nomination Committee since 2020. He was a member of the Board of Directors of INA Industrija Nafte d.d. from 2014 to 2018. As of 31 December 2021 he held no ordinary OTP shares. Dr. Tamás Gudra Member of the SB BSc Business Administration, Lawyer He graduated as business administrator in 1993 from the College of Commerce and Catering. He is a Hungarian chartered auditor since 1997. He also obtained a university degree in 2010 as a lawyer at the Faculty of Law of Janus Pannonius University in Pécs. He worked as an auditor from 1993 to 2001 at Deloitte & Touche. Between 2001 and 2003 he was an accounting expert of subsidiaries at the Accounting and Tax Directorate of the Hungarian Oil and Gas Public Limited Company (MOL Rt). Then he was managing director at the Auditor, Financial and Accounting Directorate of the National Privatization and Asset Manager Plc. (ÁPV Zrt.) between 2003 and 2007 and became the director of Controlling Directorate at the Hungarian National Asset Manager Plc. (MNV Zrt.) from 2008 to 2010. Following these assignments, he worked as the CFO of the Hungarian Football Association from 2011 until June of 2020. As of July 2020, he became the group-level CFO of Bonafarm Zrt. He was a member of the Supervisory Board of OTP Lakástakarék Zrt. between 2012 and 2021 and he is Chairman of the Hungarian Paralympic Committee’s Supervisory Board since 2016. Since 2021 he has been property inspector of Hungarian University of Agriculture and Life Sciences, member of the Executive Committee of Pick Szeged Zrt., SOLE-Mizo Zrt and MCS Vágóhíd Zrt. He has been a member of the Supervisory Board and Audit Committee of OTP Bank since 16 April 2021. As of 31 December 2021 he held no ordinary OTP shares. Olivier Péqueux Member of the SB Groupama International SA He graduated from Institute of Actuaries of France, Polytechnique School and ENSAE Paris Tech. Started to work in 1998 as an insurance commissioner for the French Insurance Supervisory Authority. In 2003, he joined the French Ministry of Finance to take part in the pension law reform ANNUAL REPORT 2021 OTP BANK OTHER INFORMATIONS and the setup of a pension fund for French civil servants. Then he became technical adviser to the French Minister of health and pensions. In 2005 he joined Groupama Group, first in charge of the actuary and accounting department of Gan Patrimoine, a life insurance company, and then in 2007 as Chief Financial Officer of Groupama Paris Val de Loire. He moved to China in March 2011 as Deputy General Manager of Groupama China, in charge of finance, actuary and investments in the joint venture between AVIC and Groupama. From 2015 to 2017, he was the General Manager of Groupama AVIC. He has been the Chief International Officer of Groupama Assurances Mutuelles since March 2018. He has been Groupama Assurances Mutuelles Deputy CEO since September 2020. He has been a member of OTP Bank’s Supervisory Board, and Audit Committee since 2018. As of 31 December 2021 he held no ordinary OTP shares. Dr. Márton Gellért Vági4 member of the SB General Secretary Hungarian Football Association Employee delegates: Klára Bella Member of the SB Director Large Corporate Department She graduated from the College of Finance and Accountancy and later obtained a degree from the Budapest University of Economic Sciences. From 1992 to 1994 she worked as a clerk at the Fertőszentmiklós branch of OTP Bank. From 1994 to 1995 she was a lending consultant at Polgári Bank. From 1995 to 1996 she worked as a risk manager at the Central Branch of OTP Bank. From 1996 to 1997 she was authorizer in the Credit Approval and Risk Management Division. From 1997 to 2010 she was Deputy Managing Director at the Central Branch. From 2010 to 2016 she was Director at the Central Branch. Between 2017 and 2020, she was Director of the Corporate Directorate. Since 1 July 2020, she has been the Director of the Large Corporate Department of the Specialised Finance Directorate. She has been a member of OTP Bank’s Supervisory Board, and representative of the Bank’s employees since 12 April 2019. As of 31 December 2021 she held 344 ordinary OTP shares. 4 His position on the Supervisory Board was terminated on 16 April 2021, and since that date he has been a member of the Board of Directors of OTP. ANNUAL REPORT 2021 OTP BANK András Michnai Member of the SB Managing Director OTHER INFORMATIONS He graduated in 1981 from the College of Finance and Accounting with a degree in business administration. He has been an employee of the Bank since 1974, and until 1981 held a variety of posts in the branch network. Following this he held a management position in the central network coordination department before returning to work in the branch network. From 1994, as deputy managing director, he participated in the central coordination of the branch network. Between 2005 and 2014 he was the managing director of the Bank’s Compliance Department. He further expanded his professional skills, obtaining a Master’s degree at the Budapest Business School, and is a registered tax advisor. He has been a member of OTP Bank’s Supervisory Board, and representative of the Bank’s employees, since 2008. He has been Secretary of OTP Bank’s Employees’ Trade Union since December 2011. As of 31 December 2021 he held 100 ordinary OTP shares. Members of OTP Bank Plc.’s senior management: Dr. Sándor Csányi Chairman & CEO László Bencsik Chief Strategic and Financial Officer, Deputy CEO Strategy and Finance Division In 1996, he graduated from the Faculty of Business Administration at the Budapest University of Economic Sciences, and in 1999 he obtained a Master’s in Business Administration (MBA) from INSEAD Business School in France. Between 1996 and 2000 he worked as a consultant at Andersen Consulting (now Accenture). From 2000 to 2003 he was a project manager at consulting firm McKinsey & Company. He joined OTP Bank in 2003, when he became managing director of the Bank Operations Management Directorate, and the manager with overall responsibility for controlling and planning. He has been deputy CEO of OTP Bank, and head of the Strategy and Finance Division, since August 2009. Since 13 March 2012 he has been Chairman of the Supervisory Board of DSK Bank. As of 31 December 2021 he held 10,038 ordinary OTP shares. Péter Csányi Member of the Board of Directors, Deputy CEO Digital Division ANNUAL REPORT 2021 OTP BANK OTHER INFORMATIONS Tibor András Johancsik Deputy CEO until 12 March 2021 IT Division He graduated from the Budapest Technical University with a degree in electrical engineering in 1988, and then in 1993 earned a further degree in foreign trade business administration from the College of Foreign Trade. He began his professional career at as a researcher in the field of industrial automation at the Hungarian Academy of Sciences Institute for Computer Science and Control (MTA SZTAKI). From 1994 onwards he held management positions at the Hungarian subsidiaries of international IT development companies (ICL, Unisys, Cap Gemini). From 2001 he worked as an advisor in the fields of IT and organisational development, then from 2003, as managing director of JET-SOL Kft., he participated in the development of numerous systems in Hungary and abroad. Since 24 February 2016 he has been Deputy CEO in charge of OTP Bank’s IT Division. He has been Chairman of the Supervisory Board of Monicomp Zrt. since 1 April 2016. György Kiss-Haypál Deputy CEO Credit Approval and Risk Management Division He is a qualified economist. He graduated from the Budapest University of Economic Sciences in 1996. He started his career as a project finance analyst for Budapest Bank Plc., and by 2007 he had been appointed head of the bank’s risk management department. Between 2002 and 2006 he also worked in Ireland as corporate credit risk portfolio manager for GE Consumer Finance Europe, and in Austria as GE Money Bank’s consumer loans portfolio manager. Between 2008 and 2015 he was member of the Board of Directors of Budapest Bank. From 2015 he was deputy head of the Credit Approval and Risk Management Division of OTP Bank Plc., and was then appointed acting head of the Division. Since 3 May 2017, he has been deputy CEO of the Credit Approval and Risk Management Division. As of 31 December 2021 he held 3,137 ordinary OTP shares. Antal György Kovács Member of the Board of Directors, Deputy CEO Retail Division László Wolf Member of the Board of Directors, Deputy CEO Commercial Banking Division Personal and organizational changes On 12 March 2021, the labour contract of Mr. Tibor Johancsik, Deputy CEO in charge of IT had been terminated by mutual agreement. The new head of the Digital Division (IT Division until 1 May 2021) is Mr. Péter Csányi, who had been in charge of digital developments and sales as managing director until his appointment. Key task of the area in transition is going to be the efficient support of the Bank’s digital transformation through further improving customer experience. The new strategy of the division is aimed at creating such an IT that has business competence, but also serving as a platform for other business areas while setting the pace of digitalization in accordance with the National Bank of Hungary’s digital recommendations. ANNUAL REPORT 2021 OTP BANK OTHER INFORMATIONS On 16 April 2016 the Board of Directors acting in the competency of the Annual General Meeting elected Ernst & Young Ltd. as the Bank’s auditor concerning the audit of OTP Bank Plc.’s separate and consolidated annual financial statements in accordance with International Financial Reporting Standards for the year 2021, from 1 May 2021 until 30 April 2022. On 16 April the Board of Directors acting in the competency of the Annual General Meeting, elects Dr. Tamás Gudra as member of the Supervisory Board (SB) and of Audit Committee (AC) of the Company until the Annual General Meeting of the Company closing the 2022 business year, but not later than 30 April 2023. On 16 April 2021 the Board of Directors acting in the competency of the Annual General Meeting, elects Dr. Sándor Csányi Mr. Antal György Kovács Mr. László Wolf Mr. Tamás György Erdei Mr. Mihály Baumstark Dr. István Gresa Dr. József Zoltán Vörös Mr. Péter Csányi Mrs. Gabriella Balogh Mr. György Nagy Dr. Gellért Márton Vági as members of the Board of Directors (BoD) of the Company until the Annual General Meeting of the Company closing the 2025 business year, but not later than 30 April 2026. On 16 April 2021, Dr. Sándor Csányi was elected as Chairman of the Bank’s Board of Directors and in accordance with subsection 4 of section 9 of the Articles of Association of the Company as Chief Executive Officer (Chairman & CEO). Dr. Sándor Csányi performs his duties until the closing AGM of the fiscal year 2025 but latest until 30 April 2026. On 16 April 2021 Mr. Tamás György Erdei, the member of the Board of Directors, was elected a Deputy Chairman of the Board of Directors. Mr. Tamás György Erdei performs his duties until the closing AGM of the fiscal year 2025 but latest until 30 April 2026 ANNUAL REPORT 2021
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