First Half of 2010 Report and Accounts 0
In accordance with Article 9 of the CMVM Regulation nr. 5/2008 we are pleased to transcribe the
FIRST HALF 2010 REPORT AND ACCOUNTS
BANCO COMERCIAL PORTUGUÊS, S.A.
a public company (Sociedade Aberta) having its registered office at Praça D. João I, 28, Oporto, registered at the Commercial Registry of Oporto, with the single commercial and tax identification number 501 525 882 and the share capital of EUR 4,694,600,000.
1 First Half of 2010 Report and Accounts
Index
Financial Highlights...... 2 Highlights ...... 3 Millennium Group ...... 6 Changes in Corporate Governance...... 12 Corporate Boards ...... 14 BCP Shares ...... 16 Qualified Shareholdings...... 22 Strategy...... 24 Economic environment ...... 26 Financial Review ...... 30 Segmental Reporting ...... 40 Risk Management...... 76 Sustainability ...... 96 Main Events ...... 102 Main Events subsequent to the end of the 1 st Half of 2010 ...... 105 Annex ...... 106 Interim Financial Statements ...... 110
First Half of 2010 Report and Accounts 2 Financial Highlights
Euro million 30 Jun. 10 30 Jun. 09 Change 10/09
Balance sheet Total assets 98,993 93,786 5.6% (1) Loans to customers 78,176 76,988 1.5% (1) Loans to customers (net) 75,920 75,072 1.1% (1) (2) Total customer funds 65,632 64,854 1.2% (1) Balance sheet customer funds 48,955 50,149 -2.4% (1) Customer deposits 44,072 44,066
Results Net interest income 705.0 675.6 4.4% (3) Net operating revenues 1,487.6 1,321.4 12.6% (4) Operating costs 776.9 775.2 0.2% Loan impairment charges (net of recoveries) 384.2 279.1 37.7% Other impairment and provisions 114.2 60.9 87.4% Income taxes 21.7 45.9 -52.7% Minority interests 27.3 12.8 113.1% Net income 163.2 147.5 10.7%
Profitability (5) Net operating revenues / Average net assets 3.1% 2.8% (6) Return on average assets (ROA) 0.4% 0.3% (5) Income before taxes and minority interests / Average net assets 0.4% 0.4% Return on average equity (ROE) 6.6% 6.1% (5) Income before taxes and minority interests / Average equity 7.9% 8.0%
Credit quality (5) Overdue loans according to Bank of Portugal / Total loans 4.1% 2.5% (5) Overdue loans according to Bank of Portugal, net/ Total loans, net 1.2% 0.0% Impairment for loan losses / Overdue loans by more than 90 days 105.1% 132.6% Impairment for loan losses / Overdue loans 93.2% 110.6%
Efficiency ratios (5) (7) Operating costs / Net operating revenues 52.2% 59.6% (5) (7) Operating costs / Net operating revenues (Portugal) 46.2% 54.6% (5) (7) Staff costs / Net operating revenues 28.5% 34.2%
Capital (pro forma IRB) Own funds 5,781 Risk weighted assets 59,527 Tier I 8.9% Total 9.7% Capital (standardised) (5) Tier I solvency ratio 8.6% 8.0% (5) Total solvency ratio 10.0% 11.1%
Branches Portugal activity 909 917 -0.9% (1) Foreign activity 863 856 0.8%
Employees Portugal activity 10,236 10,439 -1.9% (1) Foreign activity 11,109 10,918 1.7% (1) Adjusted from the impact of the operations in Turkey and in USA, in accordance with the sale agreements established. (2) Amounts due to customers (including securities), assets under management and capitalisation insurance. (3) Net interest income, dividends from equity instruments, net commissions, net trading income, equity accounted earnings, other net operating income (according to rule 16/2004 from the Bank of Portugal). (4) Staff costs, other administrative costs and depreciation. (5) According to rule 16/2004 from the Bank of Portugal. (6) Considering net income before minority interest. (7) Excludes the impact of specific items. 3 First Half of 2010 Report and Accounts
Highlights
Net income Net operating revenues Euro million Euro million
163 1.488 1.321 148 25 9 449 379
139 138 942 1.039
1st half 09 1st half 10 1st half 09 1st half 10 International International Portugal Portugal
Operating costs (*) Total customer funds Euro million Euro million
775 777 64.854 65.632 14.951 15.710 273 297
49.902 49.922 503 480
1st half 09 1st half 10 30.Jun.09 30.Jun.10 International Int ernat ion Portugal al
(*) Excluding Millennium bank Turkey and Millennium bcpbank USA. First Half of 2010 Report and Accounts 4
Loans and advances to customers (*) Total assets Euro million Euro million 76.988 78.176 93.786 98.993 15.572 17.136 21.760 22.950
61.415 61.040 72.026 76.043
30.Jun.09 30.Jun.10 30.Jun.09 30.Jun.10 International Portugal International Portugal (*) Before impairment and excluding Millennium bank Turkey and Millennium bcpbank USA.
(*) Tier I Cost-to-income
59,6% 52,2%
54,6% 46,2% 8,0% 8,6% 8,9%
1st half 09 1st half 10 30.Jun.09 30.Jun.10 Pro Forma IRB Consolidated 30Jun.10 Portugal
(*) On a comparable basis. 5 First Half of 2010 Report and Accounts
PAGE LEFT BLANK INTENTIONALLY First Half of 2010 Report and Accounts 6 Millennium Group
Millennium bcp is Portugal’s largest listed bank. It’s decision centre is in Portugal and the bank is leader in the Portuguese financial market: it is the second-largest bank in terms of market share, both in loans to customers (around 25%) and in total customers’ funds (around 22%), and it has the country’s largest banking distribution network, with a total of 909 branches. It is also a well-known institution in Europe and Africa, with banking operations in Poland, Greece, Mozambique, Angola, Romania and Switzerland. All these operations trade under the Millennium brand. The Group focuses on retail distribution of financial services in Portugal, Poland, Greece, Mozambique and Angola. Its business in Portugal accounted for 77% of total assets, 78% of gross loans to customers, 76% of total customers’ funds, and 84% of net income in the first half of 2010. International operations accounted for almost 52% of the Group’s approximately 21.345 thousand employees and for around 49% of the total of 1,772 branches. Emphasis is given to the growth of Bank Millennium in Poland, with 465 branches and a market share of about 5% both in customers’ deposits and in loans to customers, Millennium bim’s leadership of the Mozambican market, Banco Millennium Angola, which added 30,564 new customers in the first half of 2010 and the Greek operation with its 176 branches. A leading group focused in the retail business in Portugal, Poland, Mozambique, Angola and Greece (June 2010)
Million euros
Portugal Poland Mozambique Angola Greece Others
Market Shares Market Shares Market Shares Market Shares Market Shares (March 2010) (May 2010) (May 2010) (December 2009) (May 2010)
24.7% 22.0% 5.0% 5.3% 39.6% 34.5% 3.1% 2.1% 2. 0% 1.3% Millennium bcp Bank & Trust Customers’ In credit to In deposits In loans to In deposits In mortgage In deposits customers customers In loans to In deposits credit funds customers 61,040 49922
9,078 9034 5,186 821 965 411 514 3419 1,640 1778
Loans to Customer Loans to Customer Loans to Customer Loans to Customer Loans to Customer Loans to Customer customers funds customers funds customers funds customers funds customers funds customers funds (gross) (gross) (gross) (gross) (gross) (gross)
10,236 909 6,180 465 2,013 119 619 28 1,506 1,76 791 75
Employees Branches Employees Branches Employees Branches Employees Branches Employees Branches Employees Branches
Excluding Turkey and USA.
Source: BCP. Market shares in Portugal are based on Portuguese Banking Association and Portuguese banks’ public data. Market shares in Poland are from the Polish Banks Association and Polish Asset Managers Association. Market shares in Greece are based on Bank of Greece and Greek banks’ public data. Market shares in Mozambique are based on Bank of Mozambique public data. Market shares in Angola are based on National Bank of Angola public data.
The Group offers a wide range of banking products and related services, namely current accounts, means of payment, savings and investment products, mortgage loans, consumer credit, commercial banking, leasing, factoring, insurance, private banking and asset management and investment banking, among others, serving its customers on a segmented basis. With the biggest branch network in Portugal and a growing network in the other countries in which it operates, the Group also provides remote banking channels (telephone and Internet banking services), which also act as distribution points for Millennium products and services. Banco Comercial Português, S.A. (abbreviated as “BCP”, “Millennium bcp” or “the Bank”) was set up in 1985 as the first privately-owned bank to be incorporated following the start of the process of deregulation and development of the Portuguese financial system. Since its foundation, BCP has been renowned for its dynamism, innovation, competitiveness, profitability and financial strength, making its mark as a reference institution in numerous areas of financial products and services. The Bank has 7 First Half of 2010 Report and Accounts
achieved successive growth stages and has been involved in the acquisition, restructuring and integration of several financial institutions in Portugal. BCP’s growth drove the transformation of the Portuguese banking system, to become one of the most developed, modern and innovative in Europe. From 1998, after having consolidated a leading position on the Portuguese market, the Bank opted for a strategy of internationalisation aimed at taking advantage of the strong gowth prospects in foreing markets with close historic connection with Portugal or with large communities of Portuguese descendants, and with markets in which there was a strong commercial rationale calling for the establishment of banking operations using a model similar to that employed by the Bank in Portugal.
Business Areas and Support Units
Business Areas Support Units IT Department Retail Banking (South, Centre South, Centre North, North) Operations Department Madeira Regional Dept. and the Azores Regional Dept. Credit Department Retail Banking Network Support Department Banking Standardized Recovery Department Direct Banking Department Services Specialized Recovery Department Marketing Department Litigation Department ActivoBank Administrative and Logistics Department Companies Banking (South, North) Prevention and Safety Office Companies Micro-credit Banking & Compliance Office Companies Marketing Department Specialized Planning & Budget Control Department Specialized Credit Department Credit Research Office Real Estate Promotion Department Management Information Department Corporate I and II Accounting & Consolidation Department Corporate and Investment Banking Department Investors Relations Department Investment Treasury & Markets Department Audit Department Banking International Department Legal Department Tax Advisory Services - Investment Banking Tax Advising Department General Secretariat Private Banking Private Millennium Banque Privée (Switzerland) Millennium bcp Foundation Banking e Corporate Asset Management Communication Department A.M. Areas Millennium bcp Bank and Trust (Cayman) Company Secretary’s Office Office of the Chairman of the EBD Bank Millennium (Poland) FBSU -Foreign Business Support Unit European Millennium Bank (Greece) Strategic Projects Nucleus Business Banca Millennium (Romania) Staff Management Support Department Millennium Bank (Turkey) Risk Office Rating Department Shareholding & Worth Measurement Dept Millennium bim (Mozambique) Quality Department Other Millennium Angola Assets and Liabilities Management Department International Asian Desk (ALMD) Business Millennium bcpbank (USA)
As at 30 June 2010, the organisational model is based on six Business Units: Retail Banking; Companies and Specialized Credit; Corporate and Investment Banking; Private Banking and Asset Management; Business in Europe; and Other International Business, as well as two Support Units: Banking Services and Corporate Areas. Five of these eight areas have Coordination Committees, the aim of which is to simplify day-to-day management decisions. The top management of the Units included in each Business Unit and Support Unit are invomved in these Committees, and their mission is to align perspectives and to provide support to the Executive Board of Directors (EBD) in decision-taking. The Retail Banking Committee – assures the coordination the retail business in Portugal and is responsible for the definition of the commercial strategy and for its implementation within the several distribution channels. The Companies Committee’s divisions have the responsability of serving, in Portugal, the customers of the Companies segment, providing them with personalised management, and to capture potential customers, developing skills in terms of design, management and support to the sales of products and services, acting proactively in the creation of instruments that allow optimisation of customer management in order to maximise value created and satisfaction levels. It is also responsible for, monitoring and managing the international areas across the Group, for, the offer of leasing, renting, factoring products, real estate development and protocol credit and/or re-financing, as well as for the management of relationships established with the several chambers of commerce and public entities. First Half of 2010 Report and Accounts 8
The Private Banking & Asset Management Committee evaluates aspects related with the management of the areas within its responsibility, in particular business analysis, valuation of the assets under management, and the results obtained, as well as analysis of the sales and performance of investment funds. The European Banking Committee ’s monitor, coordinates and articulates the management of the subsidiary companies in Europe, implementing activity reporting procedures and financial development that enables a systematic and adequate oversight of the several operations, including control of budget compliance, activity and financial evolution, as well as support for the decision-making and subsequent implementation of resolutions involving restructuring, investment and divestment. The Banking Services Coordination Committee departments’ serve the Business Units in Portugal and in other countries, contributing in a sustained manner for the reduction of costs and improvement of service quality, and assuring an innovation level compatible with the Group’s growth objectives. It assesses information relating to the cost evolution and main service levels in Banking Services, as well as the proposals presented by the respective members, for appraisal and decision on themes related to the following Departments: Credit, Credit Recovery, Operations, Administrative and Logistics, Information and Techonology; and the Prevention and Security Office. The Rating Division was set up in July 2009 to ensure that the risk inherent in all the Bank’s customers is properly assessed. Corporate & Investment Banking Monitoring the activities of the Corporate and Investment Banking and management of the international area are not included in the Coordinating Committee. This activity is carried out by the Directors of Millennium bcp responsible for these business areas. Other International Businesses The overall coordination of operations in Africa and the United States of America has been taken over directly by the Millennium bcp directors responsible for those operations because the specifics of those markets warrant individualised treatment and they would not benefit from integration into Coordination Committees. Additionally, seven commissions report to the EBD whose duties are of an broad, companywide nature, involving the study and evaluation, for each area of intervention, of the policies and principles governing the activities of the Bank and of the Group. These commissions are: Capital, Assets and Liabilities Management Commission (CALCO); Risk Commission; Pension Fund Risk Sub-Commission; Pension Fund Monitoring Commission; Stakeholders Commission; Credit Commission and Sustainability Coordination Commission. The members of the commissions are appointed by Millennium bcp’s EBD in accordance with articles 13.º and 14.º of the EBD working regulations. The Capital, Assets and Liabilities Commission (CALCO) monitors and manages the assets and liabilities and the allocation of capital, being responsible for establishing the appropriate policies for the management of liquidity and market risks in terms of the Group’s consolidated balance sheet. The Risks Commission is responsible for monitoring the global risk levels incurred (credit, market, liquidity and operational risks), and enssuring they compatible with the objectives and strategies approved for the development of the Group’s activities. The Pension Fund Monitoring Commission’s responsibilities are defined in the pension Funds Law, namely, issuing of opinions on the changes introduced in the constitution agreements and monitoring the fund’s financial management. The Pension Fund Risk Sub-Commission is responsible for monitoring and managing the risk of the Group’s Pension Funds and is responsible for establishing the appropriate hedging strategies and investment policies. The Stakeholders Commission was established in 2005 to establishes relations with the Bank’s Stakeholders. It functions as a privileged channel for the disclosure of the company’s internal information and as a debate and strategic counselling forum for the Executive Board of Directors. Its members result from “elections” through panels of Stakeholders (Employees and Shareholders) or by invitation to individuals with a recognized merit and prestige. The Credit Commission issues opinions on credit granting to customers or economic groups with overall high exposure to risk, namely transactions involving the renewal or review of credit lines and limits, one-off operations or mid-term reviews of credit lines and limits which represent considerably increased exposure to risk. The responsibilities of the Credit Comission cover other types of credit operations, namely project finance operations, collateralised operations with financial assets from the sales 9 First Half of 2010 Report and Accounts
networks of the Bank, operations funding real estate promotion, real estate and movable asset leasing operations, and factoring operations involving the restructuring of current liabilities at the Bank. The Sustainability Coordination Commission is responsible for defining and carrying out initiatives and programs of the Bank. Its responsibilities include the decision to submit proposals on topics related to the action plan for the policy of sustainability. In accordance with International Financial Reporting Standards (IFRS) the Group had at June 30, June 2010 total assets of euros 98,993 million and total customers’ funds amounting to euros 65,632 million. Loans to customers (net, excluding securitised credit) amounted to euros 75,920 million. The consolidated solvency ratio, calculated in accordance with Bank of Portugal rules, stood at 10% (Tier I at 8.6%). BCP shares are listed on Euronext Lisbon and market capitalisation as at June 30, 2010, stood at euros 2.9 billion The adverse economic environment in Portugal and Greece during the first half of 2010 was reflected in expectations of reduction on net income and of asset quality and despite the turnaround in the Polish operation, the overall economic deterioration led some rating agencies to revise their long-term ratings for BCP. Another factor affecting in particular the long-term credit ratings assigned to BCP, as well as those of the other Portuguese banks, is the wholesale funding market. However, the Bank strengthened its liquidity and solvency position, with Tier I well above the minimum recommended by the Bank of Portugal, through the issuance of Perpetual Subordinated Debt with Conditional Coupons, amounting to one billion euros. In terms of liquidity, it is also important to highlight the increased pool of assets eligible for discount at central banks. In the 1st half of 2009, the Group received authorization from the Bank of Portugal for the use of the standard method for calculating capital requirements for operational risk (at the consolidated level and at the individual level, for entities in Portugal) as well as the use of internal model for the calculation of capital requirements for general market risk for the activities in Portugal. The Bank is still awaiting approval from the Bank of Portugal for the use of internal ratings-based methods for the calculation of regulatory capital for credit and counterparty credit risk.
LATEST RATINGS ACTIONS IN THE FIRST HALF OF 2010
• Fitch Ratings re-affirmed on March 30, 2010, BCP’s long-term Issuer Default Rating (IDR) at 'A+' but revised the Outlook to Negative, and re-affirmed its Individual rating at 'B/C'. Fitch also re-affirmed its short-term IDR at 'F1', Support at '2' and Support Rating Floor at 'BBB', revising the Outlook to Negative.
• Standard & Poor’s Ratings Services on April 27, 2010, after the downgrade in the rating on the Portuguese Republic by two notches from “A +” to “A-”, lowered the ratings assigned to various Portuguese banks and subsidiaries in Portugal of foreign banks, assigning them all a negative outlook. The long-term counterparty credit rating for BCP was lowered to “BBB +” from “A-”, while the short-term counterparty credit rating was affirmed at “A-2”.
• The Moody's rating agency on June 2, 2010, affirmed BCP’s Bank Financial Strength Rating (BFSR) at "D +" with a negative outlook.
RATINGS ACTIONS SUBSEQUENT TO THE END OF FIRST HALF OF 2010
• On July 14, the Moody's Rating Agency, stated that, following the revision of the Republic of Portugal’s rating by two notches, from “Aa2” to “A1”, it decided to downgrade the deposits rating of BCP also by two notches, from “A1” to “A3”. Moody's affirmed BCP’s Bank Financial Strength Rating, at “D+” and the Baseline Credit Assessment (“Baa3”), which depend exclusively on factors intrinsic to the Bank.
• On July 21, Fitch Rating Agency announced that it had concluded the revision process of ratings for five Portuguese Banks, resulting, for BCP, in the revision of the long-term rating from “A+” to “A”, in the reaffirmation of the short-term rating at “F1” and maintenance of a negative outlook.
First Half of 2010 Report and Accounts 10
Fitch Ratings 21-Jul-10 Long Term/Short Term Issuer A/F1 Outlook IDR Negative Individual B/C Support 2 Support Rating Floor BBB Senior Secured Debt AAA Senior Unsecured Debt A+ Subordinated Debt A Preferred Stock A-
Bank Millennium S.A. Long Term/Short Term Issuer A-/F2 Outlook IDR Negative Individual C/D Support 1
Moody's Ratings 14-Jul-10 LT/ST Ratings A3/P-2 Outlook Negative Bank Financial Strength D+ Senior Unsecured - Dom Currency A3 Subordinated Debt - Dom Currency Baa1 Other ST - Dom Currency P-2 Baseline Credit Assessment Baa3
BCP Finance Bank Ltd.
Perpetual Subordinated Debt with conditional coupons Ba3 BCP Finance Co. Non-cumulative Preferred Stock Ba3
Bank Millennium S.A. LT/ST Local and Foreign Currency Baa2/P-3 Outlook Negative Bank Financial Strength D
Standard & Poor's 27-Apr-10 Counterparty Credit Rating BBB+/A-2 Outlook Negative Certificate of Deposit BBB+/A-2 Commercial Paper Local Currency A-2 Commercial Paper A-2
BCP Finance Bank Ltd. Senior Unsecured BBB+ Subordinated BBB Commercial Paper A-2
BCP Finance Co. Preference Stock BBB-
11 First Half of 2010 Report and Accounts
PAGE LEFT BLANK INTENTIONALLY First Half of 2010 Report and Accounts 12 Changes in Corporate Governance
On April 12, 2010, Banco Comercial Português, S.A. held its Annual General Meeting, resulting in the following resolutions:
• Ratification of the appointment by the Supervisory Board of Miguel Maya Dias Pinheiro as member of the Executive Board of Directors to exercise functions during the period of suspension of Armando António Martins Vara.
• Ratification of the appointment of Vítor Manuel Lopes Fernandes, made by the Executive Board of Directors, to exercise the position of Vice-Chairman during the period of suspension of Armando António Martins Vara.
• Approval of the alteration of the number of the Executive Board members and the election of Miguel Maya Dias Pinheiro and António Manuel Palma Ramalho as new members of this corporate body, until the end of the current three-year term. In the same General Meeting several amendments to the Bank’s by laws were also approved. These aimed to: update the bylaws due to changes in the Companies Code; include in the text the pension scheme supported by the company for Executive Board Members as a result of old-age or disability; as well as, at the suggestion of several shareholders, an increase of the voting rights from 10% to 20% of the Bank’s share capital. Following the changes in the Executive Board of Directors (EBD), approved at the Annual General Meeting of April 12, 2010, the members of the Committees and Commissions appointed by the EBD were also updated. In parallel, the areas of responsibility of each Boardmember, the direct lines of reporting, and the Alternate Boardmembers in each of those areas of responsibility were redefined. The following coordination committees were kept: Private Banking and Asset Management, Business and Banking in Europe. The changes involved the split of the Retail and Companies coordinating committees. The coordination committee of Corporate and Investment Banking was eliminated and the overall coordination of the activities previously included in that Committee are currently managed of the EBD members, responsible for those areas. Similarly, the overall coordination of operations in Africa and the United States of America continues to be managed directly by EBD members responsible for these operations.
13 First Half of 2010 Report and Accounts
Coordination Committees
Its objective is to facilitate the current management decisions, involving the top management of the units integrated in each Business Areas and in the Banking Services Unit with the mission of aligning perspectives and support the management decision-making process by the Executive Board of Directors. Private Banking and Retail Companies Asset Management Vítor Fernandes * Vítor Fernandes * Luís Pereira Coutinho * José João Guilherme José João Guilherme António Ramalho Nelson Machado Nelson Machado Carlos Álvares ** Rui Manuel Teixeira ** José Araújo ** Diogo Campello José Araújo Rui Manuel Teixeira José Salgado Manuel Marecos Duarte Paulo Azevedo Jorge Gois Vasco Rebello de Andrade Manuel Lupi Bello Nuno Botelho Ricardo Valadares Virgilio Repolho Pedro Álvares Ribeiro Miguel Tavares Rodrigues Rui Teixeira Diogo Campello João Sales Luis Diogo Campello Miguel Magalhães Duarte Business in Europe Banking Services
Luís Pereira Coutinho* Vítor Fernandes* Nelson Machado Miguel Maya
Boguslaw Kott (Poland) Artur Luna Pais ** João Brás Jorge (Poland) Fernando Maia Rui Coimbra(Greece) Carlos Alves José Toscano (Romania) ** Jorge Octávio João Martins (Turkey) Manuela Reis Nicolau Romão Paulo Amaral Carlos Rocha Pedro Rocha Miguel Manso Dimitrios Kyparissis * Coordinator , who has the responsibility of appointing Julianna Boniuk the Committee Secretary Vasconcelos Guimarães ** Secretary appointed by the Coordinator
Note : The members of the Committees and Commissions are mandatorily appointed by the EBD of BCP (Articles 13 and 14 of the EBD Regulations)
Detailed information about the scope of action of each coordination committee and each committee reporting to the EBD is included in the description of the business model, included in the Millennium Group chapter in this Report. The following diagram represents the Corporate Governance Model of Millennium bcp:
Corporate Governance Model
General Meeting
Remuneration and Welfare Board
Client Executive Board of Directors Supervisory Board Statutory Auditor Ombudsman Audit Committee Nominations Committee Sustainability and Corporate Governance Committee
Coordination Committees Specialised Commissions
Retail Capital, Assets and Liabilities Management Companies Commission (CALCO)* Private Banking & Asset Management Risk Commission European Business - Pension Fund Risk Sub-Commission Banking Services Pension Fund Monitoring Commission Stakeholders Commission Credit Commission Corporate Areas Sustainability Coordination Commission
* CALCO = Capital, Assets and Liabilities Management Commission
First Half of 2010 Report and Accounts 14
Corporate Boards
Board of the General Meeting Chairman: António Manuel da Rocha e Menezes Cordeiro Vice-Chairmen: Manuel António de Castro Portugal Carneiro da Frada Secretary: Secretária da Sociedade (Ana Isabel dos Santos de Pina Cabral)
Executive Board of Directors Chairman: Carlos Jorge Ramalho dos Santos Ferreira Vice-Chairmen: Armando António Martins Vara – Resigned, on July 2, 2010, from its functions as member and Vice-Chairman of EBD of the EBD of Banco Comercial Português, S.A. (1) Paulo José de Ribeiro Moita de Macedo Members Vítor Manuel Lopes Fernandes (2) José João Guilherme Nelson Ricardo Bessa Machado Luís Maria França de Castro Pereira Coutinho Miguel Maya Dias Pinheiro (3) António Manuel Palma Ramalho (3)
Supervisory Board Chairman: Luís de Melo Champalimaud Vice-Chairmen: Manuel Domingos Vicente Pedro Maria Calaínho Teixeira Duarte Members: Josep Oliu Creus António Luís Guerra Nunes Mexia Patrick Huen Wing Ming, representing the Sociedade de Turismo e Diversões de Macau, S.A., in his own name António Víctor Martins Monteiro João Manuel de Matos Loureiro José Guilherme Xavier de Basto José Vieira dos Reis Manuel Alfredo da Cunha José de Mello Thomaz de Mello Paes de Vasconcelos Vasco Esteves Fraga
15 First Half of 2010 Report and Accounts
Statutory Auditor KPMG & Associados, SROC, S.A. represented by: Full: Vítor Manuel da Cunha Ribeirinho (ROC n.º 1081) Alternate: Ana Cristina Soares Valente Dourado (ROC n.º 1011)
Remuneration & Welfare Board Chairman: José Manuel Rodrigues Berardo Members: Luís de Melo Champalimaud Manuel Pinto Barbosa
(1) On November 3, 2009 and pursuant to the disclosure of news on issues that led to his indictment, the Director and Vice-Chairman Mr. Armando António Martins Vara decided to request the suspension of his term of office until the facts were duly investigated. The suspension resolution was adopted by the Supervisory Board at its meeting held on November 11, 2009.
On July 2, 2010, Millennium bcp informed that its relevant social bodies and Armando Vara considered that, without prejudice to the full respect for the presumption of innocence, due to the unexpected delay of the legal proceedings, which led Armando Vara to request the suspension of his functions as Member and Vice-Chairman of the Executive Board of Directors, maintaining the current suspension would be inconvenient for the social interests of the Bank. Therefore, Armando Vara resigned from his functions, assuming the obligation of non- competition until the end of the ongoing term-of-office. Within this context, it was recognised that Armando Vara had the right to be entitled to receive the comnpensation due until the end of the ongoing term of office.
(2) Following the suspension of Mr. Armando António Martins Vara, the Boardmember Vítor Manuel Lopes Fernandes was appointed as Vice-Chairman for the duration of the suspension.
(3) Appointment of Miguel Maya Dias Pinheiro and António Manuel Palma Ramalho as new Executive Board Members, until the until the end of the current three-year term, at the Annual General Meeting of April 12, 2010. First Half of 2010 Report and Accounts 16 BCP Shares
Equity markets suffered a correction at the beginning of this year as a number of events dampened investors risk appetite: concerns about economic growth on the back of more mixed economic data and also about the fiscal sustainability of several European countries, with Greece on the center stage. However, in spite of these uncertainties, the disclosure of positive fourth-quarter 2009 earnings and the continued global economic recovery led to a market rebound and a positive performance in the first quarter of 2010 for the fourth consecutive quarter. During the second quarter of 2010, the negative capital markets performance offset the gains of the previous quarter, as the sovereign debt and liquidity crisis spread to Europe’s peripheral markets and the concerns with the economic impact of the of the measures adopted by the governments to correct the public deficits and fears over the possibility of recession emerged again. At the same time, the high levels of volatility that characterized the markets since the final quarter of 2008 persisted. The financial sector was particularly penalized, with the Dow Jones index for banks falling by 23.7% in the first half 2010.
BCP share indicators Units 1H10 1H09 Price Maximum price (January 11, 2010 and January 13, 2009) (€) 0.933 0.872 First half average price (€) 0.728 0.725 Minimum price (March 28, 2010 and March 5, 2009) (€) 0.555 0.556 Last price (€) 0.620 0.724 Shares and equity Number of ordinary shares (M) 4,694.6 4,694.6 Shareholders' equity attributable to the Group (M€) 6,843.1 6,060.3 Shareholders' equity attributable to ordinary shares (1) (M€) 4,913.1 4,804.6 Value per share Adjusted net income (EPS) (2) (3) (€) 0.05 0.05 Book value (2) (€) 1.05 1.03 Market indicators Price earnings ratio (3) (P/E) 12.72 13.61 Price to book value (PBV) 0.59 0.70 Earnings yield (4) (%) 7.86 7.35 Market capitalisation (last) (M€) 2,910.7 3,398.9 Liquidity First half turnover (M€) 2,745.0 1,389.9 Average daily turnover (M€) 21.8 11.1 First half volume (M) 3,765.3 1,945.9 Average daily volume (M) 29.9 15.7 Capital rotation (5) (%) 78.5 40.9
(1) Shareholders' equity - preferred shares – "Valores Mobiliários Perpétuos Subordinados" issued in 2009 + treasury stocks related with preferred shares. (2) Considering the average number of shares deducted by the number of treasury shares. (3) Adjusted net income considers the net income deducted by the dividends of preferred shares and the "Valores Mobiliários Perpétuos Subordinados" issued in 2009. (4) EPS divided by the last price. (5) First half turnover divided by first half average market capitalization.
17 First Half of 2010 Report and Accounts
Absolute and relative performance During the period from December 31, 2009 to June 30, 2010, BCP shares recorded a minimum price of 0.555 euros, a maximum price of 0.933 euros and an average price of 0.728 euros, and stood at 0.620 euros at the final of the first half, a depreciation of 26.6%. In the following table, the comparative performance of BCP versus the main market indices is presented:
Index Price change in First Half 2010
BCP share -26.6% PSI20 -16.5% IBEX -22.4% CAC -12.5% DAX 0.1% FTSE -9.2% Bebanks -12.1% DJ Eurostoxx Banks -23.7% DJ Eurostoxx -13.2% Dow Jones -6.27% Nasdaq -6.51% S&P500 -7.57%
Liquidity BCP shares continue to be among the most traded in the Portuguese market and the most liquid of the financial sector. During the first half of 2010, 3,765.3 million shares were traded, providing an average daily volume of 29.9 million shares, this corresponds to an increase of 93% versus the first half of 2009. In terms of turnover, BCP shares represent 12.3% (1.4 billion euros) of the total turnover of the PSI 20 shares. Liquidity million shares (quarterly base)
2,177
1,588
1,257 1,202 1,133
689
1Q09 2Q09 3Q09 4Q09 1Q10 2Q10
First Half of 2010 Report and Accounts 18
Indices in which BCP shares are included BCP is included in more than 30 national and international indices, with emphasis on the following:
Index Weight (%) Ranking Euronext PSI Financial Services 31.2% 2º PSI20 10.5% 4º Lisbon General 4.7% 9º DJ Eurostoxx Mid 0.8% 64º DJ Eurostoxx Banks 0.6% 23º DJ Stoxx Mid 200 0.4% 146º DJ Stoxx 600 Banks 0.3% 36º Bebanks 0.2% 44º Euronext 100 0.2% 98º DJ Eurostoxx 0.1% 174º BE500 0.0% 403º
Main events and impact on the share price The following table summarizes the main events of the first half of 2010, the change of the share price both the next day and 5 days later, as well as the relative evolution compared to the leading benchmark for those periods.
Change Change Change Change Change vs vs DJS Change vs vs DJS Nr Data Subject +1D PSI20 Banks +5D PSI20 Banks (1D) (1D) (5D) (5D) Conclusion of Bank Millennium (Poland) 1 10/02/2010 -1.8% -1.1% -0.5% -4.5% -3.8% -6.9% capital increase Bank Millennium (Poland) fourth 1 10/02/2010 -1.8% -1.1% -0.5% -4.5% -3.8% -6.9% quarter results Agreement to sell Millennium Bank AS 1 10/02/2010 -1.8% -1.1% -0.5% -4.5% -3.8% -6.9% in Turkey 1 10/02/2010 Full year 2009 consolidated results -1.8% -1.1% -0.5% -4.5% -3.8% -6.9% 2 10/03/2010 Proposals submitted to AGM 0.0% 0.1% 0.7% 5.5% 3.1% 3.5% Amendment to the agenda the AGM 3 17/03/2010 -2.0% -1.3% -0.8% -3.9% -1.8% -2.8% agenda Change in the Republic of Portugal 4 24/03/2010 1.5% 0.6% -0.4% 1.5% 0.2% 1.1% rating by Fitch 5 30/03/2010 Fitch ratings -0.5% 0.0% 0.0% 0.2% -0.4% -1.6% 5 30/03/2010 Decision to exit the USA market -0.5% 0.0% 0.0% 0.2% -0.4% -1.6% 6 12/04/2010 AGM deliberations -0.6% -0.2% -0.3% -4.3% -1.0% -2.8% Change in hybrid debt ratings by 7 22/04/2010 0.8% 0.1% 0.3% -6.9% -1.6% -5.4% Moody’s Bank Millennium (Poland) third quarter 8 26/04/2010 -7.6% -2.2% -3.1% -4.3% -2.3% 0.2% results 9 27/04/2010 Standard and Poor's rating decision -1.9% 0.0% -0.7% -2.8% -2.1% 2.2% 10 28/04/2010 First quarter 2010 consolidated results 6.1% 1.5% 3.8% -2.9% -2.5% 2.4% Banco de Portugal decision (app lication 11 12/05/2010 -3.6% -2.9% -2.9% -9.4% -3.2% -1.9% of fine) 12 13/05/2010 Change in Moody's ratings -5.7% -1.4% -0.5% -9.3% -1.5% -0.6% 19 First Half of 2010 Report and Accounts
The following chart illustrates the performance of BCP share in the first half of 2010: Price 4 7 EUR 1 0.88 10 0.84
0.8
0.76
11 0.72 5 2 12 0.68 6 8 3 0.64 9 .1234 04 11 18 25 01 08 15 22 01 08 15 22 29 06 12 19 26 03 10 17 24 31 07 14 21 28 Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10
Dividend policy The Bank paid the dividend related to 2009 on April 26, 2010, in accordance with the proposal approved by the Annual General Meeting of shareholders and reiterates that it will maintain the announced dividend-distribution policy, the aim being to pay about 40% of the net income. The dividends paid by BCP since 2000 are detailed in the following table:
Gross dividend Net dividend per share (euros) Payout Dividend Year Paid in per share (euros) Residents Non-Residents Ratio (1) Yield (2)
2000 (3) 2001 0.15 n.a. n.a. 62.4% 2.65% 2001 2002 0.15 0.12 0.105 61.10% 3.30%
2002 2003 0.1 0.08 0.07 49,2% (4) 4.39% 2003 2004 0.06 0.051 0.045 44.70% 3.39% 2004 Interim dividend 2004 0.03 0.0255 0.0225 Final dividend 2005 0.035 0.02975 0.02623 Total dividend 0.065 0.05525 0.04875 41.30% 3.44% 2005 Interim dividend 2005 0.033 0.02805 0.02475 Final dividend 2006 0.037 0.03145 0.02775 Total dividend 0.07 0.0595 0.0525 31,9% (4) 3.00% 2006 Interim dividend 2006 0.037 0.0296 0.0296 Final dividend 2007 0.048 0.0384 0.0384 Total dividend 0.085 0.068 0.068 39,0% (4) 3.04% 2007 Interim dividend 2007 0.037 0.0296 0.0296 Final dividend 2008 0 0 0 Total dividend 0.037 0.0296 0.0296 23.70% 1.27% 2008 2009 0.017 0.0136 0.0136 39.70% 2.09% 2009 2010 0.019 0.0152 0.0152 39.60% 2.25%
(1) Payout ratio is the percentage of net profit distributed to shareholders in the form of dividend. (2) Dividend yield is the annual return, as a percentage expressed by dividing the amount of the gross dividend by the share price at the end of the year to which the dividend refers. (3) Paid in the form of scrip dividend through the issue of new shares and their proportional distribution to shareholders holding the shares representing the Bank's equity capital. (4) On the basis of the net profit before setting aside general banking risk provisions in the sum of 200 million euros.
First Half of 2010 Report and Accounts 20
Communication with shareholders and analysts In complying with its legal and regulatory reporting obligations, the Bank discloses quarterly information concerning its results and business activity and holds press conference and a conference calls with analysts and investors, in which members of the Executive Board of Directors participate. During the first half of 2010, the bank attended several events and organized 3 roadshows, after the earnings announcements, in major financial centers - London and Paris – and participated in 4 investors conferences organized by other banks including Santander (Lisbon), HSBC (London), Morgan Stanley (London), and the Portuguese Day (New York) where it made institutional presentations and one-on-one meetings with investors. During the first half of 2010, 127 meetings were held with investors, compared with 68 in the same period of 2009.
Analysts’ recommendations Price targets BCP shares are covered by the leading domestic and foreign Euros (average for BCP) investment houses, which regularly issue investment recommendations and price targets. Comparing the first half of 0.89 0.77 2010 to the same period of 2009 there was an increase in recommendations and price targets. The average price target of the investment houses that monitor the bank rose from 0.77 euros in the first half of 2009 to 0.89 euros in the first half of 2010, as shown in the chart.
30 Jun 09 30 Jun 10
Treasury shares According to a proposal approved by the Annual General Meeting, the Bank may buy or sell treasury shares up to a limit of 10% of its share capital. As at December 31, 2009, Banco Comercial Português, S.A. held 12,583,354 treasury shares. During 2010, the bank purchased and sold 33,999,911 treasury shares, corresponding to 0.72% of its share capital.
Purchases Sales Total traded
Average Average % of unit unit price share Quantity Value price (€) Quantity Value (€) Quantity capital BANCO COMERCIAL PORTUGUÊS SA (*) 13,598,153 9,360,372 0.688 20,401,758 15,043,775 0.737 33,999,911 0.72% As at June 30, 2010, Banco Comercial Português, S.A. held 5,779,749 treasury shares representing 0.12% of its share capital.
% of 31.12.2009 30.06.2010 capital BANCO COMERCIAL PORTUGUÊS SA (*) 12,583,354 5,779,749 0.12%
(*) As at June 30, 2010, this heading excludes 23,376,155 shares (December 31, 2009: 10,366,667 shares) owned by customers which were financed by the bank and, considering that there is evidence of impairment in respect of these customers under IAS 32/39, the shares of the Bank that they hold were, merely for accounting purposes and in respect of this standard, considered as treasury shares.
Shareholder structure According to the information provided by Interbolsa, the number of Banco Comercial Português shareholders stood at 176,760, as at June 30, 2010 (175,581 as at December 31, 2009). The Bank’s shareholder structure continues to be very dispersed, as no shareholder has more than 10% of the share capital and only 11 shareholders have qualified participations (above 2% of the share capital). In 21 First Half of 2010 Report and Accounts
comparison to December 31, 2009, there was an increase in the weight of the individual shareholders that now represent 27.9% of the share capital (24.6% as at December 31, 2009), and the reduction of the weight of institutional shareholders from 48.9% as at December 31, 2009 to 46.5% as at June 30, 2010.
Shareholder Number of shareholders % of capital
Group employees 3,895 0.57% Other individual shareholders 168,147 27.86% Companies 4,265 25.04% Institutional investors 453 46.53% Total 176,760 100.00%
Number of shares per Number of % of shareholder shareholders capital
> 5,000,000 74 67.25% 500,000 a 4,999,999 325 9.01% 50,000 a 499,999 3,987 9.75% 5,000 a 49,999 35,947 10.40% < 5,000 136,427 3.60% Total 176,760 100.00%
During the first half of 2010 there was an increase in the number of both national and foreign shareholders and an increase of the percentage of the share capital held by national shareholders, which stood at 60.3% as at June 30, 2010.
Number of shares per National shareholders Foreign Shareholders shareholder Number % of Capital Number % of Capital
> 5,000,000 39 30.61% 35 36.64% 500,000 a 4,999,999 264 6.85% 61 2.15% 50,000 a 499,999 3,794 9.23% 193 0.52% 5,000 a 49,999 35,053 10.13% 894 0.27% < 5,000 132,058 3.49% 4,369 0.10% Total 171,208 60.31% 5,552 39.69%
First Half of 2010 Report and Accounts 22
Qualified Shareholdings
June 30, 2010 % of voting Shareholders Number of shares % of capital rights Sonangol 469,000,000 9.99% 10.00% Teixeira Duarte Group Teixeira Duarte - Sociedade Gestora de Participações Sociais, S.A. Teixeira Duarte - Gestão de Participações e Investimentos Imobiliarios, S.A. 305,000,000 6.50% 6.50% Arenopor - Investimentos SGPS, S.A. 27,000,000 0.58% 0.58% Tedal - Sociedade Gestora de Participações Sociais, S.A. 19,500,000 0.42% 0.42% Other (Members of the Board of Directors) 10,196,970 0.22% 0.22% Total 361,696,970 7.70% 7.71% Berardo Group Fundação José Berardo (1) Fundação José Berardo 198,324,440 4.22% 4.23% Fundação José Berardo (ao abrigo de Equity Swap celebrado com BES) 29,710,526 0.63% 0.63% Metalgest - Sociedade de Gestão, SGPS, S.A. (1) Metalgest - Sociedade de Gestão, SGPS, S.A. 63,328,399 1.35% 1.35% Kendon Properties 721,480 0.02% 0.02% Moagens Associadas S.A. 13,245 0.00% 0.00% Cotrancer - Comércio e transformação de cereais, S.A. 13,245 0.00% 0.00% Bacalhôa, Vinhos de Portugal S.A. 10,596 0.00% 0.00% Members dof the Board of Directors of Metalgest, SGPS, S.A. 19,547 0.00% 0.00% Total 292,141,478 6.22% 6.23% Bansabadell Holding, SL 208,177,676 4.43% 4.44% EDP Group EDP -Imobiliária e Participações, S.A 123,509,341 2.63% 2.63% Fundo de Pensões EDP 52,285,541 1.11% 1.12% Menbers of the Board of Directors and Audit Board of EDP, S.A. 353,298 0.01% 0.01% Total 176,148,180 3.75% 3.76% Caixa Geral de Depósitos Group Caixa Geral de Depósitos, S.A. (investment portfolio) 100,281,441 2.14% 2.14% Companhia de Seguros Fidelidade-Mundial, S.A. 22,303,765 0.48% 0.48% Caixa Geral de Depósitos, S.A. (trading portfolio) 570,572 0.01% 0.01% Companhia de Seguros Império-Bonança, S.A. 105,716 0.00% 0.00% Fundo de Pensões CGD 5,905,075 0.13% 0.13% Total 129,166,569 2.75% 2.75% Sogema SGPS, S.A 124,512,917 2.65% 2.66% Eureko BV 118,251,417 2.52% 2.52% Stanley Ho Group Sociedade de Diversões e Turismo de Macau, S.A . 76,112,854 1.62% 1.62% Stanley Hung Sun Ho 30,142,080 0.64% 0.64% Total 106,254,934 2.26% 2.27% Goes Ferreira Group SFGP - Investimentos e Participações , SGPS, S.A. 43,574,742 0.93% 0.93% IPG - Investimentos, Participações e Gestão SGPS, S.A. 58,488,113 1.25% 1.25% Total 102,062,855 2.17% 2.18% Blackrock Group 94,158,383 2.01% 2.01% Total qualified shareholdings 2,181,571,379 46.47% 46.53%
Source: Information received from the shareholders (1) The shares and voting rights held by Fundação José Berardo and Metalgest are subject to reciprocal imputation
23 First Half of 2010 Report and Accounts
PAGE LEFT BLANK INTENTIONALLY First Half of 2010 Report and Accounts 24 Strategy
In a environment that remained highly uncertaint, Millennium bcp felt the need to adjust its management agenda to the current economic environment to ensure continued. The sovereign debt crisis led to a direct and substantial change in terms of wholesale financing, resulting in markets closing for medium- and long-term issues, reducing the banking credit available, incorporating the risk of a drop in deposits, of higher capital requirements due to the re-rating of some assets classes and also of heightened pressure on the banking system’s profitability levels. Millennium bcp reacted to the crisis in sovereign debt markets primarily through i) a defensive positioning in funding management, ii) the increase in assets eligible for discount with the European Central Bank, iii) the deceleration of growth in the loan portfolio along with an effort to increase customer funds, seeking to control the commercial gap, iv) an effort to reprice and increase commission fees, in order to improve the revenue base, which together with the cost control initiatives, resulted in the improvement of results and v) to optimize the risk-weighted assets, seeking to reach a Tier I ratio of around 10%. During the first half of 2010, Millennium bcp's Strategic Agenda was marked by initiatives under the following vectors: Increasing confidence in the Bank; Preparing the Bank to overcome the financial and economic crisis; Focus and sustainability; and Preparing for Higher Financial Performance:
Strategic Initiatives in 2010
Overcoming Focus and Stronger financial Increase trust financial and sustainability performance economic crisis
• Reinforce clients • Credit repricing • Effective charge of •Increase profitability relationship services commissions • Expand customer •New incentive scheme for • Strengthening funds while • Adjust business models all segments capital base. recovering term • New retail network •Grow significantly in Reducing RWA deposits spreads (ActivoBank) international operations • Commercial gap • Reinforcing •Effective management of • Focus on international control collaterals in credit potential lending to portfolio operations companies • Improve results • Cost containment •Increase leaders and • Increase ECB employees engagement eligible assets • Organization streamlining
Among the strategic initiatives implemented in the first half of 2010, it is worth mentioning the reinforcement of the relationship with customers, according to a policy of proximity and increased number of contacts, seeking business opportunities and also detecting signs of impairment, so as to act quickly in credit recovery is order to contain the rise of non-performing loans. The management of capital and liquidity have been in the spotlight, as the Bank acted to control the commercial gap’s evolution and to increase assets eligible for discounting with Central Banks. The Bank also strengthened its capital base and reducedthe Risk Weighted Assets by reinforcing the collateral in credit operations and selling non-core operations (Turkey and USA).
25 First Half of 2010 Report and Accounts
Millennium bcp is clearly focused with regard to its international operations portfolio, promoting expansion in Mozambique and Angola. In Angola, as a result of the implementation of the strategic partnership with Sonangol and Banco Privado Atlântico, the Bank is now better positioned to grow organically, expanding the branch network and increasing its coverage in several provinces. As part of its Vision of Focus and Transformation, the Bank named improved results and the focus on profitability as main goals. The initiatives taken in the first half of 2010, accordingly, consisted in the continued repricing effort and an increase in commissioning, with simultaneous control of costs. In 2009 the Bank launched initiatives to adjust business models. Some of these initiatives are currently being implemented. In particular the restructuring of Private Banking is in its final stage, with a view to strengthening the structural principles for developing the Private Banking business: more and better commercial monitoring; safeguarding the quality of the loan portfolio; focus on relevant markets; role model adjusted to the new legal and regulatory framework and observing compliance with internal rules, regulations and laws applicable and improving the contribution to the Bank’s results. Aware of the importance of innovation as a key distinguishing factor from the competition as well as a sign of excellence, enabling the capitalization of business capabilities and improving customer service, Millennium bcp has launched a new retail network, based on the ActivoBank platform. This new bank was designed for clients who are active users of new communications technologies and who value a banking relationship based on simplicity. The initiatives taken by the Bank in the first half of 2010, fall within the scope of the vision for the period 2010-2012, of "Focus and Transformation", materialised in the emphasis on the European operations portfolio and on affinity markets, and on transformation of the business model in Portugal. Millennium bcp is a bank undergoing transformation: it is institutionally stable, commercially resilient, focused on risk control, efficiency, innovation and customer service. Transformation is both necessary and motivating; it is necessary to regain the path to growth and value creation, and motivating in the sense that it provides the rallying cry for the involvement of management and other personnel. Transformation of the business model in Portugal will allow a return to growth and leadership in Retail, ensuring profitability and efficiency in the Companies segment and sustaining the cost-cutting effort. The strategy of focus and affinity in international operations involves a focus on those European markets that will allow a competitive presence and a significant position in the medium- and long-term, and continuation of investment in affinity markets. The Bank’s vision for 2010-12 also rests on a third pillar: Sustainability, which is the optimisation of capital and liquidity management and the strengthening of risk control, seeking to increase prevention, revise the credit decision process and strengthen loan recovery.
Vision for 2010-2012: Focus and transformation
Focus and Transformation: Focus on the European and affinity portfolio and Transform the business model in Portugal
Transformation in Focus and affinity in Portugal International
Resume growth and leadership in Retail Focus in European markets that sustain Lead the Corporate segments‘ a competitive presence and meaningful profitability and efficiency medium long term position Reinforce investment in affinity Sustain cost cutting effort markets
Sustainability Optimise capital and liquidity management Strict risk control: reinforce prevention, review credit process, strengthen recovery
Mobilise the organization
First Half of 2010 Report and Accounts 26 Economic environment
Despite improvements in the world economy, with significant progress in terms of world trade, the production cycle and, in some advanced economies, higher private employment, the level of uncertainty in financial markets, and particularly in the banking system, remains unusually high. The risks to economic activity favour a prudent approach on business; complete normalcy in the functioning of financial markets is yet to come; bank balance sheets remain affected by the lagged effects of the adverse credit cycle, and of past economic policy and investment decisions. The capital and liquidity reform package adds an extra contingency for the financial systems. Faced with the risk of an institutional crisis of unforeseen consequences and proportions, euro member states agreed on a special financial facility and the European Central Bank extended its scope of intervention to government debt secondary markets. Member states also reinforced their longstanding commitment to financial stability by adopting tough fiscal consolidation plans for the coming years. Such commitment represents a decisive shift in public policy in the coming months. The change in the fiscal stance from the expansionary mode characteristic of late 2008 and 2009 into rigorous austerity is likely to pull economic activity lower over the next few months. The instruments, the credibility and the degree of execution of the goals currently set forth will be key for the speed and extent of the transitioning from fiscal restrictiveness to renewed confidence.
These are not just short-term issues. They will likely continue to weigh on the economic and financial environment for a long period, creating opportunities and threats that might lead financial institutions to evaluate their strategic options, driven by outside events, such as changes in the markets and business segments they want to be in, or forced by internal imperatives, such as strengthening balance sheets, profitability or regulatory demands. Financial institutions are expected to continue dealing with fundamental challenges on their business model and strategic initiative, generating market imbalances and nurturing innovative solutions that might open a whole new range of perspectives for banking activity. Global economic activity is expected to slow after the high growth recorded in the first half of 2010 In the first half of this year, the expansion of global economic activity is estimated to have exceeded its potential growth rate. However, the change in the fiscal stance in several advanced economies, the end of the adjustment cycle of inventories and unstable financing conditions are expected to induce a substantial slowdown in economic activity in coming quarters, particularly so in the debt stricken European countries. Measures to support economic activity and financial systems provided for a reversal of the recessionary environment that lingered during 2009. According to latest IMF estimates, the rate of expansion of world output was close to 5% (annualized) in the first half of 2010. This good performance stemmed from the strong economic momentum of Asian countries, though contributions to growth were more diversified, both by countries and economic sectors, despite European prospects continuing to be of moderate growth.
Notwithstanding the upwards revision for world economic growth, Economic Activity 2008-2011 expected between 4.0% and 4.5% for this year and the next, Real GDP growth rate % confidence in the sustainability of the economic recovery 8 decreased, largely due to restrictions imposed by the reduced margin of public finances in some countries and its impact on 6 international capital flows. Given the bigger interaction between 4 State and the underlying economic activity, resulting from the 2 need for greater public intervention when activity and 0 confidence slumped over the past couple of years, sovereign risk -2 has become even more decisive for the evolution of domestic financing conditions. Hence the pressing need of governments to -4 2008 2009 2010 2011 opt for a clear commitment towards fiscal stability over the medium term, particularly in those countries with more pressing World Advanced economies indebtedness levels. Developing economies
Source:IMF, July.2010 Update 27 First Half of 2010 Report and Accounts
In this regard, credibility and foresight in economic policy choices will be crucial to mitigating the restrictive effects of fiscal consolidation and to reduce the tensions in international financial markets, without which the medium term benefits will hardly outweigh the adjustment costs of the short term. Short-term interest rates rise despite higher risk aversion The concerns about the stability of public finances in the advanced economies favoured the return of risk aversion in financial markets. This was more pronounced in the European countries and was sparked by a sudden and profound change in markets’ perception of sovereign debt levels. Most investment strategies through the quarter aimed at insulating portfolios from market turbulence, with increased exposure to traditional safe haven instruments such as US Treasuries, German bunds and gold. Cyclical assets, meanwhile, tended to lose value. Volatility increased but to levels well below those recorded over the previous year. Sovereign Risk Credit Default Swaps , 5 years, p.b. The acceleration of economic growth did not translate into a rise of long-term interest rates, contrary to what usually occurs 1200 in the early stages of economic recovery. The slope of the yield 1000 curve narrowed as central banks turned less willing to continue 800 expansionary measures and fears over the strength of the recovery surfaced. In the short end of the yield curve, the 600 prospect of a change in market liquidity promoted a sustained 400 increase in the main indexing interest rates from the historical 200 lows reached in the first quarter. Although for the U.S. and the Euro Zone underlying economic indicate that a rise in key 0 interest rates isn’t likely in the near term, the consensus on Jun -09 Dec -09 Jun -10 monetary stance has shifted. In countries where the economy seems more resilient central banks have already started GRE PORT ITA SPA GER IRL reversing the interest rate cycle, in some cases with sequential Source:Datastream increases in key rates. In the Euro Zone and the US, central banks have been mainly acting through changes in their lending procedures. The decision of the ECB to discontinue the six-month and twelve-month lending operations contributed to a significant decrease of excess liquidity in the interbanking markets pushing short-term rates higher. Such adjustment may continue into the second half of 2010, making possible for a return to more normal spreads between the short term interest rates and the ECB’s main refinancing rate. The institutional instability hindered the performance of European financial assets. Sovereign risk premiums reached very high levels, similar to those of emerging markets, indicating expectations of a default on government debt by a euro area country. The European currency depreciated against the dollar and other non-core European currencies. Risk aversion deeply affected the regular functioning of money markets, with negative consequences on financing among the Euro Zone countries. The commitments and the instruments agreed at EU level made it possible to end this vicious cycle, namely by the introduction of the the European Financial Stability Facility (EFSF) and the ECB's intervention in public debt secondary markets. The EFSF could provide up to 750 billion euros (8.2% of Eurozone GDP), of which about a third comes from IMF funding, while the remainder is financed in the market with the support of euro area state guarantees. The activation of this mechanism by a member state is subject to terms and conditions similar to those that the IMF uses in its regular country support schemes. European instability with minor impact on other markets and countries First Half of 2010 Report and Accounts 28
The European instability had adverse effects, albeit limited, elsewhere. The acceleration in world trade remains very favourable for exporters of raw materials, such as Angola or Mozambique, and for the European economies with greater sensitivity to the investment cycle, benefiting indirectly Poland. The policy drive for the development of basic infrastructures in Angola and Mozambique continues to exert a strong boost on economic activity and is expected to improve their production and exports potential. The risk of an overheating economy, given the limited availability of productive factors, requires careful coordination of economic policy to keep inflationary pressures under control. Such concern for more balanced growth underlined the authorities’ decision for tighter monetary policy and more restrictive conditions for lending. Nonetheless, the prospects for Economic Activity Indices Angola and Mozambique are very enticing, with real GDP growth Economic Sentiment Indices above 6% expected this year. Poland stands to benefit from the 110 simultaneous effect of the revival of growth in the German 100 economy, the past depreciation of the zloty and the fact that the economy has been relatively less battered by the crisis of 90 2009, with estimated GDP growth between 3% and 4% for this 80 year. 70 In these countries, there is a revitalization of the banking 60 business, with stronger credit and more customer resources. 50 Jul Ja Jul Ja This improvement contrasts with the difficulties faced by the -08 n- -09 n- 09 10 peripheral countries of southern Europe and some states of Eastern Europe, where the low propensity to invest and PT GRE POL ROM EU constraints in wholesale funding markets dampen credit demand and worsen credit conditions. Romania and Greece will most Source:Datastream likely live under a recessionary environment, given the correction of the macroeconomic imbalances accumulated over prior years. They currently benefit from EU/IMF support policies in return for strict fiscal austerity aimed at placing public finances back on a path of medium- to long-term stability. The social turmoil had a tremendously negative effect on the banking business, reducing deposits and leading to a significant deterioration of asset quality. Having regard to the adverse macroeconomic environment and the lagged effects of this situation, and under an EU wide agreement, Greece established a fund to recapitalize financial institutions, amounting to 10 billion euros, which may participate in the capital of financial institutions through purchase of preference shares.
Slowdown in lending dynamics The extension of the effects of the crisis, with a limited ability of public policies to support economic activity should continue to interfere in banking activity, particularly so through balance sheet quality. This context has contributed to the re-evaluation as to what is the most suitable form and moment for the adoption of the liquidity and capital reform package. Some Credit volumes – euro area Credit to residents, yoy growth rates, % of the proposals may be revised and deferred in time to allow for a more gradual adjustment of financial institutions and 35 economies to the new demands. 30 25 Banking activities continue to develop within a context marked 20 by a degree of unpredictability that is higher than usual. The 15 final impact of the change in economic policy is unknown and 10 some volatility persists in financial markets. The greater 5 difficulty in accessing stable wholesale funding, slow wealth 0 creation and reduced propensity to spending, particularly -5 -10 investment expenditure, underlies the slow nature of lending Mar -99 Mar -01 Mar -03 Mar -05 Mar -07 Mar -09 volumes in Portugal (in some European countries lending volumes have actually decreased). The widespread increase in Euro Area PORT GRE risk premiums and the unstable wholesale funding affected Source:Datastream domestic interest rate levels. Taking into account that key indexing rates may continue their soft ascent, financial conditions should remain relatively unfavorable to the credit cycle over the coming months. 29 First Half of 2010 Report and Accounts
Proposed changes to capital requirements, advanced by the Basel Committee and the Committee of European Banking Supervisors, aim to mitigate a number of shortcomings in the existing framework of Basel II. The regulatory reform includes changes in the level and composition of the capital of financial institutions; heavier deductions on capital; extension of risks being considered for capital calculations; limits on leverage; cyclically adjusted prudential ratios and forward-looking provisions. In addition to the greater selectivity on capital and risk-weighted assets, the proposal introduces new liquidity standards, relative to the availability of liquid assets in the very short term and the long term adequacy of funding vis-a-vis banks assets. All these proposals represent a profound change, shrinking the margin of manoeuvre for financial institutions, with costs for the sector and for economic activity. To that extent, there is an ongoing assessment of these proposals so that alternative formulations are reached in order to minimize their likely negative effects and maximize their supervisory strength, contributing for a greater resiliency of the financial sector in the near future. The collapse of a model of economic growth in advanced economies based on financial markets and the evolution of credit has weakened balance sheets and the business of some financial institutions, and the regulatory framework is likely to induce to changes in the structure of the banking sector, as already visible in Spanish mergers and the divestitures in some markets in the East. Changes in the economic, financial and regulatory contexts foreshadow increased corporate activity ahead, as prior market equilibriums are contested opening the way for new opportunities and threats that will be faced by each institution according to its vision, market positioning and financial capacity. First Half of 2010 Report and Accounts 30 Financial Review
In accordance with the agreement established for the sale of 95% of Millennium Bank AS in Turkey and the sale of all the branches and the respective deposits portfolio of Millennium bcpbank in the United States of America (USA), and in accordance with IFRS 5, as at 30 June 2010 the total assets and liabilities of these subsidiary companies will be presented, respectively, in the item of “Non current assets held for sale” and “Non current liabilities held for sale” in the Consolidated balance sheet, while the total expenses and income for the year will be represented line by line in the consolidated income statement. Until the date of sale, the Group continues to consolidate, in reserves and income, any changes occurred in the net assets of Millennium bank Turkey and Millennium bcpbank USA.
Review of profitability Net income Millennium bcp’s consolidated net income amounted to Euro 163.2 million in the first half of 2010, compared to Euro 147.5 million in the same period of 2009. Net income in the first half of 2010 includes the recognition of an impairment associated to the goodwill of Millennium bank in Greece, in the amount of Euro 73.6 million, while net income in the first half of 2009 includes the gain accounted from the entry of new shareholders in Banco Millennium Angola’s share capital, amounting to Euro 21.2 million. Excluding these impacts, net income increased 87.5%, supported by the increase in net operating revenues, in particular in net trading income, net commissions, net interest income and dividends received, as well as by cost containment, which benefited from the decrease in staff costs, in particular in pension fund costs, despite the reinforcement of the level of loan losses impairment charges. Net income in Portugal totalled Euro 137.9 million in the first half of 2010, compared to Euro 138.7 million in the first half of 2009. Net income in Portugal includes the impacts previously mentioned of the Net income recognition of an impairment associated with the Euro million operation in Greece, in the first half of 2010, and the 6.1% 6.6% gain accounted related with the shareholding in Banco 163 Millennium Angola, in the first half of 2009. Excluding 148 these impacts, net income in Portugal was up by 80.0% 9 25 from the first half of 2009. This performance was sustained by the increase in net operating revenues and 139 138 by the simultaneous reduction in operating costs, despite the reinforcement of the level of charges for 1st half 09 1st half 10 loan loss impairment. Quarterly, it is worth noting the International Portugal growth in net operating revenues, from the first ROE quarter of 2010, supported by the performance of major income items, in particular of net interest income and of net trading income. In the international activity, net income amounted to Euro 25.3 million in the first half of 2010, which compares with Euro 8.8 million posted in the same period of 2009. This rise was boosted by the increase in net operating revenues, in particular in net interest income and net commissions, partially offset by higher operating costs at Banco Millennium in Angola, as a result of the expansion plan underway, and in Bank Millennium in Poland, mostly due to the exchange rate appreciation of the Zloty against the Euro. The evolution in the net income from international activity benefited from the performance achieved in most foreign operations, in particular in Poland, Mozambique and Angola.
31 First Half of 2010 Report and Accounts
Income statement Euro million
1H 10 1H 09 Change 10/09
Net interest income 705.0 675.6 4.4% Other net income Dividends from equity instruments 19.1 3.1 Net commissions 405.0 346.6 16.8% Net trading income 314.6 214.1 46.9% Other net operating income 15.1 51.1 -70.4% Equity accounted earnings 28.9 30.9 -6.6% 782.7 645.8 21.2% Operating costs Staff costs 424.2 444.2 -4.5% Other administrative costs 301.1 278.7 8.0% Depreciation 51.6 52.3 -1.5% 776.9 775.2 0.2% Impairment For loans (net of recoveries) 384.2 279.1 37.7% Other impairment and provisions 114.2 60.9 87.4% Income before income tax 212.3 206.2 2.9% Income tax 21.7 45.9 -52.7% Income after income tax 190.6 160.3 18.9% Minority interests 27.3 12.8 113.1% Net income attributable to the Bank 163.2 147.5 10.7%
Net interest income Net interest income grew by 4.4%, to Euro 705.0 million in the first half of 2010, up from Euro 675.6 million posted in the same period of 2009. The increase in net interest income, despite being restrained by the unfavourable interest rate effect, due to the decrease in customers’ interest rates, following the declining trend of reference market interest rates, was favourably influenced by the positive volume effect, both in the activity in Portugal and the international activity. On a quarterly basis, net interest income in Portugal achieved, in this last quarter, the best performance since the second quarter of 2009. In the international activity, the growth in net interest income was boosted by the favourable interest rate effect, mostly sustained by the performance achieved by Bank Millennium in Net interest income Poland. In addition, it is worth noting the positive Euro million contributions from the subsidiary companies in 1.61% 1.61% Angola and Romania, as well as from Millennium bim in Mozambique, which, excluding the 705 exchange rate devaluation of the Metical against 676 the Euro, showed a positive evolution in net interest income. The net interest margin stood at 1.61% in the first half of 2010, the same level as in the first half of 1st half 09 1st half 10 2009. On a quarterly basis, net interest income Net interest margin has been improving since the second quarter of 2009, benefiting from the evolution in spreads from customer operations, measured by the difference between average interest rates from loans to customers and average interest rates from customer funds, as a result of the progressive repricing carried out in the loans to customers operations, reflecting the adjustment in the implicit cost of risk of loans granted.
First Half of 2010 Report and Accounts 32
Average balances Euro million 1H 10 1H 09 Balance Yield % Balance Yield %
Deposits in banks 3,883 1.21 3,805 2.33 Financial assets 7,482 3.77 4,301 5.41 Loans and advances to customers 74,852 3.43 75,307 4.71 86,217 83,413 Non current assets held for sale 924 6.84 -- -- Interest earning assets 87,141 3.40 83,413 4.64 Non interest earning assets 9,969 10,496 97,110 93,909
Amounts owed to credit institutions 10,483 1.54 8,698 3.37 Amounts owed to customers 45,888 1.91 43,825 2.86 Debt issued and financial liabilities 28,306 1.47 29,896 2.90 Subordinated debt 2,338 2.94 2,618 4.42 87,015 85,037 Non current liabilities held for sale 838 4.33 -- -- Interest bearing liabilities 87,853 1.77 85,037 2.97 Non interest bearing liabilities 2,031 2,692 Shareholders’ equity and minority interests 7,226 6,180 97,110 93,909
Net interest margin (1) 1.61 1.61
(1) Net interest income as a percentage of average interest earning assets. Note: Interest related to hedge derivatives were allocated, in the first half of 2010 and in the first half of 2009, to the respective balance item.
Other net income Other net income, which includes net commissions, net trading income, other net operating income, dividends from equity instruments and equity accounted earnings, totalled Euro 782.7 million in the first half of 2010, compared with Euro 645.8 million in the first half of 2009. Net commissions Net commissions improved by 16.8% to Euro 405.0 million in the first half of 2010 from Euro 346.6 million in the same period in 2009. The rise in net commissions was driven by the favourable evolution in net commissions more directly associated with the banking business, in particular commissions related to the distribution of insurance products through the Bank’s commercial networks (bancassurance), as well as from the growth in net commissions related with financial markets. The favourable performance in net commissions benefited from the positive evolution achieved in both the activity in Portugal (+11.8%) and in the international activity (+30.1%), highlighting the subsidiary companies in Poland, Angola, Switzerland and Greece. On a quarterly basis, net commissions in Portugal exceeded Euro 140 million in the second quarter of 2010, achieving the highest quarterly amount since the third quarter of 2007. Net trading income Net trading income, which comprises net gains arising from trading and hedging activities and net gains arising from available for sale financial assets, stood at Euro 314.6 million in the first half of 2010, compared to Euro 214.1 million in the first half of 2009, mostly influenced by the activity in Portugal. Net trading income from the activity in Portugal, booked in the first half of 2010, includes the debt valuation adjustment, as well as the results from foreign exchange, trading and hedging activities. Net trading income from the international activity was hindered by the effect of the revaluation of derivative financial instruments posted by Bank Millennium in Poland, despite the improvement in the foreign exchange activity registered by the subsidiary companies in Mozambique and in Angola.
33 First Half of 2010 Report and Accounts
Other net operating income Other net operating income, which includes other operating income, other net income from non banking activities and gains from the sale of subsidiaries and other assets, totalled Euro 15.1 million in the first half of 2010 (Euro 51.1 million in the same period of 2009). In the first half of 2009, other net income in the activity in Portugal included the gain related to the dispersal of 49.9% of Banco Millennium Angola’s share capital, in the amount of Euro 21.2 million. Excluding this impact, other net operating income was mainly influenced by lower results from services provided and from the sale/revaluation of real estate. Dividends from equity instruments Dividends from equity instruments, which include dividends received on investments in available for sale financial assets, were up to Euro 19.1 million in the first half of 2010, compared to Euro 3.1 million, in the same period of 2009, and reflect essentially the dividends received associated with the shareholding in Eureko. Equity accounted earnings Equity accounted earnings stood at Euro 28.9 million in the first half of 2010, and include, fundamentally, the appropriation of the earnings associated to the 49% shareholding in Millenniumbcp Ageas (formerly Millenniumbcp Fortis), which registered a favourable performance from the same period in 2009 and reached to Euro 27.6 million, in the first half of 2010.
Other net income Euro million
1H 10 1H 09 Change 10/09
Net commissions Banking commissions Cards 89.8 90.4 -0.6% Credit and guarantees 85.4 87.7 -2.6% Bancassurance 37.2 25.1 48.5% Other commissions 111.7 86.3 29.2% Subtotal banking commissions 324.1 289.5 11.9% Market related commissions Securities 54.3 35.4 53.6% Asset management 26.6 21.7 22.4% Subtotal market related commissions 80.9 57.1 41.7% Total net commissions 405.0 346.6 16.8%
Net trading income 314.6 214.1 46.9% (1) Other net operating income 15.1 51.1 -70.4% Dividends from equity instruments 19.1 3.1 Equity accounted earnings 28.9 30.9 -6.6% Total other net income 782.7 645.8 21.2%
(2) Other income / Net operating revenues 52.6% 48.9%
(1) Includes in the first half of 2009 the gain booked related to the dispersal of 49.9% of Bank Millennium Angola’s share capital, amounting to Euro 21.2 million. (2) Calculated according to rule 16/2004 from the Bank of Portugal.
Operating costs Operating costs, which include staff costs, other administrative costs and depreciation, totalled Euro 776.9 million in the first half of 2010, compared to Euro 775.2 million in the same period in 2009 (+0.2%), influenced by other administrative costs, despite the reduction in staff costs and the decrease First Half of 2010 Report and Accounts 34
in depreciation. The evolution in operating costs was restrained by the performance in the international activity, in particular in Banco Millennium Angola, due to the expansion plan underway, and in Bank Millennium in Poland, reflecting mostly the exchange rate appreciation of the Zloty against the Euro, notwithstanding the lower operating costs posted by Millennium bank in Greece and Banca Millennium in Romania. Consolidated operating costs were favourably influenced by the drop of 4.5% achieved by the activity in Portugal, from the first half of 2009, sustained by the reductions in staff costs and in depreciation. The consolidated cost-to-income ratio, on a comparable basis, stood at 52.2% in the first half of 2010, improving by 7.4 p.p. from 59.6% in the first half of 2009. In the activity in Portugal, the cost-to-income Operating costs ratio in the first half of 2010 stood at 46.2%, benefiting Euro million from both the initiatives implemented to restrain 59.6% operating costs and the emphasis on increasing income. 52.2% In the international activity, the cost-to-income ratio improved by 5.7 p.p., from the first half of 2009, driven 775 777 by the improvements achieved in most geographies. Staff costs
Staff costs reduced 4.5%, to Euro 424.2 million in the 1st half 09 1st half 10 first half of 2010, from Euro 444.2 million in the same period of 2009. The decrease in staff costs mostly Cost to income reflects the lower costs related to the pension fund, Operating costs despite the increase in salaries, influenced by the Activity in Portugal Euro million impact from higher annual salaries. The evolution in staff costs was determined by the 10.3% reduction in 54.6% the activity in Portugal, which more than offset the 46.2% 9.5% increase in the international activity, in particular in Bank Millennium in Poland, partially influenced by 503 480 the exchange rate appreciation of the Zloty against the Euro, and in Banco Millennium Angola, determined by the increase in the number of employees, as a result of 1st half 09 1st half 10 the expansion plan underway in this operation, notwithstanding the lower staff costs at Millennium Cost to income bank in Greece and Banca Millennium in Romania. Other administrative costs Other administrative costs amounted to Euro 301.1 million in the first half of 2010, compared to Euro 278.7 million in the same period of 2009 (+8.0%), reflecting the evolution in both the activity in Portugal and the international activity. The performance of other administrative costs in the activity in Portugal was influenced by the increase in legal fees, consulting, outsourcing, energy and advertising and sponsorship. Nevertheless, it is worth noting the savings achieved in costs related with communications and travels. In the international activity, the evolution in other administrative costs reflects, mostly, the higher costs for rents, advertising and specialised services, associated with the expansion plans carried out in the subsidiary companies in Angola and in Mozambique. Nevertheless, other administrative costs showed a reduction in Bank Millennium in Poland, excluding the exchange rate appreciation of the Zloty against the Euro, benefiting from the impact of initiatives aimed at improving operating efficiency.
Operating costs Euro million
1H 10 1H 09 Change 10/09 0 Staff costs 424.2 444.2 -4.5% Other administrative costs 301.1 278.7 8.0% Depreciation 51.6 52.3 -1.5% 776.9 775.2 0.2% Of which: Portugal activity 480.0 502.5 -4.5% Foreign activity 296.9 272.7 8.9%
(1) (2) Operating costs / Net operating revenues 46.2% 54.6%
(1) Activity in Portugal. Calculated according to rule 16/2004 from the Bank of Portugal. (2) Excludes the impact of specific items. 35 First Half of 2010 Report and Accounts
Depreciation Depreciation costs totalled Euro 51.6 million in the first half of 2010, a reduction of 1.5% from Euro 52.3 million posted in the same period of 2009. The drop in depreciation costs was mainly influenced by the activity in Portugal, in particular by depreciation related to equipment and buildings. This was partially offset by the higher level of depreciation posted in the international activity, as a result of the investments carried out as part of the strategy of organic growth developed in Angola, Mozambique and Romania. Impairment for loan losses and other impairment and provisions Impairment for loan losses (net of recoveries) stood at Euro 384.2 million in the first half of 2010, compared to Euro 279.1 million in the same period of 2009. This evolution was determined by both the activity in Portugal and the international activity. In Portugal, the evolution of impairment for loan losses (net of recoveries) was constrained by the effects from the current financial and economic environment, with particular impact of higher impairment charges, aiming to cover the loan portfolio with impairment indicators. In the international activity, despite the reinforcement of the level of impairment charges posted by the operations in Greece, Switzerland, Angola and Mozambique, following, in these operations, the expansion of the business portfolio. However, it is worth noting the favourable performance, from the same period of 2009, of Bank Millennium in Poland. The cost of risk, measured by the ratio of impairment charges (net of recoveries) to the loan portfolio, stood at 98 b.p. in the first half of 2010 (72 b.p. in the first half of 2009). Other impairment and provisions include other asset Provisioning effort impairment, goodwill impairment and other provisions, in particular provision charges related to assets received as 101b.p. 102b.p. payment in kind not fully covered by collateral, and 70b.p. 76b.p. 77b.p. 98b.p. provisions charged for several risks and contingencies. 88b.p. Other impairment and provisions amounted to Euro 114.2 72b.p. 73b.p. 58b.p. million in the first half of 2010, compared to Euro 60.9 million in the first half of 2009. This evolution is influenced by the recognition of an impairment, in the 1st half 08 2nd half 08 1st half 09 2nd half 09 1st half 10 amount of Euro 73.6 million, in the second quarter of Impairment charges as % of total loans 2010, associated with the goodwill of Millennium bank in Impairment charges (net of recoveries) as % of total loans Greece, in anticipation to the revision of the current Business Plan, which was started by the Bank taking into account the deterioration of the economic situation in Greece, and in accordance with the Group’s accounting policy and IAS 36. However, other impairment and provisions benefited from the lower level of impairment charges related to real estate, resulting from the termination of loan contracts with customers. Review of the Balance Sheet Total assets were up to Euro 98,993 million as at 30 June 2010, compared to Euro 93,786 million posted on the same date in 2009. Loans to customers Loans to customers reached to Euro 78,176 million as at 30 June 2010, showing an increase of 1.5% from Euro 76,988 million (on a comparable basis) booked on 30 June 2009, reflecting mostly the increase of 3.7% in loans to individuals, which totalled Euro 34,875 million as at 30 June 2010, supported by the growth of 4.8% in mortgage loans. Loans to companies stood at Euro 43,301 million as at 30 June 2010, slightly decreasing from 30 June 2009, despite the rise in loans granted to the services sector. Loans and advances to customers (*)
Euro million The structure of the loan portfolio remained stable and 76,988 78,176 diversified as at 30 June 2010, with loans to companies 15,572 17,136 representing 55.4% of total loans portfolio and therefore the main component of loans to customers’ portfolio, while loans to individuals represented 44.6% of total 61,415 61,040 loans to customers.
The growth in loans to customers was mostly 30.Jun.09 30.Jun.10 determined by the performance achieved in the International international activity (+10.0% from 30 June 2009), Portugal sustained by both loans to individuals and loans to (*) Before impairment and excluding Millennium bank Turkey and Millennium bcpbank USA. companies. This evolution was boosted by the increases First Half of 2010 Report and Accounts 36
showed by most international operations, in particular by Bank Millennium in Poland, boosted by the exchange rate appreciation of the Zloty against the Euro, as well as by the subsidiary companies in Mozambique, Angola, Greece and Romania. In the activity Credit quality Euro million in Portugal, the performance in loans to customers (-0.6%) was mainly influenced by loans to companies, as loans to 132.6% 105.1% individuals showed growth from 30 June 2009, driven by 2.7% the rise in mortgage loans. 1.9% 2,146 Credit quality, measured by the non-performing loan 1,456 indicators, in particular overdue loans by more than 90 days as a percentage of total loans, stood at 2.7%, in line 30.Jun.09 30.Jun.10 with the deterioration seen in the current phase of the economic cycle. The coverage ratio for loans overdue by Loans overdue by more than 90 days more than 90 days stood at 105.1% as at 30 June 2010. Loans overdue by more than 90 days / Total loans Coverage ratio
Loans to customers Euro million
30 Jun. 10 30 Jun. 09 Change 10/09
Individuals Mortgage loans 29,945 28,581 4.8% Consumer loans 4,930 5,055 -2.5% 34,875 33,636 3.7% Companies Services 17,408 16,376 6.3% Commerce 4,988 5,276 -5.5% Other 20,905 21,700 -3.7% 43,301 43,352 -0.1% Subtotal 78,176 76,988 1.5% Of which: Portugal activity 61,040 61,415 -0.6% Foreign activity 17,136 15,573 10.0%
(1) Loans associated with assets in the process of sale -- 797
Total 78,176 77,785
(1) Millennium bank Turkey and Millennium bcpbank USA.
Overdue loans by more than 90 days and impairment at 30 June 2010 Euro million
Overdue loans Overdue loans Impairment by more than by more than Coverage ratio for loan losses 90 days /Total 90 days loans
Individuals Mortgage loans 169 185 0.6% 109.5% Consumer loans 399 360 8.1% 90.2% 568 545 1.6% 96.0% Companies Services 489 526 2.8% 107.6% Commerce 296 267 5.9% 90.1% Other 793 918 3.8% 115.8% 1,578 1,711 3.6% 108.4% Total 2,146 2,256 2.7% 105.1% 37 First Half of 2010 Report and Accounts
Customer funds Total customer funds showed an increase of 1.2%, on a comparable basis, to Euro 65,632 million as at 30 June 2010, from Euro 64,854 million posted on the same date in 2009. The growth in total customer funds benefited from the rise of 13.4% in off-balance sheet customer funds, partially offset by the evolution in balance sheet customer funds, hindered by debt securities, while customer deposits kept the same level as of 30 June 2009. The performance in Total customer funds (*) off-balance sheet customer funds was sustained by the Euro million growth achieved in both capitalisation insurance (+15.4%) 64,854 65,632 and assets under management (+8.8%), from 30 June 2009, despite the return, of the instability to financial 14,951 15,710 markets and renewed investor aversion to risk in the second quarter of 2010. 49,902 49,922 The favourable evolution in total customer funds was boosted by the 5.1% increase in international activity, supported by the performance from Bank Millennium in 30.Jun.09 30.Jun.10 International Poland, benefiting additionally from the exchange rate Portugal appreciation of the Zloty against the Euro, as well as the (*) Excluding Millennium bank Turkey and Millennium bcpbank USA. important effort to further increase customer funds at Millennium bim in Mozambique and Banco Millennium in Angola. In the activity in Portugal, total customer funds remained stable from the end of June 2009, essentially conditioned by the evolution in debt securities, which, however, was offset by growth in off-balance sheet customer funds.
Total customer funds Euro million
30 Jun. 10 30 Jun. 09 Change 10/09
Balance sheet customer funds Deposits 44,072 44,066 Debt securities 4,883 6,083 -19.7% 48,955 50,149 -2.4% Off-balance sheet customer funds Assets under management 4,882 4,486 8.8% Capitalisation insurance 11,795 10,219 15.4% 16,677 14,705 13.4% Subtotal 65,632 64,854 1.2% Of which: Portugal activity 49,922 49,902 Foreign activity 15,710 14,952 5.1%
Customer funds related to assets in the process of sale (1) -- 867
Total 65,632 65,721
(1) Millennium bank Turkey and Millennium bcpbank USA.
First Half of 2010 Report and Accounts 38
Liquidity management The first six months of 2010 were characterized by a stabilisation trend in balance sheet customer funds. Despite the ability to capture and further increase customer deposits in the Retail network, liquidity management at Millennium bcp was conducted in a proactive manner, aiming to take advantage of opportunities to access alternative sources of funding, and continuously adapt to the condition of the interbank and international debt markets. The implementation of the Group’s financing plan defined for the first quarter of 2010, concerning wholesale funding, was in line with expectations, in particular, through a new securitisation operation, called “Tagus Leasing”, in the amount of Euro 1.2 billion, and the successful placement of a 2-year fixed rate debt issue in the amount of Euro 750 million and a 3-year floating rate debt issue in the amount of Euro 300 million, both under the Euro Medium Term Notes (EMTN) programme. In the second quarter of 2010, the changes in financial market conditions, in particular a more restricted access to international debt markets and an increased cost of risk, strongly related to sovereign risk affecting some member states of the European Union, implied greater difficulties for financing for financial institutions in general, and restrained the implementation of the Group’s liquidity plan defined for the period. Despite the adverse environment, in the second quarter of 2010, Millennium bcp maintained adequate levels of liquidity, including through the use of Money Market and funding operations with the European Central Bank, and was able to significantly reinforce the pool of assets eligible as collateral in potential refinancing operations with Central Banks, which amounted to Euro 16.5 billion, as at 30 June 2010, compared with Euro 11.3 billion as at 31 March 2010, in the scope of “Oceanus Plan”, which presents a sustainable model of medium-term liquidity for the Group.
Capital The capital ratios of the Group as at 30 June 2010 were determined in accordance with the Basel II guidelines, with the calculation of capital requirements following the standardised approach in respect to credit risk. During 2009, subsequent to the authorization from the Bank of Portugal, the Group applied the standard approach for operational risk and the internal models approach for generic market and foreign exchange risk, in the perimeter centrally managed from Portugal. The consolidated solvency ratio, as at 30 June 2010, stood at 10.0%, with Tier I standing at 8.6%, above the minimum limit of 8% recommended by the Bank of Portugal.
In the scope of the application of Basel II methodologies for Solvency ratio the calculation of capital requirements, adopted by the European Union through the EU directives, and transposed to Portuguese national law in 2007, Millennium bcp 11.1% 10.0% 9.7% requested formal authorisation from the Bank of Portugal to implement the IRB approach for credit and counterparty risk. 8.0% 8.6% 8.9% Regarding the stage of the process under review by the Bank of Portugal concerning the use of the IRB approach, 30.Jun.09 30.Jun.10 Pro Forma Millennium bcp calculated pro forma capital ratios IRB Jun.10 according to the aforementioned IRB approach. According Tier II to this approach the estimated Tier I and total capital ratios Tier I reached 8.9% and 9.7%, respectively, as at 30 June 2010. Core tier I was essentially influenced by the actuarial losses and the change in the amount of the pension fund corridor, determined in the first half of 2010, and by the negative effect related to the amortisation of the deferred adjustments authorised by the Bank of Portugal, related to the transition to IFRS, the mortality table of 2005 and the actuarial losses of 2008. The capital ratios presented do not include the effects related to the sale of the operations in Turkey and USA. 39 First Half of 2010 Report and Accounts
Additionally, risk weighted assets contributed favourably for the performance of capital ratios, given that they fell between 31 March 2010 and 30 June 2010, benefiting from the measures implemented to optimize and reinforce collaterals.
Solvency Euro million (1) Standardised Pro forma IRB 30 Jun. 10 (2) 31 Mar. 10 (2) 30 Jun. 10 (2) 31 Mar. 10 (2) Own Funds Tier I Capital 5,333 6,019 5,288 5,869 of which: Preference shares and Perpetual subordinated debt securities with conditional coupons 1,882 1,935 1,930 1,935 (3) Other deduction (44) (19) (561) (508) Tier II Capital 1,216 1,403 651 913 Deductions to Total Regulatory Capital (295) (127) (158) (127)
Total Regulatory Capital 6,254 7,294 5,781 6,655
Risk Weighted Assets 62,359 64,610 59,527 60,723
Solvency Ratios Core Tier I 5.6% 6.4% 6.6% 7.3% Tier I 8.6% 9.3% 8.9% 9.7% Tier II 1.5% 2.0% 0.8% 1.3% Total 10.0% 11.3% 9.7% 11.0%
(1) The presented pro forma ratios were calculated in accordance with the IRB methods, taking into consideration the revision process, by the Bank of Portugal (BoP), of the submission of the proposal to adopt these methods. Had been considered estimates of the probability of default and the lost given default (IRB Advanced) for the retail portfolio collateralized by commercial and residential real state, and estimates of the probability of default (IRB Foundation) for corporate portfolio, in Portugal. In the 1st semester of 2009, the Bank received authorization from BoP to adopt the advanced approaches (internal models) to the generic market risk and the adoption of the standard approach for the operational risk. (2) The amounts and the ratios presented do not include the impacts from the sale of 95% of Millennium bank AS in Turkey, which will have an estimated impact on Tier I of around +6 b.p., and from the sale of the operation in the USA. (3) Includes, in particular, deductions related to the shareholdings in Millenniumbcp Ageas and Banque BCP (France and Luxembourg).
First Half of 2010 Report and Accounts 40 Segmental Reporting
Millennium bcp offers a wide range of banking activities and financial services in Portugal and abroad, focusing on Retail Banking, Companies, Corporate & Investment Banking and Private Banking & Asset Management. The figures reported for each business segment result from aggregating the subsidiaries and business units integrated in each segment, including the impact from capital allocation and balancing process of each entity, both at balance sheet and income statement levels, based on average figures. Balance sheet headings for each subsidiary and business unit are re-calculated, given the replacement of their original own funds by the outcome of the capital allocation process, according to regulatory solvency criteria. As the process of capital allocation follows the regulatory criteria of solvency in place, the risk weighted assets and, consequently, the business segments’ capital allocation, were determined in accordance with the Basel II framework, applying the standard approach for calculating capital requirements for credit risks. In 2009, subsequent to the authorisation from the Bank of Portugal, the Bank adopted the standard approach for operational risk and the internal models approach for general market risk and foreign exchange risk, for the perimeter managed centrally from Portugal. Each operation is balanced through internal transfers of funds, with no impact on consolidated accounts. To ensure comparability for this information the structural changes that occurred in the second half of 2009 and in the first half of 2010 in the organisation of the segments were reflected in the 2009 figures: Retail Banking and Business Banking were individualised, while Corporate was included in the Corporate & Investment Banking segment. The capital allocation of each business segment in the first half of 2010 was 6.5% and was considered, for comparative purposes, the same percentage of capital allocation as in the same period of 2009. Each segment’s net contribution reflects the individual results achieved by its business units, independent of the percentage held by the Group. The following information is based on financial statements prepared according to IFRS and on the organisational model in place for the Group, as at 30 June 2010. 41 First Half of 2010 Report and Accounts
Retail The Retail Banking includes: (i) the Retail Bank in Portugal, where the strategic approach is to target “Mass Market” customers, those who appreciate a value proposition based on innovation and speed, as well as Prestige and Small business customers, whose specific characteristics, financial assets or income imply a value proposition based on innovation and personalisation, requiring a dedicated Account Manager; and (ii) ActivoBank, a bank focused on clients with a youthful spirit, intensive users of new communication technologies who prefer a banking relationship based on transparency, and featuring simple, modern products and services. The net contribution from Retail Banking in Portugal stood at Euro 78.4 million in the first half of 2010, showing an increase of 5.5% from Euro 74.4 million in the first half of 2009, as a result of the growth in commissions, the decrease in impairment charges and the reduction in operating costs, which more than offset the decline in net interest income. The reduction in impairment charges resulted from a joint effort between the areas of loan granting and loan recovery. Net commissions showed a favourable evolution from the first half of 2009, in particular in commissions related to deposits, mortgage lending, consumer credit and risk insurance. Operating costs were down from the first half of 2009, driven by the measures implemented to simplify organization and to optimize processes, as well as by the reduction in the number of employees. The evolution in net interest income includes the effect from the reduction in net interest income from deposits and credit, determined by both the drop in the volume of loans to customers and the lower spreads in operations with customers. Customer deposits were up by 5.7% sustained by the strategy designed to further increase customer funds, in both demand and term deposits, offsetting the reduction in debt securities, and led to an increase in total customer funds, from Euro 34,556 million as at 30 June 2009, to Euro 36,262 million as at 30 June 2010. Loans to customers eased 2.7% to Euro 34,187 million as at 30 June 2010, compared to Euro 35,123 million posted on the same date in 2009, influenced by the reduction in mortgage lending, loans for property development and consumer credit.
Change Euro million 30 Jun.10 30 Jun. 09 10 / 09 Profit and loss account Net interest income 265.2 357.6 -25.8% Other net income 224.9 210.0 7.1% 490.1 567.5 -13.7% Operating costs 335.3 367.3 -8.7% Impairment 48.0 99.0 -51.6% Contribution before income taxes 106.8 101.2 5.6% Income taxes 28.4 26.8 5.9% Net contribution 78.4 74.4 5.5%
Summary of indicators Allocated capital 1,298 1,368 -5.1% Return on allocated capital 12.2% 11.0% Risk weighted assets 19,972 21,040 -5.1% Cost to income ratio 68.4% 64.7%
Loans to customers 34,187 35,123 -2.7% Total customer funds 36,262 34,556 4.9%
Note: Loans to customers and customer funds on monthly average balances.
In line with the strategy of proximity to customers, the commercial structure of the Retail Network, is now organized by region, since early 2010. A single manager, the Commercial Director, is responsible for each group of branches in a given geographic area, ensuring an integrated vision of the network in that region and bringing closer the decision-making structure closer to customers. This restructuring has First Half of 2010 Report and Accounts 42
helped improve the process of following up on individual and businesses customers, increasing knowledge of their specific needs. In order to strengthen commitment to these objectives, the Bank worked to refine the tools available to support the Retail Network business, especially in relation to applications for financial advice and portfolio management, thus promoting better service for customers. In the first half of 2010, Millennium bcp equipped the entire commercial network with a new account opening process that reduces the physical movement of paper, thus reducing operational risk, and allows for the digitalization of documents, makin images and client signatures immediately available on the system. The first half of 2010 also saw the completion of the training plan for the Retail Network. Individuals Segment The Individuals Segment focused its strategy on developing business proposals that can provide high levels of satisfaction to its customers, while ensuring higher levels of profitability for the Bank. To this end the Bank continued its focus on integrated solutions for Individuals customers during the first half of 2010, translating into a proactive commercial dynamic by setting up two strong primary campaigns: the first, under the slogan “Change Life” focused on raising the number of salary accounts, promoting access to a simple and accessible savings solution, tailored to the savings capabilities of mass market customers; and the second based on the concept “Choose to be Prestige”, which was directed to customers with greater engagement with the Bank and higher levels of profitability: Prestige customers. The “Prestige Program” featured the offer of the “Prestige Security” credit card annuity, and was strongly and effectively promoted across the commercial network to boost placement among the best customers. Younger customers continued to be a strategic priority. There were several actions directed to this segment, of particular note the partnership with publishers Grupo Leya for the launch of the book “Make Your Money Grow”, which combines the financial and educational aspects with an incentive to savings and acquisition in this segment. For customers residing abroad, including emigrants customers, the Bank kept the focus on monitoring the commercial relationship in the network abroad (France, Luxembourg, Germany, Switzerland, United Kingdom, Canada, United States of America, Australia, South Africa, Venezuela and Brazil) through an increase in commercial targets. Regarding the branches in the Domestic Network the Bank focused on the approach to these customers, resulting in an increase in business and greater engagement with the Bank. The Bank continued to promote the digital bank statement, based on the message “Lacking space? Get rid of the your paper statement.” This was intended to demonstrate that this free service, in addition to facilitating access to bank statements - which are now made available online through the portal or e- mail - has advantages for the environment. This initiative had a strong take up, with 560,000 digital statements were issued. Businesses Segment Millennium bcp maintained its position as the leader among Businesses and Entrepreneurs, which together with the strategy of proximity to customers has been consistently reinforced through the provision of an offer of greater value as perceived by customers. The first half of 2010 saw the launch of an innovative and integrated solution targeting this segment called "Frequent Businesses Customers," which offers a comprehensive range of banking services (checks and transfers through the “millenniumbcp.pt” website, cards, personal insurance, store assistance insurance and legal protection) for a fixed monthly amount that is much lower than what the customer would pay for individual acquisition of the service. This product had good levels of subscription. Continuing the policy of supporting SMEs, Millennium bcp launched PME Investe IV, V and VI credit lines, as part of the Protocols with the IAPMEI, PME Investments (Line Management Authority) and the Mutual Guarantee Societies (Norgarante, Garval, Lisgarante and Agrogarante). The Bank also supported entrepreneurship and innovation through the “Early Stages” Credit Line, directed at new business initiatives (new companies being incorporated or those with less than three years of activity), allowing access to credit to new entrepreneurs, offering more attractive conditions. Also in this regard, there was continuity to the Program for Entrepreneurship and the Creation of Self Employment managed by IEFP and SPGM. Attentive to Companies’ cash requirements, the Bank also launched “Credit in Time”, an innovative solution aimed at those who prefer the stability of their cash management, ensuring constant 43 First Half of 2010 Report and Accounts
performance throughout the life of the loan, regardless of market fluctuations, based on fast decision- making operatives, simple formalization and low cost. Given market conditions, adjustments were made to the pricing of credit operations, continuing the effort to adjust the prices charged to customers to the cost of the Bank's funding and strengthening credit collaterals. Companies are increasingly turning to international markets in search of growth. Millennium bcp, has a unit dedicated to this business and launched two credit lines in support of Portuguese exports. Savings and Markets Products The first half of 2010 continued to be characterized by high volatility in capital markets and interest rates, a consequence of the instability in the European sovereign debt market, which is reflected in the difficulty of restoring the interbank and capital markets, with negative consequences for the activity of the financial sector, especially in obtaining financing. In this context, the Bank adopted a commercial policy focused on acquiring customer funds namely on- balance sheet funds with a higher preference for longer maturities, thereby aiming to balance the term of customer applications with the average retail loan portfolio’s remaining term, which has some bias given the significant weight that mortgage loans have in the total portfolio. With this commercial strategy, the Bank intends to further mitigate liquidity risks associated with interbank market conditions, which have a negative impact on the normal development of retail banking. For medium-term savings, the Bank has strengthened its offering in the bancassurance products related to capitalization products with guaranteed minimum rates that are fairly attractive compared to those practiced by the competition, both in savings and retirement, boosting the products through awareness- raising - for example the "PPR friend" offer vouchers. Another aspect of commercial activity has been the promotion of more conservative investment products, that increase customer confidence in the offer and the Bank. In line with this objective, the Bank actively marketed products associated with small savings, offering a return that compares favourably with the leading competitors. These applications contribute to increased levels of customer loyalty, given the new routines and habits of planned savings. Arising from the commitment made by the Bank to the market to strengthen its capital ratios and stabilize resources, Millennium promoted the sale of euro 100 million of “Subordinated Millennium bcp 2010/2020” bonds to customers with the appropriate risk profile. The Retail Bank network recorded 5% annual growth in total customer funds. The on-balance sheet products showed strong growth, with emphasis on customer deposits, given the higher propensity for products with low risk and high liquidity. In the off-balance sheet customer funds, there was a significant increase of pension products and capitalization insurance. The commercial strategy based on strengthening the trust among customers with a leveraged offering in secured products helped underpin this growth, which is reflected in the significant increase in applications for low-risk products, medium- term products and greater connection with the Bank. Credit Products The international economic and financial crisis, the national economic environment, and the low levels of confidence of individuals have limited the evolution of the Loans to Individuals business. The liquidity constraints, the rising cost of funding, increased unemployment and the increased risk associated with operations and customers constitute the factors with greatest impact on business. Despite the current context, the policy of tighter lending and increasing regulatory requirements, including the introduction of the usury rate on personal loans, on January 1, 2010, Millennium bcp has continued to support customers with financing needs and kept their focus on marketing these products, through campaigns and commercial efforts that stimulated business to produce very favorable retention rates. Steps were also made to improve in operational processes and decision making, leading to increased efficiency and compliance with laws and transparency related to providing Customers with information. Mortgage Credit Adjustments were made in the pricing of spreads and commissions, in order to increase profitability, as well as the adequacy of risk variables, including LTV's, terms and grace periods, aiming at a more strict risk management and higher credit standards. The proactive initiatives of the Intermediaries Channel First Half of 2010 Report and Accounts 44
deserve mention, designed to increase business originated by these partners and the promotion of real estate auctions under special conditions, given the high costs they represent to the Bank. Personal Credit Millennium bcp has launched an innovative product for large amounts, called “Credit to measure” designed to meet the needs of a particular market segment. The internal dynamics of Personal Credit and Car Solution campaigns was a constant, enabling the Bank to focus the commercial network on the credit granting goals. In order to comply with legislation (introduction of the usury rate, in compliance with Law Decree No. 133/2009 and respective instructions from the Bank of Portugal, with maximum change in the TAEG in each quarter), adjustments were made in the Price List of fees and commissions and to the overall personal loans offer. Insurance Products In terms of insurance, and after a year that featured the launch of several products and the reformulation of the offer in some coverages, Millennium bcp focused on the consolidation of business processes and boosting the products on offer. The entry into force of Decree-Law 222/2009 had a significant impact in the business, resulting from the requirement of synchronization between the sum insured in the life insurance policies linked to mortgages and the amount outstanding on this credit. Also the limits on the TAEG on personal loans forced the reformulation of the provision of associated insurance. It is expected that the placement of insurance associated with credit suffers some slowdown as result of the lower demand for credit, so the Bank has focused on active selling of insurance to enhance the protection of our global customers. As a result, placements in key protection concerns such as, Life, Personal Accident, Health, Home & Auto are particularly relevant. Of note is the Médis Health Insurance, sales of which increased 15% in the first half of 2010 in value, reaching new levels of market share in the business. This product was supported by a campaign, with emphasis on television and radio, offering a checkup to every subscriber of a new policy. The offer was highly valued by customers, contributing to the growth achieved. Self-banking and payment instruments Millennium bcp has continued to invest in the installation of intelligent ATMs with deposit validation technology for notes and image scanning for checks, having already achieved a market share exceeding 39%, thereby providing an innovative and quality service to customers. For an exclusive service to customers, the selfbanking area in Millennium bcp’ branches is being equipped with new models of machines for bag deposits targeting SMEs and retailers in general, improving the quality, speed and service available. Millennium bcp has continued to carefully manage the network of remote ATM equipment placed by the Bank to service the population, choosing locations that lack banking services and areas of high consumption, maintaining a stock of machines with a use rate substantially above the national average of the ATMs network . This result is reflected in the increase in profitability of 4% for the total stock of machines in the first half of 2010. More security is a direct result of the implementation of the note-inking system on Millennium bcp’s ATMs, a process Millennium bcp pioneered and where it has the largest number of machines protected. The increased capillarity of the points of use of electronic media with the consequent promotion of the use of debit and credit, increasing security and reducing the circulation of cash, is a permanent objective of Millennium bcp achieved through various measures of trade placement of automatic payment terminals. In the first half 2010, Millennium bcp has continued to enhance the Western Union money transfer service, promoting its ease of use as a distinctive characteristic when compared to major competitors. Customers can making their transfers in comfort and security through the phone or the Internet. Because the Brazilian community's is the main immigrant community living in Portugal, the Bank, together with Western Union Int., has promoted this service to Brazil, allowing these customers to make their money transfers to relatives and friends at lower cost. Cards In an difficult environment the card business had still a significant evolution in the first half of 2010, with growth in turnover of 2.8% and growth in volume of purchases of 6.1%. Income on invoicing increased 5.6% compared with the same period of 2009. Overall, the credit cards portfolio showed a slight decline. Debit cards have been the main engine of growth in invoicing, posting an increase of 8.2% in the volume of purchases. This concentration on the 45 First Half of 2010 Report and Accounts
use of debit product indicates a new pattern of card use in the market, posing new challenges to the sector. In the first half of 2010, the bank developed new sales and relationship initiatives, strengthening the value propositions in key segments, including:
• the launch of the new “Prestige Security” card, for the Affluent segment, included in the Prestige Program, distinguished by an exceptional assistance insurance package and the unique offers and promotions for holidays and leisure;
• the campaigns "I’m Going to Rock in Rio!" (Mastercard and Visa cards) and "Your Blue takes you to the Rock in Rio" (AMEX), with a total of 27,000 clients benefiting from the offer of a day of music and entertainment;
• the recognition of the American Express Gemini cards with an "Honourable Mention" in the category of Outstanding New Card Launch at the Marketing Awards 2009. This solution is innovative and unique in the Portuguese market, consisting of two cards (Visa or MasterCard and American Express) that share the same credit limit and the same statement while providing a loyalty program of higher worth;
• the campaign "Show the card and win a movie ticket," in partnership with Zon Lusomundo, recorded an 11% increase of use by customers over the same period in 2009; The first half of 2010 was also marked by the launch of the digital card statement, recently boosted by allowing of clients to join by e-mail. They also may subscribe to this service at any Millennium bcp branch or via the “millenniumbcp.pt” Internet portal. The Amex acquiring network also reported good performance in the first half of 2010, with a net increase of 6.2% for the acquisition of new merchants. The total turnover at American Express outlets in Portugal increased 13.7%, resulting from greater use of the national card (+ 20.4%) and recovery of foreign cards in Portugal (+7.4%), visible at the end of the semester. Direct Banking The growth trend in the use of direct channels continued in the first half of 2010. The number of customers using the channels - Internet and Mobile Phone - increased by 5% in this period and was accompanied by a significant increase in the number of transactions. Millennium bcp remains committed to innovation, launching a new concept of mobility: the mobile app. By installing a simple application on the phone (the app), customers can access their accounts and manage their financial assets in a simple, fast and secure manner. This application is available for iPhones, BlackBerry smartphones and Java-based smartphones. With the app a client can monitor the balances and movements in current accounts, savings and credit cards, make payment for current expenses, transfer funds to accounts of Millennium bcp or other banks, or top-up prepaid cards for mobile phones. This innovative application, so far unique in the Portuguese market, is part of Millennium’s effort to extend the range of ways costumers can contact the Bank, giving them the power to choose their contact channel according to their needs. Another important highlight was the continued reduction in the number of complaints received, the result of more efficient management of the entire contact process, focusing on service levels and implementing measures to improve business procedures. ActivoBank A strategic goal for 2010 is the focus on increasing the customer base and increasing financial resources. Despite the uncertainty in the world economy, Millennium confirmed its status as a leading bank for innovation, surprising the market with the launch of a value proposition allowing ActivoBank to provide cutting-edge financial services. And even though this repositioning and restructuring foucses on transactional retail banking, ActivoBank continues to remain true to its original speacility, focused on investment solutions. This new banking concept involved a new brand image, a new product offering and new service channels, directed at urban customers, young in spirit, who are intensive users of new communication technologies and who favor a banking relationship based on simplicity, transparency, trust, innovation and accessibility. The renewed value proposition is reflected in the brand slogan: "Simplify" – ActivoBank is a Bank thought out in detail to simplify the day-to-day lives of its customers. To achieve this repositioning a number of initiatives were implemented between March and June 2010, with an emphasis on the: First Half of 2010 Report and Accounts 46
• launch an Affiliates program to attract customers and forward requests for servicing;
• development of a new easy-to-use website that is fast, intuitive and reliable, as well as an innovative platform for smartphones that allows costumers to check accounts, transfer and top up mobile phones, among other services;
• simplification of operational processes, especially those that have a direct impact on customers, such as account opening and the possibility of delivery of debit cards on demand;
• opening of four new branches, three in Lisbon and one in Porto, with an innovative design in addition to an expanded office hours, from 10:00 to 20:00. The 3 branches that are located in shopping centres are also open on Saturdays;
• restructuring the product portfolio in order to make it more competitive, transparent, easy to understand, and to contract;
• adoption of the ActivoBank brand, using a new image and the endorsement of Millennium, capitalizing on the values, reliability and credibility of the Group. As a result of these measures, and even though the launch of the new operation occurred only on March 18, 2010, the Bank increased its rate of acquisition in the first half of 2010 to 414% compared to the same period in 2009. The activity of ActivoBank in the second half of 2010 will remain focused on the ambitious goal of adding 10,000 new customers through initiatives that lead to the consolidation and affirmation of the new value proposition.
Companies and Specialized Credit The Companies segment, in Portugal, which covers the financial needs of companies with annual turnover between Euro 7.5 million and Euro 100 million, focused on innovation, offering a wide range of traditional banking products complemented by specialised financing. Within the scope of the cross- selling strategy, Companies also acts as a distribution channel for financial products and services of the Millennium bcp business areas as a whole. The net contribution of Companies in Portugal stood at Euro 5.5 million in the first half of 2010, compared with Euro 21.7 million in the first half of 2009. The performance of this segment was determined by the increase in impairment charges, despite the stabilisation in other net income. Other net income grew by 54.8% from the first half of 2009, influenced by the favourable performance in commissions, in particular commissions related to financial services and loans. This increase offset the lower net interest income from deposits and loans, which was determined by the decrease in spreads from operations with customers. Quarterly, net interest income showed an upward trend in the second quarter of 2010, from the two previous quarters, as a result of the repricing policy implemented in loans operations, in order to adequately reflect the increased implicit cost of risk from refinancing operations to new loans granted. The increase in impairment charges posted in the first half of 2010, when compared with the same period in 2009, resulted from the higher levels in terms of non-performing loans and the devaluation of collateral following the decline in capital markets. Customer deposits decreased by 7.1%, conditioned by the current economic and financial cycle, leading to a decrease in total customer funds of 10.8% from Euro 1,893 million as at 30 June 2009 to Euro 1,689 million as at 30 June 2010. Loans to customers fell 7.1% to Euro 10,214 million as at 30 June 2010, compared to Euro 10,997 million posted on the same date in 2009, influenced by the reduction in the funding in national currency, in loans for property development and in medium- and long-term credit.
47 First Half of 2010 Report and Accounts
Change Euro million 30 Jun.10 30 Jun. 09 10 / 09 Profit and loss account Net interest income 85.0 100.0 -15.0% Other net income 41.1 26.6 54.8% 126.1 126.5 -0.3% Operating costs 29.6 28.6 3.7% Impairment 89.0 68.4 30.0% Contribution before income taxes 7.5 29.5 -74.5% Income taxes 2.0 7.8 -74.5% Net contribution 5.5 21.7 -74.5%
Summary of indicators Allocated capital 643 733 -12.3% Return on allocated capital 1.7% 6.0% Risk weighted assets 9,892 11,274 -12.3% Cost to income ratio 23.5% 22.6%
Loans to customers 10,214 10,997 -7.1% Total customer funds 1,689 1,893 -10.8%
Note: Loans to customers and customer funds on monthly average balances.
As a result of the adverse economic environment, the commercial guidelines of the Companies network in the first half of 2010, consist of: i) increasing customer funds, helping to lower the commercial gap; ii) strict management of credit and capital consumption by adopting a more selective granting policy, both in lending and in credit quality, by strengthening collaterals; and iii) improving the profitability of margins and transactions, adjusting spreads of transactions in the portfolio and of new transactions to the associated risk, optimizing the security level of the transactions and reducing exemptions from commissioning. In the current market environment, proximity to customers assumes central importance, in order to regularly monitor their activity, trying to identify new business opportunities as well as detect any signs of difficulty allowing for preventive action by the Bank. In this context, the "even closer to customers" program was implemented following similar action that took place in 2009, which recorded remarkable success and satisfaction from customers. In adittionto the definition of generic guidelines specific to each customer, depending on their involvement with the Bank, the level of the main strategic vectors defined (resources and treasury, credit, trade finance, cross-selling and customer acquisition), this program involves holding sessions of commercial promotion, with the aim of fostering better understanding and interconnection between the Bank and its customers, addressing current issues, providing information about new solutions to support business and developing networking. In the sessions already organized in 2010, besides a perspective on the macroeconomic framework, at the national and international level, issues related to business competitiveness were also discussed, particularly in terms of access to credit (consequences for companies of adopting Basel II by Banks' share and economic and financial indicators of reference), implications for companies of the new accounting standards system and guidelines to support investment and exports (the main economic driver), ending with a presentation on Millennium bcp’s commercial policy, presented by the Director with that area of responsibility. The events held so far yielded great customer satisfaction, with approximately 92% considering them useful or very useful. In parallel, the Bank also carried out under the program internal training for the commercial network, focusing on issues such as improving efficiency in the consumption of capital, lines supporting investment (PME Investe), and solutions to support export activity and commercial credit, focusing on factoring. The Specialized Credit Department continued to be strongly affected by the economic downturn, mainly by the drop in investment, so that almost all the products decreased over the previous year. However, products related to automobile financing, show a reverse trend, with a remarkable growth in excess of 50%, in line or outperforming the market, and the Bank has maintained market leadership with a share of 19% among banking operators (figures from the Leasing and Factoring Association as of May 2010). Equipment Leasing turnover was lower than the market, partly reflecting the repricing effort, which resulted in a reduction in Bank’s market share. The Bank’s Real Estate Leasing market share remains stable at around 21%. In this context, Factoring behaved more in line with the market preference for First Half of 2010 Report and Accounts 48
liquidity, with the Bank maintaining a market share exceeding 20% in both invoicing taken and credit stock, but with a significant increase in profitability, as a result of the repricing effort. With respect to the Real Estate Development Department, the prospects for the beginning of the year already pointed to the continuation of an adverse economic environment and thus reflect, increased difficulties for Real Estate Developers in the placement and development of their product, limiting the definition of the strategy action guidelines for 2010 in terms of selectivity in the choice of companies and projects to be funded, demands on the capital and guarantees structure of each project, management and adequate monitoring of the risk and size of each project and rigour in price management. It follows that the Real Estate Lending portfolio for the first half of 2010 stood at 2,788 million, representing a decrease of 2.9% over the same period of 2009. The Bank has also developed a set of actions to implement strategy, particularly:
• creation of two new business lines to support trade finance, amounting to euro 300 million for operations placed until December 31, 2011 with the aim of promoting investments in support of the national export of consumer goods, also in the form of credit to the importer with support for secure credit COSEC;
• sponsorship of the 4th Annual Conference on "Financial Management, Treasury and Risk for Companies in Portugal, organized by EuroFinance, the world leader in organizing events in this area;
• participation in various initiatives to support entrepreneurial activity launched by the Portuguese Government, including the multiple “PME Investe” credit lines supporting agriculture and tourism sectors;
• participation in some events, together with the International Department and the Chambers of Commerce, aimed at strengthening the links with customers and enhancing the presentation of business opportunities in other markets, especially the Africa Forum for interconnection to potential U.S. investors in African countries where Portugal has historical links;
• rating classification of the Real Estate Credit financings, impacting the level of risk control and improvement regarding the operability of the process that led to the change of some procedures and their interaction with the Operations Department;
• increase in the control and monitoring of property development projects, with the activities of project monitoring and supervision defined and handled by specialized companies;
• restructuring of the software applications that support the process of Real Estate Credit, mitigating operational risk, improving decision making and funding monitoring, and ensuring implementation of the latest standards established by the Bank of Portugal;
• implementing commercial actions in order promote auto finance for the Retail network’s customers;
• new partnership agreement with the SGald Automotive company, a fleet management company incorporated in the Société Générale Group, with which new Renting contracts began to be awarded (the former partnership with GE Capital Fleet Services ended in late May 2010 with an immediate effect on the level of new business, while maintaining the servicing for the portfolio of ongoing contracts);
• launch in June of a comprehensive integrated program of training, aimed not only specific areas of specialized credit, but also the technical areas about financial markets and their risks as well as in behavioural areas in general, with the aim of completing a process that will result in the first certification of Specialized Credit Managers in Portugal. In the second half of 2010, the business of the Companies network will require special attention to the judicious management of credit risk by selecting clients best able to overcome the current crisis, adjusting investment proposals submitted to funding arrangements more suited to the needs involved, while cautioning the appropriate protection of loans and safeguarding the Bank's income statement. The focus on efficient use of capital will continue, establishing transparent and lasting relationships with customers through the strategy of maintaining a close and regular and systematic monitoring, focusing on diversity in the placement of solutions for the capture of companies’s treasury (e.g., pooling cash, cash management systems, direct debits) and product enhancing commissions (e.g., leasing, life insurance and pension funds, hedge instruments), also encouraging the internationalization of companies in markets with strong GDP growth rates (North Africa, Angola, China, etc.). In terms of specialized credit, forecasts point to production volumes similar to those seen in the first half of 2010, keeping the goal of implemeting a strict policy regarding risk analysis and appropriate 49 First Half of 2010 Report and Accounts
pricing, depending on the customer’ risk profile, time and level of protection of the operations, focusing on small and medium size deals. As for the Real Estate Development Department, significant changes in the macroeconomic scenario aren’t expected and as regards the housing market in particular, the strategy was updated, continuing to focus on risk management and price versus volume with regard to new transactions, maintain the strict monitoring of the transactions in the portfolio, and reinforcing the action of adjusting the price to risk.
Corporate and Investment Banking The Corporate and Investment Banking segment includes: (i) the Corporate network in Portugal, targeting corporate and institutional customers with an annual turnover in excess of Euro 100 million, providing a complete range of value-added products and services; (ii) the Investment Banking unit specialised in capital markets, providing strategic and financial advisory, specialised financial services – Project finance, Corporate finance, Securities brokerage and Equity research - as well as structuring risk-hedging derivatives products; and (iii) the activity of the Bank's International Division. The Corporate and Investment Banking segment showed a net contribution of Euro 14.9 million in the first half of 2010, compared to Euro 71.0 million posted in the first half of 2009. The performance of this segment was determined by the higher impairment charges in the Corporate network, due to collateral devaluation, despite the favourable performance in other net income and in operating costs. Net operating income showed a favourable trend and grew 6.9%, benefiting from the increase in commissions associated with credit, bonds and commercial paper. Net interest income was hindered by the unfavourable interest rate effect, resulting from the decrease in the spreads in operations with customers, despite the positive volume effect in loans to customers. Operating costs also showed a favourable evolution, decreasing from the first half of 2009, and showing sustained savings, as well as synergies associated with the process of merging of Banco Millennium bcp Investimento into Banco Comercial Português. Total customer funds decreased 6.3% to Euro 10,970 million as at 30 June 2010, compared to Euro 11,713 million posted on 30 June 2009, as a result of the decrease in customer deposits, affected by the demobilization of some institutional clients. Loans to customers amounted to Euro 13,445 million at end of June 2010, decreasing 4.9% from Euro 12,820 million at end of June 2009, sustained by financing in national currency. Change Euro million 30 Jun.10 30 Jun. 09 10 / 09 Profit and loss account Net interest income 93.7 105.9 -11.5% Other net income 94.9 88.8 6.9% 188.7 194.7 -3.1% Operating costs 37.3 40.5 -8.1% Impairment 131.1 56.6 131.6% Contribution before income taxes 20.3 97.5 -79.2% Income taxes 5.4 26.5 -79.7% Net contribution 14.9 71.0 -79.0%
Summary of indicators Allocated capital 924 950 -2.8% Return on allocated capital 3.3% 15.1% Risk weighted assets 14,211 14,616 -2.8% Cost to income ratio 19.8% 20.8%
Loans to customers 13,445 12,820 4.9% Total customer funds 10,970 11,713 -6.3% Note: Loans to customers and customer funds on monthly average balances.
First Half of 2010 Report and Accounts 50
Corporate network The commercial orientation of the Corporate Network in the first half of 2010 was in many ways similar to the Companies Business, and consists of: i) increasing customer funds, helping to lower the commercial gap; ii) strict management of credit and capital consumption by adopting a more selective granting policy, both in lending and in credit quality, by strengthening collaterals; and iii) improving margins and transactions’ profitability, adjusting the spreads of the transactions in portfolio and of new transactions to the associated risk, optimizing the security level of the transactions and reducing exemptions in commissioning. The Bank has also developed a set of actions to implement strategy, particularly:
• creation of two new business lines to support trade finance, amounting to euro 300 million for operations placed until December 31, 2011 with the aim of promoting investments in support of the national export of consumer goods, also in the form of credit to the importer with support for secure credit COSEC;
• sponsorship of the 4th Annual Conference on "Financial Management, Treasury and Risk for Companies in Portugal, organized by EuroFinance, the world leader in organizing events in this area;
• participation in some events, together with the International Department and the Chambers of Commerce, aimed at strengthening the links with customers and enhancing the presentation of business opportunities in other markets, especially the Africa Forum for interconnection to potential U.S. investors in African countries with which Portugal has historical links; The actions of the Corporate Network, during the second half of 2010, will continue to be marked by strict management of credit risk and capital consumption and simultaneously by the improvement in margin and profitability of operations. The relationship with customers will be based on a strategy of close, regular and systematic monitoring, focusing on diversity in the placement of solutions for the capture of companies’ treasury (e.g., pooling cash, cash management systems, direct debits) and product enhancing commissions (e.g., leasing, life insurance and pension funds, hedge instruments), also encouraging the internationalization of companies in markets with strong GDP growth rates (North Africa, Angola, China, etc.).
Investment Banking The Bank maintained a 6% market share in the Euronext brokerage during the first half of 2010. It is worth mentioning the increase in the number of customers and the increase in the amount invested, with direct access to the trading room and discretionary management actions (Private Brokerage), originated from the Private Banking and Retail networks. The amount placed in certificates increased by more than 50% in June year-to-date and has now surpassed the 5,000 investors mark. It was released na innovative product, the PIC- Certificates Investment Plan, which allows the investmentment of small amounts, periodically, in the medium and long term. The admission to trading of Certificates on Euronext is near completion, which will extend this product distinctive offering to a broader range of customers beyond those of the banks that are OPEX members, in short, all banking customers nationwide. The growth of warrants have been limited by the high market volatility in recent months. In the fixed income segment of capital markets, despite the difficult market environment experienced, the Bank has again been very active and is responsible for designing and setting up a relevant set of new operations, some of them innovative. In the organization and setting up of bonds to customers, of particular note is the leadership of issues to EDP - Energias de Portugal, SA (euro 500 million in the private placement format); for Controlinveste (issuing of bonds convertible into shares of Portugal Telecom, SGPS, SA, amounting to 224 million euros, guaranteed by the Millennium bcp); and for Benfica SAD (euro 40 million, placed through Public Offer). Also of note is leadership of a number of new Commercial Paper Programs issues for key Portuguese companies, including the operations performed for EP - Roads of Portugal, SA (euro 180 million), for Brisa (euro 50 million) and for Opway Group (euro 50 million). With regards to the structuring of the Bank's own operations, the securitization of loans involving a real estate, car and equipment leasing portfolios amounting to euro 1,200 million (the Tagus Leasing No.1) was completed; Covered Bonds in the amount of 1,750 million euros and two issues of senior unsecured debt, the aggregate amount of 1,050 million euros, were issued under the Euro Note Programme of Millennium bcp, and placed on the international market . It is also worth emphasizing the intense activity in the setting up and placement of structured products whose distribution was secured by the Retail and Private Banking networks of the Bank, taking the total amount allotted amounted to 51 First Half of 2010 Report and Accounts
more than 1,350 million euros. Among those structures it is worth mentioning the “Millennium Rendimento Plus” and the “Millennium Rendimento Extra” products. In the first half of 2010, and despite the difficulties related to the macro and micro-economic environment, positive results were obtained from the sale of treasury products, including cash products (foreign exchange spot and forward trading, applications and short-term fixed rate funding), as well as interest rate, exchange rates and commodities hedging derivatives. In the corporate finance area, the Bank participated in several relevant projects completed in the first half of 2010, including advising Cimpor - Cimentos de Portugal, regarding the takeover offer launched by the CSN - Companhia Siderurgica Nacional. The Bank has also continued to develop several projects of assistance to customers in the segment of mergers and acquisitions, with the completion of their operations planned for the second half of 2010. In the equity capital markets area the Bank continued, in the first half of 2010, the takeover offer of Teixeira Duarte - Engineering and Construction SA, announced by Teixeira Duarte, SA, acting as Global Coordinator. This transaction’s goal is to complete a corporate restructuring process of the Teixeira Duarte Group. During this period, the Bank was also Global Coordinator in organizing and setting the Public Share Offer of VAA - Vista Alegre Atlantis, SGPS, SA. In the first half of 2010 the Bank maintained an active role in structured finance operations. Of particular note was the participation as Mandated Lead Arranger & Agent of the following operations: the long-term loan amounting to euro 81.5 million for finance the reorganization of the ownership structure of Grupo Salvador Caetano; and the syndicated loan of euro 168.5 million for Sport TV, to refinance existing debt and support the acquisition of television rights to broadcast matches of the Portuguese League for Professional Football. In the project finance business area, the Bank participated in many relevant operations at the national and international levels, including: Mandated Lead Arranger in the financing, amounting to EUR 467 million for the organization and settin up of the operation of a portfolio of twelve wind farms in Portugal, called ENEOP 2, with a total installed capacity of 480 MW; project contracts signature for concession of the section of High Speed Railway between Poceirão and Caia, where the Bank is a shareholder of the concessionaire ELOS – Ligações de Alta Velocidade, S.A., as well as its Financial Advisor and Mandated Lead Arranger; closing of the loan operation to EP - Roads Portugal S.A., by Mafratlântico from a bank syndicate co-led by Millennium bcp, totaling over 200 million euros.
International Department To implement the strategy for greater focus on attracting new sources of funding for the Bank, the International Division, in conjunction with the Treasury and Markets Department, is actively involved in setting lines and limits on money market operations, placing the Bank's debt and opening up new lines of credit as well as strengthening and maintaining existing ones. This action was developed through roadshows and meetings in European markets and North Africa, and 130 institutions were contacted. Relationship with Central Banks and Supranational was increases by negotiating lines, funding and hedging. In conjunction with the European Investment Bank (EIB), the Bank launched a credit line for financing small and medium enterprises, amounting to euro 50 million, that focuses on financing leasing projects of Portuguese companies. At the institutional custody business of particular note the increase by 12% to euro 112,000 million in total assets under custody for institutional investors, and regarding transactional business it is worth mentioning the growth of 11 and 8%, respectively, of commercial payments received and issued by the Bank. Partnerships with organizations that support internationalization and export were reinforced through the participation in seminars focusing on markets, business opportunities and investment in the following countries: Angola, Mozambique, Romania, Poland, Algeria, Libya, Tunisia and Saudi Arabia. The action program and the goals for the second half of 2010 include the implementation of road shows to markets in Asia and the Middle East in order to diversify the Bank’s customer base and exploring opportunities in dealing with the segment of Sovereign Funds. The completion of the commercial action plan also depends on the Bank’s presence in international events and forums.
First Half of 2010 Report and Accounts 52
Private Banking and Asset Management The Private Banking and Asset Management segment, for business segments purpose, comprises the Private Banking network in Portugal and subsidiary companies specialised in the asset management business, as well as the activities of Banque Privée BCP in Switzerland and Millennium bcp Bank & Trust in the Cayman Islands. The Private Banking and Asset Management segment posted a net loss of Euro 9.4 million in the first half of 2010 compared with a net loss of Euro 6.1 million in the first half of 2009. This evolution reflects the decrease in net interest income due to the reduction in spreads of deposits and credit to customers, and the increased financing cost as a result of developments in financial markets. The decrease in other net income, arising from the performance of International Private Banking, is associated with the decrease in commissions related to financing in foreign currency and to securities deposited. Operating costs showed a favourable performance, from the first half of 2009, benefiting from the decrease in other administrative costs, mainly influenced by consulting costs. Total customer funds were up by 5.2% from 30 June 2009, supported by growth of 27.3% in debt securities and of 7.3% in assets under management. Loans to customers amounted to Euro 1,307 million as at 30 June 2010, compared to Euro 2,298 million as at 30 June 2009, as a result of the reduction in loans to customers from Private Banking in Portugal, partially associated to financing in local currency.
Change Euro million 30 Jun.10 30 Jun. 09 10 / 09 Profit and loss account Net interest income 12.0 21.0 -42.5% Other net income 13.1 14.5 -9.8% 25.1 35.5 -29.2% Operating costs 17.5 18.3 -4.7% Impairment 20.6 20.9 -1.2% Contribution before income taxes -13.0 -3.8 -- Income taxes -3.6 2.4 -- Net contribution -9.4 -6.1 -52.5%
Summary of indicators Allocated capital 59 93 -36.3% Return on allocated capital -32.0% -13.4% Risk weighted assets 907 1,423 -36.3% Cost to income ratio 69.5% 51.7%
Loans to customers 1,307 2,298 -43.1% Total customer funds 7,018 6,671 5.2% Note: Loans to customers and customer funds on monthly average balances.
Millennium bcp private bankers In the first half of 2010, the Private Banking restructuring process, which started in 2009 continued, focusing on four areas:
• Onshore commercial area;
• Offshore commercial area;
• Support areas;
• Investment advisory area. In order to coordinate the proposed action plan for implementing the new business model a temporary organization (Program Office) was created, reporting to a Steering Committee which distributed all the 53 First Half of 2010 Report and Accounts
work in seven workstreams. This measure allowed the simultaneous development of autonomous projects, including:
• redefining the Value Proposition;
• definition and implementation of the advisory model that allows for systematic monitoring and alignment of customer portfolios over the proposals submitted;
• enhancing skills and the number of Investment Advisors;
• optimization of the onshore support structure;
• amendment of the model following non-resident customers;
• launching a program to stimulate business in order to increase the pace of acquiring new customers and simultaneously increase the average engagement with existing customers;
• segmentation of customers according to their profiles and investment portfolios;
• streamlining service as a supplement to the home banking offer. In the context of what lies ahead in the second half of 2010, the key is to ensure the continuity of this process with a view to strengthening the structural principles for developing the Private Banking business.
• increased and improved commercial follow up;
• safeguarding the quality of the loan portfolio;
• improving the contribution to the Bank's results.
Asset Management Domestic Mutual Funds, albeit constrained by the instability in financial markets recorded in the second quarter of 2010, continued to show a positive evolution, with redemptions decreasing 29% and subscriptions increasing 344% in the 1 st half of 2010. The investment policy pursued in managing these funds, sought to adapt the structure of portfolios to a backdrop of slowing economic recovery, taking the opportunity of the markets correction to take on exposure, improving the degree of liquidity of the portfolios and capitalize on the appreciation of the U.S. dollar. Millennium Gestão de Activos has maintained a leading position in two segments with higher value added funds: Equity Funds (2nd place), regarding the management performance, and although no Millennium Fund was distinguished by Morningstar in the first half of 2010, as at June 30, 5 Millennium funds occupied the first place in their performance ranking since the beginning of the year: Millennium Disponível, Millennium Obrigações Mundiais, Millennium Acções Portugal, Millennium Prestige Conservador e Millennium Prestige Moderado. In late June 2010, Millennium Gestão de Activos recorded a 9.89% share of the market of mutual investment funds, with monthly increases presented in the second quarter and increase of market share of 0.47%. The decision to align the campaign for these with the cycles of the retail network’s commercial plan proved right, with goal setting for the branches contributing decisively to the most successful placement. This methodology was applied for the PPR funds and for a basket of selected investment funds in each cycle. The offer has been strengthened with the launch of a new Treasury fund: Millennium Liquidez, which started sales on April 5, 2010. To consolidate the previous policy of pricing of most equity funds with the aim of ensuring a competitive position, the exemption from subscription fees and the reduction of the redemption commissions was made permanent. For the second half of 2010 new investment funds are expected to be created. Real Estate Investment Funds (FII) in the first half of 2010 exceeded by 4.6% the figure recorded for the same period in 2009, with the Fundo Aberto Portfolio Imobiliário in campaign for 3 rd and 4th business cycles. The objective proposed in terms of attracting investments from customers of the Retail and Private Banking networks was achieved, exceeding the figure recorded a year earlier by 18.5% and rising to the 6th place of the ranking of the largest FII operating in Portugal. The activity of the industry of Real Estate Closed Funds of Private Subscription (FIISP), managed by Interfundos, increased 1.2% over the same period last year, having been particularly affected by a number of factors through the first half of 2010, including the difficult economic environment and the worsening of conditions of access to credit by all economic agents. Mortgages suffered from the conditions of eligibility of families and property developers as a result of structural failure of equity in First Half of 2010 Report and Accounts 54
most of the projects in conjunction with sales at very low levels - in particular the residential tourism projects - revealed difficulties in developing and boosting their activity. In an environment characterized by low levels of confidence among businesses and households, there were also significant changes in the level of the fiscal framework that regulates the activity. The 2010 budget law to cancel the exemption of 50% of the rates of IMT and IMI, with respect to FIIFSP, changed the tax framework again, negating not only the benefits so far in law and which drive the activity of the Sociedades Gestoras de Fundos de Investimento Imobiliário, as well destabilizing an activity which fosters the economy and which, given the maturity of the projects involved, requires a stable legal and fiscal framework. The positive changes at the level of the legal framework for Urbanization and Construction, with a view to simplifying it, as well as the long-awaited but not yet fully regulated Sociedades de Investimento Imobiliário, seem to be at this stage, clearly insufficient for strengthening and boosting activity. The persistence of questions about the legislative framework for rehabilitation and upgrading of the urban grid continue to contribute to the delayed renewal of uninhabited real estate in urban centres. The expected entry into force of a proposed regulatory action on assessing real estate property held by real estate investment funds, already subject to public consultation by the regulator, points to new and profound changes to the legal framework, with significant impact on the level of funds managed by Interfundos. It is in this difficult and uncertain environment that the management company will seek to conduct its business, as a market leader, channelling its commercial initiative through the Millennium’s sales networks, looking for new markets and seeking to present new solutions in order to respond to market opportunities. 55 First Half of 2010 Report and Accounts
Foreign Business The Foreign Business segment, for the geographical segments purpose, comprise the operations outside Portugal, in particular Bank Millennium in Poland, Millennium bank in Greece, Banque Privée BCP in Switzerland, Banca Millennium in Romania, Millennium bim in Mozambique, Banco Millennium Angola in Angola and Millennium bcp Bank & Trust in the Cayman Islands. Millennium bank in Turkey and Millennium bcpbank in the United States of America are in the process of being sold. The Foreign Business segment, for the business segments purpose, comprise the Group operations outside of Portugal, excluding BCP Banque Privée in Switzerland and Millennium bcp Bank & Trust in the Cayman Islands, which are included in the Private Banking & Asset Management segment. The net contribution of the Foreign Business segment totalled Euro 46.1 million, compared to Euro 26.3 million in the first half of 2009. The evolution of the net contribution (+75.0%) reflects the increase in operating income, mainly boosted by net interest income (+48.7%), benefiting from the volume and interest rate effect, mainly supported by the performance achieved in the operation developed in Poland, highlighting as well positive contributions from the subsidiary companies in Angola, Romania and Mozambique, excluding the depreciation of the Metical against the Euro. The higher level of impairment posted in the Foreign Business segment (+40.2% from the first half of 2009) was determined by the operations developed in Greece, Switzerland, Angola and Mozambique, despite the positive performance recorded in Poland. Operating costs increased by 8.9%, due to the growth in staff and administrative costs in Poland, mainly reflecting the effect of the exchange rate appreciation of the Zloty against the Euro, and in Angola, related to the organic growth strategy carried out on this market. Nevertheless, operating costs were partially mitigated by the performance in Greece and Romania. Loans to customers were up by 9.1% to Euro 16,599 million as at 30 June 2010, boosted by the performance in loans to individuals, and reflecting the growth in most foreign operations, in particular Angola and Mozambique. Total customer funds increased 6.4% to Euro 15,746 million as at 30 June 2010, driven by the increase in customer deposits, which grew 3.8%, as well as the increase in assets under management. Change Euro million 30 Jun.10 30 Jun. 09 10 / 09 Profit and loss account Net interest income 251.8 169.3 48.7% Other net income 189.7 199.2 -4.8% 441.5 368.5 19.8% Operating costs 296.9 272.7 8.9% Impairment and provisions 88.3 62.9 40.2% Contribution before income taxes 56.3 32.9 71.3% Income taxes 10.2 6.5 56.6% Net contribution 46.1 26.3 75.0%
Summary of indicators Allocated capital 1,406 1,308 7.5% Return on allocated capital 6.6% 4.1% Risk weighted assets 14,754 14,262 3.5% Cost to income ratio 67.3% 74.0%
Loans to customers 16,599 15,215 9.1% Total customer funds (1) 15,746 14,804 6.4% (1) Excludes Millennium bank Turkey and Millennium bcpbank USA in 2010 and in 2009.
First Half of 2010 Report and Accounts 56
In Poland the Group is represented by a universal bank offering a wide range of financial products and services to individuals and companies nationwide; in Greece by an operation based on innovative products and services; in Switzerland by Banque Privée BCP, a platform of Private Banking under Swiss law; and in Romania with an operation focused on individuals and small and medium-sized companies. Additionally, the Group is represented in Mozambique by a universal bank targeting companies and individual customers; in Angola by a bank focused on private customers and companies and public and private institutions; and in the Cayman Islands by Millennium bcp Bank & Trust, a bank designed for international services in the area of Private Banking to customers with high net worth (Affluent segment) European Banking Poland Having successfully concluded Millennium 2010 program one year ahead of schedule, by the end of 2009 Bank Millennium approved and started implementing a new strategy for the period 2010-2012. The new strategy is aimed at balancing a strong volume growth with an adequate and sustainable level of profitability through increasing the pace of customer acquisition, exploiting the potential of the cross- selling “machine”, focusing on strengthening relationships with our customer base and developing initiatives aimed at improving revenues, while maintaining a conservative risk approach and ensuring discipline in liquidity and capital management. In order to implement this strategy, the Bank plans to leverage its main strengths, including the fourth largest retail network in Poland, with 1.1 million active customers, the high awareness of the Millennium brand, the better than average quality of the loan portfolio and the clear commitment of the parent company to the development of the Polish operation. Along with the definition of the new strategy, Bank Millennium set new medium term targets for 2012. On the financial front, the main objectives consist in reaching an ROE of 15%, a Cost-to-Income Ratio below 60% and a loan-to-deposit ratio not higher than 105%, whereas in business terms the main targets consist of achieving a 7% market share in retail banking and a 5% market share in corporate banking. To support the ambitious growth targets, in February 2010 the Bank concluded a capital increase through a rights issue, raising more than zloties 1 billion, positioning Bank Millennium as one of the best capitalized institutions in the Polish banking sector. After a year mainly devoted to internal reorganization and to the adjustment of the business model to the new reality, the Bank in 2010 has been focused on the development of the business and the improvement of the profitability levels based on sustainable revenues, while keeping costs under control and maintaining a conservative risk profile. In terms of business development the Bank returned to a growth mode based on deposits growth both in retail and in corporate. Standouts include the success of the savings account campaign, in May and June, including a promotional rate of 6,5% for “new money” up to zloties 200 thousands. In the second quarter of 2010, Bank Millennium launched a new credit card - Impresja –oriented to women’s segment, one of the major innovations of the Bank in this area up to now. The main feature of the card is 5% cash-back at a selected group of top retailers, including leading global brands. Market feedback for this new product has been very positive, and in the first month of activity 28 thousand cards were sold. In the first half of 2010, the Bank also devoted particular attention to the recovery of its natural market share in mortgage loans. Thanks to an effective marketing campaign supported by a well-known Polish brand, the adjustment of several offer features and to the participation in the state subsidized program “Family at Home”, the Bank has achieved significant market share gains. It is also worth mentioning the launch of the first internet-only current account, supported by a campaign based on a purpose-designed Millennium channel in You Tube. On the other hand, in line with the strategy of focusing lending to companies in asset-backed products, Bank Millennium significantly expanded its activity in leasing, reaching the third position in the ranking in the first quarter of 2010, and in factoring. The rational management of the time deposits spread and the impact from the effort in 2009 to adjust corporate loan spreads to market conditions, together with the significant increase of the cross-selling ratio, enabled the Bank to significantly increase core revenues, up more than 60% in comparison with the same period of 2009. Despite the increase of the activity levels, costs remained practically flat, thanks to the impact of the savings initiatives implemented during 2009. Moreover, the cost of risk significantly decreased in comparison with the first half of 2009, partially due to the maintenance of conservative underwriting criteria. The significant growth of core revenues, the control of operating costs and the reduction of the cost of risk enabled Bank Millennium to improve significantly all of its profitability indicators. Despite the deposits’ growth, the impact in the loan portfolio from the recent depreciation of the zloty, led to the increase of the loans-to-deposits ratio, which nevertheless remained at 106%. As for capital, following the above-mentioned rights issue in the beginning of the year, the Bank’s main solvency indicators remained at a very high level. 57 First Half of 2010 Report and Accounts
Bank Millennium Millions of euros Change % 1H 2009 Change % 10/09 1H 2010 1H 2009 10/09 excluding FX effect Total assets 11,168.8 10,229.0 9.2% 10,981.3 1.7% Loans to customers (gross) 9,077.8 8,049.2 12.8% 8,641.2 5.1% Loans to customers (net) 8,793.4 7,841.1 12.1% 8,417.8 4.5% Customers' funds 9,028.9 7,986.8 13.0% 8,574.2 5.3% Of which: On Balance Sheet 8,106.9 7,432.0 9.1% 7,978.6 1.6% Off Balance Sheet 922.0 554.8 66.2% 595.6 54.8% Shareholders' equity 957.4 639.8 49.6% 686.9 39.4% Net interest income 109.0 47.0 132.0% 53.3 104.6% Other net operating income 98.0 113.6 -13.8% 128.8 -24.0% Operating costs 131.0 114.7 14.2% 130.1 0.7% Impairment and provisions 32.5 40.9 -20.4% 46.3 -29.8% Net incom e 34.4 4.6 641.8% 5.3 554.2% Number of Customers (thousands) 1,121.2 1,161.3 -3.4% Employees (number) 6,180 6,414 -3.7% Branches (number) 465 484 -3.9% Market capitalisation 1,252 557 124.8% 598 109.4% % of share capital held 65.5% 65.5% Source: Bank Millennium FX rat es: Balance Sheet 1 euro = 4.1470 4.4520 zlot ies Profit and Loss Account 1 euro = 3.99590833 4.53100000 zlot ies
In the second half of the year, Bank Millennium will continue implementing the recently-approved strategy, aimed at expanding its activity both in retail and corporate areas in order to keep core revenues growth while keeping a tight control of the cost base and a conservative risk profile, having in mind the medium term targets announced for 2012. The increase of the amount of medium-term- funding, the reduction of foreign currency loans in the total portfolio, the conciliation between the deposits’ growth and a rational spread policy, the acceleration of the pace of customer acquisition while increasing the cross-selling ratio and the maintenance of the positive trends in important areas such as mortgage loans, leasing and factoring will be key challenges for the next period. Greece In the year in which Millennium bank celebrates its 10 th anniversary, the efforts to attract deposits and new customers and to control credit delinquency contitioned the 1 st half of 2010 activity and are supposed to continue during the second half of the year. To this end, the bank launched several high-profile campaigns, adding several innovating products to its range. These included the new “Millennium Dimosiou” payroll program for public servants and pensioners, a segment of the population hit particularly hard by the Greek public debt crisis. This program features a deposit paying 2% interest on the first 1,500 euros applied, an overdraft facility up to one salary for a maximum of 1,500 euros and no annual fee for the Millennium bank credit card. The launch of this program was supported by a highly-visible campaign, including a prize drawing to awarding 1,000 euros to 10 customers per month, communicated as a way of customers getting back what they lost due to the cut in their payrolls resulting from Greece’s austerity measures. Inspired by its 10th anniversary, Millennium bank also launched a new 10-month time deposit with monthly interest payments and a preferential interest rate that reaches 10% at the tenth month. The product was promoted through merchandising highlighting the number “10”; Millennium bank also continued promoting one of its most successful products: the “Savings for All” program, a savings plan paying 2% interest provided customers put aside a pre-determined monthly amount; customer acquisition was also supported by the promotion of the new “Privileged Care” health insurance program, featuring direct access to medical advice 24 hours a day and the possibility of home emergency assistance and ambulance transportation at a competitive price. First Half of 2010 Report and Accounts 58
As a result, customer acquisition was significant during the first half of 2010: around 10,000 new customers were added, raising the total customer base of Millennium bank to around of 550 thousand at the end of June 2010.
Millennium bank in Greece Millions of euros Change % 1H 2010 1H 2009 10/09 To t al asset s 6,574.6 6,817.6 -3.6% Loans to cust om ers (gross) 5,186.5 5,039.5 2.9% Loans to cust omers (net ) 5,088.5 4,974.5 2.3% Custom ers' funds 3,418.9 3,885.2 -12.0% Of which: On Balance Sheet 3,062.5 3,508.2 -12.7% Off Balance Sheet 356.5 377.0 -5.5% Shareholders' equity 378.1 382.5 -1.2% Net interest income 56.3 58.5 -3.8% Other net operating income 18.2 22.7 -19.9% Operat ing cost s 59.9 62.0 -3.3% Impairment and provisions 25.7 13.3 94.1% Net incom e -10.2 3.3 -408.3% Number of Customers (thousands) 550.3 526.0 4.6% Employees (number) 1,506 1,522 -1.1% Branches (number) 176 177 -0.6% % of share capit al held 100.0% 100.0%
Millennium bank net income stood at euro -10.2 million in the first half of 2010, which compares to euro 3.3 million in the same period of 2009. This decrease was mainly due to the impact of lower spreads on time deposits, reflecting very intense competition for customer funding, as the concerns related to the liquidity position of the country that followed the unfolding of the Greek public debt crisis rendered other liquidity sources scarce and expensive. This was heightened by increased credit delinquency.
Switzerland In an adverse market environment, Banque Privée BCP continued to develop its activities in selected key markets. Customer funds decreased 5% reflecting the performance of assets under management, associated to the effect of decreasing market prices and of the decline in loans to customers’ portfolio, mostly related to financial investments.
Millennium Banque Privée Millions of euros Change % 1H 2009 Change % 10/09 1H 2010 1H 2009 10/09 excluding FX effect Tot al asset s 835.1 856.5 -2.5% 984.3 -15.2% Loans t o cust om ers (gross) 692.0 730.8 -5.3% 839.8 -17.6% Loans t o cust om ers (net ) 654.1 697.0 -6.2% 801.0 -18.3% Cust omers' funds 2,765.2 2,534.7 9.1% 2,913.0 -5.1% Of which: On Balance Sheet 291.6 147.4 97.8% 169.4 72.1% Assets under management 2,473.6 2,387.3 3.6% 2,743.5 -9.8% Shareholders' equity 90.7 72.4 25.3% 83.2 9.0% Net interest income 4.2 3.5 21.6% 3.6 16.2% Other net operating income 10.5 6.6 60.4% 6.9 53.3% Operat ing cost s 8.7 7.4 16.6% 7.8 11.4% Impairment and provisions 8.8 3.6 144.7% 3.8 133.8% Net incom e -2.1 -0.8 -171.3% -0.8 -159.3% Number of Customers (thousands) 2 2 7.8% Employees (number) 71 63 12.7% Branches (num ber) 1 1 0.0% % of share capit al held 100.0% 100.0% FX rat es: Balance Sheet 1 euro = 1.3283 1.5265 sw iss f r an cs Profit and Loss Account 1 euro = 1.43532500 1.50210000 sw iss f r an cs
59 First Half of 2010 Report and Accounts
In that context, Banque Privée BCP had to make provisions for impairment in the amount of euro 8.8 million, which affected net income evolution in the first half of 2010: that increased and reached euro - 2.1 million, compared with euro -0.8 million in the first half of 2009. Considering only the operating performance, the Bank achieved in the first half of 2010 a result of euro 6.1 million, which represents an increase of 134% over the same period of 2009.
Millennium bank in Romania * Millions of euros Change % 1H 2009 Change % 10/09 1H 2010 1H 2009 10/09 excluding FX effect Tot al asset s 474.5 412.0 15.2% 396.6 19.6% Loans t o cust om ers (gross) 312.1 252.1 23.8% 242.7 28.6% Loans t o cust om ers (net ) 279.3 234.1 19.3% 225.4 23.9% Cust omers' funds 221.3 157.7 40.3% 151.9 45.7% Of which: On Balance Sheet 221.3 157.7 40.3% 151.9 45.7% Shareholders' equity 87.7 83.1 5.5% 80.0 9.6% Net interest income 7.7 0.0 0.0 Other net operating income 4.3 12.8 -66.4% 13.1 -67.2% Operat ing cost s 20.5 20.9 -1.7% 21.4 -4.0% Impairment and provisions 7.0 7.0 0.5% 7.1 -1.9% Net incom e -13.1 -15.6 15.9% -16.0 17.9% Number of Customers (thousands) 27.8 23.7 17.7% Employees (number) 705 699 0.9% Branches (num ber) 74 73 1.4% % of share capit al held 100.0% 100.0% * Bank started its operations in October 11, 2007. Values include Banca Millennium (Rom ania) and Banpo r Consulting (Ro m an ia). FX rat es: Balance Sheet 1 euro = 4.3700 4.2072 new rom anian leus Profit and Loss Account 1 euro = 4.14504167 4.24663333 new rom anian leus
Given this expected maintenance of high levels of market volatility, Banque Privée BCP plans to return to a positive net income still this year, by maintaining its commercial dynamic, reducing loan portfolio and associated risks, in strict compliance with regulatory requirements, increasing organizational efficiency, controling costs and focusing on constant improvement of investment management solutions. Romania The negative macroeconomic environment continued to condition on the banking system as a whole, leading to a slowdown in loans to customers, a significant increase in delinquency and a scarce liquidity framework, which resulted in more strict management practices. Under these circumstances Millennium bank pursued its business strategy implemented in 2009 aimed at improving results, based on higher efficiency in terms of costs and allocation of resources. In most aspects, the first half of 2010 broadly matched the Bank’s own expectations regarding net income. Millennium bank’s focus is to increase core revenues, which are already higher on year-on-year terms, as a result of selective lending growth and higher spreads on credit operations, which combined with lower interest paid on customer funds. The Bank also focused on building new types of relationship with customers; expanding its offer with products such as wages accounts, deposit with increasing rates, and accounts for entrepreneurs. During the first half of 2010, Millennium bank in Romania improved operating income on a monthly basis. Regarding net interest margin, demand for credit should expand going forward, however, it will take time for credit demand to translate into meaningful revenues. In turn, costs of deposits reflected the effort in reducing interest in demand deposits partially offsetting the impact of fierce market competition in term deposits. Permanent monitoring of costs was successfully implemented and significant cost savings were already materialized, namely due to the renegotiation of the rental agreements for Bank branch locations and to the renegotiation of the main contracts with suppliers. Operating costs performed better than previous year. Right now, key processes of the Bank are being revised with the objective of finding opportunities to improve efficiency and effectiveness. Bank Millennium presented a net loss of euro 13.1 million as at 30 June 2010 versus euro 15.6 million as at 30 June 2009. One of the main achievements of Millennium bank in Romania was that despite adverse economic conditions, in a two-year time frame, the Bank managed to reach the 24th position in the ranking of the 40 financial institutions in terms of total assets. First Half of 2010 Report and Accounts 60
During the first half of 2010, in line with the success of commercial efforts and service quality provided to customers, Millennium bank’s market share reached 0.61% in terms of loans to customers, as at May 10, the latest public available data. At the same date, the mortgage loans market share increased to 0.89%, and the customer funds market share reached 0.53%. Millennium bank’s prospects for the remaining of the year are consolidating its position into a competitive market, increasing its market share, acquiring new customers (expanding the customer base) and increasing cross selling on value-added products. Turkey Millennium bcp has reached an agreement to sell 95% of Millennium Bank A.S. in Turkey to Credit Europe Bank, N.V., a wholly owned subsidiary of Fiba Holding, A.S., having agreed with the buyer a put and call mechanism to sell the remaining stake for a price per share no lower than the price agreed for the majority stake. Following this announcement, the Bank has decided to maintain the strategy executed in 2009, for all business lines, in the first half of 2010, assuring only the current management of the Bank, until the completion of the operation. In individual segment, the segmentation based mainly in affluent and pre-affluent customers announced in 2009, remained the same. The main target has been to increase the customer base and improve cross selling ratios. Other critical targets were to decrease the cost of deposits and increase the concentration in commissions generation products such as mutual funds and pensions. In SME Business, the main strategy has been to increase the number of active customers, focusing on short-term loans. Another target was to increase non-cash loan volume and by that increase demand deposit and commission revenues . 61 First Half of 2010 Report and Accounts
Other international operations Mozambique Millennium bim, Mozambique’s biggest bank, with 119 branches, offers a full range of financial products and services, including insurance. Millennium bim is strongly committed to contribute to the development of the Mozambican’s economy and financial system, to strengthening and developing its business environment and helping to improve the living standards of populations, not only through the intervention in corporate social responsibility initiatives, but also by offering innovative banking products and services and by contributing to meet the financial needs of Mozambicans in the first half of 2010. Millennium bim continued its program to expand the network of retail branches and ATM's with the opening of three new branches. The main strategic vectors defined for 2010, consist of the permanent search for improvement in service quality and a continued commitment to innovation, while seeking to expand the customer base, maximizing profitability and enhancing cross-selling. The Bank continues to pay special attention to strengthening commercial capabilities, to business segmentation, to expansion of electronic banking and to branch network expansion program. At the same time, the Bank remains committed to strict compliance and risk management. In terms of innovation and launching of new products, the first half of 2010 saw the launch of the "DP 15" and the campaign “To Double the salary " with the aim of increasing customer funds. In terms of credit cards the "Come with me to Rock' in Rio and the World Cup" campaigns were launched. An institutional campaign denominated "We are born for all" was also launched, with the aim of reinforcing the positioning of Millennium bim as the "Bank of everyone and for all." These campaigns are aligned with the strategic objectives set for 2010, focusing on attracting and retaining customer funds and increasing transactions with credit cards and POS. The consolidated net profit of Millennium bim in the first half of 2010 reached 1,316 million Meticais, equivalent to euro 29.9 million, representing an increase of 35.8% in Meticais (9.7% in euros) year-on- year. Customer funds increased 20.4% year-on-year to euro 964.7million, with loans to customers recording a significant growth of 55.6% to euro 783.3 million. The overdue loans to total loans ratio stood at 1.1%, with a provision coverage of 437% as at June 30, 2010.
Millennium bim Millions of euros Change % 1H 2009 Change % 10/09 1H 2010 1H 2009 10/09 excluding FX effect Tot al asset s 1,242.2 1,043.8 19.0% 939.8 32.2% Lo an s t o cust om er s (gr oss) 821.4 525.7 56.2% 473.4 73.5% Loans to customers (net) 783.3 503.4 55.6% 453.3 72.8% Cust om ers' funds 964.7 801.1 20.4% 721.3 33.7% Of which: On Balance Sheet 964.7 801.1 20.4% 721.3 33.7% Shareholders' equit y 174.9 144.8 20.8% 130.4 34.2% Net interest income 42.8 44.3 -3.3% 35.8 19.7% Other net operating income 31.3 23.3 34.0% 18.9 65.8% Operat ing cost s 30.4 31.2 -2.4% 25.2 20.8% Impairment and provisions 7.0 2.9 140.5% 2.4 197.6% Net incom e 29.9 27.2 9.7% 22.0 35.8% Number of Customers (thousands) 776.6 611.2 27.0% Employees (number) 2,013 1,803 11.6% Branches (num ber) 119 103 15.5% % of share capit al held 66.7% 66.7% FX rat es: Balance Sheet 1 euro = 41.9850 37.8050 m et icais Profit and Loss Account 1 euro = 44.06583333 35.60458333 m et icais
It is worth mentioning the performance of Millennium Insurance, whose net profit reached 117.8 million Meticais, equivalent to 2.7 million. In the second half of 2010, Millennium bim will continue to implement the main strategic lines described above, with a greater focus on defending market share, based on a constant search for service quality and profitability improvement, reflected in a conservative risk management and operational performance’ optimization. First Half of 2010 Report and Accounts 62
Angola Banco Millennium Angola, S.A. (BMA) was incorporated on April 3, 2006, by transformation of the local branch into a Bank under Angolan law. BMA's mission is to contribute to the modernization and development of the financial system in Angola, playing a key role in increasing the Angolan population’s involvement with the banking sector, through innovative marketing of personalised financial services and products, ensuring high levels of satisfaction, loyalty and involvement of the customer base, offering the market higher quality standards and greater specialization. The strategic investment in the development of the Angolan financial involves investment, job creation, training and know-how transfer. Management priorities of Banco Millennium Angola set for 2010 are based on five pillars: i) Business Development, ii) Expansion of Retail Network; iii) Recruitment and Training; iv) Risk Management; v) Performance. Business development, assumed to be the Bank’s key priority in 2010, relying on the expansion plan of the Retail Network (opening new branches and increasing the number of provinces covered), broadening the customer base and increasing customer funds in each business segment. At the end of the first half of 2010, the Bank had52,967 active customers, growth of 136% year-on-year, with 30,564 new customers added during the first half of 2010, which compares to 5,837 customers captured in the first half of 2009. Under the expansion program of the Retail Network, five branches were opened, extending the network to 28 branches and increasing the provinces covered from six on June 2009 to ten in June 2010. The strengthening of programs for recruiting and training (initial and throughout the work life) of Angolan staff, remains a critical factor for sustainable development of the Bank. The number of employees of the Bank as at the end of June 2010, reached 619, representing annual growth of about 54%. In terms of career management, it has to be highlighted that during the first six months of the year, around 1,300 hours of training were held. The effort associated with investment in IT systems, as well as the implementation of Millennium Angola’s procedures for appropriate management and risk monitoring, in line with best practices of the Group, remain priorities in 2010. Meanwhile, the profitable growth of business requires maintaining a culture of accuracy, based on action plans supported on a sound management of costs and investment and continuous improvement of operational efficiency as well as permanent guidance for results.
Millennium Angola Millions of euros Change % 1H 2009 Change % 10/09 1H 2010 1H 2009 10/09 excluding FX effect Tot al asset s 907.0 652.1 39.1% 623.9 45.4% Lo an s t o cust o m er s (gr oss) 410.7 259.2 58.4% 248.0 65.6% Loans t o cust omers (net) 394.9 252.8 56.2% 241.8 63.3% Cust om ers' funds 514.2 367.5 39.9% 351.6 46.3% Of which: On Balance Sheet 514.2 367.5 39.9% 351.6 46.3% Shareholders' equit y 133.5 119.9 11.4% 114.7 16.4% Net interest income 20.8 10.5 98.0% 8.7 139.0% Other net operating income 20.3 9.9 105.6% 8.2 148.2% Operat ing cost s 24.1 13.8 74.0% 11.5 110.1% Impairment and provisions 6.5 0.9 632.2% 0.7 783.9% Net incom e 9.8 6.3 55.9% 5.2 88.2% Number of Customers (thousands) 53.0 22.4 136.4% Employees (number) 619 401 54.4% Branches (num ber) 28 18 55.6% % of share capit al held 52.7% 52.7% FX rat es: Balance Sheet 1 euro = 114.9200 109.9400 kw anzas Profit and Loss Account 1 euro = 122.69000000 101.63758333 kw anzas
On June 30, 2010, the Bank had total assets of euro 907 million, up 39% over the first half of 2009. Loans and customers’ funds volumes recorded a positive annual growth, reflecting an increase of 58% and 40%, respectively, compared with June 2009 (in Kwanzas, +66% and +46% respectively). During the first half of 2010, the Bank achieved the fourth position in terms of ranking to purchase U.S. dollars with a 10% share. The overdue loans to total loans’ ratio stood at 3.0%, with a coverage of overdue loans of 128%. Net income amounted to euro 9.8 million, +56% (+88% in local currency) year-on-year, resulting from the expansion policy adopted by the Bank, with controlled costs and a sustained high growth of revenues (net interest income and foreign exchange results). The significant increase in net income resulted from the strong increase of operating income, +102% year-on-year to euro 41 million. Return on Equity (ROE) 63 First Half of 2010 Report and Accounts
stood at 16.3% and the cost-to-income ratio at 58.5%, which represents an improvement when compared to last year, 67.8%. Regarding information systems’ improvement, the implementation of the Earnings Analysis System, whose process is underway and is expected to be completed by the end of 2010, deserves mention. Regarding the launch of innovative products and services, the Bank added to the existing offering the “Cocoa Card”, a service that allows companies to allocate their employees a prepaid card, even if they aren’t Bank’s customers, the “Advantage Visa Program”, a unique card in Angola that allows holders to enjoy discounts at selected shops for this purpose, and “Advantage SMEs”, an innovative service to respond to unforeseen failures in treasury of SMEs. Millennium Angola was one of 21 brands recognized as "Mark of Excellence in Angola 2009/10" by the international organization "Superbrands", in recognition of the effort and dedication of the Bank in its implementation process in Angola. This is the second award the Bank receives in less than one year. In 2009 Banl Millennium Angola was voted "Most Innovative Bank" in Angola, by emeafinance magazine.
Cayman Islands Millennium BCP Bank & Trust is a headquartered in the Cayman Islands, with a banking license of category "B", designed to provide international banking services to high net worth individuals and corporate customers. The Bank monitors a customer base focused on the Portuguese communities in Europe, South America (Brazil and Venezuela), South Africa and Portuguese speaking African countries. The Bank has a dedicated local structure and benefits from the supported of the parent company, Banco Comercial Português, S.A., to a range of activities and functions, in particular, treasury management, analysis and various risk management (market, credit, operational), internal audit, custody and clearing. Millennium BCP Bank & Trust net income reached euro 7.1 million in the first half of 2010 versus euro 5.7 million in the same period of 2009, influenced by forex results performance.
Millennium bcp Bank & Trust Millions of euros Change % 1H 2010 1H 2009 10/09 To t al asset s 3,954.3 4,133.9 -4.3% Loans t o cust om ers (gross) 611.6 715.9 -14.6% Loans to custom ers (net) 605.9 712.5 -15.0% Cust om ers' funds 1,368.4 1,525.4 -10.3% Of w hich: On Balance Sheet 1,332.8 1,495.3 -10.9% Of f Balance Sheet 35.6 30.1 18.4% Shareholders' equit y 293.1 267.0 9.8% Net interest incom e 4.5 7.3 -39.1% Other net operating income 3.1 0.6 451.1% Operat ing cost s 1.3 1.3 -5.9% Impairment and provisions -0.7 0.8 -188.9% Net incom e 7.1 5.7 23.6% Number of Customers (thousands) 1.2 1.4 -15.2% Em ployees (num ber) 15 16 -6.3% % of share capit al held 100.0% 100.0%
United States of America Banco Commercial Português SA announced its intention to leave US markets on 30 March 2010. Pursuant to this intent, BCP to have reached a purchase agreement with Investors Savings Bank to sell all of Millennium bcpbank network in the United States of America and respective deposits base, of approximately US dollars 626 million. Following the purchase and assumption agreement, the parties intend to enter into a Loan Purchase agreement under which Investors Saving Bank will purchase a portion of Millennium bcpbank’s loan portfolio. Millennium bcp has also established a cooperation agreement with the buyer for financial remittances from the United States of America. As a result of this transaction, still subject to regulatory approval, Millennium bcp will no longer develop new retail commercial activities in the United States of America. This transaction, approved by the Boards of Directors of both companies was subject to necessary regulatory approvals and is expected to be First Half of 2010 Report and Accounts 64
completed during the third quarter of 2010, having no significant impact on capital ratios of the Millennium bcp. During the transaction, Millennium bcpbank’s management remains focused being compliant with regulatory requirements, aiming to complete the operation by the end of the third quarter of 2010. The Bank's strategy is to convey the message that this agreement represents a valuable proposal for the various stakeholders with emphasis on the customers and communities which the Bank serves. In order to ensure a smooth transition to Investors Savings Bank, Millennium bcpbank implemented a number of initiatives that highlight the increased convenience for existing customers. The "Get Back ATMs Fees " promotes the benefits associated with direct deposit of checks and social security benefits into any Millennium bcpbank checking account. When a direct deposit is made, the customer receives a refund of US dollars 6 monthly, on ATM fees charged by other banks. This benefit virtually changes every ATM into a Millennium bcpbank ATM, raising the possibility of access to funds deposited with Millennium bcpbank and simultaneously ensuring a continuous flow of deposits. The Bank implemented several initiatives to improve its operating performance, resulting in increased net interest margin, costs control and provisions consistent with the loan portfolio quality. Net income in the first half of 2010 stood at –2.1 million and was affected by the additional costs related to the current transiction period. In the transition period and until the completion of the transaction - which should occur by the end of the third quarter of 2010 - the Bank will focus on implementing the Operational and Communication Plans established. On the operational side, the main focus will be the date of transfer of the core systems, offering compatibility between products, mapping products and business continuity. From the communication standpoint, priorities will be the necessary notifications, branches re-branding, welcome package and a set of initiatives focusing on high net worth customers and businesses. Additionally, two significant events are scheduled together by Millennium bcpbank and by Investors Savings Bank with the participation of Millennium bcpbank’ influential customers in the regions of New York and New Jersey. 65 First Half of 2010 Report and Accounts
Banking Services The departments that form the Banking Services area – IT and Technology, Operations, Credit, Standardized Recovery, Specialized Recovery, Litigation, Administrative and Logistics and Prevention and Security Office – provide a number of specialised services in support of the various business units, both in Portugal and abroad. They contribute to a reduction of operating costs, to better quality service, to a differentiating level of technological innovation and to minimisation of the credit and operational risks incurred. These goals form part of the strategic guidelines established for the Group and contribute to meeting the Group’s profitability and growth targets. The main areas of action in the Banking Services areas involved organisational restructuring, austere management of new investments and operating costs, and implementation of measures designed to improve the service levels of the major processes relevant to commercial activity. Careful cost management meant that the first half of 2010 came to a close with positive budget deviations. The operating costs of the Banking Services Departments taken together fell by a nominal 4% compared to the budget, while the volume of investments was down 25% year-on-year and 36% less than budgeted. The number of employees of the Banking Services areas increased by 1.8% to stand at 1,800 in the wake of the change of the perimeter of the departments that make up this Committee, particularly as a result of the transfer of Employees from the Outsourcing Special Projects Team (Unit outside the Banking Services perimeter) to the Operations Department. Measurement and active management of the service levels of the various processes supporting commercial activity continued to mark the definition of the main performance indicators in the more operational areas. There was ongoing improvement of the thresholds achieved, reflected in an increase of the degree of internal customer satisfaction, impacting very positively on the quality of the services provided to the Group’s customers. The substantial increase in doubtful loans resulting from the worsening of the economic and financial crisis, at the domestic and international levels, justified the split in early 2010 of the Credit Recovery Department into the Standardized Recovery Department (DRS), focused on monitoring customers with overdue loans and with global responsibilities of up to euro 1 million, mainly individuals, the Specialized Recovery Department (DRE), which focuses on customers with high exposure (liabilities exceeding 1 million euros), mainly companies; the Litigation Department, acting on enforcing payment dossiers; and the Corporate II Department, focused on very complex dossiers , requiring simultaneously the skills sets of recovery and investment banking. Of the main initiatives of a strategic nature, special attention is called to cost reduction and to process rationalisation and re-engineering, the strengthening of the computer and technology (IT) systems, the closer interlink with operations abroad, the optimisation of operational risk-management, improvement of the automated credit-decision support system, and consolidation of the new credit-recovery operative in Retail. Information Technology Department During the first half of 2010, and in relation to the applicational side a set of activities were implemented in a production environment. To meet legal and/or regulatory obligations, the activities of information systems adaptation to the conditions set by the Bank of Portugal on "Duty of Disclosure" were completed, namely in relation to contracts for consumer and personal credit, reflecting changes made under the " Assets data base (Basel II)", "Basic Risk Parameters " and "Direct Debit System." The "change of information in the combined statement” was also made available and, in compliance with the determination of the Securities and Markets Commission (CMVM), the notice on credit operations in the form of current accounts pledged was changed. As for development of software and management tools to support the business, notably the completion of the centralization of credit forms in the SWOC application and for the MB DOX service – which was made available by SIBS through the Banking Intranet portals - which allows reception , filing and payment of invoices for services without resort to sending by regular mail. Moreover the implementation of the issuance of debit or credit cards on Saturday, to which features were added made available in the scope of the digital statement initiative. Regarding optimization, the new workflow for opening and maintaining accounts residing in iPAC, now includes the digitization of all required documentation, as well as the installation of Kondor Global Risk (KGR), usually required to improved procedures for monitoring credit limits. Mention should also be made for the database developed with the aim of centralizing all the information relating to corporate companies in the perimeter of the Millennium Group. Also noteworthy: i) project "Blue," which added the contribution of IT to a new phase in the life of ActivoBank, reflected in the development of innovative First Half of 2010 Report and Accounts 66
and distinctive features, adaptation and updating of information systems for business support and implementation of a new concept of retail branch; ii) the new Mobile Banking solution, available in the different commercial networks, demonstrating a clear commitment to innovation and mobility and ensuring the strengthening of the customer relationship and interaction with the Bank; and iii) the implementation of iPAC 2.0 (Platform for Commercial Activity on the Intranet), again developed in close partnership with the commercial areas, which includes a refreshed layout, incorporating new features and more information in addition to being more focused on the pursuit of everyday activity of branches, particularly on tasks and deadlines to meet, providing a distinctive environment for Commercial Assistants, Customers Managers and Branch Managers. Poland launched a new Internet site, which features a modernized layout and a transactional architecture that allows for easier navigation and intuitive access to products and services. In terms of infrastructure, and according to a strategy of constant adaptation to the needs of internal customers recommended by IT, the process of upgrading the telephone system at branches took place, thereby improving the means of voice communication available and allowing interconnection with other platforms; and increased bandwidth for Internet access by employees, having tripled its capacity. In the context of centralized management of the Disaster Recovery process, a regular exercise to enhance continuity of core applications available in Portugal and Romania and solutions cross shared with Poland, Greece, Turkey, Angola and Mozambique, was successfully completed and which included once again, certification testing and validation of functional integrity of recovered data units coordinated by the local IT Quality Control of these transactions. Operations Department The Operations Department has defined as its main objectives for 2010: i) a continued effort to improve efficiency; ii) increase in employees’ skills; iii) improving the quality of service provided to the Bank’s customers. The Operations Department has sought to maintain an ongoing effort to streamline, seeking to optimize the Bank’s operations with a view to reducing their overall costs, with adequate standards of quality. This effort has involved the reformulation of processes, but also the incorporation into the Operations Department, with efficiency gains, of the Credits to Real Estate Development and management of Special Retail Price List operatives. In parallel, the development of the Distinctive Level of Service project, in partnership with the Retail Network, have helped diagnose and implement a set of actions that have an impact on improving the quality of service, and increase operating efficiency. The further development of the "SER.DO" program, notably through training and animation actions, contributed to the development and motivation of staff, expressed in the positive developments achieved in its satisfaction indexes. Credit Department During the first half of 2010, the negative environment continued to apply, impacting on the level of credit risk, which resulted in the Credit Department continuing to ensure appropriate credit strategies and decisions. Namely to identify appropriate levels of exposure, to select the appropriate goals and methods and to opt for products more suited to present needs, while taking into consideration configurations, maturities, collateral demanded and other risk factors. There was a reduction in demand, affecting all the units of the Credit Department, with impact on the number of proposals considered and the consequent need to adjust the size of the units of analysis in order to maintain their levels of efficiency. Preventing situations of non-compliance, monitoring and following-up the credit portfolio, remains a major concern of Credit Department, with cross-board application to the several networks of the Bank. The automated decision models increased their contribution to the processes of credit in Retail, with a growing and very positive alignment with the respective units of analysis. The achievement of these objectives has spread to various foreign operations. It was possible to maintain close collaboration with the Rating Department, helping to strengthen and stabilize the overall credit process both by strengthening the quality of their decisions and inherent improving in service levels. If the economic backdrop doesn’t change, the action strategy of the Credit Department will continue to be guided by high standards of requirements needed to safeguard the assets of the Bank. Standardized Recovery Department In addition to its specific units of recovery, the DRS includes within it the Recovery Support Unit, whose mission is to continue to provide operational support to the Specialized Recovery Department, to the Litigation Department and to the LGD Unit - whose mission is to ensure the collection and processing of information required to make available to the Risk Office for the calculation of Loss Given Default (LGD). The main purpose of the Standardized Recovery Department is to develop the current recovery model of small amounts through the improvement, standardization and alignment of recovery processes to achieve efficiencies and effectiveness of excellence in credit recovery. To achieve this goal a project team led by DRS was launched in May. This team involves, in addition to other areas of recovery, the Information and Technology Department and its business initiatives include: i) the implementation of a 67 First Half of 2010 Report and Accounts
process of collection and automatic processing of information for purposes of calculating LGD; ii) the definition of a metric of efficiency for credit recovery; iii) the systematization of the metrics of efficiency and publication in a “dashboard” for managing and monitoring the business; and iv) the development of improvements to the front end of recovery with significant impact on business. The completion of the work of this team is scheduled for September, but it is expected that the result of its work will be reflected in the results of the DRS in the 4 th quarter of 2010. The DRS is also developing initiatives in more specific areas of recovery, currently under internal review and evaluation, such as: i) the alignment of operating procedures and improvements in the monitoring of clients referred to the judicial process; ii) analysis of alternative channels of credit recovery; and iii) the evaluation of complementary forms of standardization of the recovery process, especially for small amounts. Specialized Recovery Department Making the Large Risks Unit autonomous from the former Credit Recovery Department was guided by the aim of increasing responsiveness to the growth of credit impairment, through the increased visibility and focus on different customer segments. The new area named the Specialized Recovery Department, integrated two major sub-areas: Generic Credit Recovery and Specialized Credit Recovery of customer declared insolvent. To strengthen the capacity of intervention, it was critical to resize the area, so the number of employees assigned to the " Large Risks Recovery" / DRE, increased from 52 at the end of 2008 to 72 in the first half of 2010, with 12 adittional positions recruited internally. In parallel with the daily struggle of recovery and containment of impairment, it was also needed to adjust the recovery processes developed by DRE in order to respond to the new format of independent action and to market conditions. In this sense, the functional analysis made the necessary changes, constituted working groups for a project, which should complete its work during the second half of 2010. Litigation Department The activity in the first half of 2010 was characterized by the consolidation of the new structure and for taking measures of internal organization in order to equip the Department with computers and management tools necessary for an adequate monitoring and control of business and in parallel, so that it can respond to various internal and external requests, with particular relevance to the field of Litigation. In bankruptcy protection, credit went beyond the targets set for the recovery period. It continued to support Credit Recovery, with a strong commitment to following up the processes in the hands of lawyers, through regular meetings for assessment of the situation and suggestions for future action. The Litigation Department stepped up and worked on cases with strong expression still under monitoring of the DRE and focused on training specifically directed to the DRS and DRE, in order to provide the technical expertise in legal area. In the Litigation area it is worth mentioning on the negative side, the increased entry of actions against the Bank of a civil nature, related processes and events relating to previous years. A similar behaviour occurs in criminal cases, whose number has intensified, with another to highlight the type of crimes that present themselves ever more sophisticated ways. On the positive side, the good results achieved in the processes of action against the bank closed during the first half, should be highlighted, given the judicial decisions favourable to the Bank and agreements/transactions that reduced the damages incurred. Administrative and Logistics Department The activity of the Property Divestment Department during the first half of 2010 ran quite successfully despite the difficulties experienced in the housing market. In the second half, the Department will held six auctions and two campaigns and expedite the sale, through divestitures in batch, always focusing on the intermediary channel. Due to organizational and functional changes in the Property Management Department, it was possible to reduce the costs of property management and accelerate the processes leading to disposals. The goals for the completion of the legalization of property were largely overcome in the first half of 2010, benefiting from the specialization which justified the creation of the Property Legalization Department in June 2009. The activity of the Works and Maintenance Management Department has been guided by the framework to contain costs and investments. In a continuing effort to streamline areas, concentrate people and optmising use of office buildings, some 6.085 m2 of warehouse space and 2.150m2 of office space were freed up during the first half of 2010. The purpose of the Administrative and Supply Department continued to be the containment/cost reduction, noting as measures the greatest reductions in postage, stewardship, petty cash expenses of employees/branches and fleet management. The Procurement Department continued and consolidated the strategy that has been followed in recent years which is embodied in the work of: i) negotiating and contracting of goods and services for the Group; ii) demand, together with internal customers and Technical Competence Centers, alternative First Half of 2010 Report and Accounts 68
solutions that are more efficient and economical; and iii) support the Group abroad, through direct negotiation, consolidation in global procurement and supply of integrated management of purchasing and contracts; and iv) promoting the evaluation of suppliers. The activity of the Management Unit for Insurance consisted of implementing the negotiation strategy focused on products with higher value with impact on cost reduction and budget control. Initiatives for the study of new solutions across the board for all operations and the identification of related international synergies are being developed. Prevention and Safety Office The Prevention and Safety Office continued to develop its activities in order to minimize the likelihood and impact of situations affecting the safety of people and operations of the institutions of the Group, in accordance with its guiding principles. Within the set of actions undertaken in this period in the areas of Physical Security, Security of Information Systems and Business Continuity it is worth mentioning the:
• completion of the rollout of Digital Video Surveillance System (CCTV) systems being installed in 893 branches and 22 buildings;
• installation within the SR07 project, of the information systems platform (SITUATOR) in the new Security Room in order to centralize alarm monitoring;
• monitoring permanent infrastructure with the consequent reactive processes and awareness of the issues of information security that involves all stakeholders;
• review of the whole framework of information security;
• development of projects for computer security, particularly in monitoring the security logs and the implementation of ISO27001 Standard International Security;
• identification with the Business Units, the process owners and team DRP, of all critical business processes, procedures, contingency procedures and information systems, enabling more effective and efficient recovery processes and activities interrupted in the event of a serious incident;
• preparation of the strategy exercises, with a Discreet Business Recovery Exercise held in an alternative location and the first Integrated Business Continuity Exercise, which involved the evacuation of a building in central Lisbon, with mobilization of the Emergency Response Team, Crisis Management Office and 15 Business Recovery Teams. 69 First Half of 2010 Report and Accounts
Corporate Areas The Corporate Areas include the Compliance Office, the Budget Planning and Control Department, the Research Office, the Management Information, Accounting and Consolidation, Investor Relations, Audit, Legal, and Tax Advisory Services Departments, the General Secretariat, the Millennium bcp Foundation, the Communication Department, the Company Secretariat, the Foreign Business Support Unit, the Strategic Projects Unit, the People Management Support Department, the Risk Office, the Rating Department, the Financial Holdings and Valuation Department and the Quality and the Assets and Liabilities Management Departments. During the first half of 2010, of the activity of the Corporate Areas, highlights include the initiatives involving employee management, support to strategy development, greater discipline in risk and capital management, and the measures directed at Bank’s streamlining and at greater efficiency. Compliance Office During the first half of 2010, the Compliance Office continued the timetable for adoption of appropriate policies and procedures to detect the risk of non compliance with the obligations to which the institution and the Group are subject, applying the necessary steps to minimize future occurrences, paying particular attention to issues related to the relationship with customers, investors and savers in general. In the period under review, the Compliance Office defined the following strategic objectives to provide guidance for its activity: (i) achieve maturity in the working tools of Compliance, in terms of risk control of operations and transactions processed within the Group; (ii) achieve maturity in the model of organization and methodology in the analysis of processes within the Group and evaluating their level of compliance risk in the areas of legal risk and code infractions, operational risk of breaches of internal rules and regulations, and risk of reputation; (iii) reach maturity in the model of relationships between the Group Compliance and the structures for compliance of all the operations, not only in regular monitoring and routine, but also in the field of structuring and global organization; and (iv) reach maturity in the structuring of the models of dissemination and promotion of culture of compliance within the Group, through the preparation and institutionalization of training programs in the Group and the preparation and dissemination of basic documents of compliance policy in the various fields of the Group’s activity. In addition to the activities related to the four major objectives outlined above, it is worth mentioning the continuing work associated with its obligations under the anti-money laundering and the fight against the terrorist financing, analysis of suspicious transactions that could involve the crime of market abuse, analysis of the advertising and new products creation processes, continued training in compliance, directly or by integrating into actions undertaken by other areas of the Group and by strengthening the integration of all the Group's operations in the principles and basic policies set centrally according to law. Planning and Budget Control Department In the first half of 2010, the Planning and Budget Control Department (DPCO), as part of its mission, ensured compliance with the obligations of disclosure and periodic reporting to supervisors, cooperating in the preparation of financial information relevant for disclosure to the market and carried out examinations and the preparation of documents for meetings of the Executive Board of Directors, CALCO, Audit Committee and the Supervisory Board. In addition to activities in the scope of the regular action, the DPCO coordinated and/or participated, in collaboration with other Bank units in different projects and initiatives, focusing on developments to meet new regulatory requirements and on the identification and implementation of opportunities to improve the internal control system. Looking ahead to the second half, relevant activities include collaboration in the strategic planning process, which involves the development of individual and consolidated budgets for 2011, alongside with the continuation or starting of initiatives of a more structural nature, namely within the ICAAP (Internal Capital Adequacy Assessment Process), improvement of internal models for assessing needs and allocating economic capital to business segments, in conjunction with the Risk Office, the Information Management Department and Research Office, and further articulation of the methodology of the Balanced Scorecard as strategic and budgetary processes of the Bank. Research Office During the first half of 2010, the Research Office ensured compliance with periodic reporting obligations of the bank as a public company, supported the elaboration of the Report on Internal Control, collaborated in the preparation and analysis of documentation for the Executive Board of Directors and Supervisory Board’ meetings, prepared presentations, speeches and statements for members of the EBD, supported the review of prospectuses of the various programs of debt, prepared meetings and coordinated the preparation of response to several information requests by the rating agencies. The First Half of 2010 Report and Accounts 70
Research Office has ensured the monitoring and analysis of the economic, market and financial systems, having collaborated on initiatives undertaken by various units of the Bank, aimed at internal and external customers, developed economic publications regularly with internal disclosure, and participated in forums related to the themes of regulation and supervision of financial systems. The Research Office also developed the sum-of-parts valuation of the Millennium Group, with analysis by business segment in Portugal and several studies in the management of capital. In order to facilitate the perception by various stakeholders of the activities undertaken by Millennium bcp in the scope of sustainable development, beyond the completion of the Sustainability Report, the Research Office developed the regulation of the Committee for the Coordination of Sustainability, collaborated in the Program "Towards a Better Millennium" and prepared: i) the communication of a non-final version to the Global Compact; ii) a document for FTSE 4 Good to update the information on the Bank; iii) a contribution to the document that is being prepared by BCSD - Sustainability in the Portuguese financial sector; and iv) the application for the Green Project Awards; v) a case study - microcredit - for the Sustainability Yearbook 2010 - annual publication of the BCSD on best practices. In innovation, the first half of 2010 was marked by continued exploration of the concept of directed creativity, as initiatives with greater mobilization were held in conjunction with the Staff Management Support Department, with the commercial area, with Millennium bcp Ageas and the Operations Department. The "open door" workshop, with the aim of exchanging experiences and sharing best practices, and the "A Thousand Ideas," workshop, in order to reward the best entries in the year 2009, were also held. Management Information Department The major strategic goal of the Management Information Department (DIG) for 2010 is the close monitoring of the evolution of Commercial Networks revenue, detecting constraints, recommending ways to address them and finding clues to the creation of new sources of income. Apart from the normal control of the performance of commercial networks, both in terms of volumes and the income statement, the monitoring of spreads on deposits acquired by the Bank and on credit operations and the fees evolution, the DIG was responsible for project teams with the aim of improving revenues, also composed of members of the Marketing Department, in one of them, and Employees of the IT and Operations Departments, on the other. The main goal of these teams is to increase revenue generated by Commercial Networks, adjusting prices, creating new sources of revenue and reducing operational risk associated with the generation and operations accounting process. The DIG is also responsible for proposals for adjustments in deposits and liquidity premiums associated with loans, a fundamental part of the model of pricing, also managed and controlled by the DIG. Simultaneously, DIG is responsible for management and control of various incentive schemes for each of the networks also targeted to boost revenue from commercial networks. Accounting and Consolidation Department The Accounting and Consolidation Department continued, in the first half of 2010, with the mission of preparing the consolidated financial statements of the Millennium Group, always aiming to provide a true and fair view of the entire group according to the accounting standards defined by several regulatory authorities. Within the activity undertaken by the Accounting and Consolidation Department, during the first half of 2010, of special note are the reformulation of the reporting for the Bank of Portugal’s Monetary and Financial Statistics, the continued implementation/development of new control mechanisms and the strengthening of partnerships with control units of the Bank's operational areas in order to improve the quality and accuracy of accounting information, the development of a set of ratios/indicators/alerts for better analysis and reporting of accounting information, and monitoring of legal changes, both in accounting and tax areas, with an impact on the Group. Audit Department Within the activity undertaken by the Audit Department in the first half of 2010, highlights include: i) the implementation of the Business Plan previously approved, which considers as the main guideline the strategic options presented by the Audit Department, particularly with regard to creation of teams specifically devoted to the themes Fraud, Supervision – Permanent Team of the Bank of Portugal in Millennium bcp, Internal Control System and Audits IRF/MiFID; ii) strengthening the focus on credit risk and impairment charges analysis, along with the inclusion of new Audit actions - Audits for Ethics and Rigor - specifically targeting the analysis of behavioural, compliance, proper use of empowerment issues, etc.; iii) the preparation of reports on the Internal Control System of 2010 for the Bank and subsidiaries, presented to the Bank of Portugal and CMVM on June 30, 2010; iv) monitoring the actions of supervisors, in particular the Bank of Portugal and CMVM, as well as ensuring the answer to their information requests and enforcement of audits included in the Independent Review Function, necessary for the continuation of the actions in order to complete the Bank’s process of application in the scope of Basel II; v) the development of activities related to the prevention, detection and investigation of fraud, 71 First Half of 2010 Report and Accounts
internal and external as well as driving and monitoring any disciplinary or criminal proceedings arising from such activity. Legal Department The Legal Department continued to pursue its goals of improving the quality of services provided by the Bank, by increasing the legal security of operations in order to safeguard the Group’s interests, seeking to prevent potential litigious situations as well as liabilities stemming from the activity of the various departments of the Bank, privileging the use of prior consultation, either by intervention of the Legal Department itself or by request from the other areas of the Bank. Tax Advisory Services Department The reorganization of the Tax Advisory Services Department (DAF) was completed during the first half of 2010. It now focus exclusively on tax issues and its role and responsibilities has been defined more precisely. To minimize the tax risk during this half the DAF oversaw the completion of the fiscal obligations of the Group companies, with particular attention to the statements regarding the 2009 Corporate Income Tax (IRC). In addition, the DAF responded or coordinated the response to requests in fiscal matters of the Group companies. DAF accompanied several transactions involving the liquidation or disposal of group companies, participating in their design and analyzing their environment and their consequences for tax purposes. It also participated in various other transactions by Group companies with a view to streamlining the tax or reducing the risk of taxation. The first half of 2010 was particularly fruitful in terms of changes in tax legislation with significant impact on the Group's companies, the products traded by them and the services provided. DAF proceeded to release these changes and monitor their implementation. The unit also analyzed and commented, if relevant, on proposed changes in Portuguese and community law that were subject to the discretion of the Group companies through the associations to which they belong (eg., the Portuguese Banking Association and the European Union Banking Federation) and the Group companies represented in meetings with tax administration. Taking advantage of the creation of the pricing list set out by Bank of Portugal notice No 8 / 2009, DAF began the systematic revision of the tax framework for all items therein, in order to ensure they are up to date and to minimize the risk of any inaccuracies. The management of procedures and processes of tax litigation (administrative and judicial) of the Group companies has occupied much of the resources of DAF, either directly or indirectly, in monitoring the project to improve the database of tax cases, which is expected to facilitate this work substantially in the future and reduce risk. General Secretariat In the first half of 2010, the General Secretariat, ensured the administrative management and logistical support for the statutory bodies, as well as the institutional relationships and external representation of the Bank. The General Secretariat also ensured the management of bank’s common areas, the use and scheduling of meeting rooms and equipment, as well as the coordination of the drivers and fleet of vehicles used by the Executive Board. Communication Department Millennium bcp’s communication strategy is based on the pursuit of a true proximity to customers, employees, institutions and other stakeholders. In the scope of the Commercial Communication, advertising campaigns combine the commercial side with a conscious discourse aligned with the current environment, constraints and challenges. Savings products were highlighted during the first half of 2010, associated with the promotion of distinctive loyalty enhancing products of Millennium bcp’s offer, such as the “Wage Advantage”, the “Life Protection” and the “Prestige Program”, as well as the communication of products designed to help customers achieve their dreams (Personal Loans and Mortgage Loans). Of particular note were the Millennium meetings in the districts of Viseu, Portalegre and Beja - attended by 1,503 customers and 349 employees - and the activation of the Millennium Portugal Cup and Rock in Rio-Lisbon 2010 sponsorships. This last event, which had more than 330,000 visitors, strengthened the perception of the Millennium bcp as dominant brand in the field of music, being mentioned by 72.6% of the people surveyed in the study by consultants BrandScore Group. In addition to the Millennium Meetings, the Bank promoted the Shared Art Exhibition, Rock in Rio - Lisbon 2010 and opened ActivoBank branches. Lastly, in the context of internal communication, the Intranet portal, Millenniumnet, deserves mention, as it represents the main communication platform, designed to inform employees about the relevant aspects of the life of the organization. With updates by the minute, the convergence of media allows for integrated digital communication, with most of the contents of Millennium television are available in different areas of Millenniumnet. The technological solution of video-on-demand is increasingly common in the community of bank employees, making communication more effective and targeted. This integrated technology enables Millennium TV to assert itself even more as an essential resource in the process of disseminating information and best practices within the Bank. One highlight is the start of a cycle of ten interviews, with journalist António Perez First Half of 2010 Report and Accounts 72
Metelo talking to senior Bank managers - a move that reflects the commitment to transparency that the Executive Board of Directors has with Millennium bcp’s stakeholders, starting with the employees themselves. The scope of Millennium TV extended in 2010 for external audiences, on special occasions, by putting videos on a channel on YouTube, as is the case in an interview with the Millennium bcp’s Chief Economist, published May 10. Company Secretary The Company Secretary within the internal organization of the Bank plays a support activity integrated into the Corporate Areas of the Bank. The Secretary reports directly to the Executive Board of Directors, and its core mission is to serve as secretary for meetings of the Credit Committee, the Executive Board of Directors and the Governing Bodies, to certify the acts performed by them and empower its members, to meet the supervisors’ demands regarding issues related to compliance with principles of good corporate governance and providing for the requests from shareholders exercising their right to information, certifying copies of minutes and other documents of the company and following the registration process of all acts of the company either with the Bank of Portugal or with the Offices of the Commercial Register. The Secretary is actively involved in promoting the Annual General Meeting and preparating the Corporate Governance Report. The Secretary establishes the interface between the Executive Board of Directors and the law firms representing the Bank in the administrative proceedings brought by supervisors. The Company Secretary also provides input and collaborates with all departments of the Bank whether running or validating any act related to the activity of the Bank. Foreign Business Support Unit The Foreign Business Support Unit is an advisory unit for the Executive Board of Directors, with responsibility for monitoring the activity of international operations. It participated in and spurred several initiatives including the strategic turnaround in Poland, Turkey, Romania and the United Sates of America, and supported the process of asset disposals in the operations in Turkey and the United States of America. Strategic Projects Unit The Strategic Projects Unit (NEP), established in the first quarter of 2010, is intended to provide technical support to the Executive Board of Directors in processes of strategic decision making, related to the business and operations of the Group, through the preparation of reports, studies and analysis of strategic nature; the coordination or participation in infrastructure or cross-board projects, in conjunction with other units and external consultants. It also centralizes, analyzes and provides information on strategic projects and promote the dissemination of relevant strategic information to ensure the relationship with various external entities. Activity in the first quarter of 2010 focused on the creation of the NEP, including the definition and approval of the respective functions, responsibilities and reporting, and disclosure to the areas of project management of internal units. Once formed, the NEP proceeded to gather information on strategic projects conducted at the Bank since 2008 for the construction of an Info Center of Projects and Employees and the development of the NEP page on the Research Office’s website in the Intranet Portal. In the second quarter of 2010, the NEP began reporting quarterly to the EBD on ongoing strategic projects or those completed in the last 12 months and took over the coordination of relationships with external consultants from the Bank. The NEP has also developed an additional set of activities highlighting the involvement with "SER Millennium", the definition of the scope of collaboration with the DSGP, collaboration in the structuring and development of the case study on Médis - prepared by staff of the Bank under guidance from AESE -, the proposed themes for the strategic thinking of the “Forum Grow Together 2010” and the coordination of the renewal of cooperation with the Corporate Executive Board. Staff Management Support Department The first half of 2010 was marked by a strong investment in strengthening the identity and values of the Bank, core issues in the "SER Millennium" program, and in the improvement of skills and leadership ability. These features part ofall programs with prominence in early 2010, including the "IT Academy” training and the training performed in the Companies network. The “Culture of Rigour” program, the “Quality in Sales” training and the “Leadership Training" programs were developed. All programs have in common innovation in approaching the theme and a significant component of shared experiences and reflections. The certification programs for business managers in Retail and Private Banking’s managers continued. As a result of the new accounting standards system a comprehensive training program in this area was organized and implemented. The methodology and contents were structured according to the needs of the various Departments of the Bank. In the first half of 2010, training focused on priority areas. The development of young employees with high potential, remains a priority. It is worth mentioning the launch of the second edition of the “Master in Retail” and the organization of the “Grow Together” forum. These initiatives also stress the importance of promoting a culture of continuous 73 First Half of 2010 Report and Accounts
learning throughout their professional life and recognition of the value of experience, principles that supported the creation of the “We value the experience” program. The program "A Day with the customer" substantiates the importance accorded to the strengthening of identity and the values of the Bank, bringing together employees from the head office and the retail network to achieve the goal common to all: providing a service of excellence to customers. Collaboration with academia has remained a constant, promoting knowledge transfer between academics and professionals and between generations, one example being the partnership with the AESE for the elaboration, discussion and dissemination of case studies about Millennium bcp and the Graduate Programme, in collaboration with the Junior Achievement Portugal, promoting entrepreneurship among the university population. RisK Office Along the first half of the year, the Risk Office proceeded with its transverse and centralised activities, in what concerns the identification, assessment, monitoring and control of risks, detailed ahead in the “Risk Management” chapter. Highlights include the continuous improvements verified in the assessment and measurement of risks, materialised in the reports to the Executive Board of Directors – by means of the quarterly report made to the Risk Commission – and to the Supervisory Board – by means of the monthly report made to the Audit Committee. Besides this, fulfilling its role within the Group’s internal control system – alongside the Compliance and the Internal Audit functions - the Risk Office has actively collaborated in the reporting to the Bank of Portugal, namely, through the Internal Control Reports (June 2009/June 2010) of the various entities of the Group. The Risk Office’s contribution to the Market Discipline Report that was included in the Annual Report for 2009 should also be mentioned, as well as the delivery of the Group’s Report on Basel II Pillar II (Internal Capital Adequacy Assessment Process – ICAAP) and the Report on Credit Concentration Risk, both delivered to the Bank of Portugal. Rating Department The Rating Department developed a set of activities during the first half of 2010 regarding the evaluation of portfolio risk: i) the application of the model for Small and Mid Corporate stabilized, and the clients classified in this manner now represent more than 70 of the EAD% of the portfolio of these segments; ii) the Real Estate projects for which risk has been assessed, represent more than 90% of the total EAD of projects financed by the Bank. During the first half of 2010, models and know-how, were purchased from S&P which allow the risk assessment of various types of clients in the property sector; iii) Project Finance deals evaluated represent approximately 80% of the EAD in this segment and it is expected that all of this portfolio will be reviewed early in the second half; iv) the information and ratings assigned by ECAIS to Sovereign and Banks which we relate with were updated, internal criteria for the classification of banks without public rating was also used; v ) Large Corporate customers were evaluated based on an internally-developed model, which is still being fine-tuned, and which already includes a component of expert judgment. Customers already classified represent more than 70% of EAD in this segment. During the first half of 2010, the Rating Department was also involved in organizing training sessions on the new Accounting Standards System (CNS), administered by PriceWaterHouse Coopers, which were attended by all employees of the Rating Department, and in the reorganization of the companies’ CAE internal codes with the aim of identifying statistically similar economic activities in order to obtain samples which, by their consistency and size, allow greater comfort and accuracy in the allocation of economic and financial notes. The Department has a set of underway: i) in conjunction with the Risk Office, it is undertaking to improve the statistical model with the aim that it incorporates a sector approach; and ii) for the Large Corporate segment a Qualitative Assessment Matrix is being developing, with a differentiated approach to the activity sectors; iii) a model is being prepared that allows the risk assessment of the sectors identified as most relevant in terms of concentration, in the Bank's portfolio. Financial Holdings and Valuation Department The activities of the Valuation and Financial Holdings Department include the management of financial holdings and the development and management of valuation solutions to support the financial management of the Group. During the first half of 2010, the action of the Financial Holdings and Valuation Department developed in the following areas: i) skills building and improvement of Group’s practices in terms of valuation of financial instruments, in particular financial instruments embedded in hedging strategies or risks mitigation; ii) management of the financial holdings that make up the investment portfolio of the Bank, incorporating for the first time a structured and comprehensive review of these share holdings and the definition and implementation of a strategy to be adopted; iii) management of the processes of sale of overdue credit transactions portfolios and the identification and presentation to investors of new portfolios, amounting to euro 62 million; iv) strengthening of the trading room monitoring functions, as well as the maintenance of information systems and the production of management information; and v) improving procedures for monitoring positions and results of the foreign exchange transactions activity. First Half of 2010 Report and Accounts 74
Quality Department In the activity of the Quality Department during the first half of 2010, it is worth mentioning the following:
• renewal of the Bank’s certificate of ISO9001:2008 after an external audit performed by BVC in April 2010;
• creation of a Model of Document Management across the entire Group to ensure effective access and sharing of best practices;
• improving the efficiency indicator for the average production of normative documents;
• systemic documentation of first level structures of Millennium bcp, facilitating the organization's general knowledge about itself and clarification of responsibilities;
• completion of the Millennium Group Employees International Survey, which is held annually with dissemination of results throughout the company. Start of diagnosis in order to develop action plans to improve motivation;
• assessment of about 100 Bank’s Internal Services areas, corresponding to the activity of the second half of 2009, with the respective results analysis and development of diagnostic by area. Assets and Liabilities Management As part of the organizational restructuring of the Group implemented in 2009, the Assets and Liabilities Management Department was created. In the future it will have responsibilities for capital, interest rate and liquidity management for the Group.
75 First Half of 2010 Report and Accounts
PAGE LEFT BLANK INTENTIONALLY First Half of 2010 Report and Accounts 76 Risk Management
In the first half of 2010, the risk management activities were developed along the following main lines of action:
• answers and tasks within the scope of Basel II approval process, concerning the regulatory capital requirements calculation for credit risk;
• the issuance of the regulatory report of Pillar II of Basel II;
• the issuance of the Credit Concentration Report;
• collaboration in the Internal Control Reports for 2009/2010;
• developing improvements concerning the reinforcement of internal procedures for risks’ assessment and reporting;
• risk mitigation, through the reinforcement of collateral levels of transactions and trough the decrease of credit exposure concentration and
• regular stress testing, according to the regulatory methodology, as well as according to internally-defined methodology. During the first half of 2010, the Group continued to reinforce its practices and processes for risk management and control, especially regarding the developments carried out within the scope of internal models, taking into consideration the regulatory requirements of Basel II’s advanced methodologies. The Group has already obtained, with reference to March 2009, a formal approval concerning the standardised approach (TSA) for operational risk (at consolidated level and at individual level, in Portugal), and also for the use of its internal VaR model concerning the capital requirements calculations for generic market risk, regarding it activities in Portugal. In April 2010, the Group anticipated the delivery, to the Bank of Portugal, of the Pillar II report (the Internal Capital Adequacy Assessment Process – ICAAP), as regulated by Instruction No. 15/2007 from the Bank of Portugal, revealing its commitment towards the supervisory review process and the serviceability of its economic capital model. In accordance with the Risk Management function’s role within the Internal Control System, the Risk Office has participated – alongside the Internal Audit and Compliance functions – in the issuance of the annual Internal Control Reports for the Bank of Portugal, as defined by the supervisor’s Notice no. 5/2008. Furthermore, within the risk management scope, highlights include the continuous improvement of the processes of identification, assessment, monitoring and control of risks, as well as at its corresponding reporting – namely, to the Audit Committee and to the Risk Commission. As a complement to its response to the regulatory requirements concerning the regular stress testing, as defined by Instuction No. 32/2009, the Group continued to carry out regular stress tests, aiming at a greater capacity to anticipate the impact of different macroeconomic factors on the balance sheet, solvency ratiosand the P&L, allowing for the timely adoption of adequate corrective/preventive measures. Risk management governance There were no changes in the last half year regarding risk management governance. Risk management is still undertaken through a functional model of transverse, multi-domestic control. Responsibility for the management of this model is entrusted to Millennium bcp’s Executive Board of Directors, which delegates to the Risk Commission the follow-up and control of each type of risk. In adittion the quarterly reports to the Risk Comission, the Risk Management function produces a monthly report to the Audit Committee, which reports to the Supervisory Board. The Group Risk Officer also plays an important role, entrusted with the co-ordination and execution of risk assessment and monitoring, and with implementation of risk controls in every business area or business support functional area. 77 First Half of 2010 Report and Accounts
Furthermore, materialisation of the risk policy is of a multi-domestic nature, implemented through the local structures of the Risk Office and of the risk governance bodies at the main subsidiaries outside Portugal (the local Risk Control Commissions). Economic capital For the calculation and management of economic capital the Group considers a time horizon of 12 months, bringing together various aspects of an economic, regulatory and practical order around this same forecasting window: business planning, external ratings, the regulatory capital within the scope of Pillar I and quantification of credit risk through the internal probability of default (PD) models, among others. In the economic capital model used in the quantification below, a goal parameter of a global 1-year default probability of 6 basis points was defined (at a confidence level of 99,94%), reflecting a rating goal of A+. The graph below shows the economic capital breakdown in June 2010:
Economic Capital breakdown 30th of July 2010
20% 100% 24%
4% 9% 76% 7% 30%
30%
Credit Market Operational Liquidity Business Pensions SUB-TOTAL Diversification Economic And Fund effect Capital Strategic
Credit risk is the most relevant risk for the Group. By march 2010, the Pension Fund risk corresponded to 20% of economic capital, before diversification benefits, due to the decline in equity markets. Market risks incorporate: the Trading Book risk, the Banking Book interest rate, equity risks and real estate risk. Credit Risk The activities developed along the first half of 2010 concerning credit risk assessment, follow-up and control, for all portfolio segments, include:
• development and implementation of new rating models for real estate development businesses;
• launching of the redevelopment of risk assessment models for Large Corporate customers;
• rating/scoring models’ performance assessment for Corporate and Retail segments;
• re-estimation of Loss Given Default (LGD) parameters;
• launching of a project in the credit recovery area, with the collaboration of an external consultant, aimed at, the construction of a data repository to support the LGD estimation;
• improving the internal regulations concerning past due credit, reinforcing the timely actions to be undertaken towards the clients in financial distress.
First Half of 2010 Report and Accounts 78
Loan portfolio structure By the end of June 2010, the Group’s loan portfolio structure did not present significant differences in relation to the en of 2009. In terms of global nominal exposure – i.e. including both on-Balance and off- Balance exposures – the graph below illustrates the global structure as of June 30, 2010, as well as the structure in the three main countries in which the Group operates:
Credit exposure structure By exposure type
2,6% 0,4% 10,2% 10,4% 9,8% 9,4% 10,6% 11,7%
87,0% 89,8% 79,2% 78,9%
Portugal Poland Greece Total
Drawn Undrawn Off-Balance Sheet
In the breakdown of the global credit portfolio, in terms of Basel II exposure segments (illustrated by the graph below) there were also no relevant changes from the structure that existed in December 2009:
Credit exposure structure By segment
6,3% 15,0% 15,0% 14,5%
14,8% 15,0% 33,0% 16,0% 7,3% 10,1% 33,2% 14,3% 29,1%
10,8% 4,2% 5,3% 52,6% 32,6% 35,5% 35,1%
Portugal Poland Greece Total
Institutions and Sovereigns Corporate SME Retail (others) Retail (residential mortgage)
79 First Half of 2010 Report and Accounts
Credit concentration risk As at the end of the first half 2010, the Group presented to the Bank of Portugal its first annual Report on Credit Concentration Risk, referring to 31/12/2009, in compliance with the supervisor’s Instruction No. 2/2010. This report identified the top 100 credit risk positions, in terms of individual exposures ( single name concentrations ) and also showed the exposures’ distribution in terms of economical activity sectors (sector concentration), both at consolidated level and for each of the three major countries where the Group operates (Portugal, Poland and Greece). It’s worth mentioning that the Bank of Portugal’s requirements reinforce Group policies concerning the identification, assessment and management of credit risk concentration. In fact, there are already internally defined limits to credit exposure, aiming at the mitigation of this risk. The status of the largest credit exposures is regularly monitored by the Risk Office and reported to the Audit Committee and to the Risk Commission. The next table shows the position of the 20 largest customers, as a percentage of Own Funds, as well as their respective weights over the consolidated Exposure at Default.
% of Own Customer Groups % of Total EAD Funds
Group 1 7,35% 1,33% Group 2 4,45% 0,88% Group 3 3,63% 0,68% Group 4 3,07% 0,59% Group 5 2,32% 0,54% Group 6 2,25% 0,57% Group 7 2,14% 0,46% Group 8 2,14% 0,45% Group 9 2,12% 0,44% Group 10 2,12% 0,43% Group 11 2,10% 0,40% Group 12 1,97% 0,53% Group 13 1,93% 0,63% Group 14 1,81% 0,31% Group 15 1,69% 0,42% Group 16 1,41% 0,31% Group 17 1,30% 0,35% Group 18 1,25% 0,26% Group 19 1,23% 0,30% Group 20 1,22% 0,23% Total 47,50% 10,09%
Models validation The Model Control Unit is responsible for the independent monitoring and validation of credit risk models. During the first half of 2010, frequent validation actions of credit risk models were undertaken, covering the corporate and retail segments in its main estimation components, for the models in Portugal and Poland. These actions have been aimed at a deeper knowledge of the models’ quality, allowing for a timely reaction to changes in prediction capacities and reinforcing the Group’s confidence on its use and performance. Operational risk Along the first half of 2010, the Group carried out the usual activities through which this type of risk is managed. Of these, highlights include: First Half of 2010 Report and Accounts 80
• the launching of a new Risks Self-Assessment (RSA) exercise in Portugal and of the first RSA exercise in Romania and Mozambique;
• the identification of key risk indicators (KRI) for new processes in Portugal, Poland and Greece;
• the strengthening of the loss data gathering process in the main Group operations;
• the increase of the process owners’ awareness of the importance of incorporating the information provided by risk management instruments in the identification of actions to mitigate the most significant exposures. Operational losses The profile of the Group’s operational losses, in percentage of total events, registered until June 30, 2010 – by cause, geographical region and amount – is presented in the following charts:
Loss amounts distribution Loss amounts distribution By type of event By country
38,2% 51 ,7%
28,5%
36 ,8%
18,3%
13,6%
1,5% 6,5 % 3 ,4% 1,6% External risks Process riks Organizational IT risks People risks risks Portugal Poland Romania Greece Mozambique
Loss amounts distribution By country
5 1 , 7 %
3 6 , 8 %
6 , 5 % 3 , 4 % 1 , 6 %
Portugal Poland Romania Greece Mozambique
Risk self-assessment The purpose of the annual risk self-assessment (RSA) exercise is to promote the identification and elimination of risks, effective or potential, within the scope of each business or business support process, for the set of processes defined within the scope of operational risk management.. In Portugal and Greece, two annual RSA exercises have already been undertaken and the third annual exercise was launched last May in Portugal. In Poland, the second annual RSA is in its final phase, while the first annual RSA in Romania is also near completion. The classification of each risk type, within each process, is obtained by means of its positioning on a risk-tolerance matrix, for three different scenarios, allowing for:
• The assessment of the exposure to risks, including the influence of already existing controls (Residual Risk);
• The assessment of the existing control environment and its influence of the over the reduction of the exposure levels, by considering the risk levels without any control (Inherent Risk);
• The identification of improvement opportunities for the risks that were assessed as having the most significant exposures (Target Risk). The most significant exposures are mitigated through corrective measures identified during the self- assessment exercise, which will be sorted in a priority order according to the assessment results. 81 First Half of 2010 Report and Accounts
Implementation will be monitored through the IT application that supports operational risk management. The annual RSA exercises also allow for profiling the magnitude of the 20 different risks that are considered in operational risk management - considering the expected severity when loss events occur and the expected frequency of such events – for the global set of processes considered. As an example of this profiling, the result from the last RSA exercise completed in Portugal is presented in the following chart:
Risk (*) Residual Exposure by risk category (Portugal)
2
Average 1
0 R1 R2 R3 R4 R5 R6 R7 R8 R9 R10 R11 R12 R13 R14 R15 R16 R17 R18 R19 R20
Risks
R1 Internal fraud and theft R7 Hardware and Software problems R14 External fraud and theft
R2 Execution of unauthorised transactions R8 Problems related to telecom services & lines R15 Property and disasters risks
R3 Employee relations R9 Systems security R16 Regulatory and tax risks
R4 Breach of work health & safety regulations R10 Transaction, capture, execution & maintenance R17 Inappropriate market and business practices R5 Discrimination over employees R11 Monitoring and reporting errors R18 Outsourcing related problems
R6 Loss of key staff R12 Customer related errors R19 Other third parties’ related problems R13 Product flaws errors R20 Project risks
(*) On a scale from 0 (lowest) to 5 (highest)
Business continuity plans Within this area of operational risk management, which is designed, promoted and coordinated by a specific unit of the Group (the Business Continuity Unit), developments and improvements have continued. For Poland and Romania, Business Continuity Plans have already been defined and implemented and in Portugal the first tests and drills have already taken place (corresponding to the 3rd and final phase of the Business Continuity Plans previously defined and implemented). These will be regularly undertaken, from now on. The issue of business continuity is addressed through two complementary approaches: the Disaster Recovery Plan, for systems and communication infrastructures, and the Business Continuity Plan, for people, premises and equipments required for a minimal support of business processes. Market risks The Group uses an integrated measure for market risk, which allows the monitoring of all relevant risk sub-types in a common way. This measure accommodates the assessment of the following risk types: generic, specific, non-linear and commodities risks. Each risk sub-type is measured individually using an appropriate risk model. The integrated measure is calculated taking into consideration these independent assessments and does not reflect any diversification effects between risk types (worst-case scenario). For the generic market risk measurement (including interest rate, FX and equity risks), a VaR (Value-at- Risk) methodology is used. VaR is calculated daily on the basis of the analytical approach defined by a methodology developed by RiskMetrics (1996), considering a time horizon of 10 working days and a statistical confidence of 99%. Non-linear risk is assessed through a specific methodology developed internally, which replicates the effect the main non-linear elements of the options positions might have on the P&L of the various First Half of 2010 Report and Accounts 82
portfolios in which these are included, similarly to the VaR methodology (using the same statistical confidence and time horizon). The specific risk and the commodities risk are measured using the standard approaches defined in the regulations that stemmed from Basel II (with a corresponding change in the time horizon considered). The capital at risk is determined both on an individual basis - for each of the position portfolios of the areas having responsibilities in risk taking and management - and also in consolidated terms, considering the effect of diversification among the various portfolios and entities. The following chart presents the VaR amounts computed through the above mentioned approaches, for the Trading Book, for June 30, 2010 and December 31, 2009:
Trading Book's market risks thousands of euros Jun 09 Average Max Min Dec 09 Generic risk (VaR) 4,180.9 7,199.4 28,100.0 2,777.6 4,177.7 Interest rate risk 1,892.6 5,654.7 25,903.8 1,953.8 1,684.2 FX risk 2,674.6 3,139.9 4,195.5 2,413.4 3,551.4 Equity risk 965.1 591.9 1,029.6 368.2 353.2 Diversification effects 1,351.4 2,187.1 3,028.9 1,957.8 1,411.1
Specific risk 1,308.8 1,557.7 2,980.3 1,113.4 1,539.1
Non-linear risk 183.1 186.6 373.2 93.9 77.5
Commodities risk 15.6 2.7 15.6 0.7 1.7 Global risk 5,688.5 8,946.4 31,469.2 3,985.6 5,796.0 Notes: - Holding term of 10 days and 99% of confidence level. - Consolidated positions from Millennium bcp, Bank Millennium, Millennium 'bank Greece, Millennium bank Turkey and Banca Millennium (Romania).
During the first half of 2010 and due to the high incertainty that was a feature of the financial markets in this period, the amounts calculated for the risks at stake have substantiallly increased, in relation to previous periods. This increase has had a particular impact over the estimated volatilities concerning the interest rate risk of sovereign debt. VaR model’s validation and monitoring In order to ensure that the internal model is adequate to the assessment of the risks involved in the positions assumed, several validations of differing scope and frequency are performed. These include back testing, the effects of diversification and the scope of the risk factors. The following chart presents the back testing that confronts the VaR indicators with the hypothetical results. The results of this process confirm the adequacy of the model for the assessment of the risks incurred.
Return VaR - BackTest / Trading Book (thousands of euros)
30.000
20.000
10.000
0
-10.000
-20.000
-30.000 Jul-09 Fev-10 Set-09 Abr-10 Mai-10 Dez-09 Jan-10 Jun-10 Nov-09 Ago-09 Mar-10 Out-09
Return VaR Series6 83 First Half of 2010 Report and Accounts
Interest rate risk (Banking Book) Assessment of the interest-rate risk involved in the transactions of the Banking Book is performed through a process of analysis of the sensitivity to risk, undertaken every month for all the operations included in the Group’s consolidated balance sheet. In this analysis, consideration is given to the financial characteristics of the positions registered in the information systems. On the basis of this data, the expected cash flows are projected in accordance with the repricing dates, and a calculation of the impact on the economic value of the Bank is performed, in light of several alternative scenarios of changes in market interest-rate curves. This analysis, referred to June 30, 2010, carried out by calculating the difference between the present value of the interest rate mismatch, discounted at market interest rates, and the present value of that mismatch, discounted at market interest rates +100 bps (for all terms), results in an impact of around 59,4 million euros and to around 0,7 million euros, for the currencies in which the Group holds its most significant positions - euros and dollars, respectively. The following tables show the impact on economic value of this shift, for each management area and for the different terms-to-maturity of the positions at stake:
Impact of a +100 bps shift of the yield curves thousands of euros Repricing gap for EUR Repricing terms to maturity < 1 Y 1 - 3 Y 3 - 5 Y 5 - 7 Y > 7 Y Total Commercial area activity -9.349,4 88.399,1 39.653,9 5.062,4 -2.617,1 121.148,9 Structural area activity 37.522,2 61.183,2 109.648,8 168.463,6 3.127,4 379.945,1 Subtotal 28.172,8 149.582,2 149.302,6 173.525,9 510,3 501.093,9 Hedging -12.542,6 -152.967,2 -144.845,4 -174.300,2 -677,7 -485.333,1 Commercial and Structural total 15.630,2 -3.384,9 4.457,2 -774,2 -167,4 15.760,8 0,0 Funding area 48.644,0 925,2 837,8 -44,7 -995,2 49.367,2 Investment portfolio -22.440,2 -3.861,7 -4.045,5 2.199,9 -4.554,8 -32.702,4 ALM -7.405,1 68.113,9 -1.733,1 3.192,3 -31.238,6 30.929,3 Banking Book total 34.428,9 61.792,4 -483,6 4.573,3 -36.956,1 63.355,0 Trading area -1.793,3 1.981,5 -1.911,5 -355,7 42,3 -2.036,6 Total (Jun 2010) 32.635,7 63.773,9 -2.395,1 4.217,7 -36.913,8 61.318,3
Impact of a +100 bps shift of the yield curves thousands of euros Repricing gap for USD Repricing terms to maturity < 1 Y 1 - 3 Y 3 - 5 Y 5 - 7 Y > 7 Y Total Commercial area activity 2.988,9 -84,1 95,0 131,7 -127,1 3.004,3 Structural area activity -1.177,8 0,0 0,0 0,0 0,0 -1.177,8 Subtotal 1.811,1 -84,1 95,0 131,7 -127,1 1.826,5 Hedging -1.705,7 -58,3 -141,5 -164,2 115,4 -1.954,2 Commercial and Structural total 105,4 -142,4 -46,5 -32,5 -11,8 -127,7 0,0 Funding area 1.392,2 399,7 0,0 0,0 0,0 1.791,9 Investment portfolio -386,8 -582,1 -96,1 -478,9 -1.350,2 -2.894,2 ALM -147,8 375,7 -10,8 -9,0 65,2 273,3 Banking Book total (Jun 2010) 963,1 50,9 -153,4 -520,5 -1.296,7 -956,6 Trading area -454,6 295,9 193,2 112,5 2.101,0 2.247,9 Total (Jun 2010) 508,5 346,8 39,8 -408,0 804,3 1.291,3
It should be noted that each month the Group carries out hedging operations on the market in order to reduce the interest-rate mismatch of the risk positions associated with the portfolio of operations belonging to the commercial and structural areas (capital operations, medium/long term funding, etc.). Risk positions that are not subject to specific hedging on the market are transferred, through internal operations, to the markets’ area (trading, funding or ALM) and, from then on, they form an integral part of the respective portfolios and are assessed as such, on a daily basis, using the VaR methodology. First Half of 2010 Report and Accounts 84
Liquidity risk Following the situation verified in 2009, the evolution of financial markets in the first half of 2010 sustained the need for very careful liquidity management. After regaining some normality in terms of access conditions in the beggining of the year - especially for shorter financing terms - the liquidity markets’ situation remained particularly challenging along the second quarter of 2010. In fact, the traditional wholesale funding markets – such as, for example, the interbanking money market or the strucutured debt market – remained virtually closed during this whole period. This market behaviour has turned the the central banks of each monetary zone - the European Central bank (ECB) in the eurozone – into the main available wholesale funding sources, especially since last April. In spite of this environment, the Group managed to refinance its operations that would reach its term in the first half of 2010, by taking advantage of some moments allowed by the funding markets. Along the last half the Group has refinanced its needs for the current year, namely, trough a series of new medium and long term debt issues, part of which was taken by clients. Within the main issues made along the first half of 2010, a significant set of Euro Medium Term Notes (EMTN), is a highlight:
• 700 million euros, for a term of 1 year,
• 500 million euros, for a term of 1 year and a quarter,
• 850 million euros, for a term of 2 years and
• 300 million euros, for a term of 3 years, as well as the placement of 95 million euros of subordinated debt, for a term of 10 years, by the end of the first half. More recently, the Group has lauched Plan Oceanus, with the aim of, on one hand, significantly increasing its liquid assets and, on the other hand, decreasing its dependence on the wholesale funding markets and on the ECB funding. Liquidity plans The Liquidity Plan defines the desired funding structure for the Group, for the next annual period. It is drawn-up on a consolidated basis and also for the main subsidiaries and is part of the budgeting process. It is very important for the Group and it is regularly monitored. Regarding the priorities, responsibilities and specific measures to be taken upon the occurrence of a liquidity crisis, these are defined in the Liquidity and Capital Contingency Plan, which is revised at least once a year. This plan defines, as an objective, the maintenance of a balanced liquidity and capital structure, also establishing the need for the continuous monitoring of market conditions, as well as lines of action and triggers aimed at decision-taking (and its anticipation) in adverse scenarios. Another fundamental line of action within the risk mitigation and contingency measures concerning the funding needs, was the reinforcement, along the last semester, of the volume of ECB’s discountable assets. During the first half of 2010, the amount of these assets has increased from around 9.400 million euros to more than 15.000 million euros, as illustrated by the following graph:
Activos elegíveis como colateral para mobilização de liquidez junto do BCE (*) Milhões de euros
15 337,7
9 670,8 9 423,2 8 740,8 7 944,1
5 989,2 5 676,1
3 844,3 3 068,3
1 707,7
Mar 08 Jun 08 Set 08 Dez 08 Mar 09 Jun 09 Set 09 Dez 09 Mar 10 Jun 10
(*) Antes de haircuts 85 First Half of 2010 Report and Accounts
The evolution of the Group’s liquidity situation for short term time horizons (up to 3 months) is controlled daily, based on two indicators defined internally - immediate liquidity and quarterly liquidity - which measure the maximum needs for fund take-up which can occur on one given day, considering cash flow projections for periods of, respectively, 3 days and 3 months. The following table illustrates the short-term liquidity gap for the main Group operations as at December 31, 2009. In parallel, the evolution of the Group’s liquidity position is calculated regularly, with an identification of all factors that justify the variations occurred.
Short-term liquidity gap millions of euros
Immediate liquidity Quarterly liquidity Portugal 0,0 2.917,9 Poland 0,0 0,0 Greece 55,1 587,9 Romania 0,0 0,0 Turkey 0,0 0,0 Note: 0,0 represents a positive treasury position (net from Highly Liquid Assets)
In structural terms, the funding through wholesale markets, as at June 30, 2010, had the following breakdown for each of the instruments used:
Liquidity breakdown (Wholesale funding )
Jun 10 Dec 09 Variation MM 7,9% 15,1% -7,2% ECB 33,7% 9,8% 23,9% SFI Deposits 1,8% 2,1% -0,3% Commercial Paper 7,9% 8,1% -0,2% Repos 0,0% 1,2% -1,2% Loan agreements 4,1% 3,8% 0,3% Schuldschein 1,6% 2,0% -0,5% EMTN 28,4% 36,7% -8,3% Covered bonds 10,2% 15,1% -4,9% Subordinated debt 4,4% 6,0% -1,6% TOTAL 100,0% 100,0% -
In relation to December 2009, there is an increase in the relevance of the ECB funding, against a reduction of, mainly, the money market and EMTN funding, as expected, due to the funding markets’ evolution, as described above. Pension Fund risk The risk inherent to the Defined Benefit Pension Fund stems from the potential depreciation of the assets of the fund or from the decrease of the expected returns on these assets. Faced with a scenario of this nature, the Group would be confronted with having to make unforeseen contributions in order to maintain the benefits defined by the fund. The regular monitoring of this risk and of its management is entrusted to the Pension Fund Monitoring Sub-Committee. Through the end of June 2010 the Pension Fund registered an accumulated loss of 3.86%, mainly because of the decline in equity markets.
First Half of 2010 Report and Accounts 86
Strategic and business risk This risk is defined as the potential or effective impact on the Group’s results and/or equity, that result from (i) adverse decisions, (ii) failures in the implementation of management strategies or (iii) lack of response capacity to changes and variations in markets. The variation of Banco Comercial Português’ (BCP) share price is a relevant indicator as the basis of the measurement of this type of risks, its quantification being undertaken within the scope of the internal model for the assessment of own funds and their allocation to the various business areas (ICAAP). From this perspective, the economic capital calculation for this risk type (included in the economic capital chart for March 2010, previously presented) is based on the evolution and price levels of BCP stock, adjusted for the deduction of the equity markets’ external influence, estimated from stock price time series for the biggest banks listed on Euronext. 87 First Half of 2010 Report and Accounts
Information on the exposure to activities and products that were affected by the recent financial crisis
The Group does not have any exposure to the US subprime/Alt-A mortgage market, through Residential Mortgage-Backed Securities (RMBS), Commercial Mortgage-Backed Securities (CMBS), Asset-Backed Securities (ABS) or Collateralized Debt Obligations (CDO). The Group also does not have any exposure to monoline insurance companies. The Group's exposure to the structured credit products potentially affected by the financial markets turmoil was limited to the exposure of its subsidiary company Millennium bcpbank in United States, through which the Group owns, as at June 30, 2010, euro 22.2 million of Residential Mortgage-Backed Securities (RMBS) and euro 24.6 million of bonds with senior AAA debt, both issued and guaranteed by Government Sponsored Entities (GSEs), and euro 11.9 million of Commercial Mortgage-Backed Securities (CMBS) SBA Pools issued and guaranteed by the Small Business Administration, a Government Agency, which are backed by the full faith and credit of the United States Government. The Group carries out operations with derivatives fundamentally to hedge structured products for customers (guaranteed-capital and other products), to hedge risks stemming from the Bank's day-to-day business, essentially including hedging the interest-rate risk and the exchange-rate risk. The trading activity of the Group's own portfolio in derivatives is immaterial insofar as Group profits or risk exposure are concerned. Over the years, the Group has carried out securitisation operations based on loans to individuals – mortgage loans and consumer credit – and also of loans to companies. Credit securitisation is used as a liquidity and capital management tool, with the aim of financing the Group's business and, under certain circumstances, to free up capital. The Group has no exposure to Special Purpose Entities (SPE) other than that resulting from the securitisation of normal credit business, as described in Notes 1 and 21 of the Notes to the Consolidated Financial Statements. Furthermore, the accounting policies in respect of SPE and securitisations have not been altered over the past 12 months. The Group’s accounting policies are described in Note 1 from the Notes to the Consolidated Financial Statements, in Volume II of the 2009 Annual Report. Additional information about the valuation of financial assets may also be found in Notes 22, 23, 24, 40, 47 and 51 under the same section and volume of the referred Annual Report.
First Half of 2010 Report and Accounts 88
Main Risks and Uncertainties in the 2 nd Half of 2010 In this section the main risks and uncertainties to which the Bank’s activity will be subject in the second half of 2010 are listed. These risk factors could mean that the future results of the Group diverge materially from the expected results. However, other risk factors could also adversely affect the results of the Group. So, the risk factors presented here should not be looked on as an exhaustive and complete declaration of all the potential risks and uncertainties which could condition the Bank’s activity in the second half of 2010. The main risks in 2010 are split into two groups: Exogenous
• Deterioration in the macro-economic context in Portugal and in other countries, in particular in Greece;
• The Portuguese Republic may be subject to a downgrade by the rating agencies, with implications for the financing of the economy;
• Adverse behaviour of the capital markets;
• The recent turbulence in the main global financial markets, specifically the interbank and debt market, could materially and adversely affect the Bank’s liquidity position and capacity to increase credit volumes
• Adverse sectorial evolution in the real estate area;
• Changes in the regulatory framework of the banking activity;
• Adverse trajectory of market interest rates;
• Intensification of the competitive environment for the sector;
• Changes to legislation and tax regulations in Portugal and in the European Union. Endogenous
• Impact on capital resulting from Greece’s financial situation deterioration
• The Bank has exposure to Greek and Portuguese sovereign debt
• The level of cover of Pension Fund liabilities could turn out to be insufficient;
• Volatility caused by the Bank’s credit risk;
• Concentration of credit;
• Difficulties in international business;
• Downgrade of rating notations;
• Contingencies/governance. 89 First Half of 2010 Report and Accounts
Exogenous Risks Deterioration of the macro-economic environment in Portugal and other countries, particularly in Greece The Portuguese economy is expected to have expanded at 1.5% year-on-year, in real terms, in the second quarter of 2010, above the EU average. However, GDP should slowdown in the second half of the year as a result of the implementation of measures to control the budget deficit, with significant impact on economic activity in 2011. In Greece, as a result of budgetary restrictions, GDP is expected to contract around 3.0% in 2010. Poland should continue to recover in 2010, with growth rates close to its potential growth level. The inevitability of restoring the financial condition of sovereign states, particularly Greece and Portugal, and the close scrutiny of investors with the escalation of public debt forced the adoption of restrictive fiscal policies by conditioning the strength of economic recovery and the profitability of financial institutions, through the reduction of business volumes and level of revenues associated. The sharp reduction in activity levels increases the competitive pressure in the global economy, highlighting competitiveness problems in some countries. The adjustment process may require moderation, or in extreme situations, a deep internal restructuring, with discontinuities of the production cycle and labour market which may disrupt the social environment. This change may be reflected in the banking activity, including through the increase of the associated level of impairment. The return of risk aversion sentiment and worsening of trust climate could lead to a return of a context of volatility in financial markets, compounded by the feeling of exhaustion of institutional capability to additionally support activity. To that extent, the economic environment is likely to worsen significantly, and would be particularly punitive for financial systems with greater exposure, active or passive, to international financial markets. The Portuguese Republic may be subject to review rating by rating agencies, with implications for the financing of the economy Standard & Poor's, Moody's and Fitch rating agencies lowered recently the rating of the Portuguese Republic, justifying this action with the implementation risk of the measures aimed at controling the budget deficit, with the increase of public debt to GDP and with the dificulty in reaching consensus between government and the opposition parties on fiscal consolidation measures to achieve the necessary convergence with countries of similar rating. The Portuguese Republic’s rating evolution is dependent on the measures included in the Stability and Growth Plan, on the additional measures already adopted, and on the viability and credibility of the plan to reduce the public deficit to below 3% of GDP by 2013. A reduction in the rating of the Portuguese Republic may occur in the future, in case of a drastic deterioration in public finances due to a weaker performance of the economy or as a result of the announced measures coming to be perceived as insufficient. Accordingly, the cost of risk for the Portuguese Republic will increase, with negative side effects on the cost of risk for Portuguese banks, and consequently in their results. Adverse behaviour of the capital markets Uncertainty with regard to the duration of the current international financial crisis could continue to penalise the evolution of the markets and maintain or worsen the already high aversion to risk, reflecting on the existence of a market risk related with the evolution of share and bond prices, penalising the evolution of commissions on stock exchange and asset management operations, the results of financial operations and other revenue and also the value of investments and securities portfolios, leading to a deterioration in the value of financial collateral, of the risk premium associated to operations in different markets and the profitability of pension funds, and could negatively affect results and solvency ratios. The recent turbulence in the main global financial markets, specifically the interbank and debt market, could materially and adversely affect the Bank’s liquidity position and capacity to increase credit volumes Since the second half of 2007, disruption in the global credit markets, coupled with the re-pricing of credit risk and the deterioration of the housing markets in the United States and elsewhere, created increasingly difficult conditions in the financial markets and had a negative impact on investor confidence. This has negatively affected the interbank markets and debt issues in terms of volume, maturity and credit spreads. Among the sectors of the global credit markets that are experiencing particular difficulty due to the current crisis are the markets associated with sub-prime mortgage backed securities, asset backed securities, collateralized debt obligations, leveraged finance and complex structured securities. These conditions have resulted in historic volatility, less liquidity or no liquidity, widening of credit spreads and a lack of price transparency in certain markets. First Half of 2010 Report and Accounts 90
As a result, greater attention must be paid to liquidity risk management. According to its risk management policies, the Group seeks to mitigate the risk of liquidity, having adopted some measures along 2008 and reinforced them during 2009 that ease the negative impact of the adverse environment of the markets’ liquidity, namely through the reduction of commercial gap, reinforcement of deposits collection, sale of non-strategic assets and increase of highly liquid assets. The debt refinancing needs in the medium and long-term estimates for 2010 stand at Euro 4.6 billion. In accordance with the strategy of global liquidity management of the Group, a significant reduction of the commercial gap (credit / on-balance sheet customer funds) has been established since 2009. It is expected that the management of loans to customers and customers’ funds growth in 2010 would lower the commercial gap during 2010. The Bank is financing it self in capital and interbank markets in accordance with its financing needs. The resort to the ECB is justified primarily when markets show signs of inefficiency. The Bank had a portfolio of highly liquid assets that allowed to mobilize as of June 30, 2010, approximately 14.7 billion euros with Central Banks after haircuts. Although the Bank considers that its risk management and risk mitigation policies are adequate, a continuation of this market environment could cause the Bank’s liquidity position to deteriorate. Such deterioration would increase funding costs and limit the Bank’s capacity to increase its credit portfolio and the total amount of its assets, which could have a material adverse effect on the Bank’s business, financial condition or results of operations. These conditions may be exacerbated by persisting volatility in the financial sector and the capital markets, or concerns about, or a default by, one or more institutions, which could lead to significant market-wide liquidity problems, losses or defaults by other institutions. Further, it is not possible to predict what structural and/or regulatory changes may result from the current market conditions or whether such changes may be materially adverse to the Bank. If current market conditions and circumstances deteriorate further, or continue for protracted periods of time, this could also lead to a decline in available funding, credit quality and increases in defaults and non performing debt, which may have a negative impact on the rating, investments, business financial condition and results of operations of the Bank. Adverse sectorial evolution in the real estate area The Portuguese market did not experience a speculative bubble in the real estate market as opposed to other countries, such as Spain, and the real estate market is in a different stage of the cycle. However, given the contraction in GDP, the pressure on the disposable income of families, oversupply, gradual dissipation of the effect of governmental incentive policies and eventual worsening of funding conditions, whether due to monetary policy or the regulatory framework, a recovery in real estate demand is not expected, which could lead to a deceleration of new production of mortgage credit and on real estate development credit, and price recovery is also not expected; in adittion, there may be a devaluation in collateral and capital losses in buildings received by way of credit default. On the other hand, a possible rise in the reference interest rates of the European Central Bank would certainly reflect both on a worsening of funding conditions and on an increase in debt servicing, which could help to increase non-performing loans and credit impairment. Changes in the regulatory framework of the banking activity The implementation of the banking sector’s regulatory reform, called "Basel III", will be applicable in Portugal, through the EU Directive transposition, whose implementation will require a strengthening of quality, consistency and transparency of capital. According to the proposals under discussion, explicit minimum ratios of Core Tier 1 and Tier 1 solvency ratios, as well as criteria for the elements that may integrate the Core Tier 1, Tier 1 and Tier 2, will be defined. "Basel III" may also imply the imposition of two quantitative ratios required in the field of liquidity: the Liquidity Coverage Ratio, which evaluates the continuity of business in a stress scenario at the short-term and Stable Net Funding Requirement, to assess the long term strength, by maintaining more stable sources of funding. Additional measures will be established to the capital requirements contained in the Capital Adequacy Directive, aiming to avoid the presence of excessive levels of leverage. Additionally, capital levels may be adjusted depending on the phase of the cycle, through the establishment of reserves or dynamic provisions and the imposition of additional conditions for the allocation of results.There would be also a strengthening of prudential regulations and supervisory measures for financial institutions deemed systemically important. The new capital and liquidity regulatory framework, with the meaningful aim of increasing the future resilience of the banking sector, may have strong impacts on all banks. Firstly, the need to strengthen the banks' equity (in an adverse market context) and secondly, greater restriction on the granting of credit (reduction of leverage, higher solvency ratio and liability adequacy rules). Adverse trajectory of market interest rates The Bank is exposed to interest rate risk. Interest rates are highly sensitive to many factors which the Bank does not control, including monetary policies and domestic and international political events. As 91 First Half of 2010 Report and Accounts
for any bank, changes in market interest rates can affect the interest received from the assets which generate interest in a different way to those which affect the interest paid by remunerated liabilities. This difference could reduce the Bank’s financial margin. Besides this, an increase in the interest rate could reduce demand for credit and the Bank’s capacity to grant credit to customers, as well as contributing towards an increase in the rate of non-performing loans by the customers of the Bank. However, it could also simultaneously have a positive impact, helping to reduce the commercial gap. Inversely, the maintenance of interest rates at minimum levels or a possible reduction in the level of interest rates could have a negative effect on the Bank through the generation of a lower financial margin on demand deposits and an increase in competition for deposits and customer loans. As a result of these factors, significant changes or the increase in volatility in interest rates could have a substantial adverse impact on the Bank’s activity, financial situation or results. Intensification of the competitive environment for the sector The Portuguese banking market is currently a fairly developed market which contains major national and foreign competitors which follow multi-product, multi-channel and multi-segment approaches, and which have significantly improved their commercial capabilities. Over recent years there has also been a significant development of banking operations through the Internet and the use of new techniques, which allow banks to more precisely assess the needs of their customers and to act accordingly, adjusting their value proposal. Foreign banks have also entered the Portuguese market, especially in areas such as corporate banking, asset management, private banking and investment banking services. These factors have led to an increase in competition. Furthermore, many Portuguese banks are dedicated to increasing their revenue through an increase in the respective market shares and cross- selling, as well as core operations, which tend to sustain more aggressive commercial strategies. An intensification of the trend of integration of financial services on a European level is also expected, which could contribute towards an increase in competition, essentially in the areas of asset management, investment banking, online brokerage services and a growing offer of remote financial services. The highly competitive level of the sector in Portugal and in other countries where the Bank operates, or the worsening thereof, means the existence of business and strategic risk, which could lead to the eventual loss of market share in some products and/or business segments and which might hamper the adjustment of spreads for the credit risk, lead towards a reduction in the rate of financial margin, of commissions and other revenue and penalise the evolution of revenue, results and the asset situation. Changes in tax laws and regulations in Portugal and the European Union The various measures to stimulate the economy and support the banking system, approved by the Portuguese Government were reflected in a sharp increase in public deficit, which amounted to 9.4% of GDP in 2009. Despite the agreement with the European Commission to reduce the budget deficit to below the limit imposed by the Stability and Growth Pact - 3% of GDP - by 2013, the Portuguese economy has diverged, in recent years, from the euro area average, as a result of the Portuguese’ low productivity and competitiveness strucutral problems, resulting in the need to implement additional measures to the Stability and Growth Pact (Law No. 12-A/2010, of 30 June 2010), which introduced changes to the IRS, IRC, VAT and stamp duty and reduction of benefits and tax credits in various taxes aspects, leading to an increased in fiscal burden, with implications for the reduction of gains resultingfrom tax planning, with direct impact on results and activity volumes. Endogenous Risks Impact on capital resulting from Greece’s financial situation deterioration Millennium bank in Greece has a weight of slightly over 6% in the Group, in terms of assets, Risk Weighted Assets (RWA) and contribution to the Tier I ratio and about 5% for Total Capital. The amount of goodwill associated with the operation accounts for nearly 60% of all the goodwill in the Group balance sheet. The maintenance or significant worsening of the financial situation in Greece could lead to an impairment in the consolidated accounts of the Group. Additionally, the recoverable amount of goodwill is reviewed annually or when there is evidence of impairment. Any impairment losses are recognized in the income statement. A review of goodwill associated with the operation, conditional on a change in market conditions, could take place. Despite not having an impact on capital ratios since goodwill is already deducted from Tier I Capital, it could impact on the Group’s results. The Bank has exposure to Greek and Portuguese sovereign debt As part of its operations in Portugal and Greece, the Bank has exposure to sovereign debt in both countries. The Bank's exposure to Portuguese and Greek sovereign debt may be relative to government bonds held in the portfolio of financial assets held to maturity (Held-to-maturity), in the trading and in the financial assets available for sale portfolios. Exposure to Greek debt is held mainly in the portfolio First Half of 2010 Report and Accounts 92
of financial assets held to maturity. The trading and financial assets available for sale portfolios are accounted at their fair value. The changes in fair value are accounted against fair value reserves until they are sold or an impairment loss exists. In the sale, the accumulated gains or losses recognized as fair value reserves of fair value are recognized as income. Any depreciation in the value of sovereign debt trading and available for sale portfolios of the Group may impact adversely on its financial position and results. In turn, the financial assets held to maturity are initially measured at fair value and subsequently measured at amortized cost. Impairment losses are recognized in the profit and losses when identified. Pension Fund The level of cover of Pension Fund liabilities could turn out to be insufficient if the behaviour of the markets leads to lower income from the assets of the Pension Fund compared to actuarial assumptions. The amount recorded in the consolidated accounts referring to liabilities for pensions is based on determined assumptions on mortality, and the longevity of the beneficiaries of the Pension Fund could be greater than foreseen and, as such, these could benefit from the fund beyond the amounts set aside for this purpose. In the last year the Bank altered the actuarial assumptions of the Pension Fund’s liabilities, both in terms of the rate of salary growth, from 3.25% to 2.5%, and the rate of growth of pensions, from 2.25% to 1.65%. While we consider that the current actuarial assumptions are adequate for the current market context, it is not possible to guarantee that the actuarial assumptions will not be altered in the future and that they will not lead to actuarial losses, including the variation of the Pension Fund corridor. Under the convergence to the IFRS and according to the definitions in IFRS 1, the Group decided to reconstitute the actuarial calculations from the date it set up its Pension Fund, which led to an increase in liabilities for pensions. In this regard, all the actuarial gains and losses which exceed 10% of the value of the liabilities for pensions are to be amortised for the average remaining period of the employees’ working lives (currently: 20 years) up to their retirement date. If the level of cover of the Pension Fund’s liabilities turns out to be insufficient, the Bank could have to make additional contributions in the future, which could adversely affect its financial situation and results. Furthermore, the Bank has to deduct the part of actuarial losses which exceed 10% of the liabilities for pensions from its own base funds or from the value of the fund (depending on which is the higher), and so an eventual decrease in the value of the fund could have an adverse effect on the Bank’s capital position. In September 2006, the EBD decided that the employee retirement pension supplement would be financed with a defined contribution plan, with employees admitted up to the date of the decision keeping the rights which arise from the defined benefit plan in force until then. This measure will lead to a gradual reduction in the financial risk of the Pension Fund in future years. In December 2008, in view of the extraordinary circumstances which conditioned the activity of financial markets in 2008, the Bank of Portugal authorised the deferral of the actuarial losses, calculated in 2008, over the four subsequent years, with the exception of the income expected from the fund’s assets relating to 2008. The Group could be adversely hit by regulatory changes to the rules relating to liabilities for pensions. Volatility caused by the Bank’s credit risk In the first half of 2010, the intensity of the worsening of the international financial crisis and its spread to economic activity led to very accentuated adjustments in the interest rates market and a quite considerable increase in the spreads of private debt instruments, which particularly affected the financial sector due to the growing difficulties of financial institutions and of the systemic risk. The cost of protection against the default of private debt instruments and in particular of the banks remained at quite high levels throughout the first half of 2010. The increase in the Bank’s credit spread will be reflected in the increase in the costs of financing and will reduce the growth capacity of assets, but it will also reduce the financial margin and lead to gains in the fair value of the liabilities at fair value. A reduction in the Bank’s credit spread will produce the inverse effect. Concentration of credit The Bank is exposed to the credit risk of its customers and counterparties and in particular to the risk resulting from the high concentration of individual exposures of its credit portfolio. On June 30, 2010 the twenty largest individual credit exposures represented around 9.5% of the credit portfolio, representing a high concentration of the credit portfolio, which together with the high credit exposure to the construction sector, helps to raise exposure to the credit risk. This is a problem which is common to most of the main Portuguese banks, given the small size of the Portuguese market, and has been, in fact, widely referred to by the rating agencies as a fundamental challenge facing the Portuguese banking system. The rating agencies have been particularly critical of Millennium bcp’s concentration of exposure in larger customers and, especially, of the exposure to shareholders, helping to make Banco Comercial Português’ rating notation sensitive to the evolution of these variables. Although the Bank carries out its business based on strict risk control policies, in particular of the credit risk, seeking to 93 First Half of 2010 Report and Accounts
increase the degree of diversification of its credit portfolio, it is not possible to guarantee that the exposure to these groups will be reduced significantly in the short and medium term. Difficulties in international business The Group has operations in international markets, which are exposed to risks arising from possibly adverse developments on a political, governmental and economic level in the countries where we are established. The Bank has operations in markets in the process of European integration, such as Poland and Romania, which currently are at a turning point, after the recession seen in 2009 (except Poland, which was the only country of EU27 to escape from the recession). The Bank has also operations in Angola and Mozambique. The process of development is still in the early stages in these countries and is characterised by high dependence on a limited number of economic sectors, including commodities such as petroleum in Angola and aluminium in Mozambique, increasing their vulnerability to shocks in these specific markets. Some of the Group’s international operations are also directly and indirectly exposed to currency exchange risks, which could adversely affect the Group’s results. So, although the markets with exchange risk currently represent currently around 9% of the Group’s net results, possible devaluations of these currencies against the euro could have a negative impact on the Group’s activity, its financial situation and on its results. The use of financing in foreign currency in some countries of Eastern Europe expose some of the Bank’s customers to the exchange risk, affecting the financial condition of these entities and, consequently, the results of the Bank. Although the Bank Millennium tightly restricted the new production of foreign currency loans in Poland at the end of 2008, the Bank still holds a considerable credit portfolio in foreign currency, which could have a considerable impact on the results through the making of additional payments for impairment in the credit portfolio and the high cost of zloty swaps. Results could also be hit if these countries’ current expectations of joining the European single currency in the medium term are frustrated or in the event of episodes of reallocation of institutional investors’ portfolios in favour of refuge assets as opposed to assets in emerging markets. The deterioration of the macro-economic environment in most of the Group’s international operations is also reflected in an increase in losses and associated impairment. The Group can also come up against difficulties in implementing its strategy with regard to the expansion of its international operations due to general conditioning factors such as the worsening of market conditions, the adverse environment, the actions of the competition or specific conditioning factors associated to possible delays in the implementation of its strategic program. These difficulties could have a visible impact on the opening of new branches, adding new customers and business volumes. Downgrade of rating notations Credit ratings are an important component of the Bank's liquidity profile. The credit ratings are based, among other factors, on financial strength, credit quality and concentration of the Bank's loan portfolio, the level and volatility of net income, capital adequacy, management quality, the Bank’s balance sheet liquidity, the availability of a significant commercial and retail deposits base and the ability to access a wide range of sources of institutional funding. The Bank's credit ratings may be revised at any time and have "positive", "stable" or "negative" outlooks, depending on rating agencies’ views of the Bank’s credit quality. Such outlooks give indications of, and suggest, what further rating actions can be. Accordingly, there is no guarantee that the Bank will not be subject to downgrades in the near future. Further, the credit conditions of the Portuguese banking system, which have an impact on the creditworthiness of the Portuguese banks, may result in an expectation of deterioration of such creditworthiness. Additionally, Portuguese banks deposits and debt ratings are dependent on the Portuguese Republic’s ratings and, as such, may vary as a result of Portuguese Republic’s ratings changing. The ratings of the Portuguese Republic are a key element in determining its capacity to support the banking system. The Bank's ability to compete successfully in the market for deposits depends on various factors including financial stability, particularly in operating results and credit ratings assigned by recognized rating agencies. To that extent, a reduction in credit rating may affect the Bank's ability to obtain financing and may have a substantial adverse effect on its business, financial condition and results. Contingencies / Governance It is not possible to guarantee beforehand that the Group will be able to execute its vision and medium term strategy, brought together in its focus on Europe and on associated markets and in the transformation of its business models in Portugal, due to general conditioning factors, such as the worsening of market conditions, the adverse environment, the increase in competition or the actions taken by our main competitors, or specific conditioning factors associated to possible delays in the implementation of its strategic program or the efficacy and degree of implementation of the measures to resume growth and leadership in Retail banking and to capture greater value in the companies and corporate segments, to maintain the drive to reduce costs and to optimise the discipline of capital and liquidity management and the strengthening of risk management. The Bank could face difficulties in the implementation of critical management measures aimed at continuing with repricing, optimising the First Half of 2010 Report and Accounts 94
recovery of banking revenues and of profitability, mitigating exposure to diverse types of risk and increasing own funds, with a negative impact on projected levels of efficiency, compromising its defined objectives and solvency. 95 First Half of 2010 Report and Accounts
PAGE LEFT BLANK INTENTIONALLY First Half of 2010 Report and Accounts 96 Sustainability
The strategy in the context of sustainable development reflects the commitment of Millennium bcp to the stakeholders and is materialized in the Master Plan for Sustainability 2010-2012. The sustainability plan covers six major areas of action, supported by internal and external communication, and has the following main objectives:
Millennium bcp’s Master Sustainability Plan (2010-2012)
Environmental Economic Dimension Social Dimension Dimension
Principles of Involvement Governance of Environmental Ethics and Customers Employees with the Sustainability Performance Conduct community
Reinforce Strengthen Strengthen the motivation and customer Reinforce Bank’s culture the feeling of Reinforce the relations and alignment and and values belonging to the Bank’s Improve the satisfaction Bank’s Bank proximity to positioning in Make the monitoring of Position the the community environmental Codes of Ethics Continue to the Sustainability Bank in market issues and Conduct promote the Strategy niches which intrinsic development of are emerging skills
Comunication
Improve awareness and monitoring sustainability strategy by the stakeholders
This summary presents the outcome of the 2010 priority action lines and describes the main activities developed during the first semester for its accomplishment.
Area Dimension Action lines Outcome
Management, Sustainability - Create methodologies for monitoring the approved action coordination and Governance plan. monitoring Achieved Not started
There were two meetings to monitor the activities developed within the sustainability plan: • The Sustainability Coordination Commission received a report on the progress of the Master Sustainability Plan activities and reanalyzed the actions to be implemented through the end of 2010; • In the Stakeholders Committee the following subjects were addressed and discussed: (i) the progress of activities under the Master Sustainability Plan and the actions scheduled to be implemented until the end of 2010, (ii) the economic and financial situation, (iii) first quarter Bank’s results and (iv) Bank of Portugal Behavioural Supervison report. It was also given feedback from the stakeholders’ representatives of the main subjects presented in the Shareholders General Meeting.
97 First Half of 2010 Report and Accounts
Plano Director de Sustentabilidade do Millennium bcp (2010-2012)
Area Dimension Action lines Outcome
- Strengthen the link between employees and the Bank's Values Values.
- Communicate the code of conduct permanently and in an Ethical Principles appealing way according to the “dilemmas” identified; and Code of - Foster a culture of compliance and rigorous risk Conduct Code of Conduct management;
- Inform the stakeholders of the different policies adopted by the Bank with impact on sustainable development. Achieved Not started
The "Being Millennium" and " Culture of Rigour " programs were launched in the first half of 2010, supported by an innovative platform of communication with the organization though the Bank's internal website: • The "Being Millennium" program was part of a global employees motivation program, with its main objectives to strengthen the culture and sense of belonging through the association between the values of the Bank and daily activities; • The priorities of the "Culture of Rigour" program are: (i) strengthening the commitment of all employees in compliance with legislation and the Bank’s internal rules and (ii) strengthening the Institutional reputation through rigorous practices in employees professional conduct.
Area Dimension Action lines Outcome
Quality and - Promote the culture of rigor and transparency of the Transparency in Organisation in customer support. Customer Service Costumers - Promote the offer of products and services which respect Products and principles of social responsibility and respond to new Services environmental challenges. Achieved Not started
In addition to the “Culture of Rigour” program the “Sales with Quality” program was launched, involving training that aims to raise the quality of procedures and communication with customers at the sales moment. In order to promote products and services aimed at encouraging entrepreneurship and new business opportunities, Millennium bcp participated in and supported many initiatives, including: In the context of microcredit: • Supported the 11th international meeting of the European Microfinance Network, held this year in Portugal for the first time, to share experiences and best practices in managing microcredit at the European level; • Signed a protocol with the Youth Foundation - working under a joint cooperation partnership including Millennium bcp, the Youth Foundation, the Universidade Católica Portuguesa, the Aveiro University and ADDICT, Development Agency for Creative Industries - to facilitate the integration of young people in the labour market through entrepreneurship and self-employment; • As part of national partnership with the Portuguese Red Cross (CVP) a protocol was signed with the CVP of Faro; • The Bank participated in several events to promote employment and entrepreneurship. First Half of 2010 Report and Accounts 98
For companies: • Participated in briefing sessions organized by the Agency for Investment and Foreign Trade of Portugal (AICEP) dedicated to Angola and the Provinces; • Sponsored the 4th Financial Management Eurofinance Conference on Treasury and Risk management which was intended to give updated information on key trends and industry best practices to specialized persons (CFOs, Treasurers, and others).
Area Dimension Action lines Outcome
- Involve employees in initiatives outside their daily Millennium Culture activity, to enhance the feeling of pride, belonging and and Identity identification with the Bank's vision, mission and values. Employees - Strengthen the internal training plans aimed at senior Proficiency and staff; knowledge - Carry out training actions on security and safety issues.
Achieved Not started
Within the employees’ motivation program an internal competition was held - "The Peak Conquest" - which awarded ten employees, who wrote the best sentence about the ten advantages of being a Millennium bcp employee. The prize was climbing to the highest point of Portugal with the renowned climber João Garcia. The “SER.DO” and "IT Academy" programs continued, and a new management game was launched in the Credit Department. These programs are designed to complement the training component with the strengthening of Bank values and culture. The first part of the “We Value Experience” program, intended for more experienced employees who are not in management functions, was completed. The Grow Together Forum, which annually brings together employees who are in the development programs "People Grow" and "Grow Fast", was held, and this year also included “Leadership in Retail” program employees. This forum's main objectives are: (i) to discuss Bank strategic issues and (ii) to strengthen the team spirit.
Area Dimension Action lines Outcome
- Strengthen the identity of the Millennium bcp Foundation, through the reinforcement of the dissemination of Foundation initiatives in the area of culture, education and social Community solidarity. - Structure a voluntary work programme for and with the Voluntary Work participation of the employees. Achieved
Not started
The “Millennium bcp Shared Art” project continued to promote and share the Bank’s cultural patrimony: • The Millennium bcp Shared Art – Traveling Art Exhibition has been presented in Bragança, Porto, Évora, Funchal, Viseu and Vila Real. As part of this exhibition a school competition “Discovering Millennium bcp Collection” was created; Openings: • an exhibition of archaeological remains of vertebrates, under the title "Bones that tell stories" in the Archaeological Centre at the Correeiros Street (NARC); 99 First Half of 2010 Report and Accounts
• a second exhibition of paintings on the theme of abstraction – “Abstraction. Discovering Millennium bcp collection”; • an exhibition of tapestries and paintings at the headquarters of the European Investment Bank in Luxembourg under the name “Nets without a sea”. This show is currently on display in the city of Guimarães. • Participation in events: "International Day of Monuments and Sites" and "European Night of Museums"; • For the 15 th anniversary of the NARC, a new space was opened using the “Roman Sardine” theme, and some commemorative events were carried out, including a special ceremony with the presence of the Minister of Culture. Millennium bcp was exclusive sponsor of the Graduate Programme and Junior Achievement Portugal promoted a presentation of the winning team of the National Competition 2009/2010. The Graduate Programme is supported and guided by professors from several Portuguese universities and volunteer tutors from Millennium bcp, and aims to provide entrepreneurial training to university students. Millennium bcp and the Management and Business School (AESE) have extended their partnership to the discussion of Millennium bcp-based case studies. This program aims to enrich the educational contents and simultaneously provides Millennium bcp management staff knowledge and experience that encourages learning from the best practices of the Bank. The Direct Banking Department participated in the initiative promoted by Microsoft – Safe Internet Day - with awareness-raising activities in primary schools, in which bank employees participated. The event involved some 60 schools, more than 6,000 children, parents and teachers benefited from these actions. Support for the reconstruction of Madeira Island after this spring’s devastating storms: • an account was opened to collect donations. The funds raised were used to buy three school transport vans for students with special needs; • collaboration with the TV broadcaster SIC in the "A flower for Madeira - worth believing" charity gala, with 100 employees participating as volunteers at the call center for fundraising.
Area Dimension Action lines Outcome
- Formalise the Bank's environmental policies and Policies and principles, assuming a commitment to medium/long term Practices Environmental environmental performance. Performance Efficient - Reduce the Bank's ecological footprint, through the management of strengthening of the internal programmes aimed at the consumption efficient use of resources. Achieved
Not started
Under a protocol signed with the Universidade Nova de Lisboa/Faculdade de Ciências Técnicas several works have been developed since 2005. In the first half of 2010 a report on Millennium bcp’s performance from 2005 and 2009 was presented. This report is the work basis for the activities that will be developed through the end of 2010.
First Half of 2010 Report and Accounts 100
Area Dimension Action lines Outcome
- Disseminate the Bank's social responsibility initiatives Internal through the most relevant internal channels. - Innovate in the communication channels and formats on Sustainability issues; Communication - Develop and further highlight Sustainability and External Millennium bcp Foundation areas;
- Highlight the initiatives of the Sustainability and social responsibility areas of the international operations.
Achieved Not started
An internal website dedicated to the theme “Social Responsibility” was developed. On this site is information about sustainability and social responsibility strategy and activities implemented is available. With the aim of strengthening the communication of the Bank's strategy and initiatives in the area of Sustainability, a new chapter was added to Volume I of the Annual Report, which was complemented by a full version - Sustainability Report 2009 - available only in digital format. Millennium bcp has promoted an unprecedented initiative, the "Open Door" workshop with the aim of sharing and discuss innovation initiatives as well as programs and projects of the organizations invited. The companies invited were from different sectors: ANA, Brisa, EDP, GALP, Portucel, PT, Refer, Sonae Sierra, Solvay, with the attendance of leaders of innovation areas. Professors from the Instituto Superior Técnico and Universidade Católica Portuguesa were also invited. 101 First Half of 2010 Report and Accounts
PAGE LEFT BLANK INTENTIONALLY First Half of 2010 Report and Accounts 102 Main Events
January
• Reorganisation of the Retail business area, enhancing customer relationships and increasing the tailoring of the banking services distribution system to each customer’s profile. This model is complemented by the revision of the incentives system for Retail, with the aim of increasing the focus of the Retail network on profitability of operations and particularly on the net interest income generated by each transaction, to implement during 2010.
• Extension of the existing partnership with the AESE - School of Management and Business on the drafting, discussion and dissemination of management case studies based on Millennium bcp.
• Bank Millennium distinguished among the “most valuable brands on the Polish market”, according to the study “Polish Brands in 2009” by Rzeczpospolita newspaper, positioning itself in the 21st position (up six places from the previous year). In the category of “financial institutions” Bank Millennium came in 9th place. February
• Agreement to sell 95% of Millennium Bank A.S. in Turkey to Credit Europe Bank, N.V., a wholly owned subsidiary of Fiba Holding, A.S., having agreed with the buyer a put and call mechanism to sell the remaining stake for a price per share no lower than the price agreed for the majority stake.
• Successful completion of Banco Comercial Português’ subsidiary Bank Millennium’s capital increase through a rights issue of 363,935,033 new shares with a subscription price of PLN 2.9 per share, in which, Banco Comercial Português, S.A. exercised its pre-emptive rights. The proceeds of the capital increase amount to PLN 1,055 million (approximately Euro 258 million) and will allow Bank Millennium to support its strategy of growth in Poland.
• Millennium bcp opened a solidarity account to collect funds to support victims of the ferocious storms that battered Madeira Island, causing numerous deaths and severe destruction.
• Best Bank of Mozambique, for the 3rd consecutive year, in the 8th edition of the “Survey of the Banking Sector in Mozambique”, according to the recent survey by the Mozambican Association of Banks and KPMG. March
• Purchase and assumption agreement with Investors Savings Bank to sell all the branches of Millennium bcpbank in the United States of America and respective deposits. Following the purchase and assumption agreement, the parties intend to enter into a Loan Purchase agreement under which Investors Saving Bank will purchase a portion of Millennium bcpbank’s loan portfolio. Millennium bcp has also established a cooperation agreement with the buyer for financial remittances from the USA. As a result of this transaction, still subject to regulatory approval, Millennium bcp will no longer develop new retail commercial activities in the USA.
• ActivoBank by Millennium debuted, with an all-new concept of banking designed for young-at- heart clients who are active users of new communication technology, and who value a banking relationship based on simplicity.
• Promotion of an unprecedented initiative, the “Open Door” workshop, with a view to sharing and discussing initiatives in innovation as well as programs and projects of the organizations invited, with the attendance of leaders of the areas of innovation of enterprises of different sectors and University teachers.
• Millennium bcp sponsored the Conference “Building a New Financial Architecture”, which was attended by several European experts in the Financial Sector and the European Parliament who discussed the Capital Requirements Directive and the proposed amendments to that Directive, as well as on the new system for Financial Supervision and Cross-Border Crisis Management in the banking sector.
103 First Half of 2010 Report and Accounts
• Millennium bcp sponsored the 4th Eurofinance Conference on Financial Management, Treasury and Risk for Companies in Portugal, focusing on the dissemination of updated information on key trends and best practices of the market to specialised business partners.
• Signature of a cooperation protocol by Millennium bcp’s microcredit network with the Portuguese Red Cross - Faro Delegation, aiming to expand access to microcredit to more citizens in financial need.
• Millennium Meeting in Viseu on March 10 and 11 and inauguration of the “Shared Art Millennium bcp” exhibition at the Grão Vasco Museum.
• “Latin America Power Deal of the Year 2009” award for Project finance operation “Porto de Pecém 1”, implemented with the support of Millennium investment banking, granted by Project Finance magazine, part of the Euromoney Group.
• Distinction of the Millennium brand as the private bank with the most valuable brand in the ranking of the 40 brands with highest market value in Portugal, according to a study by Brand Finance, a global leader in brand consulting and valuation.
• Banco Comercial Português’ long- and short-term ratings were affirmed at “A+” and at “F1” by Fitch Ratings, which simultaneously announced the revision of the Outlook from “Stable” to “Negative”. April
• Millennium bcp held its Annual General Meeting with 51.51% of the share capital represented. Among the main resolutions adopted were several amendments to the Bank’s By-laws, designed to: update the bylaws in line with changes to the Companies Code; include the Executive Board Members’ pension scheme, due to age or disability at the expense of the society; and , by proposal of several shareholders, increase the voting limit from 10% to 20% of share capital. Shareholders also approved the change in the composition and number of members of the Executive Board of Directors. The Annual General Meeting also approved the Report and Accounts for the year 2009, and the payment of a dividend of in the sum of 0.019 euros per share.
• Distinction of Millennium bcp with the title of Honorary Member of the Portuguese Association Against Leukemia for supporting the fight against leukemia in Portugal, the Bank sponsored the Biennial Gala fundraise this Association.
• Millennium Meetings in Portalegre, on 19 and April 20.
• "Best Bank in Mozambique in 2010" award granted to Millennium bim by Global Finance magazine.
• Moody's Investor Service downgraded its ratings on certain Portuguese hybrid securities, in line with its revised Guidelines for Rating Bank Hybrids and Subordinated Debt, published in November 2009, which removed the previous assumptions regarding systemic support, namely from the Portuguese Republic. Regarding Banco Comercial Português (BCP) and bearing in mind that its adjusted BCA (Baseline Credit Assessment) is “Baa3”, the rating on non- cumulative preferred securities, issued by BCP Finance Company, guaranteed by BCP, was downgraded to “Ba3” from “Baa1” and the rating on perpetual subordinated securities with conditional coupons was downgraded to “Ba3” from “Baa1”. The outlook for all the affected instruments is negative, in line with the negative outlook for BCP’s “D+” BFSR (Bank Financial Strength Rating) and corresponding “Baa3” BCA;
• Standard & Poor’s Ratings Services, after the downgrade in the rating on the Portuguese Republic by two notches from “A+” to “A-”, lowered the ratings assigned to various Portuguese banks and subsidiaries in Portugal of foreign banks, assigning them all a negative outlook. The long-term counterparty credit rating on Banco Comercial Português, S.A. was lowered to “BBB +” from “A-”, while the short-term counterparty credit rating was affirmed at “A-2”. First Half of 2010 Report and Accounts 104
May
• Authorization granted by the Government of the Special Administrative Region of Macau for Millennium bcp to provide banking services in Macau using a Full Branch Licence (on-shore) as of May 11, 2010. The shift in positioning of Millennium bcp in Macau from an Offshore Branch to an Onshore Branch is part of a strategy to boost the bank's presence in the Asia-Pacific region, with emphasis on China.
• The launch in conjunction with the European Investment Bank, of a credit line to businesses for a total amount of euro 50 million, with the aim of financing Small and Medium Enterprises’ projects, with the emphasis on finance for leasing projects of Portuguese companies, but extended to companies in other European countries where Millennium is active.
• Participation in the European Night of Museums initiative International Museum Day.
• Organization by the Millennium bcp’s microcredit network, in association with the European Microfinance Network, an NGO founded in 2003, and the National Association for the Right to Credit, the 11th Interchange Visit of European Microfinance Network, the first being held in Portugal.
• Participation in a new "ABC Markets" debriefing session dedicated to Angola, organized by the Agency for Investment and Foreign Trade of Portugal, targeting national Small and Medium- sized Enterprises, with own products and services, which do not export or are in an early export process stage, and for companies wishing to diversify markets and consolidate their sales abroad.
• Participation of the Millennium bcp’s microcredit network in (IN)FORMA 2010, by the 4th year in a row, an event that aims to disseminate proposals for employment and training, and promoting entrepreneurship among populations with high levels of unemployment and at risk of social exclusion.
• Launching the campaign "Millennium bcp Subordinated" debt securities with a maximum maturity of 10 years, with capital guarantee at maturity and the possibility of early redemption from the 5 year (inclusive) maturity onwards through the exercise of a issuer call option.
• Millennium Meetings in Beja, on 4 and May 5. June
• Millennium bcp commemorated the 25th anniversary on the date of its deed of incorporation and the first General Meeting of Shareholders held on June 25, 1985. It was the first private Portuguese bank created from the ground up after the Revolution of 1974, and from the start focused on building a new and modern bank, with quality service that was truly different from its competitors.
• Conclusion of a cooperation agreement with the Industrial and Commercial Bank of China - Macau, allowing Millennium bcp’s customers who are Chinese immigrants in Portuguese- speaking countries where Millennium bcp is active to send remittances to China under more favorable terms.
• Signing of a cooperation protocol with the Youth Foundation with the aim of delivering microcredit also to young people, supporting them in the transition the university for the labour market.
• Award of two prizes “Excellence in Communication”, in the scope of the “Grande Prémio APCE 2010”, an annual initiative of the Portuguese Association of Corporate Communication, which seeks to distinguish excellence in organizational communication strategy, in the "Management Report" (with the 2008 Report and Accounts) and "Training Course" (with the “Changing IT” program) categories.
• Distinction of Banco Millennium Angola as "Mark of Excellence in Angola 2009/10" by the international organization Superbrands.
• Affirmation of the rating the Bank Financial Strength Rating (BFSR) of the BCP to "D+" with a negative outlook by rating agency Moody's. 105 First Half of 2010 Report and Accounts
Main Events subsequent to the end of the 1 st Half of 2010
• On July 2, Armando Vara resigned from his functions as Member and Vice-Chairman of the Executive Board of Directors, at his own request, without prejudice to the full respect for the presumption of innocence, due to the unexpected delay of the legal proceedings, which motivated his request to suspend these functions;
• On July 6, Millennium bcp celebrated 10 years since the launch of its integrated financial portal for private individuals and companies, known as “millenniumbcp.pt” and created with the aim of serving all customers via the Millennium Group's internet website and through a single brand;
• On July 8, Millennium bcp was distinguished with the “Best Annual Report 2009 - Financial sector” award at the 24th edition of Investor Relations & Governance Awards, an initiative of consultants Deloitte and the Diário Económico newspaper;
• On July 14, the Moody's Rating Agency, stated that, following the review of the Republic of Portugal’s rating by two notches, from “Aa2” to “A1”, it decided to downgrade the deposits rating of BCP also by two notches, from “A1” to “A3”. Moody's affirmed BCP’s Bank Financial Strength Rating at “D+” and the Baseline Credit Assessment (“Baa3”), which depend exclusively on factors intrinsic to the Bank;
• On July 21, Fitch Rating Agency announced that it has concluded the revision process of ratings for five Portuguese Banks, resulting, as for Banco Comercial Português, in the revision the long-term rating from “A+” to “A”, in the reaffirmation of the short-term rating at “F1” and maintenance of a negative outlook;
• On July 23 the results of the stress tests in Europe, coordinated by the CEBS (Committee of European Banking Supervisors), in cooperation with the European Central Bank and the Bank of Portugal, were released. The design of scenarios and execution of the test were the sole responsibility of the supervisors involved. The threshold imposed for the Tier I ratio in the stress scenario, was demanding, at 6% -- 2% above the 4% minimum required by the Bank of Portugal. According to the results, the Bank's Tier I ratio evolves from 9.3% in December 2009 to 8.4% in December 2011, under the most adverse scenario. The results obtained by Millennium bcp are positive, showing that the bank is solid, adequately capitalized and resilient, even in extreme scenarios. First Half of 2010 Report and Accounts 106 Annex
Compliance with the recommendations of the Financial Stability Forum (FSF) and of the Committee of European Banking Supervisors (CEBS) regarding the transparency of information and assets valuation.
Page
I. Business Model
1. Description of the business model (i.e. of the reasons for engaging in Annual Report Vol. I - Millennium Group pag. activities and of the contribution to value creation process) and, if 6-10; Segmental Reportingpag. 40-75. applicable of any changes made (e.g. as a result of crisis).
2. Description of strategies and objectives. Annual Report Vol. I - Strategy pág. 24-25. Information on the exposures to activities and products that were affected by the recent financial crisis pag. 87.
3. Description of importance of activities and contribution to businees Annual Report Vol. I - Segmental Reporting (including a discussion in quantitative terms). pag. 40-74. Note 50 to the Consololidated Accounts.
4. Description on the type of activities including a description of the Annual Report Vol. I - Risk Management pag. instruments as well as of their functioning and qualifying criteria that 76-86; Notes 22-24 to the Consolidated products/investments have to meet. Accounts.
5. Description of the role and the extent of involvement of the institution, Annual Report Vol. I - Risk Management pag. i.e. Commitments and obligations. 76-86; Notes 22-24 to the Consolidated Accounts.
II. Risks and risk management
6. Description of the nature and extent of risks incurred in relation to the Annual Report Vol. I - Risk Management pag. activities and instruments. 76-86; Notes 6-7;51 to the Consolidated Accounts.
7. Description of risk management pratices of relevance to the activities, of Annual Report Vol. I - Risk Management pag. any identified weaknesses of any corrective measures that have been 76-86; Note 51 to the Consolidated Accounts. taken to address these; Annual Report Vol. I - Risk Management pag. (In the current crisis, particular attention should be givven to liquidity 84-86. Note 51 to the Consolidated Accounts. risk.)
III. Impact of the crisis on results
8. Qualitative and quantitative description of results, with a focus on losses Annual Report Vol. I - Financial Review pag. (where applicable) and write-downs impacting the results. 30-39; Notes 6-7 to the Consolidated Accounts.
9. Breakdown of the write-downs/losses by types of products and instruments Annual Report Vol. I - Information on the affected by the crisis (CMBS, RMBS, CDO, ABS and LBO further broken down exposures to activities and products that by different criteria). were affected by the recent financial crisis pag. 87.
10. Description of the reasons and factors responsible for the impact incurred. Annual Report Vol. I - Macroeconomic and Competitive Environment pag. 26-29.
11. Comparison of i) impacts between (relevant) periods and of ii) income Annual Report Vol. I - Financial Review pag. statement balances before and after the impact of the crisis. 30-39.
107 First Half of 2010 Report and Accounts
Page
12. Distinction of write-downs between realised and unrealised amounts. Annual Report Vol. I - Risk Management pag. 76-86. Notes 6-7, 42 to the Consolidated Accounts.
13. Description of the influence of the crisis had on the firm's share price. Annual Report Vol. I – BCP Share pag. 16- 21.
14. Disclosure of maximum loss risk and description of how the institution's Annual Report Vol. I - Risk Management situation could be affected by a further downturn or by a market recovery. pag. 76-86. Note 42 to the Consolidated Accounts.
15. Disclosure of maximum loss risk and description how the institution's Annual Report Vol. I - Financial Review situation could be affected by a further downturn or by a market recovery. pag. 30-39. Note 47 to the Consolidated Accounts.
IV Exposure levels and types
16. Nominal amount (or amortised cost) and fair values of outstanding Annual Report Vol. I - Information on the exposures. exposures to activities and products that were affected by the recent financial crisis pag. 87. Notes 22-24 to the Consolidated Accounts.
17. Information on credit protection (e.g. through credit default swaps) and its Annual Report Vol. I - Information on the effect on exposures. exposures to activities and products that were affected by the recent financial crisis pag. 87.
18. Detailed disclosure about exposures, with decomposition by:
a) level of seniority of tranches;
b) level of credit quality (e.g. Ratings, investment grading, vintages); c) geographic origin; Annual Report Vol. I - Information on the exposures to activities and products that d) activity sector; were affected by the recent financial e) whether exposures have been originated, retained, crisis pag. 87. warehoused or purchased; f) product characteristics: e.g. Ratings, share of sub-prime mortagages, discount rates, attachment points, spreads, funding; g) characteristics of the underlying assets: e.g. Vintages, loan-to- value ratios, information on liens, weighted average life of the underlying, prepayment speed assumptions, expected credit losses.
19. Movements shedules of exposures between relevant reporting periods and Annual Report Vol. I - Information on the the underlying reasons (sales, disposals, purchases, etc.). exposures to activities and products that were affected by the recent financial crisis pag. 87.
20. Discussion of exposures that have not been consolidated (or that have Annual Report Vol. I - Information on the been recognised in the course of the crisis) and the related reasons. exposures to activities and products that were affected by the recent financial crisis pag. 87.
First Half of 2010 Report and Accounts 108
Page
21. Exposure to monoline insurers and quality of insured assets:
h) nominal amounts (or amortised cost) of insured exposures as well as of the amount of credit protection bought; Annual Report Vol. I - Information on the i) fair values of the outstanding exposures as well as of the exposures to activities and products that related credit protection; were affected by the recent financial j) amount of write-downs and losses, differentiated into realised crisis pag. 87. and unrealised amounts; k) breakdowns of exposures by ratings or counterparty.
V. Accounting policies and valuation issues
22. Classification of the transactions and structured products for accounting Annual Report Vol. I - Information on the purposes and the related accouting tratment; exposures to activities and products that were affected by the recent financial crisis pag. 87. Note 47 to the ConsolidatedAccounts.
23. Consolidation of SPEs and other vehicles (suce as VIEs) and a reconciliation Annual Report Vol. I - Information on the of these of the structured products affected by the sub-prime crisis; exposures to activities and products that were affected by the recent financial crisis pag. 87. Note 1 to the Consolidated Accounts (Accounting Policies).
24. Detailed disclosures on fair values of financial instruments:
l) financial instruments to which fair values are applied;
m) fair value hierarchy (a breakdown of all exposures at fair valur by different levels of the fair value hierarchy and a breakdown between cash and derivative instruments as well as disclosures Annual Report Vol. I - Risk Management on migrations between the different levels); pag. 76-86. Notes 22-24; 42 and 47 to n) treatment of day 1 profits (including quantitative information); the Consolidated Accounts. o) use of the fair value option (including its conditions for use) and related amounts (with appropriate breakdowns).
25. Disclosures on the modelling techniques used for the valuation of financial instruments, including:
p) discription of modelling techniques and of the instruments to which they are applied; q) discription of valuation processes (including in particular Annual Report Vol. I - Risk Management discussions of assumptions and input factors the models rely pag. 76-86. Notes 47 and 51 to the on); Consolidated Accounts. r) types of adjustments applied to reflect model risk and other valuation uncertainties; s) sensitivity of fair values; t) stress scenarios.
VI. Other disclosure aspects
26. Description of disclosure. Annual Report Vol. I - Risk Management pag. 76-86. Note 49 and 51 to the Consolidated Accounts. Note 1 to the Consolidated Accounts (Accounting Policies).
109 First Half of 2010 Report and Accounts
PAGE LEFT BLANK INTENTIONALLY First Half of 2010 Report and Accounts 110
Interim Financial Statements
1st Half 2010 111 First Half of 2010 Report and Accounts
PAGE LEFT BLANK INTENTIONALLY First Half of 2010 Report and Accounts 112
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1st Half 2010 BANCO COMERCIAL PORTUGUÊS
Consolidated Income Statement for the six months period ended 30 June, 2010 and 2009
30 June 30 June Notes 2010 2009
(Thousands of Euros)
Interest and similar income 3 1,636,856 1,991,263 Interest expense and similar charges 3 (931,897) (1,315,700)
Net interest income 704,959 675,563
Dividends from equity instruments 4 19,087 3,108 Net fees and commissions income 5 404,991 346,635 Net gains / (losses) arising from trading and hedging activities 6 319,980 221,912 Net gains / (losses) arising from available for sale financial assets 7 (5,423) (7,787) Other operating income 8 9,091 20,774
1,452,685 1,260,205
Other net income from non banking activities 8,564 8,818
Total operating income 1,461,249 1,269,023
Staff costs 9 424,214 444,162 Other administrative costs 10 301,094 278,699 Depreciation 11 51,552 52,329
Operating expenses 776,860 775,190
684,389 493,833
Loans impairment 12 (384,177) (279,056) Other assets impairment 26 and 31 (20,393) (41,824) Goodwill impairment 29 (73,565) - Other provisions 13 (20,266) (19,118)
Operating profit 185,988 153,835
Share of profit of associates under the equity method 14 28,887 30,944 Gains / (losses) from the sale of subsidiaries and other assets 15 (2,554) 21,466
Profit before income tax 212,321 206,245 Income tax Current 16 (28,508) (56,842) Deferred 16 6,761 10,904
Profit after income tax 190,574 160,307
Attributable to: Shareholders of the Bank 163,240 147,480 Minority interests 44 27,334 12,827
Profit for the period 190,574 160,307
Earnings per share (in Euros) 17 Basic 0.05 0.05 Diluted 0.05 0.05
CHIEF ACCOUNTANT THE BOARD OF DIRECTORS
See accompanying notes to the interim consolidated financial statements BANCO COMERCIAL PORTUGUÊS
Consolidated Balance Sheet as at 30 June, 2010 and 31 December, 2009
30 June 31 December Notes 2010 2009
(Thousands of Euros) Assets
Cash and deposits at central banks 18 1,149,109 2,244,724 Loans and advances to credit institutions Repayable on demand 19 1,016,118 839,552 Other loans and advances 20 1,239,636 2,025,834 Loans and advances to customers 21 75,920,346 75,191,116 Financial assets held for trading 22 3,671,978 3,356,929 Financial assets available for sale 22 2,570,369 2,698,636 Assets with repurchase agreement 74,609 50,866 Hedging derivatives 23 581,780 465,848 Financial assets held to maturity 24 5,834,514 2,027,354 Investments in associated companies 25 428,233 438,918 Non current assets held for sale 26 1,922,777 1,343,163 Investment property 27 418,616 429,856 Property and equipment 28 625,690 645,818 Goodwill and intangible assets 29 463,403 534,995 Current income tax assets 31,312 24,774 Deferred income tax assets 30 605,886 584,250 Other assets 31 2,438,912 2,647,777
98,993,288 95,550,410
Liabilities Deposits from central banks 11,584,409 3,409,031 Deposits from other credit institutions 32 5,194,916 6,896,641 Deposits from customers 33 44,072,444 46,307,233 Debt securities issued 34 19,573,724 19,953,227 Financial liabilities held for trading 35 1,495,234 1,072,324 Other financial liabilities at fair value through profit or loss 36 4,687,815 6,345,583 Hedging derivatives 23 395,806 75,483 Non current liabilities held for sale 26 969,040 435,832 Provisions for liabilities and charges 37 254,605 233,120 Subordinated debt 38 1,988,449 2,231,714 Current income tax liabilities 2,028 10,795 Deferred income tax liabilities 30 4,107 416 Other liabilities 39 1,471,084 1,358,210
Total Liabilities 91,693,661 88,329,609
Equity Share capital 40 4,694,600 4,694,600 Treasury stock 43 (88,721) (85,548) Share premium 192,122 192,122 Preference shares 40 1,000,000 1,000,000 Other capital instruments 40 1,000,000 1,000,000 Fair value reserves 42 46,965 93,760 Reserves and retained earnings 42 (165,128) (243,655) Profit for the period attributable to Shareholders 163,240 225,217
Total Equity attributable to Shareholders of the Bank 6,843,078 6,876,496
Minority interests 44 456,549 344,305
Total Equity 7,299,627 7,220,801
98,993,288 95,550,410
CHIEF ACCOUNTANT THE BOARD OF DIRECTORS
See accompanying notes to the interim consolidated financial statements BANCO COMERCIAL PORTUGUÊS
Consolidated Income Statement for the three months period between 1 April and 30 June of 2010 and 2009
Second quarter Second quarter 2010 2009
(Thousands of Euros)
Interest and similar income 840,939 889,174 Interest expense and similar charges (476,572) (587,420)
Net interest income 364,367 301,754
Dividends from equity instruments 18,222 2,508 Net fees and commissions income 202,838 177,922 Net gains / (losses) arising from trading and hedging activities 189,531 72,530 Net gains / (losses) arising from available for sale financial assets (10,333) (8,179) Other operating income 5,122 11,256
769,747 557,791
Other net income from non banking activities 4,364 4,580
Total operating income 774,111 562,371
Staff costs 215,379 212,222 Other administrative costs 153,433 136,106 Depreciation 25,802 26,145
Operating expenses 394,614 374,473
379,497 187,898
Loans impairment (219,419) (118,973) Other assets impairment (4,786) (25,190) Goodwill impairment (73,565) - Other provisions (14,055) 1,094
Operating profit 67,672 44,829
Share of profit of associates under the equity method 12,149 19,445 Gains / (losses) from the sale of subsidiaries and other assets 579 100
Profit before income tax 80,400 64,374 Income tax Current (15,127) (19,780) Deferred 15,386 2,708
Profit after income tax 80,659 47,302
Attributable to: Shareholders of the Bank 66,836 40,803 Minority interests 13,823 6,499
Profit for the period 80,659 47,302
CHIEF ACCOUNTANT THE BOARD OF DIRECTORS
See accompanying notes to the interim consolidated financial statements BANCO COMERCIAL PORTUGUÊS Consolidated Cash Flows Statement for the six months period ended 30 June, 2010 and 2009 30 June 30 June 2010 2009 (Thousands of Euros) Cash flows arising from operating activities Interest income received 1,596,795 2,113,885 Commissions income received 465,473 440,299 Fees received from services rendered 76,019 85,740 Interest expense paid (993,815) (1,422,381) Commissions expense paid (70,542) (126,940) Recoveries on loans previously written off 12,818 15,698 Net earned premiums 10,668 9,712 Claims incurred (3,914) (3,594) Payments to suppliers and employees (842,420) (803,059)
251,082 309,360 Decrease / (increase) in operating assets: Loans and advances to credit institutions 785,328 273,171 Deposits with Central Banks under monetary regulations 996,539 241,762 Loans and advances to customers (1,116,432) (523,590) Short term trading account securities 12,405 156,901 Increase / (decrease) in operating liabilities: Deposits from credit institutions repayable on demand (34,046) 70,860 Deposits from credit institutions with agreed maturity date 5,785,783 (2,373,829) Deposits from clients repayable on demand (39,348) (180,536) Deposits from clients with agreed maturity date (2,034,581) 119,137 4,606,730 (1,906,764) Income taxes (paid) / received (14,338) 22,915
4,592,392 (1,883,849) Cash flows arising from investing activities Proceeds from sale of shares in subsidiaries and associated companies 21,617 83,408 Acquisition of shares in subsidiaries and associated companies (23,895) - Dividends received 25,212 10,522 Interest income from available for sale financial assets 33,213 56,654 Proceeds from sale of available for sale financial assets 36,652,440 13,897,093 Available for sale financial assets purchased (47,020,169) (20,773,448) Proceeds from available for sale financial assets on maturity 10,057,024 6,422,636 Acquisition of fixed assets (68,748) (48,993) Proceeds from sale of fixed assets 24,682 20,118 Increase / (decrease) in other sundry assets (3,178,027) (375,067) (3,476,651) (707,077) Cash flows arising from financing activities Issuance of subordinated debt 94,423 26 Reimbursement of subordinated debt (309,799) (82,701) Issuance of debt securities 3,120,353 3,560,350 Reimbursement of debt securities (4,241,383) (2,624,550) Issuance of commercial paper 5,273,825 13,132,790 Reimbursement of commercial paper (5,175,045) (11,076,671) Issuance of perpetual subordinated debt securities - 300,000 Dividends paid (89,095) (79,108) Dividends paid to minority interests (3,299) (3,849) Increase / (decrease) in other sundry liabilities and minority interests 293,055 (1,135,302) (1,036,965) 1,990,985 Exchange differences effect on cash and equivalents (1,286) (41,716)
Net changes in cash and equivalents 77,490 (641,657) Cash and equivalents at the beginning of the period 1,523,026 1,732,239 Cash (note 18) 584,398 552,712 Other short term investments (note 19) 1,016,118 537,870
Cash and equivalents at the end of the period 1,600,516 1,090,582
See accompanying notes to the interim consolidated financial statements BANCO COMERCIAL PORTUGUÊS
Consolidated Statement of Changes in Equity for the six months period ended 30 June, 2010 and 2009
(Amounts expressed in thousands of Euros) Other comprehensive income Other Legal and Fair value and Other reserves Total Share Preference capital Share statutory Cash Flow and retained Treasury Minority equity capital shares instruments premium reserves hedged reserves Other earnings Goodwill stock interests
Balance on 31 December, 2008 6,248,234 4,694,600 1,000,000 - 183,368 380,291 214,593 (61,731) 2,491,580 (2,883,580) (58,631) 287,744
Transfers to reserves: Legal reserve - - - - - 45,119 - - (45,119) - - - Statutory reserve - - - - - 10,000 - - (10,000) - - - Dividends paid in 2009 (79,108) ------(79,108) - - - Issue of perpetual subordinated Instruments (note 40) 300,000 - - 300,000 ------Profit for the year attributable to Shareholders of the Bank 147,480 ------147,480 - - - Profit for the year attributable to minority interests (note 44) 12,827 ------12,827 Registration costs related with the increase in share capital April 2008 (92) - - - (92) ------Dividends on preference shares (27,715) ------(27,715) - - - Treasury stock (14,510) ------(14,510) - Exchange differences arising on consolidation (41,716) ------(41,716) - - - - Fair value reserves (note 42) Financial instruments available for sale (185,894) - - - - - (185,894) - - - - - Cash-flow hedge 678 - - - - - 678 - - - - - Minority interests (note 44) 31,168 ------31,168 Other reserves arising on consolidation (note 42) 643 ------643 - - -
Balance on 30 June, 2009 6,391,995 4,694,600 1,000,000 300,000 183,276 435,410 29,377 (103,447) 2,477,761 (2,883,580) (73,141) 331,739
Issue of perpetual subordinated Instruments (note 40) 700,000 - - 700,000 ------Costs related to the issue of perpetual subordinated Instruments (9,597) ------(9,597) - - - Interest charge related to the issue of perpetual subordinated Instruments (10,500) ------(10,500) - - - Tax related to the costs and interest charge on the issue of perpetual subordinated 5,168 ------5,168 - - - Profit for the period attributable to Shareholders of the Bank 77,737 ------77,737 - - - Profit for the period attributable to minority interests (note 44) 11,258 ------11,258 Costs related with the issue increase in share capital April 2008 8,846 - - - 8,846 ------Dividends on preference shares (21,195) ------(21,195) - - - Treasury stock (12,407) ------(12,407) - Exchange differences arising on consolidation 6,969 ------6,969 - - - - Fair value reserves (note 42) Financial instruments available for sale 69,897 - - - - - 69,897 - - - - - Cash-flow hedge (5,514) - - - - - (5,514) - - - - - Minority interests (note 44) 1,308 ------1,308 Other reserves arising on consolidation (note 42) 6,836 ------6,836 - - -
Balance on 31 December, 2009 7,220,801 4,694,600 1,000,000 1,000,000 192,122 435,410 93,760 (96,478) 2,526,210 (2,883,580) (85,548) 344,305
Transfers to reserves (note 42): Legal reserve - - - - - 20,632 - - (20,632) - - - Statutory reserve - - - - - 10,000 - - (10,000) - - - Dividends paid in 2009 (89,095) ------(89,095) - - - Interest charge related to the issue of perpetual subordinated Instruments (35,000) ------(35,000) - - - Tax related to the interest charge on the issue of perpetual subordinated Instruments 8,743 ------8,743 - - - Profit for the period attributable to Shareholders of the Bank 163,240 ------163,240 - - - Profit for the period attributable to minority interests (note 44) 27,334 ------27,334 Dividends on preference shares (27,715) ------(27,715) - - - Treasury stock (3,173) ------(3,173) - Exchange differences arising on consolidation (1,286) ------(1,286) - - - - Fair value reserves (note 42) Financial instruments available for sale (46,170) - - - - - (46,170) - - - - - Cash-flow hedge (625) - - - - - (625) - - - - - Minority interests (note 44) 84,910 ------84,910 Other reserves arising on consolidation (note 42) (2,337) ------(2,337) - - - Balance on 30 June, 2010 7,299,627 4,694,600 1,000,000 1,000,000 192,122 466,042 46,965 (97,764) 2,513,414 (2,883,580) (88,721) 456,549
See accompanying notes to the interim consolidated financial statements BANCO COMERCIAL PORTUGUÊS Statement of Comprehensive income for the six months period ended 30 June, 2010 and 2009
30 June 30 June Notes 2010 2009 (Thousands of Euros) Fair value reserves Financial assets available for sale 42 (49,439) (185,893) Cash-Flow hedge 42 (772) 837
Taxes Financial assets available for sale 42 3,269 (1) Cash-Flow hedge 42 147 (159)
(46,795) (185,216)
Exchange differences arising on consolidation 42 (1,286) (41,716)
Comprehensive income recognized directly in Equity after taxes (48,081) (226,932)
Profit for the period 190,574 160,307
Total Comprehensive income for the period 142,493 (66,625)
Attributable to: Shareholders of the Bank 115,159 (79,452) Minority interests 27,334 12,827
Total Comprehensive income for the period 142,493 (66,625)
See accompanying notes to the interim consolidated financial statements BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
1. Accounting policies a) Basis of presentation
Banco Comercial Português, S.A. Sociedade Aberta (the ‘Bank’) is a public bank, established in Portugal in 1985. It started operations on 5 May, 1986, and these consolidated financial statements reflect the results of the operations of the Bank and all its subsidiaries (together referred to as the ‘Group’) and the Group’s interest in associates, for the six months period ended 30 June, 2010 and 2009.
In accordance with Regulation (EC) no. 1606/2002 from the European Parliament and the Council, of 19 July 2002, and as transposed into Portuguese Law through Decree-Law no. 35/2005, of 17 February and Regulation no. 1/2005 from the Bank of Portugal, the Group’s consolidated financial statements are required to be prepared in accordance with International Financial Reporting Standards (‘IFRS’) as endorsed by the European Union ('EU') since the year 2005. IFRS comprise accounting standards issued by the International Accounting Standards Board (‘IASB’) as well as interpretations issued by the International Financial Reporting Interpretations Committee (‘IFRIC’) and their predecessor bodies. The consolidated financial statements presented were approved by the Bank's Executive Board of Directors on 27 of July 2010. The financial statements are presented in thousands of euros, rounded to the nearest thousand.
The Group adopted the IFRS standards and interpretations for which application is mandatory for accounting periods beginning on 1 January 2010. In accordance with the transition dispositions of these standards and interpretations, comparative figures are presented in these financial statements for additional disclosures required.
The consolidated financial statements for the six months period ended 30 June 2010 have been prepared in terms of recognition and measurement in accordance with the IFRS, effective and adopted by EU, as the disclosures presented in accordance with the requirements defined by IAS 34. The financial statements include also the statement of income for the second quarter of 2010 and the comparative figures for the second quarter of 2009. The financial statements for the six months period ended 30 June 2010 do not include all the information to be published in the annual financial statements.
In 2010, BCP Group adopted the IFRS 3 (revised) - Business combinations and IAS 27 (amendment) consolidated and separate Financial statements, IAS 39 (amendment) - Financial Instruments: Recognition and measurement – Eligible hedged items and IFRS 5 - Non-current assets held for sale and discontinued operations . These interpretations, which had to be applied with reference to 1 January, 2010 had impact on the assets and liabilities of the Group. According to the transition rules of these interpretations, the new disclosures required include comparative information.
The Group's financial statements are prepared under the historical cost convention, as modified by the application of fair value for derivative financial instruments, financial assets and liabilities at fair value through profit or loss (trading and fair value option) and available for sale assets, except those for which a reliable measure of fair value is not available. Financial assets and liabilities that are hedged under hedge accounting are stated at fair value in respect of the risk that is being hedged, if applicable. Other financial assets and liabilities and non-financial assets and liabilities are stated at amortized cost or historical cost. Non-current assets and disposal groups held for sale are stated at the lower of carrying amount or fair value less costs to sell. The liability for defined benefit obligations is recognised as the present value of the defined benefit obligation net of the value of the fund and deducted from the actuarial losses not recognised.
The accounting policies set out below have been applied consistently throughout the Group entities and for all periods presented in these consolidated financial statements.
The preparation of the financial statements in accordance with IFRS requires the Executive Board of Directors to make judgments, estimates and assumptions that affect the application of the accounting policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The issues involving a higher degree of judgment or complexity or where assumptions and estimates are considered to be significant are presented in note 1 ad).
119 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
b) Basis of consolidation
As from 1 January, 2010 onwards, the BCP Group applied IFRS 3 (revised) for the accounting of business combinations. The changes in the accounting policies resulting from the application of IFRS 3 (revised) are applied prospectively.
Investments in subsidiaries
Investments in subsidiaries where the Group holds control are fully consolidated from the date the Group assumes control over its financial and operational activities until the control ceases to exist. Control is presumed to exist when the Group owns more than half of the voting rights. Additionally, control exists when the Group has the power, directly or indirectly, to manage the financial and operating policies of an entity to obtain benefits from its activities, even if the percentage of shareholding is less than 50%.
When the accumulated losses of a subsidiary attributable to the minority interest exceed the equity of the subsidiary attributable to the minority interest, the excess is attributed to the Group and charged to the income statement as it occurs. Profits subsequently reported by the subsidiary are recognised as profits of the Group until the prior losses attributable to minority interest previously recognised by the Group have been recovered.
As from 1 January, 2010, the due proportion of accumulated losses are attributed to minority interests, implying that the Group can recognise negative minority interests.
As from 1 January, 2010, on a step acquisition process resulting in the acquisition of control the revaluation of any participation previously acquired is booked against the profit and loss account, when goodwill is calculated. On a parcial disposal resulting in loss of control over a subsidiary, any participation retained is revalued at market value on the sale date and the gain or loss resulting from this revaluation is booked against the income statement.
Investments in associates
Investments in associated companies are consolidated by the equity method since the date the Group acquires significant influence until the date it ceases. Associates are those entities, in which the Group has significant influence, but not control, over the financial and operating policy decisions of the investee. It is assumed that the Group has significant influence when it holds, directly or indirectly, 20% or more of the voting rights of the investee. Conversely, if the Group holds, directly or indirectly less than 20% of the voting rights of the investee, it is presumed that the Group does not have significant influence, unless such influence can be clearly demonstrated.
The existence of significant influence by the Group is usually evidenced in one or more of the following ways:
- representation on the Executive Board of Directors or equivalent governing body of the investee; - participation in policy-making processes, including participation in decisions about dividends or other distributions; - material transactions between the Group and the investee; - interchange of the management team; or - provision of essential technical information.
The consolidated financial statements include the part that is attributable to the Group of the total reserves and results of associated companies accounted on an equity basis. When the Group’s share of losses exceeds its interest in an associate, the carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred in a legal or constructive obligation to assume those losses on behalf of an associate.
Goodwill
Goodwill arising from business combinations occurred prior to 1 January 2004 was charged against reserves.
Business combinations that occurred after 1 January 2004 are accounted for using the purchase method of accounting. The acquisition cost corresponds to the fair value, determined at the acquisition date, of the assets given and liabilities incurred or assumed including the costs directly attributable to the acquisition, for acquisitions up to 31 December, 2009.
As from 1 January, 2010 onwards, costs directly attributable to the acquisition of a subsidiary are booked directly in the income statement.
As from the transition date to IFRS (1 January 2004), positive goodwill arising from acquisitions is recognised as an asset carried at acquisition cost and is not subject to amortisation. Goodwill arising on the acquisition of subsidiaries and associates is defined as the difference between the cost of acquisition and the corresponding share of the fair value of the net assets acquired.
Goodwill arising on the acquisition of subsidiaries and associates is defined as the difference between the cost of acquisition and the total or corresponding share of the fair value of the net assets acquired, depending on the option taken.
120 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
Negative goodwill arising on an acquisition is recognised directly in the income statement in the period the business combination occurs.
The recoverable amount of the goodwill in subsidiaries is assessed annually, regardless of the existence of any impairment triggers. Impairment losses are recognised in the income statement. The recoverable amount is determined based on the value in use of the assets, calculated using valuation methodologies supported by discounted cash flow techniques, considering market conditions, the time value of money and the business risks.
Until 31 December 2009, contingent acquisition prices were determined based on the best estimate of probable future payments, being the future changes in the estimate booked against "goodwill". As from 1 January 2010, goodwill is no longer adjusted due to changes in the initial estimate of the contingent purchase price and the difference is booked in the income statement.
Purchases of minority interests and dilution
Until 31 December 2009, in an acquisition of minority interests, the difference between the fair value of the minority interests acquired and the consideration paid, was accounted against goodwill. The acquisitions of minority interests through written put options related with investments in subsidiaries held by minority interests, were recorded as a financial liability for the present value of the best estimate of the amount payable, against minority interests. The difference between the minority interests acquired and the fair value of the liability, was recorded as goodwill. The fair value of the liability was determined based on the contractual price which may be fixed or variable. In case of a variable price, the changes in the liability are recognised as an adjustment to the cost of the business combination against goodwill and the effect of the financial discount of the liability (unwinding) was recognised as a financial expense in the consolidated income statement. This accounting treatment is maintained for all options contracted until 31 December 2009.
Until 31 December, 2009, when an interest in a subsidiary was disposed of, without a loss in control, the difference between the sale price and the book value of the net assets held by the Group, plus the carrying value of goodwill in that subsidiary, was recognised in the income statement of the period as a gain or loss resulting from the disposal. The dilution effect occurs when the percentage of interest in a subsidiary decreases without any sale of interest in that subsidiary, for example, if the Group does not participate proportionally in the share capital increase of that subsidiary. Until 31 December, 2009, the Group recognised the gains or losses resulting from a dilution of a subsidiary following a sale or capital increase in the income statement.
The acquisitions of minority interests through written put options related with investments in subsidiaries held by minority interests, are recorded as a financial liability for the present value of the best estimate of the amount payable, against minority interests. The fair value of the liability is determined based on the contractual price which may be fixed or variable. In case of a variable price, the changes in the liability are recognised against the income statement as well as the effect of the financial discount of the liability (unwinding). As from 1 January 2010 onwards, in an acquisition (dilution) of minority interests not resulting in a loss of control, the difference between the fair value of the minority interests acquired and the consideration paid, is accounted against reserves.
Special Purpose Entities (‘SPE’)
The Group fully consolidates SPE’s resulting from securitization operation with assets from Group entities (as referred in note 22), when the substance of the relation with those entities indicates that the Group exercises control over its activities, independently of the percentage of the equity held. Besides these SPE resulting from securitization operations, no additional SPE’s have been consolidated considering that they do not meet the criteria established on SIC 12 as described below.
The evaluation of the existence of control is determined based on the criteria established by SIC 12, which can be analyzed as follows:
- The activities of the SPE, in substance, are being conducted on behalf of the Group, in accordance with the specific needs of the Group’s business, in order to obtain benefits from these activities; - The Group has the decision-making powers to obtain the majority of the benefits of the activities of the SPE or, by setting up an "autopilot" mechanism, the Group has delegated these decision-making powers; - The Group has the rights to obtain the majority of the benefits of the SPE and therefore may be exposed to risks inherent to the activities of the SPE; - The Group retains the majority of the residual or ownership risks related to the SPE or its assets in order to obtain benefits from its activities.
Investment fund management
The Group manages the assets held by investment funds for which the participation units are held by third parties. The financial statements of these entities are not consolidated by the BCP Group, except when the Group has the control over these investment funds, namely when it holds more than 50% of the participation units.
When the Group consolidates real estate investment funds, the real estate property resulting from these funds are classified as investment property, as described in note 1 r).
121 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
Investments in foreign subsidiaries and associates
The financial statements of the foreign subsidiaries and associates of the Group are prepared in their functional currency, defined as the currency of the primary economic environment in which they operate or the currency in which the subsidiaries obtain their income or finance their activity. In the consolidation process, assets and liabilities, including goodwill, of foreign subsidiaries are converted into euros at the official exchange rate at the balance sheet date.
Regarding the investments in foreign operations that are consolidated in the Group accounts under the full consolidation, proportional consolidation or equity methods, for exchange differences between the conversion to Euros of the opening net assets at the beginning of the year and their value in Euros at the exchange rate ruling at the balance sheet date for consolidated accounts are charged against consolidated reserves. The exchange differences from hedging instruments related with foreign operations are eliminated from profit and loss in the consolidation process against the exchange differences booked in reserves resulting from those investments. Whenever the hedge is not fully effective, the ineffective portion is accounted against profit and loss of the year.
The income and expenses of these subsidiaries are converted to Euros at an aproximate rate of the rates ruling at the dates of the transactions. Exchange differences from the conversion to Euros of the profits and losses for the reporting period, arising from the difference between the exchange rate used in the income statement and the exchange rate prevailing at the balance sheet date, are recognised in reserves - exchange differences.
On disposal of a foreign operation, exchange differences related to the investment in the foreign operation and to the associated hedge transaction previously recognised in reserves, are transferred to profit and loss as part of the gains or loss arising from the disposal.
Investments in jointly controlled entities
Jointly controlled entities, consolidated under the proportional method, are entities where the Group has joint control, established by contractual agreement. The consolidated financial statements include, in the corresponding captions, the Group’s proportional share of the entities’ assets, liabilities, revenue and expenses, with items of a similar nature on a line by line basis, from the date that joint control started until the date that joint control ceases.
Transactions eliminated on consolidation
Intragroup balances and any unrealized gains and losses arising from intragroup transactions, are eliminated in the preparation of the consolidated financial statements. Unrealized gains and losses arising from transactions with associates and jointly controlled entities are eliminated to the extent of the Group's interest in the entity. c) Loans and advances to customers
Loans and advances to customers includes loans and advances originated by the Group which are not intended to be sold in the short term and are recognised when cash is advanced to borrowers.
The derecognition of these assets occurs in the following situations: (i) the contractual rights of the Group have expired; or (ii) the Group transferred substantially all the associated risks and rewards.
Loans and advances to customers are initially recognized at fair value plus any directly attributable transaction costs and fees and are subsequently measured at amortized cost using the effective interest method, less impairment losses.
Impairment
The Group’s policy consists in a regular assessment of the existence of objective evidence of impairment in the loan portfolios. Impairment losses identified are charged against results and subsequently the charge is reversed, if there is a reduction of the estimated impairment loss, in a subsequent period.
After initial recognition, a loan or a loan portfolio, defined as a group of loans with similar credit risk characteristics, may be classified as impaired when there is objective evidence of impairment as a result of one or more events and when the loss event has an impact on the estimated future cash flows of the loan or of the loan portfolio that can be reliably estimated.
According to IAS 39, there are two basic methods of calculating impairment losses: (i) individually assessed loans; and (ii) collective assessment.
122 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
(i) Individually assessed loans
Impairment losses on individually assessed loans are determined by an evaluation of the exposures on a case-by-case basis. For each loan considered individually significant, the Group assesses, at each balance sheet date, the existence of any objective evidence of impairment. In determining such impairment losses on individually assessed loans, the following factors are considered:
- Group’s aggregate exposure to the customer and the existence of overdue loans; - The viability of the customer’s business and capability to generate sufficient cash flow to service their debt obligations in the future; - The existence, nature and estimated value of the collaterals; - A significant downgrading in the client rating; - The assets available on liquidation or insolvency; - The ranking of all creditor claims; - The amount and timing of expected receipts and recoveries.
Impairment losses are calculated by comparing the present value of the expected future cash flows, discounted at the original effective interest rate of the loan, with its current carrying value and the amount of any loss is charged in the income statement. The carrying amount of impaired loans is reduced through the use of an allowance account. For loans with a variable interest rate, the discount rate used corresponds to the effective annual interest rate, which was applicable in the period that the impairment was determined.
Individual loans that are not identified as having an objective evidence of impairment are grouped on the basis of similar credit risk characteristics, and assessed collectively.
(ii) Collective assessment
Impairment losses are calculated on a collective basis under two different scenarios:
- for homogeneous groups of loans that are not considered individually significant; or - in respect of losses which have been incurred but have not yet been identified (‘IBNR’) on loans for which no objective evidence of impairment is identified (see section (i)).
The collective impairment loss is determined considering the following factors:
- historical loss experience in portfolios of similar risk characteristics; - knowledge of the current economic and credit conditions and its impact on the historical losses level; - the estimated period between a loss occurring and a loss being identified.
The methodology and assumptions used to estimate the future cash flows are reviewed regularly by the Group in order to monitor the differences between estimated and real losses.
Loans which have been individually assessed and for which no evidence of impairment has been identified, are grouped together based on similar credit risk characteristics for calculating a collective impairment loss. This loss covers loans that are impaired at the balance sheet date but which will not be individually identified as such until some time in the future.
In accordance with "Carta-Circular" no. 15/2009 of the Bank of Portugal, loans and advances to customers are charged-off when there no realistic expectation, from an economic perspective, of recovering the loan amount. For collateralised loans, the charge-off occurs for the unrecoverable amount when the funds arising from the execution of the respective collaterals for the part of the loans which is collateralised is effectively received. This charge-off is carried out only for loans that are considered not to be recoverable and fully provided. d) Financial instruments
(i) Classification, initial recognition and subsequent measurement
1) Financial assets and liabilities at fair value through profit and loss
1a) Financial assets held for trading
The financial assets and liabilities acquired or issued with the purpose of sale or re-acquisition on the short term, namely bonds, treasury bills or shares or that are part of a financial instruments portfolio and for which there is evidence of a recent pattern of short-term profit taking or that can be included in the definition of derivative (except in the case of a derivative classified as hedging) are classified as trading. The dividends associated to these portfolios are accounted in gains arising on trading and hedging activities.
The interest from debt instruments are recognized as interest margin.
Trading derivatives with a positive fair value are included in the Financial assets held for trading and the trading derivatives with negative fair value are included in the Financial liabilities held for trading.
1b) Other financial assets and liabilities at fair vaue through profit and loss (“Fair Value Option”)
The Group has adopted the Fair Value Option for certain own bond issues, loans and time deposits performed since 2007 that contain embedded derivatives or with related hedge derivatives. The variations of the credit risk of the Group related with financial liabilities accounted under the Fair Value Option are disclosed in "Net gains / (losses) arising from trading and hedging activities".
123 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
The designation of other financial assets and liabilities at fair value through profit and loss is performed whenever at least one of the requirements is fulfilled:
- the assets and liabilities are managed, evaluated and reported internally at its fair value; - the designation eliminates or significantly reduces the accounting mismatch of the transactions; - the assets and liabilities include derivatives that significantly change the cash-flows of the original contracts (host contracts).
The financial assets and liabilities at Fair Value Option are initially accounted at their fair value, with the expenses or income related to the transactions being recognised in profit and loss and subsequently measured at fair value through profit and loss. The accrual of interest and premium/discount (when applicable) is recognised in Net interest income according with the effective interest rate of each transaction, as well as for accrual of interest of derivatives associated to financial instruments classified as Fair Value Option.
2) Financial assets available for sale
Financial assets available for sale held with the purpose of being maintained by the Group, namely bonds, treasury bills or shares, are classified as available for sale, except if they are classified in another category of financial assets. The financial assets available for sale are initially accounted at fair value, including all expenses or income associated with the transactions. The financial assets available for sale are subsequently measured at fair value. The changes in fair value are accounted for against fair value reserves until they are sold or an impairment loss exists. In the sale of the financial assets available for sale, the accumulated gains or losses recognised as fair value reserves are recognised under Net gains / (losses) arising from available for sale financial assets. Interest income from debt instruments is recognized in Net interest income based on the effective interest rate, including a premium or discount when applicable. Dividends are recognised in the income statement when the right to receive the dividends is attributed.
3) Financial assets held-to-maturity
The financial assets held-to-maturity include non-derivative financial assets with fixed or determinable payments and fixed maturity, that the Group has the intention and capacity to maintain until the maturity of the assets and that were not included in the category of financial assets at fair value through profit and loss or financial assets available for sale. These financial assets are initially recognised at fair value and subsequently measured at amortized cost. The interest is calculated using the effective interest rate method and recognised in Net interest income. The impairment losses are recognised in profit and loss when identified.
Any reclassification or sale of financial assets included in this category that does not occur close to the maturity of the assets will require the Group to reclassify the entire portfolio as Financial assets available for sale and the Group will not be allowed to classify any assets under this category for the following two years.
4) Loans and receivables - Loans represented by securities
Non-derivative financial assets with fixed or determined payments, that are not quoted in a market and which the Group does not intend to sell immediately or in a near future, may be classified in this category.
In addition to loans granted, the Group recognises in this category unquoted bonds and commercial paper. The financial assets recognised in this category are initially accounted at fair value and subsequently at amortized cost net of impairment. The incremental direct transaction costs are included in the effective interest rate for these financial instruments. The interest accounted based on the effective interest rate method are recognised in Net interest income.
The impairment losses are recognised in profit and loss when identified.
5) Other financial liabilities
The other financial liabilities are all financial liabilities that are not recognised as financial liabilities at fair value through profit and loss. This category includes money market transactions, deposits from customers and from other financial institutions, issued debt, and other transactions.
This financial liabilities are initially recognised at fair value and subsequently at the amortized cost. The related transaction costs are included in the effective interest rate. The interest calculated at the effective interest rate is recognised in Net interest income.
The financial gains or losses calculated in the time of the repurchase of other financial liabilities are recognised as Net gains from trading, hedging and available for sale financial activities when occurred.
(ii) Impairment
An assessment is made at each balance sheet date as to whether there is any objective evidence of impairment, namely circumstances where an adverse impact on estimated future cash flows of the financial asset or group of financial assets can be reliably estimated or based on a significant or prolonged decrease in the fair value, below the acquisition cost.
If an available for sale asset is determined to be impaired, the cumulative loss (measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in the profit or loss) is removed from fair value reserves and recognised in profit or loss. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurred after the impairment loss was recognised in the profit or loss, the impairment loss is reversed through the income statement. The impairment losses recognised in equity instruments classified as available for sale, when reversed, are recognised against fair value reserves.
124 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
(iii) Embedded derivatives
Embedded derivatives should be accounted for separately as derivatives if the economic risks and benefits of the embedded derivative are not closely related to the host contract, unless the hybrid (combined) instrument is not initially measured at fair value with changes through profit and loss. Embedded derivatives are classified as trading and recognised at fair value with changes through profit and loss. e) Derivatives hedge accounting
(i) Hedge accounting
The Group designates derivatives and non-financial instruments to hedge its exposure to interest rate and foreign exchange risk, resulting from financing and investment activities. Derivatives not qualified for hedging accounting are accounted for as trading instruments.
Derivative hedging instruments are stated at fair value and gains and losses on revaluation are recognised in accordance with the hedge accounting model adopted by the Group. A hedge relationship exists when:
- at the inception of the hedge there is formal documentation of the hedge; - the hedge is expected to be highly effective; - the effectiveness of the hedge can be reliably measured; - the hedge is valuable in a continuous basis and highly effective throughout the reporting period; and - for hedges of a forecasted transaction, the transaction is highly probable and presents an exposure to variations in cash flows that could ultimately affect net profit or loss.
When a derivative financial instrument is used to hedge foreign exchange arising from monetary assets or liabilities, no hedge accounting model is applied. Any gain or loss associated to the derivative and to changes in foreign exchange risk related with the monetary items are recognised through profit and loss.
(ii) Fair value hedge
Changes in the fair value of derivatives that are designated and qualify as fair value hedge instruments are recognised in profit and loss, together with changes in the fair value of the asset or liability or group of assets and liabilities that are attributable to the hedged risk. If the hedge relationship no longer meets the criteria for hedge accounting, the cumulative gains and losses recognised until the discontinuance of the hedge accounting are amortized through profit and loss over the residual period of the hedged item.
(iii) Cash flow hedge
In a hedge relationship, the effective portion of changes in fair value of derivatives that are designated and qualify as cash flow hedges are recognised in equity. Any gain or loss relating to the ineffective portion of the hedge is immediately recognised in profit and loss when occurred.
Amounts accumulated in equity are reclassified to profit and loss in the periods in which the hedged item will affect profit or loss.
In case of hedging variability of cash-flows, when the hedge instrument expires or is disposed or when the hedging relationship no longer meets the criteria for hedge accounting, or when the hedge relation is revoked, the hedge relationship is discontinued on a prospective basis. Therefore, the fair value changes of the derivative accumulated in equity until the date of the discontinued hedge accounting can be:
- Deferred over the residual period of the hedged instrument; or - Recognised immediately in results, if the hedged instrument is extinguished.
In the case of a discontinued hedge of a forecast transaction, the change in fair value of the derivative recognised in equity at that time remains in equity until the forecasted transaction is ultimately recognised in the income statement. When a forecasted transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to profit and loss.
(iv) Hedge effectiveness
For a hedge relationship to be classified as such according to IAS 39, effectiveness has to be demonstrated. As such, the Group performs prospective tests at the beginning date of the initial hedge, if applicable and retrospective tests in order to demonstrate at each reporting period the effectiveness of the hedging relationships, showing that the changes in the fair value of the hedging instrument are hedged by the changes in the hedged item for the risk being covered. Any ineffectiveness is recognised immediately in profit and loss when incurred.
(v) Hedge of a net investment in a foreign operation
Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in equity; the gain or loss relating to the ineffective portion is immediately recognised in the income statement. Gains and losses accumulated in equity related to the investment in a foreign operation and to the associated hedge operation are included in the income statement on the disposal of the foreign operation as part of the gain or loss from the disposal.
125 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
f) Reclassifications between financial instruments categories
In October 2008, the IASB issued a change to IAS 39 – Reclassification of Financial Assets (Amendments to IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7: Financial Instruments Disclosures). This change allowed an entity to transfer Financial assets from Financial assets at fair value through profit and loss – trading to Financial assets available for sale, to Loans and Receivables - Loans represented by securities or to financial assets held-to- maturity, as long as the requirements described in the Standard are met, namely:
- If a financial asset, at the date of reclassification present the caracteristichs of a debt instrument for which there is no active market; or
- When there is some event that is uncoumum and higly improbable that will occur again in the short term, that is, the event can be classified as a rare circumstancy.
The Group adopted this possibility for a group of financial assets, as disclosed in note 22.
Transfer of financial assets recognized in the category of Financial assets available-for-sale to Loans and receivables - Loans represented by securities and Financial assets held-to-maturity are permitted.
Transfers from and to Financial assets and financial liabilities at fair value through profit and loss by decision of the entity ("Fair value option") are prohibited. g) Derecognition
The Group derecognises financial assets when all rights to future cash flows have expired. In a transfer of assets, derecognition can only occur either when risks and rewards have been substantially transferred or the Group does not maintain control over the assets.
The Group derecognises financial liabilities when these are discharged, cancelled or extinguished. h) Equity instruments
An instrument is classified as an equity instrument when there is no contractual obligation at settlement to deliver cash or another financial asset to another entity, independently from its legal form, showing a residual interest in the assets of an entity after deducting all of its liabilities.
Transaction costs directly attributable to an equity instruments’ issuance are recognised in equity as a deduction to the amount issued. Amounts paid or received related to sales or acquisitions of equity instruments are recognised in equity, net of transaction costs.
Preference shares issued by the Group are considered as an equity instrument when redemption of the shares is solely at the discretion of the issuer and dividends are paid at the discretion of the Group.
Income from equity instruments (dividends) are recognised when the right to receive this income is established and are deducted to equity. i) Compound financial instruments
Financial instruments that contain both a liability and an equity component (example: convertible bonds) are classified as compound financial instruments. For those instruments to be considered as compound financial instruments, the terms of its conversion to ordinary shares (number of shares) can not change with changes in its fair value. The financial liability component corresponds to the present value of the future interest and principal payments, discounted at the market interest rate applicable to similar financial liabilities that do not have a conversion option. The equity component corresponds to the difference between the proceeds of the issue and the amount attributed to the financial liability. Financial liabilities are measured at amortized cost through the effective interest rate method. The interests are recognised in Net interest income. j) Securities borrowing and lending business and repurchase agreement transactions
(i) Securities borrowing and lending
Securities lent under securities lending arrangements continue to be recognised in the balance sheet and are measured in accordance with the applicable accounting policy. Cash collateral received in respect of securities lent is recognised as a financial liability. Securities borrowed under securities borrowing agreements are not recognised. Cash collateral placements in respect of securities borrowed are recognised under loans and advances to either banks or customers. Income and expenses arising from the securities borrowing and lending business are recognised on an accrual basis over the period of the transactions and are included in interest income or expense (net interest margin).
(ii) Repurchase agreements
The Group performs acquisition/sell of securities under reselling/repurchase agreements of securities substantially equivalent in a future date at a predetermined price ('repos' / 'reverse repos'). The securities related to reselling agreements in a future date are not be recognised on the balance sheet. The amounts paid are recognised in loans and advances to customers or loans and advances to credit institutions. The receivables are collateralized by the related securities. Securities sold through repurchase agreements continue to be recognised in the balance sheet and are revaluated in accordance with the applicable accounting policy. The amounts received from the proceeds of these securities are considered as deposits from customers and deposits from credit institutions.
The difference between the acquisition/sale and reselling/repurchase conditions is recognised on an accrual basis over the period of the transaction and is included in interest income or expenses.
126 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
k) Non-current assets held for sale and discontinued operations
Non current assets, groups of non-current assets held for sale (groups of assets together and related liabilities that include at least a non current asset) and discontinued operations are classified as held for sale when it is intention to sell the referred assets and liabilities the referred assets are available for immediate sale and its sale is highly probable.
The Group also classifies as non-current assets held for sale those non-current assets or groups of assets acquired exclusively with a view to its subsequent disposal, that are available for immediate sale and its sale is highly probable.
Immediately before classification as held for sale, the measurement of the non-current assets or all assets and liabilities in a disposal group, is performed in accordance with the applicable IFRS. After their reclassification, these assets or disposal groups are measured at the lower of their cost and fair value less costs to sell.
Discontinued operations and the subsidiaries acquired exclusively with the purpose to sell in the short term, are consolidated until the disposal.
The Group also classifies as non-current assets held for sale the investments arising from recovered loans that are measured initially by the lower of its fair value net of expenses and the loan's carrying amount on the date that the recovery occurs or the judicial decision is formalized.
The fair value is determined based on the expected selling price estimated through periodic valuations performed by the Group.
The subsequent accounting of these assets is determined based on the lower of the carrying amount and the corresponding fair value net of expenses. In case of unrealized losses, these should be recognised as impairment losses against results. l) Finance lease transactions
Finance lease transactions for a lessee are recorded at the inception date of the lease as an asset and liability, at the fair value of the leased asset, which is equivalent to the present value of the future lease payments.
Lease rentals are a combination of the finance charge and the amortization of the capital outstanding. The financial charge is allocated to the periods during the lease term so as to produce a constant periodic rate of interest on the remaining liability balance for each period.
Assets held under finance leases for a lessor are recorded in the balance sheet as a receivable at an amount equal to the net investment in the lease.
Lease rentals are a combination of the financial income and amortization of the capital outstanding.
Recognition of the financial result reflects a constant periodical return rate over the remaining net investment of the lessor. m) Interest income and expense
Interest income and expense for financial instruments measured at amortized cost are recognised in the interest income or expenses (net interest income) through the effective interest rate method. The interest related to financial assets available for sale calculated at the effective interest rate method are also recognised on the net interest income as well as assets and liabilities at fair value through profit and loss.
The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument (or, when appropriate, for a shorter period), to the net carrying amount of the financial asset or financial liability.
When calculating the effective interest rate, the Group estimates future cash flows considering all contractual terms of the financial instrument (example: early payment options) but without considering future impairment losses. The calculation includes all fees paid or received considered as included in the effective interest rate, transaction costs and all other premiums or discounts directly related with the transaction except for assets and liabilities at fair value through profit and loss.
If a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.
Specifically regarding the accounting policy for interest on overdue loans’ portfolio the following aspects are considered:
- Interest income for overdue loans with collaterals are accounted for as income up to the limit of the valuation of the collateral valued on a prudent basis. This income is registered against results in accordance with IAS 18, assuming that there is a reasonable probability of recoverability; and - The interests accrued and not paid for overdue loans for more than 90 days that are not covered by collaterals are writen-off and are recognised only when they are received, in accordance with IAS 18, on the basis that its recoverability is considered to be remote.
For derivative financial instruments, except those classified as hedging instruments of interest rate risk, the interest component is not separated from the changes in the fair value and is classified under Net gains / (losses) from trading and hedging activities. For hedging derivatives of interest rate risk and those related to financial assets or financial liabilities recognised in the Fair Value Option category, the interest component of the changes in their fair value is recognised under interest income or expense (Net interest income).
127 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
n) Fee and commission income
Fees and commissions are recognised according to the following criteria:
- Fees and commissions which are earned as services are provided are recognised in income over the period in which the service is being provided; - Fees and commissions that are earned on the execution of a significant act, are recognised as income when the service is completed.
Fees and commissions that are an integral part of the effective interest rate of a financial instrument, are recognised in the net margin. o) Financial results (Results arising from trading and hedging activities and available for sale financial assets)
Financial results includes gains and losses arising from financial assets and financial liabilities at fair value through profit and loss, that is, fair value changes and interest on trading derivatives and embedded derivatives), as well as the corresponding dividends received. This caption includes also the impairment losses, dividends and gains and losses arising from the sale of available for sale financial assets. The changes in fair value of hedging derivatives and hedged items, when fair value hedge is applicable, are also recognised in this caption. p) Fiduciary activities
Assets held in the scope of fiduciary activities are not recognized in the Group’sconsolidated financial statements. Fees and commissions arising from this activity are recognised in the income statement in the year to which they relate. q) Property and equipment
Property and equipment are stated at acquisition cost less accumulated depreciation and impairment losses. Subsequent costs are recognised as a separate asset only when it is probable that future economic benefits will result to the Group. All other repairs and maintenance expenses are charged to the income statement during the financial period in which they are incurred.
The Group performs impairment testing whenever events or circumstances show that the book value exceeds the highest between the value in use and the recoverable amount, being the difference charged to the profit and loss.
Depreciation is calculated on a straight-line basis, over the following periods which correspond to their estimated useful life:
Number of years
Premises 50 Expenditure on freehold and leasehold buildings 10 Equipment 4 to 12 Other fixed assets 3
Whenever there is an indication that a fixed tangible asset might be impaired, its recoverable amount is estimated and an impairment loss shall be recognised if the net value of the asset exceeds its recoverable amount.
The recoverable amount is determined as the highest between the sale price net of sale costs and its value in use calculated based on the present value of future cash-flows estimated to be obtained from the continued use of the asset and its sale at the end of the useful life.
The impairment losses of the fixed tangible assets are recognised in profit and loss. r) Investment property
Real estate properties owned by the investment funds consolidated in the Group, are recognised as Investment properties considering, that the main objective of these buildings is the capital appreciation on a long term basis and not its sale in a short term period, or its maintenance for own use.
These investments are initially recognised at its acquisition cost, including the transaction costs and subsequently revaluated at its fair value. The fair value of the investment property should reflect the market conditions at the balance sheet date. Changes in fair value are recognised in results as Other operating income.
s) Intangible Assets
Research and development expenditure
The Group does not capitalize any research and development costs. All expenses are recognised as costs in the year in which they occur.
Software
The Group accounts as intangible assets the costs associated to software acquired from external entities and depreciates them on a linear basis by an estimated period of three years. The Group does not capitalize internal costs arising from software development.
128 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
t) Cash and cash equivalents
For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than three months’ maturity from the balance sheet date, including cash and deposits with banks.
Cash and cash equivalents exclude restricted balances with central banks. u) Offsetting
Financial assets and liabilities are offset and the net amount is reported in the balance sheet when the Group has a legally enforceable right to offset the recognised amounts and the transactions are intended to be settled on a net basis. v) Foreign currency transactions
Transactions in foreign currencies are translated into the respective functional currency of the operation at the foreign exchange rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies, are translated into the respective functional currency of the operation at the foreign exchange rate at the reporting date. Foreign exchange differences arising on translation are recognized in the profit and loss. Non-monetary assets and liabilities denominated in foreign currencies, which are stated at historical cost, are translated into the respective functional currency of the operation at the foreign exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated into the respective functional currency of the operation at the foreign exchange rate at the date that the fair value was determined against profit and loss, except for financial assets available-for-sale, for which the difference is recognized against equity. w) Employee benefits
Defined benefit plans
The Group has the responsibility to pay to their employees retirement pensions and widow and orphan benefits and permanent disability pensions, in accordance with the agreement entered with the collective labor agreements. These benefits are estimated in the pensions plans ‘Plano ACT’ and ‘Plano ACTQ’ of the Pension Plan of BCP Group, which corresponds to the referred collective labor agreements (the conditions are estimated in the private social security of the banking sector for the constitution of the right to receive a pension).
As for the benefits estimated in the two previous pensions plans, the Group also assumes the responsibility, if some conditions are met in each year, of the attribution of a complementary plan to the employees of the Group, after due consideration of the requirements of the collective labor agreements applicable to each sector (complementary plan).
The Group’s net obligation in respect of pension plans (defined benefit pensions plan) is calculated on an half year basis at 31 December and 30 June of each year.
The Group opted at the IFRS transition date, as at 1 January 2004, for the retrospective application of IAS 19, performing the recalculation of the pension obligations and the corresponding actuarial gains and losses which will be deferred under the corridor method as defined in IAS 19. The calculation is made using the projected unit credit method and following actuarial and financial assumptions in line with the parameters required by IAS 19.
The current services cost plus the interest cost on the unwinding of the Pension liabilities less the expected return on the Plan assets are recorded in operational costs.
The Group’s net obligation in respect of defined benefit pension plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods. The benefit is discounted in order to determine its present value, using a discount rate determined by reference to interest rates of high-quality corporate bonds that have maturity dates approximating the terms of the Group’s obligations. The net obligations are determined after the deduction of the fair value of the assets of the Pensions Plan.
Employee benefits, other than pension plans, namely post retirement health care benefits and benefits for the spouse and sons for death before retirement are also included in the benefit plan calculation.
Costs arising from early retirements, as well as the corresponding actuarial gains and losses are recognised in the income statement on the year in which the early retirement is approved and announced.
Under the ‘corridor’ method, actuarial gains and losses not recognised, exceeding 10% of the greater of the present value of the defined benefit obligation and the fair value of plan assets, are recognised in the income statement over a period of 20 years, corresponding to the expected remaining working life of the employees participating in the plan.
The funding policy of the Plan is to make annual contributions by each Group company so as to cover the projected benefits obligations, including the non- contractual projected benefits. The minimum level required for the funding is 100% regarding the liability with pensioners and 95% regarding the employees in service.
Defined contributions plans
For the defined Contributions Plan for the Complementary non-contractual retirement benefit attributable to the employees of the Group, obligations are recognised as an expense in profit and loss when they are due.
129 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
Share based compensation plan (stock options)
As at 30 June 2010 there are no share based compensation plans in force. Variable remuneration paid to employees
The Executive Board of Directors decides on the most appropriate criteria of allocation among employees.
This variable remuneration is charged to income statement in the year to which it relates. x) Income taxes
The Group is subject to the regime established by the Income Tax Code. Additionally, deferred taxes resulting from the temporary diferences between the accounting net income and the net income accepted by the Tax Authorities for Income Taxes calculation, are accounted for, whenever there is a reasonable probability that those taxes will be paid or recovered in the future.
Income tax on the income for the year comprises current and deferred tax effects. Income tax is recognised in the income statement, except to the extent that it relates to items recognised directly to reserves in which case it is recognised in reserves. Deferred taxes arising from the revaluation of financial assets available for sale and cash flow hedging derivatives are recognised in shareholders’ equity and are recognised in the profit and loss in the year the results that originated the deferred taxes are recognised.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.
Deferred taxes are calculated in accordance with the liability method based on the balance sheet, considering temporary differences, between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes using the tax rates approved or substantially approved at balance sheet date and that is expected to be applied when the temporary difference is reversed.
Deferred taxes assets are recognised to the extent when it is probable that future taxable profits, will be available to absorb deductible temporary differences for taxation purposes (including reportable taxable losses).
The Group compensates, as established in IAS 12, paragraph 74 the deferred tax assets and liabilities if, and only if: (i) has a legally enforceable right to set off current tax assets against current tax liabilities; and (ii) the deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered. y) Segmental reporting
The Group determines and presents the operational segments based on the management information prepared for internal purposes.
A business operational segment is a distinguishable component of the Group that is engaged in providing an individual product or service or a group of related products or services, in a specific economic environment and that is subject to risks and returns that are different from those of other business segments, which operates in different economic environments. The Group controls its activity through the following major segments:
Portugal
- Retail Banking; - Companies; - Private Banking and Asset Management; - Corporate Banking and Investment Banking.
Foreign activity
- Poland; - Greece; - Angola: - Mozambique. z) Provisions
Provisions are recognised when (i) the Group has a present obligation (legal or resulting from past practices or published policies that imply the recognition of certain responsibilities), (ii) it is probable that an outflow of economic benefits will be required to settle a present legal or constructive obligation as a result of past events and (iii) a reliable estimate can be made of the amount of the obligation.
Provisions are reviewed at each balance sheet date and adjusted to reflect the best estimate, being reverted through profit and loss in the proportion of the payments that are probable.
The provisions are derecognised through their use for the obligations for which they were initially accounted or for the cases that the situations were not already observed.
130 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
aa) Earnings per share Basic earnings per share are calculated by dividing net income available to ordinary shareholders of the Group by the weighted average number of ordinary shares outstanding during the year, excluding the average number of ordinary shares purchased by the Group and held as treasury stock.
For the diluted earnings per share, the weighted average number of ordinary shares outstanding is adjusted to consider conversion of all dilutive potential ordinary shares, such as convertible debt and stock options granted to employees. Potential or contingent share issues are treated as dilutive when their conversion to shares would decrease net earnings per share.
If the earnings per share are changed as a result of an issue with premium or discount or other event that changed the potential number of ordinary shares or as a result of changes in the accounting policies, the earnings per share for all presented periods should be adjusted retrospectively. ab) Insurance contracts
The Group issues contracts that contain insurance risk, financial risk or a combination of both insurance and financial risk. A contract, under which the Group accepts significant insurance risk from another party, by agreeing to compensate that party on the occurrence of a specified uncertain future event, is classified as an insurance contract.
A contract issued by the Group without significant insurance risk, but on which financial risk is transferred with discretionary participating features is classified as an investment contract recognised and measured in accordance with the accounting policies applicable to insurance contracts. A contract issued by the Group that transfers only financial risk, without discretionary participating features, is classified as an investment contract and accounted for as a financial instrument.
The financial assets held by the Group to cover the liabilities arising under insurance and investment contracts are classified and accounted for in the same way as other financial assets.
Insurance contracts and investment contracts with discretionary participating features are recognised and measured as follows:
Premiums
Gross premiums written are recognised for as income in the period to which they respect independently from the moment of payment or receivable, in accordance with the accrual accounting principle.
Reinsurance premiums ceded are accounted for as expense in the year to which they respect in the same way as gross premiums written.
Provision for unearned premiums from direct insurance and reinsurance premiuns ceded
The provision for unearned gross premiums is based on the evaluation of the premiums written before the end of the year but for which the risk period continues after the year end. This provision is calculated using the pro-rata temporis method applied to each contract in force. ac) Accounting estimates and judgements in applying accounting policies
IFRS set forth a range of accounting treatments that require the Executive Board of Directors and management to apply judgment and make estimates in deciding which treatment is most appropriate. The most significant of these accounting policies are discussed in this section in order to improve understanding of how their application affects the Group’s reported results and related disclosure.
Considering that in some cases there are several alternatives to the accounting treatment chosen by management, the Group’s reported results would differ if a different treatment were chosen. Management believes that the choices made are appropriate and that the financial statements present the Group’s financial position and results fairly in all material aspects.
The alternative outcomes discussed below are presented solely to assist the reader in understanding the financial statements and are not intended to suggest that other alternatives or estimates would be more appropriate.
Impairment of available for-sale equity investments
The Group determines that available-for-sale equity investments are impaired when there has been a significant or prolonged decrease in the fair value below its acquisition cost. This determination of what is significant or prolonged requires judgment. In making this judgment, the Group evaluates among other factors, the volatility in the prices of the financial assets.
In addition, valuations are generally obtained through market quotation or valuation models that may require assumptions or judgment in making estimates of fair value.
Alternative methodologies and the use of different assumptions and estimates could result in a higher level of impairment losses recognised with a consequent impact in the consolidated income statement of the Group.
131 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
Impairment losses on loans and advances to customers
The Group reviews its loan portfolios to assess impairment losses on a regularly basis, as described in Note 1 c).
The evaluation process in determining whether an impairment loss should be recorded in the income statement is subject to numerous estimates and judgments. The probability of default, risk ratings, value of associated collaterals recovery rates and the estimation of both the amount and timing of future cash flows, among other things, are considered in making this evaluation.
Alternative methodologies and the use of different assumptions and estimates could result in a different level of impairment losses with a consequent impact in the consolidated income statement of the Group.
Fair value of derivatives
Fair values are based on listed market prices if available; otherwise fair value is determined either by dealer price quotations (both for that transaction or for similar instruments traded) or by pricing models, based on net present value of estimated future cash flows which take into account market conditions for the underlying instruments, time value, yield curve and volatility factors. These pricing models may require assumptions or judgments in estimating their values.
Consequently, the use of a different model or of different assumptions or judgments in applying a particular model could result in different financial results for a particular period.
Securitizations and special purpose entities
The Group sponsors the formation of special purpose entities (SPE's) primarily for asset securitization transactions and for liquidity purposes and/or capital management.
The Group does not consolidate SPE's that it does not control. As it can sometimes be difficult to determine whether the Group does control a SPE, a judgment is made about the exposure to the risks and rewards, as well as about its ability to make operational decisions for the SPE in question (See Note 1 b)).
The determination of the SPE's that needs to be consolidated by the Group requires the use of estimates and assumptions in determining the respective expected residual gains and losses and which party retains the majority of such residual gains and losses. Different estimates and assumptions, as for example for credit risks, anticipated liquidation and interest rate, could lead the Group to a different scope of consolidation with a direct impact in net income.
In the scope of the application of this accounting policy and in accordance with note 21, the following SPE's resulting from securitization transactions were included in the consolidation perimeter: NovaFinance n. 3 and 4, Magellan n.5 and n.6, Kion and Orchis Sp zo.o. The Group did not consolidate the following SPE's also resulting from securitization transactions: Magellan n. 1, 2, 3 and 4. For these SPE's, which are not recognized in the balance, the Group concluded that the main risks and the benefits were transferred, as the Group does not hold detain any security issued by the SPE's, that are exposed to the majority of the residual risks, neither is exposed to the performance of the credit portfolios.
Income taxes
The Group is subject to income taxes in numerous jurisdictions. Significant interpretations and estimates are required in determining the worldwide amount for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business.
Different interpretations and estimates would result in a different level of income taxes, current and deferred, recognised in the year.
The Portuguese Tax Authorities are entitled to review the Bank and its subsidiaries’ determination of its annual taxable earnings, for a period of four years or six years in case there are tax losses brought forward. Hence, it is possible that some additional taxes may be assessed, mainly as a result of differences in interpretation of the tax law which for its probability, the Executive Board of Directors considers that there is no relevant material efect at the level of the Financial Statements. However, the Executive Board of Directors of the Bank, and those of its subsidiaries domiciled in Portugal are confident that material tax assessments do not have impact in the financial statements.
Pension and other employees’ benefits
Determining pension liabilities requires the use of assumptions and estimates, including the use of actuarial projections, estimated returns on investment, and other factors that could impact the cost and liability of the pension plan.
Changes in these assumptions could materially affect these values.
Goodwill
On an annual basis, the Group performs an evaluation of the recoverable amount of the consolidation differences, based on the value in use or the fair value. According with IAS 36, the value in use should be determined based on the evaluation of the future estimated cash-flows, using all available information, which requires the use of judgment.
The assumptions made for these assessments may change with the change in economic and market conditions.
132 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
2. Net interest income and net gains arising from trading, hedging and available for sale activities
IFRS requires separate disclosure of net interest income and net gains from trading, hedging and available for sale (AFS) activities, as presented in notes 3, 6 and 7. A particular business activity can generate impact in net interest income and net gains arising from trading, hedging and AFS activities. This disclosure requirement demonstrates the contribution of the different business activities for the net interest margin and net gains from trading, hedging and AFS activities.
The amount of this account is comprised of:
Jun 2010 Jun 2009 Euros '000 Euros '000
Net interest income 704,959 675,563 Net gains from trading, hedging and AFS activities 314,557 214,125
1,019,516 889,688
3. Net interest income
The amount of this account is comprised of:
Jun 2010 Jun 2009 Euros '000 Euros '000
Interest and similar income Interest on loans and advances 1,283,112 1,744,069 Interest on trading securities 45,263 52,062 Interest on other financial assets valued at fair value through profit and loss account 42 - Interest on available for sale financial assets 50,369 43,424 Interest on held to maturity financial assets 47,811 21,584 Interest on hedging derivatives 134,537 58,366 Interest on derivatives associated to financial instruments through profit and loss account 50,822 27,252 Interest on deposits and other investments 24,900 44,506
1,636,856 1,991,263
Interest expense and similar charges Interest on deposits and inter-bank funding 535,758 752,454 Interest on securities sold under repurchase agreement 9,423 16,800 Interest on securities issued 261,047 379,252 Interest on hedging derivatives 33,628 13,148 Interest on derivatives associated to financial instruments through profit and loss account 2,906 16,320 Interest on other financial liabilities valued at fair value through profit and loss account 89,135 137,726
931,897 1,315,700
Net interest income 704,959 675,563
The balance of Interest on loans and advances includes the amount of Euros 16,005,000 (30 June 2009: Euros 6,469,000) related to commissions and other gains / losses which are accounted for under the effective interest method, as referred in the accounting policy, note 1 c).
133 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
4. Dividends from equity instruments
The amount of this account is comprised of: Jun 2010 Jun 2009 Euros '000 Euros '000
Dividends from available for sale financial assets 19,086 3,107 Other 1 1
19,087 3,108
The balance of Dividends from available for sale financial assets includes dividends and income from investment fund units received during the period.
As at the first semester of 2010, the balance includes the amount of Euros 15,841,000 related to dividends received from Eureko, B.V.
5. Net fees and commissions income
The amount of this account is comprised of: Jun 2010 Jun 2009 Euros '000 Euros '000
Fees and commissions income From guarantees 47,769 42,747 From credit and commitments 201 128 From banking services 285,253 260,057 From insurance activity 328 302 From other services 129,394 117,784
462,945 421,018
Fees and commissions expenses From guarantees 887 367 From banking services 40,339 52,783 From insurance activity 408 557 From other services 16,320 20,676
57,954 74,383
Net fees and commission income 404,991 346,635
134 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
6. Net gains / (losses) arising from trading and hedging activities
The amount of this account is comprised of: Jun 2010 Jun 2009 Euros '000 Euros '000 Gains arising on trading and hedging activities Foreign exchange activity 4,490,481 5,012,514 Financial instruments associated to financial instruments through profit and loss account Held for trading Securities portfolio Fixed income 22,615 25,439 Variable income 3,206 3,422 Certificates and VME issued 23,580 21,564 Derivatives associated to financial instruments through profit and loss account 71,550 167,067 Other financial instruments derivatives 2,548,836 1,074,706 Other financial instruments through profit and loss account 260,807 21,047 Repurchase of debt securities issued 20,521 17,432 Headging accounting Hedging derivatives 269,513 126,919 Hedged item 21,999 87,288 Other activity 4,620 1,963
7,737,728 6,559,361 Losses arising on trading and hedging activities Foreign exchange activity 4,420,008 4,971,973 Financial instruments associated to financial instruments through profit and loss account Held for trading Securities portfolio Fixed income 16,368 12,819 Variable income 4,221 2,715 Certificates and VME issued 15,136 23,641 Derivatives associated to financial instruments through profit and loss account 133,338 139,026 Other financial instruments derivatives 2,550,414 935,213 Other financial instruments through profit and loss account 10,023 46,789 Repurchase of debt securities issued 2,773 44 Headging accounting Hedging derivatives 94,098 112,859 Hedged item 169,780 80,680 Other activity 1,589 11,690
7,417,748 6,337,449 Net gains / (losses) arising from trading and hedging activities 319,980 221,912
The balance Net gains arising from trading and hedging activities includes for the six months period ended 30 June 2010, for the financial instruments through profit and loss account, a gain of Euros 179,173,000 (30 June 2009: Loss of Euros 14,455,000) which reflects the fair value changes arising from changes in the credit risk (spread) of own operations.
The balance Net gains arising from trading and hedging activities - Financial instruments associated to financial instruments through profit and loss account - held for trading - other financial instruments derivatives, includes the amount of Euros 36,600,000 (30 June 2009: Euros 46,500,000) which corresponds to the gain accounted in the first quarter of 2010 of the discontinuance of the interest rate hedging of a mortgage backed security issue of Euros 1,500,000,000. In January 2010, following the ineffectiveness of the hedge, the Executive Board of Directors decided, in accordance with paragraph 91, c) of IAS 39, the discontinuance of the application of the hedge accounting. In accordance with the decision of the Executive Board of Directors and in accordance with IAS 39, on 1st April, 2010 the hedge accounting was reestablished.
The result of repurchases of own issues is determined in accordance with the accounting policy described in note 1 d).
135 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
7. Net gains / (losses) arising from available for sale financial assets
The amount of this account is comprised of: Jun 2010 Jun 2009 Euros '000 Euros '000
Gains arising from available for sale financial assets Fixed income 8,225 15,459 Variable income 4,743 4,824 Losses arising from available for sale financial assets Fixed income (6,814) (14,954) Variable income (11,577) (13,116)
Net gains / (losses) arising from available for sale financial assets (5,423) (7,787)
The balance Losses arising from available for sale financial assets - Variable income includes as at 30 June 2010, the amount of Euros 8,934,000 related with the recognition of impairment losses related with shares and investment fund units held by the Group.
8. Other operating income
The amount of this account is comprised of: Jun 2010 Jun 2009 Euros '000 Euros '000
Operating income Income from services 19,271 27,572 Cheques and others 9,769 12,694 Other operating income 7,772 8,233
36,812 48,499
Operating costs Indirect taxes 14,191 16,985 Donations and quotizations 2,928 1,315 Other operating expenses 10,602 9,425
27,721 27,725
9,091 20,774
9. Staff costs
The amount of this account is comprised of: Jun 2010 Jun 2009 Euros '000 Euros '000
Salaries and remunerations 303,443 280,799 Mandatory social security charges 101,226 136,565 Voluntary social security charges 13,556 20,357 Other staff costs 5,989 6,441
424,214 444,162
As referred in note 48, the balance Mandatory social security charges includes, as at 30 June 2010, the amount of Euros 46,557,000 (30 June 2009: Euros 94,354,000) related to the pension cost for the period. The referred amount also includes, as at 30 June 2010, the amount of Euros 1,123,000 referred to cost with early retirements. No early retirements occoured during the first semester of 2009.
The balance Mandatory social security charges, includes the amount of Euros 3,400,000 related with the provisions for the costs with the complementary plan, as described in notes 39 and 48.
136 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
10. Other administrative costs
The amount of this account is comprised of: Jun 2010 Jun 2009 Euros '000 Euros '000
Water, electricity and fuel 11,514 10,150 Consumables 3,878 4,084 Rents 75,893 71,767 Communications 21,739 22,967 Travel, hotel and representation costs 7,364 8,685 Advertising 22,568 17,250 Maintenance and related services 19,676 18,630 Credit cards and mortgage 7,816 8,496 Advisory services 11,212 8,638 Information technology services 13,274 13,519 Outsourcing 44,943 37,057 Other specialised services 16,453 13,756 Training costs 1,733 1,612 Insurance 9,075 8,071 Legal expenses 3,993 3,704 Transportation 5,190 5,452 Other supplies and services 24,773 24,861
301,094 278,699
The balance Rents includes the amount of Euros 64,988,000 (30 June 2009: Euros 61,378,000) related to rents paid regarding buildings used by the Group as lessee.
11. Depreciation
The amount of this account is comprised of: Jun 2010 Jun 2009 Euros '000 Euros '000
Intangible assets: Software 8,198 6,517 Other intangible assets 5 191
8,203 6,708
Property and equipment: Land and buildings 21,316 21,950 Equipment Furniture 2,277 2,171 Office equipment 1,610 2,539 Computer equipment 10,588 11,638 Interior installations 2,217 3,417 Motor vehicles 1,537 961 Security equipment 1,417 1,487 Other tangible assets 2,387 1,458
43,349 45,621
51,552 52,329
137 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
12. Loans impairment
The amount of this account is comprised of: Jun 2010 Jun 2009 Euros '000 Euros '000 Loans and advances to credit institutions: For overdue loans and credit risks Impairment for the period 2,071 8,420 Write-back for the period - (8,893)
2,071 (473) Loans and advances to customers: For overdue loans and credit risks Impairment for the period 659,819 502,992 Write-back for the period (264,896) (207,765) Recovery of loans and interest charged-off (12,817) (15,698)
382,106 279,529
384,177 279,056
The balance Loans impairment is related to an estimate of the incurred losses determined according with the methodology for a regular evaluation of objective evidence of impairment, as described in note 1 c).
13. Other provisions
The amount of this account is comprised of: Jun 2010 Jun 2009 Euros '000 Euros '000
Provision for other pensions benefits Charge for the period 572 435 Write-back for the period (242) - Provision for guarantees and other commitments Charge for the period 6,967 10,682 Write-back for the period (7,064) (6,744) Other provisions for liabilities and charges Charge for the period 20,316 14,793 Write-back for the period (283) (48)
20,266 19,118
14. Share of profit of associates under the equity method
The main contribution of the investments accounted for under the equity method to the Group's profit are analysed as follows:
Jun 2010 Jun 2009 Euros '000 Euros '000
Millenniumbcp Fortis Group 27,634 29,671 Amortization of value in force (VIF) for Millennium bcp Fortis Group - (4,522) Other companies 1,253 5,795
28,887 30,944
138 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
15. Gains / (losses) from the sale of subsidiaries and other assets
The amount of this account is comprised of: Jun 2010 Jun 2009 Euros '000 Euros '000 Dilution of the share capital of Bank Millennium Angola - 21,183 Other (2,554) 283 (2,554) 21,466
The balance Dilution of the share capital of Bank Millennium Angola, corresponds to the gain arising from the dilution of the share capital of the Bank Millennium Angola through the entrance of new shareholders.
The investment was sold to Finicapital - Investimentos e Gestão, S.A. an Angolan company, by the amount of USD 100,000,000. Following the sale, the Group detains a 10% investment in the above mentioned Project. According to the characteristics of the agreement and in accordance with the accounting policy described in note 1 b), the investment is now consolidated through the equity method.
In accordance with IAS 27, the impact of this transaction resulted in a reduction of the percentage held by the Group from 100% to 50.1%, since the Group did not subscribe the capital increase of Millennium Angola. The dilution effect is similar to a partial sale of the investment in the subsidiary, considering that BCP maintains the control over Millennium Angola after this sale, with the related effect on the minority interests.
Until 31 December 2009, IFRS allowed alternative accounting treatments in what concerns transactions with minority interests (acquisitions/disposals) including the dilution effect of an investment. In accordance with the standards ruling at the date, the difference between the amount of the transaction and the amount of equity attributable to minority interests could be accounted for in accordance with the accounting policy elected by the entity, following two alternative treatments, which have to be consistently applied:
- against Reserves; or - against Goodwill (acquisitions) and Results (disposals)
IFRS defines that after adopting the accounting policy for transactions with minority interests, it has to be applied on a consistent basis for all type of transactions with the same nature. In consistency with the accounting policy adopted, in previous acquisitions in which the accounting procedure adopted for the differences between the acquisition cost and the fair value of the equity acquired was booked against goodwill, for this dilution (similar to a disposal) the referred difference was recognised against profit and loss.
The balance Other assets includes gains and losses arising from the sale of properties.
16. Income tax
The charge for the six months period ended 30 June 2010 and 2009, is comprised as follows:
Jun 2010 Jun 2009 Euros '000 Euros '000
Current tax 28,508 56,842
Deferred tax Temporary diferences (48,508) (72,774) Effect of changes in tax rate (3,406) 8 Tax losses utilized 45,153 61,862
(6,761) (10,904)
21,747 45,938
139 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
The main adjustments to net income to calculate the net taxable income, with a permanent nature, are explained in the table bellow and corresponding The reconciliation of the standard tax rate to the effective tax rate is analysed as follows: references:
Jun 2010 Jun 2009
% Euros '000 % Euros '000
Profit before income taxes 212,321 206,245
Current tax rate 26.5% (56,265) 26.5% (54,655) Local state tax 0.2% (412) 0.0% - Foreign tax rate effect -1.1% 2,261 -0.8% 1,704 Non deductible expenses 17.4% (36,986) 10.7% (22,033) Tax exempted income -33.4% 70,847 -16.5% 34,122 Fiscal incentives -0.4% 870 -1.9% 3,869 Losses brought forward 0.8% (1,603) 3.2% (6,597) Tax rate effect 0.3% (724) 0.0% (8) Previous years corrections -0.2% 385 0.8% (1,557) Autonomous tax and tax suported in foreign subsidiaries 0.1% (120) 0.4% (783) 10.2% (21,747) 22.4% (45,938)
The balance Local state tax corresponds to the aplication of an adicional income tax of 2.5% on taxable net income above Euros 2,000,000 in accordance with the stablished measures by the Portuguese Government regarding the Stability and Economic Plan.
As at 30 June 2010 and 2009, the amount of deferred taxes in the Income Statement is attributable to temporary differences arising from the following balances:
Jun 2010 Jun 2009 Euros '000 Euros '000
Intangible assets (17) 43 Other tangible assets (2,049) 2,054 Impairment losses (3,558) (61,126) Pensions 13,000 23,206 Derivatives (36) (4,536) Tax losses carried forward 43,116 61,862 Allocation of profits (22,411) (21,034) Others (34,806) (11,373)
Deferred taxes (6,761) (10,904)
140 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
17. Earnings per share
The earnings per share are calculated as follows:
Jun 2010 Jun 2009 Euros '000 Euros '000
Profit for the period attributable to shareholders of the Bank 163,240 147,480 Dividends on other capital instruments (49,979) (24,312)
Adjusted profit 113,261 123,168
Average number of shares 4,687,270,739 4,668,203,513
Basic earnings per share (Euros) 0.05 0.05
Diluted earnings per share (Euros) 0.05 0.05
The average number of shares indicated above, results from the number of existing shares at the beginning of each year, adjusted by the number of shares repurchased or issued in the period weighted by a time factor. During the year of 2009, Banco Comercial Português, S.A. issued three series of its program of perpetual subordinated debt securities in the total amount of Euros 1,000,000,000, which were considered as capital instruments as established in the accounting policy note 1 h), in accordance with the IAS 32.
The balance Dividends on other capital instruments includes the dividends distributed from the following issues:
a) Two issues by BCP Finance Company Ltd which, considering the rules established in IAS 32 and in accordance with the accounting policy presented in note 1 h), were considered as equity instruments. The issues are analysed as follows:
- 5,000,000 Perpetual Non-cumulative Guaranteed Non-voting Preference Shares with par value of Euros 100 each, issued on 9 June, 2004, amounting to Euros 500,000,000, issued to redeem the 8,000,000 Non-cumulative Guaranteed Non-voting Preference Shares, with par value of Euros 50 each, issued by BCP Finance Company on 14 June, 1999, amounting to Euros 400,000,000.
- 10,000 preference shares with par value of Euros 50,000 perpectual each without voting rights issued in 13 October 2005, in the amount of Euros 500,000,000, to redeem the 6,000,000 preference shares, of Euros 100 each, without voting rights, in the amount of Euros 600,000,000, issued by BCP Finance Company at 28 September 2000.
b) Three issued of perpetual subordinated debt securities analysed as follows:
- In June 2009, as referred in note 40, the Bank has issued Euros 300,000,000 of perpetual subordinated debt securities with conditional coupons presenting a nominal value of Euros 1,000, which were considered as capital instruments.
- In August 2009, as referred in note 40, the Bank has issued Euros 600,000,000 of perpetual subordinated debt securities with conditional coupons presenting a nominal value of Euros 1,000, which were considered as capital instruments.
- In December 2009, as referred in note 40, the Bank has issued Euros 100,000,000 of perpetual subordinated debt securities with conditional coupons presenting a nominal value of Euros 1,000, which were considered as capital instruments.
141 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
18. Cash and deposits at central banks
This balance is analysed as follows: Jun 2010 Dec 2009 Euros '000 Euros '000
Cash 584,398 683,474 Central banks 564,711 1,561,250
1,149,109 2,244,724
The balance Central banks includes deposits with central banks of the countries where the group operates in order to satisfy the legal requirements to maintain a cash reserve calculated based on the value of deposits and other liabilities. The cash reserve requirements, according with the European Central Bank System for Euro Zone, establishes the maintenance of a deposit with the Central Bank equivalent to 2% of the average value of deposits and other liabilities, during each reserve requirement period. The rate is different for countries outside the Euro Zone.
19. Loans and advances to credit institutions repayable on demand
This balance is analysed as follows:
Jun 2010 Dec 2009 Euros '000 Euros '000
Credit institutions in Portugal 729 837 Credit institutions abroad 721,097 407,766 Amounts due for collection 294,292 430,949
1,016,118 839,552
The balance Amounts due for collection represents essentially cheques due for collection on other financial institutions.
20. Other loans and advances to credit institutions
This balance is analysed as follows: Jun 2010 Dec 2009 Euros '000 Euros '000
Credit institutions in Portugal 109,384 201,302 Credit institutions abroad 1,134,564 1,827,187
1,243,948 2,028,489 Overdue loans - less than 90 days - 1 Overdue loans - more than 90 days 18,253 17,838
1,262,201 2,046,328 Impairment for other loans and advances to credit institutions (22,565) (20,494)
1,239,636 2,025,834
142 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
Concerning derivative financial transactions with institutional counterparties, and according to the signed agreements, the Group has, as of 30 June 2010, the amount of Euro 774,239,000 (31 December 2009: Euros 399,380,000) of Loans and advances to credit institutions granted as collateral on the mentioned transactions.
The movements for impairment for other loans and advances to credit institutions for the Group is analysed as follows:
Jun 2010 Jun 2009 Euros '000 Euros '000
Balance on 1 January 20,494 9,049 Impairment for the period 2,071 8,420 Write-back for the period - (8,893)
Balance on 30 June 22,565 8,576
21. Loans and advances to customers
This balance is analysed as follows: Jun 2010 Dec 2009 Euros '000 Euros '000
Public sector 713,720 667,282 Asset-backed loans 44,017,035 43,144,253 Personal guaranteed loans 15,434,054 15,284,915 Unsecured loans 5,354,783 5,576,052 Foreign loans 3,785,465 3,947,356 Factoring 1,365,122 1,483,839 Finance leases 5,086,835 5,212,390
75,757,014 75,316,087 Overdue loans - less than 90 days 273,497 219,343 Overdue loans - more than 90 days 2,145,963 1,812,780
78,176,474 77,348,210 Impairment for credit risk (2,256,128) (2,157,094)
75,920,346 75,191,116
As at 30 June 2010, the balance Loans and advances to customers includes the amount of Euros 5,981,007,000 (31 December 2009: Euros 4,973,000,000) regarding mortgage loans which are a collateral for five asset-back securities. The last asset-back security program was issued during 2009.
Since 2009, following "Carta-circular" no. 15/2009 from the Bank of Portugal, the Bank only writes-off overdue loans fully provided which, after an economic analysis, are considered uncollectable on the basis that there are no perspectives of recovery. The application of this criteria resulted in an increase in the amount of overdue loans recognised in the balance sheet, in the amount of Euros 241,000,000.
143 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
The analysis of loans and advances to customers, by type of credit, is as follows:
Jun 2010 Dec 2009 Euros '000 Euros '000
Loans not represented by securities Discounted bills 714,097 828,880 Current account credits 6,029,728 6,053,858 Overdrafts 2,123,550 2,065,403 Loans 23,758,212 23,596,519 Mortgage loans 32,382,876 31,690,518 Factoring 1,365,122 1,483,839 Finance leases 5,086,835 5,212,390
71,460,420 70,931,407 Loans represented by securities Commercial paper 2,601,351 2,711,682 Bonds 1,695,243 1,672,998
4,296,594 4,384,680
75,757,014 75,316,087
Overdue loans - less than 90 days 273,497 219,343 Overdue loans - more than 90 days 2,145,963 1,812,780
78,176,474 77,348,210 Impairment for credit risk (2,256,128) (2,157,094)
75,920,346 75,191,116
The analysis of loans and advances to customers, by sector of activity, is as follows:
Jun 2010 Dec 2009 Euros '000 Euros '000
Agriculture 742,445 700,500 Mining 542,182 390,322 Food, beverage and tobacco 615,821 764,556 Textiles 551,357 604,422 Wood and cork 296,198 314,996 Printing and publishing 360,182 339,582 Chemicals 959,114 1,012,677 Engineering 1,336,616 1,317,710 Electricity, water and gas 1,212,628 977,141 Construction 5,210,385 5,492,989 Retail business 2,074,874 2,208,398 Wholesale business 2,912,750 3,021,443 Restaurants and hotels 1,348,892 1,357,873 Transports and communications 2,198,457 2,018,918 Services 17,407,884 16,578,852 Consumer credit 4,929,982 5,088,656 Mortgage credit 29,945,379 29,068,536 Other domestic activities 1,166,078 1,013,079 Other international activities 4,365,250 5,077,560
78,176,474 77,348,210 Impairment for credit risk (2,256,128) (2,157,094)
75,920,346 75,191,116
144 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
Loans and advances to customers includes the effect of traditional securitization transactions owned by Special Purpose Entities (SPEs) consolidated under the full consolidation method following the application of SIC 12, in accordance with accounting policy 1 b).
Securitization transactions engaged by BCP Group refer to mortgage loans, consumer loans, leases, commercial paper and corporate loans. The traditional securitization transactions are set through specifically created SPEs. As referred in accounting policy 1 b), when the substance of the relationships with the SPEs indicates that the Group holds control of its activities, the SPEs are fully consolidated.
The balance Loans and advances to customers includes the following amounts related to securitization transactions, presented by type of transaction:
Jun 2010 Traditional Synthetic Total Euros '000 Euros '000 Euros '000
Mortgage loans 6,131,777 - 6,131,777 Consumer loans 689,010 - 689,010 Leases 1,328,413 - 1,328,413 Commercial paper 437,545 - 437,545 Corporate loans 2,030,212 - 2,030,212
10,616,957 - 10,616,957
Dec 2009 Traditional Synthetic Total Euros '000 Euros '000 Euros '000
Mortgage loans 5,845,786 - 5,845,786 Consumer loans 684,596 - 684,596 Leases 185,618 - 185,618 Commercial paper 484,146 - 484,146 Corporate loans 2,013,156 - 2,013,156
9,213,302 - 9,213,302
During the first semester of 2009, the Group issued a securitization transaction named as Magellan n.º 6 (Mortgage loans) issued by Banco Comercial Português, S.A. Considering the characteristics of this securitization and according to accounting policy 1 g), this transaction was not derecognised from the Group's financial statements.
145 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
The Group's credit portfolio divided between impaired credit and credit not impaired is analysed as follows:
Jun 2010 Dec 2009 Euros '000 Euros '000
Total of loans 87,210,530 85,867,672 Loans and advances to customers with impairment Individually significant Gross amount 7,572,598 7,129,930 Impairment (1,476,612) (1,464,723)
Net book amount 6,095,986 5,665,207
Parametric analysis Gross amount 4,080,196 4,007,979 Impairment (550,967) (463,588)
Net book amount 3,529,229 3,544,391
Loans and advances to customers without impairment 75,557,736 74,729,763
Impairment (IBNR) (316,627) (317,040)
84,866,324 83,622,321
The balance Total of loans includes the loans and advances to customers balance and the guarantees granted and commitments to third parties balance (see note 45), in the amount of Euros 9,034,056,000 (31 December 2009: Euros 8,519,462,000).
The balances Impairment and Impairment (IBNR) were determined in accordance with the accounting policy described in note 1 c), including the provision for guarantees and commitments to third parties (see note 37), in the amount of Euros 88,078,000 (31 December 2009: Euros 88,257,000).
The Group is applying physical collaterals and financial guarantees as instruments to mitigate the credit risk. The physical collaterals are mainly mortgages on residential buildings for the mortgage portfolio and other mortgages on other types of buildings related to other types of loans. In order to reflect the market value, these collaterals are regularly reviewed based on independent and certified valuation entities or through the application of evaluation coefficients that reflect the market trends for each specific type of building and geographical area. The financial guarantees are reviewed based on the market value of the respective assets, when available, with the subsequent application of haircuts that reflect the volatility of their prices.
The balance Loans and advances to customers includes the following amounts related to finance leases contracts:
Jun 2010 Dec 2009 Euros '000 Euros '000
Gross amount 5,777,285 5,936,249 Interest not yet due (690,450) (723,859)
Net book value 5,086,835 5,212,390
The analysis of the financial lease contracts by type of client, is presented as follows:
Jun 2010 Dec 2009 Euros '000 Euros '000 Individuals Home 137,691 144,081 Consumer 93,808 95,922 Others 289,057 308,455 520,556 548,458 Companies Mobiliary 1,952,209 1,873,510 Mortgage 2,614,070 2,790,422 4,566,279 4,663,932
5,086,835 5,212,390
146 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
Regarding operational leasing, the Group does not present relevant contracts as leaser.
In accordance with note 10, the balance Rents, includes as at 30 June 2010 the amount of Euros 64,988,000 (31 December 2009: Euros 126,993,000), corresponding to rents paid regarding buildings used by the Group as leaser.
The loans portfolio includes restructured loans that have been formally negotiated with the clients, in order to reinforce collaterals, defer the maturity date or change the interest rate. The analysis of restructured loans by sector of activity is as follows:
Jun 2010 Dec 2009 Euros '000 Euros '000
Agriculture 4,536 5,825 Mining 157 101 Food, beverage and tobacco 5,419 8,324 Textiles 13,751 15,362 Wood and cork 4,858 4,188 Printing and publishing 1,920 4,035 Chemicals 10,492 9,208 Engineering 15,052 26,635 Electricity, water and gas - 208 Construction 29,728 27,987 Retail business 8,118 8,332 Wholesale business 20,783 10,720 Restaurants and hotels 1,756 1,636 Transports and communications 21,150 28,943 Services 216,343 18,101 Consumer credit 152,978 121,171 Mortgage credit 31,941 107,410 Other domestic activities 524 617 Other international activities 4,282 12,001
543,788 410,804
The analysis of the overdue loans by sector of activity is as follows:
Jun 2010 Dec 2009 Euros '000 Euros '000
Agriculture 16,982 13,727 Mining 10,396 5,549 Food, beverage and tobacco 46,079 47,638 Textiles 40,741 40,472 Wood and cork 44,047 49,460 Printing and publishing 24,387 19,254 Chemicals 15,492 12,198 Engineering 110,456 92,652 Electricity, water and gas 1,649 536 Construction 440,094 286,556 Retail business 91,469 86,651 Wholesale business 227,706 263,277 Restaurants and hotels 60,444 54,371 Transports and communications 52,347 45,023 Services 585,544 475,769 Consumer credit 428,564 353,402 Mortgage credit 187,976 145,237 Other domestic activities 16,057 16,013 Other international activities 19,030 24,338
2,419,460 2,032,123
147 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
The analysis of the overdue loans, by type of credit, is as follows:
Jun 2010 Dec 2009 Euros '000 Euros '000
Public sector 1,682 1,852 Asset-backed loans 1,062,956 863,515 Personal guaranteed loans 476,670 433,662 Unsecured loans 746,224 606,773 Foreign loans 6,801 856 Factoring 369 1,124 Finance leases 124,758 124,341
2,419,460 2,032,123
The movements of impairment for credit risk are analysed as follows:
Jun 2010 Jun 2009 Euros '000 Euros '000 Impairment for overdue loans and for other credit risks: Balance on 1 January 2,157,094 1,480,456 Transfers resulting from changes in the Group's structure (11,400) - Other transfers (8,357) 252,937 Impairment for the period 659,819 502,992 Write-back for the period (264,896) (207,765) Loans charged-off (286,562) (87,921) Exchange rate differences 10,430 (10,313)
Balance on 30 June 2,256,128 1,930,386
As refered, as at 30 June 2009 the balance Other transfers includes the effect of the adoption of "Carta-circular" no. 15/2009 of the Bank of Portugal.
If the impairment loss decreases on a subsequent period to its initial accounting and this decrease can be objectively associated to an event that occurred after the recognition of the loss, the impairment in excess is reversed through profit and loss.
The analysis of the impairment, by sector of activity, is as follows:
Jun 2010 Dec 2009 Euros '000 Euros '000
Agriculture 44,704 52,959 Mining 15,198 23,250 Food, beverage and tobacco 45,438 43,695 Textiles 49,214 45,557 Wood and cork 25,273 29,538 Printing and publishing 17,708 17,110 Chemicals 12,911 17,287 Engineering 102,552 106,959 Electricity, water and gas 7,235 5,002 Construction 224,012 193,204 Retail business 74,357 79,465 Wholesale business 192,191 277,736 Restaurants and hotels 42,805 35,942 Transports and communications 42,027 44,700 Services 526,336 454,294 Consumer credit 359,673 317,216 Mortgage credit 185,120 159,805 Other domestic activities 7,848 7,278 Other international activities 281,526 246,097
2,256,128 2,157,094
148 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
The impairment for credit risk, by type of credit, is analysed as follows:
Jun 2010 Dec 2009 Euros '000 Euros '000
Public sector 2,686 4,738 Asset-backed loans 1,135,550 1,034,026 Personal guaranteed loans 384,275 348,043 Unsecured loans 682,790 727,233 Foreign loans 4,175 3,968 Factoring 547 808 Finance leases 46,105 38,278
2,256,128 2,157,094
The analysis of the loans charged-off, by sector of activity, is as follows:
Jun 2010 Jun 2009 Euros '000 Euros '000
Agriculture 2,966 151 Mining 11,331 - Food, beverage and tobacco 6,612 312 Textiles 8,444 9,630 Wood and cork 7,550 1,234 Printing and publishing 729 268 Chemicals 615 609 Engineering 18,144 21,602 Electricity, water and gas 8 29 Construction 8,793 3,558 Retail business 6,253 3,751 Wholesale business 69,820 13,052 Restaurants and hotels 2,652 371 Transports and communications 3,138 2,031 Services 111,069 17,583 Consumer credit 22,689 9,969 Mortgage credit 202 193 Other domestic activities 470 723 Other international activities 5,077 2,855
286,562 87,921
In compliance with the accounting policy described in note 1 c), loans and advances to customers are charged-off when there are no feasable expectations, from an economic perspective, of recovering the loan amount. For collateralized loans, the charge-off occurs for the unrecoverable amount when the funds arising from the execution of the respective collaterals are effectively received. This charge-off is carried out only for loans that are considered not to be recoverable and fully provided.
The analysis of the loans charged-off, by type of credit, is as follows:
Jun 2010 Jun 2009 Euros '000 Euros '000
Asset-backed loans 109,138 39,665 Personal guaranteed loans 42,493 19,534 Unsecured loans 129,903 24,965 Foreign loans - 2 Factoring 172 - Finance leases 4,856 3,755
286,562 87,921
149 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
The analysis of recovered loans and interest, during 2010 and 2009, by sector of activity, is as follows:
Jun 2010 Jun 2009 Euros '000 Euros '000
Agriculture 127 220 Mining 11 341 Food, beverage and tobacco 69 262 Textiles 775 356 Wood and cork 692 10 Printing and publishing 176 601 Chemicals - 53 Engineering 163 217 Electricity, water and gas - 84 Construction 1,910 3,066 Retail business 41 720 Wholesale business 810 2,893 Restaurants and hotels 410 133 Transports and communications 29 434 Services 775 1,227 Consumer credit 6,807 4,850 Mortgage credit - 151 Other domestic activities 9 77 Other international activities 13 3
12,817 15,698
The analysis of recovered loans and interest during 2010 and 2009, by type of credit, is as follows:
Jun 2010 Jun 2009 Euros '000 Euros '000
Asset-backed loans 572 2,498 Personal guaranteed loans - 1,447 Unsecured loans 12,015 11,719 Factoring - 34 Finance leases 230 -
12,817 15,698
As detailed in note 51, the Group, as part of the liquidity risk management, holds a pool of eligible assets that can serve as collateral in funding operations with the European Central Bank and other Central Banks in countries were the Group operates, which include loans and advances to customers.
22. Financial assets held for trading and available for sale
The balance Financial assets held for trading and available for sale is analysed as follows:
Jun 2010 Dec 2009 Euros '000 Euros '000 Bonds and other fixed income securities Issued by public entities 3,035,300 2,423,924 Issued by other entities 1,244,749 1,747,880 4,280,049 4,171,804
Overdue securities 4,925 4,925 Impairment for overdue securities (4,925) (4,925) 4,280,049 4,171,804
Shares and other variable income securities 696,589 736,871
4,976,638 4,908,675
Trading derivatives 1,265,709 1,146,890
6,242,347 6,055,565
150 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
The balance Trading derivatives includes, the valuation of the embedded derivatives separated from the host contract in accordance with the accounting policy 1 d) in the amount of Euros 86,654,000 (31 December 2009: Euros 9,987,000).
The portfolio of financial instruments held for trading and available for sale securities, as at 30 June 2010, is analysed as follows:
Securities Available Trading for sale Total Euros '000 Euros '000 Euros '000 Fixed income: Bonds issued by public entities Portuguese issuers 101,881 22,299 124,180 Foreign issuers 628,432 530,955 1,159,387 Bonds issued by other entities Portuguese issuers 108,831 123,779 232,610 Foreign issuers 241,069 775,995 1,017,064 Treasury bills and other Government bonds 1,288,229 463,504 1,751,733
2,368,442 1,916,532 4,284,974 of which: Quoted financial assets 2,061,818 1,180,738 3,242,556 Unquoted financial assets 306,624 735,794 1,042,418
Variable income: Shares in Portuguese companies 10,088 82,761 92,849 Shares in foreign companies 6,653 291,152 297,805 Investment fund units 21,086 284,849 305,935
37,827 658,762 696,589 of which: Quoted financial assets 15,341 17,853 33,194 Unquoted financial assets 22,486 640,909 663,395
Impairment for overdue securities - (4,925) (4,925)
2,406,269 2,570,369 4,976,638
Trading derivatives 1,265,709 - 1,265,709
3,671,978 2,570,369 6,242,347
of which: Level 1 2,129,501 1,908,708 4,038,209 Level 2 1,301,772 432,086 1,733,858 Level 3 1,050 63,092 64,142 Financial assets at cost 239,655 166,483 406,138
The trading portfolio is stated in accordance with the accounting policy 1 d) at fair value.
As referred in IFRS 7, financial assets held for trading and available for sale are valued in accordance with the following fair value measurement levels:
- Level 1: financial instruments measured in accordance with quoted market prices or providers; - Level 2: financial instruments measured in accordance with internal valuation techniques based on observable market inputs; - Level 3: financial instruments measured in accordance with valuation techniques based on inputs not based on observable data that have significant impact in the instruments valuation.
151 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
Financial assets at cost includes the amount of Euros 378,881,000 (31 December 2009: Euros 441,229,000) regarding Angola's and Mozambique's Government Bonds.
Quoted financial assets includes securities measured with stock market's quotations, provider's prices and securities listed in other organised markets.
As referred in the accounting policy presented in note 1 d), the available for sale securities are presented at market value with fair value accounted for in shareholder's equity (fair value reserves), as referred in note 42. The fair value reserve in the amount of Euros 51,890,000 is presented net of impairment losses in the amount of Euros 59,646,000.
The balance Financial assets available for sale - variable income securities - shares in foreign companies, includes the amount of Euros 229,197,000 related to the investment held in Eureko B.V. This investment is measured annually based on independent valuations obtain in the first quarter of each year. As referred in note 42, the fair value reserve associated to this investment amounts to Euro 77,951,000 as at 30 June 2010.
The portfolio of financial instruments held for trading and available for sale securities, as at 31 December 2009, is analysed as follows:
Securities Available Trading for sale Total Euros '000 Euros '000 Euros '000 Fixed income:
Bonds issued by public entities Portuguese issuers 146,895 1,816 148,711 Foreign issuers 615,799 468,525 1,084,324 Bonds issued by other entities Portuguese issuers 625,094 551,837 1,176,931 Foreign issuers 458,402 117,472 575,874 Treasury bills and other Government bonds 324,988 865,901 1,190,889
2,171,178 2,005,551 4,176,729
of which: Quoted financial assets 1,707,794 1,267,862 2,975,656 Unquoted financial assets 463,384 737,689 1,201,073
Variable income: Shares in Portuguese companies 8,556 115,241 123,797 Shares in foreign companies 7,325 264,091 271,416 Investment fund units 20,842 318,678 339,520 Other securities 2,138 - 2,138
38,861 698,010 736,871 of which: Quoted financial assets 19,064 19,357 38,421 Unquoted financial assets 19,797 678,653 698,450
Impairment for overdue securities - (4,925) (4,925)
2,210,039 2,698,636 4,908,675
Trading derivatives 1,146,890 - 1,146,890
3,356,929 2,698,636 6,055,565
of which: Level 1 1,806,262 1,038,462 2,844,724 Level 2 1,345,781 1,294,426 2,640,207 Level 3 - 88,747 88,747 Financial assets at cost 204,886 277,001 481,887
152 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
As referred in the accounting policy presented in note 1 d), the available for sale securities are presented at market value with fair value accounted for in shareholder's equity (fair value reserves), as referred in note 42. The fair value reserve, as at 31 December 2009, in the amount of Euros 101,329,000 is presented net of impairment losses in the amount of Euros 56,785,000.
The balance Financial assets available for sale - variable income securities - shares in foreign companies, includes the amount of Euros 212,359,000 related to the investment held in Eureko B.V. This investment is measured annually based on independent valuations obtain in the first quarter of each year. As referred in note 42, the fair value reserve associated with this investment amounts to Euro 61,113,000 as at 31 December 2009.
During the first semester of 2010, the Group reclassified non-derivative financial assets, from the available for sale portfolio to the held to maturity and from the held for trading portfolio to the available for sale and to held to maturity portfolios (note 24).
As referred in the accounting policy note 1 f) these reclassifications were performed under the scope of IAS 39 – Financial Instruments: Recognition and Measurement (Reclassification of Financial Assets) revised in October 2008, based on the following considerations:
• Market conditions in the first semester of 2010, for sovereign and financial institutions of peripherical Euro zone countries, that resulted in a strong increase in the volatility, credit spreads and difficulties of issuers to place their financial liabilities in the market;
• Underlying value of the portfolio (quality of the issuers expressed in investment grade ratings) and capacity of the Group to hold the assets in a stable portfolio with no short term profit objective, and intention and capacity to hold in the long term.
As at 30 June 2010 these reclassifications are analysed as follows:
At the reclassification date June 2010 Book value Fair value Book value Fair value Difference Euros '000 Euros '000 Euros '000 Euros '000 Euros '000
From Financial assets held for trading to: Financial assets available for sale 225,482 225,482 43,238 43,238 - Financial assets held to maturity 2,154,973 2,154,973 1,883,543 1,693,173 (190,370) From Financial assets available for sale to: Loans represented by securities 2,713,524 2,713,524 294,260 261,196 (33,064) Financial assets held to maturity 627,492 627,492 625,030 543,950 (81,080)
2,846,071 2,541,557 (304,514)
The amounts accounted in Profits and losses and in fair value reserves, in June 2010 related to reclassified financial assets are analysed as follows:
P&L Changes Fair value Fair value Interest changes Total reserves Equity Euros '000 Euros '000 Euros '000 Euros '000 Euros '000
At the reclassification date From Financial assets held for trading to: Financial assets available for sale 170 (3,048) (2,878) - (2,878) Financial assets held to maturity 3,028 5,175 8,203 - 8,203 From Financial assets available for sale to: Financial assets held to maturity 5,476 - 5,476 (9,510) (4,034)
8,674 2,127 10,801 (9,510) 1,291
After the reclassification From Financial assets held for trading to: Financial assets available for sale 1,537 - 1,537 - 1,537 Financial assets held to maturity 30,108 - 30,108 - 30,108 From Financial assets available for sale to: Loans represented by securities 3,386 - 3,386 122 3,508 Financial assets held to maturity 1,831 - 1,831 12 1,843
36,862 - 36,862 134 36,996
153 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
If the reclassifications described previously had not occurred, the additional amounts recognised in results during the first semester of 2010, would be as follows: Fair value Interest changes P&L Euros '000 Euros '000 Euros '000
Impact in P&L without reclassifications: Until 31 December 2009 From Financial assets held for trading to: Financial assets available for sale - - - Financial assets held to maturity - (136,706) (136,706) From Financial assets available for sale to: Loans represented by securities 122 - 122 Financial assets held to maturity - - - 122 (136,706) (136,584) After 1 January 2010 From Financial assets held for trading to: Financial assets available for sale - (25,000) (25,000) Financial assets held to maturity - (31,547) (31,547) From Financial assets available for sale to: Loans represented by securities - - - Financial assets held to maturity 12 - 12
12 (56,547) (56,535)
134 (193,253) (193,119)
If the reclassifications described previously had not occurred, the additional amounts recognised in equity during the first semester of 2010, would be as follows: Retained Fair value P&L earnings reserves Equity Euros '000 Euros '000 Euros '000 Euros '000
Impact in equity without reclassifications: Until 31 December 2009 From Financial assets held for trading to: Financial assets available for sale - 391 (391) - Financial assets held to maturity (136,706) (22,117) - (158,823) From Financial assets available for sale to: Loans represented by securities 122 273 (33,459) (33,064) Financial assets held to maturity - - - - (136,584) (21,453) (33,850) (191,887) After 1 January 2010 From Financial assets held for trading to: Financial assets available for sale (25,000) - 25,000 - Financial assets held to maturity (31,547) - - (31,547) From Financial assets available for sale to: Loans represented by securities - - - - Financial assets held to maturity 12 - (81,092) (81,080) (56,535) - (56,092) (112,627)
(193,119) (21,453) (89,942) (304,514)
154 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
As at 31 December 2009, this reclassification is analysed as follows:
At the reclassification date December 2009 Book value Fair value Book value Fair value Difference Euros '000 Euros '000 Euros '000 Euros '000 Euros '000
From Financial assets held for trading to: Financial assets available for sale 28,682 28,682 29,301 29,301 - Financial assets held to maturity 1,416,654 1,416,654 1,419,593 1,397,476 (22,117)
From Financial assets available for sale to: Loans represented by securities 2,713,524 2,713,524 286,271 252,739 (33,532) 1,735,165 1,679,516 (55,649)
The amounts accounted in Profits and losses and in fair value reserves, in December 2009 related to reclassified financial assets are analysed as follows:
P&L Changes Fair value Fair value Interest changes Total reserves Equity Euros '000 Euros '000 Euros '000 Euros '000 Euros '000
At the reclassification date From Financial assets held for trading to: Financial assets held to maturity 12,344 16,998 29,342 - 29,342
12,344 16,998 29,342 - 29,342 After the reclassification From Financial assets held for trading to:
Financial assets available for sale 1,776 - 1,776 1,107 2,883 Financial assets held to maturity 35,328 - 35,328 - 35,328
From Financial assets available for sale to: Loans represented by securities 10,567 - 10,567 220 10,787
47,671 - 47,671 1,327 48,998
If the reclassifications described previously had not occurred, the additional amounts recognised in results and in fair value reserves during 2009, would be as follows:
Fair value Interest changes P&L Euros '000 Euros '000 Euros '000
Impact in P&L without reclassifications: Until 31 December 2009 From Financial assets held for trading to: Financial assets available for sale - 1,107 1,107 Financial assets held to maturity - (2,071) (2,071) From Financial assets available for sale to: Loans represented by securities 220 - 220 Financial assets held to maturity - - - 220 (964) (744) After 1 January 2010 From Financial assets held for trading to: Financial assets available for sale - - - Financial assets held to maturity - (14,428) (14,428) From Financial assets available for sale to: Loans represented by securities - - - Financial assets held to maturity - - - - (14,428) (14,428)
220 (15,392) (15,172)
155 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
If the reclassifications described previously had not occurred, the additional amounts recognised in equity during 2009, would be as follows:
Retained Fair value P&L earnings reserves Equity Euros '000 Euros '000 Euros '000 Euros '000
Impact in equity without reclassifications: Until 31 December 2009 From Financial assets held for trading to: Financial assets available for sale 1,107 (716) (391) - Financial assets held to maturity (2,071) (5,618) - (7,689) From Financial assets available for sale to: Loans represented by securities 220 53 (33,805) (33,532) Financial assets held to maturity - - - - (744) (6,281) (34,196) (41,221) After 1 January 2010 From Financial assets held for trading to: Financial assets available for sale - - - - Financial assets held to maturity (14,428) - - (14,428) From Financial assets available for sale to: Loans represented by securities - - - - Financial assets held to maturity - - - - (14,428) - - (14,428)
(15,172) (6,281) (34,196) (55,649)
The movements of the impairment of the financial assets available for sale are analysed as follows:
Jun 2010 Jun 2009 Euros '000 Euros '000
Balance on 1 January 56,785 42,085 Impairment for the period 8,934 6,034 Write-back against fair value reserves (6,064) - Loans charged-off (9) (7,569) Exchange rate differences - (209)
59,646 40,341
The Group recognises impairment on financial assets available for sale when there is a significant or prolonged decrease in its fair value or when there is an impact on expected future cash flows of the assets. This valuation involves judgement in which the Group takes into consideration among other factors, the volatility of the prices of securities.
Thus, as a consequence of the low liquidity and significant volatility in financial markets, the following factors were taken into consideration in determining the existence of impairment:
- Equity instruments: (i) decreases more than 30% against the purchase price; or (ii) the market value below the purchase price for a period exceeding 12 months; - Debt instruments: when there is objective evidence of events with impact on recoverable value of future cash flows of these assets.
156 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
The analysis of the securities portfolio included in the financial assets held for trading and available for sale, by sector of activity, as at 30 June 20010 is analysed as follows: Other Financial Overdue Gross Bonds Shares Assets Securities Total Euros '000 Euros '000 Euros '000 Euros '000 Euros '000
Mining - 73 - - 73 Textiles - 1 - - 1 Wood and cork - 3,585 - 361 3,946 Printing and publishing 41 5,538 - 998 6,577 Chemicals - 62 - - 62 Engineering - 851 - - 851 Electricity, water and gas 1,926 1,804 - - 3,730 Construction - 32,795 - 2,560 35,355 Retail business - 27 - - 27 Wholesale business - 153 - 475 628 Restaurants and hotels - 51 - - 51 Transport and communications 15,811 14,472 - 529 30,812 Services 1,226,971 331,027 305,935 2 1,863,935 Other international activities - 215 - - 215 1,244,749 390,654 305,935 4,925 1,946,263
Government and Public securities 1,283,567 - 1,751,733 - 3,035,300 Impairment for overdue securities - - - (4,925) (4,925)
2,528,316 390,654 2,057,668 - 4,976,638
The analysis of the securities portfolio included in the financial assets held for trading and available for sale, by sector of activity, as at 31 December 2009 is analysed as follows: Other Financial Overdue Gross Bonds Shares Assets Securities Total Euros '000 Euros '000 Euros '000 Euros '000 Euros '000
Mining - 73 - - 73 Food, beverage and tobacco - 234 - - 234 Textiles - 1 - - 1 Wood and cork 2,444 - - 361 2,805 Printing and publishing 41 7,090 - 998 8,129 Chemicals - 45 - - 45 Engineering 105 1,095 - - 1,200 Electricity, water and gas 25,053 1,178 - - 26,231 Construction - 32,998 - 2,560 35,558 Retail business - - 241 - 241 Wholesale business - 2,627 - 475 3,102 Restaurants and hotels - 51 - - 51 Transport and communications 91,018 14,839 - 529 106,386 Services 1,627,635 334,773 341,365 2 2,303,775 Other international activities 1,584 209 52 - 1,845
1,747,880 395,213 341,658 4,925 2,489,676
Government and Public securities 1,233,035 - 1,190,889 - 2,423,924 Impairment for overdue securities - - - (4,925) (4,925)
2,980,915 395,213 1,532,547 - 4,908,675
157 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
The analysis of the trading derivatives by maturity as at 30 June 2010 is as follows:
Jun 2010 Notional (remaining term) Fair value Up to 3 months to More than 1 3 months 1 year year Total Assets Liabilities Euros '000 Euros '000 Euros '000 Euros '000 Euros '000 Euros '000 Interest rate Derivatives: OTC Market: Forward rate agreement 290,166 1,575,684 4,800 1,870,650 808 859 Interest rate Swaps 2,609,470 6,223,478 31,308,137 40,141,085 938,617 963,256 Interest rate Options (purchase) 334,498 122,091 948,338 1,404,927 30,543 - Interest rate Options (sale) 334,498 110,222 952,545 1,397,265 - 29,060 Other interest rate contracts 132,487 216,669 1,369,839 1,718,995 48,841 5,942 3,701,119 8,248,144 34,583,659 46,532,922 1,018,809 999,117 Stock Exchange transactions: Interest rate futures 453,644 - - 453,644 1,865 1,948 Currency Derivatives: OTC Market: Forward exchange contract 1,359,177 219,259 2,827 1,581,263 22,122 48,790 Currency Swaps 5,638,885 741,743 2,703 6,383,331 91,489 150,173 Currency Options (purchase) 149,912 58,428 7,835 216,175 14,372 - Currency Options (sale) 146,091 39,336 366 185,793 - 32,409 7,294,065 1,058,766 13,731 8,366,562 127,983 231,372 Share Derivatives: OTC Market: Shares/indexes Swaps 33,619 309,412 193,307 536,338 5,827 60,112 Shares/indexes Options (purchase) 107,719 - 180,251 287,970 8,025 - Shares/indexes Options (sale) 107,800 - 16,122 123,922 - 8,521 Shares/indexs Forwards - - 50,000 50,000 - - 249,138 309,412 439,680 998,230 13,852 68,633 Stock Exchange transactions: Shares futures 48,890 - - 48,890 - -
Commodity derivatives: Stock Exchange transactions: Commodities futures 121,940 - - 121,940 - -
Credit derivatives: OTC Market: Credit Default Swaps 20,000 22,415 2,133,635 2,176,050 16,546 187,053 Other credit derivatives (purchase) 4,818 - - 4,818 - - Other credit derivatives (sale) 4,818 - 75,539 80,357 - - 29,636 22,415 2,209,174 2,261,225 16,546 187,053 Total financial instruments traded in: OTC Market 11,273,958 9,638,737 37,246,244 58,158,939 1,177,190 1,486,175 Stock Exchange 624,474 - - 624,474 1,865 1,948 Embedded derivatives 86,654 7,111
11,898,432 9,638,737 37,246,244 58,783,413 1,265,709 1,495,234
158 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
The analysis of the trading derivatives by maturity as at 31 December 2009 is as follows:
Dec 2009 Notional (remaining term) Fair value Up to 3 months to More than 1 3 months 1 year year Total Assets Liabilities Euros '000 Euros '000 Euros '000 Euros '000 Euros '000 Euros '000 Interest rate Derivatives: OTC Market: Forward rate agreements 49,527 184,326 37,200 271,053 62 68 Interest rate Swaps 2,803,262 5,208,635 27,524,333 35,536,230 838,987 770,559 Interest rate Options (purchase) 879,328 377,330 1,046,805 2,303,463 27,908 - Interest rate Options (sale) 899,328 366,668 993,507 2,259,503 - 27,171 Other interest rate contracts 2,001 272,820 1,486,816 1,761,637 54,244 50,597 4,633,446 6,409,779 31,088,661 42,131,886 921,201 848,395 Stock Exchange transactions: Interest rate Futures 61,149 - - 61,149 3,648 3,423 Currency Derivatives: OTC Market: Forward exchange contract 1,499,089 182,809 485 1,682,383 32,364 19,223 Currency Swaps 5,017,193 399,821 3,861 5,420,875 94,025 47,057 Currency Options (purchase) 174,415 229,472 7,439 411,326 23,506 - Currency Options (sale) 178,341 234,446 658 413,445 - 43,844 6,869,038 1,046,548 12,443 7,928,029 149,895 110,124 Stock Exchange transactions: Currency futures 2,082 - - 2,082 - -
Share Derivatives: OTC Market: Shares/indexes Swaps 115,364 235,763 286,567 637,694 11,793 57,466 Shares/indexes Options (purchase) 103,725 84,989 2,067 190,781 5,412 - Shares/indexes Options (sale) 103,880 45,000 - 148,880 - 117 Shares/indexes Forwards - - 50,000 50,000 - - Other shares/indexes contracts 2,558 - - 2,558 - - 325,527 365,752 338,634 1,029,913 17,205 57,583 Stock Exchange transactions: Shares futures 34,902 - - 34,902 - - Shares/indexes Options (purchase) - - 100,476 100,476 3,606 - Shares/indexes Options (sale) - - 24,197 24,197 - 5,215 34,902 - 124,673 159,575 3,606 5,215
Commodity derivatives: Stock Exchange transactions: Commodities futures 94,002 4 - 94,006 - -
Credit derivatives: OTC Market: Credit Default Swaps 3,471 37,463 2,240,114 2,281,048 41,348 27,404 Other credit derivatives (purchase) 4,818 - - 4,818 - - Other credit derivatives (sale) 4,818 - 90,999 95,817 - - 13,107 37,463 2,331,113 2,381,683 41,348 27,404 Total financial instruments traded in: OTC Market 11,841,118 7,859,542 33,770,851 53,471,511 1,129,649 1,043,506 Stock Exchange 192,135 4 124,673 316,812 7,254 8,638 Embedded derivatives 9,987 15,439
12,033,253 7,859,546 33,895,524 53,788,323 1,146,890 1,067,583
159 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
23. Hedging derivatives
This balance is analysed as follows: Jun 2010 Dec 2009 Euros '000 Euros '000 Hedging instruments Assets: Swaps 569,855 465,848 Forwards 11,925 - 581,780 465,848 Liabilities: Swaps 395,806 75,483
Hedging derivatives are measured in accordance with internal valuation techniques considering mainly observable market inputs. In accordance with the hierarchy of the valuation sources, as referred in IFRS 7 these derivatives are classified in level 2.
The Group applies derivatives to hedge interest and exchange rate exposure risks. The accounting method depends on the nature of the hedged risk, namely if the Group is exposed to fair value changes, variability in cash-flows or highly probable forecast transactions.
Since 1 January 2005, for the hedging relationships which comply with the hedging requirements of IAS 39, the Group adopted the hedge accounting method, namely through the fair value hedge model, and holds in its derivatives portfolio mainly interest rate swaps, which are hedging fair value changes in interest rate risk of Debt securities issued, Deposit, Loans of inter-bank money market and Financial assets available for sale.
The Group performs periodical effectiveness tests of the hedging relationships. For this period an amount of Euros 9,059,000 (31 December 2009: Euros 14,087,000), was recorded against the results, corresponding to the ineffective part of the fair value hedge relationships. The Group also adopted fair value hedge to cover interest rate risk for a specific portfolio with fixed interest rate loans with maturity of more than one year for which adopted an hedging policy for those portfolios, resulting from changes originated by interest rate variations. For the referred hedging relationships, the ineffective part of the fair value hedge amounted to a negative value of Euros 5,613,000 (31 December 2009: negative amount of Euros 59,000). The Group designated in 2010 a group of future transactions in foreign currency, for which adopted cash flow hedge model for exchange rate risk. The referred hedging relationships, as at 30 June 2010, amounted a value of Euros 0 of ineffective portion. The Group has adopted a dynamic dual currency cash flow hedge for variable interest rate loans and deposits and a policy of hedging changes in cash flows for mortgage credit in foreign currency. For the mentioned hedging relationships, the ineffective portion amounted to a negative amount of Euros 1,620,000 in the period (31 December 2009: positive amount of Euros 52,000).
As referred in note 6, in 2009 and 2010 the Group discontinued an interest rate hedging relationship of a mortgage backed security issue in the amount of Euros 1,500,000,000 in accordance with paragraph 91, c) of IAS 39, due to the break of its effectiveness. Following the decision from the Executive Board of Directors and in accordance with IAS 39, on 1 April, 2009 and 1 April 2010, respectively, the hedging relationship was reestablished.
160 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
The accumulated adjustment on financial risks covered performed on the assets and liabilities which includes hedged items is analysed as follows:
Jun 2010 Dec 2009 Euros '000 Euros '000 Hedged item
Loans 38,185 57,164 Deposits / Loans (3,436) (2,535) Debt issued (292,935) (144,970)
(258,186) (90,341)
The analysis of the portfolio of hedging derivatives by maturity as at 30 Junho 2010 is as follows:
Jun 2010 Notional (remaining term) Fair value Up to 3 months to More than 1 3 months 1 year year Total Assets Liabilities Euros '000 Euros '000 Euros '000 Euros '000 Euros '000 Euros '000 Fair value hedge derivatives with interest rate risk: OTC Market: Interest rate Swaps 144,251 3,338,113 8,846,207 12,328,571 566,632 58,646
Cash flow hedge derivatives with interest rate risk: OTC Market: Interest rate Swaps 343,054 173,630 - 516,684 3,223 337,160
Cash flow hedge derivatives with currency risk: OTC Market: Forward exchange contract 11,314 34,096 179,632 225,042 11,925 -
Total financial instruments Traded by: OTC Market 498,619 3,545,839 9,025,839 13,070,297 581,780 395,806
498,619 3,545,839 9,025,839 13,070,297 581,780 395,806
161 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
The analysis of the portfolio of hedging derivatives by maturity as at 31 December 2009 is as follows:
Dec 2009 Notional (remaining term) Fair value Up to 3 months to More than 1 3 months 1 year year Total Assets Liabilities Euros '000 Euros '000 Euros '000 Euros '000 Euros '000 Euros '000 Fair value hedge derivatives with interest rate risk: OTC Market: Interest rate Swaps 152,302 877,859 10,299,742 11,329,903 393,090 48,358
Cash flow hedge derivatives with interest rate risk: OTC Market: Interest rate Swaps 710,000 1,488,584 3,151,520 5,350,104 72,758 27,125 Total financial instruments Traded by: OTC Market 862,302 2,366,443 13,451,262 16,680,007 465,848 75,483
862,302 2,366,443 13,451,262 16,680,007 465,848 75,483
24. Financial assets held to maturity
The balance Financial assets held to maturity is analysed as follows:
Jun 2010 Dec 2009 Euros '000 Euros '000 Bonds and other fixed income securities Issued by Government and public entities 2,859,470 1,247,255 Issued by other entities 2,975,044 780,099
5,834,514 2,027,354
The balance Financial assets held to maturity also includes, as at 30 June 2010, the amount of Euros 1,883,543,000 (31 December 2009: Euros 1,419,593,000) related to non derivatives financial assets (bonds) reclassified from financial assets held for trading caption to financial assets held to maturity caption, which Euros 660,536,000 are regarding from reclassifications occured on the first semester of 2010, as referred in the accounting policy note 1 f) and note 22.
The balance Financial assets held to maturity also includes, as at 30 June 2010, the amount of Euros 625,030,000 related to non derivatives financial assets (bonds) reclassified, on the first semester of 2010, from financial assets available for sale caption to financial assets held to maturity caption, as referred in the accounting policy note 1 f) and note 22.
162 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
The analysis of the bonds and other fixed income securities portfolio included in the Financial assets held to maturity, by sector of activity, is analysed as follows:
Jun 2010 Dec 2009 Euros '000 Euros '000
Transport and communications 170,887 97,141 Services 2,804,157 682,958 2,975,044 780,099
Government and Public securities 2,859,470 1,247,255 5,834,514 2,027,354
As detailed in note 51, the Group, as a part of the management of the liquidity risk, holds a pool of eligible assets that can serve as collateral in funding operations with the European Central Bank and other Central Banks in countries were the Group operates, which include fixed income securities.
25. Investments in associated companies
This balance is analysed as follows: Jun 2010 Dec 2009 Euros '000 Euros '000
Portuguese credit institutions 21,961 21,155 Foreign credit institutions 20,655 20,767 Other Portuguese companies 382,723 393,589 Other foreign companies 2,894 3,407
428,233 438,918
The balance Investments in associated companies is analysed as follows:
Jun 2010 Dec 2009 Euros '000 Euros '000
Banque BCP, S.A.S. 16,658 16,802 Banque BCP (Luxembourg), S.A. 3,997 3,965 Millenniumbcp Fortis Grupo Segurador, S.G.P.S., S.A. 365,581 380,110 SIBS - Sociedade Interbancária de Serviços, S.A. 14,216 13,356 Unicre - Cartão Internacional de Crédito, S.A. 21,961 21,155 VSC - Aluguer de Veículos Sem Condutor, Lda. - 123 Other 5,820 3,407 428,233 438,918
These investments correspond to unquoted companies, consolidated by the equity method. The investment held in the associated company Millenniumbcp Fortis Grupo Segurador, S.G.P.S. corresponds to 49% of the share capital of the company. The Group companies included in the consolidation perimeter are presented in note 55.
163 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
The main indicators of the associated companies are analysed as follows: Total Total Total Profit for Assets Liabilities Income the year Euros '000 Euros '000 Euros '000 Euros '000
Jun 2010 Millenniumbcp Fortis Grupo Segurador, S.G.P.S., S.A. 13,525,212 12,283,126 888,174 39,152 SIBS - Sociedade Interbancária de Serviços, S.A. (*) 139,375 74,585 66,615 6,351 Unicre - Cartão Internacional de Crédito, S.A. (*) 289,887 221,401 231,206 7,577 VSC - Aluguer de Veículos Sem Condutor, Lda. 162,884 164,881 24,641 (2,244)
Dec 2009 Millenniumbcp Fortis Grupo Segurador, S.G.P.S., S.A. 13,314,725 12,025,714 1,381,222 96,786 SIBS - Sociedade Interbancária de Serviços, S.A. 131,568 65,603 140,082 12,702 Unicre - Cartão Internacional de Crédito, S.A. 298,563 226,153 245,068 15,153 VSC - Aluguer de Veículos Sem Condutor, Lda. 173,996 173,749 54,684 (6,400)
(*) - estimated values.
The Group limits the exposure in investments in foreign subsidiares, through funding of the net investment in foreign operations with loans/deposits in the same currencies, to mitigate the risk of currency exchange rate. The information on net investments, held by the Group, in foreign institutions and the funding used to hedge these investments, are as follows: Net Hedging Net Hedging Investment instruments Investment instruments Company Currency Currency '000 Currency '000 Euros '000 Euros '000
Banque Privée BCP (Suisse) S.A. CHF 123,497 119,833 92,974 90,215 Millennium bcp Bank & Trust USD 340,000 340,000 277,076 277,076 BCP Finance Bank Ltd USD 561,000 561,000 457,175 457,175 BCP Finance Company, Ltd USD 1 1 1 1 Millennium bcpbank, National Association USD 70,774 70,774 57,676 57,676 BII Finance Company Limited USD 25 25 20 20 Bank Millennium S.A. PLN 1,691,433 1,691,433 407,869 407,869
The information on the gains and losses in exchange rates on the loans to cover the investments in foreign institutions, accounted for as exchange differences, is presented in the statement of changes in equity.
Regarding the investment held in Bank Millennium S.A., the Group decided to apply a partial hedge in the amount of PLN 1,691,433,000. The total net investment amounts to PLN 3,349,311,000.
The ineffectiveness generated in the hedging operations is recognized in the statement of income, as refered in accounting policy 1 e).
164 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
26. Non current assets and liabilities held for sale
This balance is analysed as follows:
Jun 2010 Dec 2009 Euros '000 Euros '000
Discontinued operations (Millennium Bank, Anonim Sirketi - Turkey) and Millennium bcpbank, national association - USA) 1,090,658 495,151 Subsidiaries acquired exclusively with the purpose of short-term sale 14,473 14,473 Investments arising from recovered loans 1,011,089 1,019,356
2,116,220 1,528,980 Impairment (193,443) (185,817)
1,922,777 1,343,163
The assets included in this balance are accounted for in accordance with the accounting policy note 1 k).
The balance Discontinued operations corresponds to the Turkish and United States of America (USA) subsidiaries of the Group that in accordance with the current negotiations and the expectation of the Executive Board of Directors will be sold in less than 1 year.
In accordance with IFRS 5, the subsidiary referred in previous paragraphs, is accounted for under the following criteria:
- The total of assets and liabilities attributed to the Group, will be presented in two separated lines in the balance sheet, and the total expenses and income for the year, attributed to the Group, will be represented separately line by line in the consolidated income statement; - Until the date of sale, the Group continues to consolidate in reserves and income, any changes occurred in the net assets of the subsidiary.
The financial information concerning the subsidiary classified as Non current assets held for sale, is analysed as follows:
Jun 2010 Dec 2009 Millennium Bank Millennium bcpbank Millennium Bank Anonim Sirketi national association Total Anonim Sirketi Euros '000 Euros '000 Euros '000 Euros '000 Assets Loans and advances to credit institutions 45,222 429 45,651 83,010 Loans and advances to customers 355,769 418,587 774,356 336,665 Other assets 108,871 161,780 270,651 75,476 509,862 580,796 1,090,658 495,151 Liabilities Deposits from credit institutions 69,782 8,516 78,298 97,772 Deposits from customers 355,250 510,011 865,261 315,263 Other liabilities 20,888 4,593 25,481 22,797 445,920 523,120 969,040 435,832 Equity Share capital, reserves and retained earnings 65,801 60,218 126,019 66,490 Profit (1,859) (2,542) (4,401) (7,171) 63,942 57,676 121,618 59,319 509,862 580,796 1,090,658 495,151
165 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
The financial information of income statement concerning the subsidiary, is analysed as follows:
Jun 2010 Dec 2009 Millennium Bank Millennium bcpbank Millennium Bank Anonim Sirketi national association Total Anonim Sirketi Euros '000 Euros '000 Euros '000 Euros '000
Net interest income 4,845 8,629 13,474 1,028 Net fees and commissions income 1,280 2,417 3,697 3,721 Net gains on trading 878 143 1,021 8,966 Other operating income 290 107 397 (79)
Total operating income 7,293 11,296 18,589 13,636
Staff costs 6,080 6,637 12,717 12,250 Other administrative costs 3,948 4,018 7,966 8,228 Depreciation 707 1,052 1,759 1,088
Total operating expenses 10,735 11,707 22,442 21,566
Other results 497 11 508 -
Loans and other assets impairment and other provisions 544 (2,134) (1,590) (475)
Operating loss (2,401) (2,534) (4,935) (8,405) Income tax 542 (8) 534 1,234 Loss for the period (1,859) (2,542) (4,401) (7,171)
The balance Subsidiaries acquired exclusively with the view of short-term sale corresponds to a real estate company acquired by the Group within the restructuring of a loan exposure, that the Group intends to sell in less than 1 year. Until the date of sale, the Group continues to consolidate in reserves and income, any changes occurred in the net assets of the subsidiary.
The balance Investments arising from recovered loans includes buildings and other assets resulting from the foreclosure of contracts of loans to customers, originated by (i) delivery of the assets, with option to repurchase or leasing, accounted with the celebration of the contract or the promise to delivery the asset and the respective irrevocable power of attorney issued by the customer in the name of the Bank; or (ii) the adjudication of the assets as a result of a judicial process of guarantees execution, accounted with the title of adjudication or following the adjudication request after the record of the first pawn (payment prosolvency).
These assets are available for sale in a period less than 1 year and the Group as a strategy for its sale.
This balance includes buildings and other assets for which the Group has already established contracts for the sale in the amount of Euros 136,104,000 (31 December 2009: Euros 138,847,000).
The movements of impairment for non current assets held for sale are analysed as follows:
Jun 2010 Jun 2009 Euros '000 Euros '000
Balance on 1 January 185,817 144,863 Transfers 82 - Impairment for the period 27,263 41,399 Write-back for the period - (16) Loans charged-off (19,719) (7,613)
Balance on 30 June 193,443 178,633
27. Investment property
The balance Investment property includes the amount of Euros 410,917,000 (31 December 2009: 422,691,000) related to buildings accounted in the "Fundo de Investimento Imobiliário Imosotto Acumulação", "Fundo de Investimento Imobiliário Gestão Imobiliária" and "Fundo de Investimento Imobiliário Imorenda", which in accordance with SIC 12, are consolidated under the full consolidation method as referred in the accounting policy presented in note 1 b).
The buildings are valuated in accordance with the accounting policy presented in note 1 r).
166 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
28. Property and equipment
This balance is analysed as follows: Jun 2010 Dec 2009 Euros '000 Euros '000
Land and buildings 949,776 958,453 Equipment Furniture 96,599 97,412 Machines 55,294 57,711 Computer equipment 306,600 305,874 Interior installations 142,508 141,144 Motor vehicles 20,282 20,552 Security equipment 78,152 76,844 Work in progress 64,604 55,039 Other tangible assets 49,688 46,302
1,763,503 1,759,331 Accumulated depreciation Charge for the period (43,349) (90,510) Accumulated charge for the previous periods (1,090,265) (1,018,804) (1,133,614) (1,109,314)
Impairment (4,199) (4,199) 625,690 645,818
29. Goodwill and intangible assets
This balance is analysed as follows: Jun 2010 Dec 2009 Euros '000 Euros '000 Intangible assets Software 115,804 136,752 Other intangible assets 55,679 57,603
171,483 194,355 Accumulated depreciation Charge for the period (8,203) (14,226) Accumulated charge for the previous periods (135,503) (146,893)
(143,706) (161,119)
27,777 33,236
Goodwill Millennium Bank, Societé Anonyme (Greece) 294,260 294,260 Bank Millennium, S.A. (Poland) 164,040 164,040 Banco de Investimento Imobiliário, S.A. 40,859 40,859 Unicre - Cartão de Crédito Internacional, S.A. 7,446 - Others 2,586 2,600
509,191 501,759 Impairment Millennium Bank, Societé Anonyme (Greece) (73,565) -
435,626 501,759
463,403 534,995
167 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
According to the accounting policy 1 b), the recoverable amount of the Goodwill is annually evaluated during the second semester of each year, regardless the existence of impairment signs or, in accordance with the paragraph 9 of the IAS 36, always if exists indicators that the asset has impairment.
In accordance with IAS 36 the recoverable amount of goodwill should be the greater between its value on use (the present value of the future cash flows expected from its use) and its fair value less costs to sell. Based on this criteria the Group during the second semester of 2009 made valuations to their investments for which there is goodwill recorded (Bank Millennium, S.A. (Poland); Millennium Bank, S.A. (Greece); Banco de Investimento Imobiliário, S.A.) which considered among other factors:
(i) an estimate of future cash flows generated by each entity; (ii) an expectation of potential changes in the amounts and timing of cash flows; (iii) the time value of money; (iv) a risk premium associated with the uncertainty by holding the asset; and (v) other factors associated with the current situation of financial markets.
The valuations were based on reasonable assumptions and sustainable representing the best estimate of the Executive Board of Directors on the economic conditions that affect each entity, the budgets and the latest projections approved by the Executive Board of Directors for those entities and their extrapolation to future periods.
The assumptions made for these assessments may change with the change in economic conditions and market.
On this basis, and considering the current economic situation in Greece, that started in the end of 2009 and has been worsening in 2010, a set of circumstances identified by Executive Board of Directors resulted in the start of a in depth review of the assumptions that support the Business Plan of Bank Millennium (Greece). The review is being performed and will incorporate not only the impacts that result from the current economic conditions in Greece but also the impact, if any, of the measures implemented with the support of EU and FMI and that may have an impact on the projections for the operation in Greece.
Notwithstanding the reassessment of the Business Plan that will be concluded during the second semester of 2010, Executive Board of Directors concluded for the need to reflect in the consolidated financial statements of the first semester of 2010, a prudent approach on the expected results of the reassessment.
For this reason, as at 30 June 2010, impairment was recognized in the Goodwill associated to Bank Millennium (Greece) in the amount of Euros 73,565,000.
For the other entities the Group estimates that are not expected significant changes in these assumptions which could lead to the recoverable amount to be reduced to a level below the book value, as therefore it will realise tests on the second semester of 2010, as referred on the accounting policy.
30. Deferred income tax assets and liabilities
Deferred income tax assets and liabilities as at 30 June 2010 and 31 December 2009 generated by temporary differences are analysed as follows:
Jun 2010 Dec 2009 Assets Liabilities Assets Liabilities Euros '000 Euros '000 Euros '000 Euros '000
Intangible assets 338 116 288 116 Other tangible assets 2,236 5,852 1,950 7,404 Impairment losses 199,947 22,441 190,358 15,372 Pensions 283,297 - 296,152 - Financial assets available for sale 405 49,469 235 4,348 Derivatives - 3,927 - 4,002 Allocation of profits 66,967 - 44,556 - Others 115,373 129,758 60,118 110,000 Tax losses carried forward 148,886 - 131,835 -
817,449 211,563 725,492 141,242
Deferred tax assets 605,886 584,250
Available for sale assets - 3,675 - - Others - 432 - 416
Deferred tax liabilities 4,107 416
Net deferred tax 601,779 583,834
168 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
Deferred tax related to the losses carried forward are recognised only if the existence of future taxable profits is probable. The uncertainty of the recoverability of the tax losses carried forward is considered in the deferred tax assets calculation.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when deferred taxes are related to the same tax.
As referred in the accounting policy note 1 x), the compensation is performed at each subsidiary, and therefore the consolidated financial statements reflect in its assets the sum of the deferred tax of subsidiaries that have deferred tax assets and in its liabilities the sum of the deferred tax of subsidiaries that have deferred tax liabilities.
The net deferred tax asset movement is analysed as follows:
Jun 2010 Jun 2009 Euros '000 Euros '000
Balance on 1 January 583,834 586,616 Transfers - (6,625) Charged to profit 6,761 10,904 Charged to equity 3,416 (2,066) Exchange rate differences 7,768 (2,404)
Balance on 30 June 601,779 586,425
The variation in the net deferred tax does not correspond to the deferred tax expense for the period considering that there are a number of situations where changes in deferred tax are charged directly to shareholders' equity, namely: (i) potential gains and losses resulted form the re-valuation of financial assets available for sale (ii) deferred tax assets and liabilities of currency translations on foreign subsidiaries and (iii) acquisition and disposal of subsidiaries.
As at 30 June 2010, the amount of unrecognised temporary differences refers mainly to tax losses carried forward in the amount of Euros 185,762,000 (31 December 2009: Euros 150,196,000) in foreign operations. The referred amounts were not recognised considering the degree of uncertainty and remaining period for recovery. Except for the tax losses carried forward, the remaining temporary differences do not have a maturity date.
The maturity date of recognised tax losses carried forward is presented as follows: Jun 2010 Dec 2009 Maturity date Euros '000 Euros '000
2010 - 1,838 2011 22,777 23,368 2012 - 1,578 2013 3,922 14,873 2014 81,326 77,520 2015 and following years 40,859 23,393
148,884 142,570
169 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
31. Other assets
This balance is analysed as follows: Jun 2010 Dec 2009 Euros '000 Euros '000
Debtors 163,248 171,480 Amounts due for collection 22,665 27,413 Recoverable tax 80,868 77,596 Recoverable government subsidies on interest on mortgage loans 25,767 27,231 Associated companies 3,556 18,322 Other amounts receivable 46,386 33,101 Prepayments and deferred costs 1,634,967 1,660,532 Amounts receivable on trading activity 66,910 159,165 Amounts due from customers 145,440 163,141 Sundry assets 281,712 336,506
2,471,519 2,674,487 Impairment for other assets (32,607) (26,710)
2,438,912 2,647,777
As at 30 June 2010 the balance Prepayments and deferred costs includes the amount of Euros 540,408,000 (31 December 2009: Euros 552,575,000) referring to the corridor and an amount of Euros 1,314,588,000 (31 December 2009: Euros 961,070,000) related to actuarial losses, in accordance with the accounting policy presented in note 1 w).
The deferred costs of the Group related to pensions, included in Prepayments and deferred costs are, analysed as follows:
Jun 2010 Dec 2009 Euros '000 Euros '000
Projected benefit obligations Obligations covered by the Pension Fund (5,029,665) (5,034,533) Other benefits not covered by the Pension Fund (374,531) (375,349) Value of the Pension Fund 5,153,675 5,530,471 (250,521) 120,589 Actuarial losses Corridor 540,408 552,575 Amount in excess of the corridor 1,314,588 961,070 1,854,996 1,513,645
1,604,475 1,634,234
The obligations related with other benefits not covered by the Pension Fund are fully provided for as described in note 48.
The movement of impairment for other assets is analysed as follows: Jun 2010 Jun 2009 Euros '000 Euros '000
Balance on 1 January 26,710 26,270 Transfers 12,872 371 Impairment for the period 1,071 761 Write back for the period (7,941) (320) Exchange rate differences (105) (331)
Balance on 30 June 32,607 26,751
170 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
32. Deposits from other credit institutions
This balance is analysed as follows:
Jun 2010 Dec 2009 Euros '000 Euros '000
Credit institutions in Portugal 655,763 1,261,417 Credit institutions abroad 4,539,153 5,635,224
5,194,916 6,896,641
Concerning derivative financial transactions with institutional counterparties, and according to the signed agreements, the Group has, as of 30 June 2010, the amount of Euros 484,395,000 (31 December 2009: Euros 475,990,000) of Deposits from other credit institutions received as collateral of the mentioned transactions.
33. Deposits from customers
This balance is analysed as follows:
Jun 2010 Dec 2009 Euros '000 Euros '000
Deposits from customers: Repayable on demand 14,540,556 14,577,945 Term deposits 27,264,117 28,210,357 Saving accounts 1,862,856 2,942,325 Treasury bills and other assets sold under repurchase agreement 54,808 241,002 Others 350,107 335,604
44,072,444 46,307,233
Pursuant to the law, the Deposit Guarantee Fund was established to guarantee the reimbursement of funds deposited in Credit Institutions. The criteria to calculate the annual contributions to the referred fund are defined in the Regulation n. 11/94 of the Bank of Portugal.
34. Debt securities issued
This balance is analysed as follows:
Jun 2010 Dec 2009 Euros '000 Euros '000
Bonds 16,831,522 17,502,050 Commercial paper 2,658,436 2,376,154 Others 83,766 75,023
19,573,724 19,953,227
171 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
35. Financial liabilities held for trading
The balance is analysed as follows:
Jun 2010 Dec 2009 Euros '000 Euros '000
Short selling securities - 4,741 FRA 859 68 Swaps 1,366,536 953,083 Futures 1,948 3,423 Options 69,990 76,347 Embedded derivatives 7,111 15,439 Forwards 48,790 19,223 1,495,234 1,072,324
of which: Level 1 1,948 8,638 Level 2 1,493,286 1,063,686 Level 3 - -
As referred in IFRS 7, financial liabilities held for trading are classified in accordance with the following fair value measurement level:
- Level 1: financial instruments measured in accordance with quoted market prices or providers. - Level 2: financial instruments measured in accordance with internal valuation techniques based on observable market inputs. - Level 3: financial instruments measured in accordance with valuation techiques based on inputs not based on observable data that have significant impact in the instruments valuation.
The balance Financial liabilities held for trading includes, the embedded derivatives valuation separated from the host contract in accordance with the accounting policy presented in note 1 d), in the amount of Euros 7,111,000 (31 December 2009: Euros 15,439,000). This note should be analysed with note 22.
36. Other financial liabilities at fair value through profit or loss
The balance is analysed as follows:
Jun 2010 Dec 2009 Euros '000 Euros '000
Deposits from credit institutions 566,295 1,281,460 Deposits from customers 10,370 12,005 Bonds 4,058,292 5,000,180 Commercial paper and other liabilities 52,858 51,938
4,687,815 6,345,583
Other financial liabilities at fair value through profit or loss are measured in accordance with internal valuation techniques considering mainly observable market inputs. In accordance with the hierarchy of the valuation sources, as referred in IFRS 7, these instruments are classified in level 2.
The balance Other financial liabilities at fair value through profit or loss account includes an positive amount of Euros 179,173,000 (31 December 2009: negative amount of Euros 106,089,000) related to the fair value changes resulting from variations in the credit risk (spread) of the Group BCP, as referred in the accounting policy presented in note 1 d).
172 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
37. Provisions for liabilities and charges
This balance is analysed as follows:
Jun 2010 Dec 2009 Euros '000 Euros '000
Provision for guarantees and other commitments 88,078 88,257 Technical provision for the insurance activity: For direct insurance and reinsurance accepted: Unearned premium / reserve 9,472 7,958 Life insurance 41,474 38,654 Bonuses and rebates 1,596 1,824 Other technical provisions 7,381 6,995 Provision for pension costs 3,372 3,067 Other provisions for liabilities and charges 103,232 86,365
254,605 233,120
Changes in Provision for guarantees and other commitments are analysed as follows:
Jun 2010 Jun 2009 Euros '000 Euros '000
Balance on 1 January 88,257 77,729 Transfers (132) 47 Charge for the period 6,967 10,682 Write-back for the period (7,064) (6,744) Amounts charged-off (133) - Exchange rate differences 183 (499)
Balance on 30 June 88,078 81,215
Changes in Other provisions for liabilities and charges are analysed as follows:
Jun 2010 Jun 2009 Euros '000 Euros '000
Balance on 1 January 86,365 89,007 Transfers (84) (2,891) Charge for the period 20,316 14,793 Write-back for the period (283) (48) Amounts charged-off (2,362) (11,298) Exchange rate differences (720) (358)
Balance on 30 June 103,232 89,205
The provisions were accounted in accordance with the probability of occurrence of certain contingencies related with the Group's inherent risks, which is revised in each reporting date in order to reflect the best estimate of the amount and probability of payment.
38. Subordinated debt
This balance is analysed as follows: Jun 2010 Dec 2009 Euros '000 Euros '000
Bonds 1,986,064 2,229,266 Other subordinated debt 2,385 2,448
1,988,449 2,231,714
173 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
As at 30 June 2010, the characteristics of subordinated debt issued are analysed as follows:
Issue Maturity Nominal value Book value Issue date date Interest rate Euros '000 Euros '000
Non Perpetual Bonds Banco Comercial Português: BCP March 2011 June 2001 March 2011 Fixed rate of 6.35% 149,300 151,072 BCP September 2011 September 2001 September 2011 Fixed rate of 6.15% 119,987 123,252 Mbcp Ob Cx Sub 1 Serie 2008-2018 September 2008 September 2018 See reference (i) 276,429 276,429 Mbcp Ob Cx Sub 2 Serie 2008-2018 October 2008 October 2018 See reference (i) 76,377 76,377 Bcp Ob Sub June 2020 - Emtn 727 June 2010 June 2020 See reference (ii) 94,101 93,810 Bank Millennium: Bank Millennium December 2001 December 2011 Fixed rate of 6.360% 80,017 80,017 Bank Millennium 2007 December 2007 December 2017 Fixed rate of 6.337% 149,917 149,917 Banco de Investimento Imobiliário: BII 2004 December 2004 December 2014 See reference (iii) 14,980 14,980
BCP Finance Bank: EMTN 44 Issue - 1 Tranche March 2001 March 2011 Fixed rate of 6.25% 399,327 407,655 EMTN 44 Issue - 2 Tranche May 2001 March 2011 Fixed rate of 6.25% 199,663 203,828 BCP Fin. Bank Ltd EMTN -295 December 2006 December 2016 See reference (iv) 313,638 313,700 1,891,037 Perpetual Bonds BCP - Euro 200 millions June 2002 - See reference (v) 85 29 BPA 1997 June 1997 - Euribor 3 months + 0.95% 39,915 39,915 TOPS's BPSM 1997 December 1997 - Euribor 6 months + 0.4% 30,034 30,896 BCP Leasing 2001 December 2001 - See reference (vi) 4,986 4,986
75,826 Other subordinated debt BIM December 2000 - 50% Discount rate of B.Mozambique 2,200 2,382
Accruals 19,204
1,988,449
References : (i) - 1st year 6%; 2nd to 5th year Euribor 6 months + 1%; and following 6th year Euribor 6 months + 1.4% (ii) - Until the 5th year fixed rate of 3.25%; 6th year and following years Euribor 6 months + 1.0% (iii) - Until 10th cupon Euribor 6 months + 0.4%; After 10th coupon Euribor 6 months + 0.9% (iv) - Euribor 3 months + 0.3% (0.8% after December 2011) (v) - Until 40th coupon 6.130625%; After 40th coupon Euribor 3 months + 2.4% (vi) - Until 40th coupon Euribor 3 months + 1.75%; After 40th coupon Euribor 3 months + 2.25%
39. Other liabilities
This balance is analysed as follows: Jun 2010 Dec 2009 Euros '000 Euros '000 Creditors: Suppliers 38,987 72,731 From factoring operations 16,425 22,501 Associated companies 269 13,064 Other creditors 677,528 629,605 Public sector 64,460 62,306 Other amounts payable 61,914 63,997 Deferred income 1,736 2,086 Holiday pay and subsidies 67,488 69,264 Other administrative costs payable 1,209 1,188 Amounts payable on trading activity 74,319 156,659 Other liabilities 466,749 264,809
1,471,084 1,358,210
174 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
The balance Other creditors includes the amount of Euros 40,996,000 (31 December 2009: Euros 40,996,000), related to the obligations with retirement benefits already recognised in Staff costs, payable to previous members of the Board of Directors. The referred obligations are not covered by the Pension Fund of the Group, and therefore correspond to amounts payable by the Group.
The movements of the obligations with retirement benefits to pay to previous members of the Executive Board of Directors are presented in note 48.
The balance Other creditors includes, as at 30 June 2010, the amount of Euros 9,400,000 (31 December 2009: Euros 6,000,000) related with the costs with the Complementary plan, as described in notes 9 and 48.
40. Share capital, preference shares and other capital instruments
The share capital of the Bank, amounts to Euros 4,694,600,000 and is represented by 4,694,600,000 shares with a nominal value of 1 Euro each, which is fully paid.
The balance Preference shares corresponds to two issues by BCP Finance Company which according to IAS 32 and, in accordance with the accounting policy presented in note 1 h), were considered equity instruments. The issues are analized as follows:
- 5,000,000 Perpetual Non-cumulative Guaranteed Non-voting Preference Shares with par value Euros 100 each, issued on 9 June, 2004, amounting to Euros 500,000,000, issued to redeem the 8,000,000 Non-cumulative Guaranteed Non-voting Preference Shares of par value Euros 50 each, issued by BCP Finance Company on 14 June, 1999, amounting to Euros 400,000,000.
- 10,000 preference shares with par value of Euros 50,000 each without voting rights issued in 13 October 2005, in the amount of Euros 500,000,000, issued to finance the early redemption of the 6,000,000 preference shares of Euros 100 each, in the amount of Euros 600,000,000, issued by BCP Finance Company at 28 September 2000.
During 2009, Banco Comercial Português, S.A. issued 3 tranches of its perpetual subordinated debt securities which based on its characteristics are classified, in accordance with accounting policy presented in note 1 h), as capital instruments under IAS 32. The tranches 3 issued in 2009 are analysed as follows:
- In June 2009, the Bank has issued Euros 300,000,000 of perpetual subordinated debt securities with conditional coupons presenting a nominal value of Euros 1,000.
- In August 2009, the Bank has issued Euros 600,000,000 of perpetual subordinated debt securities with conditional coupons presenting a nominal value of Euros 1,000.
- In December 2009, the Bank has issued Euros 100,000,000 of perpetual subordinated debt securities with conditional coupons presenting a nominal value of Euros 1,000.
41. Legal reserve
Under Portuguese legislation, the Bank is required to set-up annually a legal reserve equal to a minimum of 10 percent of annual profits until the reserve equals the share capital. Such reserve is not normally distributable in cash. In accordance with the proposal for application of the results approved in the General Shareholders meeting held on 12 April, 2010, the Bank increased the Legal reserves in the amount of Euros 20,632,000. As referred in note 42, and in accordance with the proposed for application of results of 2009, part of this amount was transferred to the balance Other reserves and retained earnings.
In accordance with current legislation, the Group companies must set-up annually a reserve with a minimum percentage between 5 and 20 percent of their net annual profits depending on the nature of their economic activity.
175 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
42. Fair value reserves, other reserves and retained earnings
This balance is analysed as follows: Jun 2010 Dec 2009 Euros '000 Euros '000
Other comprehensive income Exchange differences arising on consolidation (97,764) (96,478) Fair value reserves Financial assets available for sale 51,890 101,329 Cash-flow hedge (932) (160) Tax Financial assets available for sale (4,170) (7,439) Cash-flow hedge 177 30
(50,799) (2,718)
Other reserves and retained earnings: Legal reserve 446,042 425,410 Statutory reserve 20,000 10,000 Other reserves and retained earnings 2,514,999 2,463,481 Goodwill arising on consolidation (2,883,580) (2,883,580) Other reserves arising on consolidation (164,825) (162,488)
(67,364) (147,177)
The legal reserve changes are analysed in note 41. The Fair value reserves correspond to the accumulated fair value changes of the financial assets available for sale and cash flow hedge, in accordance with the accounting policy presented in note 1 d).
The balance Statutory reserves correspond to a reserve to stabilise dividends that, according with the bank’s by-laws can be distributed.
The balance Reserves and Retained Earnings includes, as at 1 January 2006, a restatement in the amount of Euros 220,500,000 (net of deferred tax) resulting from the decision taken by the Executive Board of Directors regarding an asset booked on the consolidated financial statements.
The balance Other comprehensive income includes profit and loss that in accordance with IAS/IFRS are recognised in equity.
The movements in Fair value reserves for financial assets available for sale, during the first semester of 2010 are analysed as follows:
Balance on Impairment in Balance on 1 January Revaluation profit and loss Sales 31 December Euros '000 Euros '000 Euros '000 Euros '000 Euros '000
Eureko, B.V. 61,113 16,838 - - 77,951 Other investments 40,216 (54,556) 8,934 (20,655) (26,061)
101,329 (37,718) 8,934 (20,655) 51,890
As referred in note 22 the position held in Eureko B.V. is re-valuated on an annual basis considering independent and external valuations obtained in the first quarter of each year.
The balance Other investments includes a negative amount of Euros 36,179,000 (31 December 2009: positive amount of Euros 5,998,000) in relation to the share of 49% on the fair value reserves of Millenniumbcp Fortis.
As referred in note 7, the balance Impairment in profit and loss corresponds to the impairment of shares and investment funds units held by the Group.
The gross movements in Fair value reserves for financial instruments available for sale, during second semester of 2009 are analysed as follows:
Balance on Impairment in Balance on 1 January Revaluation results Sales 31 December Euros '000 Euros '000 Euros '000 Euros '000 Euros '000
Eureko, B.V. 61,113 - - - 61,113 Other investments (45,371) 92,864 23,160 (30,437) 40,216
15,742 92,864 23,160 (30,437) 101,329
176 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
The movements in Fair value reserves for financial assets available for sale, during the first semester of 2009 are analysed as follows:
Balance on Impairment in Balance on 1 January Revaluation results Sales 31 December Euros '000 Euros '000 Euros '000 Euros '000 Euros '000
Eureko, B.V. 256,715 (195,602) - - 61,113 Other investments (55,080) 19,301 6,034 (15,626) (45,371)
201,635 (176,301) 6,034 (15,626) 15,742
43. Treasury stock
This balance is analysed as follows: Banco Comercial Other Português, S.A. treasury shares stock Total Jun 2010 Net book value (Euros '000) 18,653 70,068 88,721 Number of securities 29,155,904 (*) Average book value (Euros) 0.64 Dec 2009 Net book value (Euros '000) 19,115 66,433 85,548 Number of securities 22,950,021 (*) Average book value (Euros) 0.83
Treasury stock refers to own securities held by the companies included in the consolidation perimeter. These securities are held within the limits established by the bank's statutory laws and by "Código das Sociedades Comerciais".
(*) As at 30 June 2010, this balance includes 23,376,155 shares (31 December 2009: 10,366,667 shares) owned by clients which were financed by the Bank. Considering the fact that for these clients there is evidence of impairment, under the IAS 32/39 the shares of the Bank owned by these clients were, only for accounting purposes and in respect for this standard, considered as treasury stock.
44. Minority interests
This balance is analysed as follows: Balance Income Statement Jun 2010 Dec 2009 Jun 2010 Jun 2009 Euros '000 Euros '000 Euros '000 Euros '000
Bank Millennium, S.A. 330,189 234,198 12,631 1,601 BIM - Banco Internacional de Moçambique 60,887 55,516 10,213 9,329 Banco Millennium Angola, S.A. 63,113 52,090 4,610 2,469 Other subsidiaries 2,360 2,501 (120) (572)
456,549 344,305 27,334 12,827
177 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
The movements of the minority interests are analysed as follows: Jun 2010 Jun 2009 Euros '000 Euros '000
Balance on 1 January 344,305 287,744
Exchange differences 3,054 (27,458) Sale of 49.9% of Banco Millennium Angola - 62,225 Capital increase of Bank Millennium 87,814 - Dividends (3,299) (3,849) Other (2,659) 250
84,910 31,168 Net income attributable to minority interests 27,334 12,827
456,549 331,739
45. Guarantees and future commitments
This balance is analysed as follows: Jun 2010 Dec 2009 Euros '000 Euros '000
Guarantees granted 9,034,056 8,519,462 Guarantees received 33,225,656 32,432,228 Commitments to third parties 15,049,132 14,045,340 Commitments from third parties 14,423,227 14,410,522 Securities and other items held for safekeeping on behalf of customers 164,835,233 163,465,691 Securities and other items held under custody by the Securities Depository Authority 162,627,105 151,596,727 Other off balance sheet accounts 168,611,948 161,721,899
The amounts of Guarantees granted and Commitments to third parties are analysed as follows:
Jun 2010 Dec 2009 Euros '000 Euros '000 Guarantees granted: Guarantees 8,229,397 7,760,959 "Stand-by" letter of credit 278,871 212,438 Open documentary credits 432,243 441,369 Bails and indemnities 93,246 104,217 Other liabilities 299 479
9,034,056 8,519,462 Commitments to third parties Irrevocable commitments Term deposits contracts 2,493,284 558,977 Irrevocable credit lines 3,321,792 3,477,010 Securites subscription 84,263 51,218 Other irrevocable commitments 291,416 277,743 Revocable commitments Revocable credit lines 6,944,243 7,283,037 Bank overdraft facilities 1,887,756 2,366,468 Other revocable commitments 26,378 30,887 15,049,132 14,045,340
178 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
Within its normal business, the Group offers certain financial products that traditionally include credit related instruments accounted in off-balance sheet accounts.
The guarantees granted by the Group may or may not be related with loan transactions, where the Group grants a guarantee in connection with a loan granted to a client by a third entity. According with its specific characteristics it is expected that some of these guarantees expire without being executed and therefore these transactions do not necessarily represent a cash-outflow.
Stand-by letters and open documentary credits aim to ensure the payment to third parties from commercial deals with foreign entities and therefore financing the shipment of the goods. Therefore the credit risk of these transactions is limited once they are collateralized by the shipped goods and are generally short term operations.
Irrevocable commitments are non-used parts of credit facilities granted to corporate or retail customers. Many of these transactions have a fixed term and a variable interest rate and therefore the credit and interest rate risk is limited.
The financial instruments accounted as Guarantees and other commitments are subject to the same approval and control procedures applied to the credit portfolio, namely regarding the analysis of objective evidence of impairment, as described in note 1 c). The maximum credit exposure is represented by the nominal value that could be lost related to guarantees and commitments undertaken by the Group in the event of default by the respective counterparties, without considering potential recoveries or collaterals.
Considering their nature, as described above, no material losses are anticipated as a result of these transactions.
46. Relevant events occured during 2010
Agreement to sell 95% of Millennium Bank AS in Turkey
On 10 February 2010, an agreement was signed with the financial institution Credit Europe Bank, N.V., a wholly owned subsidiary of Fiba, Holding, A.S., in order to sell 95% of Millennium Bank AS in Turkey, by Banco Comercial Português Group, for a total price of approximately Euros 61.8 million subject to a final adjustment as soon as the transaction is completed. Banco Comercial Português will retain a 5% stake in the company, having agreed with the buyer a put and call mechanism to sell the remaining stake for a price per share no lower than the price agreed for the majority stake. This transaction, which is subject to regulatory approval from the supervisory authorities, will generate a capital gain, pre-tax, of approximately Euros 5.4 million and have a positive impact of 6 basis points on Banco Comercial Português' Tier I capital ratio.
Agreement to sell all the branches of Millennium bcpbank in the United States of America (USA)
On 30 March 2010, Banco Comercial Português informed that it had decided to change its presence in the U.S. market. Pursuant to this objective, BCP has signed a purchase and assumption agreement with Investors Savings Bank to sell all the branches of Millennium bcpbank in the United States of America (USA) and deposits of approximately USD 600 million. Following the purchase and assumption agreement, the parties intend to enter into a Loan Purchase agreement under which Investors Saving Bank will purchase a portion of Millennium bcpbank 's loan portfolio. BCP has also established a cooperation agreement with the buyer for financial remittances from the USA. As a result of this transaction, BCP will no longer develop new retail commercial activities in the USA. This transaction, which has received approval from the Board of Directors of both companies, and is subject to regulatory approval, is expected to be closed during the quarter ending September 2010 and will have no material impact on BCP's capital ratios.
Approval of 2009 results
In the General Shareholders Meeting held on 12 April 2010 was approved the following proposal for the results distribution:
a) Euros 20,632,635 for reinforcement of legal reserves; b) Euros 10,000,000 for reinforcement of reserve for stability of dividends; c) Euros 89,197,400 for distribution of dividends; d) Euros 86,496,315 for retained earnings.
Its was also approved the following application of the results:
a) To each share corresponds a dividend of 0.019 Euros; b) Not to be paid, and to be registered as retained earnings, the amount corresponding to the shares that in the first day of the period of payment of dividends, are owned by the Bank.
Share Capital increase of Bank Millennium (Poland) from PLN 849,181,744 to PLN 1,213,116,777
On February 2010 Bank Millennium (Poland) finalised the share capital increase, which corresponded to the issue of 363,935,033 ordinary shares with a nominal amount of 1 Zloty each. Following the share capital increase, Bank Millennium share capital amounts to PLN 1,213,116,777.
179 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
47. Fair value
Fair value is based on market prices, whenever these are available. If market prices are not available, as occurs regarding many products sold to clients, fair value is estimated through internal models based on cash-flow discounting techniques. Cash-flows for the different instruments sold are calculated according with its financial characteristics and the discount rates used include both the interest rate curve and the current conditions of the pricing policy in the Group.
Therefore, the fair value obtained is influenced by the parameters used in the evaluation model that, have some degree of judgement and reflect exclusively the value attributed to different financial instruments. However it does not consider prospective factors, like the future business evolution. Therefore the values presented cannot be understood as an estimate of the economic value of the Group.
The main methods and assumptions used in estimating the fair value for the financial assets and financial liabilities of the Group are presented as follows:
Cash and deposits at central banks, Loans and advances to credit institutions repayable on demand and Amounts owed to other credit institutions
Considering the short term of these financial instruments, the amount in the balance sheet is a reasonable estimate of its fair value.
Other loans and advances to credit institutions, Amounts owed to other credit institutions from Inter-bank Money Market transactions and Assets with repurchase agreements
The fair value of these financial instruments is calculated discounting the expected principal and interest future cash flows for these instruments, considering that the payments of the instalments occur in the contractually defined dates.
The discount rate used reflects the current conditions applied by the Group on identical instruments for each of the different residual maturities. The discount rate includes the market rates for the residual maturity date (rates from the monetary market or from the interest rate swap market, at the end of the year). As at 30 June 2010, the average discount rate was 4.81% for loans and advances and 1.53% for the deposits. As at 31 December 2009 the rates were 3.42% and 1.43%, respectively.
Financial assets held for trading (except derivatives), Financial liabilities held for trading (except derivatives), Financial assets available for sale and Other financial liabilities held for trading at fair value through profit or loss
These financial instruments are accounted at fair value. Fair value is based on market prices, whenever these are available. If market prices are not available, fair value is estimated through numerical models based on cash-flow discounting techniques, using the interest rate curve adjusted for factors associated, predominantly the credit risk and liquidity risk, determined in accordance with the market conditions and time frame.
Market interest rates are determined based on information released by the suppliers of financial content - Reuters and Bloomberg - more specifically as a result of prices of interest rate swaps. The values for the very short-term rates are obtained from similar sources but regarding interbank money market. The interest rate curve obtained is calibrated with the values of interest rate short-term futures. Interest rates for specific periods of the cash flows are determined by appropriate interpolation methods. The same interest rate curves are used in the projection of the non-deterministic cash flows such as indexes.
When optionality is involved, the standard templates (Black-Scholes, Black, Ho and others) are used considering the volatility areas applicable. Whenever there are no references in the market of sufficient quality or that the available models do not fully apply to meet the characteristics of the financial instrument, specific quotations supplied by an external entity are applied, typically a counterparty of the business.
In case of shares not listed, they are recognised at historical cost when there is no available market value and it is not possible to reliably determine its fair value.
Financial assets held to maturity
These financial instruments are accounted at amortised cost net of impairment. Fair value is based on market prices, whenever these are available. If market prices are not available, fair value is estimated through numerical models based on cash-flow discounting techniques, using the interest rate curve adjusted for factors associated, predominantly the credit risk and liquidity risk, determined in accordance with the market conditions and time frame.
180 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
Hedging and trading derivatives
All derivatives are recorded at fair value.
In case of derivative contracts that are quoted in organised markets their market prices are used. As for derivatives traded "Over-the-counter", it is applied methods based on numerical cash-flow discounting techniques and models for assessment of options considering variables of the market, particularly the interest rates on the instruments in question, and where necessary, their volatilities.
Interest rates are determined based on information disseminated by the suppliers of financial content - Reuters and Bloomberg - more specifically those resulting from prices of interest rate swaps. The values for the very short-term rates are obtained from a similar source but regarding interbank money market. The interest rate curve obtained is calibrated with the values of interest rate short-term futures. Interest rates for specific periods of the cash flows are determined by appropriate interpolation methods. The interest rate curves are used in the projection of the non-deterministic cash flows such as indexes.
Loans and advances to customers with defined maturity date
The fair value of these instruments is calculated by discounting the expected principal and interest future cash flows for these instruments, considering that the payments of the instalments occur in the contractually defined dates. The discount rate used reflects the current conditions applied by the Group in similar instruments for each of the homogeneous classes of this type of instrument and with similar residual maturity. The discount rate includes the market rates for the residual maturity date (rates from the monetary market or from the interest rate swap market, at the end of the year) and the spread used at the date of the report, which was calculated from the average production of the last three months of the year. For 30 June 2010, the average discount rate was 5.40% and for December 2009 it was 5.67% assuming the projection of the variable rates according to the evolution of the forward rates implicit in the interest rate curves. The calculations also include the credit risk spread.
Loans and advances to customers and deposits repayable on demand without defined maturity date
Considering the short maturity of these financial instruments, the conditions of the portfolio are similar to conditions used at the date of the report. Therefore the amount in the balance sheet is a reasonable estimate of its fair value.
Deposits from customers
The fair value of these financial instruments is calculated by discounting the expected principal and interest future cash flows, considering that payments occur in the contractually defined dates. The discount rate used reflects the current conditions applied by the Group in similar instruments with a similar maturity. The discount rate used reflects the actual rates of the Group to this type of funds and with similar residual maturity date. The discount rate includes the market rates of the residual maturity date (rates of monetary market or the interes rate swap market, at the end of the year) and the spread of the Group at the date of the report, which was calculated from the average prodution of the second quarter of 2010. For 30 June 2010, the average discount rate was of 2.42% and for December 2009 it was 2.27%.
Debt securities issued and Subordinated debt
For these financial instruments the fair value was calculated for components for which fair value is not yet reflected in the balance sheet. For instruments that are at fixed rate and for which the Group adopts "hedge-accounting", the fair value related to the interest rate risk is already recorded.
For the fair value calculation, other components of risk were considered, in addition to the interest rate risk already recorded. The fair value is based on market prices, whenever these are available. If market prices are not available, fair value is estimated through numerical models based on cash-flow discounting techniques, using the interest rate curve adjusted by associated factors, predominantly the credit risk and trading margin, the latter only in the case of issues placed for non-institutional customers of the Group.
As original reference, the Group applies the curves resulting from the interest rate swaps markets for each specific currency. The credit risk (credit spread) is represented by an excess from the curve of interest rate swaps established specifically for each term and class of instruments based on the market prices on equivalent instruments.
For own emissions placed among non institutional costumers of the Group, one more differential was added (trade spread), which represents the margin between the financing cost in the institutional market and the cost obtained by distributing the respective instrument in the commercial network owned.
The average reference rates of the curve of income obtained from quotations of the market in EUR and used in the calculation of the fair value of debt issued were 6.27% (31 December 2009: 5.28%) for subordinated issues and 5.22% (31 December 2009: 3.05%) senior and collateralized issues.
For debt securities, the calculation of fair value focused on all the components of these instruments, so that the difference found as at 31 December 2009 was a decrease in the amount of Euros 706,998,000 (31 December 2009: an increase in the amount of Euros 24,119,000), corresponding to an increase in financial liabilities. The values previouly refered include a receivable amount of Euros 79,543,000 (31 December 2009: a payable amount of Euros 5,452,000) which are recorded in financial assets and liabilities held for trading and reflect the fair value of derivatives embedded.
181 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
As at 30 June 2010, the following table presents the values of the interest rates used in the definition of the interest rate curves of main currencies, namely EUR, USD, GBP and PLN used to determine the fair value of the assets and liabilities of the Group:
Currencies EUR USD GBP PLN
1 day 0.40% 0.40% 0.53% 3.40% 7 days 0.45% 0.50% 0.58% 3.40% 1 month 0.50% 0.62% 0.66% 3.54% 2 months 0.53% 0.72% 0.75% 3.65% 3 months 0.73% 0.92% 0.93% 3.77% 6 months 0.99% 1.07% 1.17% 3.90% 9 months 1.10% 1.23% 1.32% 4.09% 1 year 1.20% 1.40% 1.48% 4.14% 2 years 1.37% 0.96% 1.42% 4.58% 3 years 1.60% 1.33% 1.80% 4.84% 5 years 2.08% 2.05% 2.45% 5.15% 7 years 2.49% 2.56% 2.93% 5.31% 10 years 2.90% 3.01% 3.39% 5.39% 15 years 3.27% 3.43% 3.77% 5.29% 20 years 3.37% 3.59% 3.86% 5.14% 30 years 3.23% 3.71% 3.85% 4.75%
The following table shows the financial assets and liabilities of the Group that represent its fair value:
30 June 2010 At fair value through Available Amortised Book Fair profit or loss for sale cost Others value value Euros '000 Euros '000 Euros '000 Euros '000 Euros '000 Euros '000
Cash and deposits at central banks - - 1,149,109 - 1,149,109 1,149,109 Loans and advances to credit institutions Repayable on demand - - 1,016,118 - 1,016,118 1,016,118 Other loans and advances - - 1,239,636 - 1,239,636 1,230,759 Loans and advances to customers - - 75,920,346 - 75,920,346 72,297,532 Financial assets held for trading 3,671,978 - - - 3,671,978 3,671,978 Financial assets available for sale - 2,570,369 - - 2,570,369 2,570,369 Assets with repurchase agreement - - 74,609 - 74,609 74,609 Hedging derivatives 581,780 - - - 581,780 581,780 Held to maturity financial assets - - 5,834,514 - 5,834,514 5,455,808 Investments in associated companies - - - 428,233 428,233 428,233
4,253,758 2,570,369 85,234,332 428,233 92,486,692 88,476,295
Deposits from central banks - - 11,584,409 - 11,584,409 11,584,409 Deposits from other credit institutions - - 5,194,916 - 5,194,916 5,176,495 Amounts owed to customers - - 44,072,444 - 44,072,444 44,065,800 Debt securities - - 19,573,724 - 19,573,724 18,866,726 Financial liabilities held for trading 1,495,234 - - - 1,495,234 1,495,234 Other financial liabilities held for trading at fair value through profit or loss 4,687,815 - - - 4,687,815 4,687,815 Hedging derivatives 395,806 - - - 395,806 395,806 Subordinated debt - - 1,988,449 - 1,988,449 1,839,296 6,578,855 - 82,413,942 - 88,992,797 88,111,581
182 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
31 December 2009 At fair value through Available Amortised Book Fair profit or loss for sale cost Others value value Euros '000 Euros '000 Euros '000 Euros '000 Euros '000 Euros '000
Cash and deposits at central banks - - 2,244,724 - 2,244,724 2,244,724 Loans and advances to credit institutions Repayable on demand - - 839,552 - 839,552 839,552 Other loans and advances - - 2,025,834 - 2,025,834 2,004,234 Loans and advances to customers - - 75,191,116 - 75,191,116 73,173,088 Financial assets held for trading 3,356,929 - - - 3,356,929 3,356,929 Financial assets available for sale - 2,698,636 - - 2,698,636 2,698,636 Assets with repurchase agreement - - 50,866 - 50,866 50,866 Hedging derivatives 465,848 - - - 465,848 465,848 Held to maturity financial assets - - 2,027,354 - 2,027,354 1,998,051 Investments in associated companies - - - 438,918 438,918 438,918
3,822,777 2,698,636 82,379,446 438,918 89,339,777 87,270,846
Deposits from central banks - - 3,409,031 - 3,409,031 3,409,031 Deposits from other credit institutions - - 6,896,641 - 6,896,641 6,849,076 Amounts owed to customers - - 46,307,233 - 46,307,233 46,302,798 Debt securities - - 19,953,227 - 19,953,227 19,977,346 Financial liabilities held for trading 1,072,324 - - - 1,072,324 1,072,324 Other financial liabilities held for trading at fair value through profit or loss 6,345,583 - - - 6,345,583 6,345,583 Hedging derivatives 75,483 - - - 75,483 75,483 Subordinated debt - - 2,231,714 - 2,231,714 2,160,649 7,493,390 - 78,797,846 - 86,291,236 86,192,290
48. Pensions
The Group assumed the liability to pay to their employees pensions on retirement or disabilities and other obligations. These liabilities comply with the terms of the 'Acordo Colectivo de Trabalho do Sector Bancário' (ACT). The Group's pension obligations and other liabilities are mainly covered through the Banco Comercial Português Pension Fund managed by PensõesGere - Sociedade Gestora de Fundo de Pensões, S.A. At 30 June 2010 and 31 December 2009 the number of participants covered by this pension plan is analysed as follows:
Jun 2010 Dec 2009 Number of participants Pensioners 15,625 15,637 Employees 10,308 10,390
25,933 26,027
183 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
In accordance with the accounting policy, described in note 1 w), the Group's pension obligation and the respective funding for the Group as at 30 June 2010 and 31 December 2009 based on an actuarial valuation made using the projected unit credit method are analysed as follows:
Jun 2010 Dec 2009 Dec 2008 Dec 2007 Dec 2006 Euros '000 Euros '000 Euros '000 Euros '000 Euros '000 Projected benefit obligations Pensioners 4,165,845 4,197,436 4,415,254 4,525,481 4,466,823 Employees 1,238,351 1,212,446 1,307,655 1,353,257 1,248,536
5,404,196 5,409,882 5,722,909 5,878,738 5,715,359
Seniority premium 55,290 54,958 54,916 53,723 51,526 Value of the Pension Fund (5,153,675) (5,530,471) (5,322,224) (5,616,436) (5,578,010) Provisions for defined contributions complementary plan - - (12,812) - -
Liabilities not financed by the Pension Fund 305,811 (65,631) 442,789 316,025 188,875 Liabilities covered by the Extra Fund (429,821) (430,307) (445,452) (456,598) (461,376)
(Surplus) / Deficit coverage (124,010) (495,938) (2,663) (140,573) (272,501)
As at 30 June 2010, the Projected benefit obligations caption includes the amount of Euros 293,004,000 (31 December 2009: Euros 297,623,000) related to the obligations with past services for the Complementary Plan which are fully funded by the value of the Pension Fund.
Following the decision of the Executive Board of Directors dated 21 September 2006, the ‘Complementary Pension Plan’ which was established in the ‘Plano de Pensões do Fundo de Pensões do Grupo Banco Comercial Português’ (Defined benefit), will be funded through a defined contribution. However, the employees hired until the reference date of this decision maintain the benefits that they were entitled to under the previous plan (‘Defined Benefit’). This defined benefit is guaranteed by the Group's companies to which they are contractually related at the date of retirement. On this basis, the Group's companies have to assure the annual funding of the Fund, in order to cover the defined benefit, in case of a deficit. The amount is determined in accordance with the actuarial valuation performed each year, and funding will be performed annually.
As referred in notes 9 and 39 and in accordance with accounting policy note 1 w), the Group assumed the responsibility to pay retirement complements to employees, if some specific conditions are met during each year on the Group’s financial performance as defined by the Complementary Plan. The rules defined establish that if the conditions referred above are achieved for a financial year, the Bank should contribute to the Pension Fund the respective amounts for the eligible employees.
Considering its performance, until 2008 were made contributions on an annual basis, considering that the criteria defined were verified. During 2009, and considering that the conditions for the applicability of the Complementary Plan were not verified in 2008 and that the estimates for 2009 allowed to conclude that the conditions would not be met again, CAE performed a reassessment of the estimate of costs related to this liability. Based on this assessment, the Group reviewed the calculation of the amount to be accounted for each year. On this basis, the Group booked, as at 31 December 2009, a cost of approximately Euros 6,000,000 related to the Complementary Plan. In the future, these criteria and the related estimates will be reassessed on an annual basis by the Executive Board of Directors. The difference between the estimated and effective amounts will be accounted as an actuarial gain or loss.
As referred in note 9, as at 30 June 2010, it was recognised in staff costs the amount of Euros 3,400,000 related with the provisions for the costs with complementary plan.
The change in the present value of obligations during the first semester of 2010 and during 2009 is analysed as follows:
Jun 2010 Dec 2009 Extra-Fund Pension benefit Seniority Other retirement obligations premium benefits Total Total Euros '000 Euros '000 Euros '000 Euros '000 Euros '000
Balance as at 1 January 5,034,533 54,958 375,349 5,464,840 5,777,825
Service cost 17,397 1,623 640 19,660 41,589 Interest costs 134,530 1,443 9,941 145,914 312,785 Actuarial (gains) and losses Not related to changes in actuarial assumptions (21,809) - 941 (20,868) (69,802) Arising from changes in actuarial assumptions - - - - (298,551) Payments (141,663) (2,607) (12,340) (156,610) (311,972) Early retirement programmes 1,123 - - 1,123 1,830 Contributions of employees 5,659 - - 5,659 11,325 Other charges (105) (127) - (232) (189)
Balance at the end of the period 5,029,665 55,290 374,531 5,459,486 5,464,840
184 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
As at 30 June 2010 the value of the pensions paid by the Pension Fund, excluding the Extra-fund and the Seniority premium, amounted to Euros 141,663,000 (31 December 2009: Euros 284,721,000).
The elements of the assets of the Pension Fund are analysed as follows:
Jun 2010 Dec 2009 Euros '000 Euros '000 Variable income securities: Shares 1,000,432 1,239,032 Bonds 980,288 1,021,138 Fixed income securities 1,648,838 1,797,029 Properties 380,763 380,920 Investment fund units 1,004,376 992,898 Loans and advances to credit institutions and others 138,978 99,454
5,153,675 5,530,471
The balance Properties includes the buildings owned by the Fund and used by the Group companies which as at 30 June 2010, amounted to Euros 378,689,000 (31 December 2009: Euros 378,845,000).
The securities issued by companies of the Group accounted in the portfolio of the Fund are analysed as follows:
Jun 2010 Dec 2009 Euros '000 Euros '000
Fixed income securities 323,314 349,864 Variable income securities 21,871 39,104
345,185 388,968
The change in the fair value of assets of the Fund during the first semester of 2010 and during 2009 is analysed as follows:
Jun 2010 Dec 2009 Euros '000 Euros '000
Balance as at 1 January 5,530,471 5,322,224
Expected return on plan assets 144,039 278,756 Actuarial gains / (losses) (386,246) 188,354 Contributions to the Fund 1,520 11,953 Payments (141,663) (284,721) Contributions of employees 5,659 11,325 Other charges (105) 2,580
Balance at the end of the period 5,153,675 5,530,471
185 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
The evolution of the fair value of the securities related with those asset contributions made in 2006 and 2005 that resulted in significant actuarial gains or losses in 2007 and 2006 is presented as follows:
Potential and realised Gains/(Losses)
2007 2006
Contribution Contribution Year Acumulated Year Acumulated Issuer year value Euros'000 Euros'000 Euros'000 Euros'000
Friends Provident PLC (i) 2005 82,531,602 (32,333) (10,428) 14,873 21,905 Millennium bcp Imobiliária (ii) 2005 200,000,000 (2,866) (115,866) (113,000) (113,000) EDP - Energia de Portugal (i) 2005 164,228,497 49,742 188,705 97,905 138,963 Banca Intesa Spa (i) 2005 486,656,411 (54,799) 187,128 171,248 241,927 EDP - Energia de Portugal (i) 2006 44,225,000 9,135 20,590 17,980 11,455 Banco Sabadell (i) 2006 20,467,500 (803) (14,910) 2,205 (14,108) Banco Sabadell (i) 2006 83,079,500 (2,622) (64,925) 7,203 (62,304) (34,546) 190,294 198,414 224,838 Type: (i) - shares (ii) - commercial paper
As referred in note 53, the Pensions Fund registered an actuarial loss in the approximate amount of Euros 115.000.000 related to the commercial paper issued by Millennium bcp Imobiliária. The amount of the actuarial loss, net of amortisations, as at 30 June 2010 is Euros 89,125,000 (31 December 2009: Euros 92,000,000). The amount will continue to be amortised by the remaining term of 16 years with an annual amortisation of approximatly Euros 5,750,000.
The change in the amounts payable to the Pension Fund related to the obligations in the first semester of 2010 and during 2009 is analysed as follows:
(Surplus) / Deficit Jun 2010 Dec 2009 Extra-Fund Pension benefit Seniority Other retirement obligations premium benefits Total Total Euros '000 Euros '000 Euros '000 Euros '000 Euros '000
Balance as at 1 January (495,938) 54,958 375,349 (65,631) 442,789
Service cost 17,397 1,623 640 19,660 41,589 Interest costs 134,530 1,443 9,941 145,914 312,785 Cost with early retirement programs 1,123 - - 1,123 1,830 Expected return on plan assets (144,039) - - (144,039) (278,756) Actuarial (gains) and losses Not related to changes in actuarial assumptions 364,437 - 941 365,378 (258,156) Arising from changes in actuarial assumptions - - - - (298,551) Contributions to the Fund (1,520) - - (1,520) (11,953) Benefits paid - (2,607) (12,340) (14,947) (27,251) Provisions for Complementary Defined Contribution Plan - - - - 12,812 Other charges - (127) - (127) (2,769)
Balance at the end of the period (124,010) 55,290 374,531 305,811 (65,631)
186 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
In accordance with IAS 19, deferred actuarial losses, including the corridor, as at 30 June 2010 are analysed as follows:
Actuarial losses Amount in excess Corridor of the corridor Euros '000 Euros '000
Balance as at 1 January 2009 552,575 961,070 Actuarial gains and losses Not related with changes in actuarial assumptions - 365,378 Amortisation of actuarial gains and losses - (24,027) Variation in the corridor (12,167) 12,167
Balance as at 30 June 2010 540,408 1,314,588
As at 30 June 2010, considering the value of the actuarial gains and losses registered in the calculation of the benefit obligations and in the value of the Fund, the value of the corridor calculated in accordance with paragraph 92 of IAS 19, amounted to Euros 540,408,000 (31 December 2009: Euros 552,575,000).
As at 30 June 2010, the net actuarial gains and losses in excess of the corridor amounted to Euros 1,314,588,000 (31 December 2009: Euros 961,070,000) and will be amortized against results over a 20 year period, as referred in the accounting policy presented in note 1 w).
As at 30 June 2010, the Group accounted as pension costs the amount of Euros 46,557,000 (30 June 2009: Euros 94,354,000), which is analysed as follows:
Jun 2010 Jun 2009 Pension and other Seniority benefits costs premium Total Total Euros '000 Euros '000 Euros '000 Euros '000
Service cost 18,037 1,623 19,660 40,078 Interest costs 144,471 1,443 145,914 161,559 Expected return on plan assets (144,039) - (144,039) (138,734) Amortization of actuarial gains and losses 24,027 - 24,027 39,195 Costs with early retirement programs 1,123 - 1,123 20 Other charges - (128) (128) (7,764)
Cost of the period 43,619 2,938 46,557 94,354
In accordance with the remuneration policy for Board Members, the Group has the responsibility of supporting the cost with the retirement pensions of former Group's Board Members, as well as the Complementary Plan for these members in accordance with the aplicable rules, funded through the Pension Fund and insurance policy. Based on the actuarial calculations the Group recognises a provision to cover the effect of the annual Pension increase rate. As at 30 June 2010, the Group had a provision of Euros 40,996,000 (31 December 2009: Euros 40,996,000).
Considering the market indicators, particularly the estimations of the inflation and the long term interest rate for Euro Zone as well as the demographic characteristics of the participants, the Group maintained the actuarial assumptions used for the calculation of the liabilities for the pension obligations with reference to 30 June 2010. The comparative analysis of the actuarial assumptions is analysed as follows:
Banco Comercial Português Fund
Jun 2010 Dec 2009
Increase in future compensation levels 2.50% 2.50% Rate of pensions increase 1.65% 1.65% Projected rate of return of fund assets 5.50% 5.50% Discount rate 5.50% 5.50% Mortality tables Men TV 73/77 - 1 year TV 73/77 - 1 year Women TV 88/90 - 2 years TV 88/90 - 2 years Disability rate 0% 0% Turnover rate 0% 0% Costs with health benefits increase rate 6.5% 6.5%
187 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
The assumptions used in the calculation of the pension liabilities are in accordance with the requirements of IAS 19. No disability decreases are considered in the calculation of the total liabilities.
The projected rate of return of the Plan assets was determined on a consistent way according with current market conditions and with the nature and return of the plan assets.
Net actuarial losses related to the diference between the actuarial assumptions used for the estimation of the pension liabilities and the actual liabilities as well as the impact of changing assumptions, for the year ended 30 June 2010 amounted to Euros 365,378,000 (31 December 2009: actuarial gains of Euros 556,707,000) and are analysed as follows:
Actuarial (gains) / losses Jun 2010 Dec 2009 % Euros '000 % Euros '000 Deviation between expected and actual liabilities Increase in future compensation levels 0.00% - 2.67% (20,236) Pensions increase rate 0.00% - 1.50% (31,683) Disability 0.00% - 0.10% 5,618 Turnover 0.00% - -0.13% (7,282) Mortality deviations 0.00% - 0.32% 18,140 Others -0.39% (20,868) -0.60% (34,359) Changes on the assumptions: Discount rate 0.00% - 5.50% 173,564 Increase in future compensation levels 0.00% - 2.50% (143,542) Pensions increase rate 0.00% - 1.65% (328,573) Mortality tables 0.00% - 0.00% - Return on Plan assets -3.86% 386,246 9.43% (188,354)
365,378 (556,707)
Health benefit costs have a significant impact in pension costs. Considering this impact we produced a sensitivity analysis to a positive one percent variation in health benefit costs (from 6.5% to 7.5% in first semester 2010) and a negative variation (from 6.5% to 5.5% in first semester 2010) of one percent in health benefit costs, whose impact is analysed as follows:
Positive variation of 1% Negative variation of 1% (6.5% to 7.5%) (6.5% to 5.5%) Jun 2010 Dec 2009 Jun 2010 Dec 2009 Euros '000 Euros '000 Euros '000 Euros '000 Pension cost impact 441 433 (441) (433) Liability impact 40,812 42,042 (40,812) (42,042)
The liabilities with health benefits are fully covered by the Pension Fund and correspond, in June 2010, to the amount of Euros 265,277,000 (31 December 2009: Euros 273,271,000). The estimated value of contributions to the pension plan in 2010 is Euros 113,125,000.
49. Related parties
The Group grants loans in the ordinary course of its business within the Group's companies and to other related parties. Under the Collective Agreement of Labour for Employees of the Portuguese Banking Sector which includes substantially all employees of banks operating in Portugal, the Group grants loans to employees at interest rates fixed under the above referred agreement for each type of loan upon request by the employees.
As at 30 June 2010, loans to members of the Executive Board of Directors and their direct family members amounted to Euros 873,000 (31 December 2009: Euros 918,000), which represented 0.01% of shareholders’ equity (31 December 2009: 0.01%).
As at 30 June 2010, the principal loans and guarantees (excluding interbank and money market transactions) the Group has made to shareholders holding individually or together with their affiliates, 2% or more of the share capital whose holdings, in aggregate, represent 46.5% of the share capital as of 30 June 2010 (31 December 2009: 43.8%) described in the Executive Board of Directors report, amounted to approximately Euros 2,128,634,000 (31 December 2009: Euros 2,404,250,000). Each of these loans was made in the ordinary course of business, on substantially the same terms as those prevailing at the time for comparable transactions with other persons.
188 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
The shareholder and bondholder position of members of the Boards is as follows:
Changes during 2010 Shareholders / Bondholders Security Number of Unit securities at Price 30/06/2010 31/12/2009 Acquisitions Disposals Date Euros Members of Executive Board Paulo José de Ribeiro Moita Macedo BCP shares 259,994 259,994 Vitor Manuel Lopes Fernandes BCP shares 20,000 20,000 BCP Investimento Telecoms March 2013 20 0 20 (a) 01 Mar 10 1,000.00 Luís Maria França de Castro Pereira Coutinho BCP shares 247,288 247,288 José João Guilherme BCP shares 51,000 51,000 Nelson Ricardo Bessa Machado BCP shares 259,992 259,992 Miguel Maya Dias Pinheiro BCP shares 150,000 150,000 MillenniumBcp Valor Capital 2009 15 15 António Manuel Palma Ramalho BCP shares 12,092 12,092 BPSM/97 Top's Perpetuas Subord 1/2 Serie 498,798 498,798 Members of Supervisory Board
Luís de Melo Champalimaud BCP shares 20,000 20,000 António Luís Guerra Nunes Mexia BCP shares 1,299 1,299 Manuel Domingos Vicente BCP shares 1,000 1,000 Pedro Maria Calaínho Teixeira Duarte BCP shares 1,456 1,456 BCP shares (e) 8,200,000 200,000 235,164 24 Mar 10 0.801 311,092 25 Mar 10 0.803 4,453,744 31 Mar 10 0.819 3,000,000 21 Apr 10 0.798 Josep Oliu Creus BCP shares 13,000 13,000 Manuel Alfredo Cunha José de Mello BCP shares 236,701 236,701 BCP Finance Bank MTN 6.25 (29.3.2011) 200 200 BCP Fin Iln World Bk Enhan Nt Oct 2010 200 200 BCP Ob Cx Subordinadas 1ª S (2008/2018) 1,000 1,000 BCP Fin Iln Bask Enhan X Eur Dec/10 200 200 BCP Fin Iln Bask Enhan XI Eur Dec/10 80 80 BCP Fin E Iberica Autocall VII/09 Feb/11 0 20 20 (b) 02 Feb 10 1,000.00 BCP Fin Bk RC Allianz X/09 Eur Feb/2010 0 30 30 (b) 25 Feb 10 10,000.00 BCP Fin Bk RC BG Gr Plc X/09 Eur Feb/10 0 300 300 (b) 25 Feb 10 1,000.00 BCP Fin Renascimen. Fin XI/09 Eur Var05/11 0 40 40 (b) 02 Feb 10 5,000.00 BCP Fin Bk Camale. 125% XI/09 (11/2014) 150 150 BCP Fin Sel Ac Eur Ret 2 Fontes XI(05/11) 100 100 BCP Fin Bk Rc Nokia XII/09 Eur (04/10) 0 20 20 (b) 15 Apr 10 1,000.00 BCP Fin Selec BrasilL XII/09 Eur (06/11) 329 329 BCP Fin Iln Wr Bask Enhanc X Eur Dec/10 100 100 BCP F Iln Portfol Slt 4 A Call Eur 03/10 0 50 50 (b) 16 Mar 10 1,000.00 BCP Financ Bank MTN 6,25 (29.03.2011) 100 100 BCP/2009 Eur 1000M 5,625 (04/2014) 3 3 BCP Fin Select Canarinha XII/09(06/2011) 50 50 BCP Fin Bk Rc Bhp Billiton Plc.III(07/2010) 50 0 50 (a) 04 Mar 10 1,000.00 BCP Fin Saude Mundial Autocall IV/10 04/12 75 0 75 (a) 23 Apr 10 1,000.00 BCP Fin Escolh Tripla Europeia IV/10 04/11 47 0 7 (a) 23 Apr 10 10,000.00 40 (a) 23 Apr 10 10,000.00 BCP Fin Inv Bayer Autocall IV/10 04/12 45 0 5 (a) 29 Apr 10 10,000.00 40 (a) 29 Apr 10 10,000.00 BCP Fin Bk Rc BHP Billiton Plc.III(07/10) 100 0 100 (a) 04 Mar 10 1,000.00 BCP Fin Inv Mundial III (03/2011) 100 0 100 (a) 26 Mar 10 BCP Fin Rc Rio Tinto III/10 10,50 (07/2010) 100 0 100 (a) 30 Mar 10 1,000.00 BCP Fin Rc Xstrata Plc V/10 Eur (03 08 10) 200 0 200 (a) 03 May 10 1,000.00 BCP Fin Farmace Glob V/10 Eur (03 05 12) 200 0 200 (a) 03 May 10 1,000.00 BCP Fin Bk Rc Nokia VI/10 EUR (10/2010) 10 0 10 (a) 14 Jun 10 10,000.00 BCP Fin Bk Rc Soc Generale I/10 (05/2010) 0 0 20 (a) 07 Jan 10 10,000.00 20 (b) 07 May 10 10,000.00 Certific BCP I s/ Ouro Mar / 2011 400 0 400 (c) 17 May 10 126.00 Certific BCP I s/ Fut Ice Brent Cru Jun 2011 8,700 0 8,700 (c) 17 May 10 5.73
189 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
Changes during 2010 Shareholders / Bondholders Security Number of Unit securities at Price 30/06/2010 31/12/2009 Acquisitions Disposals Date Euros António Vítor Martins Monteiro BCP shares 2,078 2,078 BCP Finance Bank MTN 6.25 (29.3.2011) 50 50 João Manuel Matos Loureiro BCP shares 1,500 1,500 José Guilherme Xavier de Basto BCP shares 1,188 1,188 Bcp Ob Cx Multi Rend Dax Feb 2007/10 0 100 100 (b) 12 Feb 10 1,000.00 BCP Mill Rend Semestral March 5 0 5 (a) 01 Mar 10 1,000.00 José Vieira dos Reis BCP shares 16,074 16,074 BCP Ob Cx Inv Água May 08/2011 340 340 BCP Cx Invest Saúde July 2008/11 200 200 BCP Ob Cx Subordinadas 1ª S (2008/2018) 1,100 1,100 Super Aforro Mille Sr B Feb 2009/14 20 20 BCP Rendimento Mais April 2012 100 100 Millennium BCP Valor Capital 2009 20 20 BCP Inv Total November 2012 100 100 BCP Inv Cabaz Eenergia Nov 2 50 50 BCP Mill Rendimento Plus Jun 2010/2014 50 0 50 (a) 28 Jun 10 1,000.00 Millennium BCP Subordinadas 2010/2020 25 0 25 (a) 28 Jun 10 1,000.00 Certific BCPI S&P 500 4,915 2,850 2,065 (c) 15 Apr 10 12.10 Certific BCPI Eurostoxx 50 820 820 Certific BCPI PSI 20 0 160 160 (d) 27 Apr 10 73.50 Thomaz de Mello Paes de Vasconcelos BCP shares 1,000 1,000 Vasco Esteves Fraga BCP shares 1,000 1,000 Huen Wing Ming Patrick BCP shares 2,746,076 2,746,076 Spouse and Dependent Children
Luís Maria Salazar Couto Champalimaud BCP shares 12,000 12,000 Ana Maria Almeida M Castro José de Mello BCP shares 4,980 4,980 BCP Ob Cx Subordinadas 1ª S (2008/2018) 400 400 BCP Fin Iln World Bk Enhan Nt Oct 2010 100 100 BCP Fin Iln Wr Bask Enh X Eur Dec/10 100 100 BCP Fin Bk RC BG GR Plc X/09 Eur Feb/10 0 20 20 (b) 25 Feb 10 1,000.00 BCP F Bk RC Allianz X/09 Eur Feb/2010 0 2 2 (b) 25 Feb 10 10,000.00 BCP Fin Escolh Tripla Europeia IV/10 04/11 3 0 3 (a) 23 Apr 10 10,000.00 BCP Fin Bk Rc BHP Billiton Plc.III(07/10) 10 0 10 (a) 25 Feb 10 1,000.00 Isabel Maria V. L. P. Martins Monteiro BCP Fin Iln World Bk Enh II Eur 10/10 50 50 Maria Emília Neno R. T. Xavier de Basto BCP shares 376 376 Plautila Amélia Lima Moura Sá BCP shares 2,754 2,754 BCP Ob Cx Inv Global 12% Feb 06/11 500 500 BCP Ob Cx Multi Rend Dax Feb 07/10 0 400 400 (b) 12 Feb 10 50.00 BCP Ob Cx Inv Mundial May 2010 0 700 700 (b) 07 May 10 50.00 BCP Ob Cx Invest Cabaz Mund Feb 08/11 400 400 BCP Cx Inv Energias Renov Jun 2011 400 400 BCP Ob Cx Invest Plus Sep 2008/11 300 300 Certific BCPI Eurostoxx 50 (04/2010) 0 240 240 (d) 18 Mar 10 29.31 Certific BCPI Eurostoxx 50 240 0 240 (c) 18 Mar 10 29.31 Certific BCPI S/DJ Stoxx Utili (10/2012) 2,125 2,125 Certific BCPI S/DJ Stoxx Basic (10/2012) 1,485 1,485
(a) Subscription. (b) Reimbursement. (c) Purchase. (d) Sell. (e) BCP shares owned indirectely through the company "PACIM Sociedade Gestora de Participações Sociais, S.A."
190 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
As at 30 June 2010, the Bank's credits over subsidiaries and the Millennium bcp Fortis Group, represented or not by securities, included in the captions of Loans and advances to credit institutions and to customers and financial assets held for trading and available for sale, are analysed as follows:
Loans and advances Financial assets Credit Available Institutions Customers Trading for sale Total Euros '000 Euros '000 Euros '000 Euros '000 Euros '000
Banco de Investimento Imobiliário, S.A. 2,334,121 547,380 2,881,501 Banque Privée BCP (Suisse) S.A. 435,122 435,122 Millennium bcp Bank & Trust 1,235,859 1,235,859 BCP Finance Bank Ltd 573,779 12,374 152,081 738,234 Banca Millennium S.A. 150,908 150,908 Bank Millennium (Poland) Group 300,867 300,867 Millennium Bank (Greece) Group 1,706,840 316,397 2,023,237 Banco Millennium Angola, S.A. 231,669 231,669 BCP Holdings (USA), Inc. 27,666 27,666 Millennium bcp Fortis Group 231 231 Others 1,379 2,581 3,960
6,970,544 30,478 12,374 1,015,858 8,029,254 As at 30 June 2010 the Bank had credits over associated companies, represented or not by securities, included in the captions of Loans and advances to credit institutions and to customers, and financial assets held for trading and available for sale in the amount of Euros 108,608,000.
As at 30 June 2010 the Bank's liabilities with subsidiaries and the Millennium bcp Fortis Group, represented or not by securities, included in the captions Deposits from credit institutions and to customers, Debt securities issued and in Subordinated debt are analysed as follows:
Deposits from Credit Debt Subordinated Institutions Customers Securities Issued Debt Total Euros '000 Euros '000 Euros '000 Euros '000 Euros '000
Banco ActivoBank, S.A. 199,278 199,278 Banco de Investimento Imobiliário, S.A. 3,189 1,386 689,885 24,207 718,667 Bank Millennium (Poland) Group 35,450 35,450 Banque Privée BCP (Suisse) S.A. 122,990 122,990 Millennium bcp Bank & Trust 2,287,127 2,287,127 BCP Finance Bank Ltd 5,315,357 1,490,297 6,805,654 BCP Finance Company, Ltd 4,060 1,017,060 1,021,120 Millennium bcp, S.G.P.S., Sociedade Unipessoal, Lda. 26,992 26,992 BCP Investment, B.V. 177,195 177,195 BIM Banco Internacional de Moçambique, S.A.R.L. 124,190 124,190 Millennium Bank (Greece) Group 734,881 734,881 Millennium bcp Gestão de Activos Sociedade Gestora de Fundos de Investimento, S.A. 12,730 12,730 Millennium bcp Imobiliária, S.A. 381 381 Banco Millennium Angola, S.A. 1,475 1,475 Millennium bcp Prestação de Serviços, A.C.E. 10,328 10,328 BCP Capital Sociedade de Capital de Risco, S.A. 24,814 24,814 Millennium bcp Fortis Group 732,440 732,440 Others 1,121 14,490 15,611
8,825,058 1,004,816 689,885 2,531,564 13,051,323
As at 30 June 2010 the Bank's liabilities with associated companies, represented or not by securities, included in the captions Deposits from credit institutions and to customers, Debt securities issued and in Subordinated debt in the amount of Euros 13,896,000.
191 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
As at 30 June 2010, the income generated by the Bank on inter company transactions with subsidiaries, included in the captions of Interest income, Commissions, Other operating income and Gains arising from trading activity, are analysed as follows:
Gains arising Interest Commissions Other operating from trading income income income activity Total Euros '000 Euros '000 Euros '000 Euros '000 Euros '000 Banco ActivoBank, S.A. 72 231 303 Banca Millennium S.A (Romania) 1,146 94 1,240 Banco de Investimento Imobiliário, S.A. 17,974 2,073 96 20,143 Bank Millennium (Poland) Group 5,524 8,396 13,920 Banque Privée BCP (Suisse) S.A. 2,216 2,216 Millennium bcp Bank & Trust 7,890 26,477 34,367 BCP Finance Bank Ltd 3,144 477,399 480,543 Millennium Bank, Anonim Sirketi (Turkey) 268 11,088 11,356 Bitalpart, B.V. 773 773 BIM Banco Internacional de Moçambique, S.A.R.L. 3,518 3,518 Millennium Bank (Greece) Group 11,179 10,546 21,725 Millennium bcp Gestão de Activos Sociedade Gestora de Fundos de Investimento, S.A. 5,104 5,104 Banco Millennium Angola, S.A. 1,088 283 1,371 Millennium bcp Prestação de Serviços, A.C.E. 7,482 7,482 Millennium bcp Fortis Group 1,621 37,166 1,953 40,740 Others 399 8 116 523
53,222 44,423 13,583 534,096 645,324
As at 30 June 2010, the costs incurred by the Bank on inter company transactions with subsidiaries, included in the captions Interest expense, Commissions, Administrative costs and Losses arising from trading activity, are analysed as follows:
Losses arising Interest Commissions Administrative from trading expense costs costs activity Total Euros '000 Euros '000 Euros '000 Euros '000 Euros '000
Banco ActivoBank, S.A. 986 1,119 56 2,161 Banca Millennium S.A (Romania) 1 1 Banco de Investimento Imobiliário, S.A. 2,860 4,876 154 445 8,335 Bank Millennium (Poland) Group 219 21,812 22,031 Banque Privée BCP (Suisse) S.A. 158 158 Millennium bcp Bank & Trust 12,336 1,907 14,243 BCP Finance Bank Ltd 43,330 359,061 402,391 BCP Finance Company, Ltd 24,591 24,591 Millennium bcp, S.G.P.S., Sociedade Unipessoal, Lda. 223 223 BCP Investment, B.V. 95 95 Millennium Bank, Anonim Sirketi (Turkey) 5,554 5,554 BIM Banco Internacional de Moçambique, S.A.R.L. 216 216 Millennium Bank (Greece) Group 2,121 1,103 3,224 Seguros e Pensões Gere, S.G.P.S., S.A. 20 20 Banco Millennium Angola, S.A. 10 10 Millennium bcp Prestação de Serviços, A.C.E. 7 35,411 35,418 Millennium bcp Fortis Group 288 288 Others 137 137
87,310 5,995 35,909 389,882 519,096
The inter company balances and transactions are eliminated on consolidation, as referred in note 1 b).
192 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
As at 31 December 2009, the Bank's credits over subsidiaries and the Millennium bcp Fortis Group, represented or not by securities, included in the captions of Loans and advances to credit institutions and to customers and financial assets held for trading and available for sale, are analysed as follows:
Loans and advances Financial assets Credit Available Institutions Customers Trading for sale Total Euros '000 Euros '000 Euros '000 Euros '000 Euros '000
Banco de Investimento Imobiliário, S.A. 2,338,376 570,994 2,909,370 Banque Privée BCP (Suisse) S.A. 543,338 543,338 Millennium bcp Bank & Trust 1,339,523 1,339,523 BCP Finance Bank Ltd 606,574 32,189 202,238 841,001 Banca Millennium S.A. 150,106 150,106 Bank Millennium (Poland) Group 701,187 701,187 Millennium Bank (Greece) Group 1,056,797 60,413 483,775 1,600,985 Banco Millennium Angola, S.A. 182,252 182,252 BCP Holdings (USA), Inc. 25,059 25,059 Millennium bcp Fortis Group 783 783 Others 339 339
6,918,492 25,842 92,602 1,257,007 8,293,943 As at 31 December 2009, the Bank had credits over associated companies, represented or not by securities, included in the captions of Loans and advances to credit institutions and to customers, and financial assets held for trading and available for sale, in the amount of Euros 128,417,000.
As at 31 December 2009, the Bank's liabilities with subsidiaries and the Millennium bcp Fortis Group, represented or not by securities, included in the captions Deposits from credit institutions and to customers, Debt securities issued and in Subordinated debt, are analysed as follows:
Deposits from Credit Debt Subordinated Institutions Customers Securities Issued Debt Total Euros '000 Euros '000 Euros '000 Euros '000 Euros '000
Banco ActivoBank, S.A. 202,361 202,361 Banco de Investimento Imobiliário, S.A. 1,847 1,392 418,088 15,409 436,736 Bank Millennium (Poland) Group 17,122 17,122 Banque Privée BCP (Suisse) S.A. 88,527 88,527 Millennium bcp Bank & Trust 2,436,917 2,436,917 BCP Finance Bank Ltd 8,229,391 1,790,665 10,020,056 BCP Finance Company, Ltd 3,694 1,020,569 1,024,263 Millennium bcp, S.G.P.S., Sociedade Unipessoal, Lda. 79,672 79,672 BCP Investment, B.V. 41,348 41,348 BIM Banco Internacional de Moçambique, S.A.R.L. 102,894 102,894 Millennium Bank (Greece) Group 836,833 836,833 Millennium bcp Gestão de Activos Sociedade Gestora de Fundos de Investimento, S.A. 12,971 12,971 Millennium bcp Imobiliária, S.A. 1,957 1,957 Seguros e Pensões Gere, S.G.P.S., S.A. 1,229,691 1,229,691 Banco Millennium Angola, S.A. 32,455 32,455 Millennium bcp Prestação de Serviços, A.C.E. 8,994 8,994 BCP Capital Sociedade de Capital de Risco, S.A. 18,049 18,049 Grupo Millennium bcp Fortis 1,040,434 1,040,434 Others 808 1,057 1,865
11,949,155 2,439,259 418,088 2,826,643 17,633,145
As at 31 December 2009, the Bank's liabilities with associated companies, represented or not by securities, included in the captions Deposits from credit institutions and to customers, Debt securities issued and in Subordinated debt, in the amount of Euros 15,731,000.
193 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
As at 31 December 2009, the income generated by the Bank on inter company transactions with subsidiaries, included in the captions of Interest income, Commissions, Other operating income and Gains arising from trading activity, are analysed as follows:
Gains arising Interest Commissions Other operating from trading income income income activity Total Euros '000 Euros '000 Euros '000 Euros '000 Euros '000 Banco ActivoBank, S.A. 215 215 Banca Millennium S.A (Romania) 4,551 183 4,734 Banco de Investimento Imobiliário, S.A. 63,514 1,988 343 65,845 Bank Millennium (Poland) Group 8,315 4,265 12,580 Banque Privée BCP (Suisse) S.A. 12,002 12,002 Millennium bcp Bank & Trust 28,883 648 47,527 77,058 BCP Finance Bank Ltd 11,907 407,707 419,614 Millennium Bank, Anonim Sirketi (Turkey) 1,232 15,939 17,171 BitalPart, B.V. 2,087 2,087 BIM Banco Internacional de Moçambique, S.A.R.L. 6,173 6,173 Millennium bcp Investimento Group 14,309 61 10,910 25,280 Millennium Bank (Greece) Group 31,552 22,910 54,462 Millennium bcp Gestão de Activos Sociedade Gestora de Fundos de Investimento, S.A. 9,746 9,746 Millennium bcp Imobiliária, S.A. 725 12 737 Banco Millennium Angola, S.A. 1,086 233 1,319 Millennium bcp Prestação de Serviços, A.C.E. 163 10,960 11,123 Millennium bcp Fortis Group 9,677 59,478 3,372 2,060 74,587 Others 18 1 213 232
190,021 72,088 21,012 511,844 794,965
As at 31 December 2009, the costs incurred by the Bank on inter company transactions with subsidiaries, included in the captions Interest expense, Commissions, Administrative costs and Losses arising from trading activity, are analysed as follows:
Losses arising Interest Commissions Administrative from trading expense costs costs activity Total Euros '000 Euros '000 Euros '000 Euros '000 Euros '000
Banco ActivoBank, S.A. 4,845 1,744 110 6,699 Banca Millennium S.A (Romania) 15 2,768 2,783 Banco de Investimento Imobiliário, S.A. 1,369 8,937 748 11,054 Bank Millennium (Poland) Group 140 12,657 12,797 Banque Privée BCP (Suisse) S.A. 737 737 Millennium bcp Bank & Trust 41,244 15,253 56,497 BCP Finance Bank Ltd 254,722 507,972 762,694 BCP Finance Company, Ltd 49,589 49,589 Millennium bcp, S.G.P.S., Sociedade Unipessoal, Lda. 246 246 BCP Investment, B.V. 569 569 Millennium Bank, Anonim Sirketi (Turkey) 177 5,473 5,650 BIM Banco Internacional de Moçambique, S.A.R.L. 688 688 Millennium bcp Investimento Group 13,440 6,699 523 10,557 31,219 Millennium Bank (Greece) Group 11,810 10,910 22,720 Seguros e Pensões Gere, S.G.P.S., S.A. 2,986 2,986 Banco Millennium Angola, S.A. 109 109 Millennium bcp Prestação de Serviços, A.C.E. 10 101,750 101,760 Millennium bcp Fortis Group 573 3,321 3,894 Others 693 83 776
383,389 17,380 103,039 569,659 1,073,467
The inter company balances and transactions are eliminated on consolidation, as referred in note 1 b).
194 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
50. Segmental reporting
The segments presented, concerning business and geographic segments, are in accordance with IFRS 8. In conformity with the Millennium bcp Group management model, the primary segment corresponds to segments used for Executive Board of Directors' management purposes. Millennium bcp Group offers a wide range of banking activities and financial services in Portugal and abroad, with a special focus on Commercial Banking, Corporate and Investment Banking and Private Banking and Asset Management.
Segments description
Commercial Banking is the core business of the Group’s activity, in terms of both volume and contribution to net income. Commercial Banking activity includes the Banco Comercial Português network in Portugal, operating as a distribution channel of products and services from other companies of the Group targeting the segments of Retail Banking, Companies and Foreign Business, operating through several banking operations in markets with affinity to Portugal and in countries with higher growth potential.
The Retail Banking includes: (i) the Retail Bank in Portugal, for which the strategic approach is to target “Mass Market” customers, those who appreciate a value proposition based on innovation and speed, as well as Prestige and Small business customers, whose specific characteristics, financial assets or income imply a value proposition based on innovation and personalisation, requiring a dedicated Account Manager; and (ii) ActivoBank, a bank focused on clients with a young spirit, intensive users of new communication technologies who prefer a banking relationship based on transparency, and featuring simple, innovated products and services.
The Companies segment, in Portugal, which covers the financial needs of companies with an annual turnover between Euro 7.5 million and Euro 100 million, focused on innovation and offering a wide range of traditional banking products complemented by specialised financing. Within the scope of the cross selling strategy, Companies also act as a distribution channel for financial products and services for the Millennium bcp business areas as a whole.
The Corporate and Investment Banking segment includes: (i) the Corporate network in Portugal, targeting corporate and institutional customers with an annual turnover in excess of Euro 100 million, providing a complete range of value added products and services; (ii) the Investment Banking unit specialised in capital markets, providing strategic and financial advisory, specialised financial services – Project Finance, Corporate Finance, Securities brokerage and Equity Research as well as structuring risk hedging derivatives products; and (iii) the activity of the Bank's International Division.
The Private Banking and Asset Management segment, for business segments purpose, comprises the Private Banking network in Portugal, and subsidiary companies specialised in the asset management business, as well as the activities of Banque Privée in Switzerland and BCP Millennium bcp Bank & Trust in the Cayman Islands.
The Foreign Business segment comprises for geographical segment purposes, the operations outside Portugal, in particular Bank Millennium in Poland, Millennium bank in Greece, Banque Privée BCP in Switzerland, the Banca Millennium in Romania, Millennium bim in Mozambique, Banco Millennium Angola in Angola and Millennium bcp Bank & Trust in the Cayman Islands. Millennium bank in Turkey and Millennium bcpbank in the United States of America, are in the process of being sold. The Foreign Business segment, for the business segments purpose comprise the Group operations outside of Portugal, excluding BCP Banque Privée in Switzerland and Millennium bcp Bank & Trust in the Cayman Islands that are part of Private Banking segment & Asset Management.
In Poland the Group is represented by a universal bank offering a wide range of financial products and services to individuals and companies nationwide, in Greece by an operation based on innovative products and services and in Switzerland by Banque Privée BCP, a operation of Private Banking under Swiss law, and in Romania with an operation focused on individuals and small and medium sized companies. Additionally, the Group is represented in Mozambique by a universal bank targeting companies and individual customers, in Angola by a bank focused on private customers and companies and public and private institutions, and in the Cayman Islands by Millennium bcp Bank & Trust, a bank designed for international services in the area of Private Banking to customers with high net worth (Affluent segment).
The Other segment caption includes the centralised management of shareholdings and the remaining corporate activities and operations that are not included in the business segments, namely the bancassurance activity, a joint venture with the Belgian Dutch Group Ageas, and the remaining amounts not allocated to the segments.
195 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
Business segments activity
The figures reported for each business segment result from aggregating the subsidiaries and business units integrated in each segment, including the impact from capital allocation and balancing process of each entity, both at balance sheet and income statement levels, based on average figures. Balance sheet headings for each subsidiary and business unit are re calculated, given the replacement of their original own funds by the outcome of the capital allocation process, according to regulatory solvency criteria.
As the process of capital allocation follows the regulatory criteria of solvency in place, the risk weighted assets and, consequently, the business segments capital allocation, were determined in accordance with the Basel II framework, applying the standard approach for calculating capital requirements for credit risks. In 2009, subsequent to the authorisation from the Bank of Portugal, the Bank adopted the standard approach for operational risk and the internal models approach for general market risk and foreign exchange risk, for the perimeter managed centrally from Portugal. Each operation is balanced through internal transfers of funds, with no impact on consolidated accounts.
Operating costs determined for each business area rely on one hand the amounts accounted directly in the respective cost centres, and on the other hand, the amounts resulting from internal cost allocation processes. For example, in the first set of costs are included costs related to phone communication, traveling accomodation and representation expenses and to advisory services, and in the second set are included costs related to correspondence, water and electricity and to rents related to spaces occupied by organic units, among others. The allocation of this last set of costs is based on the application of previously defined criteria, related to the level of activity of each business area, like the number of current accounts, the number of customers or employees, the business volume and the space occupied.
Financial flows generated by the business areas, in particular the placement of funds from new deposits and funding of loans granted, are processed at market prices, having the Bank’s Treasury as counterparty. These market prices are determined according to the currency, the maturity of the transactions and their repricing periods. Additionally, all financial flows resulting from capital allocation are based on the average 6 month Euribor interest rate for each given period.
To ensure comparability for this information the structural changes that occurred in the second half of 2009 and in the first half of 2010 in the organisation of the segments were reflected in the 2009 figures: Retail Banking and Business Banking were individualised, Corporate became part of the Corporate & Investment Banking segment. A capital allocation of each business segment in the first half of 2010 was 6.5% and was taking, for comparative purposes, the same percentage of capital allocation as in the same period of 2009.
Each segment’s net contribution reflects the individual results achieved by its business units, independent of the percentage held by the Group. The following information is based on financial statements prepared according to IFRS and on the organisational model in place for the Group, as at 30 June 2010.
Geographical Segments
The Group operates with special emphasis in the Portuguese market, and also in a few affinity markets and in markets of recognised growth potential. Considering this, the geographical segments include Portugal, Poland, Greece, Mozambique, Angola and Other. The segment Portugal reflects, essentially, the activities carried out by Banco Comercial Português in Portugal, ActivoBank and Banco de Investimento Imobiliário. The segment Poland includes the business carried out by Bank Millennium (Poland); the segment Greece contains the activity of Millennium Bank (Greece), while the segment Mozambique contains the activity of BIM Banco Internacional de Moçambique (Mozambique) and the segment Angola contains the activity of Banco Millennium Angola (Angola). The segment Other comprises the Group’s operations not included in the remaining segments, namely the activities developed in other countries, such as Banque Privée BCP in Switzerland, Banca Millennium in Romania, Millennium Bank in Turkey, Millennium bcp Bank & Trust in the Cayman Islands and Millennium bcpbank in the United States.
196 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
As at 30 June 2010, the net contribution of the major business segments is analyzed as follows:
Private Corporate Commercial Banking Banking and Retail Foreign and Asset Investment Banking Companies Business Total Management Banking Other Consolidated
Income statement Interest income 476,891 165,276 555,144 1,197,311 59,696 197,241 182,608 1,636,856 Interest expense (211,696) (80,273) (310,429) (602,398) (40,612) (103,501) (185,386) (931,897) Net interest income 265,195 85,003 244,715 594,913 19,084 93,740 (2,778) 704,959 Commissions and other income 234,350 41,817 152,856 429,023 35,052 81,074 7,972 553,121 Commissions and other costs (9,547) (703) (35,364) (45,614) (10,180) (1,414) (54,180) (111,388) Net commissions and other income 224,803 41,114 117,492 383,409 24,872 79,660 (46,208) 441,733 Net gains arising from trading activity 73 58,596 58,669 1,865 15,278 238,745 314,557 Staff costs and administrative costs 334,467 29,568 263,219 627,254 27,175 37,237 33,642 725,308 Depreciations 829 53 23,784 24,666 206 48 26,632 51,552 Operating costs 335,296 29,621 287,003 651,920 27,381 37,285 60,274 776,860 Impairment and provisions (47,963) (88,958) (80,188) (217,109) (28,720) (131,050) (121,522) (498,401) Share of profit of associates under the equity method (21) 28,908 28,887 Net gain from the sale of other assets (2,554) (2,554) Profit before income tax 106,812 7,538 53,612 167,962 (10,280) 20,322 34,317 212,321 Income tax (28,378) (1,998) (11,014) (41,390) 4,392 (5,385) 20,636 (21,747) Minority interests (25,424) (25,424) (1,910) (27,334) Profit after income tax 78,434 5,540 17,174 101,148 (5,888) 14,937 53,043 163,240
Income between segments 7,700 3,340 11,040 (288) (10,752)
Balance sheet Cash and Loans and advances to credit institutions 4,252,994 2,543,108 2,403,754 9,199,856 3,672,930 4,291,553 (13,759,476) 3,404,863 Loans and advances to customers 34,186,892 10,213,659 15,339,363 59,739,914 2,567,419 13,444,949 168,064 75,920,346 Financial assets 1,260 2,242,976 2,244,236 55,563 956,563 9,402,279 12,658,641 Other assets 670,236 35,899 1,621,165 2,327,300 38,176 50,548 4,593,414 7,009,438 Total Assets 39,111,382 12,792,666 21,607,258 73,511,306 6,334,088 18,743,613 404,281 98,993,288
Deposits from other credit institutions 5,862,222 3,608,391 4,541,626 14,012,239 3,082,059 5,480,947 (5,795,920) 16,779,325 Deposits from customers 20,176,308 1,450,962 12,789,716 34,416,986 2,968,839 5,127,424 1,559,195 44,072,444 Debt securities issued 8,349,829 5,154,306 942,940 14,447,075 5,126,542 107 19,573,724 Other financial liabilities held for trading at fair value through profit or loss 2,523,086 1,557,488 340,819 4,421,393 53,284 1,549,098 159,274 6,183,049 Other financial liabilities 278,114 137,754 568,858 984,726 30,007 194,699 1,174,823 2,384,255 Other liabilities 188,833 25,389 1,251,370 1,465,592 12,916 31,849 1,190,507 2,700,864 Total Liabilities 37,378,392 11,934,290 20,435,329 69,748,011 6,147,105 17,510,559 (1,712,014) 91,693,661
Equity and minority interests 1,732,990 858,376 1,171,929 3,763,295 186,983 1,233,054 2,116,295 7,299,627
Total Liabilities, Equity and minority interests 39,111,382 12,792,666 21,607,258 73,511,306 6,334,088 18,743,613 404,281 98,993,288
197 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
As at 30 June 2009, the net contribution of the major business segments is analysed as follows:
Private Corporate Commercial Banking Banking and Retail Foreign and Asset Investment Banking Companies Business Total Management Banking Other Consolidated
Income statement Interest income 796,382 260,564 545,403 1,602,349 121,085 304,854 (37,025) 1,991,263 Interest expense (438,789) (160,612) (384,439) (983,840) (91,820) (198,983) (41,057) (1,315,700) Net interest income 357,593 99,952 160,964 618,509 29,265 105,871 (78,082) 675,563 Commissions and other income 220,403 27,868 129,957 378,228 33,936 97,227 (12,522) 496,869 Commissions and other costs (10,457) (1,304) (37,795) (49,556) (9,716) (5,711) (52,551) (117,534) Net commissions and other income 209,946 26,564 92,162 328,672 24,220 91,516 (65,073) 379,335 Net gains arising from trading activity 8 98,374 98,382 (2,581) (1,100) 119,424 214,125 Staff costs and administrative costs 366,582 28,505 242,232 637,319 26,885 40,424 18,233 722,861 Depreciations 762 51 21,677 22,490 207 126 29,506 52,329 Operating costs 367,344 28,556 263,909 659,809 27,092 40,550 47,739 775,190 Impairment and provisions (99,024) (68,446) (71,554) (239,024) (12,287) (56,596) (32,091) (339,998) Share of profit of associates under the equity method 1,545 1,545 (1,603) 31,002 30,944 Net gain from the sale of other assets 21,466 21,466 Profit before income tax 101,179 29,514 17,582 148,275 11,525 97,538 (51,093) 206,245 Income tax (26,800) (7,821) (6,927) (41,548) (1,990) (26,548) 24,148 (45,938) Minority interests (12,327) (12,327) (500) (12,827) Profit after income tax 74,379 21,693 (1,672) 94,400 9,535 70,990 (27,445) 147,480
Income between segments 22,361 (2,361) 20,000 (2,043) (17,957)
Balance sheet Cash and Loans and advances to credit institutions 5,825,712 3,407,193 2,538,746 11,771,651 3,898,413 6,314,917 (17,150,130) 4,834,851 Loans and advances to customers 35,089,821 10,996,752 14,589,105 60,675,678 3,707,450 12,820,110 (1,348,503) 75,854,735 Financial assets 1,402 2,696,950 2,698,352 47,019 3,398,338 997,063 7,140,772 Other assets 741,072 36,548 435,282 1,212,902 41,454 125,258 4,576,499 5,956,113 Total Assets 41,658,007 14,440,493 20,260,083 76,358,583 7,694,336 22,658,623 (12,925,071) 93,786,471
Deposits from other credit institutions 7,062,085 4,063,371 4,003,988 15,129,444 3,577,795 6,880,746 (18,061,907) 7,526,078 Deposits from customers 19,086,149 1,658,353 13,178,407 33,922,909 2,977,423 6,160,457 1,792,179 44,852,968 Debt securities issued 9,188,779 5,275,028 1,009,191 15,472,998 544,085 5,745,195 (78,731) 21,683,547 Other financial liabilities held for trading at fair value through profit or loss 3,901,287 2,239,623 400,518 6,541,428 268,859 2,228,931 169,359 9,208,577 Other financial liabilities 669,736 358,879 485,399 1,514,014 94,665 478,008 526,302 2,612,989 Other liabilities 233,795 32,795 266,599 533,189 17,202 112,050 847,876 1,510,317 Total Liabilities 40,141,831 13,628,049 19,344,102 73,113,982 7,480,029 21,605,387 (14,804,922) 87,394,476
Equity and minority interests 1,516,176 812,444 915,981 3,244,601 214,307 1,053,236 1,879,851 6,391,995
Total Liabilities, Equity and minority interests 41,658,007 14,440,493 20,260,083 76,358,583 7,694,336 22,658,623 (12,925,071) 93,786,471
198 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
As at 30 June 2010, the net contribution of the major geographic segments is analyzed as follows:
Portugal Private Corporate Banking and and Retail Asset Ma- Investment Mozam- Consoli- Banking and Companies nagement Banking Other Total Poland Greece Angola bique Other dated
Income statement Interest income 476,891 165,276 27,424 197,241 182,608 1,049,440 291,891 123,655 30,643 58,717 82,510 1,636,856 Interest expense (211,696) (80,273) (15,382) (103,501) (185,386) (596,238) (185,922) (68,315) (10,163) (16,469) (54,790) (931,897) Net interest income 265,195 85,003 12,042 93,740 (2,778) 453,202 105,969 55,340 20,480 42,248 27,720 704,959 Commissions and other income 234,350 41,817 21,004 81,074 7,972 386,217 86,417 24,145 7,638 25,534 23,170 553,121 Commissions and other costs (9,547) (703) (7,932) (1,414) (54,180) (73,776) (16,154) (5,299) (579) (11,050) (4,530) (111,388) Net commissions and other income 224,803 41,114 13,072 79,660 (46,208) 312,441 70,263 18,846 7,059 14,484 18,640 441,733 Net gains arising from trading activity 73 5 15,278 238,745 254,101 26,064 (658) 13,267 16,769 5,014 314,557 Staff costs and administrative costs 334,467 29,568 17,458 37,237 33,642 452,372 119,936 54,907 21,740 27,724 48,629 725,308 Depreciations 829 53 1 48 26,632 27,563 9,611 5,033 2,320 2,719 4,306 51,552 Operating costs 335,296 29,621 17,459 37,285 60,274 479,935 129,547 59,940 24,060 30,443 52,935 776,860 Impairment and provisions (47,963) (88,958) (20,640) (131,050) (121,522) (410,133) (32,403) (25,727) (6,490) (6,994) (16,654) (498,401) Share of profit of associates under the equity method (21) 28,908 28,887 28,887 Net gain from the sale of other assets (2,554) (2,554) (2,554) Profit before income tax 106,812 7,538 (12,980) 20,322 34,317 156,009 40,346 (12,139) 10,256 36,064 (18,215) 212,321 Income tax (28,378) (1,998) 3,625 (5,385) 20,636 (11,500) (8,324) 1,252 (724) (6,412) 3,961 (21,747) Minority interests (1,910) (1,910) (11,045) (4,505) (9,874) (27,334) Profit after income tax 78,434 5,540 (9,355) 14,937 53,043 142,599 20,977 (10,887) 5,027 19,778 (14,254) 163,240
Income between segments 7,700 3,340 (288) (10,752)
Balance sheet Cash and Loans and advances to credit institutions 4,252,994 2,543,108 214,364 4,291,553 (13,759,476) (2,457,457) 718,008 1,190,104 171,800 248,851 3,533,557 3,404,863 Loans and advances to customers 34,186,892 10,213,659 1,307,407 13,444,949 168,064 59,320,971 8,793,376 5,088,509 394,900 783,302 1,539,288 75,920,346 Financial assets 1,260 1,730 956,563 9,402,279 10,361,832 1,426,165 333,271 254,555 124,326 158,492 12,658,641 Other assets 670,236 35,899 21,228 50,548 4,593,414 5,371,325 208,564 121,232 85,735 85,684 1,136,898 7,009,438 Total Assets 39,111,382 12,792,666 1,544,729 18,743,613 404,281 72,596,671 11,146,113 6,733,116 906,990 1,242,163 6,368,235 98,993,288
Deposits from other credit institutions 5,862,222 3,608,391 99,339 5,480,947 (5,795,920) 9,254,979 1,506,401 2,413,084 285,403 60,196 3,259,262 16,779,325 Deposits from customers 20,176,308 1,450,962 1,344,436 5,127,424 1,559,195 29,658,325 8,027,034 3,062,460 514,237 964,705 1,845,683 44,072,444 Debt securities issued 8,349,829 5,154,306 5,126,542 107 18,630,784 272,981 669,959 19,573,724 Other financial liabilities held for trading at fair value through profit or loss 2,523,086 1,557,488 1,549,098 159,274 5,788,946 253,826 83,773 56,504 6,183,049 Other financial liabilities 278,114 137,754 12,627 194,699 1,174,823 1,798,017 444,269 80,591 11,305 17,933 32,140 2,384,255 Other liabilities 188,833 25,389 9,646 31,849 1,190,507 1,446,224 121,810 45,273 25,603 87,586 974,368 2,700,864 Total Liabilities 37,378,392 11,934,290 1,466,048 17,510,559 (1,712,014) 66,577,275 10,626,321 6,355,140 836,548 1,130,420 6,167,957 91,693,661
Equity and minority interests 1,732,990 858,376 78,681 1,233,054 2,116,295 6,019,396 519,792 377,976 70,442 111,743 200,278 7,299,627
Total Liabilities, Equity and minority interests 39,111,382 12,792,666 1,544,729 18,743,613 404,281 72,596,671 11,146,113 6,733,116 906,990 1,242,163 6,368,235 98,993,288
199 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
As at 30 June 2009, the net contribution of the major geografic segments is analysed as follows:
Portugal Private Corporate Banking and and Retail Asset Ma- Investment Mozam- Consoli- Banking and Companies nagement Banking Other Total Poland Greece Angola bique Other dated
Income statement Interest income 796,382 260,564 52,392 304,854 (37,025) 1,377,167 264,881 156,208 16,701 56,373 119,933 1,991,263 Interest expense (438,789) (160,612) (31,443) (198,983) (41,057) (870,884) (221,186) (99,746) (6,915) (12,989) (103,980) (1,315,700) Net interest income 357,593 99,952 20,949 105,871 (78,082) 506,283 43,695 56,462 9,786 43,384 15,953 675,563 Commissions and other income 220,403 27,868 22,108 97,227 (12,522) 355,084 70,640 23,078 4,808 24,815 18,444 496,869 Commissions and other costs (10,457) (1,304) (7,604) (5,711) (52,551) (77,627) (17,595) (7,454) (568) (10,125) (4,165) (117,534) Net commissions and other income 209,946 26,564 14,504 91,516 (65,073) 277,457 53,045 15,624 4,240 14,690 14,279 379,335 Net gains arising from trading activity 8 (1,100) 119,424 118,332 57,487 7,084 5,646 8,640 16,936 214,125 Staff costs and administrative costs 366,582 28,505 18,321 40,424 18,233 472,065 104,337 57,228 12,230 28,233 48,768 722,861 Depreciations 762 51 1 126 29,506 30,446 8,805 4,764 1,595 2,960 3,759 52,329 Operating costs 367,344 28,556 18,322 40,550 47,739 502,511 113,142 61,992 13,825 31,193 52,527 775,190 Impairment and provisions (99,024) (68,446) (20,895) (56,596) (32,091) (277,052) (40,921) (13,252) (886) (2,908) (4,979) (339,998) Share of profit of associates under the equity method (1,603) 31,002 29,399 1,545 30,944 Net gain from the sale of other assets 21,466 21,466 21,466 Profit before income tax 101,179 29,514 (3,764) 97,538 (51,093) 173,374 1,709 3,926 4,961 32,613 (10,338) 206,245 Income tax (26,800) (7,821) (2,372) (26,548) 24,148 (39,393) 281 (2,140) 822 (5,863) 355 (45,938) Minority interests (500) (500) (687) (2,733) (8,907) (12,827) Profit after income tax 74,379 21,693 (6,136) 70,990 (27,445) 133,481 1,303 1,786 3,050 17,843 (9,983) 147,480
Income between segments 22,361 (2,361) (2,043) (17,957)
Balance sheet Cash and Loans and advances to credit institutions 5,825,712 3,407,193 382,543 6,314,917 (17,150,130) (1,219,765) 393,940 1,478,794 179,456 245,013 3,757,413 4,834,851 Loans and advances to customers 35,089,821 10,996,752 2,297,926 12,820,110 (1,348,503) 59,856,106 7,841,121 4,974,486 252,758 503,445 2,426,819 75,854,735 Financial assets 1,402 1,672 3,398,338 997,063 4,398,475 1,826,335 358,570 173,005 227,795 156,592 7,140,772 Other assets 741,072 36,548 21,802 125,258 4,576,499 5,501,179 144,540 118,977 46,916 67,510 76,991 5,956,113 Total Assets 41,658,007 14,440,493 2,703,943 22,658,623 (12,925,071) 68,535,995 10,205,936 6,930,827 652,135 1,043,763 6,417,815 93,786,471
Deposits from other credit institutions 7,062,085 4,063,371 436,289 6,880,746 (18,061,907) 380,584 1,384,041 2,044,912 198,958 45,864 3,471,719 7,526,078 Deposits from customers 19,086,149 1,658,353 1,334,732 6,160,457 1,792,179 30,031,870 7,557,193 3,508,173 367,511 801,101 2,587,120 44,852,968 Debt securities issued 9,188,779 5,275,028 544,085 5,745,195 (78,731) 20,674,356 209,413 799,778 21,683,547 Other financial liabilities held for trading at fair value through profit or loss 3,901,287 2,239,623 231,002 2,228,931 169,359 8,770,202 303,567 71,704 124 62,980 9,208,577 Other financial liabilities 669,736 358,879 45,300 478,008 526,302 2,078,225 225,353 159,409 19,722 35,450 94,830 2,612,989 Other liabilities 233,795 32,795 9,982 112,050 847,876 1,236,498 98,633 55,700 21,172 81,094 17,220 1,510,317 Total Liabilities 40,141,831 13,628,049 2,601,390 21,605,387 (14,804,922) 63,171,735 9,778,200 6,639,676 607,487 963,509 6,233,869 87,394,476
Equity and minority interests 1,516,176 812,444 102,553 1,053,236 1,879,851 5,364,260 427,736 291,151 44,648 80,254 183,946 6,391,995
Total Liabilities, Equity and minority interests 41,658,007 14,440,493 2,703,943 22,658,623 (12,925,071) 68,535,995 10,205,936 6,930,827 652,135 1,043,763 6,417,815 93,786,471
200 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
Reconciliation of net income of reportable segments with the net result of the Group
Description of the relevant items of reconciliation:
Jun 2010 Dec 2009 Euros '000 Euros '000 Net income (excluding Minority Interests) Retail Banking 78,434 74,379 Companies 5,540 21,693 Corporate and Investment Banking 14,937 70,990 Private Banking e Asset Management (9,355) (6,132) Foreign Business 46,067 26,327
135,623 187,257 Impact on the Net interest income of the allocation of capital (1) 8,832 14,069
126,791 173,188
Amounts not allocated to segments Minority interests (27,334) (12,827) Operating expenses (2) (60,275) (47,936) Loan impairment and other provisions (47,957) (19,877) Goodwill impairment of Greece (3) (73,565) Gains established with the sale of assets (4) 21,183 Instruments measured at FVO (Own Credit Risk) 179,173 (14,455) Accounting for hedging interest rate risk (5) 36,600 46,500 Others (6) 29,807 1,704
Total not allocated to segments 36,449 (25,708)
Consolidated net income 163,240 147,480
(1) Represents the impact on Net interest income due to allocation of capital. The balance sheet items of each subsidiary and each business unit are recalculated considering the replacement of accounting equity by the amounts assigned through the allocation within the regulatory criteria for creditworthiness.
(2) Includes operating costs not allocated to business segments, including those related to the areas with corporate and strategic projects.
(3) As referred in note 29 of the Consolidated Financial Statements.
(4) Gains resulting from the spread to new shareholders of the share capital of Banco Millennium Angola.
(5) Results from financial operations associated with the economic strategy of hedging interest rate risk associated with fixed rate liabilities through interest rate swaps, in result from the discontinuance of an hedging relationship, in sequence of an effectiveness valuation done regulary.
(6) Includes funding for non interest bearing assets and the financial strategies as well as tax effect associated with the other impacts.
51. Risk Management
The Group is subject to several risks during the course of its business. The risks from different companies of the Group are managed centrally coordinating with the local departments and considering the specific risks of each business.
The Group's risk management policy is designed to ensure adequate relationship at all times between its own funds and the business it carries on, and also to evaluate the risk/return profile by business line.
Monitoring and control of the main types of financial risk – credit, market, liquidity and operational – to which the Group's business is subject are of particular importance.
201 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
Main Types of Risk
Credit – Credit risk is associated with the degree of uncertainty of the expected returns as a result of the inability either of the borrower (and the guarantor, if any) or of the issuer of a security or of the counterparty to an agreement to fulfils their obligations.
Market – Market risk reflects the potential loss inherent in a given portfolio as a result of changes in rates (interest and exchange) and/or in the prices of the various financial instruments that make up the portfolio, considering both the correlations that exist between them as well as the respective volatility.
Liquidity – Liquidity risk reflects the Group's inability to meet its obligations at maturity without incurring in significant losses resulting from the deterioration of the funding conditions (funding risk) and/or from the sale of its assets below market value (market liquidity risk).
Operational – Operational risk is understood to be the potential loss resulting from failures or inadequacies in internal procedures, persons or systems, and also the potential losses resulting from external events.
Internal Organisation
The Banco Comercial Português Executive Board of Directors is responsible for the definition of the risk policy, including approval at the very highest level of the principles and rules to be followed in risk management, as well as the guidelines dictating the allocation of economic capital to the business lines.
The General and Supervisory Board, through the Financial Subjects Committee, ensures the existence of adequate risk control and of risk management systems at the level both of the Group and of each entity. At the proposal of the Banco Comercial Português Executive Board of Directors, the General and Supervisory Board is also in charge of with approving the risk tolerance level acceptable to the Group.
The Risk Committee is responsible for monitoring the overall levels of risk incurred, ensuring that they are compatible with the objectives and strategies approved for the business.
The Risk Office is responsible for the control of risks in all the Group entities, in order to ensure that the risks are monitored on an overall basis and that there is alignment of concepts, practices and objectives. It must also keep the Risk Committee informed of the Group’s level of risk, proposing measures to improve control and implementing the approved limits.
The activity of every entity included within the Banco Comercial Português consolidation perimeter is governed by the principles and decisions established centrally by the Risk Committee, and they are provided with Risk Office structures which are established in accordance with the risks inherent in their particular business. A Risk Control Committee has been set up at each subsidiary, responsible for the control of risks at local level, in which the Group Risk Office takes part.
Risk Evaluation and Management Model
For purposes of profitability analysis and risk quantification and control, each entity is divided into the following management areas:
Trading: involves those positions whose objective is to obtain short term gains through sale or revaluation. These positions are actively managed, are tradable without restriction and may be valued frequently and precisely, including the securities, the derivatives and the sales activities; Financing: involves the Bank’s institutional financing and money market activity of the Group; Investment: includes those positions in securities to be held to maturity or during a longer period of time or those that are not tradable on liquid markets; Commercial: commercial activity with customers; Structural: deals with balance sheet elements or operations that, because of their nature, are not directly related with any of the other areas; ALM: is the function of managing assets and liabilities.
The definition of the management areas allows effective separation of the management of the trading and banking portfolios, as well as an adequate allocation of each operation to the most adequate business strategy line.
Risk assessment
Credit Risk
Credit granting is based on prior classification of the customers’ risk and on thorough assessment of the level of protection provided by the underlying collateral. In order to do so, a single risk notation system has been introduced, the Rating Master Scale. It is based on the expected probability of default, allowing greater discrimination in the assessment of the customers and better establishment of the hierarchies of the associated risk. The Rating Master Scale also identifies those customers showing worsening credit capacity and, in particular, those classified as being in default in keeping with the new Basel II Accord.
All the rating and scoring models used by the Group have been duly calibrated for the Rating Master Scale.
The protection level concept has been introduced as a crucial element of evaluation of the effectiveness of the collateral in credit risk mitigation, leading to more active collateralization of loans and more adequate pricing of the risk incurred.
202 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
The Group adopts a continuous monitoring policy towards its decision processes, promoting changes and improvements in those processes whenever it considers necessary, in order to ensure a greater consistency and efficiency in decision taking.
To quantify the credit risk at the level of the various portfolios, the Group has developed a model based on an actuarial approach, which provides the distribution of total loss probability. In addition to the Probability of Default (PD) and of the Amount of the Loss Given Default (LGD) as the central points, consideration is also given to the uncertainty associated with the development of these parameters, through the introduction of the respective volatility. The effects of diversification and/or concentration between the sectors of the loan portfolios are quantified by introducing the respective correlations.
The Group’s exposure to credit risk as at 30 June 2010 and 31 December 2009 is presented in the following table:
Jun 2010 Dec 2009 Euros '000 Euros '000 Loans and advances to credit institutions Repayable on demand 1,016,118 839,552 Other loans and advances 1,239,636 2,025,834 Loans and advances to customers 75,920,346 75,191,116 Financial assets held for trading and available for sale 5,545,758 5,318,694 Assets with repurchase agreement 74,609 50,866 Hedging derivatives 581,780 465,848 Financial assets held to maturity 5,834,514 2,027,354 Investments in associated companies 428,233 438,918 Other assets 803,945 987,245 Guarantees granted 9,034,056 8,519,462 Irrevocable commitments 6,190,755 4,364,948 Credit default swaps (notional) 152,351 489,896 106,822,101 100,719,733
Market Risks
The Group in monitoring and control of market risk existing in the diverse portfolios uses and integrated risk measure that includes the main types of market risk identified by the Group: Generic risk, specific risk, non linear risk and commodities risk.
The measure used by in evaluating the generic market risk is the VaR (Value at Risk). The VaR is calculated on the basis of the analysis approximation defined in the methodology developed by the RiskMetrics. It is calculated considering a 10 working day time horizon and an unilateral statistical confidence interval of 99%.
In calculating the volatility associated with each risk vector, the model assumes a greater weighting for the market conditions seen in the more recent days, thus ensuring more accurate adjustment to market conditions.
A specific risk evaluation model is also applied to securities and associated derivatives for which the performance is related to its value. With the necessary adjustments, this model follows regulatory standard methodology.
Complementary measures for the non linear risk, which incorporates the options risk not coverded on the VaR model at a confidence level of 99%, and a standard measure for the commodities risk are also used.
Capital at risk values are determined both on an individual basis for each one of the position portfolios of those areas having responsibilities in risk taking and management, as well as in consolidated terms taking into account the effects of diversification between the various portfolios.
To ensure that the VaR model adopted is appropriate to the evaluation of the risks involved in the positions that have been assumed, a back testing process has been instituted. This is carried out on a daily basis and it confronts the VaR indicators with the actual results.
The following table shows these major trading book indicators for the first semester of 2010:
Euros '000 2010.06.30 Average Maximum Minimum 2010.01.01
Generic Risk ( VaR ) 4,180 7,198 28,100 2,778 4,178 Interest Rate Risk 1,893 5,655 25,904 1,954 1,684 FX Risk 2,675 3,140 4,195 2,413 3,551 Equity Risk 965 592 1,030 368 354 Diversification effects 1,352 2,188 3,029 1,957 1,411
Specific Risk 1,308 1,557 2,980 1,113 1,539
Non Linear Risk 183 187 373 94 77
Commodities Risk 16 3 16 1 2 Global Risk 5,688 8,946 30,166 4,247 5,796
203 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
Evaluation of the interest rate risk originated by the banking portfolio is performed through a risk sensitivity analysis process carried out every month for all operations included in the Group’s consolidated balance sheet.
In this analysis consideration is given to the financial characteristics of the contracts available on the information systems. On the basis of these data the respective expected cash flows are projected in accordance with the repricing dates.
Aggregation of the expected cash flows for each time interval for each of the currencies under analysis allows determination of the interest rate gaps per repricing period.
The interest rate sensitivity of the balance sheet in each currency is calculated through the difference between the present value of the interest rate mismatch after discounting the market interest rates and the discounted value of the same cash flows by simulating parallel shifts of the market interest rates.
The following table shows the expected impact on the banking books economic value of parallel shifts of the yield curve by +/ 100 and +/ 200 basis points, on each of the main currencies:
30 June 2010 Euros '000 Currency - 200 bp - 100 bp + 100 bp + 200 bp
CHF (2,323) (2,238) 3,563 7,017 EUR (65,571) (67,212) 63,355 125,524 PLN 9,134 4,457 (4,251) (8,307) USD 4,014 1,287 (957) (1,819) TOTAL (54,746) (63,706) 61,710 122,415
31 December 2009 Euros '000
Currency - 200 bp - 100 bp + 100 bp + 200 bp
CHF 3,370 1,823 910 1,915 EUR 9,361 (14,024) 22,254 43,129 PLN 8,339 4,090 (3,941) (7,738) USD 4,136 1,834 (2,157) (5,176) TOTAL 25,206 (6,277) 17,066 32,130
The Group regularly undertakes hedging operations on the market aiming to reduce the interest rate mismatch of the risk positions associated with the portfolio of transactions of the commercial and structural areas.
Liquidity risk
Evaluation of the Group’s liquidity risk is carried out using indicators defined by the supervisory authorities on a regular basis and other internal metrics for which exposure limits are also defined.
The evolution of the Group’s liquidity situation for short term time horizons (up to 3 months) is reviewed daily on the basis of two indicators defined in house, immediate liquidity and quarterly liquidity. These measure the maximum fund taking requirements that could arise on a single day, considering the cash flow projections for periods of 3 days and of 3 months, respectively.
Calculation of these indicators involves adding to the liquidity position of the day under analysis the estimated future cash flows for each day of the respective time horizon (3 days or 3 months) for the transactions as a whole brokered by the markets areas, including the transactions with customers of the Corporate and Private networks that, for their dimension, have to be quoted by the Trading Room. The amount of assets in the Bank’s securities portfolio considered highly liquid is added to the calculated value, leading to determination of the liquidity gap accumulated for each day of the period under review.
In parallel, the evolution of the Group’s liquidity position is calculated on a regular basis identifying all the factors that justify the variations that occur. This analysis is submitted to the Capital and Assets and Liabilities Committee (CALCO) for appraisal, in order to enable the decision making that leads to the maintenance of financing conditions adequate to the continuation of the business. In addition, the Risks Commission is responsible for controlling the liquidity risk.
This control is reinforced with the monthly execution of stress tests, to characterize the Bank's risk profile and to ensure that the Group and each of its subsidiaries, fulfil its obligations in the event of a liquidity crisis. These tests are also used to support the liquidity contingency plan and management decisions.
204 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
During this period another fundamental vector of the Group's intervention in terms of mitigating liquidity risk has been the increase of the pool of discountable assets that can be used in funding operations with the European Central Bank and other Central Banks of the countries where the Group operates, as an element of prevention against any event of disruption in the financing markets. The eligible pool of assets for funding operations in the European Central Bank and other Central Banks is detailed as follows:
Jun 10 Dec 09 Euros '000 Euros '000 European Central Bank Securites 15,698,514 9,406,122 Loans and advances to costumers 103,653 28,167 Other Central Banks Securites 1,720,160 1,469,615
17,522,327 10,903,904
As at 30 June 2010, the amount borrowed from the European Central Bank and from the Other Central Banks amounted to Euros 11,558,000,000 and Euros 14,147,000 respectively (31 December 2009: 2,925,000,000 and Euros 119,000,000).
The amount of eligible assets for funding operations in the European Central Banks includes securities issued by SPE's concerning securitization operations in which the assets were not derecognised at a consolidated level, therefore the respective securities are not recognised in the securities portfolio.
Operational Risk
The approach to operational risk management is based on the business and support end to end processes. Process management is the responsibility of the Process Owners, who are the first parties responsible for evaluation of the risks and for strengthening the performance within the scope of their processes. The Process Owners are responsible for keeping up to date all the relevant documentation concerning the processes, for ensuring the real adequacy of all the existing controls through direct supervision or by delegation on the departments responsible for the controls in question, for coordinating and taking part in the risk self assessment exercises, and for detecting and implementing improvement opportunities, including mitigating measures for the more significant exposures.
In the operational risk model implemented in the Group, there is a systematic process of gathering information on operational losses, that defines on a systematic form, the causes and the effects associated to an eventual detected loss. From the analysis of the historical information and its relationships, processes involving greater risk are identified and mitigation measures are launched to reduce the critical exposures.
Covenants
The contractual terms of instruments of wholesale funding encompass obligations assumed by the Group as debtor or issuer, concerning general duties of societary conduct, maintenance of banking activity and the inexistence of certain credit privileges to other creditors (“negative pledge”). These terms reflect essentially the standards internationally adopted for each type of instrument.
The terms of the Group’s participation in securitization operations involving its own assets are subject to mandatory changes in case the Group stops respecting certain rating criteria. The criteria established in each transaction results mainly from the existing risk analysis, at the moment that the transaction was set, being these methodologies are usually applied by each rating agency in a standardized way to all the securitization transactions involving the same type of loans. Generally, changes in the Group’s interventions of a financial nature consist of pledging collaterals or nominating a substitute or a guarantor that complies with the established rating criteria and in the Group’s interventions as a mere services provider consist of substituting the services provider for an alternative one. In what regards the Group’s securitization transactions where the underlying loans were derecognised, only the Group’s intervention as loans’ manager and as interest rate swap’s counterparty is subject to changes. In case Group stops complying with the established rating criteria, regarding its participation as loans’ manager, a substitute loans’ manager must be nominated and in case it stops complying with the referred criteria regarding its participation as interest rate swap’s counterparty, a collateral must be pledged, an alternative counterparty must be nominated or the right to early liquidate the swap must be conferred to the counterparty, depending on the transaction or the rating in analysis.
The two notch reduction of the long term rating from “A1” to “A3” and the reduction of the short term rating from “P 1” to “P 2” by Moody’s, announced on 14 July, triggered the need to establish a contingent liquidity facility covering 6 months of interest on the notes for each of the securitizations Magellan Mortgages No3 and No4 (for which the loans have been derecognized) and Kion Mortgages Finance No1. A similar facility should also be established in Caravela SME No. 1. In addition, in this transaction (for which the loans have not be derecognised), the fund account should also be transferred to an alternative bank with a minimum short term rating of “P 1” by Moody’s and collateral should be posted for the interest rate swap.
In a hypothetic scenario of a further one notch downgrade of the long term rating by Moody’s, an additional facility in Caravela SME1 would be required for the transaction and the interest rate swap would need to be transferred to or guaranteed by an eligible counterparty. Similarly, the interest rate swaps included in the cover pool of the BCP Covered Bond Programme would need to be transferred to or guaranteed by an eligible counterparty. In a scenario where BCP ceases to be rated at least “P 2” by Moody’s the servicing of the loans securitized in Kion Mortgages Finance Nº2, which have not been derecognised, would need to be adjusted. A downgrade of Bank Millennium S.A. to below “Baa2” would trigger the accelerated amortization of Orchis, in which the loans have not been derecognised.
205 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
A one notch downgrade by Standard&Poor’s does not produce additional impacts, with the exception of the loss of the “A 2” short term rating assigned to BCP, which would trigger the need to establish a subordinated loan to cover the set off risk associated with portfolio securitized in Tagus Leasing Nº1 (which has not been derecognised).
A one notch downgrade by Fitch does not produce additional impacts, with the exception of the loss of the “F 1” short term rating assigned to BCP, which would trigger the need to transfer the interest rate swaps included in the cover pool of the Covered Bonds Programme or obtain a guarantee from an eligible counterparty.
52. Solvency
Consolidated own funds of Banco Comercial Português are determined according to the applicable regulatory rules, namely the Regulation 12/92 from the Bank of Portugal. The own funds result from the adding the core own funds (Tier 1) with the complementary own funds (Tier 2) and subtracting the component of Deductions.
The Tier 1 comprises the steadiest components of the own funds. This heading includes the paid up capital and the share premium, the reserves and the retained earnings, the minority interests related to the share capital not held on fully consolidated companies and the deferred impacts related to the transition adjustments to the International Financial Reporting Standards. Preference shares and other hybrid instruments are also included within the Tier 1, after the Bank of Portugal's approval and as long as they do not exceed the regulatory limits defined by that entity versus the total amount of Tier 1, determined before the deduction related to the qualified investments.
Furthermore, the following are negative components of Tier 1: own shares, goodwill and other intangible assets, deferred costs related with actuarial variations in excess of the Pension Fund’s corridor, the provisioning shortage if credit impairment, determined in accordance with the International Financial Reporting Standards stands below the amount of credit provisions defined by Regulation 3/95 from the Bank of Portugal on an unconsolidated basis, and the deduction related to the qualified investments. This deduction refers to the investments owned in financial institutions, on one hand, and in insurance companies, on the other, above 10% and not below 20% of their share capital, respectively, as long as they are not fully consolidated. This deduction, which is done in equal parts to Tier 1 and Tier 2, is also applied to the part of the aggregate amount of investments on financial institutions, individually representing up to 10% of their share capital, that exceed the respective regulatory limit.
Tier 1 can also be influenced by the existence of revaluation differences on available for sale securities and other assets, on cash flow hedge transactions or on financial liabilities at fair value through profits and losses, to the extent related to own credit risk, by the existence of a fund for general banking risks and/or net profits arising from the capitalization of future revenues from securitized assets.
If the amount of preference shares and other elegible hybrid instruments approved by the Bank of Portugal to increase the Tier 1 exceeds the respective limits, this excess is deducted to this heading and added to the Tier 2.
In 2008, the Bank of Portugal introduced some changes to the own funds calculation. Thus, through the new Regulation 6/2008, similarly to credit and other receivables, potential gains and losses arising from available for sale debt securities were excluded from the own funds, to the portion exceeding the impact of related hedging transactions. The obligation of deducting to the Tier 1 the positive revaluation reserves representing non realized gains on available for sale equity instruments (net of taxes), in excess to the potential related impaired amounts is maintained.
Simultaneously, through Regulation 7/2008, the Bank of Portugal extended, for three additional years, the amortization plan of the transition adjustments to the International Financial Reporting Standards that were not fully recognized in the own funds of June 30, 2008, concerning post retirement health benefits and liabilities of the pension fund. On the other hand, the Bank of Portugal published Regulation 11/2008 which allowed, for regulatory purposes, the enlargement of the pension fund corridor up to the amount of the actuarial losses of 2008, excluding the expected return of the fund's assets in 2008, to be amortized steadily through the next four years.
Finally, the Bank of Portugal increased the limit of preference shares and other elegible hybrid instruments within the Tier 1, from 20% to 35%, as long as it corresponds to perpetual instruments, with no incentives to redeem, and suspended the 10% limit applied to the amount of deferred tax assets that could be included in the Tier 1.
The complementary own funds include the subordinated debt and 45% of the unrealized gains in available for sale equity securities and other assets, as well as the amounts related to preference shares and other hybrid instruments that have been deducted to the Tier 1. These components are part of the Upper Tier 2, except the subordinated debt, that is split between Upper Tier 2 (perpetual debt) and Lower Tier 2 (the remaining).
Subordinated debt can only be included in the own funds with the agreement of the Bank of Portugal and as long as their total amount complies with the following limits: a) the Tier 2 cannot surpass the amount of the Tier 1and b) the Lower Tier 2 cannot surpass 50% of the Tier 1. Additionally, non perpetual subordinated loans should be amortized at a 20% annual rate, along their last five years to maturity. The Tier 2 is also subject to the deduction of 50% of investments owned in financial institutions and insurance companies, as already mentioned. If the amount of Tier 2 is not enough to accommodate this deduction, the excess should be subtracted to the Tier 1.
206 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
In order to conclude the calculation of the regulatory capital, there are still some deductions to the own funds that need to be performed, namely the amount of real estate assets resulting from recovered loans that have exceeded the regulatory period of permanence in the Bank’s accounts, the impairment concerning securitization transactions that have not reached the regulatory definition of effective risk transfer, to the extent of the amounts not recognized in the Bank's accounts, and the potential excess of exposure to risk limits in the scope of Bank of Portugal published Regulation 6/2007.
Capital requirements have been determined in accordance with the Basel II framework since the beginning of 2008. In this scope, the Bank timely filed with the Bank of Portugal a formal request, regarding the use of the internal ratings based approach for credit risk and the internal models approach for market risk, as well as the standard approach for calculating operational risk requirements, which had some developments during the first semester of 2009.
Therefore, the Bank of Portugal authorized BCP Group to use the standard approach to calculate capital requirements for operational risk, instead of the basic indicator approach, and the internal models approach to calculate capital requirements for the generic market risk of the trading portfolio, comprising the sub portfolios managed from Portugal, related to debt instruments, capital instruments and foreign exchange risks.
As at December 2009, capital requirements for credit risk were determined taking into account the risks recorded both on balance and off balance sheet weighted based on the type of counterparties, the maturity of transactions and the existing collaterals, as defined by the Regulation 5/2007 from the Bank of Portugal for the standard approach. The requirements for securitized assets were determined in accordance with the Regulation 7/2007 from the Bank of Portugal. Capital requirements for operational risk were calculated following the standard approach described in the Regulation 9/2007 from the Bank of Portugal. Additionally, capital requirements for the trading portfolio were also calculated, according to the Regulation 8/2007 from the Bank of Portugal, namely for the specific risk, while capital requirements for the generic risk were calculated in accordance to the internal models approach.
The confirmation that an entity has an amount of own funds not below the amount of its capital requirements assures the adequacy of its capital, reflected on a solvency ratio represented by the percentage of total own funds to the result of 12.5 times the capital requirements of at least the regulatory minimum of 8%. Additionally, the Bank of Portugal released a recommendation in order to, by September 30, 2009, the financial groups submitted to its supervision, as well as the respective mother companies, strengthen their Tier 1 ratios to a figure not below 8%.
Jun 2010 Dec 2009 Euros '000 Euros '000 Core own funds Paid up capital and share premium 4,886,722 4,886,722 Reserves and retained earnings (637,214) (58,184) Minority interests 452,395 340,117 Preference shares 1,881,927 1,933,566 Intangible assets (463,343) (534,934) Net impact of accruals and deferrals and other regulatory adjustments (787,309) (465,517)
5,333,178 6,101,770 Complementary own funds Upper Tier 2 132,819 135,455 Lower Tier 2 1,083,017 1,430,372
1,215,836 1,565,827 Deductions to total own funds (295,089) (127,015)
Total own funds 6,253,925 7,540,582
Own funds requirements Requirements from Regulation n. 5/2007 4,593,026 4,884,722 Trading portfolio 46,885 27,996 Operacional risk 348,789 348,789
4,988,700 5,261,507 Capital ratios Tier 1 8.6% 9.3% Tier 2 (*) 1.4% 2.2% Solvency ratio 10.0% 11.5%
(*) Includes deductions to total own funds
207 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
53. Accounting impact arising from the inspection from the supervisory authorities
In the scope of the investigations carried out by the supervisory authorities since the end of 2007, which are described in note 54, the Bank promoted, from that date, an internal investigation in relation to the transactions realized with off shore entities.
This internal investigation identified that, between 1999 and 2002, BCP Group financed off shore entities for the purposes of acquisition of shares issued by the Group. In November 2002, the referred offshore entities sold, to a financial institution, the BCP shares held, which represented 4.99% of the share capital of the Bank as at that date and, simultaneously acquired notes (Notes), issued by that financial institution, with an amount equivalent to 50% of the proceeds from the sale. This financial institution communicated to the market, on 9 December 2002, the acquisition of a qualified investment in the Bank.
The above referred loans were subject to a restructuring operation, occurred in March 2004, having been assumed by a group whose main activity, developed through the company Edifícios Atlântico, S.A., consists on the development of real estate projects (from now on referred to as “GI”). Following this restructuring operation, GI assumed net liabilities amounting to 450 million euros, net of the reimbursement of the Notes occurred in December 2004. On the same date, the Bank sold to GI an entity named Millennium bcp Imobiliária, for 26 million euros, and a real estate portfolio for 61 million euros.
Regarding the above mentioned restructuring operation, GI, through Millennium bcp Imobiliária issued commercial paper in the amount of Euros 210 million subscribed by BCP Group and that in 2005 was contributed in kind to the Banco Comercial Português Group Pension Fund and together with shares issued by quoted companies. As referred in note 48, after this contribution, and as a result of the communication by Millennium bcp Imobiliária that it was not able to repay its debts, the Pensions Fund registered an actuarial loss in the approximate amount of Euros 115,000,000 in 2006 and 2007 related to the commercial paper issued by Millennium bcp Imobiliária. The total amount net of amortizations, as at 30 June 2010 as referred in note 48, in accordance with the accounting policy described in note 1 w), is Euros 89,125,000 (31 December 2009: Euros 92,000,000). The amount will continue to be amortized by the remaining term of 16 years with a annual amortization of approximatly Euros 5,750,000.
Considering the significant exposure of the Group towards GI and the real estate sector in which this entity operates, in 2005, the Bank allocated a provision, in the amount of 85 million euros, to the existing loans resulting from the above referred transactions.
In June 2006, the Group, which previously had acquired a minority shareholding of 11.5% in Millennium bcp Imobiliária, granted shareholders loans to this entity, in the amount of 300 million euros, in order to allow Millennium bcp Imobiliária to acquire, from another GI subsidiary, an indirect majority shareholding in an Angolan entity which owned the so called Baia de Luanda Project. This entity had obtained, in October 2005, the concession, for 60 years, of the Baia de Luanda leasehold. With the proceeds from this transaction, GI repaid to BCP an additional portion of the loan, corresponding to 305 million euros.
Considering the significance of the Project, the additional financing requirements for its development and the extent of GI’s indebtedness with BCP, this entity proposed and BCP accepted, a holding of 68.34% of Millennium bcp Imobiliária share capital which at that date held an economic interest of 54% in the Baia de Luanda Project, as a repayment of the residual loan, which amounted to 61 million euros, which, in June 2007, extinguished the remaining of the above mentioned net liabilities assumed in the amount of Euros 450 million. As a result of this transaction, BCP become owner of 90% of Millennium bcp Imobiliária share capital and, indirectly, of 54% of the future economic benefits of the above mentioned project, which were subject to full consolidation method in accordance with the accounting policy described in note 1 b). Considering the existing indications arising from the ongoing investigations conducted by the supervisory authorities regarding a more thorough review of the economic substance of the above referred transactions, the Group decided to consider a more prudent interpretation, regarding the risks identified, the nature of the transactions and restructurings which occurred, and recorded an adjustment of 300 million euros with effect at 1 January 2006, with a net impact of 220.5 million euros after considering the tax effect.
As referred to in note 54, such decision does not represent any kind of recognition by the Bank of the existence of the alleged infractions which may be attributed to it. As referred also in note 54, as at 12 December 2008, the Group was notified for the administrative proceeding nº 24/07/CO constituted by the Bank of Portugal and for the administrative proceeding nº 41/2008 constituted by CMVM related to the inquiry processes referred above. The Bank maintains the position of contesting any infractions attributed to this matter considering the legal terms applicable. Notwithstanding this fact, the Executive Board of Directors considers that the financial statements for the periods of 2009 and 30 June 2010 include, in all material respects the disclosures regarding the impact on the financial position of the Group of the referred matters, as disclosed in notes 48, 53 and 54.
The above referred adjustment, recognised in accordance with IFRS and in the notes to the financial statements, can be analysed as follows:
Restated Equity Net income Equity 31.12.2006 2006 01.01.2006 Euros '000 Euros '000 Euros '000
Previosly reported 4,841,892 779,894 4,247,494 Adjustments:
Loan granted (300,000) (300,000) Provision for loan losses 9,825 9,825 Deferred tax 76,896 (2,604) 79,500
(213,279) 7,221 (220,500)
Restated 4,628,613 787,115 4,026,994
208 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
Banco Comercial Português, S.A. during 2009, after analysing the market conditions and the development perspectives of the Luanda Bay Urban Requalification Project ("Baía de Luanda Project"), decided to reduce the Millenniumbcp Group shareholder participation in the project to 10%, through the sale to the Angolan company Finicapital Investimentos e Gestão S.A.. This sale will generate a cash inflow of approximately 100,000,000 USD, giving place to a gain of Euros 57,196,000.
According to the characteristics of the agreement, and in accordance with the accounting policy described in note 1 b), the investment is now consolidated through the equity method.
Banco Comercial Português considers that the participation Millenniumbcp Group will maintains in the Baía de Luanda project will allow the Group to keep a relevant presence in a highly important project to Angola. Additionally to that, the Group maintains the expectation that the Baia de Luanda Project will generate results in the future, which will be registered against results of the Bank in the years that are generated.
54. Administrative proceedings
1. At the end of the year of 2007, the Bank received a formal notice dated of 27 December 2007 informing that administrative proceeding no. 24/07/CO was being brought by the Bank of Portugal against the Bank, “based in preliminary evidence of administrative offences foreseen in the General Framework of credit Institutions and Financial Companies (approved by Decree-Law no. 298/92, of December 31), in particular with respect to breach of accounting rules, provision of false or incomplete information to the Bank of Portugal, in particular in what respect to the amount of own funds and breach of prudential obligations”. A press release issued by the Bank of Portugal on 28 December 2007 mentioned that such administrative proceeding was brought “based in facts related with 17 off shore entities, which nature and activities were always hidden from the Bank of Portugal, in particular in previous inspections carried out”.
On 12 December 2008, the Bank was notified of an accusation under the process of administrative proceeding no. 24/07/CO instructed by the Bank of Portugal.
On March 2009, the Bank did not accept the charges or accusations made against it, and provided defense under this process of administrative proceeding within their term.
On 12 May 2010 the Bank was notified of the contents of the decision that, within the scope of the proceedings, was issued by the Board of Directors of Banco de Portugal, applying to it, as primary sanction, a single fine of Euros 5,000,000.
The Bank appealed from this decision issued by the administrative authority.
2. On 12 December 2008, the Bank was notified by the CMVM of the accusation under the process of administrative proceedings no No. 41/2008 wherein it was charged with seven administrative offences for the alleged violation of article 7th of the securities Code (CVM) and of article 389 (1) (a) of that Code.
In accordance with article 7th of the CVM the information relating to financial instruments, organized trading methods, the activities of financial intermediation, the settlement, clearing of operations, public offers of securities and issuers must be complete, true, updated, objective, clear and lawful.
According the charges, each one of the administrative offences the Bank was charged with is a very serious administrative offence able of being punished with a fine that may go from Euros 25,000 to Euros 2,500,000 and that, with the accumulation of violations, foressen in article 19th (1) and (2) of the Administrative Offences General Regime, a single fine shall be applied, with the maximum limit that may not exceed the double of the highest maximum limit of the administrative offences, attaining a maximum amount of EUR 5,000,000. The Bank did not accept the charges brought against it and has provided, on 27 January 2009, defense under the process of administrative proceeding in question, having sustained a total rejection of the accusation.
Banco Comercial Português was notified on 26 June 2009 of the CMVM's decision, within the scope of the administrative offence proceedings nr. 41/2008 that resulted in a single fine of 5,000,000 with the partial suspension of the sentence's execution for Euros 2,500,000 for a two year term. The fine would be charged in its full amount if, during the suspension time the bank would practice any criminal or administrative offence, as foreseen in the Securities Code and it was tinaly disclosed.
The Bank did not accept this accusation and opposed to it on 24 July 2009.
On 21 July 2010, the Criminal First Level Court pronouced the sentence of the process which partialy judged the appeal in regarding the suspension of Euros 2,500,000 for a two year period and confirmed the CMVM's decision in all the remainder. The Bank appealed the court's decision.
209 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
3. Previously, on 21 December 2007, CMVM had addressed a notice to the Bank, indicating that it should make public disclosure thereof, which the Bank did on 23 December 2007. The notice read as follows:
“The CMVM, pursuant to its powers, is now engaged in a supervision action on BCP (as a listed company), in order to determine the nature and the activities of several off shore entities responsible for investments in securities issued by BCP Group or related entities. Despite the process of supervision being in progress, in particular in order to obtain a complete and final description of the situation and of the market behaviour of those entities, as well as to determine the relevant liabilities (including personal liabilities), the CMVM came to the following preliminary findings: a) The mentioned off shore entities have constituted securities portfolios – which included almost exclusively shares of BCP – with financing obtained from Banco Comercial Português, and there is, in general, no evidence that such entities were financed for this purpose by any other significant transfer from an entity external to the BCP Group; b) It is already known that part of the debts was eliminated through the assignment of credits to third parties for a residual consideration; c) The conditions of these financings and the governance of such entities give the appearance that BCP has assumed all the risk concerning those off shore entities, and that it had power to control the life and business of such entities; d) Thus, such transactions are in fact a financing for the acquisition of own shares not reported as such. This configuration is also present in a transaction made with a financial institution, which lead this institution to disclose a qualified shareholding, even though the economic interest and the possibility of exercising the voting rights remained within BCP; e) Pursuant to the described circumstances, it may be concluded that the information given to the authorities and to the market, in the past, was not always complete and/or true, in particular in what concerns the amount of BCP’s own funds and its owners; and f) Significant market transactions made by the mentioned entities were detected, involving significant considerations; these transactions require a deeper analysis, in order to find out about possible infringements of the market rules.
Thus, given the nature of these conclusions and the urgency of the matter, the CMVM, under article 360, no. 1, f) of the Portuguese Securities Code, asks BCP to immediately: a) Inform the market about whether the financial information recently disclosed by it already reflects all the financial losses pursuant to the above mentioned situation; b) Inform about the existence of any other situations which were not disclosed, in order to allow the investors to make a properly reasoned judgment about the securities issued by BCP; and c) Transcribe in its communication the full text of this CMVM notice; BCP may inform, if it deems appropriate, the fact that BCP was not yet formally heard about these conclusions.
The CMVM will continue the current process of supervision within its powers and with all its consequences, and will notify the appropriate authorities of any illegalities of different nature, and will further cooperate with the Bank of Portugal within the framework of Bank of Portugal’s powers.”
4. On July 2009, the Bank was notified of the accusation deducted by Public Ministry in a criminal process against five former members of the Board of Directors of the Bank, related mainly to the above mentioned facts and note 53, and to present in this process a request for an indemnity.
Considering this notification, and although considering as reproduced the contents of the defence presented in the above mentioned administrative proceedings, the Bank decided, in order to avoid any risk of a future allegation of loss of the right to an indemnity that may occur if no recourse is presented in this process, to present legal documentation regarding: (i) the recognition of its right, in a later period namely following the final identification of the facts, present a separate process in civil courts requesting an indemnity and (ii) additionally and cautiously, if the right to the request of a separate indemnity process in civil courts is not recognized, a civil indemnity according to the facts and terms mentioned in the accusation, if they are proven.
210 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
55. BCP Group list of companies
As at 30 June 2010 the Banco Comercial Português Group's subsidiary companies included in the consolidated accounts using the purchase method according, were as follows:
Group Bank Head Share % % % Subsidiary companies office capital Currency Activity control held held
Millennium bcp Gestão de Activos Sociedade Oeiras 6,720,691 EUR Investment fund management 100.0 100.0 100.0 Gestora de Fundos de Investimento, S.A.
Interfundos Gestão de Fundos de Lisbon 1,500,000 EUR Investment fund management 100.0 100.0 100.0 Investimento Imobiliários, S.A.
BII Investimentos International, S.A. Luxembourg 150,000 EUR Investment fund management 100.0 100.0 –
BCP Capital Sociedade de Lisbon 28,500,000 EUR Venture capital 100.0 100.0 100.0 Capital de Risco, S.A.
Banco de Investimento Imobiliário, S.A. Lisbon 157,000,000 EUR Banking 100.0 100.0 100.0 BII Internacional, S.G.P.S., Lda. Funchal 25,000 EUR Holding company 100.0 100.0 – BII Finance Company George Town 25,000 USD Investment 100.0 100.0 – Banco ActivoBank, S.A. Lisbon 23,500,000 EUR Banking 100.0 100.0 –
BIM Banco Internacional de Maputo 1,500,000,000 MZN Banking 66.7 66.7 – Moçambique, S.A.
Banco Millennium Angola, S.A. Luanda 3,809,398,820 AOA Banking 52.7 52.7 52.7
Bank Millennium, S.A. Warsow 1,213,116,773 PLN Banking 65.5 65.5 65.5
Millennium TFI S.A. Warsow 10,300,000 PLN Investment fund management 100.0 65.5 –
Millennium Dom Maklerski S.A. Warsow 16,500,000 PLN Broker 100.0 65.5 –
Millennium Leasing Sp. z o.o. Warsow 43,400,000 PLN Leasing 100.0 65.5 –
Millennium Lease Sp.z o.o. Warsow 86,318,000 PLN Leasing 100.0 65.5 –
BBG Finance BV Rotterdam 18,000 EUR Investment 100.0 65.5 –
TBM Sp.z o.o. Warsow 500,000 PLN Advisory and services 100.0 65.5 – MB Finance AB Stockholm 500,000 SEK Investment 100.0 65.5 – Millennium Service Sp. z o.o Warsow 1,000,000 PLN Services 100.0 65.5 –
Millennium Telecomunication Sp. z o.o. Warsow 100,000 PLN Broker 100.0 65.5 –
BG Leasing S.A. Gdansk 1,000,000 PLN Leasing 74.0 48.5 –
Banque Privée BCP (Suisse) S.A. Geneve 70,000,000 CHF Banking 100.0 100.0 –
Millennium bcpbank, national association Newark 2,500,000 USD Banking 100.0 100.0 –
Millennium Bank, Societé Anonyme Athens 184,905,000 EUR Banking 100.0 100.0 –
211 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
Group Bank Head Share % % % Subsidiary companies office capital Currency Activity control held held
Millennium Bank, Anonim Sirketi Istanbul 202,535,316 TRY Banking 100.0 100.0 –
Millennium Fin, Vehicles, Vessels, Appliances and Athens 589,980 EUR Investment 100.0 100.0 – Equipment Trading, Societé Anonyme
Millennium Mutual Funds Management Athens 1,176,000 EUR Investment fund management 100.0 100.0 – Company, Societe Anonyme
Banca Millennium S.A. Bucarest 465,830,000 RON Banking 100.0 100.0 –
Millennium bcp, S.G.P.S., Funchal 25,000 EUR Holding company 100.0 100.0 100.0 Sociedade Unipessoal, Lda.
Bitalpart, B.V. Rotherdam 19,370 EUR Holding company 100.0 100.0 100.0
BCP Investment B.V. Amsterdam 620,774,050 EUR Holding company 100.0 100.0 100.0
BCP holdings (usa), Inc. Newark 250 USD Holding company 100.0 100.0 –
MBCP Reo I, LLC Delaware 370,174 USD Real estate management 100.0 100.0 –
MBCP Reo II, LLC Delaware 924,804 USD Real estate management 100.0 100.0 –
MBCPPhoenix, LLC Delaware 33,389,021 USD Services 100.0 100.0 –
Millennium bcp Bank & Trust George Town 340,000,000 USD Banking 100.0 100.0 –
BCP Finance Bank, Ltd. George Town 246,000,000 USD Banking 100.0 100.0 –
BCP Finance Company George Town 1,031,000,815 EUR Investment 100.0 3.0 –
Millennium BCP Escritório de Sao Paulo 27,200,000 BRL Financial Services 100.0 100.0 100.0 Representações e Serviços, Ltda.
Millennium BCP Teleserviços Lisbon 50,004 EUR Videotex services 100.0 100.0 100.0 Serviços de Comércio Electrónico, S.A.
Caracas Financial Services, Limited George Town 25,000 USD Financial Services 100.0 100.0 100.0
Banpor Consulting S.R.L. Bucarest 1,750,000 RON Services 100.0 100.0 100.0 Millennium bcp Imobiliária, S.A. Lisbon 50,000 EUR Real estate management 99.9 99.9 99.9
Millennium bcp Prestação Lisbon 331,000 EUR Services 93.8 94.3 73.5 de Serviços, A. C. E.
Servitrust Trust Management and Funchal 100,000 EUR Trust services 100.0 100.0 100.0 Services, S.A. Imábida Imobiliária da Arrábida, S A. Oporto 1,750,000 EUR Real estate management 100.0 100.0 100.0 Services, S.A.
212 BANCO COMERCIAL PORTUGUÊS Notes to the Interim Consolidated Financial Statements 30 June, 2010
As at 30 June 2010 the associated companies, were as follows:
Group Bank Head Share % % % Associated companies office capital Currency Activity control held held
Baía de Luanda Luanda 19,200,000 USD Services 10.0 10.0 –
Banque BCP, S.A.S. Paris 65,000,000 EUR Banking 19.9 19.9 19.9
Banque BCP (Luxembourg), S.A. Luxembourg 12,500,000 EUR Banking 19.9 19.9 –
Luanda Waterfront Corporation George Town 9,804 USD Services 10.0 10.0 –
Lubuskie Fabryki Mebli S.A. Swiebodzin 13,400,050 PLN Furniture manufacturer 50.0 32.8 –
Pomorskie Hurtowe Centrum Rolno SpoŜywcze S.A. Gdansk 21,357,000 PLN Wholesale business 38.4 25.2 –
Nanium, S.A. Vila do Conde 15,000,000 EUR Electronic equipments 41.1 41.1 41.1
SIBS Sociedade Interbancária de Serviços, S.A. Lisbon 24,642,300 EUR Banking services 21.9 21.9 21.5
Unicre Cartão de Crédito Internacional, S.A. Lisbon 10,000,000 EUR Credit cards 32.1 32.1 31.8
VSC Aluguer de Veículos Lisbon 12,500,000 EUR Long term rental 50.0 50.0 – Sem Condutor, Lda.
As at 30 June 2010 the Banco Comercial Português Group's subsidiary and associated insurance companies included in the consolidated accounts under the purchase method and equity method were as follows:
Group Bank Head Share % % % Subsidiary companies office capital Currency Activity control held held
Millennium Insurance Agent Unipersonal Athens 18,000 EUR Insurace broker 100.0 100.0 – Limited Liability Company
S&P Reinsurance Limited Dublin 1,500,000 EUR Life reinsurance 100.0 100.0 100.0
SIM Seguradora Internacional de Maputo 147,500,000 MZN Insurance 89.9 60.0 – Moçambique, S.A.R.L.
Group Bank Head Share % % % Associated companies office capital Currency Activity control held held
Millenniumbcp Fortis Grupo Segurador, Lisbon 1,000,002,375 EUR Holding company 49.0 49.0 – S.G.P.S., S.A.
Companhia Portuguesa de Seguros de Lisbon 12,000,000 EUR Health insurance 49.0 49.0 – Saúde, S.A.
Ocidental Companhia Portuguesa de Lisbon 22,375,000 EUR Life insurance 49.0 49.0 – Seguros de Vida, S.A.
Ocidental Companhia Portuguesa de Lisbon 12,500,000 EUR Non life insurance 49.0 49.0 – Seguros, S.A.
Pensõesgere, Sociedade Gestora Fundos Lisbon 1,200,000 EUR Pension fund management 49.0 49.0 – de Pensões, S.A.
213
First Half of 2010 Report and Accounts 114
Investor Relations Sofia Raposo
Avenida Professor Doutor Cavaco Silva (Parque das Tecnologias) Edif. 1, Piso 0 B 2744-002 PORTO SALVO Tel: (351) 211 131 080 [email protected]
Corporate Communication Miguel Magalhães Duarte
Rua São Julião, 149, Piso 2 1100-063 LISBOA Tel: (351) 211 132 840 [email protected]