K&H Bank Bába Ágnes CFO The outlooks of the Hungarian Banking Sector Budapest, 21 April 2004

Balance Sheet total the depth of financial intermediation (total assets/GDP) is quite low in Hungary reasons: 1.) low level of household savings and lending 2.) corporate lending: much more developed but still underdeveloped compared to EU empirical studies: direct relation exists between GDP/capita and depth of financial intermediation the GDP growth and the (real) growth of total assets is faster in Hungary than in EU countries

loans, deposits the loans and deposits to GDP ratios are much below the EU average (around 40%), but while loans grow aggressively, deposits stagnate retail lending still lags considerably behind EU (even Greece and Portugal has high ratios) –> rapid convergence along with growing income and wealth, the savings rate will improve –> slow convergence slowly converging deposits vs. rapidly growing loans: increasing importance of external financing

retail loans very low basis, strong, rapid convergence to EU proportion (consumption, home-building) still a lot of room to grow (delayed consumption is significant)

retail loans high dinamics of housing loans the composition of retail lending is already „EU conform” although state subsidy system is a driver, lower HUF interest environment and FCY loans can give independence to the market consequence: equally big potential in consumer and housing loans

retail deposits high proportion of cash and deposit type investments (almost double of EU) considerable lag in insurance and share type savings accelerating convergence of insurance type assets no convergence is expected in share type investments

corporate loans and deposits relatively close to EU ratio (compared to retail) within corporate funding the weight of bank loans is higher than in EU (financial intermediation: Banks vs. Capital markets –> German model) a further growth (higher than GDP growth) is expected due to primarily to small and medium enterprises (half of them has no bank financing relationship) deposits: already at EU level -> no significant growth potential (compared to GDP) -> K&H: market share is an opportunity

profitability indicators profitability ratios are already comperable or higher than in EU countries increasing competition will result in decreasing margins (retail segment) offset by further improvement in operating expenses

profitability indicators still high (although decreasing) proportion of interest income drivers of improvement: loan related fees, asset management products

provisions Non-performing loans: doubtful and bad still worse loan quality missing retail interbank customer information

retail margins 1 the forecasted decrease in consumer margins is the consequence of the domestic competition and the lower risks (debtor records) margins of housing loans: determined by the government’s subsidy policy

retail margins 2 The pricing will be deteminated by the domestic competition in the future too (liquidity position of the banking sector).

corporate margins loan margins are expected to increase from their very low level the margins on deposits within a year are approx. at the same level in Hungary and the EMU, therefore the deposit margins will not change considerably

strategy of K&H      rapidly increasing consumer and SME lending & leasing modest growth of upper corporate segments market share gain in deposits on a modestly growing market insurance as a differentiator strong mutual funds growth