Banco BPI 2006 This page was intentionally left blank. Report

Index

REPORT Leading business indicators 4 Introduction 6 The identity of BPI 10 Governing bodies 11 Shareholder value creation 12 Shareholders 13 Historical milestones 14 BPI Governance 16 Social responsibility 19 Financial structure and business 23 Distribution channels 24 The BPI Brand 26 Human resources 28 Technology 32 Highlights of the year 35 Background to operations 43 Domestic Commercial Banking 53 Bancassurance 74 Asset Management 75 Investment Banking 81 Private Equity 86 Financial investments 87 International banking activity 88 Financial review 92 Risk management 143 Banco BPI shares 156 Rating 161 Final acknowledgements 163 Proposed appropriation of net profit 164

CONSOLIDATED FINANCIAL STATEMENTS AND NOTES Consolidated financial statements 165 Notes to the consolidated financial statements 173 Legal certification of accounts and audit report 270 Audit Committee’s report and opinion 272

THE BPI GROUP’S CORPORATE GOVERNANCE REPORT The BPI Group’s Corporate Governance report 276 Appendices 368

ANNEXES Definitions, acronyms and abbreviations 376 Glossary 378 Formulary 381 Methodological notes 383 General index 384 Index of figures, tables, charts and “boxes” 388 Thematic index 390 Miscellaneous information 391 Leading business indicators

(Consolidated figures in millions of euro, except where indicated otherwise) PCSB IAS / IFRS 2002 2003 2004 2005 2006 Δ% 05/06 Net total assets 25 669.1 26 195.3 24 010.3 30 158.7 35 565.5 17.9% Assets under management1, F 7 520.7 8 583.9 9 671.3 13 434.5 14 072.9 4.8% Business volume2, F 38 976.0 40 599.0 43 459.4 49 328.0 56 384.4 14.3% Loans to Customers (gross) and guarantees 19 738.0 20 690.1 21 958.9 24 409.2 28 263.0 15.8% Total Customer resourcesF 19 238.0 19 908.9 21 500.5 24 918.8 28 121.4 12.9% Business volume2 per Employee3 (thousands of euro) 5 332 5 881 6 242 6 621 6 924 4.6% Operating income from bankingF per Employee3 (thousands of euro) 97 103 113 125 131 5.3% Administrative overheads, depreciation and amortisationF / operating income from banking4, F 66.7% 65.3% 62.6% 57.7% 56.6% Net profit 140.1 163.8 192.7 250.8 308.8 23.1% Cash flow after taxationF, G 258.4 292.2 300.2 390.6 410.3 5.1% Return on average total assets (ROA)F 0.6% 0.6% 0.8% 0.9% 0.9% Return on Shareholders’ equity (ROE)5, F 13.5% 13.9% 15.2% 23.7% 24.3% Loans in arrears for more than 90 days (in the balance sheet) / Customer loansF 1.3% 1.2% 1.1% 1.3% 1.1% Loan impairments (in the balance sheet) / Customer loansF 1.6% 1.4% Cost of risk6, F 0.31% 0.25% 0.33% 0.24% 0.16% Cover of pension obligation recognised in the balance sheetF 100.1% 101.4% 100.3% 100.2% 110.7% Shareholders’ equity 1 168.9 1 227.3 1 231.5 1 181.4 1 450.6 22.8% Ratio of own funds requirements7, G 10.2% 9.9% 9.8% 11.5% 9.4% Tier I7 7.3% 6.7% 6.5% 7.3% 7.4% Data per shareF adjusted (euro)8 Cash flow after taxationF 0.36 0.39 0.40 0.52 0.55 5.3% Net profit 0.19 0.22 0.26 0.34 0.41 23.4% Dividend 0.08 0.09 0.10 0.12 0.16 33.3% Book value 1.54 1.61 1.62 1.58 1.94 22.6% Weighted average no. of sharesF (in millions)8 726.1 753.3 753.3 747.9 746.2 (0.2%) Adjusted Closing price8 (euro) 2.18 2.92 2.98 3.86 5.91 53.1% Total Shareholder returnF 3.0% 38.5% 5.1% 33.7% 56.3% - Stock market capitalisation at year end 1 656.8 2 219.2 2 264.8 2 933.6 4 491.6 53.1% Dividend yieldF, G 3.9% 4.1% 3.4% 4.0% 4.1% - Retail branches9 (number) 590 609 615 622 698 12.2% Corporate and institutionals centres network10 (number) 61 54 52 52 56 7.7% BPI Group staff complement11 (number) 7 506 7 025 7 080 7 493 8 318 11.0% 1) Unit trust (mutual) funds, PPR and PPA, capitalisation insurance, assets under discretionary management and advisory mandates of institutional Clients and assets Table 1 of pension funds under management (including the Group’s staff pension funds). 2) Loans, guarantees and total Customer resources. 3) Number of Employees of the companies which are consolidated in full. 4) The operating income from banking excludes recoveries of loans and interests in arrears written-off. 5) In the calculation of the ROE for 2004, shareholders' equity was added by the goodwill G recorded in the consolidation of SIC, in June 2004, that for accounting purposes was, at that time, fully written off against reserves. 6) Loans provisions (PCSB) and loan impairments (IAS / IFRS) in the year, deducted of recoveries of loans in arrears written-off (in the income statement) / Customer loans. 7) Calculated in accordance with Bank of Portugal rules governing minimum own funds requirements (Notice 7 / 96). 8) Adjusted for capital increase, re-denomination and re-nominalisation. 9) Includes traditional branches (521 in 2005 and 561 in 2006), housing shops, in-store G branches, investment centres and automatic shops in Portugal, branches in Angola (43 in 2005 and 71 in 2006, of which 66 were functioning at 31 December 2006), investment centres in Angola (3 in 2006) and branches in Paris (11 in 2005 and 12 in 2006). 10) Distribution network specialising in serving companies (41 corporate centres), 1 Project Finance G centre, Institutionals (6 centres), the branch in Madrid and corporate centres in Angola (3 in 2005 and 7 in 2006). 11) Group staff complement in the domestic activity (7 084 in 2006) and in the international activity (1 234 in 2006). Includes term Employees and temporary workers, and excludes bursaries.

4 Banco BPI | Annual Report 2006 GROWTH, PROFITABILITY, STRENGTH AND VALUE 2002-2006

Net total assets plus th.M.€ th.M.€ Loans and Customer 43.3 disintermediation 28.1 resources 36.8 24.9 31.1 32.5 31.6 24.6 21.5 1 21.0 Net total assets 19.9 Disintermediation2 19.2 18.9 17.6 Total Customer resources1 16.5 1) Corrected for Loans to Customers duplication of balances. 2) Off-balance sheet 1) Corrected for duplication of Customer resources. balances. 0203 04 05 06 02 03 04 05 06

Net profit per share € % Administrative overheads1, depreciation and amortisation 0.41 As % of operating income from banking 0.34 66.7 65.3 62.6 0.26 57.7 0.22 56.6 0.19

1) Excluding early-retirement costs. 02 03 04 05 06 02 0403 05 06

Cost of risk1 % % Own funds 11.5 requirements ratio 0.33 10.2 9.9 According to Bank of 9.8 9.4 0.31 4.3 Portugal rules 2.9 3.2 3.3 2.1 0.25 0.24 1.4 1.4 1.4 1) Loan provisions (PCSB) and loan 1.4 1.4 impairments 0.16 (IAS / IFRS) recognised in the year and after deducting recoveries of 5.9 5.3 5.1 5.9 5.9 loans and interests in arrears Tier II previously written off (profit and Preference shares Tier I loss account) / loan portfolio. Core capital 02 0304 05 06 02 0304 05 06

Stock market capitalisation th.M.€ BPI Ratings 4.5 Long-term rating notations A+ Fitch Ratings Stable 31 Oct. 961

2.9

2.2 2.3 A2 Moody’s Positive 1 Nov. 961, 2 1) Attribution date. 1.7 2) Rating notation attributed to all banks that composed BPI Group A- Standard & Poor’s at that date. Positive 27 Apr. 991, 3 3) Rating notation attributed to BFB. 02 0304 05 06

Figure 1

Report | Leading business indicators 5 Introduction

STRENGTH AND MATURITY The takeover bid (the “Bid”) launched by BCP on 13 March 2006 for the whole of BPI’s share capital and which was immediately viewed as hostile in a unanimous stance taken by the Board of Directors, constitutes an unavoidable reference point when in reviewing the past year and leaves an indelible mark on the Bank’s own history.

BCP’s takeover bid put to the test BPI the most crucial facets of a business organisation: the shareholder structure, the quality of human resources, flexibility, creativity and capacity to deliver. The response was a manifestation of strength and maturity, revealed in two principal areas: on the one hand, the shareholders’ cohesion and firmness, supporting unswervingly the Board of Directors and its Executive Committee; on the other, the Bank’s operational performance, the results of which are amongst the best in Europe, reflecting the confidence and serenity with which the technical and commercial teams confronted this demanding challenge.

The response On 10 April, the Board of Directors published its report on the Bid’s acceptability and conditions, as required in terms of the Securities Code. Entitled “A wholly unacceptable Offer” and with the sub-title “BPI versus BCP – value creation versus value destruction”, the Report constitutes the centrepiece of the response to the takeover bid and includes a Business Plan which envisages a twofold increase in the Bank’s earnings by 2010.

Supported precisely on the growth potential demonstrated in the Business Plan, the Board draws four fundamental conclusions:

᭿ the Bid significantly undervalues the Bank and does not serve the interests of its Shareholders, Customers and Employees; ᭿ the integration plan presented by the bidder underestimates the potential realisable synergies by appropriate management; ᭿ the Bid does not share with BPI’s shareholders any amount engendered by the announced cost synergies; ᭿ BPI is in a position to create much more value for its shareholders.

Taking into consideration BCP’s governance model, its historical track record of value destruction and the proposed integration plan, the Board also recommended the outright rejection of any suggestion by the bidder advocating the exchanging of BPI share for BCP shares.

6 Banco BPI | Annual Report 2006 Performance The 2006 results have borne full testimony to the above conclusions: reported net profit improved to 309 million euro, 23% more than in 2005 and 6% higher than the Business Plan’s projections which were also exceeded in other key indicators, such as the improvement in net operating revenue from banking (+3.4%) and in earnings per share (+10.9%), while operating expenditure trended in line with projections (+0.2%). In a slightly more detailed analysis, we find out that BPI was the Portuguese bank that grew the most in lending activity and resource taking in domestic operations – respectively 17% and 12% – and is one of the Iberian Peninsulas’ most profitable financial institutions, with a ROE of 24.3%. Also noteworthy is the ability to attract new Customers – a further 120 thousand in Portugal and 74 thousand in Angola – one of the best performances amongst national banks, regardless of their size and an unequivocal market signal relating to BPI’s competitiveness. In fact, BCP’s takeover bid did not perturb the Group’s organic growth potential, underpinned by the opening in 2006 of 40 branches and three investment centres in Portugal and 28 branches, 4 corporate centres and three investment centres in Angola. This programme will be intensified in 2007 with the inauguration of a further 80 branches and Chairman of the Board of Directors 8 investment centres in Portugal and 30 branches, one corporate centre Artur Santos Silva and one investment centre in the Angolan market where BFA confirmed its leading position.

The bank’s activity in Angola underwent an important qualitative evolution, with the consolidation of its presence in new business areas – such as investment banking – and the growing affirmation of the services related to electronic banking. At the same time, commercial performance registered an important acceleration, translated into the expansion in the loan portfolio (+49%), in total resources (+35%), in the number of Customers (+32%), in net operating revenue from banking (+16%) and in the number of employees, which increased 63% to give a total headcount of 1 234 persons, above all driven by the distribution network’s strong expansion. Nonetheless, BFA’s profit suffered a decrease of 9.6% in relation to the previous year and fell short of the goal set in the Business Plan. This underperformance can be explained by the unfavourable currency trend, but above all it is a consequence of an important about-turn in Angolan monetary policy. This policy change led to an abrupt decline in interest rates and the ensuing alteration to the assumptions on which the profit forecasts were based, as was duly highlighted in the presentation of the half-yearly accounts.

Report | Introduction 7 BFA’s increasingly more solid structure will contribute to progressively reducing the volatility in the results delivered by the Group’s overseas operations, which has always been underlined in the presentations to the market. Meanwhile, this trend was more than offset in 2006 by the growth in domestic activity, where net profit improved by around 35%, well above the market’s consensus estimates and the business plan’s projections. This fact confirms the diversity and equilibrium of the Group’s growth sources which continued to be supported by comfortable solidity and risk indicators: the capital ratios evidenced stability, the cost of credit risk declined from 0.24% to 0.16%, the efficiency ratio improved from 57.7% to 56.6% and, at the end of the year, the employees’ pension funds presented a surplus of close to 240 million euro, corresponding to 11% of liabilities.

The recognition In the last two years, the Bank’s overall performance has received an unprecedented level of public acclaim in terms of its diversity and scope. To start with, from the Customers’ perspective: as can be gleaned from the information provided in separate chapters in the Report, BPI has remained regularly in first place amongst the five biggest Portuguese banks in the leading polls and surveys covering quality of service; it has climbed consistently over the past seven years in the ranking of the most trusted banking brands, moving into second position in 2006; while its branches were rated as the best in Europe by a reputable British company specialising in this domain, in a survey that involved 66 banks in 12 countries. On the home front, BPI was honoured with all the most prestigious performance prizes:

᭿ Best Portuguese bank ex-aequo (Biggest and Best, Exame magazine); ᭿ Best financial company quoted on Euronext Lisboa (Stock Awards, Jornal de Negócios); ᭿ Best national asset management company (Best Funds, Standard & Poors, Diário Económico); ᭿ Best growth performance amongst financial institutions (Best of European Business, Roland Berger, CNN, Jornal de Negócios and Universidade Católica); ᭿ Best Annual Report in the Financial Sector, Best Investor Relations Officer and Best Financial Analyst (Investor Awards, Deloitte, Diário Económico and Semanário Económico); ᭿ Best corporate governance practice in Europe’s financial sector and Europe’s Best on-line Annual Report (MZ Consult, JP Morgan, KPMG and Linklaters).

The shareholders’ support The Bank’s business performance and the market’s recognition gave full backing to the firm rejection of the takeover bid. Right from the beginning, this stance was expressed by a comfortable majority of shareholders, whose support was demonstrated unequivocally over more than one year in all the decisive moments of the process. In this regard, we highlight the two general meetings which approved important decisions for BPI’s future with explicit majorities. The first of these Meetings, held on 20 April 2006, gave its seal of approval to a far-reaching refinement to the Group’s governance model, adapting it to the latest developments in best international practices. It also approved, based on a motion presented before BCP’s takeover bid, raising the limit envisaged in the Statutes

8 Banco BPI | Annual Report 2006 on the exercise of voting rights from 12.5 to 17.5%, with the backing of more than 77% of the votes cast. The second Meeting, held on 19 January 2007, which counted with the participation of some 80% of the company’s share capital (the highest ever attendance at a General Meeting of the Bank) conferred on the Board of Directors (with a majority of 82%) rights which it was exceptionally barred from exercising within the ambit of the takeover bid, to enable it to decide on a possible sale of the shareholding in BCP, as well as to execute the ambitious programme approved in October 2006 for new branch openings.

In a clear sign of support for the Bank’s strategy and its management bodies, the key shareholders reinforced their positions in its capital: La Caixa increased its holding from 16 to 25%, Banco Itaú raised its stake from 16.4 to 17.6%, while Allianz made it known that it had applied to the Bank of Portugal for authorisation to exceed the limit of 10%. The behaviour of the shares, the average price of which was patently and consistently situated above the Bid price, constitutes in the final analysis the most striking manifestation of this support. This reflects a solid conviction with respect to the stimulating prospects open to BPI following a year that remains for now as marked as the best ever in the Institution’s 25 year history.

Executive Committee of the Board of Directors Pedro Barreto | Manuel Ferreira da Silva | António Domingues (Deputy-Chairman) | Fernando Ulrich (Chairman) José Pena do Amaral | Maria Celeste Hagatong | António Farinha Morais

Report | Introduction 9 The identity of BPI

A company is just like a person: it has its own identity and personality, it stands out for its character, its principles, its way of doing, its objectives.

Banco BPI’s identity is marked by the financial and business culture of Banco Português de Investimento. The essential traits of this culture are management independence, organisational flexibility, team work, recognition of merit, the ability to anticipate, strict management of risks and the secure creation of value.

Earning a just return from the Bank’s business operations through the adoption of superior management and service practices constitutes a fundamental goal of our activity. The safeguarding of Customer interests, with dedication, loyalty and confidentiality, is one the core principles of the business ethics and code of conduct assumed by the Bank’s Employees.

An institution’s personality asserts itself through its own attributes, which gain consistency and credibility in its daily interaction with Customers and the community. In particular, BPI values two of these attributes: Experience and Harmony.

Experience is the reflection of the training undergone by our teams and the important professional capital accumulated during the history of each one of the institutions which gave rise to the Bank. It translates itself into the dimension of our commercial presence, the soundness of our financial indicators, the security of our growth and in our proven ability to achieve and lead.

We wish to combine Experience with Harmony, which expresses the permanent ambition of serving our Customers and the community with the highest standards of ethics and quality. It is a projected aspiration for the future, always open-ended, imposed by the constant desire to refine so that we do better. It is our most challenging mission that, in the final analysis, justifies all others.

10 Banco BPI | Annual Report 2006 Governing bodies

Shareholders’ General Meeting

Chairman João Vieira de Castro

Deputy-Chairman Remunerations Committee Portuguese Statutory Auditor Manuel Cavaleiro Brandão1

Chairman Secretaries Member in office IPI – Itaúsa Portugal Investimentos, SGPS, S.A. Galucho – Indústrias Metalomecânicas, S.A. Deloitte & Associados, SROC, S.A. (Represented by Augusta Francisco) Members (Represented by Carlos Rosa Justino) Alternate member Arsopi – Holding, SGPS, S.A. Produtos Sarcol, S.A. (Represented by Maria Alexandra Magalhães) Carlos Luís Oliveira de Melo Loureiro HVF, SGPS, S.A.4

Nomination, Evaluation and Board of Directors Audit Committee Remuneration Committee Chairman Chairman Chairman Artur Santos Silva Artur Santos Silva Artur Santos Silva Deputy-Chairmen Deputy-Chairman Deputy-Chairman Carlos da Câmara Pestana Ruy Octávio Matos de Carvalho Ruy Octávio Matos de Carvalho Fernando Ulrich Ruy Octávio Matos de Carvalho Members Members Alfredo Rezende de Almeida Members Carlos da Câmara Pestana Jorge de Figueiredo Dias Alfredo Rezende de Almeida Marcelino Armenter Vidal Marcelino Armenter Vidal Herbert Walter António Domingues Roberto Egydio Setúbal António Farinha Morais Armando Leite de Pinho Caixa Holding, S.A., Sociedad Unipersonal Corporate Governance Committee (Represented by Marcelino Armenter Vidal) Carlos Moreira da Silva2 Chairman Edgar Alves Ferreira3 Artur Santos Silva Isidro Fainé Casas 2 Deputy-Chairman Jorge de Figueiredo Dias Armando Leite de Pinho José Pena do Amaral Klaus Dührkop Members Manuel Ferreira da Silva Carlos Moreira da Silva Maria Celeste Hagatong Company Secretary Edgar Alves Ferreira Pedro Barreto Klaus Dührkop RAS International, N.V. Member in office Tomaz Jervell (Represented by Herbert Walter) Manuel Correia de Pinho

Roberto Egydio Setúbal Alternate member Tomaz Jervell Alexandre Lucena e Vale

Executive Committee of Board of Directors

Chairman Fernando Ulrich

Deputy-Chairman António Domingues

Members António Farinha Morais José Pena do Amaral Manuel Ferreira da Silva Maria Celeste Hagatong Pedro Barreto

1) Elected at the General Meeting of 19 January 2007. Figure 2 2) Elected at the General Meeting of 20 April 2006 to fill the vacancy created when the number of Board of Directors’ members was raised from 19 to 21 (election subject to suspensive condition pending the coming into effect of the alterations to the statutes, which occurred on 30 June 2006). 3) Co-opted by the Board of Directors on 20 October 2005 to fill the vacancy left by the renouncement of Manuel Oliveira Violas, which co-option was ratified at the General Meeting of 20 April 2006. 4) Appointment approved at the General Meeting of 20 April 2006 to fill the vacancy left by the renouncement of the company Violas, SGPS, S.A.

Report | The identity of BPI and Governing bodies 11 Shareholder value creation

Return on investment (ROI) BPI management’s overriding goal is to create value for Banco BPI shareholder average annual return its Shareholders. Until 31 December 2006

In 2006 56.3 In 2006, the return on the investment in BPI shares F 33.3 was 56.3% while the market gained 33.3%. Last 5 years 25.9 December 2001 11.4 BPI has consistently created value over time. An investor Since acquisition of BFE 19.2 August 1996 who subscribed for shares G at the time of the Initial 12.2 Public Offering directed at the general public in Since acquisition of BFB 15.2 August 1991 11.2 September 1986, had achieved an annual average return Since the Initial Public Offering on investment (ROI) of 17.1% to the end of 2006, 17.1 September 1986 12.1 whereas if he had opted for an alternative investment in 0% 15% 30% 45% 60% Portuguese equities – measured by reference to the PSI Geral index – he would have obtained an annual average BPI Chart 1 1 return of 12.1%. Market 1) Market return calculated on the basis of the PSI Geral index (total return). The following table shows the various annual average rates of return earned by a shareholder who, having invested in BPI shares at the beginning of the year, had disinvested at the end of the same year or at the end of each one of the following years:

Value creation for BPI shareholders1 (1997-2006) Percentage return; annual average rates Exit3 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Entry2 1997 BPI 139.8 77.3 47.1 26.8 10.5 8.9 13.6 12.3 14.9 18.9 Market4 65.2 44.4 32.9 21.2 11.8 5.6 7.2 8.5 9.4 11.6 1998 BPI 31.1 15.7 3.5 (7.2) (4.9) 2.2 2.7 6.4 11.4 Market 26.2 19.2 9.3 1.4 (3.5) (0.3) 2.2 3.9 6.8 1999 BPI 2.5 (7.4) (16.3) (11.3) (2.1) (0.9) 3.7 9.4 Market 12.6 1.6 (5.8) (9.7) (4.9) (1.4) 1.1 4.6 2000 BPI (16.0) (23.8) (15.1) (3.1) (1.4) 3.9 10.3 Market (8.2) (13.8) (16.1) (8.8) (4.0) (0.7) 3.5 2001 BPI (30.4) (14.7) 1.1 2.1 7.9 14.9 Market (19.0) (19.8) (9.0) (2.9) 0.8 5.6 2002 BPI 3.0 19.9 14.7 19.2 25.9 Market (20.7) (3.5) 3.2 6.5 11.4 2003 BPI 38.5 20.6 24.8 32.0 Market 17.4 17.7 17.5 21.3 2004 BPI 5.1 18.5 30.0 Market 18.0 17.6 22.6 2005 BPI 33.7 44.5 Market 17.2 25.0 2006 BPI 56.3 Market 33.3 1) The calculations are based on the assumption that during the investment period, the shareholder in question reinvested his dividends on the day immediately after Table 2 their receipt in order to acquire new BPI shares. It was also assumed that the same shareholder took part in all the capital increases and convertible-debt issues reserved for shareholders, subscribing for the maximum number of securities to which he was entitled. 2) Entry (at the beginning of the year). 3) Exit (at the end of the year). 4) PSI-Geral index.

12 Banco BPI | Annual Report 2006 Shareholders

At 31 December 2006, Banco BPI’s capital was held by institutional investors and companies holding 91.8% of 11 749 shareholders, of whom 11 322 were individuals the capital. representing 8.2% of the capital, while 427 were

Shareholders owning more than 2% of Banco BPI’s capital At 31 December 2006 No. of shares % of capital % of voting rights (according Shareholders held held to the Securities Code)1, 2

La Caixa Group3, 4 190 000 268 25.0% 25.4% Itaú Group5 133 000 000 17.5% 17.8% Allianz Group6 67 072 233 8.8% 9.0% Banco Santander Central Hispano7 61 251 116 8.1% 8.2% BCP Group8 49 883 884 6.6% 6.7% Deutsche Bank9 23 800 244 3.1% 3.2% Arsopi10 22 293 049 2.9% 3.0% HVF SGPS, S.A. 21 681 062 2.9% 2.9% Castlerigg Master Investments Ltd.11 15 650 514 2.1% 2.1% Note: shareholder positions recorded at 31 December 2006 at the securities clearing house (Central de Valores Mobiliários), based on the information received from the Table 3 Central de Valores Mobiliários.

1) Taking into consideration that as at 31 December 2006 the BPI Group had registered at the Securities Clearing House 11 004 068 own shares corresponding to 1.45% of Banco BPI’s share capital. 2) In terms of statutory provisions, the exercise of voting rights is limited to 17.5%. 3) Through Catalunya de Valores, SGPS, Unipessoal, Lda., (16.48%), 100% held through Caixa Holding, S.A.U., which in turn is wholly-owned by the La Caixa Group’s parent entity, Caixa d'Estalvis i Pensions de Barcelona (“La Caixa”) and through Caixa Holding, S.A.U. (8.52%). 4) At 31 December 2006, the Euroclear Bank, based on the information received from the Central de Valores Mobiliários, had a shareholding in Banco BPI capital of 9.0%. Excluding the direct shareholding held by Caixa Holding, S.A.U., which is kept in this custodian bank, the shareholding held by Euroclear Bank in Banco BPI capital was 0.5% and therefore has not been included in the table above. 5) Through IPI – Itaúsa Portugal Investimentos – SGPS, Lda., 100% held. 6) Through the subsidiaries controlled by Reunione Adriática di Sicurtá S.p.A. (100% held by Allianz SE): through RAS International III B.V. (8.64%), 100% held and through Companhia de Seguros Allianz Portugal (0.18%), 65% held and by the Fundo de Pensões Allianz Portugal. According to information received from RAS International N.V., it incorporated, by merger, which became effective on 20 February 2007, its investee company RAS International III B.V. Therefore, RAS International N.V. has become the direct holder of the shareholding previously held by RAS International III B.V. 7) Through companies controlled by Banco Santander Totta (6.98%), by unit trust (mutual) funds (0.33%), by pension funds (0.57%) and by other entities controlled by Banco Santander Central Hispano (0.18%). 8) Through BCP and companies controlled by it (1.67%), by the BCP Group Pension Fund (4.63%) and by unit trust (mutual) funds (0.26%). 9) Custodian bank. 10) Shares held by companies of the Arsopi Group and by its Shareholders. 11) Castlerigg Master Investments Ltd informed Banco BPI that following acquisitions made up until 13 April 2006, it has become the holder of 15 650 514 Banco BPI shares, representing 2.06% of the capital. Castlerigg Master Investments Ltd also advised that it is a private investment (mutual) fund – held by various institutional investors who are not related and by high net worth individual investors – specialising in trading operations on the global markets, and is managed by Sandell Asset Management Corp. It informed that for the purposes envisaged in article 20 of the Securities Code, the voting rights are attributable to the following entities: Sandell Asset Management Corp., Thomas Sandell, Daniel Mignon and InterCaribbean Services Ltd.

Note: according to the criterion followed by Banco BPI in the last annual report relating to the identification of own qualified shareholding, calculated as provided for in article 20 of the Securities Code, the said shareholding at 31 December 2006 would amount to 1.98% of the Bank’s capital (2.01% of the voting rights). Taking into account the alterations introduced in November 2006 to the Securities Code’s regime for the imputation of votes, Banco BPI began to adopt the criterion of not regarding as imputable to it the votes attaching to the shares of the portfolios managed by companies in which it has an interest, of the pension funds managed by BPI Pensões (with the exception of the Banco BPI Pension Fund) and of the Unit Trust Funds managed by BPI Gestão de Activos, continuing therefore to consider as imputable the votes attaching to the shares held by the Banco BPI Pension Fund and by the members of the management and oversight bodies. At 31 December 2006, under the abovementioned criterion, the holding of own shares was 1.80%, which corresponded to 1.83% of the voting rights. On the last day before the publication of the 2006 Report for which there is information available from the Securities Clearing House, (Central de Valores Mobiliários), that is on 15 March 2007, and according to the same criterion, the holding of own shares was 1.99% of the Bank’s capital (2.01% of the voting rights).

Report | Shareholder value creation and Shareholders 13 Historical milestones

LEADERSHIP, INNOVATION AND GROWTH

1981 Sociedade Portuguesa de Investimentos was conceived in It was the Group’s overriding objective to guarantee the 1981 with a well-defined project for a decade that had just provision of a complete range of financial services to started: to finance investment projects launched by the companies and individuals alike. An alliance was then forged private sector, to participate in the creation of a dynamic with the Itaú Group, initially through its equity participation capital market and to contribute to the country’s industrial in BFB. In 1993, this interest was converted into a direct modernisation. BPI counted on a diversified shareholder base shareholding in BPI, following which Banco Itaú became one that included a strong domestic component, represented by of the key shareholders. 100 of the most dynamic companies in the country, and five of the most prominent international financial institutions. 1995 The Institution’s composition was reorganised in 1995: the 1985 original BPI was transformed into an SGPS (holding company), SPI was transformed into an investment bank in 1985, following which it became the only Group company to be listed thereby allowing it to attract sight and term deposits, grant on the stock exchange, controlling Banco Fonsecas & Burnay short-term loans, participate in the interbank markets and and Banco Português de Investimento, formed in the engage in currency operations. A year later, in 1986, the meantime through the transfer of the assets and liabilities bank’s future direction was marked by the opening of its allocated to the business activity traditionally conducted by capital to the general public and the listing of its shares on this type of institution and hitherto undertaken by BPI. the Lisbon and Oporto Stock Exchanges. This reorganisation precipitated the specialisation of the 1991 Group’s various units and was accompanied by an important In 1991, a decade after its formation, BPI had already reinforcement of its shareholder structure with the entry of two conquered an undisputed leadership in the principal areas of new strategic partners of considerable size to team up with the Investment Banking, playing a major role that gained further Itaú Group: La Caja de Ahorros y Pensiones de Barcelona (“La momentum as the decade advanced thanks to the Caixa”), and the German insurance group Allianz. privatisation programme in Portugal, and assumed its ambition to consolidate its position as one of the country’s 1996 / 1998 premier financial groups. It was in this spirit that it resolved A year later (in 1996) the acquisition of Banco de Fomento to acquire Banco Fonsecas & Burnay, thereby marking BPI’s and Banco Borges marked the beginning of the process entry into the Commercial Banking arena, affording it a involving the integration of the BPI Group’s three banks that substantial gain in size in preparation for the corporate would culminate, two years later, with the creation of Banco concentration process in the Portuguese financial system. BPI, providing it with the largest single-brand banking network in Portugal. Banco BPI was formed in 1998 by the

Net total assets plus disintermediation

Acquisition of Banco Fonsecas & Burnay 5 th.M.€ Creation of SPI, Transformation of SPI Sociedade Portuguesa into Banco Português de Investimentos de Investimento 5 M.€ 66 M.€

81 82 83 84 85 86 87 88 89 90 91 92 93

14 Banco BPI | Annual Report 2006 merging of Banco Fonsecas & Burnay (BFB), Banco de Fomento in Angola in the wake of the transformation of Banco BPI’s e Exterior (BFE) and Banco Borges & Irmão (BBI), to be joined Luanda branch into a fully-fledged Angolan-law bank. later that year by Banco Universo (an in-store bank), acquired in the meantime. After the merger, the structure was significantly At the same time, BPI intensified the programme directed at simplified: BPI SGPS now comprises just two banking the rationalisation, rejuvenation and qualification of its human institutions: Banco Português de Investimento, named BPI – resources, the upgrading of its technology, the streamlining of Investimentos, and a new commercial bank called Banco BPI. its distribution channels and boosting Brand development. This process is constantly evolving and seeks to reinforce in a 1999-2001 decisive manner the essential skills required to affirm the goals The next three years – 1999 to 2001 – have confirmed BPI’s that form the springboard for the Bank’s plans for the future: potential for growth, modernisation and structural efficiency, quality and service. reinforcement engendered by the 1998 merger: the Group has boosted market shares in all the key areas of commercial In 2004, Artur Santos Silva, BPI’s founder and leader from its banking, it has expanded and streamlined its distribution first hour, ceased executive functions, retaining the structure, rapidly transforming itself into a multi-channel chairmanship of the Board of Directors. bank, it has thoroughly renovated its technological capability and built up one of the financial system’s most dynamic 2006 brand names. In October 2006, BPI completed its twenty fifth year of existence, taking as reference the creation of SPI – Sociedade 2001-2005 Portuguesa de Investimentos in 1981. The success of this In 2002, BPI concluded an important reorganisation venture can be measured objectively using the creation of programme that endowed the Group with a much simpler value for the Shareholders, Customers and Employees as the legal configuration, more attuned to its business model and yardsticks; the annual average return on BPI shares up until more conducive to the obtainment of cost savings and the end of 2006 was close to 18%. efficiency gains in the Group’s functioning. In essence, the programme involved the centralisation at Banco BPI of commercial banking business and the concentration at Banco de Investimento of its natural business. BPI SGPS incorporated Banco BPI and simultaneously its business object was altered to embrace Commercial Banking, adopting the name Banco BPI and assuming the command position at the helm of the whole Group. Banco de Fomento was formed

Creation of Banco BPI Creation of Banco 43 th.M.€ Acquisition of (merge of the commercial banks de Fomento Angola BPI's 25th anniversary Banco Fomento BFB, BFE and BBI) Creation of e Exterior the holding and Banco 20 th.M.€ BPI SGPS Borges & Irmão 8.2 17 th.M.€ th.M.€

94 95 96 97 98 99 00 01 02 03 04 05 06 Figure 3

Report | Historical milestones 15 BPI Governance

Guiding principles Refinements to BPI’s governance practices and report Ever since its beginning, BPI has adopted a set of guiding Banco BPI’s Board of Directors has been permanently principles for its governance policy which include the concerned with the governance and oversight model creation of value as the prime objective of the Directors implemented by the Group, as well as presenting an and Employees, transparency, the independence of increasingly more comprehensive corporate governance executive management, and equity in the relationship with report, responding positively to the latest initiatives of the Shareholders, Customers and Employees. Portuguese Securities Market Commission (CMVM), taking advantage of developments on the legislative front (in BPI’s corporate governance practice is crafted around 2006 above all the revision of the Companies Code), as these principles and has led it to embrace (in the majority well as to the pronouncements and documents published of cases ahead of time) the corporate governance by various national and European organisations, namely regulations and recommendations issued by the the Portuguese Corporate Governance Institute1 (Instituto Portuguese Securities Market Commission (Comissão do Português de Corporate Governance), the European Mercado de Valores Mobiliários). Commission and the Organisation for Economic Cooperation and Development (OECD). Annual corporate governance report In the report on the BPI Group’s corporate governance Hence, Banco BPI’s Board of Directors submitted to the presented as an annex to the Directors’ Report, it is Shareholders General Meeting held on 20 April 2006 a important to underline: proposal to amend the company’s statutes, with a view to incorporating the most recent national and international ᭿ the detailed description of the composition, recommendations in the domain of Corporate responsibilities and activity undertaken by the BPI Governance, thereby placing the Bank at the forefront as Group’s management and control bodies; regards statutory solutions relating to corporate governance. The proposal tabled by the Board of ᭿ the report on the protection of Shareholders’ interests, Directors was structured into three plans of action: including the measures taken by BPI aimed at stimulating their participation in the company’s affairs, ᭿ the adoption of a far-reaching and streamlined in particular, at General Meetings; management and oversight model;

᭿ the characterisation of BPI’s remuneration policy and ᭿ the promotion of Shareholders’ participation at General information about the amounts earned by the members Meetings; of the Board of Directors, including an exhaustive G description of the share incentive scheme (Portuguese ᭿ the granting of powers to Shareholders to decide on the initials – RVA); remuneration of Directors and the Executive Committee and on dividend policy. ᭿ the description of the policies and practices adopted by BPI – expressed in regulations and Codes of Conduct applicable to management bodies and Employees – with the object of safeguarding against the occurrence of conflict of interest situations or the breach of professional confidentiality, to guarantee diligence and loyalty in securities broking activity, to promote the combat against terrorism and money laundering and to prevent the occurrence of insider trading G situations.

1) Incorporate above all in the publication in February 2006 of the “White Paper on Corporate Governance in Portugal”.

16 Banco BPI | Annual Report 2006 All the points of the aforesaid proposal were accepted by ᭿ reduction in the number of shares required to be the Shareholders. entitled to one vote and, consequently, to participate at general meetings: from 1 000 to 500 shares; Effective from 30 June 2006 (date on which the alterations to the Companies Code came into force), BPI ᭿ the inclusion of a rule requiring the Board of Directors began to have a new far-reaching and streamlined to submit for deliberation at the General Meeting a management and oversight model (normally referred to as proposed long-term dividend policy; the Anglo-Saxon model) which includes the following governing bodies: ᭿ the inclusion of a rule that requires that when the General Meeting appoints the Remuneration Committee, ᭿ a Board of Directors, whose number of members was it must prescribe for each mandate the limits of the raised from 19 to 21 with the election of two new fixed remuneration of all the members of the Board of independent members, at the same time as provision Directors and the percentage of net profit that can be was made for the Board to delegate the day-to-day appropriated for the variable component of the management of the company to an Executive remuneration paid to members of the Executive Committee; Committee.

1 ᭿ an Audit Committee , which shall be composed solely of RECOGNITION IN 2006 non-executive members of the Board of Directors, the Value creation majority of whom must be independent, which shall be For the third consecutive year BPI was considered to be responsible for, amongst other aspects, the oversight of the best company in the financial sector on the Euronext the company’s activity, as well as overseeing the activity – Lisbon, in the 2006 edition of the “Stock Awards”. and independence of the Portuguese statutory auditor This event is organised by the Jornal de Negócios and (Revisor Oficial de Contas); Deloitte, and has as its object distinguishing the best companies admitted to the Portuguese stock market, ᭿ a Portuguese statutory auditor, appointed by the General based on the company’s operating performance, its Meeting following a proposal of the Audit Committee, earnings and the return delivered to its Shareholders in whose duty it is to examine and certify the accounts; the preceding year and in the last three years.

᭿ a Company Secretary; Corporate governance BPI was also distinguished in the Investor Relations ᭿ two new consultative bodies of the Board of Directors: Awards and for the 5th year running, in the category the Nominations, Evaluation and Remuneration “Best Corporate Governance Disclosure”: in the previous Committee and the Corporate Governance Committee; 4 editions, the bank has won three first places and has obtained one honourable mention; this year it received an The Meeting also approved the following statutory honourable mention. amendments: In the 9th edition of “IR Global Rankings”, BPI was ᭿ the alteration to the limit on the counting of votes when amongst the 5 best in the category “Best corporate issued by a single shareholder on his own, as governance practices”. The awards jury was composed of representative of others and / or by persons with whom JP Morgan, Linklaters and MZ Consult, with KPMG there are any of the relationships envisaged in article auditing the results-evaluation process. 20(1) of the Portuguese Securities Code: the limit was raised from 12.5% to 17.5% of the votes corresponding to share capital;

1) The Audit Committee retains many of the powers and duties previously vested in the Internal Control Committee created in 1999, an initiative pioneered by BPI.

Report | BPI Governance 17 Investor relations Investor Relations Website In the 2006 edition of the “Investor Relations Awards” – The Bank’s use of the Internet in its institutional and for the tenth time out of nineteen editions – BPI won communication was also the recipient of recognition. the award for the “Best Annual Report – financial sector”. Namely: The “Investor Relations Awards” are an event sponsored by Deloitte, Semanário Económico and Diário Económico, ᭿ In the “Investor Relations Awards”, BPI received a which seeks to reward excellence in the communication of honourable mention in the category “Best Use of financial information by companies listed on the Euronext Technology in Investor Relations”. Lisbon market. ᭿ In the “IR Global Rankings”, BPI’s Annual Report – The Investor Relations Manager, Ricardo Araújo, won the Internet version – was adjudged the best in Europe’s prize for the “Best Investor Relations Officer”. financial sector for the 3rd consecutive year.

BPI also obtained an honourable mention in the category ᭿ In the survey “Investor Relations Internet Sites: “Grand Prize for the Best Overall Investor Relations Practices of European listed companies”, conducted by Programme”. CompanynewsGroup, Banco BPI was judged to be the Portuguese listed company which presented the best practices in terms of financial and institutional communication via the Internet.

Best Best Best Best Best Report and Accounts Investor Relations overall Investor information use of technology of the financial sector Officer Relations program* concerning Corporate in Investor Relations* Ricardo Araújo Governance*

of Euronext Lisbon of Euronext Lisbon of Euronext Lisbon of Euronext Lisbon of Euronext Lisbon

Best Top 5 Best Best Best Investor Relations Best Corporate Annual Report financial company Portuguese bank Web site Governance practices on-line listed (ex aequo) (Portugal, 2006) (2006) (financial sector, 2006)

“IR Internet Sites: practices of of Europe of Europe of Euronext Lisbon Exame Special Edition 2006 european listed companies” “Maiores e Melhores”

* honourable mention

18 Banco BPI | Annual Report 2006 Social responsibility

BPI interprets its corporate responsibility as being the set Investor relations of duties and obligations the Institution is bound by in BPI attributes great importance to keeping a frank and relation to the Community in which it is integrated and to transparent relationship with shareholders, investors, the specific interest groups that depend on its activity: financial analysts, the authorities and other capital Customers, Shareholders, Employees and Investors, market players. represented in the capital market where the share is subject to permanent scrutiny. Fruit of this recognition and long before it was already common practice amongst companies listed on the stock From this perspective, the exercise of corporate social exchange, BPI created in 1993 a structure dedicated responsibility (or citizenship) assumes multiple exclusively to this end – the Investor Relations Division dimensions of quite contrasting natures which from the which reports directly to the Executive Committee of the outset entail compliance with the Law and applicable Board of Directors and to the Chairman of the Board of regulations, the observance of specific conduct rules, the Directors. governance system and its execution, the policies for human resource advancement, the promotion of Quality The dissemination of accurate, timely, frequent, clear and and interaction with Investors, as well as the support for unbiased information that is relevant for assessing its initiatives within Society in fields such as Health, shares listed on the stock market constitutes one of BPI’s Education, Solidarity and Culture. primary concerns.

Governance Comprehensive information about investor relations Since its inception BPI has pursued a set of practices activity during 2006 is provided in the BPI Group’s and guiding principles, the application of which ensures Corporate Governance Report. a diligent, effective and balanced management of the interests of all its Shareholders and other stakeholders. Standards of conduct The professional activity of the members of BPI Group Some of the structural pillars of BPI’s governance policy governing bodies and company Employees is governed by are the creation of value as management’s overriding stringent standards of ethical and professional conduct, objective, the adoption of best market practices in terms embodied in Codes of Conduct that all persons falling of communication and the dissemination of information, within their ambit must undertake in writing to abide by. the independence of executive management vis-à-vis any Shareholder or specific interest groups, and the BPI’s first Code of Conduct was approved in 1994, while commitment to stringent standards of ethical and the respective provisions have been the object of professional conduct. BPI’s governance policy is successive refinements embodied in separate documents described in much greater detail in the annual corporate in accordance with the specific nature of certain activities. governance report which BPI has published since 2000 The provisions under review are aimed at ensuring when such practice was not yet compulsory for quoted professional confidentiality, equity and safeguarding companies in Portugal. against conflicts of interest, the non-utilisation of privileged information for one’s own benefit – in particular Indeed, the Bank has adopted – in the majority of cases, the occurrence of insider trading – and the prevention and ahead of time – the corporate governance combat against money laundering. recommendations issued by the CMVM, while simultaneously keeping abreast of the latest The various Codes of Conduct currently in force at the BPI pronouncements in this domain by the European Group are the object of public disclosure via the Commission, the OECD and other national and www.ir.bpi.pt website. Complete information dealing with international bodies. this theme is contained in the BPI Group’s annual corporate governance report.

Report | Social responsibility 19 Quality The affirmation of service quality as a hallmark of the BPI The year saw the continuing investment in behavioural brand has been one of BPI’s main strategic priorities over training at the branch network, at the same time as this the years. In recent years and during 2006, as a result of training area was extended to the various central services the several initiatives embarked on, BPI consolidated its Divisions, with the object of ensuring the consolidation of leading position in the national banking market. The main Customer-orientation culture throughout the organisation. opinion surveys published have evidenced BPI’s progress, placing it amongst the banks with the best results in In Angola and also during 2006, an intensive training service quality and Customer satisfaction. programme was implemented covering some 175 courses which totalled more than 42 thousand training hours. In 2006 saw Banco BPI’s branches being judged the “best addition, a programme of specialised practical-training in Europe” according to a study undertaken by the periods in Portugal was executed. Lafferty Group, which evaluated the service provided by 66 banks in 12 European countries. Sponsorship and solidarity As part of its social investment policy, BPI continued to Similarly, the Service Quality Index (SQI), Banco BPI’s support in 2006, namely through its patronage policy, a basic instrument for monitoring the level of its diversified spectrum of important social initiatives in the Customers’ satisfaction with the service provided, reveals areas of Solidarity, Education, Investigation and Culture, that BPI has been maintaining its already very high a summary of which is presented next. In Angola, BFA – Customer satisfaction levels. In 2006, some 80 000 Banco de Fomento Angola (100%-held by BPI) Customers (20 000 per quarter) were contacted in order announced the creation of a Fund, for a period of 5 to compile that indicator. years, to support local activities in these fields, to which it has decided to allocate annually 5% of net income. Besides this instrument for evaluating and measuring Service Quality, work continued on the use of the Mystery Social solidarity Customer studies in 2006 for gauging and keeping track Continuity was given during the course of 2006 to the of attendance practices, and on the development of policy of lending regular support to social-welfare control and monitoring methods for internal service levels. institutions, notably, to those involved in child protection, such as Operation Red Nose, Cadin (support centre for Training child development), Ajuda de Berço, the Instituto de BPI’s training policy in 2006 reveals the maintenance of Surdos-Mudos da Imaculada Conceição e Raríssimas the commitment to enhancing the efficiency and quality (association for mental and rare deficiencies). In this of service. sphere, we continued to support the initiative Amigos no Palco (Friends on Stage) and, on another plane, the Throughout the year, roughly 70% of the Employees support given to the Cruz Vermelha Portuguesa deployed in activity in Portugal participated in training (Portuguese Red Cross), the Fundação Pro Dignitate, the courses, with each employee having devoted on average Leigos para o Desenvolvimento, AMARA (Associação pela 31.4 hours to training, 9% more than in 2005. The Dignidade na Vida e na Morte), the Associação Portuguesa investment in training as a percentage of payroll costs de Paralisia Cerebral (Portuguese Cerebral Palsy remained steady at 1.2%. Association) and to the Associação Portuguesa dos Direitos dos Menores e da Família (Portuguese Association for Minors’ and Family Rights), amongst others.

20 Banco BPI | Annual Report 2006 In Angola, an agreement was concluded, in association Reference is also made to the support for the creation of with the American Agency for International Development scientific and pedagogical laboratories at the University (USAID), for the electrification of the Kilamba Kiaxi and of Coimbra’s Sciences and Technology Faculty and Viana municipalities. BFA will make available USD 1.2 research and development activities conducted at the million over the next 3 years for this project. Instituto Superior Técnico.

A contribution was also made to the Projecto Jango In Angola, support was given to the realisation of a Juvenil. This refers to a project implemented by the PSI / post-graduate course in International Commercial Law at Angola, with the objective of preventing against HIV / the Universidade Agostinho Neto. The course is a AIDS at community level. The project has the backing of scientific collaboration with the University of Lisbon’s the Health and Youth and Sports Ministries, and is Law Faculty Institute for Legal Cooperation and the Law currently funded by BFA, USAID and BOEING. BFA’s Faculty of the Universidade Agostinho Neto. 2006 contribution was USD 400 thousand out of a total budget of USD 834 thousand. It is also worth highlighting the work done in collaboration with the Associação Portuguesa de Apoio a Education and research Africa (APOIAR) (Portuguese Association for Support to In the field of support for Research and Innovation, the Africa) to assist in the reactivation of the Escola de São most salient initiatives were BPI’s collaboration in three Paulo’s IT Centre in the Benguela province. projects: the execution and development of the protocol with Ipatimup (Instituto de Patologia e Imunologia Culture Molecular da Universidade do Porto), the installation of On the cultural patronage front, we highlight the an auditorium for training at the Hospital Curry Cabral following main initiatives realised during 2006: Transplant Centre and involvement at the Cotec centre, a business association for innovation. ᭿ ongoing patron figure of the Serralves Museum, the country’s most visited; In the Education and Research arena, BPI has been reinforcing its support for higher-learning institutions, ᭿ sponsorship of the exhibitions “Anos 80: Uma through the establishment of long-term protocols Topologia”, grand overview of the 1980s with 250 concluded with the Instituto Superior Técnico (Higher fundamental works of 70 artists from around the world, Technical Institute), the University of Coimbra’s Sciences which took place at the Serralves Museum, and “O and Technology Faculty, the Porto Engineering Faculty, Poder de Arte” (The Power of Art) which was staged at the University of Lisbon’s Fine Arts Faculty and with the the Palácio de São Bento. student associations of the Instituto Superior Técnico and the Lisbon Faculty of Medicine. ᭿ sponsorship of the exhibition “Amadeu de Souza-Cardoso: Diálogos de Vanguarda”, which took BPI also gave regular support to the initiatives of the place at the Calouste Gulbenkian Foundation and University of Aveiro, the Algarve University and the welcomed more than 100 000 visitors, making it the Institute of Visual Arts, Design and Marketing (IADE), most visited exhibition in the Foundation’s history; through the granting of university prizes to the best students, sponsorship of workshops and specialised ᭿ sponsorship in partnership with the Calouste Gulbenkian conferences and scientific-pedagogical projects of mutual Foundation of the book “La Legende de Saint Julian interest. L’Hospitalier” by Flaubert and Amadeo de Souza-Cardoso, and the cycle of the World’s Great Orchestras;

Report | Social responsibility 21 ᭿ sponsorship of the National Portuguese Language In Mozambique, BCI Fomento, in partnership with the Contest, an initiative of Expresso, SIC and Jornal de Joaquim Chissano centre, promoted the staging of a Letras. number of debates and exhibitions, amongst which one devoted to the 70 years of Malangatana and another ᭿ sponsorship of “Arte Lisboa”, the most important dedicated to paying homage to Aquino de Bragança. Portuguese fair of contemporary art; Also in Mozambique, the quality and diversity of the ᭿ patronage of the Casa da Música Foundation; services provided by the BCI Maputo and Beira mass-media archives were reinforced. ᭿ continuing support for the Museums of the Presidency of the Republic and of Caramulo, of which the Bank is The mass-media archive created in 1997 is a a patron. computerised multimedia library integrated within BCI Fomento’s organic structure, and is utilised primarily by Still in the cultural arena, we highlight the support given students (80% of users), teachers, senior and technical by BFA: staff of companies and public administration, as well as financial sector personnel. In 2006 the number of users ᭿ III Symposium on National Culture, which counted with was situated at 33 700 in Maputo and 14 115 in Beira. the presence of 700 national and foreign participants;

rd ᭿ 3 edition of the Coopearte project, collective exhibition of modern artists and aimed at cultural promotion and interaction.

22 Banco BPI | Annual Report 2006 Financial structure and business

The BPI Group – headed by Banco BPI – is a financial Banco Português de Investimento, the BPI Group’s and multi-specialist group, focusing on the banking original matrix, is engaged in investment banking business, with a comprehensive spectrum of financial business – Equities, Corporate Finance and Private services and products for corporates, institutional and Banking – at Iberian Peninsula level. individual Customers. In asset management activity, BPI is a prime player in Domestic activity the management of unit trust (mutual) funds, pension The Group’s commercial bank Banco BPI serves more funds and life-capitalisation insurance, which it than 1.3 million Customers – Individuals, Companies and distributes via Banco BPI and Banco Português de Institutions – through its multi-channel distribution Investimento. network comprising 574 retail branches, 19 investment centres, branches specialising in home loans (19), a International activity network of external promoters (5 312), structures In Angola, BPI is the leader in commercial banking dedicated to the Corporate (42 centres) and Institutional activity with a market share close to 25% through its Customers (6 centres), telephone banking (BPI Directo) 100%-stake in Banco de Fomento. BFA served a universe and a homebanking service (BPI Net). of 304 thousand Customers at the end of 2006.

Main units of the BPI Group

Banco BPI

1.8% 2.2% 81.9% 14.1% Capital allocated Capital allocated Capital allocated Capital allocated

Investment Banking Financial investments Domestic Commercial Asset Management Insurance International and Private Equity Banking Commercial Banking

Banco Português Inter-risco ᭿ Individuals and BPI Gestão Allianz Portugal Banco de Fomento de Investimento Small Businesses de Activos Angola 100% 100% 100% 35%1,2 100% Banking ᭿ ᭿ ᭿ ᭿ ᭿ Equities Private Equity ᭿ Corporate Banking, Unit trust funds Non-life and life-risk Individuals Banking management insurance ᭿ Corporate Banking ᭿ Corporate Finance Institutional Banking ᭿ Investment Banking ᭿ Private Banking and Project Finance Participating BPI Pensões Cosec BCI Fomento interests Mozambique BPI Suisse (100%) 100% 50%1,3 30%1,4

᭿ Pension funds ᭿ Export credit insurance management

BPI Vida

100%

᭿ Insurance capitalisation

Portugal Portugal Portugal Portugal Portugal Angola Spain Portuguese emigrant Mozambique communities5 Madrid branch

Note: The percentages indicated refer to the participations (direct and indirect) of Banco BPI in each company. Figure 4 1) Equity-accounted subsidiaries. 2) In association with Allianz, which holds 65% of the capital. 3) In association with Euler Hermes, a company of Allianz Group. 4) In partnership with Caixa Geral de Depósitos and a group of Mozambican investors which, together, hold 70% of the share capital. 5) The BPI Group has overseas branches, representative offices and distribution agreements in overseas cities with large communities of Portuguese emigrants.

Report | Financial structure and business 23 Distribution channels

DOMESTIC OPERATIONS PORTUGAL Individuals and Small Businesses Banking 2005 2006 Galiza Viana Clients (x 1 000) 14 Individuals 1 176 1 172 Braga

Small businesses 135 143 37 Vila Real Bragança (Turnover below EUR 2.5 million) 10 7

Physical network Porto 101 Traditional branches 521 561 In-store 13 13 Housing areas 64 64 Viseu 24 Guarda BPI Net areas 322 375 Aveiro 11 Investment centres 16 19 38 Madrid Housing shops 18 19 Automatic bank (ATM) 1 166 1 241 Coimbra External promoters 2 728 5 312 19 Castelo Branco Remote channels (x 1 000) 11

BPI Net (regular users) 335 384 Leiria BPI Directo (regular users) 305 329 25

BPI Imobiliário (real estate properties) 369 562 Santarém Portalegre Customer resources (M.€) 16 910 18 747 20 5 € Loans granted (M. ) 11 977 13 124 Lisboa 154

Corporate Banking, Institutional Évora Banking and Project Finance 2005 2006 7

Clients Setúbal Companies 14 039 14 757 45 Project Finance 277 232 Institutional1 863 911 Beja Madrid branch 97 128 9

Physical network Corporate centres2 41 41 Project Finance centre 1 1 Faro 20 Institutional centres 6 6 Madrid branch 1 1

Remote channels (x 1 000) BPI Net Empresas (regular users) 49 56 Azores 7 Customer resources (M.€) 1 775 1 965 Loans granted (M.€) 11 005 13 738

Madeira 10

1) Local authorities, autonomous regions, social security system, universities, public utility associations, State Business Sector and other non-profit entities. 2) Includes the branch of Galiza.

24 Banco BPI | Annual Report 2006 Banco BPI Sweden

Hamburg Canada Banco Português de Investimento Belgium Paris (12 branches) Luxembourg Newark BPI Suisse Geneva S.ta Maria – Azores (SFE4) Madrid

Funchal – Madeira (SFE4)

Banco BPI (Cayman) Macau (SFE4) Cayman Islands (SFE4)

Netherlands Antilles Caracas

Banco de Fomento (Angola – 71 branches)

BCI Fomento3 (Mozambique) Brazil

Johannesburg Australia

ANGOLA Cabinda (2)

Soyo OPERATION IN ANGOLA 2005 2006 Uíge (2) Negage Clients (x 1 000) 230 304 N'zage Luanda (38 branches)

Physical network Catete Malange Number of branches 43 715 Gabela Saurimo Sumbe Waku-Kungo Investment centres 0 35 Lobito (3) Corporate centres 3 75 Catumbela Kuito Luena Benguela (2) Automatic bank (ATM) 42 93 Huambo (2)

Active POS 98 107 Caconda Matala Remote channels Lubango (2) Menonge Namibe BFA Net Particulares (subscribers) 12 552 17 367 Tômbua

BFA Net Empresas (subscribers) 1 751 1 994 Ondjiva Customer resources (M.€) 1 069 1 440 Santa Clara Loans granted (M.€) 419 624

Commercial Banking Investment Banking Banks Banks 3) 30% shareholding. At 31 December 2006 BCI Fomento held 38 branches. Overseas branches Overseas branches 4) SFE – Sucursal Financeira Exterior (off-shore financial branch). 5) At 31 December 2006, 66 branches, two investment centres and six corporate centres Representative offices were operating. Distribution agreements

Figure 5

Report | Distribution channels 25 The BPI Brand

In 2006 the BPI Brand obtained the broadest public to a consistent rise in successive editions of the ranking recognition in the most diversified spectrum of activities which has been published for seven consecutive years: and categories. Amongst others, the following facts, some from 2001 to 2004, inclusive, the Bank occupied fourth of which are also referred to in more detail in separate place, with 8% in the first two years and 10% in the chapters of the Report, merit special mention: following two; in 2005 it advanced to third spot, which it retained in 2006, with the same result of 11%.

᭿ the branches making up BPI’s commercial distribution

network were adjudged the best in Europe in a study ᭿ BPI was elected, ex-aequo, the best large Portuguese conducted by the British specialist consultants Lafferty bank in the Exame magazine’s ratings of the “Biggest Group, which reviewed 66 banks in 12 European and Best”; countries. Portugal received the most points, with BPI

capturing the absolute top slot in front of Citibank ᭿ for the second consecutive year, it was considered the Germany, with a score of 9 points out of ten. Five best financial company quoted on Euronext-Lisboa, in criteria were considered: exteriors and interiors, display the Jornal de Negócios’ “Stock Awards” selection; windows, merchandising, attendance and

automated-banking zone. ᭿ it was the only financial company to be distinguished with the prize “Growth – Large Companies” in the

᭿ the Bank advanced from third to second place in the awards event “Best of European Business”, organised ranking of Trusted Brands published annually by the by Roland Berger, CNN, Jornal de Negócios and Reader’s Digest Selections and based on polls Universidade Católica; conducted amongst the magazine’s readers in 15

European countries. In Portugal, the survey (published ᭿ it won the awards for the “Best Financial Institution in in February 2007) was based on a sample of 12 Research”, “Best Annual Report in the Financial thousand readers. Amongst the most trusted banking Sector”, “Best Investor Relations Officer” and “Best brands, BPI climbed from third to second place and Financial Analyst”, in the event “Investor Relations improves its result from 11 to 23%, overtaking Awards”, promoted by Deloitte, Diário Económico and Millennium, which edged up from 18 to 19%. Caixa Semanário Económico; Geral de Depósitos continues to be the frontrunner, but

retreats from 40 to 33%. BPI’s result gives continuity ᭿ it was awarded the prize for Europe’s best on-line annual report in the financial sector category and the “top 5” prize for the best corporate governance practices awarded within the ambit of the IR Global Rankings event, promoted by MZ Consult, KPMG, Linklaters and JP Morgan;

᭿ it was nominated for the second year running the best Investor Relations site of the PSI 20 in the awards event Practices of European Listed Companies, presented by CompanynewsGroup.

26 Banco BPI | Annual Report 2006 According to the Basic Study of the Financial System In 2006 the financial sector was the second biggest (BASEF) published by Marktest, BPI retained (as in the investor in advertising, slightly below the food and last four years) the first place in the satisfaction drinks sector, growing by 50%. This is the largest indicator rankings amongst the five largest banks in the increase in recent years and by far the highest amongst Portuguese financial system, a position confirmed by all the areas of activity. BPI was the third biggest the results of the “European Customer Satisfaction investor in the financial system, having increased its Index” (ECSI). This is another independent study spending by 46% when compared with the preceding (pan-European and conducted annually) which is dealt year, although it fell from first to third place in terms of with in more detail in the chapter devoted to Quality. the efficiency ratio (which is measured by way of the Still on the subject of the BASEF’s results, it should be ratio amount invested / spontaneous recollection). In mentioned that the Bank holds 4th place within the the communication policy arena, 2006 was marked by financial system as a whole in the categories “top of two principal channels: the promotion of innovative mind awareness”, “innovation”, “financial strength” services, such as the BPI Imobiliário site and BPI Net and “efficiency”. Bolsa and, on the other, the affirmation of the Bank’s competitive product range through investment solutions for individuals, home loans, salary-domiciled accounts, motor car finance and credit cards.

Interbrand, the world leader in the brand valuations, attributed at its own initiative a value of 450 M.€ to BPI. This represents an increase of 8% over the previous estimate and corresponds to fourth place amongst Portuguese banking brands. In justifying this value, Interbrand declares that “the Brand’s growth since the reading in 2004 is due above all to the coherence and consistency of its communication strategy (…)”.

Report | The BPI Brand 27 Human resources

At 31 December 2006, the BPI Group’s workforce Banco BPI staff complement numbered 8 318. This figure represents increases of 348 Distribution by geographical and business area in 2006 and 477 respectively in staff deployed in domestic Banco BPI 80% operations and in operations in Angola.

Banco de Fomento Banco Português Angola de Investimento 15% 2% Overseas branches and Other subsidiaries representative offices 1% 2% Staff in Portugal Staff in overseas operations

Chart 2

BPI Group Employees Year-end figures Year-average figures 2005 2006 Δ% 2005 2006 Δ% Domestic activity Banco BPI 6 316 6 688 5.9% 6 289 6 567 4.4% Banco Português de Investimento 136 129 (5.1%) 136 131 (3.9%) Other subsidiary companies 116 93 (19.8%) 123 96 (22.2%) Subtotal – activity in Portugal1 6 568 6 910 5.2% 6 549 6 794 3.7% Overseas branches and representative offices 168 174 3.6% 166 166 0.2% Subtotal – domestic activity 6 736 7 084 5.2% 6 715 6 960 3.6% International activity Banco de Fomento Angola 757 1 234 63.0% 654 958 46.5% Subtotal – international activity 757 1 234 63.0% 654 958 46.5% Total1 7 493 8 318 11.0% 7 369 7 919 7.5% Of which: Activity in Portugal Fixed-term contracts 582 590 1.4% 453 575 26.9% Temporary employment2 43 175 307.0% 169 175 3.1% Overseas branches and representative offices Fixed-term contracts 15 22 46.7% 15 16 6.4% Temporary employment2 - - -- - 1) Includes fixed-term contracts and temporary employment of persons with no binding work contracts with BPI. The number of Employees with stable binding Table 4 work contracts with BPI in the activity in Portugal increased 3.4% from 5 943, in 2005, to 6 145, in 2006. 2) Temporary employment costs are recorded in the books under the caption GENERAL AND ADMINISTRATIVE OVERHEADS.

28 Banco BPI | Annual Report 2006 BANCO BPI The Bank’s commercial area absorbed the greater portion Banco BPI Employees1 of new Employees recruited in 2006. Indeed, of the 460 Distribution by area of activity Δ people admitted, 350 were allocated to that network. The 2005 2006 % opening of 44 new branches naturally contributed to the Retail Branches network2 3 506 3 789 8.1% 3 need to recruit more personnel. Priority continued to be Corporate Centres 422 412 (2.4%) 4 given to the selection of new graduates with top-flight Non-traditional channels 247 343 38.9% Product factories5 659 548 (16.8%) behavioural and technical skills. Marketing 96 154 60.4% Commercial activity 4 930 5 246 6.4% Similarly, the Bank continued to invest in the area of new Central services 1 386 1 442 4.0% information technologies, thereby enabling it to extend Total 6 316 6 688 5.9% the availability of interactive information through its 1) Activity in Portugal. Includes temporary workers (43, in 2005, and 175, Table 6 intranet. in 2006) and fixed-term contracts (572, in 2005, and 578, in 2006). 2) Branches, investment centres and respective support structure (the following divisions: loans to individuals and small businesses, retail network projects, new Banco BPI Employees branches and commercial support). Selected indicators 3) Corporate Centres and Credit Risks Division. 4) Telephone Banking, Internet, Automated Banking and Protocol Banking. 2005 2006 5) Cards, mortgage loan financing (which includes 19 housing shops), personal loans and motor-car finance. Employees (no.) 6 316 6 688 Employees as % of the Group total staff 84% 80% with higher education 40.8% 41.5% Banco BPI staff complement with higher education Distribution by area of activity Distribution by functional areas (at the Individuals network) 35.6% 35.0% No. At 31 December 2006 Average age 39.3 39.5 5 246 Average period of service in BPI 13.0 13.0 4 930 Men 48.4% 48.4% 4 557 4 535 4 408 Women 51.6% 51.6% 57% Employees per branch1 6.1 6.0 1) Based on the number of Employees at the traditional and in-store Table 5 network (3 239 in 2005 and 3 436 in 2006). 6%

Of the total of 6 688 Employees working at Banco BPI at 22% 5% 1 978 2% 8% the end of 2006, 78.4% were integrated in commercial 1 685 1 450 1 442 activity and 21.6% in central support services. The 1 386 Central Commercial efficiency gains obtained in the functioning of the central services (22%) activity (78%) 1 442 5 246 services have permitted a continuing reduction in the human resources allocated to support activities. 02 03 04 05 06

Commercial activity Retail branches Central services Corporate centres network Non-traditional channels Product factories Marketing Central services

Chart 3 Chart 4

Report | Human resources 29 BANCO PORTUGUÊS DE INVESTIMENTO Banco Português de Investimento’s activity remains Banco Português de Investimento Staff complement Staff complement with centred on the Equities, Corporate Finance and Private university degree

Banking businesses, the backbone of which is a young, No. % experienced and highly-qualified workforce with superior 79 77 78 74 75 skills. Around 75% of Employees have university degrees, 200 and of these, 36% have completed post-graduate courses.

Banco Português de Investimento Employees 146 Selected indicators 135 136 129 2005 2006 Employees 136 129 Employees with higher education 74.2% 75.2% Average age 36.9 38.0 Average period of service in BPI 9.1 10.5 Men 60.3% 59.7% Women 39.7% 40.3% Table 7 021 03 0405 06 02 03 0405 06

BANCO DE FOMENTO ANGOLA 1) As a consequence of the demerger-merger process of a part of the activity At the end of 2006, BFA’s headcount stood at 1 234 of Banco Português de Investimento into Banco BPI, which took place at the end of 2002, 54 employees were transferred to Banco BPI in 2003, in addition Employees, of whom only 14 working at BFA belonged to to the passage of 250 persons (already transferred during 2002). BPI's Portuguese staff. Chart 5 Chart 6

BFA’s human resources are characterised primarily by their Banco de Fomento Angola youth and training: Staff complement Staff complement with university degree

No. % ᭿ the average age of Employees is 28; 57 1 234 ᭿ 57% of these either attend university or have already 50 graduated. This percentage rises to 66% for those 45 Employees who were recruited during 2006. 35 757 32 Banco de Fomento Angola Employees Selected indicators 590 2005 2006 441 Employees 757 1 234 Employees with higher education 50% 57% 286 Average age 29.1 28.1 Men 47.4% 50% Women 52.6% 50% 02 03 0405 06 02 03 04 05 06 Table 8

Chart 7 Chart 8

30 Banco BPI | Annual Report 2006 TRAINING Activity in Portugal During the year, roughly 70% of the Employees deployed in A review of the content of, and the creation of, new Portugal received internal and external training. The learning models more adapted to the specific needs of training of newly-graduated Employees resulted in a 29% branch Employees was carried out in close collaboration increase in the number of induction and integration with the branch network. Training became more sales programmes realised. orientated, with more emphasis of the practical aspects.

The Branch Network continues to account for about 90% Classroom-type training sessions were attended by 19 321 of training courses. participants (23% more than in 2005), out of a total of 121 574 hours (25% more than in the previous year). The training rate (expenditure on training as a percentage of payroll costs) was situated at 1.2% in 2006, or the E-learning involved 14 148 participants out of a total of same figure as that for the previous year. 31 326 training hours. Courses essentially covered BPI’s computer applications. Training – Activity in Portugal 2005 2006 Mention is also made of the fact that investment continued Global training to be made in behavioural training at the branch network, with this training area being extended to the different Percentage of Employees with training 73.30% 70.41% Divisions of central services. This measure is aimed at In-house courses 71.10% 67.75% consolidating the Customer-orientation culture. External courses 2.20% 2.66%

Average no. of training hours per Employee 28.9 31.44 Activity in Angola Average duration of training (hours) 4.4 4.6 In 2006 an extensive training programme involving some Percentage of personnel allocated to training 0.12% 0.12% 175 courses was undertaken which totalled more than 42 Training rate 1.20% 1.18% thousand training hours and a programme of specialised Classroom training practical training periods spent in Portugal. Percentage of Employees with training 63.50% 66.20% In-house courses 61.30% 63.56% Average no. of training hours per Employee 22.5 26.57 Average duration of training (hours) 6.2 6.3 Average no. of participants per session 4 2.5 Training rate 1.10% 1.04% Investment in training per participant (€) 543 571 E-learning training Employee participation 73.30% 57.34% Average duration of training per Employee (hours) 9.5 7.9 Investment in training per participant (€) 72.8 92 Support for personal advancement Graduates 156 155 Post-graduates 64 81 Table 9

Report | Human resources 31 Technology

INFORMATION SYSTEMS IN PORTUGAL

BPI’s information systems in Portugal are based on a Efficiency, availability and performance in Portugal multi-channel and multi-functional, robust and scalable Selected indicators architecture, and on the full integration of web 2005 2006 technologies and transactional platforms. Central systems processing capacity (in millions of instructions per second – MIPS) 1 282 1 451 Middle range systems processing capacity The intranet – informative and transactional – placed at (in transactions per minute – tpm) 812 180 813 710 the Group’s disposal constitutes a common interface for Central and middle-range systems storage capacity (in terabytes)1 18.1 24.1 an increasingly more significant number of in-house, PC’s per Employee2 1.3 1.4 business and training processes. Employees with access to the intranet and e-mail 100% 100% Page views on the intranet, per day (x 1 000) 1 250 1 400 Support for business management, marketing and sales, Employees with access to the Internet 23% 33% for control and process management, as well as providing Availability of transaction sites 99.8% 99.8% assistance in finding front-end solutions, for the Page views on the Internet per day (all the BPI sites) (x 1 000) 1 147 1 456 management of Customer relations and for the Systems availability at the branches applications platforms for financial management, are before 8.30 a.m. 99.6% 99.2% made available in an integrated manner with traditional Real timeG in cards: from 7 a.m. till 4 p.m. 100% 99.96% operating applications. Response time to transactions at the branches (less than three seconds) 99.6% 99.5% Transactions on the multi-channel platform The core objective at the moment of conceiving and per day (x 1 000) 520 630 maintaining information systems is to attain a high level Technological Help desk: resolution of problems of performance, robustness and security which reflect in less than two hours 87% 88% No. of processes solved by the significant efficiency and availability indices. Question Treatment System (x 1 000) 319 876 1) The figure for 2006 includes the capacity of development and testing areas. Table 10 2) Including PC’s without specific user and PC’s dedicated to management, monitoring and testing tasks.

Applications overview – Principal components

Management and Distribution channels Business support Operational risk management Internet GPC MIS APC – Persons and Accounts Application BPI Net Loan Process Management BPI Net Empresas Managers Products Information BPI Net Mobile Accounts Loans Payments System BPI Net SMS Funds Cards Insurance BPI Online Securities Foreign ... Cards web sites BPI GO Data Marts Opportunities General and financial data Marketing Manager Planning Transactions manager Risk Telephone Back-office and control BPI Directo Risk Management PAC Guarantees Accounting Correspondence Operational Commercial Action and Collaterals Commercial Plan Financial Loans network Security and STQ MCF – Multi-channel Platform E-learning Central services Auditing Processes treatment Subsidiaries (workflow) Legal Representative GAS – Access and Security Management CAD disclosures offices Support to Management Automatic Fiscal Intranet payment-decision Resources management Financial management Legal Star.Net criteria Trading and intermediation Statistic

Data warehouse

Figure 6

32 Banco BPI | Annual Report 2006 ACTIVITY IN 2006 Besides the conclusion of important projects that were in ᭿ Implementation of conditions for the holding of progress, 2006 was essentially characterised by the “paperless” Board of Directors meetings and other launching and development of key projects within the in-house forums. The attendance at meetings and the ambit of BPI’s information systems to be fully making available of documentation will then be effected implemented during 2007. The structural nature and and controlled electronically, via a platform which takes relevance of these projects will result in levels of into account the requirements of profile segregation, functionality, performance and robustness commensurate accessibility and auditability. with BPI’s activity. Infrastructure, control and security Decision and business support ᭿ Evolution of the Data centre – core infrastructures – ᭿ Upgrade of the loan-management processes, namely, including the complete upgrading of the technological management of home-loan applications, so as to platform, attaining better scalability, high availability optimise the entire process and make it less onerous, and contingency indices. as well as to include new functionalities. ᭿ Development of GAS – Contas, an extension of the GAS ᭿ Creation of the loans process manager, GPC – system (access and security management which also Empresas, to manage the whole underlying workflow G, provides for the control of accesses at BPI) which will from the compilation of the supporting information permit the implementation of rules capable of filtering dossier (component already functioning) through to the access to common information with a high degree of making the funds available. sophistication and control.

᭿ Revision and modernisation of the transfers ᭿ Creation of conditions for the adaptation of operational management system, which also has the added goal of reporting and risk-control systems to the Basle II guaranteeing the implementation of Banco BPI SEPA directives. This involved the development of information Compliant, on 1 January 2008, in accordance with the repositories and additional applications for the trend in available legislation. systemisation and organisation of information, thereby ensuring the functionalities and production of the ᭿ Development of a new cheque management system with required reports. a view to ensuring a more effective control over the lifecycle of cheques and the availability of more information for Customers.

Optimisation of processes ᭿ Remodelling and restructuring of daily computerised processing, with the attainment of significant performance and functionality gains, especially evident and relevant for Customer-relationship processes.

᭿ Launching of the Papiro project, which seeks to create conditions for the dematerialisation of the vast majority of Customer documents or those produced by the Bank, making the associated processes less cumbersome.

Report | Technology 33 INFORMATION SYSTEMS IN ANGOLA

ACTIVITY IN 2006 Evolution of the information systems Banco de Fomento Angola’s (BFA) organic growth, Functionalities were developed for receiving and namely, of its commercial network, was accompanied by transmitting payment orders through the Real-Time the development and expansion of the support Payments System, thereby permitting the execution of infrastructure for the information systems. This entailed interbank transfers on the same day and creating a daily having to significantly reinforce the team deployed in the foreign operations reporting system called the Overseas Information Systems Division. A start was also made to Banking Operations Information System (Sistema de an in-house restructuring process with the creation of Informação de Operações Bancárias com o Exterior). areas with specific technical expertise, in particular, in telecommunications, Internet, management information In relation to the back-up systems, work commenced on and cheques. the technical improvement of the Windows systems with a view to accommodating the Bank’s rapid growth, not BFA’s expansion entailed a considerable effort, what with only organic, but also in the number of users. In addition, the opening of 23 new branches, three corporate centres continuity was given to the projects launched in 2005, and two investment centres, representing an increase of communications redundancy and disaster recovery in 250% relative to the number of premises inaugurated in order to guarantee business continuity in case any one of 2005 (11 branches). The number of employees working its components fails. at central services also rose appreciably, obliging the erection of a new central building. Besides the increase All these technical advances were realised in parallel with in the number of branches, it is also worth highlighting the training of technical staff in Luanda and Lisbon, both the availability and installation of one NET kiosk and two at companies specialising in technical training and with ATM at each branch, as well as the introduction of BPI teams. The emphasis was placed on on-the-job Reuters information at the investment centres and the training in order to facilitate the understanding and adaptation of the entire IT infrastructure to the new familiarity with work processes and methods. Besides this branch layout. facet of training, various courses were conducted internally and externally. In order to meet these needs and challenges, the Information Systems Division reorganised and reinforced Efficiency, availability and performance of BFA information systems its capability, carrying out a gradual separation of Selected indicators functions. This reorganisation was directed at enhancing 2005 2006 this division’s specialisation in the branches’ back-up and Central systems processing capacity (CPW1) 10 020 10 900 help-desk areas, as well as at central services. It was also Storage capacity (in terabytes) 3 3.1 necessary to create a team specialising in PC’s per Employee 0.8 0.88 Employees with access to the e-mail 42% 48% telecommunications, which will assume responsibility for Employees with access to the intranet 95% 95% data and voice communications. Number of processes available through the intranet 5% 5% Employees with access to the Internet 5% 16% In order to guarantee generalised support for the entire Page views on the Internet, per day (x 1 000) 9.5 10 commercial network, and in collaboration with the Availability of transaction sites 98.5% 99.8% Marketing Division, the intranet was reformulated and Transactions on the multi-channel platform improved so as to allow for easier consultation of the per day (x 1 000) 7.0 8.1 content. This reformulation involved the implementation Active debit cards (x 1 000) 40 75.8 Branches: opening before 8 a.m. 99.3% 99.3% of processes for the control and publication of content. Response time to transactions at the branches – Luanda (less than two seconds) 98% 98% Response time to transactions at the branches – province (less than eight seconds) 98% 98% Technological help desk: resolution of problems (less than two hours) 90% 90% 1) Commercial Processing Workload (capacity of processing commercial Table 11 transactions); benchmark IBM for IBM AS / 400 systems.

34 Banco BPI | Annual Report 2006 Highlights of the year

2006 January, 26 Release of 2005 consolidated net profit: net profit of 251 M.€ which represents a year-on-year increase of 30%. ROE was 23.7%. February Creation of the investment banking unit of BFA specialising, in its initial phase, in the analysis and granting of finance for investment. March, 13 O Banco Comercial Português (BCP) makes preliminary announcement of a general takeover bid for the shares representing the capital of Banco BPI, S.A., at a price of €5.70 per share. March, 15 Banco BPI’s Board of Directors issues an announcement which underlines the hostile nature of the takeover bid launched by BCP and advises that it is analysing how it will act in this scenario so that, in the terms of the law, the Bank and its management can continue pursuing the sustained strategy of value creation for the Shareholders. April, 10 Banco BPI’s Board of Directors unanimously approves and publishes the report prepared in accordance with the law on the acceptability and conditions of the takeover bid for the Bank’s shares launched by BCP. The report, entitled “A Wholly Unacceptable Offer”, with the sub-title “BPI versus BCP: value creation versus value destruction”, includes a 5-year Business Plan which foresees the doubling of the Bank’s profits by the end of 2010. April, 20 BPI’s Shareholders unanimously approve at the Annual General Meeting the annual report, the distribution of a dividend of 12 euro cents in respect of 2005, and a vote of confidence and praise in the Board of Directors and in the Audit Board, extended to each member of the governing bodies, senior management and to the other Employees of BPI. April, 20 BPI’s Shareholders approve in GM, with 77.4% of the votes in favour, amending the Company’s statutes, as regards raising the limit for the counting of votes from 12.5% to 17.5%. April, 20 BPI’s Shareholders pass a resolution at the same GM to adopt a new management and oversight model for the company. The management and oversight bodies now encompass the Board of Directors, the Audit Committee, the Portuguese Statutory Auditor, the Company Secretary and two new consultative bodies to the Board of Directors: the Company’s Governance Committee and the Nominations, Evaluation and Remuneration Committee. April, 26 Release of the consolidated net profit for the first quarter of 2006: net profit amounted to 74.2 M.€, which represents year-on-year growth of 7%. ROE was 24%. May, 8 Banco BPI pays a dividend of 12 cents per share, which corresponds to a payout of 36.4% and a dividend yield of 4.1%. May, 19 Holding of BPI’s 5th Annual Conference for research analysts and investors, promoted by BPI’s Executive Committee and transmitted live on the Investor Relations website. May, 31 Banco Itáu’s stake in BPI reaches 17.5% (previously 16.1%). June, 30 With the coming into force of the new Companies Code, the BPI Group’s amended governance model, deliberated by the Shareholders at the GM of 20 April 2006, becomes effective. July, 6 Caixa Holding (a company of the Spanish group La Caixa) announced publicly that by virtue of the acquisition of shares representing 0.305% of Banco BPI’s capital, its direct holding is now 2.203% while its total shareholding now stands at 18.679%, thereby conferring on it 18.985% of the voting rights. July BFA is honoured in the 2006 edition of the Luanda International Fair with the prize Leão de Ouro, in the banking sector category.

Report | Highlights of the year 35 July, 25 Fitch Ratings reiterates its A+ long-term rating for Banco BPI. July, 27 Release of the consolidated net profit relating to the first half of 2006: net profit of 148.6 M.€, which represents a year-on-year improvement of 39%. ROE was 24%. August BFA receives the prize for the best automatic processing of foreign operations in 2005 (“Straight Through Processing” – Excellence Award). September, 21-23 Banco Português de Investimento organises in Madrid, the third Iberian conference on small and mid caps, which was attended by 61 institutional investors and 24 Iberian companies. September, 24 Banco BPI and Banco de Fomento Angola sign cooperation protocols with the Bank of China covering the financing of external trade and emigrants’ transfers. The credit line supporting China’s and Macau’s exports to Angola amounts to 100 M.US$, and the protocol for immigrants’ transfers seeks to facilitate the transfers of capital by citizens of the Peoples Republic of China working in Angola. September, 28 Banco BPI launches the second securitisation home-loan operation in the amount of 1 500 M.€, consolidating before international investors and rating agencies the quality of BPI’s home loan portfolio and the Bank’s capabilities as an originator. October, 12 Banco Fomento Angola is awarded the mandate for the provision of advisory services to the Capital Markets Commission with a view to the implementation of the capital market in Angola. October, 23 The consolidated results relating to the first nine months of 2006 are released: net profit was 218.1 M.€, which represents year-on-year growth of 38%. ROE was 23.5%. November, 10 Caixa Holding (held by the Spanish group La Caixa) makes public that following the acquisition of shares representing 1.751% of Banco BPI’s capital, its interest has risen to 22.797%, which taking into account BPI’s treasury shares confers on it the imputation of 23.155% of the voting rights. November, 12 In the 2006 edition of the Stock Awards, Banco BPI is judged to be the best quoted financial company. The Stock Awards are an event organised by Jornal de Negócios with the object of distinguishing quoted companies which present the best operating performance and the best profit and value-creation indicators for the Shareholder, from a one and three-year perspective. The results were audited by Deloitte. November, 14 The Chairman of Banco BPI’s Board of Directors informs about the revocation of the pre-emption contract between Banco BPI’s shareholders. November, 28 In the Investor Relations Awards event promoted by Deloitte, Semanário Económico and Diário Económico, with the aim of rewarding excellence in financial communication by companies listed on the Euronext Lisbon market, BPI was commended for the tenth time out of nineteen editions, with the prize Best Annual Report in the financial sector. December, 13 Banco BPI’s Board of Directors deliberates and makes public the request made to the Chairman of Banco BPI’s General Meeting Committee for the realisation of two General Meetings on 19 January, at 10.00 am and at 11.30 am, respectively. December, 31 BFA’s distribution network at the end of 2006 totals 71 branches, seven corporate centres and three investment centres, following the opening of 28 new branches, four corporate centres and three investment centres.

36 Banco BPI | Annual Report 2006 2007 January, 17 Moody's reiterates its A2 long-term rating and positive Outlook for Banco BPI. January, 19 Banco BPI’s Shareholders elect at the General Meeting of 19 January, Dr. Manuel Eugénio Cavaleiro Brandão to the post of Deputy-Chairman of the General Meeting. January, 19 Banco BPI’s Shareholders approve at the General Meeting of 19 January, the motions presented by the Board of Directors, which covered an authorisation for the Board of Directors to deliberate on the sale of the shareholdings of the Bank and of BPI Vida in the capital of BCP, and a motion relating to the expansion of Banco BPI’s branch network. January, 25 Earnings release: the BPI Group posts a consolidated net profit for 2006 of 308.8 M.€, which reflects an increase of 23.1% relative to the net profit reported in 2005. ROE was situated at 24.3%. January, 26 Standard & Poor's reiterates its A-long-term rating for Banco BPI. February, 23 The Internet version of BPI’s Annual Report was judged to be the best in Europe’s financial sector by the jury of the IR Global Rankings (MZ Consult, JP Morgan, Linklaters and KPMG), repeating the distinction of the past two years. The Bank was also, and for the second consecutive year, amongst the five best in Europe in the category “Best corporate governance practices”.

Report | Highlights of the year 37 BCP’S TAKEOVER BID FOR BANCO BPI’S CAPITAL

TAKEOVER BID – Chronology of the facts

2 15 March 2006 Announcement of Banco BPI’s Board of Directors highlights hostile nature of the bid

4 10 April 2006 Report of Banco BPI’s Board of Directors on the acceptability and the conditions of the bid and disclosure of the Bank’s Business Plan

5 20 April 2006 Approval at BPI’s General Meeting of the change to the limitation on voting rights from 12.5% to 17.5%

Mar. Apr. May Jun. Jul. Aug. Sep. 2006 3 31 March 2006 8 14 July 2006 Delivery by the bidder of the application Commencement of the in-depth investigation for registration of the bid at the CMVM and phase by the Competition Authority notification to the Competition Authority 7 5 July 2006 BCP informs about the Insurance Institute of Portugal’s non opposition 1 13 March 2006 6 12 June 2006 Publication of the bid’s preliminary announcement BCP informs about the Bank of for 100% of Banco BPI’s capital Portugal’s decision not to oppose BPI BCP Authorities

BID The year 2006 will be marked by the publication on 13 Announcement by Banco BPI’s Board of Directors March of the preliminary announcement of a takeover bid On 15 March, the Board of Directors of Banco BPI issued for the entire capital of Banco BPI by BCP. an announcement in which it highlighted the hostile nature of the bid. In this context, it informed that it was In accordance with the said preliminary announcement, analysing the options which in terms of the law it might adopt with a view to enabling the Bank and its ᭿ the consideration offered in cash is 5.70 euro for each management to pursue the sustained strategy of value share; creation for the Shareholders that up until the aforesaid date it had been following. ᭿ the bid shall be subject to the verification, up until the end thereof, of the following conditions: minimum Report of Banco BPI’s Board of Directors on the bid’s acceptance level of 50.01% of the share capital in the acceptability and conditions case that, on the date of the bid closure, there are no On 10 April, the report of Banco BPI’s Board of Directors legal or statutory limits to the counting of votes issued on the acceptability and conditions of the bid, prepared by a shareholder or related Shareholders; or of 90%, in in accordance with article 181(1) of the Securities Code, the opposite case. and approved unanimously by the Board of Directors was published. The report, entitled “A Wholly Unacceptable Following the preliminary announcement, the bidders Offer” and with the subtitle “BPI versus BCP: value (Banco Comercial Português and BCP Investment BV) creation versus value destruction”, includes a five-year lodged with the CMVM an application for the registration business plan in which it is projected that the Bank’s of the bid on 31 March, date on which the operation’s profits will double by the end of 2010 (to 519 million prior notification was made to the Competition Authority. euro in 2010, versus 251 million euro in 2005).

38 Banco BPI | Annual Report 2006 12 19 January 2007 9 23 October 2006 EGM approves plan for the opening of branches and confers upon the Board of Directors the BPI announces plan to open 80 branches in Portugal possibility of deciding on the sale of the position held by the Bank and by BPI Vida in BCP in 2007, and 30 new branches in Angola 13 25 January 2007 Disclosure of BPI’s 2006 results: net profit of 308.8 M.€ exceed 14 November 2006 10 the 291 M.€ forecast in the business plan Announcement of the revocation of the pre-emption agreement between BPI Shareholders 15 1 February 2007 BPI’s announcement relating to the exposition to the CMVM concerning 11 13 December 2006 the agreement announced between BCP and Banco Santander Banco BPI’s Board of 17 12 March 2007 Directors deliberates to Banco BPI Board of Directors informs that it request the convening deliberated unanimously not to make a statement of an Extraordinary on the content of the Competition Authority’s General Meeting (EGM) preliminary decision Oct. Nov. Dec. Jan. Feb. Mar. Apr. 2007

16 1 March 2007 Preliminary decision of the Competition Authority, in favour of non opposition to the operation, which includes a number of undertakings by BCP to the Competition Authority

14 29 January 2007 BCP informs about the entering into contracts with Santander and BCP Pension Fund for the purchase of 10.5% of BPI’s share capital, and about the commitment relating to the eventual sale of assets

Figure 7

Based on the potential growth and the goals expressed in the Business Plan, BPI’s Board of Directors “believes that Principal points in the Report of BPI’s Board of Directors concerning the bid’s acceptability and this offer is an attempt to buy BPI, that significantly conditions undervalues the bank and is not in the best interest of ᭿ “The price offered does not reflect the standalone Shareholders, Clients and Employees. The Board has, value of BPI and the existing growth potential therefore, unanimously rejected the offer and advises supported by BPI’s Business Plan. shareholders to do the same and not tender their shares”. ᭿ BPI can deliver much higher value to its shareholders. ᭿ BPI’s governance model allows it to deliver solid In a letter sent to all the Shareholders introducing the operating results. report, the Board of Directors commits that “offers its full ᭿ BPI integration into BCP under the Offer would support to the CEO and the executive team to help them destroy a significant number of skilled jobs. deliver the Business Plan”, if the bid is rejected, as is ᭿ BPI integration into BCP under the Offer would be recommended. negative for our clients in terms of convenience, pricing, products and services. ᭿ Given BCP’s governance model, value destruction track record and the integration plan it announced”, the Board of Directors concludes that “BCP’s stated intention to consider the analysis and promotion of the necessary conditions for BPI shareholders to become BCP shareholders should be dismissed outright.”

Report | Highlights of the year 39 Alteration to the limitation on Banco BPI’s voting rights Extraordinary General Meeting of BPI approves plan to from 12.5% to 17.5% expand branches and authorises the Board of Directors to On 9 March, Banco BPI announced to the market the decide on the disposal of the position held in BCP resolution to be presented to the Company’s General In the disclosure of the results for the third quarter of Meeting, to be held on 20 April, amongst other points, a 2006, BPI announced a branch expansion plan for 2007 motion to amend the statutes of Banco BPI, S.A., (80 new branches and eight investment centres in entailing the alteration to the limit on the counting of Portugal; 30 new branches and a corporate centre in votes from 12.5% to 17.5% of the votes corresponding to Angola). the share capital. Following doubts raised about the legal possibility of At the said Shareholders General Meeting held on 20 BPI’s Board of Directors being able during the takeover April, Shareholders owning shares corresponding to bid period, to approve the expansion plan, and of the 67.54% of the capital were present or represented. The request for clarification on the part of the CMVM, BPI amendment, entailing the raising from 12.5% to 17.5% advised that it refers to a gradual programme of of the limit for the counting of votes, was approved by openings, with the result that by the closure of the bid 77.42% of the votes cast. launched by BCP not more than 20 branches would be opened in Portugal, except if such was deliberated in Position of the regulatory authorities General Meeting. As regards the branches to be opened Since the bid is subject to non opposition or in Angola, BPI clarified that the opening in 2007 of 15 authorisation of the competent authorities, the Bank of of the 30 branches corresponded only to the bringing Portugal and the Insurance Institute of Portugal notified forward of the branch openings contemplated in the BCP of their non opposition, which was disclosed to the Business Plan for 2008. market on 12 June and 5 July, respectively. On 13 December, Banco BPI’s Board of Directors decided In relation to the CMVM, there have been regular to request the convening of an Extraordinary GM to communications with the aim of clarifying issues which deliberate on (1) a motion of the Board of Directors have arisen within the ambit of the bid, not only by the relating to the branch expansion programme for Banco actual CMVM, but also by the bidder or by Banco BPI. BPI, S.A., and (2) a motion of the Board of Directors whereby the latter is authorised to decide on the disposal On 14 July 2006, the Executive Board of the of Banco BPI, S.A.’s and BPI Vida – Companhia de Competition Authority decided to make a start to an Seguros de Vida, S.A.’s holdings in the capital of BCP in-depth investigation, given that the “operation is (4.44%). capable in the light of details gathered, of creating or reinforcing a dominant position that could lead to At the General Meeting of 19 January 2007, at which significant obstacles to effective competition in the 79.31% of the Bank’s capital was present (the highest markets considered as important.” On 1 March 2007, shareholder participation ever since BPI has been a the Competition Authority issued a preliminary decision quoted company) the Board of Directors’ motions were of non opposition to the operation, which included a approved by 81.8% of the votes cast. number of undertakings assumed by BCP to the Competition Authority. Disclosure of Banco BPI’s 2006 results On 25 January 2007, Banco BPI disclosed its 2006 Revocation of the pre-emption agreement between BPI’s results. The net profit of 308.8 M.€ exceeded the 291 shareholders M.€ projected in the Business Plan for 2006-2010. On 14 November, following the decision taken by the CMVM concerning the pre-emption agreement, it was decided by the respective signatories to revoke it.

40 Banco BPI | Annual Report 2006 Agreement between BCP and Banco Santander Totta Decision of the Competition Authority On 29 January 2007, BCP informed that it had entered On 1 March 2007 the Competition Authority’s preliminary into contracts with companies of the Santander Group decision in the BCP / BPI concentration process is made (Portugal) and with the BCP Pension Fund for the public. The preliminary decision was not to oppose the purchase of Banco BPI shares corresponding to 10.5% of concentration, imposing a number of undertakings to be the capital (5.87% and 4.63%, respectively), subject to assumed by BCP. the approval of the relevant authorities and under commitment relating to the possible sale of assets. On 12 March, Banco BPI’s Board of Directors made public their unanimous deliberation not to pronounce Following this announcement, BPI presented its case to itself on the content of the Competition Authority's the CMVM, sending a copy to the Bank of Portugal and to decision, reiterating declarations made by it on 10 April the Insurance Institute of Portugal, whose conclusions 2006 of that Bid’s rejection and the opinion that “BPI’s were made public, concerning the legal problems it integration into BCP under the terms of the offer would believed emerged from the transactions announced, be negative for Clients in terms of convenience, pricing, namely: products and services”.

᭿ that the information disclosed is neither clear nor Since 12 March, date on which the Board of Directors transparent, reason for which BCP and the Santander approved the Report, the following facts have occurred: Group should be obliged to disclose the contracts entered into; ᭿ On 16 March 2007 the Competition Authority authorised the BCP / BPI concentration with the ᭿ that the reference in point 4 of BCP’s announcement following undertakings assumed by BCP: (“From the date the contracts are signed, the sellers shall hold the shares on behalf of BCP, to whom shall belong ᭿ sale of BCP’s and BPI’s shareholdings in Unicre; all the rights attaching thereto …”) cannot be permitted for anticipating the effects that justify the subjection to ᭿ development of an acquiring operation; authorisation of the acquisitions announced; ᭿ sale of 60 BPI branches to an entity outside the BCP ᭿ that the stipulation regarding the price adjustment and Group; the granting of a “qualified position” to Banco Santander Totta in relation to the sale of Banco BPI ᭿ sale of a portfolio of Corporate Customers (SME) in branches / assets should not be authorised, because it the amount of 450 million euro; breaches the principle of the equal treatment of Shareholders; ᭿ measures relating to the mobility of Corporate Customers, namely, the waiving of commissions on ᭿ that BCP should not be authorised to acquire shares the unilateral rescission of accounts and the provision over the counter that confer on it more than 10% of of the company’s historical banking relationship Banco BPI’s capital, “given that there is no acceptable record. interest which leads to the lifting of the prohibition envisaged in article 180(1)(a) of the Securities Code”; ᭿ On 23 March 2007, BCP lodged with the Portuguese Securities Market Commission (CMVM) an updated ᭿ that the off-market sale by the BCP Pension Fund to application to register the Bid. BCP itself of the first-mentioned’s holding in Banco BPI, under the conditions disclosed, is illegal within the On the date on which the present Report is placed at our disciplinary framework that governs pension funds. Shareholders’ disposal, that is, on 3 April 2007, that application was in the process of being reviewed by the CMVM with a view to approving the Bid’s registration.

Report | Highlights of the year 41 Behaviour of BPI shares in 2006 BPI shares appreciated by 53.1% in 2006, closing the Since 13 March (date of the Bid preliminary year with a quotation of €5.91. Up till 10 March (last announcement), the share price has been systematically stock exchange session before the day the Bid was higher than the €5.70 offered by BCP, having closed at a launched), BPI gained a further 24%, outperforming the lower price on only one stock exchange session. Since 13 other European banks (DJ Europe Stoxx Banks: 9%), the March 2006 till 12 March 2007, the average price was PSI-20 (12.2%) and comparable Iberian banks1 (10.2%). 5.90 euro. In the same period, the minimum price was From that date, the share appreciated by 23.4% to the 5.62 and the maximum 6.74 euro. end of the year, outstripping the gains posted by the PSI-20 (15.7%) and DJ Europe Stoxx Banks (8.8%) In 2006, BPI shares originated a trading volume of indices, while it is on a par with that recorded by 2 677 million euro (+181% relative to 2005), which comparable Iberian banks (23.9%). Since the beginning corresponds to a daily trading average of 10.5 M.€. of 2007 to the date this report was closed, BPI has posted an additional gain of 13.4%. The behaviour of BPI shares is dealt with in greater detail in a separate chapter “Banco BPI shares”.

Trend in Banco BPI’s share price Chronology of the facts related with the takeover bid

€ 7.2 73.6% 6.7 13 12 15 17 16 6.2 11 3 5 7 9 10 2 4 6 8 14 5.7

1 5.2

4.7

4.2

3.7 Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. 2006 2007

Chart 9

Note: The events indicated in the chart are described in this chapter’s initial chronology.

1. Preliminary announcement of the of the takeover bid 2. Board of Directors highlights the bid’s hostile nature 3. Application for the bid’s registration and notification to the Competition Authority 4. Report of Banco BPI’s Board of Directors on the acceptability and condition of the bid and disclosure of the Business Plan 5. Alteration to Banco BPI’s limitation of voting rights from 12.5% to 17.5% 6. BCP informs about the Bank of Portugal’s non-opposition decision 7. BCP informs about the non-opposition of the Insurance Institute of Portugal 8. Start of the in-depth investigation phase by the Competition Authority 9. BPI announced expansion plan for the distribution network in Portugal and Angola 10. Revocation of the pre-emption agreement between BPI’s Shareholders 11. Banco BPI’s Board of Directors convenes extraordinary General Meeting 12. Extraordinary General Meeting approves expansion plan for the distribution network and confers upon the Board of Directors the possibility of selling the BPI Group’s equity position in BCP 13. Disclosure of BPI’s results for 2006 14. Conclusion of BCP’s contracts with Santander and BCP’s Pension Fund for the purchase of 10.5% of BPI’s capital 15. BPI presents its case to the CMVM regarding the agreement announced between BCP and Santander 16. Competition Authority’s preliminary decision 17. Banco BPI’s Board of Directors deliberates not to pronounce itself on the content of the Competition Authority’s preliminary decision.

1) Comparable Iberian banks: Banesto, Bankinter, BES, Pastor, Popular and Sabadell.

42 Banco BPI | Annual Report 2006 Background to operations

GLOBAL ECONOMY, EURO ZONE AND PORTUGAL ECONOMIES

Global and euro zone economies Buoyant growth continued to mark the global economy’s innovation. In the short term, however, the Euro zone’s performance in 2006. The most salient feature was the average growth is also affected by the sluggishness of final fact that this expansion was shared by all the world’s consumption, both public and private. Despite the revival regions, at the same being accompanied by appreciable in 2006, this component of demand continues to suffer dynamism in international trade. Thus, global GDP growth from the less encouraging prospects as regards was situated above the 5% level, with the variation for employment and pay rises in the zone’s larger countries, the whole of the OECD recording a figure of 3.2%, while as well as from measures aimed at curbing public that relating to the universe of emerging economies expenditure, notably in the health and pensions areas and exceeded 7% (including growth of more than 5% in Latin which, in the light of demographic trends, constitute the America and sub-Saharan Africa). In the meantime, the chief threat to future macroeconomic equilibrium. volume of global trade in goods and services registered an expansion of close to 10%, with the exports of Turning to the global economy, the short-term prospects developed countries posting growth of 8% and those of remain optimistic, although, in parallel with the the emerging economies a figure of almost 11%. This maintenance – or even reinforcement – of the reformist trend is all the now remarkable in that it occurred in and innovation-oriented thrust, the need is becoming parallel with the rise in crude-oil prices. Moreover, increasingly apparent not to ignore the risks which have inflation remained in check, advancing by an average of become more acute, namely in the environmental and 3.3% in the United States and 2.2% in the Euro zone. social domains. Such a scenario could aggravate protectionist inclinations which in the present economic The factors behind these favourable developments are and demographic context, would jeopardise sustainable primarily linked to the access gained to the principal growth. In the meantime, international forecasts remain markets by the emerging markets (where more than half frankly positive, albeit with some deceleration relative to of the world’s population live), and to the increased 2006. This abatement should be more pronounced in the productivity stemming from the development of global case of the United States, where the indicators point to a production chains in both industry and services. This “soft landing” after the robust expansion of the past few last-mentioned trend was made possible by the diffusion years, thereby contributing to a reduction in the of the new technologies, by the abundance of finance respective external deficit. and by the adoption of innovative forms of business organisation. Among the developed countries, the GDP growth commitment to the opening up of markets and to the Year-on-year rates of change preservation of monetary stability made an important % 6 contribution. In the European Union, this trend also began to be translated into economic recovery and the correction of budgetary deficits in the majority of those 3 countries where they prevailed and which benefited from the increase in receipts associated with higher growth.

0 Exports and the investment in fixed capital, in particular, in equipment, constituted the most dynamic aspects of the Euro zone economy in 2006. This denotes above all -3 2002 2003 2004 2005 2006 the capacity of companies to adapt and take advantage of the new competitive environment in the areas of Portugal Chart 10 management strategies and the location and specialisation Spain Euro zone of manufacturing activity, whilst not overlooking Source: Eurostat.

Report | Background to operations 43 One of the main risks faced by the international economy A particularly interesting case is that of Spain, one of the in the first months of 2006 stemmed from the rise in the best-performing economies in the Euro zone, but which price of crude oil and its implications for inflation and from the outset appeared to be extremely vulnerable to economic growth. After peaking in the summer, some the property market’s reaction to the hike in interest moderation then ensued, in large part due to the subdued rates. Spanish economic growth in 2006 (3.8%) demand triggered not only by the decline in consumption, outpaced that of 2005 (3.5%). This is explained on the but also by the stimulus for the recourse to substitutes one hand by the increased contribution from exports and, and to the development of new forms of energy. This on the other, by the continuing growth in employment, state of affairs resulted from constraints (bottlenecks) in notably in the construction and services sectors, which in the supply of crude oil and in refining capacity, not to turn fuelled more robust private consumption. In parallel, mention environmental considerations. In this domain, in industry (the sector most exposed to external awareness is gaining momentum that the lack of action competition) the formidable entrepreneurial dynamism now will entail much higher costs than the measures ensured productivity gains and the conquest of new needed to reduce existing risks. This in turn will instil markets, thereby allowing the country to begin correcting significant dynamism into the areas associated with or compensating for the accumulated loss of environmental protection throughout the world. competitiveness observed in recent years. Notwithstanding this trend, crude oil will continue to be the most important source of energy at global level and Business climate indicator its price is not expected to decline in a sustained manner % below 60 USD / barrel, while at the same time continuing 110 to display significant volatility. 100 The emphasis placed on monetary stability and the consequent action of the central banks around the globe 90 permitted a situation in which the spike in energy prices did not lead to a sustained acceleration in inflation, 80 although it continues to warrant a cautious stance towards monetary policies. In particular, this is the case 70 in the Euro zone where the benchmark interest rate was 2002 2003 2004 2005 2006 raised gradually during the course of 2006 (from 2.25 to Portugal Chart 11 3.5 per cent), a course of action that is expected to Spain continue into the early part of 2007. The business Euro zone restructuring in progress in the principal European Source: Eurostat. economies was not adversely affected by this policy, thanks to the dynamism of external demand and to the competitiveness gains registered in certain sectors and countries. These two factors have also permitted overcoming the effects of the stronger Euro. Corporate financing conditions also benefited from the behaviour of the financial markets, which proved to be very favourable to the large-scale restructuring operations currently under way in Europe.

44 Banco BPI | Annual Report 2006 Portuguese economy In 2006 the Portuguese economy began to echo Europe’s production costs. The favourable international economic and the world’s good performance, as well as the first fruits landscape and the improved business-confidence of the reforms directed at, on the one hand, ensuring the indicators constitute factors that hold out the prospect of a correction of the macroeconomic imbalances and, on the gradual revival in this area. As concerns budgetary policy, other, keeping pace with and further extending integration 2006 registered an about-turn with respect to its into the European and global markets. These effects credibility. Not only is the deficit expected to fall short of manifested themselves primarily in the good performance the budgeted figure (without recourse to extraordinary staged by net exports, which alone accounted for the measures), while tough measures were also taken in key acceleration in GDP growth to 1.2% (from 0.4% in 2005). areas such as pensions, health, education, regional and Domestic demand – in particular, final consumption – local administration and public administration, the fruits of continued to reflect the budgetary-correction measures and which will reinforce spending curbs in the next few years. the containment of individuals’ spending against the backdrop of the high level of indebtedness attained. These A positive signal from the standpoint of the Portuguese effects will continue to make themselves felt in 2007, economy’s dynamism is that resulting from the significant although the upturn in confidence should lead to an upturn acceleration in bank financing to non-financial companies in capital formation. The main beneficiary will be (up from 5.5% in December 2005 to 10.7% in 2006). entrepreneurial investment geared to the external markets The climb in interest rates was responsible for some and to the services sectors, as well as to the areas linked deceleration in home loans (from 11.1% to 10.0% in the to innovation and energy, in particular, renewable energies same period), although this was offset by the larger and energy efficiency. expansion in consumer credit (with rates of 4.5% and 10.1% respectively). The ratio of non-performing loans fell The Portuguese economy has benefited from neighbouring in the case of both companies (from 1.8% to 1.6%) and Spain’s good performance: however, its growth is still being individuals (from 2.0% to 1.8%). Total deposits held at affected by budgetary correction and the curtailment in Portuguese banks grew in December 2006 at a rate of business investment. Only now is this beginning to give 8.3%, thereby confirming throughout the year this signs of reacting to the dependence on activities that are variable’s recovery which began in 2005 following several overly vulnerable, on the domestic front, to the amount of years in which the recomposition of the portfolios of the public spending and, on the external front, to the various non-monetary players (agents) was responsible for competition from countries with much lower unit their virtual stagnation.

Detailed forecasts for Portugal and the Euro zone Growth rates in % 2006 2007 Portugal Euro zone Portugal Euro zone BP1 EC2 EC2 BP1 EC2 EC2 Private consumption 1.2 1.1 2.0 1.5 1.3 1.6 Public consumption (0.2) 0.0 2.0 0.0 0.0 1.4 Fixed investment (3.1) (2.6) 4.3 0.0 0.4 3.0 Exports of goods and services 9.3 7.9 7.9 6.2 5.4 6.0 Imports of goods and services 4.3 2.9 7.5 3.5 3.0 5.7 GDP 1.2 1.2 2.6 1.8 1.5 2.1 Inflation3 3.0 2.9 2.2 2.3 2.2 2.1 Current balance account4 (7.6) (7.4) 0.1 (7.3) (7.3) 0.2 1) Bank of Portugal forecasts, Economic Bulletin, Winter 2006. Table 12 2) European Commission, Autumn forecasts, November 2006. 3) Harmonised Index of Consumer Prices. 4) As percentage of GDP.

Report | Background to operations 45 MARKETS

Currency market During 2006 and confirming the projections at the end of Euro exchange rates in 2006

2005, the euro appreciated by around 11% against the USD dollar. However, the upward movement was not evenly 1.42 spread during the course of the year. In the early months of the year, propelled by the possibility of interest-rate 1.34 differentials widening and the decline in capital flows 1.26 into the US, the euro consolidated its upward trend. The second and third quarters were dominated by stability 1.18 due to the uncertainty surrounding the direction of the economic and interest-rate cycles on either side of the 1.10 Atlantic. Later, the conclusion of the procession of interest-rate hikes, combined with the outlook for an JPY 162 economic slowdown in the US, drove the euro area’s currency higher to above 1.30 in the last month of the 154 year after having initiated the year in the neighbourhood of 1.18. 146

The Japanese economy confirmed its recovery, thereby 138 enabling the Bank of Japan to abandon its zero-interest rate policy. However, economic data showed themselves 130 Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. to be erratic, the new government’s reformist drive petered out and the authorities adopted a more cautious USD / EUR Chart 12 JPY / EUR approach than expected in the management of monetary policy. Consequently, the yen depreciated throughout the Source: ECB, Reuters. year, dominated by carry-trade strategies which in turn were justified by the low short-term interest rates. The yen’s movement vis-à-vis the euro was more pronounced than against the dollar owing to the general strength of the European currency.

In 2007, certain of the factors underpinning the European currency’s value could run out of steam, above all if the cooling down of the American economy turns out to be moderate, thereby implying lack of action on the part of the Federal Reserve. However, the European economy’s positive behaviour, coupled with the strong growth in lending, may justify the prolongation of the cycle of interest rate hikes in Europe. Accordingly, the USD / EUR exchange rate should trade throughout the year within a relatively wide band of between 1.25 and 1.35.

46 Banco BPI | Annual Report 2006 Money market The Federal Reserve pursued its endeavours directed at At the beginning of 2007, the ECB reaffirmed its normalising interest rates, announcing four hikes of 25 accommodative stance with respect to monetary policy, basis points each in the Fed Funds rate in the first half of reasserting its intention to continue with regular hikes in 2006, raising this benchmark to the current rate of the benchmark rate. It is envisaged that the cycle will 5.25%. Anticipating the decisions of the monetary terminate when the benchmark rate reaches 4%. However, authority, six-month Libor climbed until June when it risks associated with the possibility of the present cycle reached 5.64%, only to retreat subsequently to 5.35% in extending even further beyond that level and the first half December. The fall in short-term interest rates in the US of the year still persist. mirrored expectations that, due to the economic downturn projected for the second half of 2007, the Federal Reserve Bond market will be forced to re-orient its monetary policy, giving it a In the first six months of 2006, long-term interest rates more expansionist bias. (10 years) in the US and Europe climbed from 4.40% to 5.24% and from 3.34% to 4.13%, respectively, spurred Reiterating the leading forecasts at the close of 2005, the by the removal of the expansionist bias of monetary European Central Bank (ECB) maintained its efforts policies. Nonetheless, this rise was less pronounced than directed at correcting accommodative monetary policy in previous cycles, while yields remained at during the course of 2006. It realised five hikes of 25 historically-low levels. On the one hand, the improved basis points in the refinancing rate, which left this economic conditions induced lower financing benchmark standing at 3.5% at the end of 2006. The requirements on the part of the States, foreshadowing the ECB’s decisions were dictated by the marked improvement contraction in the supply of public debt; whilst on the in economic conditions in the euro area, by the strong other, the surplus of global liquidity, in conjunction with expansion in lending, namely to individuals, and by the pensions funds’ needs associated with the ageing acceleration in the rhythm of money supply growth. population, exercised pressure on the demand side. In the Mirroring the trend in key rates, six-month Euribor edged meantime, the yield curve’s slope (differential between 10 up gradually from 2.62% in January to 3.85% in and 3-year rates) continued to flatten in the US and December, to reach its peak for the year. Europe, sporadically attaining negative values, although these do not herald the advent of economic recessions. Six-month interest rates in 2006

% 6

5

4

3

2 Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec.

Euribor Chart 13 Libor USD

Sources: BPI, Reuters.

Report | Background to operations 47 After a period of correction noted in the third quarter, Ten-year interest rates in 2006 occasioned by the conclusion of the Federal Reserve’s % cycle of interest-rate hikes and the emergence in recent 5.4 months of prospects of an economic downswing in 2007, the yields turned out to be more reactive to the trend in 4.8 short-term interest rates, rising once again (in 10-year notes, reverting to 3.95% and 4.72% in the euro area and 4.2 the US respectively). In 2007, long-term interest rates should continue to climb gently, due not only to the 3.6 continued rise in the refinancing rate by the ECB, but also to the postponement of the projected cuts in key interest 3.0 rates in the US. However, the above-mentioned factors of Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. a structural nature, in tandem with the persistence of Portugal (EUR) Chart 14 considerable liquidity in the capital markets, will continue Germany (EUR) to engender low yields in the near future. USA (USD) Sources: BPI, Reuters. The interruption in the cycle of short-term interest-rate hikes in the US midway through 2006 at a time when the ECB pursued its drive to normalise monetary Corporate credit risk premiums conditions, explained the narrowing of the differential in Euro-denominated issues (2002-2006) Basis ten-year interest rates between the two economic zones. points 300 This decreased from around 110 basis points in January to approximately 75 basis points in December. This trend may become more pronounced in 2007 in the event that 225 expectations appear on the horizon of the inauguration of a monetary-expansion cycle in the US before the end of 150 the upward movement in the benchmark rate by the ECB. 75 Credit-risk premiums in the corporate debt market were relatively stable despite the slight correction noted 0 2002 2003 2004 2005 2006 halfway through the year triggered by the announcement of deterioration in the credit quality of certain large-scale AAA Chart 15 companies, notably in the automobile sector. Indeed, this AA A phenomenon was evident in the lower credit ratings BBB notations. The continuation of reduced risk aversion, the Sources: Morgan Stanley, Bloomberg. robustness of corporate balance sheets and low financing costs should keep spreads at low levels, although the economic downturn forecast for 2007, thereby increasing the probability of defaults occurring, may by anticipation explain the suave increases in interest-rate differentials, primarily in the sub-A risk classes.

48 Banco BPI | Annual Report 2006 Equities market 2006 was globally very positive for the equities markets. In sectorial terms, the trends were similar in both The principal European market indices accumulated markets: construction, utilities and renewable energies gains of more than 10% in the year, while the North stood out on the positive side, while Media was American indices posted returns of between 10% prominent on the negative side. (Nasdaq) and 16% (Dow Jones). Finally, it is important to underline the intense activity in This behaviour was underpinned by a favourable the initial public offering market (IPO). During the course macroeconomic environment, with healthy economic of 2006, there was one IPO in Portugal (Galp Energia) growth and stable inflation. Furthermore, the earnings and ten in Spain (Astroc Mediterraneo, BME, GAM, disclosed by companies were in most cases positive, Grifols, Parquesol Immobiliaria, Renta Corp, Riofisa, continuing to display a certain degree of “immunity” to Técnicas Reunidas, Vocento and Vueling). Also the rise in interest rates and crude-oil prices. Finally, the noteworthy in Portugal was the 3rd and final phase of announcement of a number of merger and acquisitions Portucel’s privatisation. operations supported a sustained climb in the European markets. PSI20 and IBEX 35 indexes’ evolution

Base 100 Despite this positive performance by the stock markets, it 180 is important to point out that they suffered a meaningful correction in May / June 2006. Behind this correction 148 was the escalating geopolitical instability, expectations of interest rate hikes in Europe and some signs of a 115 slowdown in the North American economy.

83 The Iberian markets shadowed that stock market trend, with the IBEX35 and PSI20 advancing by 32% and 50 30%, respectively. These markets’ better performance 2002 2003 2004 2005 2006 vis-à-vis their European counterparts is fundamentally PSI-20 Chart 16 explained by the intense corporate activity in Spain and IBEX 35 Portugal. In fact, throughout 2006 Iberian companies Source: Bloomberg. continued to search for growth opportunities, accompanied by the announcement of various expansion initiatives, not only to other geographical areas, but also to other business areas.

Report | Background to operations 49 BACKGROUND TO OPERATIONS IN ANGOLA

Angolan economy Angola continues to form part of the select group made up Inflation rate in Angola Real GDP growth in Angola of the world’s most dynamic economies. In 2006, it once % % again recorded GDP expansion of more than 10%. 120 32 According to official estimates, Angola’s gross domestic product grew by roughly 20%, propelled above all by the oil sector’s expansion (growth of 21.2%). In the 90 24 meantime, the contribution made by the other sectors has been improving, posting an increase of 17.2%. Government forecasts for 2007 point to GDP growth of 60 16 31.2%, anchored to a 33.6% expansion in the oil-producing sector and 27.9% for the remainder. Amongst the most robust non-oil sectors are agriculture, 30 8 commerce and construction.

0 0 The creation of basic infrastructures, which are 02 03 04 05 06 07 08 09 02 03 04 05 06 07 08 09 indispensable for the normalisation of economic activity, Proj. Proj. will extend into the next few years, thereby underpinning Chart 17 Chart 18 the construction sector. Agriculture is also emitting encouraging signs, with the volume of certain crops Sources: Banco Nacional de Angola (BNA – Central Bank of Angola) and International increasing twofold. Nonetheless, in the near future, the oil Monetary Fund (IMF). and diamond-mining sectors will remain the cornerstones of Angola’s development. It is envisaged that oil Angolan GDP breakdown by business sector At 31 December 2006 production (which attained 551 million barrels in 2006) will exceed 2 million barrels / day by the end of the Manufacturing industry Diamond Construction 5% and other decade, placing Angola as the region’s second biggest 5% 2% Other producer. As regards the outlook for the diamond industry, 8% Angola (which is presently the world’s fourth largest Agriculture, forestry, producer) could become the biggest exporter provided that cattle breeding the findings of the latest geological surveys are confirmed. and fishing 9% Trade, transport, Oil, gas Economic projections for Angola1 communications and refined products E P P and banking 2005 2006 2007 14% 57% Real GDP growth (y-o-y, %) 20.6 19.5 31.2 Chart 19 Oil sector 26 21.2 33.6 Non-oil sector 14.1 17.2 27.9 Inflation (y-o-y, %) 152 12.22 10 Oil production (millions of barrels) 454.9 498.1 736.7 Average exchange rate (AKZ / USD) 87.32 80.42 80.0 Source: Ministry of Finance. Table 13 1) These projections correspond to the macroeconomic panorama underlying the State budget for 2007. 2) Observed figure. E – estimated; P – projection.

50 Banco BPI | Annual Report 2006 Angola benefits from an extremely favourable external In 2006, Angolan interest rates registered a fundamental position. The rise in exports by volume and value as a structural change. On the one hand the control over consequence of the higher oil output and the rise in the inflation and the increasing credibility of the monetary international oil price continues to outstrip the increase in authorities and, on the other, the higher liquidity imports by a wide margin, thus facilitating the stemming from the strong net inflow of foreign currency, accumulation of foreign currency reserves, which in turn induced a steep drop in interest rates. The significant has been conducive to exchange-rate stability. Reserves decrease in the State’s financing requirements justified reached 8 500 million dollars at the end of 2006, against the existence of negative real interest rates and the 3 300 million dollars at the end of the previous year. The temporary interruption to issues by the Treasury and by increase in reserves has been crucial for the maintenance Banco Nacional de Angola (BNA). However, the situation of the stable currency policy pursued by the authorities, was regularized during the second half of the year, with and which has been fundamental for keeping prices in interest rates climbing slightly. At the end of 2006, check. It must be recalled that, given the local economy’s 181-day interest rates stood at 7.42%, while a year characteristics, inflation presents a fundamental imported before the interest rates were situated at 11.1%. The component. During 2006, inflation continued on its stability of monetary conditions favoured the lengthening downward trajectory, falling from 18.5% in December of the yield curve in the money market, with the 2005 to 12.2% at the end of last year. The government authorities intensifying issues with maturities longer than forecasts an inflation rate of 10% for 2007. three months and embarking on the issue of one-year Central Bank Securities (Títulos do Banco Central – TBC) Angolan financial system with placing rates of below 10%. In 2007, interest rates Despite the natural tendency to appreciate as a should remain at low levels, even though the downward consequence of the existence of an external surplus in trajectory has been interrupted. The intensification of 2006, the trend in the kwanza’s exchange rate vis-à-vis economic activity, which bolsters the credit market, is the dollar was characterised by stability around the conducive to a decrease in the existing liquidity surplus, 80.30 level after a slight appreciation noted in January thereby sustaining nominal interest rates which are from 80.80 to 80.40. In November the kwanza staged a currently negative, in real terms. timid appreciation although at the end of the year it was once again situated at around 80.30. In 2007, the Interest rates in the placement of Central Bank securities issued authorities will tend to strive for maintaining currency in 2006 stability anchored to the increase in reserves resulting % 16 from the positive external position. Although currency appreciation is justified by the trade balance and is conducive to keeping inflation under control, it tends to 12 make imports more expensive, which remain fundamental for ensuring the provision of basic goods to the 8 population and for the pursuance of the public investment plan. 4

0 Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec.

28 days 63 days 91 days Chart 20 182 days 365 days

Source: Banco Nacional de Angola (BNA).

Report | Background to operations 51 The normalisation of economic activity tends to foster Kwanza / Dollar exchange rate (AKZ/USD) dynamism in the banking sector. This process is crucial AKZ for guaranteeing Angola’s development. A symptom of the 100 economic progress is the expansion in bank lending of 90 40% in 2006, with financing in foreign currency (dollars) continuing to be a dominant feature. Indeed, this posted 80 an annual increase of 90%, representing 60% of the total portfolio of loans advanced. Deposits evolved in a 70 similar direction, expanding by 68% in the year. In this case, the annual expansion in dollar-denominated 60 deposits was even more expressive: 88% which compares 50 with the 29% growth in deposits in local currency. 2003 2004 2005 2006 Accordingly, placements in foreign currency continue to Source: Banco Nacional de Angola (BNA). Chart 21 be the population’s preferred vehicle, accounting for 70% of total deposits.

52 Banco BPI | Annual Report 2006 Domestic Commercial Banking

INDIVIDUALS AND SMALL BUSINESSES BANKING

OVERVIEW Individuals and Small Businesses Banking was responsible Individuals and Small Business Banking for a resources portfolio of 18 747.3 M.€ and a loan and Selected indicators Amounts in M.€ Δ guarantees portfolio of 13 123.5 M.€. These figures 2005 2006 % correspond to high annual growth rates: 10.9% for Total Customer resources1 16 910.0 18 747.3 10.9% resources and 9.6% for loans and guarantees. On-balance sheet resources 12 646.7 14 518.1 14.8% Off-balance sheet resources 4 263.4 4 229.2 (0.8%) Loan and guarantees portfolio2 11 977.1 13 123.5 9.6% Particularly noteworthy was the expressive expansion in Ratio of loans in arrears3 1.4% 1.4% - balance sheet resources, the annual growth rate of which Accounts opened (in thousands) 115.0 114.9 (0.1%) was 14.8% in 2006. Also of note was the behaviour of Total business per account opened (th.€) 12.0 17.1 43% the small businesses segment – a priority market – where 1) Securities not included. Table 14 resources climbed 17% in 2006 while credit expanded 2) Factoring G not included. 3) Loans in arrears for more than 90 days. by 14.5%. From the perspective of the opening of new accounts – It should be pointed out the opening of 40 new traditional an important factor in generating business – 2006 can branches, three investment centres and one housing shop, also be regarded as being extremely positive. In 2006, which contributed to the past year’s good performance. some 115 thousand new accounts were opened by Mention should also be made of the expansion and Individuals and Small Businesses Banking, the same dynamism of the external promoters’ network. figure as in the previous year. It should be pointed out that the amount of business per account opened was BPI managed to ensure the competitiveness of the range of substantially higher in 2006 than in 2005: 43% more. products and services in a year marked by heightened At the end of the year, the number of Customers totalled competition. Advertising campaigns were conceived around 1.3 million. the key products making up BPI’s product range, while more than 180 direct marketing initiatives were conducted. Individuals and Small Businesses Banking On average, 11 initiatives per month were realised for the Loans and guarantees Customer resources € € individuals’ and four for the small businesses segments th.M. th.M. which generated 3.2 million proactive contact 13.1 18.7 opportunities for the different channels. Roughly half of 12.0 16.9 11.2 15.6 the contacts were made by the branches while the 10.2 14.5 13.8 remainder were realised by telemarketing, mailing, e-mail 9.0 or SMS. On average, there were three contact opportunities for each Customer, with 54% of the Customers on the data base having been contacted.

02 03 0405 06 02 03 0405 06

Other loans and guarantees Off-balance sheet Customer Mortgage loans resources On-balance sheet Customer resources

Chart 22 Chart 23

Report | Domestic Commercial Banking 53 CUSTOMER RESOURCES In 2006 Customer resources registered portfolio growth of Individuals and Small Business Banking 1 1 837.3 M.€, or 40% more than the variation recorded Customer resources Amounts in M.€ Δ in 2005. The corresponding annual growth rate was 2005 2006 % therefore 10.9%. Sight deposits 3 038.2 3 229.4 6.3% Time deposits 5 095.9 6 831.1 34.1% 2, G € Bonds and structured products With a portfolio variation of +1 735.2 M. , time deposits placed with Customers 1 219.9 1 141.9 (6.4%) were the most salient component, being the major driving Unit trust funds3 2 871.0 2 752.4 (4.1%) force behind the expansion in Customer resources. PPR and PPA4 1 626.1 1 919.5 18.0% Insurance capitalisation5 2 979.9 2 812.6 (5.6%) The PPR/PPA products also turned in a good performance, Preference shares 79.0 60.4 (23.5%) posting a growth rate of 18.0%, well above the global Total Customer resources 16 910.0 18 747.3 10.9% trend in resources. 1) Does not include securities portfolio. Table 16 2) Guaranteed-capital and limited-risk bonds. 3) Excludes PPR and PPA. Time deposits 4) Includes PPR in the form of insurance capitalisation recorded in the balance sheet (233.8 M.€ in 2005 and 442.8 M.€ in 2006). The rise in interest rates, which made the yield on time 5) Excludes PPR. deposits more attractive relative to the other investments, as well as the competitiveness of BPI’s product range, Individuals and Small Businesses Banking meant that the portfolio of time deposits presented Customer resources in 2006 € Bonds and Preference shares growth of 1 735.2 M. . in 2006. This expansion structured 0.3% Insurance (Capita- corresponded to a variation of 34.1%. products lisation and PPR) 6.1% 15.0%

Time deposits Amounts in M.€

2005 2006 Δ% Time Unit trust deposits funds Time deposits 4 176.0 5 983.9 43.3% 36.4% 14.7% Savings accounts 919.8 847.1 (7.9%) Sight deposits PPR and PPA Total 5 095.9 6 831.1 34.1% 17.2% 10.2% Table 15 On-balance sheet Off-balance sheet 75% 25%

Observing the items making up time deposits – savings Chart 24 accounts and time deposits proper –, the last-mentioned grew by +43.3% in 2006, while savings accounts fell by 7.9%. This decline in savings accounts is essentially due to the trend in home-savings accounts following the tax changes made in 2005 that made these less attractive, and in retirement-savings accounts.

54 Banco BPI | Annual Report 2006 Unit trust (mutual) funds The portfolio of unit trust (mutual) funds (excluding PPR Some 183 thousand Customers had a retirement-savings and PPA) fell during 2006 by 4.1% to 2 752.4 M.€. plan with BPI at the close of 2006, which corresponds to This drop is fundamentally explained by the decrease an increase of 27 thousand Customers subscribing to this noted in the money-market and variable-rate funds, which product relative to the 2005 figure. This increase exceed are designed to attract short-term investments. On the the one recorded in the previous year. other hand, the diversification and growth funds, which are primarily directed at medium and long-term The number of Customers aged 50 or less has been investment horizons, performed well, with the relevant growing at a faster rate, resulting in the increased portfolio recording a substantial increase of 350 M.€. percentage of this group out of the total universe of Customers holding PPR products, from 39.8% in 2005 In December 2006, the BPI Group had a share of 11.4% to 42.7% in 2006. in the unit-trust fund (excluding PPR / PPA) and guaranteed-capital funds market, giving it fifth place in The placing of plans with periodic contributions for the ranking. Customers with retirement-savings plans continued to be one of the Bank’s priorities with the aim of ensuring the Unit trust funds1 product’s programmed and ongoing reinforcement. It is Selected indicators Amounts in M.€ important to mention that in December 2006, 35% of Δ 2005 2006 % the Customer base with retirement-savings plans had Liquidity and variable-rate bonds 1 766.9 1 338.3 (24.3%) associated periodic-contribution arrangements, which Diversification 701.5 862.2 22.9% represents a net increase of around 15 thousand Fixed-rate bonds 73.3 31.9 (56.4%) periodic-contribution plans in the year under review. Capital growth (equities) 218.0 407.4 86.8% Real estate 111.4 112.7 1.1% Retirement / education savings plans (PPR/E) Total 2 871.0 2 752.4 (4.1%) Portfolio evolution Periodic subscription plans 1) Excludes PPR and PPA. Table 17 th.M.€ Clients % of Clients (thousands) 2.0 200 Retirement savings plans The portfolio of retirement savings plans of Customers of Individuals and Small Businesses Banking grew by 1.5 150 19.3% in 2006 to 1 863.1 M.€. Contributing to this 68 65 growth was the 36% increase in the volume of BPI Group 74 86 83 Customer subscriptions in 2006. This enabled the Group 1.0 100 to increase its market share in subscriptions from 16.1% in 2005 to 19.9% in 2006 and to climb two places in the rankings in a year marked by the strong dynamism 0.5 50 displayed by all the competition in the promotion of PPR. 32 35 26 14 17 0 0 03 0405 06 02 03 04 05 06

Portfolio (th.M.€) Customers without periodic No. Clients subscription plans Customers with periodic subscription plans

Chart 25 Chart 26

Report | Domestic Commercial Banking 55 In 2006, continuity was given to a number of initiatives Capitalisation insurance embarked upon to strengthen Banco BPI’s strong At 31 December 2006, the capitalisation insurance positioning in the retirement area. Of these initiatives, we portfolio (excluding PPR in the form of insurance) highlight the following: totalled 2 812.6 M.€, held by some 110 thousand Customers. ᭿ continuous training in the commercial area; Of note was the good performance of the capitalisation ᭿ updating and improving the retirement Simulator in insurance targeted at the upper segment, sold exclusively accordance with the changes to the Caixa Geral de at the investment centres. The portfolios of these Aposentações regime; products registered an increase of 168.2 M.€ in 2006, which corresponds to a 121% growth rate. ᭿ the placing on the Internet site – www.bpiinvestimentos.pt – of an advisory matrix about PPR according to the Of the five principal Portuguese banking groups, the BPI Customer’s profile; Group held the third biggest market share in portfolio (excluding PPR in the form of insurance): 18.1%, in ᭿ extending the exemption on subscription commissions December 2006. to the entire range of PPR products;

᭿ making the transfer between the Bank’s PPR’s more flexible through the total exemption from commissions;

᭿ the campaign advocating the anticipation of contributions to PPR/E, whereby a gift was offered in exchange for contributions which enable Customers to benefit from the maximum tax allowance;

᭿ continuation of the campaign “Come Plan Your Retirement With Us”, the objective of which is to foster the creation of BPI retirement plans to complement the state system;

᭿ “Invest in your and their future”, an initiative in which solidarity is associated with the PPR, under which for each contribution made to the PPR in December, BPI gave aid to social solidarity institutions (Ajuda de Berço, CADIN, ISIC, Nariz Vermelho, Raríssimas). A total of 125 000 € was made available.

56 Banco BPI | Annual Report 2006 LOANS TO CUSTOMERS The portfolio of loans and guarantees to individuals and Individuals and Small Businesses Banking small businesses amounted to 13 123.5 M.€ at the Loans and guarantees to Customers in 2006 close of 2006. This figure corresponds to an annual Mortgage growth rate of 9.6%, well above the 7.0% registered in loans 74% 2005. The portfolio’s variation in 2006 was 1 146.4

M.€, that is, 47% higher than the portfolio’s variation Personal loans, credit cards and observed in 2005. car finance 8% Owing to its importance in total lending to the individuals Equipment and Commercial loans and small businesses’ segment – i.e. 74.2% –, the trend property leasing and guarantees 4% 14% in mortgage loans is the chief explanation for the overall trend in loans. In 2006, this component of the loan book posted a growth rate of 8.5%, that is, 2.5 p.p. above the Chart 27 preceding year’s variation. Mortgage loans The greater part of this business area’s indicators point to It is also worth highlighting the growth rates recorded in a positive evolution throughout 2006. personal loans, which were particularly influenced by the loans associated with the Galp and Portucel privatisation The mortgage-loan portfolio grew by 8.5%, that is, 2.5 operations, motor-car financing and the leasing of p.p. more than in the previous year. At 31 December equipment and real estate, and which exceeded the 2006, it stood at 9 735 M.€. growth rates registered in the previous year. The strict criteria applied by BPI in its approval procedures Individuals and Small Businesses Banking had a positive influence on the loan-impairment ratio, Customer loans Amounts in M.€ which represented 0.56% of the portfolio at the end of 2005 2006 Δ% the year. Mortgage loans1 8 969.2 9 735.0 8.5% Personal loans 485.8 554.3 14.1% Mortgage loans Credit cards2 168.4 172.3 2.3% Selected indicators Amounts in M.€ Car finance3 276.1 308.2 11.6% 2005 2006 Δ% 4 Commercial loans 1 480.0 1 644.2 11.1% Loan portfolio Bank guarantees 162.1 185.3 14.3% Loan portfolio balance (M.€) 8 969.2 9 735.0 8.5% 3 Equipment and property leasing 435.5 524.2 20.4% Market share – portfolio balance1 9.5% 9.4% -0.1 p.p. Total 11 977.1 13 123.5 9.6% Average amount per contract (M.€) 48.5 49.9 2.9% 1) Loans secured by fixed property. Corresponds primarily to home loans Table 18 Ratio of loans in arrears for and loans for home alterations. more than 90 days 1.21% 1.26% 0.04 p.p. 2) Includes outstanding credit of non-Bank Customers. 3) Includes motor car financing and leasing originated by Individuals and Small Impairments (in the balance sheet) Businesses Banking. as % of gross loan portfolio 0.59% 0.56% -0.03 p.p. 4) Includes overdrafts, current accounts loans, discounted bills receivable and other Loan contracting loans which form part of the loans products tailored mainly for sole traders and small Loans contracted in the year (M.€) 1 347.5 1 672.0 24.1% businesses. Market share – contracting 7.7% 9.3% 1.6 p.p. Loan-to-value ratio 57% 61% 4 p.p. Average amount per contract (M.€) 68.9 74.2 7.7% Weighted average period of the loan (in years) 30.3 32.8 8.2% 1) Market value includes securitised loans. The 2006 market share Table 19 refers to November.

Report | Domestic Commercial Banking 57 In the relation to the contracting of mortgage loans, BPI BPI Imobiliário reached 1 672 M.€ in 2006, 24.1% more than in the The BPI Imobiliário Internet site continues to be a previous year. Consequently, market share in new-loan benchmark in Portugal. It offers the biggest on-line data contracting rose significantly, from 7.7% in 2005 to base of properties and property development for sale in 9.3% in 2006. This increase in new contracting was the country. mainly due to the efficacy of the Bank’s commercial thrust, coupled with the revisions to the product and the At the end of 2006, BPI Imobiliário had 2 478 partners campaigns conducted during the year, as well as to the and some 562 thousand property-sale announcements, restructuring of the property-broking channel. that is, 18.1% and 52.1% respectively more than in 2005. With regards to the demand for properties, some The average term of the new loans and the average 31 thousand requests for visits were recorded and 569 amount contracted by Customers continued their upward thousand email messages directed at around 23 thousand trend of recent years, to be situated at 32.8 years and 74 subscribers to the alert service. thousand euro, respectively. BPI Imobiliário web site Restructuring of the property-broking channel Selected indicators Δ This channel underwent a restructuring in 2006 with the 2005 2006 % object of facilitating greater and closer monitoring by the No. of active partners 2 099 2 478 18.1% Bank: No. of property announcements 369 266 561 753 52.1% No. of subscribers of the alert service 18 540 23 255 25.4% No. of messages sent to ᭿ The commercial monitoring of the principal partners subscribers of the alert service 482 747 568 961 17.9% began to be effected by a central team. No. of requests for visits made via the site 20 188 30 671 51.9% Table 21 ᭿ The monitoring of the other partners began to be supported by a central business-promotion team created Mortgage loans contracted by BPI Imobiliário for this purpose and which complements the work of distribution channel Properties available on the In 2006 web site the commercial network. Real-estate Thousand brokers 23% 592 ᭿ The introduction of new functionalities in the dedicated Housing IT system for the property-broking channel. shops Branches with 7% home-loan “areas” 16% The specialised sales channels – housing shops, branches 369 with dedicated home-loan desks and real-estate agents – 350 concluded 46.3% of the total mortgage-loan contracting 281 in 2006, compared with 42.4% in 2005. The channel which recorded the largest increase was that of the estate 199 agents.

Branches Mortgage loans contracted by distribution channel without home-loan 2005 2006 “areas” 54% 02 03 0405 06 Housing shops 7.1% 7.2% Real-estate brokers 15.7% 22.7% Chart 28 Chart 29 Branches with home-loan “areas” 19.6% 16.4% Branches without home-loan “areas” 57.6% 53.7% Table 20

58 Banco BPI | Annual Report 2006 Personal loans The personal loans portfolio expanded by 14.1% in 2006 The contracting of motor car finance for which Individuals to 554.3 M.€ at the end of the year. Contracting and Small Businesses Banking is responsible was 151.7 amounted to 277.5 M.€, up 20.1% in relation to 2005, M.€, in 2006 which is 16.3% more than in 2005. This as a result of the Galp and Portucel privatisation trend bears testimony to this business area’s good operations. performance in a difficult year for the automobile distribution sector, which recorded a drop of 5.1% in the Personal loans number of new passenger vehicles sold. Selected indicators Δ 2005 2006 % Several factors were behind the results achieved. Amongst Loan portfolio (M.€) these were: Consumer credit 478.4 510.3 6.7%

Loans for acquisition of securities 7.4 44.1 496.7% ᭿ the performance of the sales force; Total loan portfolio 485.8 554.3 14.1% Ratio of loans in arrears ᭿ for more than 90 days 3.07% 2.66% -0.41 p.p. competitive pricing; Impairments (in the balance sheet) as % of gross loan portfolio 2.96% 3.56% +0.60 p.p. ᭿ product differentiation through maintenance contracts € Loans contracted (M. ) and Allianz insurance as a complement to the financing Consumer credit 229.3 234.9 2.5% product; Loans for acquisition of securities 1.8 42.6 - Total loans contracted 231.1 277.5 20.1% ᭿ the outstanding success of the Hyundai, Mercedes, Average period of loan (in years) 5.4 5.9 8.2% Vantagem ACP, Incentivos a Concessionários, Table 22 Multi-Produto and Volvo S40 / V50 campaigns.

Motor car finance It is worth underlining the performance seen in the placing The car finance portfolio relating to individuals and small of motor car insurance and the maintenance service, the businesses totalled 308.2 M.€ at the close of 2006, up contracting of which at Individuals and Small Businesses 11.6% on the amount at December 2005. This figure is Banking posted growth of 52.4% and 31.8% respectively. higher than that achieved in 2005, when the corresponding increase was 3.7%. Individuals and Small Commercial loans, guarantees and sureties, and leasing Businesses Banking was responsible at the end of 2006 The commercial loans, guarantees and sureties, equipment for 61% of the BPI Group’s motor car finance portfolio. and real-estate leasing portfolio in 2006 repeated the good performance observed in 2005. The annual growth rate Motor car finance noted in 2006, 13.3%, is 0.6 p.p. higher than that Selected indicators Amounts in M.€ recoded in the previous year and is above the average Δ 2005 2006 % growth rate for loans advanced by Individuals and Small Loan portfolio Businesses Banking. Long-term rental 91.9 89.8 (2.3%) Credit 70.4 75.3 7.1% The sustained increase in this business, as well as the Leasing 113.8 143.1 25.8% winning of new Customers in the small business segment, Total loan portfolio 276.1 308.2 11.6% continues to be driven by Banco BPI’s focus on the No. of maintenance contracts 289 381 31.8% conclusion of protocols with institutions and other No. of Allianz insurance policies 1 875 2 858 52.4% Ratio of loans in arrears companies. for more than 90 days 1.19% 1.28% +0.08 p.p. Impairments (in the balance sheet) as % of gross loan portfolio 4.96% 1.59% -3.37 p.p. Credit contracted in the year1 130.4 151.7 16.3% 1) Discounted contract value of the first rental / initial instalment. Table 23

Report | Domestic Commercial Banking 59 Commercial loans and leasing Credit cards excluding Private Label Selected indicators The number of BPI credit cards, excluding Private Label, Δ 2005 2006 % placed with Customers increased 1.7% to reach 496 Loan portfolio (M.€) thousand at the close of 2006. Commercial loans1 1 480.0 1 644.2 11.1% Bank guarantees 162.1 185.3 14.3% Accumulated billing amounted to 789 M.€, which Equipment leasing 156.0 172.3 10.5% corresponds to growth of 4.5%, relative to 2005. Property leasing 279.5 351.9 25.9% Total loan portfolio 2 077.6 2 353.6 13.3% Besides the aforementioned restructuring, noteworthy in Ratio of loans in arrears for more than 90 days2 1.51% 1.44% -0.07 p.p. the individuals segment was the decline in the Gold Impairments (in the balance sheet) card’s interest rate to less than half, making it the 2 as % of gross loan portfolio 1.83% 1.70% -0.13 p.p. market’s cheapest rate. In the range for companies, the 1) Includes overdrafts, current accounts loans, discounted bills receivable Table 24 and other loans which form part of the loans products tailored mainly for main development was the launching of the MasterCard sole traders and small businesses. Business and Corporate cards. 2) Commercial loans and leasing.

Private Label Equipment and real-estate leasing for individuals and The number of credit cards placed with Customers rose small businesses turned in an excellent performance, by 18.9% to reach 12 thousand at the close of 2006. expanding by 20.4% in 2006, or 4.8 p.p. higher than in 2005. The acceleration in business investment registered The accumulated billing on these cards was 92 M.€, in 2006, coupled with the commercial drive through which represents 10.4% of the total billing relating to campaigns and concerted commercial action were BPI credit cards in 2006. favourable to the overall leasing portfolio’s more robust growth. It is important to point out that Individuals and In this range, five new Private Label cards were Small Businesses Banking was responsible for 47% of launched: Agriloja, Dihor, Efcis, Unapor and Makro the BPI Group’s leasing portfolio at the end of 2006. Particulares.

Credit cards Credit cards The number of BPI credit cards placed with Customers Selected indicators Δ increased 2%. At the end of 2006, 508 thousand cards 2005 2006 % had been issued, which corresponds to a market share of No. of cards at the end of the year (x 1 000) 9.2% (data for September 2006). The balance Excluding Private Label 487.8 495.9 1.7% outstanding on credit cards grew at an annual rate of Private Label 10.1 12.0 18.9% Total credit cards 498.0 508.0 2.0% 2.3% to stand at 172.3 M.€ at year’s end. Market share1 10.0% 9.2% -0.8 p.p. Billing (M.€) Still in relation to 2006, it is worth noting the Excluding Private Label 755.5 789.2 4.5% restructuring of the range of credit cards aimed at Private Label 91.1 91.8 0.8% individual Customers, which entailed the launching of the Total billing 846.6 881.0 4.1% BPI card (first BPI product with a chip) and the Loan portfolio (M.€)2 168.4 172.3 2.3% incorporation of the no. 1 card, the Classic card and the Ratio of loans in arrears Premium card into that card. This restructuring gave rise for more than 90 days 2.34% 4.56% 2.22 p.p. Impairments (in the balance sheet) to the rationalisation of the number of cards without as % of gross loan portfolio 5.14% 6.66% 1.52 p.p. having an adverse effect on billing. 1) Market value includes the cards Visa, American Express and Table 25 Mastercard. The 2006 market share refers to September. 2) Outstanding of Individuals and Small Businesses Banking Customers and non-Clients.

60 Banco BPI | Annual Report 2006 Debit cards The number of BPI debit cards placed with Customers at Debit cards the end of 2006 was 834 thousand. This figure Selected indicators Δ corresponds to a market share of 8.6%1. 2005 2006 % No. of cards at the end of the year (x 1 000) 856.8 834.0 (2.7%) Billing relating to debit cards in the year under review was Market share1 8.5% 8.6% 0.1 p.p. € 3 688 M. , which is 9.6% more than in the previous year. Billing (M.€) 3 364.9 3 688.0 9.6% 1) Market value includes the cards Visa, Maestro and Multibanco. Table 26 The 2006 market share refers to September.

Insurance In addition to the range of insurance products associated The MedicAll BPI health insurance policy, which presents with credit products, Banco BPI pursued the strategy of extremely competitive conditions in terms of price, offering insurance under the autonomous-sale regime at flexibility and adaptability to the Customers’ requirements, the distribution network. was launched in May 2006. In eight months of commercialisation at Individuals and Small Businesses As regards the VitAll life assurance policy, the first Banking, more than 6 300 policies have been sold, autonomous-sale insurance products commercialised by corresponding to 9200 persons insured, in an average of the Bank, by the end of 2006 more than 24 thousand had 1.5 persons covered per policy. been sold since the launch in November 2005 in the overall amount of 1.4 thousand M.€ of capital insured.

1) Market share relating to September 2006.

Report | Domestic Commercial Banking 61 PHYSICAL DISTRIBUTION NETWORK Activity in 2006 During the course of 2006, BPI pursued its expansion plan In 2007, BPI will continue to reinforce the distribution for the physical distribution network, even intensifying it network’s expansion plan with the scheduled inauguration of with the opening of 40 traditional branches, three 80 traditional branches. In this scenario of the physical investment centres and one housing shop. network’s enlargement, new operations involving branch openings concentrated in other regions of the country are also Individuals and Small Businesses Banking comprised a contemplated. We highlight the operation in Braga, which total of 574 traditional branches at the end of 2006, of entails the opening of seven new branches in February. which 13 are located in store. It also included 19 Following this operation, BPI will yet again possess the investment centres catering for high net worth Customers, largest distribution network in that borough. and 19 housing shops, the majority of which are situated in shopping malls. With the goal of promoting a greater adherence to the alternative channels and thus free the commercial network to Physical distribution network concentrate on sales activity founded on personal contact and 2005 2006 the quality of service, it should be mentioned that during High-street branches 521 561 2006 a further 53 traditional branches were equipped with a New layout 148 199 BPI-Net zone. Home loans areas 64 64 Internet areas 322 375 INVESTMENT CENTRES In-store branches 13 13 At the end of the year, Banco BPI’s network specially Investment centres 16 19 catering for high net-worth Customers or those with the potential to accumulate financial assets, was composed of Housing shops 18 19 19 investment centres. In 2006, three new investment Table 27 centres were opened, located in Guimarães, Lisbon and Traditional branch network Santarém. Eight new investment centres are scheduled to BPI continues to be committed to fostering a closer be opened in 2007. relationship with its Customers, which entails ensuring a good physical implantation in the market. Accordingly, in the Through the investment centres, BPI offers besides three-year period 2004 to 2006, 78 traditional branches traditional banking services, a personalised support service were opened: 12 in 2004; 26 in 2005; and 40 in 2006. In to the Customer in the selection of financial solutions. This this fashion, the traditional network underwent a 15.7% service is founded on a stable and long-term relationship enlargement in the aforesaid period. between the Customer and the respective financial advisor.

Around 51% of the abovementioned branches were opened Investment centres Selected indicators Amounts in M.€ in 2006: in particular in the final quarter of the year the Δ branch enlargement process was intensified with the opening 2005 2006 % of 26 branches, 14 of which in December. With this group Customer resources 2 179.0 2 533.0 16.2% of new branches (excluding those opened in December), it Resources ex-securities 1 911.8 2 203.4 15.3% was possible to generate new business worth 80.4 M.€ and Securities 267.3 329.5 23.3% capture 4 241 new Customers during 2006. Loan portfolio 259.8 308.8 18.8% Note: the figures for 2005 were adjusted by the loans and resources Table 28 Under the network-expansion plan, branch opening portfolios of Customers who during 2006 were transferred from operations were decided and developed in regions with traditional branches to the investment centres network. acknowledged growth potential. Of special note was the operation carried out in Viseu which consisted of the opening The total resources of the investment centres’ Customers of six new branches since September 2005, of which four registered growth of 16.2% in 2006. This figure is up 1.7 were inaugurated in 2006. This operation contributed to BPI p.p. on the previous year and at the end of the year, they boasting the largest distribution network in that borough. totalled 2 533.0 M.€. It is also worth highlighting the

62 Banco BPI | Annual Report 2006 positive behaviour of time deposits, capitalisation insurance BPI Net and BPI Directo 1 and securities: the respective portfolios grew by 30.7%, Subscribers Transactions and consultations 23.0% and 23.3%. Thousand Millions

Although this network is more geared to the attraction of 547 53.8 resources, lending activity also performed well. Lending 496 478 grew by 18.8% in 2006, that is, 7.5 p.p. more than in 45.8 2005, with the portfolio amounting to 308.8 M.€. 41.8 378 It must also be noted that in 2006 roughly 1 500 high 30.8 net-worth Customers or those with potential to accumulate 292 financial assets were transferred from the traditional branch network to the investment centres. 19.2

NETWORK OF EXTERNAL PROMOTERS At the end of the year, Banco BPI’s Network of External Promoters comprised 5 312 promoters. Amongst these, 2 584 assumed the role of the Bank’s promoters in 2006. 02 03 0405 06 02 03 0405 06 The volume of business of Customers canvassed by the Transactions Network of External Promoters amounted to 903 M.€ at the Consultations close of 2006. This figure represents an increase of 523 M.€ in the year under review and corresponds to an annual growth Chart 30 Chart 31

rate of 137%. This sales drive means that in 2006 a total of 1) Subscribers are those Customers whose initial password has been near 20 thousand associated Customers was attained, given changed in the first utilisation. Single contract and password, that 10 048 new Customers were captured during the year. simultaneously valid for BPI Net and BPI Directo.

The Network of External Promoters contributed in a positive Also meriting special mention was BPI’s appreciable manner to the expansion in BPI’s Individuals and Small growth in online brokerage in the wake of the launching of Businesses Banking business: it was responsible for 16% of the BPI Net Bolsa service at the end of 2005. The creation the variation in its business, 10% of resources and 25% of of this service enabled the Bank to attain a market share of loans advanced. 9.5% in this type of transaction at the end of the year.

HOMEBANKING SERVICES The following are the year-end data: Banco BPI places at the disposal of its Customers the following home banking services; BPI Directo, BPI Net, ᭿ 650 thousand users (up 10% relative to 2005); BPI Net Empresas, Mobile Banking and SMS Banking, as ᭿ 547 thousand active users (up 10% relative to 2005); well as the stock brokerage services BPI Online and BPI ᭿ 77% of the total of the Bank’s account-balance Net Bolsa. consultations (vs. 72% in December 2005); ᭿ 91%1 of the Bank’s total transactions (vs. 81% in The year under review was marked by the increase in the December 2005). number of users and the utilisation level of the Direct Banking Channels. This increase meant that it was possible to raise the level of transactional activity transferred from the branches to these channels. It also enabled freeing the Commercial Network to carry out more value-added functions, notably, commercial interaction with Customers.

1) Includes transactions via ATM.

Report | Domestic Commercial Banking 63 BPI Net ᭿ 64% of the average level of service quality; ᭿ 384 thousand active users (15% more than in 2005); ᭿ 2 528 thousand call centre calls (8% less than in 2005); ᭿ 20.6 million accesses recorded in 2006 (24% more than ᭿ 391 thousand calls received on the centralised line (17% in 2005); less than in 2005); ᭿ 45.5 million consultations made (16% more than in ᭿ 66 thousand email messages received (5% more than in 2005); 2005); ᭿ 7.2 million transactions carried out (7% more than in ᭿ 378 thousand employee calls (25% more than in 2005); 2005). ᭿ 22 thousand employee messages received by email.

Online brokerage SITES ON THE INTERNET / E-MAIL / SMS ᭿ 9.5% market share in 2006 (4.3% in 2005); 2006 saw the intensification of Customer communication ᭿ 9.8% monthly market share in December 2006 (6.1% in via the new channels. In this context, new sites were December 2005); launched on the Internet as were new functionalities ᭿ 8 501 users in December 2006. added, such as the launch of the site BPI Automóvel. The following are the main indicators relating to this area: BPI Directo ᭿ 329 thousand active users (8% more relative to 2005); ᭿ 532 million pages visited (27% more than in 2005); ᭿ 1.2 million calls received (16% less than in 2005); ᭿ 30 million access (12% more than in 2005); ᭿ 64% of calls received were attended in less than 20 ᭿ 1.7 million email messages sent (35% less than in seconds (the percentage defined previously was 80%); 2005); ᭿ 64% of the calls attended by BPI Directo were dealt with ᭿ 167 email campaigns (89 more campaigns than in by automatic attendance. 2005); ᭿ 381 thousand SMS (increase of 83% relative to 2005); SMS Banking and Mobile Banking ᭿ 23 campaigns by SMS (14 more campaigns than in ᭿ 3.9 thousand active users in SMS Banking (3% more 2005). than in 2005); ᭿ 10 thousand active users in Mobile Banking (25% more TELEMARKETING than in 2005). The profitability of telemarketing activity grew substantially in 2006. This growth resulted from the concentration of BPI Net Empresas more profitable products and the fact that advantage was ᭿ 47 thousand companies signed up (22% more than in taken of the opportunities created through the new 2005); channels. In addition, there was a widening of ᭿ 23 thousand user companies (22% more than in 2005), debt-recovery activity to all the relevant products. The ᭿ 5.5 million accesses (32% more than in 2005); following are the most important indicators of this activity. ᭿ 19 million operations executed (34% more than in 2005); ᭿ 141 thousand decision-makers contacted in commercial ᭿ 23 billion euros transacted (48% more than in 2005). campaigns, with a success rate of 9.5% and an overall amount sold of 18.6 M.€; TELEPHONIC ATTENDANCE ᭿ 124 thousand decision-makers contacted in polls; The quality of the service in question in 2006 was slightly ᭿ 51 thousand decision-makers contacted in loan-recovery below that which can be considered ideal (i.e. that 80% of activity. the calls are attended within 20 seconds). Telephonic attendance activity carried out by the call centre was justified by the launching of new specialised lines – BPI Exportação, External Collectors and Insurance – and by the continued centralisation of activities at this facility. The principal indicators relating to this service’s performance in 2006 are as follows:

64 Banco BPI | Annual Report 2006 SERVICE QUALITY

BPI developed and reinforced during 2006 a plan to boost IQS – Service Quality Index the quality of service, founded on four fundamental pillars. The IQS continues to be Banco BPI’s basic instrument for These are: to monitor positioning in the banking sector, to monitoring Customer satisfaction and the perception they promote the ongoing improvement in attendance, to enhance have of the quality of service provided by the commercial the performance of internal processes that impact on network and in the other contact channels. The IQS service, and to increase the involvement and motivation of includes the following three components. the sales teams and Employees. IQS Competition The lines laid down for the development of service quality Bi-annual survey aimed at assessing the Bank’s positioning led to the following initiatives in 2006. vis-à-vis the competition with respect to quality.

᭿ Use of the Service Quality Index was intensified as an IQS Bank instrument for the analysis and identification of the Annual survey conducted involving some 5 000 Banco BPI priority actions to be taken in the organisational and Customers, with a view to evaluating the level of the Bank’s attendance processes. service from the standpoint of an organisation.

᭿ In the systematic assessment of processes, new quality IQS Branch evaluation methods were considered, such as the mystery Quarterly survey realised involving some 20 000 Banco Customer and the periodic visits to Branches by the BPI Customers, with the object of assessing the quality of quality division. service provided by each Branch.

᭿ Internal communication concerning the theme in Overall conclusions of the Bank’s IQS question was evolved, a fundamental facet for The results of the Bank’s 2006 IQS point the continued maximising Employee involvement. In this regard, an perception of high quality service. The overall IQS Bank intranet site was created dedicated to service quality, reached 802 points in 2006, on a par with the 2005 where the best practices are publicised and where the result. result of the main indicators are shared. Overall conclusions of the IQS Branch for the 4th quarter of ᭿ Training in attendance was intensified, aligning the 2006 Bank’s objectives with the goals of service quality and In the fourth quarter of 2006, the IQS Branch was 879 approximating the concepts of service and selling. points, demonstrating that the degree of Customer satisfaction with the quality of service at BPI branches ᭿ Internal service-quality monitoring methods were remains high. Amongst the group of service quality factors, developed, extending them to new processes and we highlight that of “personal attendance”, in relation to involving central services. which the satisfaction levels surpass the level of overall satisfaction. – IQS. In relation to this index’s initial ᭿ Continuity was given to improving the complaints position (fourth quarter of 2002), there has been a positive handling process. In this regard, the complaints directed trend in the level of Customer satisfaction as regards all at the Bank were all centralised irrespective of the the factors relating to service quality. channel of entry or of the area responsible for handling them. A complaints book is made available at all the Group’s attendance areas pursuant to Decree-Law 156 / 2005 of 15 September. Moreover, effort continued to be directed at improving quality and the response time, with a consequent reduction of more than 27% in the average response time, which in 2006 was 5.8 days.

Report | Domestic Commercial Banking 65 BPI BRANCHES CONSIDERED THE BEST IN EUROPE

Banco BPI’s branches were considered the “best in Ratings of Portuguese banks Ten best European banks Europe” in 2006 according to a study conducted by the (global ranking) Lafferty Group. This survey evaluated the branches of 66 banks distributed in 12 European countries. BPI 9.0 BPI 9.0

This study reflects the observation of different aspects of #2 8.8 the branches, namely, the external and internal appearance #2 8.5 #3 8.5 of the premises, attendance, automation, merchandising and the display windows. BPI’s Branches were classified in #3 8.4 #4 8.4 first place in relation to all the aspects considered, with #5 8.0 the exception of attendance, where they were ranked Average 8.1 second. #6 8.0 #4 7.5 #7 7.8 (Quote) “…in the areas of zoning, on-floor advisers and use 7.8 of modern retail environment, some of BPI branches are #8 #5 7.3 the best yet researched.” (unquote) (Lafferty Report, May #9 7.8 2006). #6 5.5 #10 7.7

Source: "Best European Retail Branches" Lafferty Report.

Chart 32 Chart 33

66 Banco BPI | Annual Report 2006 BPIgo

Context of BPIgo Banco BPI has sought to enhance the quality of Customer Below are the functional improvements implemented within attendance service, with the object of increasing their the ambit of this strategy. involvement and loyalty. ᭿ Significant increase in information relating to the This objective led to the investment that has been made in Customer, which permitted furnishing the Branches improving the management of Customer relations. This detailed information about the Customer’s relationship process is presently founded on three essential pillars: with the Banco BPI, as well as improving the proactive identification and centralised storage of the relevant commercial support given. knowledge we possess about our Customers, definition of the respective commercial monitoring plan, and communication ᭿ Integration of the transactional environment Star.net, consistent with the Customer, both in time and transversally whose objective is improving the integration between sales throughout the entire Institution. and service, the application’s performance and the possibilities of future evolution. The application BPIgo was developed to support this process, and is today the principal prop of the sale force’s ᭿ Simplification of the application’s use, which permitted a activity. The substantial increase in the efficiency and more friendly and efficient use of the current operations. efficacy of all the parties involved can be attributed to it. ᭿ Integration of BPIgo with BPINet, with the object of Banco BPI has systematically developed the BPIgo boosting the commercial contact opportunities through application in three functional areas: Banco BPI’s home banking. It permits placing on BPINet, in the form of banners, the specific commercial proposals ᭿ the systematic sharing of information concerning the for each Customer and allows the monitoring (through Customer and the commercial processes associated telemarketing) of the Branches and other channels. therewith, centralising at a single point the access to all the commercial information; ᭿ Integration of BPIgo with the management of applications of credit processes, with the objective of linking the ᭿ supporting the joint work between the various parties decision processes to the management of the commercial involved in the commercial process, namely the Branches, relationship with the Customer through BPIgo. Permits Central Services and Remote Channels; relating the commercial and operational dimensions of the simulation, decision and purchase of credit product ᭿ the simplification of the management and control of the processes, substantially improving the monitoring of all sale force’s commercial activity, through schedules and the opportunities in progress. reports oriented towards commercial initiatives The launch in 2006 of a new application was accompanied BPIgo in 2006 by a wide-ranging training scheme based on e-learning This During 2006, a new cycle of development was completed as action was targeted at all the Branch employees and entailed part of the strategy of converging the commercial the alignment of the application’s use within the scope of applications into a single and integrated application the best commercial practices. environment. The improvements made during the year under review to the BPIgo, consolidated this instrument’s central role in the sales processes and in the work of the commercial network and the other contact channels with Customers.

Report | Domestic Commercial Banking 67 CORPORATE BANKING, INSTITUTIONAL BANKING AND PROJECT FINANCE

At the end of 2006, Corporate Banking, Institutional Corporate Banking, Institutional Banking and Project Finance Banking and Project Finance G were responsible for a loan Selected indicators Amounts in M.€ Δ and guarantees portfolio of 13 738 M.€, which 2005 2006 % represents growth of 25% relative to 2005. This was due Loans and guarantees1 fundamentally to the loan portfolio’s expansion of 2 699 Large corporations 3 612.5 4 955.7 37.2% M.€, 33% more than in the preceding year. Companies (SME) 4 345.1 5 009.5 15.3% Project Finance 1 375.4 1 739.1 26.4% Institutional Banking and The following are the principal factors which contributed State Business Sector 1 672.5 2 033.2 21.6% to this very positive trend: Loans and guarantees 11 005.4 13 737.6 24.8% Resources2 1 774.8 1 965.5 10.7%

᭿ expansion of domestic activity resulting from the 1) Includes loans to Customers, loans to credit institutions, debt securities Table 29 and guarantees. intensification of the Bank’s commercial thrust in these 2) Includes sight deposits and time deposits. segments, coupled with a slight improvement in the economic climate; Corporate Banking, Institutional Banking and Project Finance Loans and guarantees Customer resources

th.M.€ th.M.€ ᭿ the steep increase in the various segments’ liabilities 2.0 portfolio based at the Madrid branch (growth of 178% 13.7 1.8 relative to December 2005), stemming from the greater 1.7 1.7 11.0 1.6 commercial dynamism in the Spanish market and the 10.2 9.8 participation in major syndicated financing operations; 9.5

᭿ the growing participation in international projects in the Project Finance segment;

᭿ reinforced presence in the institutional and public sector in the wake of the greater commercial aggressiveness and enhanced qualitative relationship;

᭿ the continuation of an aggressive strategy aimed at 02 03 0405 06 02 03 0405 06 enticing new business clients. Guarantees Loan portfolio All the Corporate Banking, Institutional Banking and Project Finance segments turned in positive Chart 34 Chart 35 performances, as borne out by the growth of the large corporations in both absolute and relative terms (1 343 M.€ relative to 2005, corresponding to growth of 37.2%).

Resources amounted to 1 965 M.€, registering an increase of 10.7% when compared to December 2005 and which is appreciably higher that that observed in the previous year (4.3%).

68 Banco BPI | Annual Report 2006 LARGE CORPORATIONS AND COMPANIES The loan and guarantees portfolio of the Large Corporations trend is essentially attributable to the more intense and Companies segments amounted to 9 965 M.€ in commercial aggressiveness and to the slight increase in December 2006, corresponding to an expansion of 25% economic activity. when compared with 2005. Continuing the drive directed at the crafting of solutions The Large Corporations segment registered growth of tailored to corporate Customers’ requirements, new 37.2%. The highlight in Portugal was the creation of a products and services were unveiled in 2006. Amongst Spanish and other multinationals corporate centre which these were: boasts a commercial team specially prepared to respond to the specific needs of Customers with Iberian ᭿ the BPI Exportação line, earmarked for financing operations. The Madrid branch’s stepped-up commercial investments supporting exports; drive in the Spanish market is another factor worth ᭿ BPI Cosec export insurance, an export-credit insurance mentioning. In December 2006, the Large Corporations’ created by Cosec to be sold exclusively by BPI; loan and guarantee portfolio domiciled at the Madrid ᭿ Angola Express credit line, for financing the export of branch amounted to 979 M.€, up 155% relative to the consumer and intermediate goods destined for Angola, 2005 figure. in partnership with BFA; ᭿ a range of Corporate / Business cards specifically One of the activities which assumed special importance in adapted to the business community; this segment was the financing granted within the scope of ᭿ the broader spectrum of derivative products, tailored to major acquisition and business restructuring operations, in the specific needs of each Customer; both the domestic and Spanish markets. ᭿ the BPI PME Garantia Mútua line, a credit line of 75 M.€, integrated in the mutual guarantee system and For its part the Companies segment recorded 15% growth, earmarked for financing SME’s. significantly higher than that of the previous year. This

Public incentive systems Banco BPI maintained the protocol established under the This partnership is also founded on the creation of specific SIME programme and, in line with previous years, once products for selling through the Bank’s network, namely, again played a prominent role in the associated activities: BPI / COSEC Exportação, geared to supporting SME first Bank in the number of projects contracted, and second exporters and credit insurance products associated with Bank both in terms of the number of approved candidatures factoring and cards. and in terms of the total proposed investments. BPI also continued to give support to companies in the tourism sector Mutual guarantee through the line created under a protocol with the Tourism Banco BPI continued to contribute to the dynamic Institute of Portugal and terminated at the end of 2006. development of mutual guarantee business through its commercial activity, on the basis of the protocols in force Cosec with the companies Norgarante, Lisgarante and Garval. In 2006, the partnership between Banco BPI and COSEC was intensified, materialising in an expressive increase in In 2006, the Bank continued to assume a leading role in credit insurance sold through the Corporate Banking the mutual guarantee business’ overall portfolio in terms of network in terms of the number of policies (133%) and the the amount contracted (29% of the total). amount thereof (137%). With the objective of strengthening its support for SME’s This trend enabled BPI to become COSEC’s biggest sales activities. BPI launched the BPI PME Garantia Mútua line, channel, bearing in mind that the amount captured via designed to lend support to companies’ treasuries and for this channel in new credit-insurance business corresponds investment in micro and small and medium-sized to 34%. companies, with special emphasis on smaller operations (up to 250 thousand €).

Report | Domestic Commercial Banking 69 PROJECT FINANCE At the end of 2006, the Project Finance segment Bank’s first participations in financing operations in the presented a loan and guarantees portfolio totalling United States of America, which were realised in the 1 739 M.€, which represents growth of 26.4% relative transportation sector. to December 2005. At that date, the total value of operations on hand (including amounts not advanced) BPI’s performance enabled it to maintain a prominent was 2 200 M.€, to which must be added 270 M.€ position amongst national financial institutions in the relating to operations still to be contracted. structuring, mounting and underwriting of investment projects in this financing regime. The infrastructures and The trend observed in Project Finance activity during public services areas, namely transportation, energy and 2006 chiefly reflects the sustained growth in BPI’s the environment once again occupied centre stage. participation in European projects, with the focus on the Spanish market considering that the majority of financing The following are some of the operations in which BPI deals closed in Portugal in the period in question were was involved in 2006. for relatively smaller amounts. Of special note were the

Structuring, mounting and financing of project finance Public-private partnerships and public administration operations ᭿ Ministry of Health – Support to the Health Partnerships ᭿ Babcock & Brown – Mandated lead arranger of the mission, as leader of the consulting consortium, in the refinancing of the portfolio of 89 megawatts of Enersis’s preparation, launching and monitoring of the tenders for mini-hydro plants (Project Spring) in the total amount of the hospitals of Loures, Cascais, Braga and Vila Franca 180 M.€. This operation, together with the refinancing of de Xira; financial consultant for the structuring, the same promoter’s portfolio of wind farms, constituted launching and negotiation of the tender for the the largest operation realised in Europe’s renewable installation of a new contact centre for the National energy sector in 2006, having won the PFI Renewable Health Service, as well as for the tender for the operation Deal of The Year award. of the Physical Rehabilitation Centre of S. Brás de ᭿ Tejo Energia – Participation in the refinancing of the Alportel. coal-fired thermoelectric power station of Tapada do ᭿ Ministry of Internal Administration – Financial Pego, with an installed capacity of 584 megawatts, in the consultancy within the ambit of the project for the total amount of 646 M.€. integrated system of emergency and security networks of ᭿ Eólicas de Portugal – Mandated lead arranger in the Portugal. structuring, mounting and financing of the Innovation ᭿ Azores Regional Government – Financial consulting Support Fund (Fundo de Apoio à Inovação) and in the within the scope of the first tender for the motorway issue of the deposit-guarantee of the Wind Farms Tender concession of the Island of São Miguel under the shadow with 1200 megawatts, adjudicated to the consortium tolls regime. Eólicas de Portugal, in the total amount of 111 M.€. ᭿ Aveiro Port Administration – Financial consultancy within ᭿ Central termoeléctrica de biomassa de Terras de Santa the scope of the definition of the commercial operation Maria – Structuring, mounting and financing, in the model for the new terminals and the preparation and capacity of sole lead arranger, of the Project for the presentation of the strategic plan for the Port of Aveiro. construction and operation of the biomass thermoelectric ᭿ Lisbon Municipality – Financial consulting in the power plant located in the borough of Oliveira de structuring and preparation of the PPP tender for the Azeméis, with an installed capacity of 10 megawatts, in construction and maintenance of the municipality’s the amount of 23 M.€. schools. ᭿ Central fotovoltaica do Cavalum – Structuring, mounting ᭿ Maia Municipality – Evaluation of the water, sanitation, and financing, in its capacity as sole lead arranger, of the solid-waste collection and street cleaning systems. Project for the construction and operation of a ᭿ Funchal Municipality – Evaluation of water and sanitation photovoltaic power station located in the borough of systems. Freixo de Espada à Cinta, with an installed capacity of 460 kilowatts, in the amount of 0.5 M.€.

70 Banco BPI | Annual Report 2006 Organising and mounting of financial restructurings / financing solutions in the State Business Sector ᭿ Refer – evaluation of the impact of and modes for the ᭿ Hospital de Vallecas – Participation in the financing of transposition of directives on the levy for usage of the the construction and operation, under the PPP regime, of railroad infrastructure. a new hospital in Madrid, in the total amount of 98 M.€. ᭿ Transgás – Assistance in the negotiations with EDP and ᭿ Hospital de Coslada – Participation in the financing of updating the economic-financial projections model. the construction and operation, under the PPP regime, of ᭿ Águas de Portugal – Assistance in the financial a new hospital in Madrid, in the total amount of 94 M.€. structuring of multi-municipal systems, including the ᭿ Tranvia de Parla – Participation in the financing of the negotiations with the European Investment Bank. construction and operation, under the PPP regime, of the ᭿ SIMAB – Evaluation of the produce markets and support surface metro system in the city of Parla, in the total in the sale of SIMAB’s financial interests in those amount of 87 M.€. markets. ᭿ Parque Eólico de Alentisque – Participation in the ᭿ Parque Expo – Preparation of the financial-economic financing of the construction and operation of a wind feasibility study for SGU – Sociedade de Gestão Urbana. farm in Spain, with an installed capacity of 46.5 megawatts, in the total amount of 57 M.€. Other consultancy assignments ᭿ Proasego (Tahuna and Zorreras) – Participation in the ᭿ Norscut – Financial consulting within the ambit of the financing of the construction and operation of wind farms restoration of financial equilibrium under the SCUT in Spain, with an installed capacity of 40 megawatts, in Interior Norte concession contract. the total amount of 50 M.€. ᭿ Agrupamento Biotermoeléctricas de Portugal – Financial consulting within the ambit of the tender for the France attribution of reception points for the forest-waste ᭿ HIT (Abertis) – Participation, in the capacity of senior biomass thermoelectric power plants. lead arranger, in financing the acquisition of Societé des Autoroutes du Nord et de l’Est de la France (SANEF) by International area Abertis, in the total amount of 3 500 M.€. Spain ᭿ Eiffarie (Eiffage / Macquarie) – Participation in financing ᭿ Renomar – Participation in the financing of the the acquisition of Société des Autoroutes Paris-Rhin-Rhône construction and operation of wind farms in Spain, with (APRR) by Eiffarie, in the total amount of 7 650 M.€. installed capacity of 852 megawatts, in a total amount of 806 M.€. United Kingdom ᭿ Hospital de Burgos – Participation in the financing of the ᭿ M6 Toll – Participation in the refinancing of the construction and operation, under the PPP regime, of the motorway concession in the United Kingdom, in the total new hospital of Burgos (Spain), in the total amount of amount of 1 030 M. GBP. 255 M.€. ᭿ Ciralsa – Participation in the financing of the USA construction and operation of a motorway concession in ᭿ Indian Toll Road – Participation in the financing of the Alicante, in the total amount of 255 M.€. widening and the operation of a motorway concession in ᭿ Forlasa – Mandated lead arranger for the financing of the the United States, in the total amount of 4 063 M.US$. construction and operation of wind farms in Spain, with ᭿ Icon Parking – Participation in the financing of the an installed capacity of 102 megawatts, in the total operation of parking lots in New York, in the total amount amount of 136 M.€. of 350 M.US$. ᭿ Euroglosa45 – Participation in the refinancing of the motorway concession M-45, in Madrid, in the total Ireland amount of 120 M.€. ᭿ N25 Waterford – Participation in the financing of the ᭿ Xeresa Golf – Participation in the refinancing of the hotel construction and operation of a motorway concession in complex, with golf courses, of Starwood, in Benidorm. Ireland, in the total amount of 241 M.€. Total amount of 104 M.€.

Report | Domestic Commercial Banking 71 CUSTOMER SEGMENTATION AND COMMERCIAL OFFICE FOR ANGOLA NETWORK Angola is currently one of the African countries with the The Corporate Banking, Institutional Banking and State greatest potential for economic development. The BPI Business Sector areas managed in an integrated manner Group’s presence in the Angolan market (through BFA), the Bank’s relationship with BPI’s corporate and makes it possible to service and offer specialist support to institutional client base, as well as the respective product corporate Customers interested in this market. and services range. In order to assist Portuguese companies wishing to do Corporate Banking Customers are segmented according to business in that country, BPI set up in Portugal a their turnover – Large Corporations and Companies –, as dedicated structure – the Office for Angola. well as in accordance with the respective specifics – Project Finance, Institutional Banking and State Business 2006 witnessed an intensification of the Office for Sector, while being serviced by a network of 49 corporate Angola’s activity, with contacts having been established and institutional centres. with more than 400 entities, which represents an increase of 22.6% relative to 2005. 2006 saw the maintenance of the two support areas for Large Corporations (North and South) and the three The activity carried out confirmed the importance of the regional divisions (North, Centre, South and Islands) to Office for Angola as a support structure for its Customers’ serve the rest of the corporate market, thereby ensuring commercial areas who have current business dealings in national coverage and greater proximity. These areas Angola, as well as giving guidance to companies seeking to coordinate 39 corporate centres. set up an economic relationship with that country, The work already undertaken in previous years was intensified In the Large Corporations South area, a corporate centre namely, as concerns the canvassing for new Customers and was set up to lend support to Spanish and other the procurement of business opportunities. At the same multinational companies with a view to undertaking a time, the focus was placed on improving the disclosure of specialised service that is more adapted to the the BPI Group’s presence in Angola. characteristics of these Customers. The collaboration with the commercial areas was extended Institutional Banking has a specific commercial network to monitoring the priority projects within the scope of the which ensures the quality of service, proximity and Convention between Portugal and Angola for the covering competence in the service rendered to the Customer, and it of credit risks by Cosec (line increased by 100 million euro is composed of five institutional services: North, Centre, to 300 million euro). BPI underwrote the contracting of South, Madeira and Azores and a Corporate Centre for the five operations in the amount of approximately 42 M.€, State Business Sector. which represents some 17% of the line’s amount used (250 M.€, in December 2006). The Project Finance area concentrates its activity on the financing of project finance operations and public-private partnerships (PPP), providing consultancy, organisation and mounting services, as well as participating in the financing of highly-complex large-scale projects.

BPI NET EMPRESAS BPI Net Empresas is a Corporate Internet Banking service geared to corporate and institutional Customers, and is the principal means of electronic interaction with the Bank’s Corporate Banking Customers. BPI Net Empresas registered, in Corporate Banking, a significant increase in the number of users during 2006 (11%), which can be ascribed to the availability of new functionalities synchronised to companies’ requirements.

72 Banco BPI | Annual Report 2006 INSTITUTIONAL BANKING AND STATE BUSINESS SECTOR

In 2006, the loan, guarantees and other similar products In this last chapter, special reference merits being made portfolio of the Institutional Banking and State Public of the work carried out in the local authorities in 2006, Sector Division posted growth of 21.6%, to reach an with special mention of the following cases: overall amount of around 2 033 M.€. ᭿ Cascais Municipality – first local entity in Portugal to Contributing to this result was primarily the 58.6% obtain a rating from the three leading international expansion in Customer loans which form part of the State ratings agencies – Fitch Ratings, Moody’s Investors Public Sector. Service and Standard & Poor’s;

For the fourth consecutive year, the severe quantitative ᭿ Lisbon Municipality – advice within the ambit of the restrictions on the access to credit by local authorities revision of the municipality’s international rating (Fitch and municipal companies were retained. Despite this and Moody’s); restrictive backdrop and the existence of unfavourable competitive conditions, the liabilities portfolio with ᭿ Oporto Municipality – advice within the ambit of the Institutional clients increased by 7.8%, in 2006. revision of the municipality’s international rating;

The financial and advisory work initiated some years ago ᭿ Madeira Autonomous Region – advising within the ambit proceeded positively, not only as relates to the support for of the revision of the Region’s international rating. key public-sector companies in accessing the international capital markets, but also in advising in the process The Bank also supported with special attention, given the involving the procurement of an international rating. alterations promoted during the year to the legal framework governing local and regional finances in Portugal, the application in the regional and local sector of the new rating methodology of Moody’s Investors Service.

COMMUNICATION WITH CUSTOMERS In 2006, the following were the most salient Regional seminars dealing with Derivatives: 14 regional communication initiatives with Customers. sessions were held which covered the whole of the country, at which BPI solutions for the management of interest-rate Campaigns risk were presented. BPI Exportação and Angola Express campaigns: launched respectively in March and April 2006. The first disclosed All together, more than one thousand companies the launching of the credit line Crédito BPI Exportação, participated in these seminars and other initiatives designed to finance investments supporting exports and conceived for Customers. other solutions for export companies. The second promoted in partnership with BFA the launching of the line Angola BPI Angola Guide Express, directed at financing the exports of consumer and The BPI Angola Guide was launched in May 2006 and intermediate goods to Angola. brings together a whole series of useful information for those seeking to do business in Angola. Seminars for Customers Angola and BPI Exportação Seminars: 2006 saw a start Newsletter BPI Empresas made to the organisation of a number of sessions with This is an electronic Newsletter with practical information Customers aimed at debating and analysing the specifics about products and services for the Corporate segment, as of the Angolan market and the presentation of an array of well as studies and other useful information for business financial products specially conceived to incentivise activity, This monthly newsletter is distributed via email to exports of national companies to Angola and other markets. roughly 8 000 recipients.

Report | Domestic Commercial Banking 73 Bancassurance

In the insurance area, BPI has a strategic partnership The positive performance that has been observed is with the sector’s world leader – the German group Allianz. reflected in the indicators relating to activity and This association has been cemented through BPI’s 35% revenue, as well as in the number of insurance policies stake in the capital of Allianz Portugal, and in a sold in 2006. The key figures are as follows: distribution agreement in terms of which insurance policies are marketed via the Bank’s commercial network. ᭿ commissions rose by 19% to 23.2 M.€;

BPI Customers thus have at their disposal an extensive ᭿ life and non-life insurance premiums totalled range of insurance products which cover both life respectively 43.9 M.€ and 34.8 M.€, which correspond assurance – death and disability insurance – and the to growth of 16% in life risk and 13% in non-life risk other branches – motor insurance and all-risks insurance: (the market posted growth of 6% and 1% in life and household, fire, alterations and installations, public non-life insurance premiums respectively); liability, theft, personal accident, unemployment and sickness. ᭿ the trend in the number of insurance policies has also been positive; at the end of 2006, there were more May saw the launching of the second autonomous-sale than 395 thousand active life-risk policies and more insurance product – Medicall BPI health insurance –, than 280 thousand active non-life insurance policies. conceived by the insurer Allianz. Commissions Sales of the autonomous-sale policies – Vitall BPI (life) Intermediation of insurance products and Medicall BPI (health) – have proved to be a success: M.€ by the end of the year, policies had been subscribed to 23.2 by more than 30 000 Customers, representing global premium income of more than four million euro. 19.6

16.2

12.9

10.6

02 03 0405 06

Chart 36

74 Banco BPI | Annual Report 2006 Asset Management

OVERVIEW The volume of third-party financial assets under the BPI Assets under management Breakdown of assets under Group’s management at the end of 2006 amounted to 14 management At 31 December 2006 thousand M.€, as a result of the 5% growth in the year, € € th.M. Institutional Clients that is, 638 M. . In terms of size, the unit trust (mutual) 2.5% funds accounted for 32% of total managed assets, 14.1 Hedge funds capitalisation insurance 30%, the pension funds 24%, 13.4 Structured 2.9% structured products 9%, and hedge funds 3%. products 9.1% Pension 9.7 funds Assets under management Amounts in M.€ 23.9% 8.6 Δ 2005 2006 % 7.5 Unit trust (mutual) funds 4 713 4 645 (1.5%) Pension funds 3 169 3 493 10.2% Life assurance 3 982 4 350 9.3% Institutional Clients 335 372 11.1% Absolute return (hedge funds) 316 421 33.3% Life Unit trust assurance Structured products 1 349 1 331 (1.4%) (mutual) funds 29.8% 31.8% Assets under management1 13 434 14 073 4.8% 02 03 0405 06 1) Adjusted for duplication of balances. Table 30 Chart 37 Chart 38

Report | Bancassurance and Asset Management 75 UNIT TRUST FUNDS The unit trust funds under management totalled 4 645 At the end of 2006, BPI Gestão de Activos had a market M.€ at the close of 2006. The funds domiciled in share of 15.4% in funds domiciled in Portugal, retaining Portugal totalled 4 473 M.€, while there were four its fourth place in the ranking of unit-trust fund UCITS III1 funds domiciled in Luxembourg amounting to management companies. Considering only the group of 172 M.€. value-added funds (which does not include money-market funds, variable-rate funds and PPR), BPI Gestão de Unit trust funds under management Amounts in M.€ Activos occupied third position in the domestic market 2005 2006 Δ% with a share of 14.9%. Bond and money market 2 013 1 469 (27.0%) Capital growth (equities) 466 692 48.4% The most representative funds of the management Tax efficiency (PPR/E and PPA) 1 472 1 553 5.5% company’s portfolio continue to be the funds BPI Global, Diversification 762 931 22.2% BPI Liquidez, BPI Reforma Segura PPR and BPI Reforma Total 4 713 4 645 (1.5%) Investimento PPR, with an aggregate value of 3 251 Table 31 M.€, corresponding to 73% of the total assets under As regards the behaviour of the various categories of BPI management. In the universe of 263 unit trust funds in funds, there was a reinforcement of the trend observed in existence in Portugal, these four funds were amongst the previous years whereby the volume under management 16 largest national funds, with BPI Liquidez being expanded significantly in the categories of capital-growth ranked the market’s fifth biggest fund. funds (+48%), diversification funds (+22%) and PPR/E (+6%), at the expense of bond and money market funds It is worth noting that BPI Gestão de Activos is the only (trend also witnessed on the market). fund-management company in Portugal which manages a large-scale fund under the flexible funds category (BPI BPI registered net subscriptions to non-Portuguese Global), with a volume exceeding 859 M.€. equities funds in the amount of 91 M.€ (27% of the net subscriptions on the market), national equities funds in Unit trust funds under Breakdown of unit trust funds the amount of 16 M.€ (23% of net subscriptions on the management under management At 31 December 2006 market), and flexible funds of 134 M.€ (roughly half of € th.M. Capital growth the market’s net subscriptions), of which 118 M.€ in BPI 4.7 4.6 (equities) € Diversification Global and 16 M. in BPI Brasil. 4.4 15% 4.0 20%

In the year, the net subscription of BPI PPR (retirement 3.5 savings) plans was 51 M.€ (27% of the retirement-savings unit trust funds), of which 16.9 M.€ corresponded to subscriptions to the new BPI Reforma Acções PPR, a product that was virtually non-existent at the end of 2005.

The increase in the relative weight of the equity funds, Bond flexible funds and PPR in BPI’s funds portfolio improved and money Tax efficiency the ratio of commission received per unit of assets under market (PPR/E management. It is this fact which explains the 20% rise 32% and PPA) in commission received from 47.5 M.€ in 2005 to 57.0 02 03 0405 06 33% € M. in 2006. Chart 39 Chart 40

1) Undertakings for Collective Investment in Transferable Securities.

76 Banco BPI | Annual Report 2006 Turning to individual performance and, in particular, as The Bank also made the transfer between BPI PPR’s regards net annual contracting, we highlight the following more flexible, making such transfer exempt from any funds. commission.

᭿ BPI Reforma Investimento PPR was the best fund in In the area of retirement planning – which has been one terms of the net subscriptions taken: 203 M.€ in total. of the BPI’s strategic priorities in recent years – the retirement simulators were updated in accordance with ᭿ BPI Global recorded net new business contracted of the new calculation rules of the Caixa Geral de Pensões, 118 million euro, and boasted a total of more than 45 at the same time as the training of branch employees was thousand participants at the close of 2006. stepped up.

᭿ The equities funds BPI Reestruturações and BPI Europa The implementation of various initiatives within the scope Valor attained 55.4 M.€ and 21.6 M.€, respectively. of the strategy of BPI’s affirmation in the retirement-savings market has had tangible results, as borne out by the 73% ᭿ PPR BPI Reforma Acções, launched less than two years growth in the universe of Customers with PPR in the last ago represented net new contracting of 16.9 M.€. five years (since 2002).

BPI Gestão de Activos activity in 2006 2006 saw the ongoing drive to diversify Customers’ Unit trust funds returns portfolios through the increased placing of medium and In 2006, 12 unit trust funds managed by BPI Gestão long-term resources, in particular, through the placement de Activos obtained above-average returns, with three of diversification and equity funds. With this objective, of them topping the rankings. minimum investment amounts were reduced, thereby making them more accessible: 250 euro for the initial The following are the main highlights of fund performance. investment and 50 euro for additional subscriptions.

᭿ BPI Brasil was the best fund in the flexible funds Furthermore, a new possibility was introduced enabling category: 13.9% yield in 2006. the subscription of periodic-investment plans in funds, ᭿ BPI Obrigações de Alto Rendimento Alto Risco which permit the Customer to freely define a plan of (high-risk high-yielding bonds) was the best international fixed-rate bond fund: 5.5%. periodic subscriptions to the funds, starting with a ᭿ BPI Reforma Acções PPR (equities retirement PPR) minimum of 50 euro. In accordance with this plan, was the market’s best PPR in 2006: 14.1%. Customers can also opt for annual inflation indexation or ᭿ BPI Reestruturações (restructuring fund), an for some other rate. As with the PPR, these investment international equities fund, was one of the best plans are totally flexible and may be altered at any three in its class: 20.5% return in 2006. moment without any cost. ᭿ The European equities fund, BPI Europa Valor and BPI Europa Crescimento once again distinguished themselves for their excellent performance, 24.1% Retirement Savings Plans and 21.6% respectively. With the object of making the PPR range even more competitive, BPI abolished as from 1 October the Source: APFIPP, Medidas de Rendibilidade e Risco (risk and return measures) (29 December, 2006). subscription commissions on these products, as a result of which they are fully exempt from commission on one-off or planned periodic subscriptions.

Report | Asset Management 77 PENSION FUNDS At 31 December 2006, BPI Pensões managed 35 Besides these eight mandates, a start was made to the pension funds (two more than at the end of the previous management of a new mandate of a pension plan year), representing a total volume of financial assets of belonging to the BPI Group, whose volume of financial 3 493 M.€, an increase of 10.2% relative to the end assets is 22 M.€. of 2005.

These assets under management corresponded to 94 Pension funds under company pension plans and 1 363 accounts of individual management € participants. During the year, the total volume of th.M. No. 3.6 3.5 100 contributions and transfers was in the order of 147 M.€, 3.2 while the total amount of pension payments and benefits was 176 M.€. 2.7 75 2.2 At the end of 2006, BPI Pensões held on to the second 2.1 2.0 place in the ranking of pension-fund management firms, 1.8 50 in terms of the volume of managed assets, with market Assets under management share1 estimated to be 20.2%. No. of Plans

0.9 25 Note: in 2006, Client movement Attracting new Clients involved the extinction of a collective accession to the Open Pension In 2006, BPI Pensões maintained its leadership in the Funds and the intake of new Clients. attraction of new Clients. Eight new mandates for the 0 0 management of pension plans were initiated in 2006, 02 03 0405 06 Chart 41 through the constitution of new funds or the transfer of existing funds to BPI Pensões’ management:

᭿ BNP Paribas (defined contribution plan), ᭿ Bridgestone Portugal, ᭿ Caixa Económica da Misericórdia de Angra do Heroísmo, ᭿ Cofina Indústria, ᭿ Grupo Continental Mabor / Indústria Têxtil do Ave, ᭿ Johnson’s Wax, ᭿ Milupa Comercial, ᭿ Novartis Farma.

1) Does not include the amounts allocated to PPR and PPA and the amounts allocated to the Bank of Portugal’s and Portugal Telecom’s pension-fund management companies, to Previsão, the only objective of which falls under the management of the respective shareholders’ pension funds.

78 Banco BPI | Annual Report 2006 Pension fund returns Participation in the seminar organised by APFIPP As was the case in the previous year, 2006 was a year In March 2006, BPI Pensões marked its presence at a marked by good results as regards the returns achieved seminar organised by the Portuguese Association of Unit by the managed pension funds. The median return was Trust, Pension and Wealth Funds (Associação Portuguesa 6.2%, while the average return weighted by the dos Fundos de Investimento, Pensões e Patrimónios) with respective amounts was 12.1%. the setting up of a stand. In this manner, it gave the participants an opportunity to learn about the company, In a long-term analysis, BPI Pensões maintains its business and its products, as well as enabling them to consistency in the presentation of very positive results. access the institutional site on the Internet According to surveys conducted by two consultants, the (www.bpipensoes.pt) and to try out the retirement results obtained up until 2006 (expressed by the median simulator. return of the pension funds managed by BPI Pensões compared with the market’s figure) is reflected in the Extension of the site www.bpipensoes.pt to employees of following chart. company clients During 2006, the private section of the institutional site Pension funds long term returns on the Internet was extended to the participants of all the % % pension funds, employees of the companies Client. Although this service had been inaugurated already in 10.3 2005, it was in 2006 that the participants of the 9.7 9.9 majority of companies with defined-contribution pension 9.5 8.5 plans managed by BPI Pensões adhered to this service. 7.3

7.2 This tool – of major importance to participants – allows 6.4 5.4 6.6 them to monitor individually the respective personal 5.7 pension plan by permitting them to access balances and 5.0 movements on their accounts in the pension funds. In addition, it affords the possibility of altering investment options, personal details and the beneficiaries in the case of death, as well as allowing them to request the benefit Last Last Last Last Last Last payment or to inform BPI Pensões directly of the 3 years 5 years 17 years 3 years 5 years 13 years termination of the employment contract with the

Source: Mercer Investment Consulting. Source: Watson Wyatt International associate. Ltd. – Subsidiary in Portugal. BPI Pensões weight average Application of Decree-Law no. 12 / 06 of 20 January Market median Chart 42 In 2006, BPI Pensões adapted the pension fund contracts (constitution, management and adherence) to The returns posted by BPI Pensões’ open-end pension the rules dictated by the new legislation, with special funds were excellent, as evidenced by the leading places emphasis on the governance structures. Amongst the occupied in ten-year, five-year and three-year returns, as main alterations introduced by the new rules, we refer to well as the performance in the first year of activity of the the creation of pension-plan monitoring committees, the two pension funds constituted little more than a year ago, appointment of an ombudsman for individual participants which also enabled them to head the rankings. and the formalisation and implementation of the principles arising from the duty to provide information to the participants and beneficiaries.

Report | Asset Management 79 LIFE CAPITALISATION ASSURANCE The volume of assets managed by BPI Vida at the end of hand, even though with much lower levels of new the year totalled 4 350 M.€, which corresponds to business contracted, BPI Reforma Garantida, which offers growth of 9.3% relative to the previous year. a guaranteed rate of return for the first five years the policy is in force, saw its new business climb by 356%. New business written in 2006 was 937.8 M.€, a figure which although not as expressive as that of the previous Turning to products in account units, the main highlights year was, nonetheless, the second best annual were the conservative and balanced risk profiles of the performance ever. New business written in 2006 BPI Capitalização CI / PB product, which posted new increased by 49.5% when compared with BPI Vida’s business growth in the period 2005 / 2006 of 14% and average new business written in the last six years. This 22%, respectively, and the BPI Vida Universal product, figure is higher than the increase posted by the registering new business growth of 387%. This is an Portuguese insurance market (measured with the same average-risk product with a one-year maturity, but offering assumptions), which was situated at 36.1%. a very interesting yield.

Customer preference for capitalisation products linked to The yields on BPI Vida’s products in account units unit trust funds (a trend which began to be observed in presented a very satisfactory performance in 2006, as the the previous year) was confirmed in 2006. New business following table confirms. written by BPI Vida grew by 13% in this segment. Return vs. volatility

Life capitalisation assurance business written Amounts in M.€ Return Risk class 2005 2006 Δ% BPI Vida Universal (Equities) 16.9% Medium BPI Novo Aforro Familiar 917.6 239.4 (74%) BPI Capitalização CI / PB Conservative 5.3% Low BPI Aforro PPR 177.8 205.8 16% BPI Capitalização CI / PB Balanced (Equities) 7.2% Medium BPI Reforma Garantida 5.3 24.2 356% BPI Capitalização CI / PB Aggressive (Equities) 11.0% Medium BPI Multi-suportes Table 33 (assurance in account units) 402.1 455.9 13% Life capitalisation assurance Other 470.4 12.5 (97%) New business per year Assets under management Total 1 973.2 937.8 (52%) M.€ th.M.€ Table 32 1 973 4.3 4.0 BPI Vida’s new business in 2006, which shadowed the downward trend registered in the Portuguese insurance market, was influenced by factors of a macroeconomic nature, such as the decline in the price of long-term bonds ands the increase in short and medium-term 938 2.1 interest rates, which made conservative capitalisation 834 insurance (i.e. associated with bond investments) less 1.6 574 attractive. It is also worth pointing out that an 1.2 extraordinary volume of premiums was recorded in 2005. 212 It is important to underscore the performance of the two PPR (retirement-savings plans) marketed by BPI Vida. 02 03 0405 06 02 03 0405 06 The volume of sales of BPI Reforma Aforro PPR – a Chart 43 Chart 44 product conceived for Customers wishing to plan for retirement with capital guaranteed – grew by 16%, with new business written exceeding 205.8 M.€. On the other

80 Banco BPI | Annual Report 2006 Investment Banking

OVERVIEW The contribution from Investment Banking activity – Investment Banking corporate finance, brokerage, equities trading and private Selected indicators Amounts in M.€ Δ banking – to net profit more than doubled relative to 2005 2006 % 2005, to total 24.8 M.€ in 2006. The relative share in Contribution to the consolidated net profit 10.5 24.8 135.9% consolidated net profit climbed from 4.2% in 2005 to Average allocated capital 14.8 22.0 48.5% As % of the Group’s average 8.0% in 2006. Shareholders’ Equity 1.4% 1.7% - ROE 65.5% 105.5% - The return on Investment Banking shareholders’ equity, Assets under discretionary management characterised by the minimal consumption of capital or effective advisory (Private Banking) 1 710 2 144 25.4% (1.7% of the Group’s average shareholders’ equity in Market shares Equity brokerage 10.1% 11.6% - 2006), was situated at 105.5%. On-line brokerage (BPI Net Bolsa and BPI Online)1 14.0% 17.0% - In the equities business special mention is made of the 1) Market share in online brokerage through the internet site. Table 34 expressive increase in stock brokerage commissions from 6.2 M.€ to 11.3 M.€ (+82%), and the profits from In addition BPI advised a vast array of entities (about trading activity, which doubled the contribution to 50), of which we highlight Altri in the M&A operations earnings, from 7.9 M.€ in 2005 to 15.9 M.€ in 2006. segment, in the acquisition of Celbi; Tertir’s key shareholder in the sale of its stake to Mota-Engil; and In the privatisations segment, BPI acted as the global advising Ricon in the acquisition of part of Gant’s capital. coordinator for the Portucel and Celtejo operations, as well as co-leader in the public offer for sale of Galp Energia. The volume of private banking business grew by 26% and in 2006 totalled 2 928 M.€. In the capital-market operations segment, BPI, besides having led the public offer for sale of 25.72% of Portucel’s capital, gave assistance to Prisa in the takeover bid launched by it for Media Capital, as well as supporting Sonaecom in the listing of the new shares in 2006.

The Bank organised for the third consecutive year the Iberian Small & Mid Caps conference at which 24 companies and more than 60 specialist investors participated. It organised for the first in the US a conference of Iberian banks which was attended by seven Iberian banks and around 20 American investors. BPI also realised 25 road shows with companies and analysts.

Report | Investment Banking 81 CORPORATE FINANCE

In 2006, BPI was involved in some 100 origination In the M&A segment, BPI advised amongst others Altri in processes of new mandates and provided advisory the acquisition of Celbi; Tertir’s key shareholder in the services to approximately 50 organizations. In this way, it sale of its shareholding to Mota Engil; and Ricon in the reinforced its already strong competitive positions in most acquisition of part of the equity capital of Gant. segments of the markets in which it operates. BPI also advised a vast array of entities in their In the privatisations segment, BPI assumed the role of investment and financing decisions, carrying out global coordinator in the Portucel and Celtejo operations, valuations and acting as agent in the procurement of the as well as that of co-leader in the public offer for sale of funds required for their investment projects. Galp Energia. In the closing stages of 2006, BPI secured the mandate In the segment of capital market operations, in addition to advise NAER – Novo Aeroporto, S.A., in the to having led the public offer for sale of 25.72% preparatory and execution works relating to the tender for Portucel’s capital, BPI assisted in the public offer for the privatisation of ANA – Aeroportos de Portugal, S.A. acquisition launched by Prisa for Media Capital, as well as giving support to Sonaecom in the processes The following is a list of some of the public advisory undertaken in 2006 for the listing of new shares. assignments carried out by BPI, which translated themselves (in the case of deals) into success commissions.

CORPORATE FINANCE ADVISORY ASSIGNMENTS

᭿ Altri – Advising on the acquisition of Celbi. ᭿ Ricon – Advising on the acquisition of a stake in Gant within the ambit of the latter’s initial public offering. ᭿ Allianz Portugal – Advising on the organisation and mounting of the public offer for the distribution of shares ᭿ Sonae, SGPS – Advising on the process involving reserved for employees. Modelo-Continente’s loss of public-company status.

᭿ Auto-Sueco – Advising on the analysis of investment ᭿ Sonaecom – Advising on the listing of the company’s decisions. shares.

᭿ Cin – Advising on the company’s valuation. ᭿ Sonae Turismo – Advising on the valuation of the group and on the acquisition of the shares owned by Torralta’s ᭿ Distebe – Advising on the process of procuring capital. minority shareholders.

᭿ Azores Regional Government – Advising on the valuation ᭿ Tertir – Advising on the sale of the shareholding in Mota of the Tabaco Micaelense factory. Engil.

᭿ Parpública – Advising on the privatisations of 25.7% of ᭿ Unicer – Advising on the procurement of financial Portucel’s capital and 5% of Celtejo’s. support for an investment Project, on the valuation of one of the group’s subsidiaries and on an acquisition deal. ᭿ Partex – Advising on the calculation of the fair value of its crude-oil interests. ᭿ VAA – Advising on the group’s financial restructuring.

᭿ Prisa – Advising on the public offer for acquisition ᭿ Vicaima – Advising on the group’s valuation. launched for Media Capital.

82 Banco BPI | Annual Report 2006 EQUITIES

Secondary equities market Primary equities market BPI continued to actively develop its business and assert BPI was the global coordinator of the third phase of itself as an “Iberian broker” in 2006, specialising strongly Portucel’s privatisation. This operation, through which in small and medium caps. The fact that it is now a Portucel became a totally private-capital company, had an member of the Madrid Stock Exchange, coupled with the original design and mounting format. BPI was responsible development of the Madrid financial branch, have for practically half of the public offer for sale, that is, for contributed decisively to its affirmation in stock brokerage. the placement of the tranche reserved for the general Meanwhile, positive results were achieved not only in terms public. It was also BPI who collected the orders given by of the contribution to the Bank’s earnings, but also from the institutional investors and which accounted for almost standpoint of the evolution of the business model. 75% of the total offer. BPI also participated in the initial public offering of Galp Energia. This trend was responsible for the generation of brokerage and placing commissions in the amount of 11.3 M.€, BPI also played a very active role in block placement which corresponds to a positive year-on-year variation of operations, as well as assisting investors in the constitution 82%. It is worth noting the good results obtained from of important positions in Iberian companies. institutional clients, where growth was 106%. In 2006, brokerage commissions from trading Spanish equities Research and sales represented 24% of total brokerage commissions and 28% In 2006, research coverage was broadened with a start of brokerage commission derived from institutional clients. being made to the analysis of 15 Iberian companies resulting from IPO’s or of small and medium cap As regards brokerage services rendered to individuals, 2006 companies: Altri, Corporacion Dermoestetica, Europistas, was the first full year of BPI Netbolsa. This service places Fadesa, Galp Energia, GAM, Grifols, Ibéria, La Seda, at the disposal of subscribers to Banco BPI’s homebanking Mecalux, OHL, Tubos Reunidos, Uralita, Vocento and service – BPI Net – an Internet stock broking platform Vueling. At the end of 2006, BPI Equity Research already used at BPI Online, the investment bank’s Internet covered 85 companies (60 in Spain and 25 in Portugal). stock broker. It should be mentioned that BPI Equity Research also analyses companies not included in the main Spanish This improvement in service enabled the Group to attain a index (IBEX35). BPI is therefore one of the Iberian market share in 2006 of 17%, compared with the 14% research houses with the biggest coverage both in Spain registered in 2005. This growth of three percentage points and in Portugal. was attained in a competitive environment in which the main financial groups and operators in this segment lost In 2006, 524 research reports were prepared (excluding market share. The BPI Group brokered deals worth 1 849 daily newswires), with the Iberian Small & Mid Caps M.€, which represents a year-on-year variation of 106% Guide – a product widely acknowledged by the relative to the previous year, compared with the brokerage institutional investor community – being published on a market’s growth of 70%. quarterly basis. Also noteworthy is the preparation of sectorial reports and renewable energy studies.

Report | Investment Banking 83 For the third year running, BPI organised (this time in Trading Oporto) a conference devoted to small and medium Equities trading activity conducted by BPI’s Equities Iberian caps. This conference, which is now a key event Department, which covers the portfolios managed in Banco for institutional investors dedicated to this category of BPI’s balance sheet, contributed positively – with 15.9 M.€ companies, was attended by 24 companies and 60 – to the profits from financial operations in 2006. That specialist investors. In 2006, BPI organised for the first represented a rise of more than 100% when compared with time in the US a conference of Iberian banks. Seven the 2005 contribution of 7.9 M.€. banks (Bankinter, BBVA, BES, Banco BPI, Pastor, Popular and Sabadell) and around 20 American investors The value-at-risk G (two weeks with confidence level of participated in this conference. 99%) observed in those portfolios was 2.1 M.€. The relationship between the results obtained and this risk Still in 2006, BPI staged 25 road shows with companies measurement, and the fact that in only one of the 12 and analysts. As part of the commercial activities carried months of 2006 did these portfolios not make a positive out in 2006, BPI organised some 700 one-on-one aggregate contribution to the BPI Group’s profits from meetings, at which approximately 100 different financial operations, characterises the manner in which institutional investors were present. these portfolios are managed.

In 2006, BPI also earned considerable profits from the sale of options on Iberian equities.

Recognition BPI’s research continued to obtain good classifications in the rankings which evaluate the quality of estimates and recommendations made. In 2006, BPI Equity Research obtained the biggest hit ratio in the analysis of Iberian Biggest Best hit ratio financial Research companies, conferred in the survey conducted by AQ, a BPI Equity Research institution renowned British company which specialises in the analysis (Banco Português de (Banco Português de of the efficiency of recommendations and estimates Investimento) Investimento) produced by analysts. The hit ratio is a ratio based on Iberian companies of Euronext Lisbon strictly quantitative criteria and analyses the percentage of on-target recommendations, that is, those which were confirmed by the performance recorded in the market.

In 2006, BPI’s analysis team was judged the best in Portugal within the ambit of the Investors Relations Awards. This annual event was organised by Deloitte, by Diário Económico and by Semanário Económico. In the last four years in which this prize was awarded, BPI was voted Best Best the best research house operating in Portugal three times, financial analyst financial analyst having received an honourable mention in the other year. Tiago Veiga Anjos Bruno Miguel Silva* In the same event, BPI received the prize for the best of Euronext Lisbon of Euronext Lisbon financial analyst in Portugal plus an honourable mention in this same category.

* honourable mention

84 Banco BPI | Annual Report 2006 PRIVATE BANKING

BPI Private Banking’s business volume at the end of BPI Private Banking Capitalisation Insurance 2006 totalled 2 928 M.€, which represents growth of Gross yields Amounts in M.€ 26% relative to the end of 2005. Assets under BPI 2005 2006 Last 3 years Private Banking’s discretionary management and advisory BPI Capitalização PB – Ultra Conservative 1,98% 2.30% 3.02% mandates posted growth of 25% in the year under review. BPI Capitalização PB – Conservative 5,11% 5.39% 5.62% € At the end of 2006, they amounted to 2 144 M. . The BPI Capitalização PB – Balanced 8,52% 7.23% 7.84% volumes allocated to the solutions under BPI Private BPI Capitalização PB – Aggressive 14,31% 11.02% 12.15% Banking’s discretionary management at the close of 2006 Table 36 registered a total volume of 979 M.€. This was the component of business volume which presented the most BPI SUISSE, S.A. significant growth (up by 43%, relative to the end of BPI (Suisse), S.A.’s business volume at the end of 2006 2005). It is also worth highlighting the significant recorded extremely positive growth, in line with the trend increase noted in the loan portfolio and in the assets seen in recent years. The volume of Customers’ assets relating to stable investments under custody. The loan under management and advisory mandates presented a portfolio grew by 18% when compared with the end of variation of 29% when compared with the end of 2005. 2005, while the assets relating to stable investments It should be pointed out that the forementioned growth under custody rose by 32% relative to the end of 2005. continues to be attributable almost exclusively to the capture of new Clients and new assets to the BPI Group. Private Banking Selected indicators Amounts in M.€ 2005 2006 Δ% Assets under management 1 710 2 144 25% Discretionary management 684 979 43% Advisory services 1 026 1 165 14% Stable investments under custody 474 627 32% Loans advanced 134 158 18% Business volume 2 318 2 928 26% Table 35

Within the ambit of commercial activity, of special note were the growing rate of new Customer intake and the capture of new assets. Contributing meaningfully to this growth has been Customer satisfaction in general with the quality of service and, in particular, with the attractive returns achieved consistently in recent years by the investment solutions managed discretionarily by BPI Private Banking. Those solutions continue to present attractive returns that outperform both the markets and the competition. At the close of 2006, these solutions already accounted for more than 45% of BPI Private Banking’s total assets (excluding stable investments).

Report | Investment Banking 85 Private Equity

During 2006, BPI’s private equity G activity was management teams working, endowed with a strategic essentially directed at monitoring the portfolio of business vision, in companies with strong growth potential. participating interests, the management of the venture-capital funds in which the Group has interests An investment operation was realised during 2006 and in the analysis of new investment opportunities. involving a total of 3.0 M.€ in the Serlima Group. The motive behind this operation was to provide that group At the end of 2006, the BPI Group’s Private Equity area with the resources needed to speed up the build-up (through Inter-Risco) managed a group of assets which process in the facilities management sector, thereby totalled some 53.3 M.€, at market values, and included boosting the prospect of entering the Iberian market at a its own portfolio and third party funds. later stage.

The Caravela Fund – a venture-capital fund promoted by On the other hand, in the wake of an active demand for the BPI Group –, is endowed with a capital of 30.0 M.€, portfolio-rotation opportunities, disinvestment deals were and has been the Private Equity area’s favoured concluded involving five investee companies. These sales investment vehicle. generated gains of 3.7 M.€.

The Caravela Fund’s investment policy geared to national The current investment portfolio comprises the following. SMEs focused on projects spearheaded by professional

Private Equity holdings At 31 December 2006 Company % held Activity

Ibersol 5.00% Fast food outlets (Pizza Hut, Burguer King, O'Kilo, Pasta Café, Frangão…) Douro Azul 11.26% Cruise operator on the river Douro and hotel business Arco Bodegas Unidas 2.14% Wine production and sales Fernando & Irmãos 10.00% Holding that controls Aveleda – wine production and sales Caravela Gest 20.00% Food retailer (Haagen Dazs) Tecmic 24.45% Microelectronics ChipIdea 6.42% Provisions of services to the semiconductors industry / chip design Serlima 29.83% Facility management services (cleaning, maintenance and industrial laundries) Sociedade de Vinhos Borges 12.50% Wine production and sales TvTel 10.51% Telecommunications and cable television Conduril 9.21% Construction Table 37

86 Banco BPI | Annual Report 2006 Financial investments

At the end of 2006, the available-for-sale principal equity Financial investments investments1 made by the Group amounted to some At 31 December 2006 % held Balance sheet 490.0 M.€ and corresponded to the participating Company value (M.€) interests in BCP, Impresa, Cofina and Vista Alegre BCP 4.4% 449.5 Atlantis. Impresa 7.1% 27.8 Cofina 5.0% 9.4 The total value of disposals realised in 2006 was Vista Alegre Atlantis 17.3% 3.3 approximately 138.1 M.€, which in turn generated gains Total 490.0 of some 31.9 M.€. Table 38

At the end of the year, the portfolio recorded unrealised gains totalling 121.2 M.€. These were accounted for directly in shareholders’ equity, under the caption FAIR VALUE RESERVE.

1) The total portfolio of equities available-for-sale amounted to 541.4 M.€ at 31 December 2006, and registered unrealised capital gains of 140.4 M.€.

Report | Private Equity and Financial investments 87 International banking activity

BANCO DE FOMENTO ANGOLA

BFA’s contribution to the BPI Group’s consolidated net Banco de Fomento Angola profit in 2006 was 63.0 M.€. At the end of 2006, Banco Selected indicators Amounts in M.€ Δ de Fomento Angola’s (BFA) shareholders’ equity stood at 2005 2006 % 193 M.€. and total assets amounted to 1 715 M.€, that Total assets 1 293.5 1 715.0 32.6% is, 13.3% and 4.8% respectively of the Group’s Loans to Customers (net) 419.0 623.8 48.9% Loans in arrears for more than 90 days 1.2% 1.4% - corresponding indicators. Customer resources 1 069.0 1 440.4 34.7% Shareholders’ equity 136.4 193.3 41.7% The number of Customers rose from 230 thousand in Operating income from banking 123.2 142.7 15.9% December 2005 to 304 thousand in December 2006. Net interest income 71.0 86.5 21.8% Commissions and other operating COMMERCIAL BANKING income 25.1 33.0 31.5% Deposits Profits from financial operations 27.0 23.2 (14.2%) Administrative overheads, depreciation Deposits made by Customers, when measured in euro, and amortisation 30.0 46.4 54.6% € registered an expansion of 36% in 2006 to 1 369 M. . Administrative overheads, depreciation BFA’s market share in deposits was situated at 22.1% at and amortisation / operating income from banking 24.4% 32.5% - the end of the year, placing it second in the market Personnel costs / operating income rankings. In the more competitive segments of the from banking 11.3% 14.1% - Angolan banking system – corresponding to deposits BFA’s contribution to the BPI Group’s net profit 69.7 63.0 (9.6%) made in dollars and time deposits in local currency –, No. of Employees 757 1234 63.0% BFA’s market shares were 27.8% and 15.4%, Traditional branches 43 711 65.1% respectively, that is, first and third positions in the No. of Customers 230 290 304 169 32.1% market table. Customers using BFA NET 14 303 19 361 35.4% Of which, individuals 12 552 17 367 38.4% Loans companies 1 751 1 994 13.9% The loan portfolio measured in euro recorded expansion ATM machines (no.) 42 93 121.4% of 49% to total 623.8 M.€, with loans in American Debit cards issued (valid) 128 132 254 531 98.6% dollars being the component of the balance that grew the 1) At 31 December 2006, 66 branches were operating. Table 39 most. According to Central Bank statistics, BFA’s market share in December 2006 was 25.3% (for this purpose, Customer loans Customer deposits credit includes loans, treasury bills (BT) and treasury M.€ M.€ 1 368 bonds (OT), as well as financial investments). This figure 624 corresponds to first place in the market ranking. As regards the component of credit expressed in USD, BFA’s market share was higher: 30.1%, thereby enabling BFA 1 003 to occupy the leading position. 419

At 31 December 2006, 62.3% of the loan portfolio was 591 allocated to the corporate segment, with the remaining 487 37.7% referred to the individuals’ segment. 203 402 131 83

02 03 0405 06 02 03 0405 06

Chart 45 Chart 46

88 Banco BPI | Annual Report 2006 At 31 December 2006, BFA’s securities portfolio totalled During the year under review, BFA initiated a process of 404.4 M.€, that is, equivalent to roughly 24% of assets. acquiring POS VISA which will allow it to commercialise The portfolio’s maturity profile is essentially short term, POS VISA on the Angolan market. This is a pioneering given that the dealing securities (treasury bills G and activity which will make possible the acceptance of Central Bank securities), which account for 73% of the international Visa-network cards in the Angolan market, securities portfolio, have a maximum maturity of one while stimulating the issue of credit cards in local year. In turn, treasury bonds have a residual maturity of currency. 2.8 months. On-line banking Overseas trade operations The functionalities of BFA Net Empresas were improved, Overseas trade operations amounted to 7.2 thousand namely, as regards the processing of salaries and M.US$. This figure represents growth of 12% relative payments to suppliers by means of electronic file. to 2005. Distribution network During 2006, BFA enlarged its distribution network throughout Angolan territory by 76% following the COOPERATION PROTOCOLS opening of 28 new branches (six of which outside BFA, BPI and the Bank of China signed two Luanda) and four corporate centres, while a start was cooperation protocols in 2006. The first protocol made to the establishment of the investment centres makes provision for the opening of a credit line of network which comprised three units at the close of USD 100 million earmarked for financing the exports 2006. The investment centres are manned by teams of made by China to Angola. The second protocol is Customer managers dedicated to personalised designed to facilitate transfers made by Chinese immigrants in Angola. The two protocols reflect the attendance, at the same time as reinforcing the importance of Macau as a cooperation platform in the segment-oriented approach to Customers. commercial relations between China and the Portuguese-speaking countries which, in the specific At the end of 2006, BFA boasted a network1 comprising case of Angola, have experienced expressive growth 71 branches (38 in Luanda and 33 in the provinces), in recent years. seven corporate centres and three investment centres. This network gives BFA a market share of 17% in terms of the number of branches and, therefore, second Cards position in the market. BFA continued to consolidate its position of the chief operator of Multicaixa cards during 2006, having attained A start was made in 2006 to the reorganisation operation a 43% share of new business (in relation to the 254 involving revamping the image of BFA’s branches, where thousand issued and active cards), at the same time the overriding goal is to free up more space for making available 93 active ATM’s out of a total of 282 personalised attendance and the installation of for the all banking system. permanently open automatic zones.

2006 also saw the implementation of the Also noteworthy was the opening of the first branch non-personalised Debit Card (Multicaixa), which within a university campus (Catholic University branch). permitted eliminating waiting time for the delivery of That event reinforced the Bank’s ties with the University cards to Customers: the card is handed over at the same and with its teaching staff, employees and students. time an account is opened.

1) Of which five branches, one corporate centre and one investment centre commenced activity in the beginning of 2007.

Report | International banking activity 89 INVESTMENT BANKING The investment banking unit of Banco de Fomento Recognition BFA was distinguished in the 2006 edition of the Angola was created in February 2006. At the close of Luanda International Fair with the Leão de Ouro 2006, this unit had a staff of nine with diversified (golden lion) prize for the banking sector. 657 experience. companies participated at Filda, of which 340 were national and 317 foreign, so breaking the previous In its initial phase, investment banking is geared towards participation record. The award represents recognition the analysis and granting of credit for investment with a for the image, structure and architectural construction of the stand, interactivity with the public medium and long-term perspective. This type of financing and the availability of services. was not effectively available in the Angolan market, where financial activity still remains largely centred on It should be noted that in 2006, BFA received the short-term operations. The lengthening of the financing prize for the best automatic processing of foreign maturity periods (which entails an entirely different type operations in 2005 (Straight Through Processing – Excellence Award), attributed by Deutsche Bank. of analysis) made the financing of important investments During 2005, more than 90% of the payment orders in the industrial and services sectors a viable proposition. were processed automatically without the need for subsequent correction. Also in this context, a number of initiatives were embarked on with the object of boosting the relationship with the public sector and with public-sector companies.

In the near term, investment banking will continue to Prize Excellence Award direct its attention to this activity, paying particular

Leão de Ouro Straight Through attention to the sectors considered to be of strategic (banking sector) Processing importance for the Angolan economy. As and when the market matures, the Bank will progressively ramp up the 2006 2006 provision of financial services to both private and public-sector entities.

90 Banco BPI | Annual Report 2006 COMMERCIAL BANKING IN MOZAMBIQUE – BCI FOMENTO

BCI Fomento’s contribution to Banco BPI’s consolidated The securities portfolio (valued in euro) decreased by net income, corresponding to the 30% interest in its some 48% to stand at 34.5 M.€ at the end of 2006. capital, increased from 1.8 M.€ in 2005 to 4.2 M.€ in This decrease reflects the higher demand for credit in 2006. local currency.

The shareholding in BCI Fomento is equity accountedG. BCI Fomento At the end of 2006, this shareholding was recorded in Selected indicators Amounts in M.€ Δ Banco BPI’s consolidated balance sheet at 11.8 M.€. At 2005 2006 % that date, BCI Fomento’s shareholders’ equity attained a Total assets 385.5 409.7 6.3% counter value of 39 M.€. Loans to Customers (net) 188.2 224.0 19.0% Customer deposits 313.1 342.8 9.5% Shareholders’ equity 35.9 39.4 9.7% Total assets amounted to 409.7 M.€, which represents BCI Fomento contribution to the growth of 6.3% relative to 2005. BPI Group’s net profit 1.8 4.2 129.4% No. of Employees 549 637 16.0% Deposits Traditional branches 35 38 8.6% Deposits taken from Customers in 2006 (when measured No. of ATM machines 63 67 6.4% in euro) posted growth of 9.5%, climbing to 342.8 M.€. No. of POS 436 671 53.9% Deposits in local currency represented the most dynamic No. of Customers 86 394 84 435 (2.3%) Table 40 component of the aforementioned growth. BCI Fomento continued to gain market share as regards deposits in the Distribution network Mozambican banking system in 2006. At the end of the During 2006, BCI Fomento continued to boost the year, this share was situated at 25% (against 24% in physical network of branches, opening three new 2005 and 23% in 2004). branches. It also enlarged its ATM network, adding another four units to the Rede Ponto 24 system, as well Credit as extending the number of POS terminals by 235 units. The loan portfolio (expressed in euro) expanded by 19% At the end of the year, it boasted 38 branches, 67 ATMs to 224 M.€. This growth is wholly attributable to the and 671 POS (68 of which belong to the BCI Automático trend in the component of credit denominated in local network). These channels serve a universe of 84 currency by virtue of notice 5 / GGBM / 2005, which thousand Customers. tightly controls the granting of loans in foreign currency to non-exporting entities (companies and individuals). In At the end of 2006, BCI Fomento’s workforce numbered these cases it is now compulsory to constitute, at the 637. This staff complement is characterised by the large time of granting the credit, provisions amounting to 50% contingent of young people: 76.3% of employees are of the value of foreign-currency operations involving aged less than 35. With the goal of enhancing non-exporting entities. In 2006, BCI Fomento’s share of employees’ professional skills, BCI Fomento promoted the credit market was situated at 26.7%, that is, close to various training courses which covered 415 staff, the level registered at the end of the previous year. including the granting of study bursaries (in 2006, 44 study bursaries were granted).

Report | International banking activity 91 Financial review

Consolidated principal indicators (Consolidated figures in millions of euro, except where indicated otherwise) 2005 2006 Δ%

Net total assets 30 158.7 35 565.5 17.9% Assets under management1 13 434.5 14 072.9 4.8% Business volume2 49 328.0 56 384.4 14.3% Loans to Customers (gross) and guarantees 24 409.2 28 263.0 15.8% Total Customer resources 24 918.8 28 121.4 12.9% Business volume2 per Employee3 (thousands of euros) 6 621 6 924 4.6% Operating income from banking per Employee3 (average no.) (thousands of euros) 125 131 5.3% Administrative overheads, depreciation and amortisation4 / operating income from banking 57.7% 56.6% - Administrative overheads / operating income from banking 53.3% 52.8% - Personnel costs / operating income from banking and equity accounted results5 32.8% 32.6% - Administrative overheads, depreciation and amortisation / operating income from banking and equity accounted results5 56.2% 55.4% - Net profit 250.8 308.8 23.1% Data per share adjusted (euro) Net profit 0.34 0.41 23.4% Dividend 0.12 0.16 33.3% Book value 1.582 1.940 22.6% Weighted average no. of shares6 (in millions) 747.9 746.2 (0.2%) Operating income from banking and equity accounted results / average total assets5 3.3% 3.2% - Profit before taxation and minority interests / average total assets5 1.1% 1.3% - Return on average total assets (ROA) 0.9% 0.9% - Profit before taxation and minority interests / average shareholders equity and minority interests5 23.2% 27.0% - Return on Shareholders’ equity (ROE) 23.7% 24.3% - Loans in arrears for more than 90 days / Customer loans 1.3% 1.1% - Loan impairments (in the balance sheet) / Customer loans 1.6% 1.4% Loan impairments in the year, deducted of recoveries of loans in arrears written-off (in the income statement) / Customer loans 0.24% 0.16% BPI Group Employees pension funds assets 2 273.3 2 470.5 8.7% Pension obligation cover 100.2% 110.7% - Shareholders’ equity7 1 181.4 1 450.6 22.8% Own funds8 2 088.1 2 011.2 - Risk weighted assets8 18 134.5 21 292.0 - Ratio of own funds requirements5, 8 11.5% 9.4% - Tier I5, 8 7.3% 7.4% - 1) Unit trust (mutual) funds, PPR and PPA, capitalisation insurance, assets under discretionary management and advisory mandates of institutional Clients and assets Table 41 of pension funds under management (including the Group’s staff pension funds). 2) Loans, guarantees and total Customer resources. 3) Number of Employees of the companies which are consolidated in full. 4) Personnel costs, outside supplies and services, depreciation and amortisation. 5) Calculated in accordance with Bank of Portugal Instruction 16 / 2004. 6) Weighted average number of shares considered in the calculation of the basic earnings per share. It corresponds to the number of shares issued after deducting the average portfolio of own shares. At the end of 2005 and 2006, the number of shares issued was 760 million. 7) Excludes minority interests. 8) in accordance with Bank of Portugal rules governing minimum own funds requirements (Notice 7 / 96).

92 Banco BPI | Annual Report 2006 Consolidated

CONSOLIDATED EARNINGS BPI’s consolidated net profit in 2006 was 308.8 M.€, 41.4 euro cents. The return on average shareholders’ which represents an improvement of 23.1% relative to equity climbed from 23.7% in 2005 to 24.3% in 2006. the previous year. Earnings per share rose by 23.4% to

Consolidated income statement Amounts in M.€ 2005 2006 Δ%

Net interest income (narrow sense) 511.5 540.7 5.7% Unit linked gross margin 3.2 7.5 137.4% Income from securities (variable yield) 17.7 14.7 (16.9%) Commissions related to deferred cost (net) 13.9 18.4 31.8% Net interest income 546.4 581.3 6.4% Technical results of insurance contracts 11.9 3.3 (72.6%) Commissions and other similar income (net) 271.5 301.9 11.2% Gains and losses in financial operations 75.1 123.8 64.8% Operating income and charges (6.1) 7.8 227.6% Net operating income 898.8 1 018.1 13.3% Personnel costs 302.4 339.4 12.2% Early retirements costs 0.6 (0.1) (124.6%) Other administrative expenses 176.9 198.1 12.0% Depreciation of fixed assets 39.4 39.0 (1.0%) Administrative overheads, amortisation and depreciation 519.3 576.4 11.0% Operating profit 379.5 441.7 16.4% Recovery of loans written-off 17.6 21.0 19.1% Loan provisions and impairments 64.7 56.5 (12.7%) Other impairments and provisions 35.6 6.0 (83.1%) Profits before taxes 296.8 400.3 34.8% Corporate income tax 59.8 100.3 67.6% Equity-accounted results of subsidiaries 24.7 22.1 (10.5%) Income attributable to minority interest 10.9 13.3 22.4% Net profit 250.8 308.8 23.1% Cash flow after taxation 390.6 410.3 5.1% Table 42

Contribution by business area to consolidated net profit in 2006 Average capital allocated by business area in 2006

M.€ 67.2 308.8 Commercial Banking 82% 24.1 24.8 192.6

Investment Banking 2% International activity Participating interests 14% and others 2% Domestic Investment Participating International Consolidated Commercial Banking interests Commercial net profit Banking and others Banking International activity Domestic activity

Chart 47 Chart 48

Report | Financial review 93 Consolidated

The increase in consolidated net profit reflects the 34.7% In Angola, BFA pursued its ambitious programme directed improvement in earnings from domestic operations to at enlarging the distribution network with the dual object 241.5 M.€ in 2006. The return on average shareholders’ of improving coverage in Angolan territory and intensifying equity in domestic operations, which corresponded to the presence in Luanda, evolving a segmented approach 86% of the Group’s average capital, improved from to business. In 2006, the distribution network grew with 18.8% to 22.1%. the creation of 28 branches (+65%) and four Corporate Centres, totalling 7 corporate centres at year-end. In In domestic operations BPI attained significant levels of addition, a start was made to setting up a network of new business, benefiting from the recovery, albeit Investment Centres, which at the end of 2006 comprised moderate, of the Portuguese economy which, in turn, was three units. BFA’s Employee headcount rose by 63% to characterised by the dynamic export sector and the 1 234, corresponding at the close of 2006 to 15% of the improvement in growth prospects. Customer loans in Group’s total Employees. domestic operations grew by 16.9%. Contributing to this trend were the 28.8% expansion in loans to companies, BFA’s activity in Angola continued to be characterised by and the acceleration (although more modest) in loans to expressive growth, as borne out by the 49% expansion in individuals and small businesses, which were up 9.3%. Customer loans, 35% in Customer resources and 32% in Customer deposits grew by 21.9%, while total Customer the number of Customers. resources expanded 11.9%. Noteworthy too was the higher contribution to consolidated Simultaneously, BPI implemented a plan involving the net profit from 1.8 M.€ in 2005 to 4.2 M.€ in 2006 from expansion of the physical network in Portugal. In 2006, the 30% holding in BCI Fomento1 in Mozambique. This 40 new branches were opened – which corresponds to a bank also recorded significant growth in activity; Customer 7.5% increase in the branch network – and three loans were up by 19% and deposits by 9.5%. Investment Centres (+18.8%). The workforce deployed in domestic operations rose by 348 Employees (+5.2%), in Consolidated net profit part due to the expansion of the distribution network. M.€ 309 It should also be noted that Investment Banking’s contribution to consolidated net profit increased to 24.8 251 M.€, which more than doubled relative to the preceding year’s figure. This performance is largely attributable to 193 the good behaviour of the equity markets and BPI’s rising 164 affirmation as a broker in the Iberian market equity 140 markets.

The contribution from international operations, to which 14.2% of the Group’s capital is allocated, totalled 67.2 M.€. This figure corresponds to 21.8% of consolidated net profit. The return on shareholders’ equity was situated 02 03 0405 06 at 37.1% in 2006. Chart 49

1) Equity accounted.

94 Banco BPI | Annual Report 2006 Consolidated

ROE by business areas in 2006 Amounts in M.€ Domestic activity1 International BPI Group activity of (consolidated) Commercial Investment Participating Total Commercial Banking Banking interests and other Banking2 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 Average risk weighted assets 16 627.4 17 712.5 271.4 374.4 577.4 498.1 17 476.2 18 585.1 393.3 595.8 17 869.519 180.8 Shareholders' equity (average) 811.0 890.4 71.1 104.3 70.4 95.8 952.6 1 090.6 107.1 181.1 1 059.7 1 271.7 Adjustment for capital reallocation 95.3 148.9 (56.3) (82.3) (39.0) (66.6) ------Capital allocated (adjusted) 906.3 1 039.4 14.8 22.0 31.5 29.2 952.6 1 090.6 107.1 181.1 1 059.7 1 271.7 Net profit 177.8 192.6 10.5 24.8 (8.9) 24.1 179.3 241.5 71.5 67.2 250.8 308.8 Adjustment to profit due to capital reallocation 1.4 2.9 (0.8) (1.6) (0.6) (1.3) ------Net profit (adjusted) 179.1 195.5 9.7 23.2 (9.5) 22.9 179.3 241.5 71.5 67.2 250.8 308.8 ROE3 19.8% 18.8% 65.5% 105.5% neg. 78.2% 18.8% 22.1% 66.8% 37.1% 23.7% 24.3%

Geographical segmentation of the BPI Group’s activity Table 43 1) Domestic operations comprise the commercial banking activity conducted in Portugal, including the provision of banking services to non-residents abroad (namely, amongst Portuguese emigrant communities) and those of the Madrid branch, as well as the activities relating to investment banking, private equity and other investments. 2) International operations comprise the activity conducted by Banco Fomento Angola, as well as the appropriation of the 30% equity interest held in BCI Fomento in Mozambique and the activity of BPI Dealer in Mozambique (92.7% held). International operations’ contribution to net profit in 2006 from Banco Fomento Angola amounted to 63.0 M.€, from BCI Fomento was 4.2 M.€ and from BPI Dealer Mozambique was 0.01 M.€. Calculation of ROE by business areas 3) Shareholders’ equity allocated to international operations is the figure appearing in the accounting records. In the domestic operations, in determining the capital allocated to each area it is assumed that each one uses the exact same amount of capital as the average of capital employed in domestic activity. In this manner, the amount of capital allocated to each area is calculated by multiplying the weighted assets by the quotient between shareholders’ equity and the domestic activity weighted assets. Whenever the shareholders’ equity of a business area is more (or less) than the allocated capital, it is assumed that there has been a redistribution of capital, whereby that area’s contribution is adjusted by the costs (revenue) resulting from the increase (decrease) in outside resources by virtue of the capital reallocation. The return generated by each area results from the quotient between the adjusted contribution and the capital allocated to the area.

In tandem with the growth in consolidated earnings, asset ᭿ at 31 December 2006, the consolidated own funds quality and the sound financial base recorded a very requirements ratio G according to Bank of Portugal rules positive trend, as can be gauged from the following data: was situated at 9.4%, while the Tier I ratio was 7.4%. On that date, this indicator reflected the negative ᭿ the cost of credit risk, measured by impairment losses impact of 0.6 percentage points on the total capital in the year net of recoveries of arrear loans previously ratio (impact of -0.7 percentage points on the Tier II written off, decreased from 0.24% in 2005 to 0.16% ratio). This situation is due to the value of participating in 2006. The ratio of consolidated loans in arrears for interests amounting to more than 20% in the insurance more than 90 days stood at 1.1% at the end of 2006; area now having to be deducted from Tier II following the entry into force of Bank of Portugal Notice 12 / 06. ᭿ at the end of 2006, pension fund net assets covered total pension obligations to the extent of 111%, as evidenced by the financial surplus of 239.6 M.€ in the pension funds.

Report | Financial review 95 Consolidated

CONSOLIDATED BALANCE SHEET Net total assets grew by 17.9% to 35 565.5 M.€, domestic operations, while the remaining 5% was primarily reflecting the accelerated expansion in loans allocated to activity in Angola. and deposits. Roughly 95% of assets was allocated to

Consolidated balance sheet Amounts in M.€ 2005 2006 Δ%

Assets Cash and deposits at central banks 618.0 559.9 (9.4%) Amounts owed by credit institutions 338.5 369.5 9.2% Loans and advances to credit institutions 919.0 906.7 (1.3%) Loans and advances to Customers 20 963.2 24 630.1 17.5% Financial assets held for dealing 4 184.9 4 345.1 3.8% Financial assets available for sale 1 571.8 3 064.9 95.0% Hedging derivatives 338.9 407.5 20.2% Investments in associated companies and jointly controlled entities 132.8 141.8 6.8% Other tangible assets 275.2 289.3 5.1% Intangible assets 5.9 8.8 50.3% Tax assets 214.0 133.4 (37.7%) Other assets 596.5 708.5 18.8% Total assets 30 158.7 35 565.5 17.9% Liabilities and shareholders' equity Central banks' resources 53.9 – (100.0%) Financial liabilities held for dealing 315.4 201.8 (36.0%) Credit institutions' resources 2 523.4 3 960.2 56.9% Clients' resources and other loans 14 028.5 16 235.5 15.7% Debts evidenced by certificates 5 075.5 5 464.6 7.7% Technical provisions 2 925.6 2 811.1 (3.9%) Financial liabilities associated to transferred assets 2 000.4 3 368.1 68.4% Hedging derivatives 388.1 480.8 23.9% Provisions 50.7 54.9 8.3% Tax liabilities 69.6 85.7 23.1% Instruments representing capital 26.5 27.2 2.9% Other subordinated loans 653.4 588.9 (9.9%) Other liabilities 560.2 559.3 (0.2%) Share capital 760.0 760.0 0.0% Share premium account and reserves 201.2 424.8 111.1% Other equity instruments 12.3 8.7 (29.4%) Treasury stock (42.9) (51.7) (20.3%) Net profit 250.8 308.8 23.1% Minority interests 306.3 276.7 (9.6%) Total liabilities and shareholders' equity 30 158.7 35 565.5 17.9% Note: Bank guarantees 3 138.8 3 321.7 5.8% Off-balance sheet Customer resources1 8 160.0 8 392.6 2.9% 1) The amount of unit trust funds included in these resources has been corrected for fund units held in the portfolios of the Group’s banks. Table 44

96 Banco BPI | Annual Report 2006 Consolidated

Loans to Customers grew by 17.5% in 2006, which The expansion in total assets also entailed some recourse accounted for some 68% of the increase in consolidated to short-term funding which, however, remained at assets. On the other hand, a significant amount of relatively low levels. Liquid short-term monetary assets1 European bonds with high ratings G were acquired represented only 6.5% of net total assets. It is also worth (+1 116.1 M.€), which corresponded to 75% of the noting that during 2006 securities repurchase operations increase in the portfolio of assets available for sale and (repos) for short-term funding gained in importance, with to 21% of the increase in consolidated assets. highly positive implications for the diversification of short-term funding when compared to the traditional Customer resources posted overall growth of 12.9% to money-market alternative. 28 121.4 M.€. Consolidated net assets and Balance sheet Customer resources expanded 17.7% in disintermediation 2006 to 19 728.7 M.€. Around 90% of this increase th.M.€ resulted from the 23.1% expansion in Customer deposits to 14 106.0 M.€ at the close of 2006. Off-balance sheet 43.3 resources were 2.9% higher. 36.8

32.5 31.6 Complementing the expansion in resources, work 31.1 continued on the medium and long-term funding plan which in line with previous years enabled BPI to access Disintermediation1 stable funding sources commensurate with asset profiles. Net total assets2 The Bank tapped the international financial markets for 1) Off-balance sheet Customer some 3 000 M.€ through the issue of medium and resources. long-term debt or via medium and long-term loans from 2) Corrected for duplication of other financial institutions (about 1 500 M.€), as well as balances. G through a home-loan securitisation operation in the 02 03 04 05 06 Chart 50 amount of 1 500 M.€.

Consolidated balance sheet structure in 2006

Assets (net) Liabilities and shareholders’ equity Liquid assets and loans 5.2% Resources of credit institutions and financial to credit institutions 11.7% liabilities held for trading 22.0% 15.4% Debt securities Financial assets and hedging derivatives Customer resources and technical provisions1

53.6% Loans to Customers 69.3% Financial liabilities related to transferred assets Investments, fixed assets and other 9.5% 9.9% Shareholders' equity, minority interests, 3.6% subordinated debt and other liabilities 2006 2006

1) Related to capitalisation insurance with discretionary share in profits. Chart 51

1) Resources of central banks and other credit institutions after deducting liquid assets and placements at central banks or other credit institutions.

Report | Financial review 97 DOMESTIC OPERATIONS

Domestic operations principal indicators (Figures in millions of euro, except where indicated otherwise) 2005 2006 Δ%

Net total assets 29 200.7 34 314.5 17.5% Assets under management1 13 434.5 14 072.9 4.8% Business volume2 47 748.6 54 164.9 13.4% Loans to Customers (gross) and guarantees 23 898.7 27 483.9 15.0% Total Customer resources 23 849.8 26 680.9 11.9% Business volume2 per Employee (thousands of euros)3 7 134 7 840 9.9% Operating income from banking per Employee (average no.) (thousands of euros)3 118 129 8.9% Administrative overheads, depreciation and amortisation4 / operating income from banking 63.0% 60.6% - Administrative overheads / operating income from banking 58.5% 56.7% - Net profit 179.3 241.5 34.7% Return on shareholders' equity (ROE) 18.8% 22.1% - Loans in arrears for more than 90 days / Customer loans 1.3% 1.0% - Loan impairments (in the balance sheet) / Customer loans 1.5% 1.2% - Loan impairments in the year, deducted of recoveries of loans in arrears written-off (in the income statement) / Customer loans 0.19% 0.08% - Shareholders’ equity5 1 032.9 1 245.7 20.6% 1) Unit trust (mutual) funds, PPR and PPA, capitalisation insurance, assets under discretionary management and advisory mandates of institutional Clients Table 45 and assets of the managed pension funds (including the Group’s staff pension funds). 2) Loans, guarantees and total Customer resources. 3) Number of Employees of the companies which are consolidated in full. 4) Personnel costs, outside supplies and services (administrative overheads), depreciation and amortisation. 5) Excludes minority interests.

98 Banco BPI | Annual Report 2006 Domestic operations

DOMESTIC OPERATIONS INCOME STATEMENT Domestic operations generated net profit of 241.5 M.€ (that is, +62.2 M.€) relative to 2005. The return on in 2006, which corresponds to an improvement of 34.7% shareholders’ equity in 2006 was 22.1%.

Domestic operations income statement Amounts in M.€ 2005 2006 Δ%

Net interest income (narrow sense) 440.5 454.2 3.1% Unit linked gross margin 3.2 7.5 137.4% Income from securities (variable yield) 17.7 14.7 (16.9%) Commissions related to deferred cost (net) 13.9 18.4 31.8% Net interest income 475.3 494.8 4.1% Technical results of insurance contracts 11.9 3.3 (72.6%) Commissions and other similar income (net) 245.6 269.1 9.6% Gains and losses in financial operations 48.1 100.6 109.2% Operating income and charges (5.4) 7.5 240.4% Net operating income 775.6 875.3 12.9% Personnel costs 288.5 319.3 10.7% Early retirements costs 0.6 (0.1) (124.6%) Other administrative expenses 165.5 177.1 7.0% Depreciation of fixed assets 34.7 33.7 (2.9%) Administrative overheads, amortisation and depreciation 489.3 530.0 8.3% Operating profit 286.3 345.4 20.6% Recovery of loans written-off 17.6 21.0 19.1% Loan provisions and impairments 54.2 38.5 (29.0%) Other impairments and provisions 33.3 5.4 (83.8%) Profits before taxes 216.4 322.5 49.1% Corporate income tax 48.4 85.1 75.7% Equity-accounted results of subsidiaries 22.3 17.4 (21.6%) Income attributable to minority interest 10.9 13.3 22.4% Net profit 179.3 241.5 34.7% Net interest income (narrow sense) 301.6 319.1 5.8% Table 46

Net profit from domestic activity in 2006

M.€

892.8 Equity-accounted results of subsidiaries [17.4] 241.5 Minority shareholders’ interest [13.3] 651.3 Corporate income tax [85.1]

Loan impairments and other, deducted of recoveries of loans and interests in arrears Operating income from banking previously written off [22.9] [875.3]

Administrative overheads, depreciation and amortisation [530.0]

Income Net profit Costs and taxes

Chart 52

Report | Financial review 99 Domestic operations

2006 saw BPI register significant expansion in activity in The income statement also benefited from the substantial Portugal, which benefited from a more favourable reduction in other impairment charges and provisions. economic background and the greater confidence in the These totalled 5.4 M.€ in 2006, whilst in the previous economy’s revival. The growth in Customer loans year the net amount set aside was 33.3 M.€, of which accelerated from 9.4% in 2005 to 16.9% in 2006, 30.9 M.€ was in respect of financial investments. spurred by the 28.8% expansion in Corporate Banking’s loan portfolio. Loans to individuals and small businesses Profit before taxation was 106.1 M.€ higher, that is, up rose by a more moderate 9.3%. Deposits were up by 49.1% in relation to 2005. The average corporate income 21.9%, while total Customer resources increased by tax rate1 advanced from 22.4% in 2005 to 26.4% in 11.9%. 2006. Also having a negative impact on earnings was the decrease in equity-accounted results of 21.6% (-4.8 The significant expansion in volumes, in spite of the M.€), chiefly explained by the smaller contribution from continuing contraction in intermediation margins against Viacer. a backdrop of stiff competition, explains the 4.1% advance in net interest income. Net operating income Net profit from domestic from banking climbed 12.9%. activity M.€

During 2006, Banco BPI opened 40 new branches and 242 three Investment Centres in Portugal, while the average staff headcount in domestic operations rose by 245 (+3.6%). Despite the retail network’s expansion and the 179 increase in Employees, the productivity and efficiency 162 144 indicators behaved positively in 2006. The volume of 122 Customer loans and resources per Employee and net operating income from banking per Employee grew by 9.9% and 8.9%, respectively. The indicator administrative overheads, depreciation and amortisation as a percentage of net operating income from banking improved from 63.0% in 2005 to 60.6% in 2006. 02 03 04 05 06 Also noteworthy was the 52.2% decrease (-19.1 M.€) in Chart 53 credit risk cost (loan impairment charges in the year net of reversals and after deducting recoveries of arrear loans previously written off). As a percentage of the loan portfolio, the cost of credit risk declined from 0.19% in 2005 to 0.08% in 2006. This figure is situated below the average (0.22%) registered in the last five years.

1) Measured by the relationship between corporate income tax and profits before income tax.

100 Banco BPI | Annual Report 2006 Domestic operations

REVENUE Net interest income Net interest income derived from domestic operations The 11.6% growth in the loan portfolio’s average balance was 4.1% higher relative to 2005, that is, 19.5 M.€. was the main factor behind the total increase in This rise is explained by the positive volume-effect remunerated assets, accounting for 69% of the total associated with the expansion in activity, expressed in the increase. growth in the loans and deposits average balances of 11.6% and 7.2%, respectively. This trend compensated 2006 saw the pressure of the narrowing of loan spreads for the contraction in spreads G which continues to occur. becoming more pronounced. The spread relative to the respective market benchmarks1, in the corporate, project Narrow net interest income, the principal component of finance and institutional banking segment, decreased by net interest income, increased 3.1% (+13.7 M.€) when 0.19 percentage points. In the individuals and small compared with 2005. It is also worth noting the 137% businesses segment, the spread contracted by 0.26 growth (+4.4 M.€) in the profit earned from percentage points. capitalisation insurance without discretionary profit sharing (gross margin on unit links), which was the The average spread on the mortgage-loan portfolio source of these products’ robust growth. narrowed by 0.19 percentage points to 0.95% in 2006. New mortgage loans were contracted with an average Commissions associated with the amortised cost totalled spread of 0.68%, 0.17 percentage points lower than the 18.4 M.€ in 2006 (13.9 M.€ in 2005), which reflects the figure for 2005. cumulative effect of the phased income-statement recognition of these commissions over the life of the credit It is important to point out that the backdrop of rising operations. Deferred accounting of these commissions began interest rates in the market permitted the average spread during 2005. Previously these commissions were fully on deposits to widen by 0.32 percentage points2 despite recorded in the caption COMMISSIONS AND OTHER INCOME (NET). the keen competitive pressure, bearing in mind that certain deposits do not earn interest. The average spread Net interest income Amounts in M.€ between loans and resources widened marginally by 0.04 2005 2006 Δ% percentage points. Net interest income (narrow sense) 440.5 454.2 3.1% Gross margin on unit link products 3.2 7.5 137.4% Net interest income in 2006 Narrow net interest income Income from securities (variable yield) 17.7 14.7 (16.9%) € Narrow M. Commissions relating to the net interest amortised cost (net)1 13.9 18.4 31.8% income 91.8% Net interest income 475.3 494.8 4.1% 1) Deferred accounting of these commissions began during 2005. Table 47 454 Previously these commissions were recorded in full in the caption 440 440 437 436 COMMISSIONS AND OTHER INCOME.

Narrow net interest income Narrow net interest income derived from domestic operations was up 3.1% (+13.7 M.€ in absolute terms). Gross margin on unit link Dividends products The significant growth in activity, as evidenced in the 3.0% 1.5% 15% expansion in average interest-earning assets, Commissions related generated a positive volume effect on the net interest to deferred € cost margin of about 65 M. , which compensated from the 3.7% 02 03 04 05 06 contraction of 16 basis points in the average spread Chart 54 Chart 55 between remunerated assets and liabilities.

1) Average spread in relation to the respective benchmarks. 2) The 3-month Euribor moving average was considered for this purpose.

Report | Financial review 101 Domestic operations

In the meantime, the average spread between expansion in loans. The funding of loans has been remunerated assets and liabilities contracted, with the complemented mainly through the tapping of medium decrease in the relative weight of deposits in balance and long-terms resources from institutional investors and sheet funding being a contributing factor (from 54% of from debt securitisations. In September 2006, BPI interest-bearing liabilities in 2005 to 49% in 2006). carried out the second home-loan securitisation operation Indeed, despite the expansion in deposits having been (and the third debt securitisation operation undertaken by higher than in previous years (7.2% increase in terms of the Bank), in the amount of 1 500 M.€ and with an average balance), this continued to be less than the average spread of 17 basis points1.

Trend in interest income and expense Amounts in M.€ 2005 2006 ΔM.€ Δ%

Interest-earning assets Placements with credit institutions 35.4 41.8 +6.4 +18.0% Loans to Customers 746.2 938.9 +192.7 +25.8% Bonds and other fixed-income securities1 41.4 91.5 +50.1 +120.9% Interest income from interest-earning assets 823.0 1 072.2 +249.2 +30.3% Interest-bearing liabilities Amounts owed to central banks and to other credit institutions and financial liabilities held for trading, excluding derivatives 89.6 141.1 +51.5 +57.4% Customer deposits and other remunerated resources 168.9 237.0 +68.1 +40.3% Debt securities2 130.53 178.0 +47.6 +36.5% Subordinated debt and participating bonds 24.7 27.1 +2.4 +9.9% Financial liabilities associated to transferred assets 13.2 68.2 +55.0 +415.2% Interest cost on interest-bearing liabilities 426.9 651.4 +224.6 +52.6% Subtotal 396.2 420.8 +24.6 +6.2% Other income and costs 14.3 21.6 +7.3 +51.5% Trading derivatives (1.1) 12.8 +13.9 - Hedging derivatives 31.23 (1.0) (32.2) (103.1%) Narrow net interest income 440.5 454.2 +13.7 +3.1% Note: does not include BPI Vida’s interest-earning assets and interest-bearing liabilities, bearing in mind that the margin earned on capitalisation insurance Table 48 is essentially recorded in the captions GROSS MARGIN ON UNIT LINKS and TECHNICAL RESULTS OF INSURANCE CONTRACTS. 1) Debt securities in the portfolio of dealing assets and in the portfolio of assets available for sale. 2) Includes income from bonds indexed to indices, hedged by derivative instruments. The results of built-in derivatives and on hedging derivatives are recorded separately in the caption HEDGING DERIVATIVES. 3) Adjusted for the impact of the transition to IAS / IFRS relating to the accounting for share-issue premiums and built-in options.

The behaviour of narrow net interest income was also impact, narrow net interest income would have increased negatively affected by contributions made to the pension 7.0% (+30.6 M.€) relative to 2005, and total net funds in 2005 (mostly towards the end of the year) in the interest income would have risen 7.7% (+36.4 M.€). amount of 626.7 M.€. These contributions were earmarked to cover the funding of pension obligation The following table presents the average interest rates requirements resulting from the transition to IAS / IFRS corresponding to the average balance on remunerated and from the change to the actuarial assumptions which assets and liabilities, and the spreads on these vis-à-vis occurred at the end of 2005. The estimated negative the market average. The 3-month Euribor rate was used impact in 2006, considering for this purpose the average as the market benchmark (moving average). three-month Euribor rate, was 16.9 M.€. Without this

1) All-in average spread of the debt securitisation operation.

102 Banco BPI | Annual Report 2006 Domestic operations

Average interest rates on remunerated assets and liabilities Amounts in M.€ 2005 2006

Average Interest Average Average Average Interest Average Average balance interest rate spread1 balance interest rate spread1 Interest-earning assets Loans to Customers 19 411.9 746.2 3.8% 1.7% 21 671.7 938.9 4.3% 1.4% Companies, institutionals and project finance 7 198.2 252.7 3.5% 1.4% 7 986.2 328.3 4.1% 1.2% Mortgage loans 8 359.1 277.9 3.3% 1.2% 8 952.0 347.9 3.9% 1.0% Other loans to individuals 871.7 73.4 8.4% 6.3% 924.9 72.0 7.8% 4.9% Loans to small businesses 1 839.6 94.0 5.1% 3.0% 2 050.5 113.8 5.5% 2.6% Other 1 143.4 48.2 4.2% 2.1% 1 758.0 77.0 4.4% 1.5% Other interest-earning assets2 2 215.5 76.8 3.5% 1.3% 3 214.9 133.2 4.1% 1.2% Derivatives 508.1 522.1 Interest-earning assets 21 627.4 1 331.1 6.2% 4.0% 24 886.6 1 594.2 6.4% 3.5% Interest-bearing liabilities Customer deposits and other remunerated resources3 11 660.4 168.9 1.4% 0.7% 12 496.9 237.0 1.9% 1.0% Financial liabilities associated to transferred assets 558.1 13.2 2.4% (0.2%) 2 310.4 68.2 3.0% (0.0%) Other interest-bearing liabilities4 9 455.7 244.7 2.6% (0.4%) 10 536.0 346.2 3.3% (0.4%) Derivatives 478.1 510.3 Interest-bearing liabilities 21 674.2 904.9 4.2% (2.0%) 25 343.3 1 161.7 4.6% (1.7%) Note: Euribor 3 months 2.2% 2.9% Note: BPI Vida's remunerated assets and liabilities and corresponding interest income and expense were excluded from the table for the reason that the interest income Table 49 and expense earned on capitalisation insurance is essentially recorded in the captions GROSS MARGIN ON UNIT LINKS and TECHNICAL RESULTS OF INSURANCE CONTRACTS. 1) In relation to the annual average of the 3-month Euribor: interest-earning assets = average yield - Euribor 3M; interest-bearing liabilities = Euribor 3M - average yield. 2) Bonds and other fixed-income securities in the portfolio of dealing assets and in the portfolio of assets available for sale and placements with credit institutions. 3) Deposits, cheques, orders payable and other Customer resources. 4) Includes amounts owed to central banks and to other credit institutions and financial liabilities held for trading, excluding derivatives, includes debt securities, subordinated debt and participating bonds.

Technical result of insurance contracts Commissions The contribution of capitalisation insurance with Commissions and other net income climbed by 9.6%. discretionary profit sharing to net profit declined from 11.9 This increase reflects the increases of 5.1% (+11.5 M.€) M.€ in 2005 to 3.3 M.€ in 2006. This trend reflects in Commercial Banking commissions and 57% (+23.5 mainly the fact that BPI decided to charge lower M.€) in Investment Banking commissions. management commissions owing to the fact that the income from capitalisation insurance, in particular, that Commercial Banking’s relative importance in total with low risk, was affected by the adverse behaviour of the commissions derived from domestic operations was interest-rate markets. situated at 88% in 2006. The biggest contribution to the growth in these commissions was the higher commission The contribution to net operating income from banking of revenue earned from asset management (unit trust funds capitalisation insurance with discretionary profit sharing and pension funds) (up 24.4%;+12.8 M.€). This corresponds to the gains and losses on the management of improvement is explained in large part by the higher resources taken and allocated to those insurance products relative weight of the unit trust and capital-growth funds after deducting liabilities to Customers (mathematical in the total portfolio which, because they are more provisions and profit sharing). value-added oriented, generate much higher unitary

Report | Financial review 103 Domestic operations

commissions. It is also worth noting the higher Commissions and other similar income (net) Amounts in M.€ commissions associated with insurance broking1 (+18.1%) 2005 2006 Δ% which reflects, besides the commercialisation of credit Commercial Banking commissions insurance, the success obtained in the broking of Allianz Unit trust funds and pension funds 52.4 65.2 24.4% autonomous-sale insurance products, the sale of which Commissions associated with loans and guarantees 62.1 61.2 (1.4%) began in 2005. Income from cards 50.5 50.2 (0.5%) Deposits and related services 27.2 25.9 (5.1%) Also noteworthy was the trend in commissions associated Intermediation of insurance products 19.7 23.3 18.1% with loans and guarantees, which fell by 1.4% relative to Banking services 8.8 7.5 (14.6%) 2005. These were negatively affected by the fact that in Securities-related services 3.4 2.3 (32.2%) 2005, a part of commissions began to de deferred – the Other 0.6 0.7 11.7% commissions associated with the deferred cost –, which Commercial Banking commissions 224.8 236.3 5.1% began to be included in net interest income. The increase Investment Banking commissions in commissions associated with loans and guarantees, to Unit trust funds 9.1 10.5 16.2% which must be added the commissions associated with Portfolio management and advisory services 2.5 3.4 36.1% the amortised cost so as to ensure comparability, was Brokerage and placing 5.7 12.2 115.4% € Consultancy and valuations 4.0% (+3.0 M. ) in 2006. (Corporate Finance) 2.8 4.5 59.3% Other 0.7 2.1 177.4% Investment Banking commissions posted expressive Investment Banking commissions 20.9 32.8 57.3% growth of 57.3% (+11.9 M.€) relative to 2005. Total 245.6 269.1 9.6% Table 50 Brokerage and placing commissions more than doubled, Commissions in 2006 which corresponds to an increase of 6.5 M.€ (+115%). Income Deposits from cards and related BPI’s increasing affirmation as an Iberian broker, with 18.7% services 9.6% strong specialisation in small and medium-sized Loans and guarantees companies, has contributed to this trend. BPI has been a Insurance 22.8% broking member of the Madrid Stock Exchange since 2004, and 8.7% its equities research provides extensive coverage of Unit trust funds, and pension funds Iberian companies. Moreover, BPI earned commissions of Other from 24.2% commercial 1.3 M.€ in the third phase of Portucel’s privatisation, in banking 12.2% which it was the global coordinator, and in the initial 3.9% Commercial banking Investment banking public offering of Galp Energia, where its role was that of co-leader. Chart 56

Consultancy and valuation commissions were 1.7 M.€ higher (+59%). Of this figure, 1.3 M.€ was derived from the primary market operations referred to above. The commissions associated with unit trust funds were up by 1.5 M.€ (+16%), while those associated with private banking activity, portfolio management and advisory services grew by 0.9 M.€ (+36%).

1) Insurance broking commissions include gains corresponding to the share in the results of the insurance portfolio. In 2006, commissions on the placement of insurance rose by 25.5% to 12.6 M.€ and the appropriated results of portfolios climbed by 10.5% to 10.7 M.€.

104 Banco BPI | Annual Report 2006 Domestic operations

Profits from financial operations Profits from financial operations were 100.6 M.€, 109% Profits from financial operations Amounts in M.€ more (+52.5 M.€) than those earned in 2005. 2005 2006 Δ M.€ Trading portfolio and assets revalued Their relative importance in net operating income from through the income statement Equities 7.6 24.8 +17.2 banking relating to domestic operations, climbed from Interest rate 9.4 6.8 (2.5) 6.2% in 2005 to 11.5% in 2006. Structured products 3.4 5.1 +1.7 Currency 8.3 9.4 +1.2 € Contributing to this trend was the increase of 17.2 M. Trading portfolio and assets revalued in the gains derived from share dealing and the 13.7 through the income statement 28.6 46.2 +17.6 M.€ rise in realised gains on available-for-sale shares. Financial assets available for sale Equities 20.1 33.8 +13.7 It is also important to note the increase of 57.6 M.€ in Bonds 5.2 6.2 +0.9 Other 0.0 0.3 +0.3 unrealised gains in the available-for-sale shares, to 140.4 Financial assets available for sale 25.3 40.2 +14.9 M.€ at the end of 2006. These unrealised gains are Interests and financial gains and recorded directly in shareholders’ equity, under the item losses with pensions FAIR VALUE RESERVE, with the result that they have no Interest cost (101.6) (102.9) (1.4) impact in the 2006 income statement. At the time the Expected pension fund return 95.8 117.2 +21.4 securities are sold, the gain (or the loss) previously Interests and financial gains and losses with pensions (5.8) 14.2 +20.0 recognised in shareholders’ equity is recorded in the Total 48.1 100.6 +52.5 INCOME STATEMENT. Table 51

Profits from financial operations include the financial gain with pensions which corresponds to the differential between the financial assumptions of the pension funds’ income1 and the interest cost of liabilities. The financial gain with pensions increased by 20.0 M.€ in 2006 to 14.2 M.€, by virtue the shortfall in the funding of obligations ceased to exist as from the end of 2005, coupled with the fact that the positive differential between the fund’s expected rate of return and the discount rate remained positive. The differential between the funds’ expected rate of return and the discount rate was 0.75% in 20052 and up till June 2006, and 0.5% thereafter as a result of the increase in the discount rate on that date from 4.5% to 4.75%. The funds’ expected rate of return remained unchanged at 5.25%.

1) The variances, accumulated outside the corridor, between the funds’ actual and expected income are recognised in the income statement (in personnel costs) in a gradual manner over the average period of time to Employees’ expected retirement age. At the end of 2006, there was 42.6 M.€ in accumulated negative variances, all accommodated within the corridor (corresponded to 1.7% of the value of the pension funds). 2) At the end of 2005 the fund’s rate of return was reduced from 6.00% to 5.25% and the discount rate from 5.25% to 4.50%, with the differential of 0.75% between the two being maintained.

Report | Financial review 105 Domestic operations

ADMINISTRATIVE OVERHEADS, DEPRECIATION AND AMORTISATION Administrative overheads (personnel costs, outside Administrative overheads, depreciation and amortisation1 supplies and services), depreciation and amortisation Five year trend As % of operating income from banking increased by 8.3% relative to 2005, influenced by the M.€ % expansion of the physical distribution network in 80 Portugal, following the opening of 40 new branches 530 (+7.5%) and three Investment Centres (+18.8%). 489 473 472 475

This trend was nevertheless outpaced by the increase in 68.8 70 revenue, thereby permitting an improvement in efficiency 67.7 65.9 indicators: the indicator “administrative overheads, 63.0 depreciation and amortisation as a percentage of net 60.6 operating income from banking” improved from 63.0% in 60 2005 to 60.6% in 2006.

Administrative overheads, depreciation and amortisation Amounts in M.€ 50 2005 2006 Δ% 02 03 04 05 06 02 03 0405 06 Personnel costs (excluding early-retirement costs) 288.5 319.3 10.7% Chart 57 Chart 58 Outside supplies and services 165.5 177.1 7.0% 1) Excluding early-retirement costs. Administrative overheads 454.0 496.4 9.3% Depreciation and amortisation 34.7 33.7 (2.9%) Subtotal 488.7 530.1 8.5% Costs with early-retirements 0.6 (0.1) - Total 489.3 530.0 8.3% Efficiency ratio1 63.0% 60.6% - 1) Administrative overheads, depreciation and amortisation, excluding Table 52 early retirement costs, as a percentage of net operating income from banking.

Personnel costs Personnel costs, excluding early-retirement costs, were Personnel costs in 2006 10.7% higher in 2006 (+30.8 M.€) when compared with Variable costs 2005. 15.7% Pension costs Of this increase, 22.2 M.€ resulted from the 8.3% rise 9.7% in the remuneration component (fixed and variable), Other including employer’s contributions. 3.1%

Fixed remuneration and employer’s contributions grew by Fixed costs 6.0% (+12.8 M.€) as a result of the updating of the and social charges 71.5% salary scales by 2.5% stemming from the review of the

ACTV (collective employment agreement for the banking Chart 59 system) and the respective monetary clauses, as well as the 3.6% increase in the average number of Employees (+245), driven chiefly by the expansion of the distribution network.

106 Banco BPI | Annual Report 2006 Domestic operations

The remaining increase in remuneration (+9.3 M.€) Outside supplies and services occurred via the variable component of remuneration, Outside supplies and services were up 7.0% (+11.6 M.€) which corresponded to a 23.9% rise in the variable relative to 2005. This increase can be attributed to the remuneration. This trend was in part influenced by the 28.4% (+6.2 M.€) rise in advertising and other publicity fact that all the variable remuneration relating to 2006 costs and the higher costs of surveys and polls, which was paid in cash, with the result that it was fully were 49.2% higher (+1.7 M.€). recognised as a cost of the year1. Variable remuneration in 2006 represented 17% of total remuneration and Outside supplies and services Amounts in M.€ employer’s contributions. In addition, the trend in 2005 2006 Δ% personnel costs was influenced by the increase of 8.6 Advertising, public relations and studies M.€ (+38.5%) in pension costs resulting from the higher Advertising campaigns 21.7 27.8 28.4% current service cost. This increase reflected mainly the Studies 3.4 5.1 49.2% Subtotal: advertising, public relations impact of the decline from 5.25% to 4.5% in the and studies 25.1 33.0 31.3% discount rate in December 2005, only to be revised Costs related to businesses upwards to 4.75% in June 2006. The current service Cards and automatic banking 9.6 11.6 20.7% cost was 16.1 M.€ in the first half of 2006, and 13.5 Treasury, compensation and cheques 8.1 8.1 0.2% M.€ in the second half (total of 29.6 M.€), against the Home loans, consumer credit and motor car finance 6.7 5.2 (23.4%) 2005 total of 20.9 M.€. Other 3.3 3.7 11.6% Subtotal: costs related to businesses 27.7 28.6 3.0% Personnel costs Amounts in M.€ Costs with installations, communications, 2005 2006 Δ% IT and other Remunerations Premises 39.4 41.1 4.2% Fixed remunerations and social charges 215.3 228.2 6.0% Communications 21.3 21.9 2.7% Variable remunerations 40.4 50.0 23.9% IT costs (software and hardware) 18.8 18.5 (1.5%) Other 10.3 10.0 (2.9%) Other 25.6 27.1 5.6% Remunerations 266.0 288.2 8.3% Subtotal: costs with installations, communications, IT and other 105.2 108.6 3.2% Pension costs 22.5 31.1 38.5% Costs related to human resources 7.3 6.9 (5.3%) Subtotal 288.5 319.3 10.7% Other costs 0.1 0.0 - Costs with early retirements 0.6 (0.1) (124.6%) Total 165.5 177.1 7.0% Total 289.1 319.2 10.4% Table 53 Table 54

Outside supplies and services in 2006

Advertising, Costs related to public relations businesses and studies 16.1% 18.6%

Other 3.9%

Installations, communications, IT and other 61.3%

Chart 60

1) The variable remuneration paid in cash is recognised in full as a cost of the relevant financial year. The cost relating to the remuneration paid in the form of shares and share options (the RVA scheme) is amortised on a straight-line basis from the beginning of the year to which it refers up till the date it becomes freely disposable by Employees.

Report | Financial review 107 Domestic operations

Costs related to the size of the operating structure – cost Meanwhile, there was a decrease of 1.6 M.€ in costs of premises, communications and IT systems, and others associated with loans. This primarily reflects the fact that – were 3.2% higher, that is, 3.4 M.€ in absolute terms. during 2005 a significant part of costs with valuation This trend is essentially associated with the expansion of services ceased to be recorded in outside supplies and the retail branch (+7.5%) and Investment Centre services, and are now booked under commissions networks (+18.8%) in Portugal. associated with the amortised cost. These costs are now amortised over the life of the operations concerned. Costs associated with business, more directly indexed to the level of activity, rose by 3.0% (+0.8 M.€). Depreciation and amortisation Depreciation and amortisation in domestic operations On the other hand, costs associated with cards increased decreased by 2.9% to 33.7 M.€, in 2006 (1.0 M.€ less by 2.0 M.€, mainly as a result of the SIBS’ revised tariff than in 2005). This situation is explained in part by the relating to use of the ATM network (+1.0 M.€) and the withdrawal of fixed assets deployed in activities which are start made to the substitution of current cards with now being carried out under the outsourcing regime. magnetic bands for those with chips (+0.5 M.€).

Depreciation and amortisation Amounts in M.€ Depreciation and amortisation in the year Net fixed assets 2005 2006 Δ% 31 Dec. 2005 31 Dec. 2006 Intangible assets 3.1 3.1 (0.2%) 5.4 8.5 Tangible assets Premises 9.7 8.8 (9.5%) 151.5 142.4 Computer hardware 8.3 8.7 +5.2% 17.3 17.2 Other tangible assets 13.5 13.0 (3.7%) 59.6 61.9 Capital expenditure in progress 12.9 11.7 Tangible assets 31.6 30.6 (3.2%) 241.2 233.3 Total 34.7 33.7 (2.9%) 246.5 241.8 Table 55

108 Banco BPI | Annual Report 2006 Domestic operations

IMPAIRMENTS AND PROVISIONS Loan impairments The cost of credit risk evolved favourably in 2006. Loan Loan impairments as % of loan portfolio impairments, which correspond to the estimated loan loss Five year trend In 2006 taking into account the total amount of the exposure, the % 0.60 Companies, amount recoverable and the time frame to recovery, institutionals € and project 0.19% amounted to 38.5 M. in 2006, which corresponds to a finance decrease of 29.0% relative to the previous year’s figure. 0.45 Mortgage 0.41 0.03% 0.39 loans Loan impairment allowances as a percentage of the 0.33 0.31 average balance on the performing loan portfolio fell from 0.30 0.28 Small 0.30 businesses 0.26% 0.28% to 0.18% in 2006. This figure is situated below 0.21 the average (0.32%) registered in the last five years. 0.19 0.18 Other 0.89% 0.15 Recoveries of arrear loans and interest previously written 0.08 off from assets were up 19.1% to 21.0 M.€. Total 0.18% 0.00 The cost of credit risk, which corresponds to the amount 02 03 0405 06 of impairment charges recognised in the year net of arrear Loan impairments1 loans and interest written off from assets, decreased by Loan impairments, deducted of 52.2%: from 36.6 M.€ in 2005 to 17.5 M.€ in 2006. recoveries of loans and interests in arrears written-off1 As a percentage of the loan portfolio, this corresponded to a decline from 0.19% in 2005 to 0.08% in 2006 (the 1) Generic and specific loan provisions under PCSB. average for the past five years was 0.22%).

Chart 61 Chart 62

Loan provisions and impairments Amounts in M.€ 2005 As % of the loan 2006 As % of the loan portfolio1 portfolio1 Loan provisions and impairments Corporate banking, Institutional banking and Project Finance 15.3 0.20% 16.4 0.19% Individuals and small businesses banking Mortgage loans 14.5 0.17% 3.0 0.03% Loans to individuals – other purposes 15.4 1.71% 14.7 1.53% Loans to small businesses 8.2 0.45% 5.3 0.26% Individuals and small businesses banking 38.1 0.33% 23.1 0.19% Other 0.8 0.15% (1.0) (0.17%) Loan provisions and impairments 54.2 0.28% 38.5 0.18% (-) Recovery of loans written-off 17.6 - 21.0 - Cost of risk2 36.6 0.19% 17.5 0.08% 1) Average performing loan portfolio. Table 56 2) Loan provisions and impairments deducted of recoveries of loans and interests in arrears previously written off.

Other impairments and provisions Impairments and provisions for securities and other In 2005, impairments and provisions for securities and purposes totalled 5.4 M.€ in 2006, which included other purposes of 33.3 M.€ were recognised. This figure impairment charges on available-for-sale financial assets refers principally to impairments relating to available-for-sale of 6.4 M.€. financial assets in the amount of 30.9 M.€.

Report | Financial review 109 Domestic operations

EQUITY-ACCOUNTED RESULTS OF SUBSIDIARIES MINORITY SHAREHOLDERS’ INTERESTS Subsidiaries consolidated using the equity method in Minority shareholders’ interests, which essentially domestic operations contributed 17.4 M.€ to correspond to the dividends on the preference shares G consolidated net profit from domestic operations in issued by BPI Capital Finance, increased by 22.4%, from 2006. The chief contribution came from the appropriated 10.9 M.€ in 2005 to 13.3 M.€ in 2006. The preference results of the subsidiaries in the insurance area, which in shares are denominated in euro and confer the right to a 2006 was 14.1 M.€. The appropriated profit relating to non-cumulative preferential dividend indexed to the the participating interests in Allianz Portugal and in three-month Euribor. Cosec amounted to 12.8 M.€ and 1.3 M.€, respectively. When compared with 2005, the above trend reflects the It is important to mention the smaller contribution from rise in market rates and the issue in June 2005 of Viacer (down from 6.3 M.€ in 2005 to 1.8 M.€ in preference shares in the amount of 300 M.€. Of this 2006), which was largely influenced by restructuring amount 60.4 M.€ was recognised in the consolidated costs at the Unicer Group. balance sheet at the end of 2006 (79.0 M.€ in December 2005) by virtue of having been placed with Equity-accounted results of subsidiaries Amounts in M.€ Customers, while the remaining 239.6 M.€ was placed 2005 2006 Δ% with BPI Group companies. For purposes of calculating Subsidiaries in the insurance area own funds, this issue (the part placed with Customers) is Allianz Portugal 12.6 12.8 1.4% included in own funds. Cosec 1.8 1.3 (26.0%) Subsidiaries in the insurance area 14.4 14.1 (2.1%) At the end of 2006, the balance sheet value of Viacer 6.3 1.8 (71.7%) preference shares was 275.2 M.€. Finangest 1.5 1.5 2.9% Other 0.1 0.0 (51.6%) Total 22.3 17.4 (21.6%) Table 57

Equity-accounted results of subsidiaries in 2006

Cosec 7.7% Viacer 10.2%

Other 8.8%

Allianz Portugal 73.3%

Chart 63

110 Banco BPI | Annual Report 2006 Domestic operations

DOMESTIC OPERATIONS BALANCE SHEET Net total assets employed in domestic operations expanded by 17.5% (+5 113.8 M.€) to 34 314.5 M.€ at the end of December 2006.

Domestic operations balance sheet Amounts in M.€ 2005 2006 Δ%

Assets Cash and deposits at central banks 469.0 411.5 (12.3%) Amounts owed by credit institutions 335.1 359.1 7.2% Loans and advances to credit institutions 930.0 912.6 (1.9%) Loans and advances to Customers 20 544.3 24 006.2 16.9% Financial assets held for dealing 3 905.8 4 048.1 3.6% Financial assets available for sale 1 500.4 2 957.5 97.1% Hedging derivatives 338.9 407.5 20.2% Investments in associated companies and jointly controlled entities 120.8 129.9 7.6% Other tangible assets 241.2 233.3 (3.3%) Intangible assets 5.4 8.5 58.1% Tax assets 214.0 133.4 (37.7%) Other assets 595.8 707.0 18.7% Total assets 29 200.7 34 314.5 17.5% Liabilities and shareholders' equity Central banks' resources 53.9 – (100.0%) Financial liabilities held for dealing 315.4 201.8 (36.0%) Credit institutions' resources 2 847.1 4 411.7 55.0% Clients' resources and other loans 12 932.0 14 779.8 14.3% Debts evidenced by certificates 5 075.5 5 464.6 7.7% Technical provisions 2 925.6 2 811.1 (3.9%) Financial liabilities associated to transferred assets 2 000.4 3 368.1 68.4% Hedging derivatives 388.1 480.8 23.9% Provisions 46.0 46.5 1.2% Tax liabilities 55.2 66.4 20.3% Instruments representing capital 26.5 27.2 2.9% Other subordinated loans 653.4 588.9 (9.9%) Other liabilities 542.6 545.2 0.5% Share capital, share premium account, reserves and other equity instruments 896.6 1 055.8 17.8% Treasury stock (42.9) (51.7) (20.3%) Net profit 179.3 241.5 34.7% Minority interests 306.2 276.7 (9.6%) Total liabilities and shareholders' equity 29 200.7 34 314.5 17.5% Note: Bank guarantees 3 068.5 3 199.7 4.3% Off-balance sheet Customer resources1 8 160.0 8 392.6 2.9% 1) The amount of unit trust funds included in these resources has been corrected for fund units held in the portfolios of the Group's banks. Table 58

Report | Financial review 111 Domestic operations

The growth in assets employed in domestic operations in preference shares, climbed 16.6% to 18 288.3 M.€ at 2006 is attributable to the 16.9% (+3 462.0 M.€) the end of 2006, which permitted covering an important expansion in the loan portfolio and to the 97.1% increase part of the funding needs engendered by asset growth. in the portfolio of available-for-sale financial assets The funding of assets was also complemented by the (+1 457.1 M.€). This increase primarily reflects the raising of medium and long-term resources through bond acquisition of high-rated European corporate bonds. At issues under the EMTN Programme (debt securities the end of 2006, these two items jointly represented placed with institutional investors increased by 395 M.€, 79% of net total assets in domestic operations. that is, 10.7% more), as well as by a home-loan securitisation operation – Douro RMBS 2 – in the amount Customer resources on the balance sheet, captured of 1 500 M.€. through deposits, bonds, capitalisation insurance and

Balance sheet structure in 2006

Assets (net) Liabilities and shareholders’ equity Liquid assets and loans to credit institutions 4.9% Resources of credit institutions and financial 13.4% liabilities held for trading Financial assets and 21.6% hedging derivatives 15.9% Debt securities

Customer resources and technical provisions1 Loans to Customers 51.3% 70.0% Financial liabilities related to transferred assets Investments, fixed assets and other 9.8% 9.6% Shareholders' equity, minority interests, 3.5% subordinated debt and other liabilities 2006 2006

1) Related to capitalisation insurance with discretionary share in profits.

Chart 64

112 Banco BPI | Annual Report 2006 Domestic operations

MEDIUM AND LONG-TERM FINANCING In recent years, BPI has been diversifying its sources of Debt securitisation medium and long-term funding, not only through the In 2005 BPI carried out two debt securitisation operations recourse to the Euro Medium Term Notes Programme, but totalling 2 000 M.€. These operations marked BPI’s debut also by means of the raising of loans from other financial as originator in this market. Furthermore, they permitted entities. It also resorted to the realisation of diversifying the base of institutional investors, lengthening debt-securitisation operations. the maturity of medium and long-term funding, and the release of some 100 M.€ in own funds. The EMTN Programme saw its maximum ceiling raised to 10 000 M.€. The great majority of medium and long-term The first securitisation operation carried out by BPI involved issues are realised under this Programme, directly from the loans to small and medium-sized companies – Douro SME Bank’s balance sheet. The flexibility afforded by the Series 1 –, in April 2005 in the amount of 500 M.€. In Programme is reflected in the number of issues realised November of the same year, BPI floated a home-loan with varying amounts in the form of private or public securitisation operation in the amount of 1 500 M.€. placings. The dispersion of the issues results in evident advantages as regards the dilution of the inflow and In 2006, BPI launched a second home-loan securitisation repayment of funds over a period of time. 2006 saw the operation. This operation – Douro RMBS 2 for 1 500 M.€ realisation of 38 issues with a total value of 1 577 M.€. – definitively consolidated the quality of BPI’s home-loan portfolio and the Bank’s capabilities as an originator in the Financing contracted from other financial entities also eyes of institutional investors and rating agencies. Of all constitute an important component of BPI’s medium and the securitisations already effected by national originators long-term funding. In 2006, the Bank contracted six such (including BPI’s first operation), Douro RMBS 2 obtained operations, one of which with the European Investment the second most favourable tranching and boasted an Bank and earmarked for the provision of finance to small innovative structure which conferred on it the distinction of and medium-sized companies. being the Portuguese securitisation operation executed in 2006 with the lowest average costs. The placing spreads Finally, BPI pursued its funding strategy in 2006 through for the C and D classes were in fact the lowest ever asset securitisation, launching a second home-loan achieved in Portugal for these rating levels. securitisation operation in the amount of 1 500 M.€. These loans were not derecognised in the balance sheet, with the result that they continue to shown under the caption LOANS TO CUSTOMERS. The funds raised through these operations began to be recorded on the liabilities side of the balance sheet in the caption FINANCIAL LIABILITIES ASSOCIATED WITH TRANSFERRED ASSETS.

Home-loans securitisation operation in 2006 – Douro RMBS 2 Issue date: 28 September 06 Estimated average life Classes Amount (M.€) Rating1 Spread2 (years) A1 315.0 1.51 Aaa / AAA / AAA 0.05% A2 1 125.0 7.51 Aaa / AAA / AAA 0.14% B 27.75 7.58 Aa3 / AA / AA 0.17% C 18.0 7.58 A2 / A- / A+ 0.23% D 14.25 7.58 Baa2 / BBB / BBB+ 0.48% 1) Rating notations of Moody's, S&P and Fitch. Table 59 2) Up till the date of the call option (October 2015).

Report | Financial review 113 Domestic operations

LOANS AND RESOURCES Loans to Customers The loan portfolio relating to domestic operations grew by Customer loan portfolio Amounts in M.€ 16.9%, which represents an acceleration in the growth 2005 2006 Δ% rate when compared with the 9.4% expansion recorded a Corporate banking, Institutional year earlier. The loan portfolio’s behaviour was spurred by banking and Project Finance Corporate Banking 5 505.9 7 111.2 29.2% the 28.8% expansion in Corporate Banking, Institutional Project finance 1 089.6 1 438.7 32.0% Banking and Project Finance’s loan portfolio, which Institutional / State Business mirrors the greater dynamism in lending to national Sector Banking 1 480.9 1 853.1 25.1% companies and the expressive growth in the Madrid Corporate banking, Institutional banking and Project Finance 8 076.4 10 403.0 28.8% branch’s loan book. Individuals and small businesses banking Loans to companies, which account for 68% of Corporate Mortgage loans 8 966.6 9 732.0 8.5% Banking, Institutional Banking and Project Finance’s Loans to individuals – other purposes 935.8 1 033.4 10.4% portfolio, posted growth of 29.2% (+1 605.3 M.€) Loans to small businesses 1 949.6 2 193.1 12.5% relative to December 2005, while the corresponding figure Individuals and small businesses banking 11 852.0 12 958.5 9.3% in 2005 increased by about 7%. Contributing to this trend Other 573.3 582.3 1.6% € was the 14.1% (+749 M. ) increase in loans to national Total loans in arrears 289.1 267.1 (7.6%) companies and, therefore, outstripped by a wide margin Loan impairments 286.0 278.0 (2.8%) the market average growth in lending to non-financial Interests 39.5 73.3 85.7% 1 companies (+7.2%) . Another contributing factor was the Net loan portfolio 20 544.3 24 006.2 16.9% expressive growth of 857 M.€ in the loan portfolio Bank guarantees 3 068.5 3 199.7 4.3% domiciled at the Madrid branch to 1 056.9 M.€ at the Table 60 end of 2006. This was fundamentally due to the intensification of commercial activity and the participation Loan portfolio in 2006 in large investment operations. The Project Finance area Breakdown by Customer segment grew 32.0% (+349 M.€), due exclusively to the Companies, Mortgage Institutionals and loans expansion of the Madrid Branch’s portfolio which, in turn, Project Finance 43.4% 40.6% reflects BPI’s growing participation in European (and in particular, Spanish) projects. Institutional / State Business Other loans Sector Banking (which represents 18% of Corporate to individuals 4.3% Banking’s portfolio) maintained high growth rates: 25.1%. Loans to small businesses 9.2% Loans to small businesses were 12.5% higher. Other Individuals and 2.4% small businesses banking The expansion in the mortgage-loan portfolio registered an acceleration in 2006. The portfolio’s rate of growth rose Chart 65 from 6.0% in 2005 to 8.5% in 2006, compared with the market’s growth of 9.9%2 in 2006 (+11.1% in 2005). BPI continued to apply the rigorous criteria implemented at the end of 2003 in the loan approval process.

1) Loans to non-financial corporations. Source: Bank of Portugal, “Monthly Economic Indicators”. 2) Housing loans to individuals (includes credit to emigrants). Source: Bank of Portugal, “Monthly Economic Indicators”.

114 Banco BPI | Annual Report 2006 Domestic operations

Resources taken In domestic operations total Customer resources Total Customer resources1 Amounts in M.€ expanded 11.9% to 26 680.9 M.€ at the close of 2006. 2005 2006 Δ% On-balance sheet resources Balance sheet resources, which represent roughly 69% of Sight deposits 4 349.3 4 703.8 8.2% total resources, expanded 16.6% (+2 598.4 M.€). About Term and savings deposits 6 102.0 8 033.6 31.7% 88% of this increase resulted from the 21.9% growth in Total deposits 10 451.2 12 737.5 21.9% 2 deposits. Particularly significant was the 31.7% growth in Capitalisation insurance (BPI Vida) 3 810.9 4 159.9 9.2% € Structured products – guaranteed capital time deposits (+1 931.7 M. ), which benefited from the / limited risk and fixed-rate bonds 1 348.8 1 330.5 (1.4%) rise in interest rates that in turn made the yield on these Preference shares placed placements relatively more attractive when compared to with Customers 79.0 60.4 (23.5%) alternative investments. On-balance sheet resources 15 689.9 18 288.3 16.6% Off-balance sheet resources Unit trust (mutual) funds 3 519.0 3 345.0 (4.9%) Capitalisation insurance grew 9.2%. Capitalisation Equity (PPA) and retirement (PPR) insurance without discretionary profit sharing (unit links) savings plans 1 472.0 1 553.2 5.5% increased by 463.5 M.€ to 1 348.8 M.€ at the close of Pension funds3 3 169.1 3 494.4 10.3% 2006, whilst capitalisation insurance with discretionary Off-balance sheet resources 8 160.0 8 392.6 2.9% profit sharing posted a decrease of 3.9% (-114.5 M.€). Total 23 849.8 26 680.9 11.9% 1) Corrected for double counting: placements of unit trust funds and Table 61 pension funds managed by BPI in the Group's deposits, structured Off-balance sheet resources – unit trust funds, PPR, PPA products and unit trust funds. and pension funds – expanded 2.9% relative to 2005. 2) BPI Vida savings products with discretionary participation in results are recorded in the balance sheet under the caption AMOUNTS OWED TO CUSTOMERS (1 348.8 M.€ at Pension funds under management increased by 10.3% 31 December 2006) and those with discretionary profit sharing are recorded under the (+325.3 M.€), while PPR and PPA were 5.5% higher caption TECHNICAL PROVISIONS (2 811.1 M.€ at 31 December 2006). 3) Includes BPI Group Employees pension funds. (+81.2 M.€). Total Customer resources in 20061 The 4.9% decrease in unit trust funds was due to a Deposits contrasting trend in their components. Whilst bond and 47.7% money-market funds contracted by 27%, the growth and diversification funds were up 32.1% (+394.5 M.€). As a Capitalisation insurance consequence, the relative weight of the growth and 15.6% diversification funds advanced from 38% at the end of Structured products and other bonds and 2005 to 52% at the end of 2006. These funds, being 31.5% preference shares placed more value-added oriented, benefit from higher unitary with Customers 5.2% management commissions, with the result that the change Off-balance sheet On-balance sheet in the composition of the funds’ portfolio originated a positive impact on income which compensated by a wide 1) Corrected for duplication of balances. Chart 66 margin the impact of the overall decrease in volumes under management.

Report | Financial review 115 Domestic operations

PORTFOLIO OF SECURITIES AND PARTICIPATING INTERESTS At 31 December 2006, the portfolios of dealing and The available-for-sale assets portfolio grew by 97% available-for-sale assets and investments in associated (+1 457.1 M.€), largely as a consequence of the companies and jointly controlled entities totalled 7 135.5 acquisition of European corporate bonds (+1 116.1 M.€, which corresponded to 20.8% of total assets M.€), all with international investment grade G ratings employed in domestic operations. In relation to 2006, and high liquidity, and of Brazilian public debt (+306.7 growth of 29.1% was recorded (+1 608.5 M.€), as a M.€), in recognition of the Brazilian economy’s consequence of the expansion of the available-for-sale consistent improvement. portfolio following the acquisition of foreign corporate bonds. The portfolio of available-for-sale shares expanded by 120.3 M.€ (+28.6%), which reflects to a great degree the Financial assets and investments in associated market appreciation of the principal participating companies and jointly controlled entities Amounts in M.€ interests. At the end of 2006, the portfolio registered Δ 2005 2006 % unrealised gains (net of losses) of 140.4 M.€, which were Financial assets held for dealing disclosed in the fair value reserve. For purposes of Bonds of public-sector issuers 945.8 435.3 (54.0%) calculating own funds, 45% of the positive fair value Corporate bonds and bonds of other entities 2 079.2 2 423.0 16.5% reserve is considered in Tier II, while 100% of the Shares 218.3 472.9 116.7% negative fair value reserve is considered in Tier I. Participating units 528.3 545.6 3.3% Derivatives with positive fair value 134.2 171.3 27.6% Fair value reserve – shares portfolio Financial assets held for dealing 3 905.8 4 048.1 3.6% available for sale At 31 December 2006 Amounts in M.€ Financial assets available for sale % of Closing Market Unrealised Bonds of public-sector issuers 874.0 1 038.7 18.8% capital1 price at Value gains (losses) Corporate bonds and bonds 31 Dec. 06 (Fair value of other entities 151.0 1 326.7 778.7% reserve) Shares 420.9 541.2 28.6% BCP 4.4% 2.80 449.5 +113.2 Participating units 49.3 48.0 (2.6%) Impresa 7.1% 4.68 27.8 +2.6 Other 5.2 2.8 (45.6%) Cofina 5.0% 1.82 9.4 +4.1 Financial assets available for sale 1 500.4 2 957.5 97.1% Ibersol 5.0% 9.75 9.8 +5.4 Investments in associated companies Vista Alegre Atlantis 17.3% 0.13 3.3 +1.3 and jointly controlled entities 120.8 129.9 7.6% Other 41.5 +13.7 Total 5 527.0 7 135.5 29.1% Total 541.2 +140.4 Table 62 1) Does not include shares held by unit trust funds under BPI management. Table 63 The portfolio of dealing assets amounted to 4 048.1 M.€ at the close of 2006. Of this total, 85.2% (3 447.1 M.€) Portfolio of financial assets and participating interests in 2006 corresponded to BPI Vida’s investment portfolio allocated Financial assets Financial assets available Equities to cover capitalisation insurance. The remainder of the held for dealing for sale Other 7.6% dealing portfolio was up 0.9% to 601.0 M.€ at the end 8.4% Bonds and of 2006. other 33.9%

Investments in For hedging of associated companies insurance capitalisation and jointly controlled products entities 48.3% 1.8%

Chart 67

116 Banco BPI | Annual Report 2006 Domestic operations

PENSION OBLIGATIONS At 31 December 2006, pension funds’ net assets result that, taking into consideration that the corridor was guaranteed the funding of 111% of the amount of 247.0 M.€, BPI has an unutilised margin of 204.5 M.€ to pension obligations of Employees. This figure accommodate any future actuarial losses. corresponded to the pension funds’ financial surplus of 239.6 M.€. Employees’ pension obligations cover Amounts in M.€ 2005 2006 At the end of 2005, Banco BPI had accumulated Total past service pension liabilities 2 269.5 2 230.8 negative actuarial variances in the balance sheet of Pension funds 2 273.3 2 470.5 291.4 M.€, of which 276.8 M.€ resulted from the Financing of pension liabilities 100.2% 110.7% change made in December 2005 to the actuarial Corridor 227.3 247.0 assumptions used in the calculation of pension Amount of the corridor used (accumulated) 227.3 42.6 obligations and which gave rise to an increase in Margin available 0.0 204.5 Amount outside the corridor 64.1 (0.1) liabilities by that amount. The discount rate fell from Pension funds return 11.1% 13.6% 5.25% to 4.50%, while the expected growth rate in Table 64 pensions rose from 1.75% to 2.00%. It should be pointed out that as from December 2006, the At the end of June 2006, accompanying the climb in liabilities relating to the complementary retirement and long-term interest rates on corporate bonds1, BPI survivors’ pension plan which the directors forming part of increased the pension funds’ discount rate by 0.25 Banco BPI’s Executive Committee and other directors of percentage points, from 4.50% to 4.75%, reinstating one Banco Português de Investimento benefit from, which were third of the decrease decided on at the end of 2005. previously covered by provisions, are now covered by a This alteration gave rise to a decrease of 79.0 M.€ in pension fund set up for this purpose. The initial pension obligations to Employees. The rates for the contribution to the fund was 21.9 M.€. fund’s expected income remained unchanged at 5.25%, for the growth in salaries at 2.75%, and for the growth in Directors' complementary pension plan cover Amounts in M.€ pensions at 2.00%. 2005 2006 Total past service pension liabilities 23.9 21.9 The abovementioned positive actuarial variance resulting Pension funds - 21.9 from the decrease in liabilities2 (79.0 M.€) together with Financing of pension liabilities - 100.1% the positive variance of 192.8 M.€ in the funds’ income Table 65 (actual return of 13.6% versus expected return of 5.25%), were responsible for the decrease in the accumulated negative actuarial variances carried in the balance sheet. This decrease was from 291.4 M.€ in December 2005 (of which 64.1 M.€ was recorded outside the corridor3) to 42.6 M.€ in December 2006.

At the end of 2006, the accumulated negative variances in the balance sheet were fully recorded within the 10% corridor envisaged by the Bank of Portugal to accommodate the fund’s negative variances (actuarial and income) without giving rise to any impact on the impact statement, with the

1) The discount rate is computed based on low-risk corporate bond-market rates with maturities similar to those for the payment of the obligations. 2) In the IAS / IFRS’s regulatory framework, the envisaged corridor, besides being used for accommodating the funds’ actuarial or income variances, can also be used to accommodate the changes to the actuarial-financial assumptions without giving rise to an impact in the income statement. The amounts which are situated outside the corridor can be amortised over the expected period to the anticipated average retirement age. 3) The amount recorded outside the corridor was being recognised as a cost in the income statement over the average period of time to Employees’ expected retirement age.

Report | Financial review 117 Domestic operations

PENSION OBLIGATIONS – REGULATORY FRAMEWORK

INTERNATIONAL ACCOUNTING STANDARDS BPI GROUP PENSION FUNDS Pursuant to Regulation no. 1606 / 2002 of the European In terms of Bank of Portugal rules, banks are required to Parliament and Council of 19 July, the BPI Group began to guarantee that pension obligations are funded exclusively prepare and present the consolidated financial statements by way of pension funds. Other financial companies must in conformity with the International Accounting Standards ensure full funding of retirement obligations by pension with effect from 1 January 2005. Insofar as the accounting funds or by an insurance contract serving the same treatment of post-retirement benefits is concerned, it purpose, while the unfunded portion must be covered by applies IAS 19. provisions carried in the balance sheet.

The main differences between IAS 19 and the previous The Group’s staff pension funds fully guarantee the old Bank of Portugal Notice 12 / 2001 are as follows: age, infirmity and survivors’ pensions of the banks’ Employees and former Employees (Banco BPI and Banco ᭿ IAS 19 is wider than Notice 12 / 2001, in that it Português de Investimento) and of the subsidiaries which requires the recognition of all post-retirement benefits, adhered to the Vertical Collective Employment Agreement which in the BPI Group’s case, results in the additional (BPI Fundos and Inter-Risco). recognition of obligations for medical care and the death subsidy on retirement; At the end of 2006, the funds’ net assets totalled 2 470 M.€ (which exceeds the Group’s shareholders’ equity of ᭿ in terms of actuarial-financial assumptions, IAS 19 (and 1 451 M.€ on the same date) and encompassed a universe contrary to Notice 12 / 2001, which established of 6 835 current Employees, 7 120 pensioners and 2 177 maximum differentials between the rate of return and the former Employees. rate of salaries and pension increases), sets out only a reference for the discount rate – “market rates of low-risk Recapitalisation of the pension funds bonds, with their maturity term being similar to the When the Group ventured into Commercial Banking in payment period of the obligations” and defines the 1991 through the acquisition of Banco Fonsecas & Burnay guiding principles for the other assumptions; (BFB), BFB had a pension fund shortfall of EUR 128 million (of which EUR 89 million refers to obligations for ᭿ the costs relating to early retirements must be recognised current pension payments and EUR 39 million to pension in the year in which they are incurred, with the possibility obligations for the past services of current Employees). of this cost being deferred over a maximum period of ten Hence at the time of the acquisition, the shortfall in years ceasing to exist; pension funds’ net assets to meet the obligations of current pension payments was covered by setting aside ᭿ the “corridor” regime remains, only that in addition to provisions carried in the balance sheet. the actuarial variances, the impact of the changes to the actuarial-financial assumptions may also be As a consequence of the financial effort made, at the end accommodated in this “corridor”. The amounts falling of 1995 the pension funds fully covered the obligations for outside the corridor may be amortised over an expected current pension payments, while 100% cover for the average period up until receipt of the benefits (according retirement obligations relating to current Employees was to Notice 12 / 2001, the maximum amortisation period achieved at the end of 1998. was 10 years).

118 Banco BPI | Annual Report 2006 Domestic operations

Early retirements Investment policy Following the acquisition of the commercial banks (BFB in The investment policy of Banco BPI’s Pension Fund is set 1991 and BFE and BBI in 1996), intensive programmes out in the management contract, in accordance with were implemented directed at modernising and enhancing Standard 21 / 2001-R, of 28 November of the Insurance the efficiency and competitiveness of the structures Institute of Portugal. This takes into consideration the core acquired. Workforce rationalisation and rejuvenation was objectives for each asset class, as follows. one the priorities assumed and which translated itself into the implementation of an early-retirement programme. This entailed a large financial commitment aimed at covering Asset class Benchmark the increase in pension obligations. In the period 1995 to Equities 30% MSCI Europe 2006, a total of 3 862 early retirements have been Fixed-rate bonds 25% EFFAS>1 realised which have led to an increase of 555.2 M.€ in Variable-rate bonds 20% 3-month Euribor pension obligations. Hedge Funds 5% 3-month Euribor Real estate 15% EFFAS>1 Within the ambit of the strategic programme directed at Liquidity 5% 3-month Euribor raising efficiency and reducing costs in the period Total 100% 2002-2004, a total of 1 357 early retirement accords Table 66 were executed. The TWR (Time Weighted Rate of Return) and the standard Only three early-retirement accords were realised during deviation are the benchmark measurements used respectively 2005 and 2006. for analysing the management performance of the investments of Banco BPI’s Pension Fund and of the risk. Pension funds assets and BPI Group Employees pension liabilities BPI Pensões, in its capacity of Banco BPI’s Pension Fund M.€ management entity, carries out the monitoring of the risk 2 500 implicit in the said fund’s portfolio, in accordance with the limits laid down internally, using for this purpose the VaR (Value at Risk) methodology. 1 875

In monitoring risk, use is made amongst others of the KMV 1 250 system, the licence for which belongs to Moody’s KMV. This system applies to the portfolio’s credit component (Corporate bonds) and permits gauging, for each security, 625 the probability of this entering into default (EDF – Expected Default Frequency). The inputs for this system 0 are quite diverse and include information about the 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 accounts of the companies, as well as the indicators relating to the behaviour of the issuer’s shares when these Pension funds Chart 68 are quoted on the stock market. Past service liabilities

The following are the tools currently used for assessing risk:

᭿ market VaR (Value at Risk), taking into consideration the volatility of the price of assets / benchmarks, with a confidence interval of 99% and in a time horizon of one month; ᭿ currency VaR, taking into consideration the volatility of exchange rates in the last 30 days, with a confidence interval of 99% and in a time horizon of one month; ᭿ credit VaR, based on the probability of insolvency within one year (varies between 1-0.2), taking into account a recovery rate of 20%.

Report | Financial review 119 Domestic operations

Monitoring Committee The Monitoring Committee for Banco BPI’s Pension Fund’s Banco BPI pension funds' assets Breakdown by asset class pension plan was formed on 20 October 2006, in accordance with the provisions of Decree-Law 12 / 2006, At 31 December 2006 Foreign equities of 20 January. This committee is charged with verifying Portuguese 9.7% compliance with the pension plan and the management of equities 39.6% Real estate the respective funding vehicles. The Monitoring Committee 8.6% is composed of six members in office and two alternates, Other of whom: 1.4% Liquidity Variable-rate ᭿ 6.5% four members in office and one alternate are Banco BPI bonds 4.0% representatives, nominated by Banco BPI ‘s Directors; Fixed-rate bonds 30.2% ᭿ two members in office and one alternate are representatives of the participants and beneficiaries, Chart 69 nominated by the Workers’ Committee. Breakdown by geographical area Composition of the pension funds At 31 December 2006 Rest of America Europe 1.6% At 31 December 2006, the equities component 31.7% represented 49% of the portfolio of Banco BPI Employees Emerging Spain markets pension fund, while the bond portfolio accounted for 34%. 9.2% 5.6% Investments in European markets represented around 92% Diversification of the fund’s assets. The equities portfolio is composed 0.7% chiefly of shares in Portuguese companies, while the bond portfolio refers mainly to non-Iberian European markets.

Returns Portugal The structure of Banco BPI Pension Fund’s investments, 51.2% which has remained stable over the years, has produced Chart 70 very positive historical results above the market average, with a direct impact on the Pension Fund’s solvency and on the annual cost to Banco BPI. BPI Group Employees pension funds Return vs. market performance In 2006 the BPI Group’s staff pension funds achieved a % 19.9 gross annual average return of 13.6%. 18.3 16.1 16.0 15.2 16.1 14.1 Since 31 December 1991, the Group’s pension funds have 17.3 13.6 11.5 14.4 earned an annual average return of 11.2%, whilst the pay 13.2 11.0 8.6 7.8 increases under the Banking Sector’s ACTV salary scale 11.3 6.7 10.9 7.4 7.5 averaged 3.9%. Meanwhile, the pension-fund market’s 3.3 5.4 7.2 8.0 return median was situated at 7.9% (according to data 5.7 6.9 1.9 disclosed by Mercer Investment Consulting). 1.2 -2.0 -3.3 92 93 94 95 96 97 98 99 0001 02 03 04 05 06

BPI Group Employees pension funds return Chart 71 Pension funds market’s return median

120 Banco BPI | Annual Report 2006 INTERNATIONAL OPERATIONS

OVERVIEW The contribution from international operations (to which Net profit from international activity 14.2% of the Group’s average shareholders’ equity was Five year trend As a % of consolidated net profit allocated) to the Group’s consolidated net profit was 67.2 M.€ % 40 M.€, which corresponded to 21.8% of consolidated net 72 profit. 67

30 28.5 The return on average shareholders’ equity was 37.1% in 2006. 21.8

20 16.2 Banco de Fomento in Angola generated a contribution of 31 63.0 M.€ to consolidated net profit, 9.6% less than in 12.7 12.2 2005. The conversion into euro of BFA’s shareholders’ 20 18 10 equity in 20061, bearing in mind the depreciation that occurred during the year of the kwanza and the dollar against the euro, was responsible for a negative impact on 0 BFA’s contribution of 5.3 M.€ (against a positive impact in 02 03 04 05 06 02 03 0405 06 € 2005 of 8.6 M. ). Excluding the impact of the currency Chart 72 Chart 73 revaluation of BFA’s shareholders’ equity in 2005 and 2006, BFA’s contribution would have risen by 11.7%.

The contribution from the 30% participating interest in BCI Fomento (equity accounted) increased from 1.8 M.€ to 4.2 M.€.

International operations principal indicators (Figures in millions of euro, except where indicated otherwise) 2005 2006 Δ% Net total assets 1 305.6 1 726.9 32.3% Business volume1 1 579.4 2 219.5 40.5% Loans to Customers (gross) and guarantees 510.5 779.1 52.6% Total Customer resources 1 069.0 1 440.4 34.7% Business volume2 per Employee (thousands of euros)2 2 086 1 799 (13.8%) Operating income from banking per Employee (average no.) (thousands of euros)2 188 149 (20.9%) Administrative overheads, depreciation and amortisation / net operating income from banking 24.4% 32.5% - Cost-to-income3, G 20.5% 28.8% - Net profit 71.5 67.2 (6.0%) Return on shareholders' equity (ROE) 66.8% 37.1% - Loans in arrears for more than 90 days / Customer loans 1.2% 1.4% - Loan impairments (in the balance sheet) / Customer loans 5.4% 5.7% - Loan impairments in the year, deducted of recoveries of loans in arrears written-off (in the income statement) / Customer loans 3.46% 3.57% - Shareholders’ equity 148.5 204.8 38.0% 1) Loans, guarantees and total Customer resources. Table 67 2) Number of Employees of the companies which are consolidated in full. 3) Administrative overheads as % of operating income from banking.

1) Effective from 30 June 2006, owing to the fact that the Angolan economy ceased to be regarded as being a hyperinflationary economy for purposes of BFA’s consolidation, the currency differences resulting from the conversion to euro of BFA’s accounts are now recorded directly in shareholders’ equity.

Report | Financial review 121 International operations

In Angola, BFA continued to perceive as a priority in Banco de Fomento in Angola’s commercial activity 2006 the execution of the strategic programme for continues to register expressive growth, benefiting from a organic growth, with a view to ensuring that it is robust Angolan economy that is characterised by its constantly in the best conditions to respond to the stellar GDP growth. medium and long-term opportunities in Angola. The programme involves the expansion of the distribution BFA’s Customer loans portfolio expanded 49%; Customer network, and the development of a segmented approach resources were up 35% and the number of Customers to the market and to Customers. Equally, it entails an grew by 32% to total 304 thousand at the end of 2006. expressive reinforcement of the staff complement and respective skills, as well as the development of an In Mozambique, BCI Fomento’s contribution to net profit, operational infrastructure. In this domain, BFA aims to which more than doubled, was sustained by the benefit in all these departments from Banco BPI’s significant increase in activity. BCI Fomento’s Customer experience to access the market’s best practices. loans portfolio recorded growth of 19.0% to total 224.0 M.€. at the end of 2006, while deposits grew by 9.5% to BFA’s distribution network expanded by around 76%, with 342.8 M.€ in December 2006. the opening of 28 branches, four corporate centres and three Investment Centres. In 2006, BCI Fomento’s workforce increased by 16% to 637 Employees. It opened three branches, bringing the At the end of 2006, the distribution network was distribution network strength to 38 branches. composed of 71 branches, seven corporate centres and three Investment Centres. According to its expansion programme, BFA projects having 100 Branches, eight corporate centres and four Investment Centres by the end of 2007.

BFA’s workforce increased by 477 people (+63%) relative to December 2005 to total 1234 at the end of December 2006, which corresponded to 15% of the Group’s total headcount. Roughly 66% of the Employees recruited during 2006 attend university or have already graduated. Taking the workforce as a whole, this percentage stands at 57%.

122 Banco BPI | Annual Report 2006 International operations

CONSOLIDATION OF INTERNATIONAL OPERATIONS International operations comprise the activity conducted by Up to the end of June (when the Angolan economy was Banco de Fomento in Angola, as well as the appropriation considered to be a hyperinflationary), the gains or losses of the results attributable to the 30% participating interest resulting from the conversion into euro of income, costs in BCI Fomento, in Mozambique, and the activity of the and initial shareholders’ equity were recognised in the broker BPI Dealer (92.7% held), also in Mozambique. income statement for the period, under the item PROFITS / Banco de Fomento Angola’s contribution to the net profit LOSSES FROM FINANCIAL OPERATIONS, in accordance with the from international operations in 2006 was 63.0 M.€, while principles of IAS 29 – Financial Reporting in BCI Fomento contributed with 4.2 M.€ and BPI Dealer Hyperinflationary Economies. Moçambique with 0.01 M.€. The local currency is the Kwanza; however, the Angolan The COSTS and INCOME captions, as well as the captions ASSETS economy’s high utilisation of the dollar explains why the and LIABILITIES, presented as being derived from international major share of business with Banco de Fomento Angola’s operations, refer almost exclusively to Banco de Fomento Customers is expressed in American dollars. At the end of Angola, given that BCI Fomento Mozambique’s contribution is 2006, more than 75% of deposits and more than 90% of recognised in the BPI Group’s financial statements using the the loan portfolio were denominated in dollars. A equity method, while the accounts of BFE Dealer substantial portion of revenue and costs is expressed in the Mozambique (also consolidated in full) are not material. American currency or is indexed thereto, as is the case with personnel costs. Consolidation of Banco de Fomento Angola The financial statements of Banco de Fomento Angola are In December 2006, around 64% of assets and liabilities recognised in the consolidated financial statements using and shareholders’ equity were expressed in strong foreign the purchase method. currencies, whilst the remainder was expressed in kwanza (AKZ). Their inclusion is preceded by the conversion of the income statement and balance sheet balances into euro, Euro exchange rates based on exchange rates disclosed by the Banco Nacional 2005 2006 Δ% de Angola (central bank) by way of indication. At the end of the year Effective from the second half of 2006, for purposes of AKZ / EUR 95.86 105.71 10.3% BFA’s consolidation, the Angolan economy ceased to be USD / EUR 1.187 1.317 11.0% regarded as a hyperinflationary economy, with the result that Average of the year the conversion of the income statement and the balance AKZ / EUR 108.08 102.22 (5.4%) sheet is done in accordance with the principles of IAS 21. USD / EUR 1.241 1.260 1.5% Table 68 The income and costs generated each month are converted to euro at the exchange rate of the month in which they In accordance with the Angolan central bank’s regulations, are recognised. In the case of assets and liabilities, the Banco de Fomento has available a special reserve for the exchange rate ruling at the end of the year is used. The maintenance of own funds so as to compensate for the gains or losses resulting from this conversion are decrease in the value of shareholders’ equity (expressed in recognised directly in the shareholders’ equity, in the kwanza) which results from the local currency’s caption REVALUATION RESERVES. depreciation.

Report | Financial review 123 International operations

INTERNATIONAL OPERATIONS INCOME STATEMENT The contribution from international operations – activity lower than in 2005. In 2006 this represented 21.8% of of the subsidiaries in Angola (Banco de Fomento Angola) consolidated net profit (in 2005, it corresponded to and in Mozambique (BCI-Fomento and BFE Dealer) – to 28.5%). The return on shareholders’ equity was situated consolidated net profit in 2006 was 67.2 M.€, 6.0% at 37.1% in 2006.

International operations income statement1 Amounts in M.€ 2005 2006 Δ% Net interest income (narrow sense) 71.1 86.5 21.8% Gross margin on unit link products - - - Income from securities (variable yield) - - - Commissions relating to the amortised cost (net) - - - Net interest income 71.1 86.5 21.8% Technical result from insurance contracts - - - Commissions and other similar income (net) 25.9 32.8 26.7% Profits from financial operations 27.0 23.2 (14.2%) Operating income and expenses (0.7) 0.3 134.9% Net operating income from banking 123.2 142.7 15.9% Personnel costs 13.9 20.1 44.1% Early retirements costs - - - Other administrative expenses 11.4 21.0 84.7% Depreciation of fixed assets 4.7 5.3 12.7% Administrative overheads, amortisation and depreciation 30.0 46.4 54.6% Operating profit 93.2 96.4 3.4% Recovery of loans written-off - - - Loan provisions and impairments 10.5 18.0 71.7% Other impairments and provisions 2.3 0.6 (72.7%) Profits before income tax 80.5 77.7 (3.4%) Corporate income tax 11.4 15.1 33.3% Equity-accounted results of subsidiaries 2.4 4.6 92.5% Net profit 71.5 67.2 (6.0%) Cash-flow after taxation 88.9 91.1 2.5%

1) The contribution from international operations includes the net profit of Banco Fomento Angola (69.7 M.€ in 2005 and 63.0 M.€ in 2006) and of BCI Fomento Table 69 (1.8 M.€ in 2005 and 4.2 M.€ in 2006, net of taxes), which in the case of the latter was equity accounted deducted of taxes on dividends received from BCI Fomento.

Net profit from international activity in 2006

M.€ 147.4 Equity accounted results of subsidiaries [4.6]

67.2 Corporate income tax [15.1] 80.1 Operating income from banking [142.7] Loan impairments and other [18.6]

Administrative overheads, depreciation and amortisation [46.4]

Income Net profit Cost and taxes

Chart 74

124 Banco BPI | Annual Report 2006 International operations

The buoyant growth in BFA’s commercial activity, with Profit before taxation decreased 3.4% (-2.7 M.€). variations in Customer loans and resources of 49% and 35%, respectively, was reflected in the 15.9% The result was also negatively affected by the higher improvement (+19.5 M.€) in net operating income from effective corporate income tax rate in Angola, from 13.4% banking. Of special note was the 21.8% increase (+15.5 in 2005 to 19.0% in 2006. M.€) in net interest income, despite this having been penalised by the steep decline in interest rates on the The decrease in the relative importance of interest earned portfolio of short-term securities issued by the Angolan on Angolan public-debt securities – Treasury Bonds and central bank and by the Angolan state. Treasury Bills – (tax exempt), contributed to the aforementioned increase in 2006. Meanwhile, this was On the other hand, administrative overheads, depreciation attenuated by the exceptional recovery of 7.1 M.€ of and amortisation were 54.6% higher (+16.4 M.€), as a taxes paid on interest derived from these securities in consequence of the execution of the programme directed at 2003 and 2004. It is worth noting that the effective tax the major expansion of the operational structure in Angola. rate benefited both in 2005 and in 2006 from BFA’s In 2006, this entailed expanding the distribution network decision not to distribute dividends relating to the profits by around 76% and boosting the workforce by 63%. generated in those years.

The indicator “administrative overheads, depreciation and Also noteworthy was the increase (from 2.4 M.€ in 2005 amortisation as a percentage of net operating income to 4.6 M.€) in equity-accounted earnings. These from banking” was situated at 32.5% in 2006. It should correspond to the appropriation of net profit attributable be pointed out that income has still not benefited to the 30% equity holding in BCI Fomento in significantly from the distribution network’s enlargement, Mozambique. bearing in mind that the opening of the majority of new branches took place in the second half of 2006.

In addition, the income statement records an increase of 7.5 M.€ (+71.7%) in loan impairment charges to 18.0 M.€. This increase mainly reflects the 5.0 M.€ rise in collective loan impairments1, which are directly indexed to the expansion of the loan and guarantees portfolio. For their part, specific loan impairments, earmarked to cover non-performing loans, were up 2.5 M.€.

1) BFA constitutes collective impairment charges (general provisions) for loans and guarantees equivalent to 4% of loans advanced in the year.

Report | Financial review 125 International operations

REVENUE Net interest income Net interest income relating to international operations Operating income from banking Net interest income grew by 21.8%, climbing from 71.1 M.€ in 2005 to M.€ M.€ 86.5 M.€ in 2006. This was the result of the marked 142.7 expansion in business with Customers, as evidenced by 86.5 the 64% growth (+189.9 M.€) in the average balances 123.2 on Customer loans and the 63% growth (471.7 M.€ 71.1 more) in deposits.

Remunerated assets and liabilities posted growth of 57%, 74.4 39.3 which generated a positive volume effect on net interest 58.1 37.1 income of 29.3 M.€. This fact permitted compensating 48.8 30.5 for the effect of the contraction in the unit intermediation margin G, which fell from 7.4% in 2005 to 6.5%. This decline can be ascribed almost exclusively to the steep decline in the average remuneration rate on the securities 02 03 04 05 06 02 03 04 05 06 held for dealing, from 31.9% in 2005 to 10.9% in 2006. Chart 75 Chart 76

Average balance sheet and factors influencing the trend in net interest income from BFA Amounts in M.€ 2005 2006 Change in net interest income Average Average Interest AverageAverage Interest Volume effect and Rate Structure Total balance interest (income / balance interest (income / residual effect effect effect rate costs) rate costs) Volume Residual Total effect effect Interest-earning assets Placements with credit institutions 430.7 2.3% 9.7 621.3 3.6% 22.2 4.3 2.5 6.8 5.7 12.5 Loans to Customers 297.7 9.8% 29.2 487.6 9.3% 45.1 18.7 (1.1) 17.6 (1.7) 15.9 Financial assets held for dealing 159.8 31.9% 51.0 251.7 10.9% 27.4 29.3 (19.3) 10.0 (33.6) (23.6) Financial assets available for sale 34.8 8.0% 2.8 88.5 8.3% 7.4 4.3 0.1 4.5 0.1 4.6 Correction for the structure effect1 ------(3.8) 0.9 (2.8) - 2.8 Interest-earning assets 922.9 10.0% 92.7 1 449.1 7.0% 102.0 52.9 (16.8) 36.0 (29.5) 2.8 9.3 Interest-bearing liabilities Customer deposits2 751.6 0.7% 5.2 1 223.3 0.9% 11.1 3.3 1.0 4.3 1.6 5.9 Securities sold with repurchase agreements2 57.8 28.2% 16.3 49.2 8.8% 4.4 (2.4) 1.7 (0.8) (11.2) (12.0) Other 3.3 3.5% 0.1 - - 0.1 -- - - Correction for the structure effect1 ------11.4 (8.2) 3.2 - (3.2) Interest-bearing liabilities 812.7 2.7% 21.7 1 272.5 1.2% 15.5 12.3 (5.5) 6.8 (9.6) (3.2) (6.1) Average spread between interest-earning assets and interest-bearing liabilities 7.4% 5.8% Net interest income 71.1 86.5 40.6 (11.3) 29.3 (19.9) 6.1 15.5 1) Reconciliation line for the sum of the volume, price and residual effects of the components of remunerated assets and liabilities relative to the value Table 70 of these effects calculated for the aggregate of remunerated assets and liabilities, by virtue of the fact that the last-mentioned are also influenced by the change in the structure of placements and resources, the effect of which is not evidenced by the sum of the effects of their components. 2) Recorded in the caption RESOURCES OF CUSTOMERS AND OTHER LOANS.

126 Banco BPI | Annual Report 2006 International operations

Customer deposits increased 63% in terms of average conditions practised by BFA in operations involving the balances, representing around 90% of the expansion in sale of securities with repurchase agreements, realised interest-earning assets. Given that part of these resources with Customers. In turn, this fact resulted in the decrease are not remunerated, (the average remuneration rate was in the interest cost associated with these resources. Thus, situated at 0.9% in 2006), this increase implied the the price effect on net interest income, relating to the maintenance of the funding costs relating to the dealing portfolio and to securities repurchase expansion of assets at significantly low figures. operations G, was negative in the amount of 22.4 M.€. This was only partially compensated by the positive The growth of 63.8% in Customer loans (in terms of volume effect of 10.0 M.€ for the year as a whole, average balances), the remuneration rates of which were provoked by the increase in the dealing portfolio’s only marginally lower (9.3% in 2006 versus 9.8% in average balance. 2005), generated an increase of 15.9 M.€ in interest income. This constituted the principal positive effect on It is worth noting that the Angolan Treasury’s lower net interest income. financing requirements created a scenario conducive to a significant reduction in the amounts issued, as occurred On the other hand, the high level of balance sheet in the first and second quarters, and insofar as Treasury liquidity explains the 44% increase in placements with Bills were concerned, the temporary suspension of issues. credit institutions, primarily expressed in dollars, which With effect from the third quarter, the Angolan monetary had a positive impact on the interest margin of 12.5 M.€. authorities re-oriented short-term securities issues to longer-dated maturities (predominantly 182 days and The expressive decline noted in the average remuneration 364 days, when previously they were concentrated in the rates on dealing securities (Central Bank Securities and 28 to 91 day periods), at the same time considerably Treasury Bills) from 31.9% in 2005 to 10.9% in 2006 altering the amounts issued and with remuneration rates had a negative impact on the margin. This decline in close to 1 and 3 percentage points above the USD Libor, remuneration rates naturally had repercussions for the depending on the maturities.

Net interest income quarterly evolution Amounts in M.€ 1st Q. 2nd Q. 3rd Q. 4th Q. 2005 1st Q. 2nd Q. 3rd Q. 4th Q. 2006 2005 2005 2005 2005 2006 2006 2006 2006 Income Interest on Customer loans 5.8 6.5 7.8 9.2 29.2 9.9 10.2 11.2 13.8 45.1 Interest on securities 11.0 11.5 12.6 18.7 53.8 16.5 6.6 5.2 6.4 34.7 Interest on placements with credit institutions 1.8 2.2 2.6 3.1 9.7 4.2 5.1 6.7 6.2 22.2 Interest income from interest-earning assets 18.5 20.2 23.0 31.0 92.7 30.6 21.9 23.2 26.4 102.0 Costs Interest cost on interest-bearing liabilities 3.8 4.1 6.3 7.5 21.7 4.2 3.0 3.7 4.6 15.5 Net interest income 14.7 16.0 16.8 23.6 71.1 26.4 18.9 19.5 21.8 86.5 Table 71

Report | Financial review 127 International operations

Commissions Gains and losses from financial operations Commissions and other similar income totalled 32.8 M.€, Profits from business dealings with Customers were up which corresponds to a 26.7% increase relative to 2005. 54.2%, climbing from 18.5 M.€ to 28.5 M.€ in 2006.

The behaviour of commissions is influenced by the large In addition, profits from financial operations include the number of overseas operations – processing of payment result of the currency revaluation of BFA’s accounts of orders received and issued, and the issue of overseas 8.6 M.€ in 2005 and a negative figure of 5.3 M.€ in cheques. The value of overseas operations was 7.2 2006. Accordingly the profit earned from financial thousand million American dollars, 12% more than in operations retreated by 3.9 M.€ to 23.2 M.€ in 2006. 2005 (6.4 thousand million dollars). In relation to BFA’s consolidation, it should be mentioned Commissions and other similar income (net) Amounts in M.€ that by virtue of Angola’s economy no longer being 2005 2006 Δ% considered as hyperinflationary, the currency differences Guarantees and documentary credits 2.1 3.0 39% resulting from the conversion of BFA’s accounts into euro Banking services 20.2 25.9 28% began to be recorded directly in SHAREHOLDERS’ EQUITY AS Reimbursement of expenses 3.6 5.4 51% FROM 30 JUNE 2006. The amount included in profits from Other 0.0 (1.5) - financial operations thus refers to the Kwanza’s behaviour Commissions and other similar vis-à-vis the Euro which occurred in the first six months income (net) 25.9 32.8 27% of the year. Table 72

128 Banco BPI | Annual Report 2006 International operations

ADMINISTRATIVE OVERHEADS, DEPRECIATION AND AMORTISATION Administrative overheads, depreciation and amortisation Administrative overheads, depreciation and amortisation increased 54.6% to 46.4 M.€. The hefty investment in Five year trend As % of operating income from banking Banco Fomento Angola’s operational structure and the M.€ % considerable increase in business with Customers were 60 the main factors behind this trend.

Personnel costs rose by 44.1% to 20.1 M.€ in 2006. 46.4 45 This growth reflects the 46.5% increase in the average 37.0 36.6 number of personnel. Costs associated with outside 30.4 32.5 supplies and services were up 84.7%, while depreciation 30.0 30 and amortisation were 12.7% higher. 24.4 21.2 22.6 18.1 The indicator “administrative overheads, depreciation and 15 amortisation as a percentage of net operating income from banking” was situated at 32.5% in financial year

2006. 0 02 03 04 05 06 02 03 0405 06

Administrative overheads, depreciation Chart 77 Chart 78 and amortisation Amounts in M.€ 2005 2006 Δ% Personnel costs 13.9 20.1 44.1% Outside supplies and services 11.4 21.0 84.7% Administrative overheads 25.3 41.1 62.3% Depreciation and amortisation 4.7 5.3 12.7% Total 30.0 46.4 54.6% Efficiency ratio1 24.4% 32.5% - 1) Administrative overheads, depreciation and amortisation as a percentage Table 73 of operating income from banking.

Report | Financial review 129 International operations

IMPAIRMENTS AND PROVISIONS In international operations, provisions and impairments Coverage of loans in arrears1 booked in the year totalled 18.6 M.€ in 2006, which by impairments corresponds to an increase of 5.9 M.€. % 800 759

Loan impairment charges increased by 7.5 M.€ at the € end of 2006 to 18.0 M. . This is mainly explained by 553 600 the increase in collective loan impairments1 (from 7.9 € € M. in 2005 to 13.0 M. in 2006), which are directly 435 Total loan impairments2 as a % indexed to the expansion in the portfolio of loans and 415 of loans in arrears1 400 guarantees. As a percentage of the average balance on Specific impairments for loans in arrears2 as a % of loans in the loan portfolio, loan impairment charges in the year 245 arrears1 rose from 3.46% in 2005 to 3.56% in 2006. 200 1) Loans in arrears for more than 90 days. Specific loan impairments, earmarked to cover the 100 2) Accumulated loan impairments collection risk of loans granted which are in arrears, 80 78 80 72 80 in the balance sheet. 0 amounted to 5.0 M.€ in 2006, that is, 2.5 M.€ more 02 03 04 0605 Chart 79 than the amounts set aside in 2005. In 2006, these represented 1.00% of the average balance of the loan portfolio (0.84% in 2005). RESULTS OF EQUITY-ACCOUNTED SUBSIDIARIES Equity-accounted earnings, which correspond to the From another perspective, the loan loss noted in 2006 appropriation of the net profit attributable to the 30% and resulting from the increase in loans in arrears for holding in BCI Fomento in Mozambique, increased from more than 90 days, adjusted for write-offs G, was 4.7 M.€. 2.4 M.€ in 2005 to 4.6 M.€ in 2006. This improvement This figure corresponds to 0.94% of the loan portfolio’s is explained by the increase observed in commercial average balance (4.0 M.€ in 2005, that is, 1.31% of the activity. 2005 average loan portfolio). At the end of 2006, the ratio of loans in arrears for more than 90 days was 1.4%. BCI Fomento’s Customer loans portfolio posted growth of This indicator benefits from the fact that the loan portfolio 19.0%, standing at 224.0 M.€ at the close of 2006. is relatively current as a result of the large expansion Deposits expanded by 9.5% to 342.8 M.€. The ratio of registered in recent years. Total loans in arrears for more loans in arrears stood at 2.2% in December 2006 than 90 days was 415% covered by impairment charges. (situated at 3.6% in December 2005).

At the end of 2006, BCI Fomento served 84 thousand Customers. There were 637 Employees on its payroll, 16% more than in 2005, while the distribution network was composed of 38 branches (three more than at the end of the preceding year) and 67 ATM.

1) BFA constitutes collective loan impairments up to 4% of loans granted in the year.

130 Banco BPI | Annual Report 2006 International operations

INTERNATIONAL OPERATIONS BALANCE SHEET Net total assets were 32.3% higher advancing to 1 726.9 expansion in Customer resources and loans. M.€, at the end of December 2006, owing to the strong

International operations balance sheet Amounts in M.€ 2005 2006 Δ% Assets Cash and deposits at central banks 148.9 148.5 (0.3%) Amounts owed by credit institutions repayable on demand 12.9 18.9 46.3% Loans and advances to credit institutions 327.1 461.7 41.2% Loans and advances to Customers 419.0 623.8 48.9% Financial assets held for dealing 279.1 297.0 6.4% Financial assets available for sale 71.4 107.4 50.5% Hedging derivatives - - - Investments in associated companies and jointly controlled entities 12.0 11.8 (1.2%) Other tangible assets 34.0 56.0 64.5% Intangible assets 0.5 0.3 (31.7%) Tax assets 0.0 0.0 9.7% Other assets 0.7 1.5 114.0% Total assets 1 305.6 1 726.9 32.3% Liabilities and shareholders' equity Resources of central banks - - - Financial liabilities held for dealing - - - Resources of other credit institutions - 12.6 - Resources of Customers and other loans 1 096.5 1 455.7 32.8% Debt securities - - - Technical provisions - - - Financial liabilities associated to transferred assets - - - Hedging derivatives - - - Provisions 4.7 8.3 78.2% Tax liabilities 14.5 19.3 33.7% Participating bonds - - - Subordinated debt - - - Other liabilities 41.5 26.1 (37.1%) Share capital, share premium account, reserves and other capital instruments 77.0 137.6 78.8% Treasury stock - - - Net profit 71.5 67.2 (6.0%) Minority interests - - - Total liabilities and shareholders' equity 1 305.6 1 726.9 32.3% Note: Bank guarantees 70.3 122.0 73.5% Table 74

Report | Financial review 131 International operations

Customer resources – deposits and sales of securities other hand, investments with greater liquidity – cash, with repurchase agreement G – grew 34.7% (+371.4 liquid assets and loans to central banks and credit M.€) and loans to Customers were up 48.9% (+204.9 institutions, as well as the portfolio of assets held for M.€). Despite loans to Customers presenting growth rates dealing – represent a significant part of assets (53.6% of which outpaced those for Customer resources, the net total assets at the close of 2006). transformation rate of Customer resources into loans remains at significantly low levels. At the end of 2006, Shareholders’ equity employed in international operations that ratio was situated at 45.6% (41.2% in 2005). amounted to 204.8 M.€ at the end of 2006, which corresponded to 11.9% of total assets. 94.4% of the The balance sheet relating to international operations is capital was allocated to activity in Angola, that is 193.3 characterised by the high degree of liquidity. Customer M.€. The remaining 11.5 M.€ was allocated to activity resources constitute the principal component of liabilities in Mozambique, through the 30% holding in BCI and guarantee the funding of 83.4% of assets. On the Fomento, which is recognised using the equity method.

Balance sheet structure in 2006

Assets (net) Liabilities and shareholders’ equity 3.8% Other liabilities

Liquid assets and loans to credit institutions 36.4%

Financial assets 23.4% 84.3% Customer resources

Loans to Customers 36.1% Investments, fixed assets and other 11.9% Shareholders' equity 4.0% 2006 2006

Chart 80

132 Banco BPI | Annual Report 2006 International operations

LOANS AND RESOURCES Customer loans Resources taken Customer loans expanded by 48.9% to total 623.8 M.€ Customer resources grew by 34.7% to 1 440.4 M.€ at at the end of 2006. This growth was fuelled by the the close of 2006. Expressed in dollars2, Customer expansion in loans to companies. The loan book’s growth resources registered growth of 50% in 2006. expressed in dollars1 was 65% in 2006. The growth of 36.4% in deposits to 1 368.6 M.€ at the The loan portfolio presented a relatively diversified end of 2006 was responsible for virtually the whole of structure: 32% were loans to individuals and 68% loans the expansion in Customer resources. Roughly 66% of granted to companies. With respect to the portfolio of the deposits corresponded to sight deposits, while 34% loans to companies, the most important sectors were referred to time deposits. In 2006, the average interest commerce (34% of loans to companies), the construction rate on deposits was 0.9%. sector (14% of loans to companies) and the transportation and communications sector (19% of loans to companies). Customer resources Amounts in M.€ The extractive industries sector represented only about 7% 2005 2006 Δ% of the corporate loans portfolio, whereas in the economy Sight deposits 689.9 901.5 30.7% the oil and diamond exploration industry accounted for Time deposits 313.5 467.1 49.0% more than 50% of GDP. Securities sold with repurchase agreements 65.6 71.9 9.5% Total 1 069.0 1 440.4 34.7% Table 76 Customer loan portfolio Amounts in M.€ 2005 2006 Δ% PORTFOLIO OF SECURITIES Companies 199.1 440.2 121.1% The portfolio of assets held for dealing totalled 297.0 Individuals 231.4 207.1 (10.5%) M.€ at the end of 2006, a figure that corresponds to an Loans in arrears (net of impairments) increase of 6.4% in relation to the year before. It is and other1 (11.6) (23.5) - composed of short-term securities with maturities of up Total 419.0 623.8 48.9% to one year, expressed in kwanza and issued by the 1) Interests and other. Table 75 Central Bank (TBC – Central Bank Securities) and by the State (BT – Treasury Bills). The portfolio’s residual Customer loans Customer resources maturity in December 2006 was 2.8 months. M.€ M.€ This securities portfolio’s performance was affected by 1 440 624 the decrease in the amounts issued to the market during the first half of 2006. This trend underwent a change during the course of the third quarter, with the 1 069 419 resumption of issues.

The portfolio of available-for-sale assets totalled 107.4 627 M.€. It is composed of treasury bonds, expressed in 211 479 489 kwanza, indexed to the American dollar and with

125 131 maturities of up to seven years. This portfolio’s average remuneration in 2006 was 8.3%.

02 03 04 05 06 02 03 04 05 06 The income from treasury bills and treasury bonds is exempt from taxation. Chart 81 Chart 82

1) At the end of 2006, dollar-denominated loans represented around 90% of the loan portfolio. 2) At the end of 2006, deposits expressed in dollar represented around 75% of total deposits.

Report | Financial review 133 CAPITAL MANAGEMENT

Shareholders’ equity At the end of 2006, shareholders’ equity totalled ᭿ Having a negative impact: on the one side, the 1 727.3 M.€. Shareholders’ equity attributable to distribution of 89.6 M.€ by way of dividends relating to shareholders was 1 450.6 M.€ while minority interests, 2005 and the currency variation of 8.7 M.€ relating to which correspond almost entirely to the preference shares the revaluation of BFA’s shareholders’ equity and net issued by BPI Capital Finance, stood at 276.7 M.€. profit with effect from June 2006. From that date onwards, the Angolan economy ceased to be regarded The shareholders’ equity attributable to shareholders as a hyperinflationary economy for consolidation increased by 22.8% in 2006 (+269.2 M.€). This purposes. situation is the result of the conjugation of the following main factors. The Board of Directors will submit for the Shareholders General Meeting’s approval the distribution of a dividend ᭿ Having a positive impact: net profit for the year (308.8 of 16 euro cents per share in respect of 2006. The M.€ attributable to the shareholders) and the increase of proposed dividend per share implies the distribution of 69.1 M.€ in the value of the revaluation reserve, which net profit of 121.6 M.€, corresponding to 39.4% of the chiefly reflects the increase in unrealised gains on consolidated net profit for the year. available-for-sale shares recorded in the fair value reserve.

Shareholders' equity and minority interests Amounts in M.€ Shareholders' equity Minority interests Total Shareholders' equity and minority interests at 31 Dec. 2005 1 181.4 306.3 1 487.7 2005 dividend payment (89.6) - (89.6) 2006 profit attributable to shareholders and minority interests 308.8 13.3 322.0 Decrease (increase) in treasury stocks (net of capital gains) (8.7) - (8.7) Revaluation reserve (net of deferred taxes) 69.1 - 69.1 Preference shares (issuance, net of shares reacquired) - (30.0) (30.0) Preference shares' dividend payments - (12.8) (12.8) Exchange difference on investments in foreign currencies (8.7) - (8.7) Other (1.6) - (1.6) Shareholders' equity and minority interests at 31 Dec. 2006 1 450.6 276.7 1 727.3 Table 77

Shareholders' equity and minority interests evolution in 2006

M.€ 69.1 (30.0) 322 (12.8) (19.1) 1 727.3 1 487.7 (89.6)

31 Dec. 2005 2006 dividends Consolidated Revaluation Issuance of Dividends of Other 31 Dec. 2006 payment profit in reserves net of preference preference 20061 deferred taxes shares2 shares

1) Consolidated net profit attributable to shareholders and income attributable to minority interests. Chart 83 2) Net of shares reacquired.

134 Banco BPI | Annual Report 2006 Consolidated

Own funds At the end of 2006, total own funds stood at 2 011.2 ᭿ The increase of 58.3 M.€ in the value of preference M.€, which corresponds to a decrease of 3.7% (-76.9 shares in Tier I, by virtue of the growth in basis own M.€) relative to December 2005. funds having permitted the accommodation of all the preference shares in basis own funds. In 2005, basis Basis own funds rose by 251.5 M.€ (+19.1%) to own funds included only a part, while the remaining 1 568.2 M.€. For their part, complementary own funds 78.9 M.€ was included in complementary own funds. (net of deductions) decreased by 328.4 M.€ (-42.6%) to be situated at 443.0 M.€ at the end of the year. On the other side, the most noteworthy negative impact on the behaviour of basis own funds was due to the Retained earnings in the year of 187.2 M.€ constituted increase in the differential between the amount of the principal factor that contributed to the positive trend provisions calculated according the Bank of Portugal’s in basis own funds. This figure corresponded to a rise of rules (Notices 3 / 1995 and 8 / 2003)2, and the amount 0.9 percentage points in the Tier I ratio. of impairment charges recorded in the consolidated balance sheet, which rose from 42.9 M.€ in December Basis own funds also registered the positive impacts of 2005 to 82.1 M.€ in December 2006. the following. For purposes of calculating own funds, the level of ᭿ The decrease over the year of the pension funds’ provisions (specific and general) that would result from actuarial and income variances, which permitted the application of the provisioning regime prescribed by eliminating in full the amount of 64.1 M.€ recognised the Bank of Portugal is taken into consideration when outside the corridor1 in December 2005, and which, for these are more than the impairment charges recorded in purposes of calculating own funds, is deducted from the consolidated accounts. In this situation, basis own basis own funds. At the end of 2006, basis own funds funds are reduced by the positive difference between the were reduced by 0.4 M.€ relating to the increase in amount of provisions (specific and general), calculated liabilities arising from changes to the plans’ conditions according to the Bank of Portugal’s rules, and the loan which had not yet been recognised as a cost. impairment charges recorded in the consolidated accounts in conformity with IAS / IFRS.

However, the part of this differential that corresponds to general provisions3, that is, surplus general provisions vis-à-vis estimated losses on loans, is treated as a positive element of complementary own funds.

1) For purposes of computing own funds, variances in the fund’s income vis-à-vis the actuarial assumptions and the increase in pension obligations as a result of the change in the assumptions which are not accommodated in the envisaged corridor, are written off immediately and in full from basis own funds. In terms of accounting treatment, these amounts are recognised gradually as costs in the income statement over a period to the average retirement age. 2) Defines the minimum specific cover for loans in arrears and doubtful debts which takes into consideration the age of the default situations, the type of loans and the nature of the collateral. In addition, it requires the setting aside of provisions for general credit risks, defined in accordance with the global amount of the loans and guarantees portfolio and not allocated to any specific identified risk. The Bank of Portugal’s specific provisioning regime continues to be applied in the individual financial statements, whilst in the consolidated financial statements the impairment concept is used, in conformity with IAS / IFRS. 3) The amount of general provisions included in Tier II cannot exceed the lesser of 1.25% of the risk-weighted assets and the differential between 50% of the amount of basis own funds and the amount resulting from the sum of subordinated liabilities and participation securities.

Report | Financial review 135 Consolidated

As regards the behaviour of complementary own funds It should be mentioned that the phased recognition of (net of deductions), it is worth highlighting the negative the impact of the transition to IAS / IFRS originated in impact of 165 M.€ that resulted from the coming into 2006 a positive overall impact of 4.9 M.€ on total own force in December 2006 of Bank of Portugal Notice funds: a reduction of 7.0 M.€ in basis own funds and an no.12 / 06. In compliance with that notice, the amount increase of 11.9 M.€ in complementary own funds of participating interests which are more than 20% in (including deductions). insurance and reinsurance companies and in holding companies in the insurance sector must now be deducted At 31 December de 2006, a negative amount of 154.2 from Tier II. Previously, the amount of these holdings was M.€ had still to be recognised in own funds, resulting included in total in risk-weighted assets. from the impact of transition to IAS / IFRS. This figure was made up of a negative impact on basis own funds of The following also had a negative impact: 166.1 M.€, corresponding to 0.8% of risk-weighted assets, and a positive impact on Tier II (complementary ᭿ the inclusion in Tier I of the total of the preference own funds net of deductions), of 11.9 M.€, shares, as referred to earlier (in December 2005, Tier II corresponding to 0.1% of risk-weighted assets. The included preference shares totalling 78.9 M.€); recognition of the impacts will observe the transitional periods laid down by the Bank of Portugal. ᭿ the 56.7 M.€ decrease in the amount of general provisions included in Tier II.

DEDUCTION FROM OWN FUNDS OF INVESTMENTS IN INSURANCE SECTOR COMPANIES Bank of Portugal Notice no. 12 / 06 came into effect on At 31 December 2006, the balance sheet value of the 26 December 2006. Through this accord, participating aforesaid participating interests was 271.8 M.€, at the interests of more than 20% in insurance and reinsurance same time as Banco BPI held in its portfolio 11.2 M.€ of undertakings, as well as in insurance holding companies, BPI Vida subordinated debt G. For purposes of own funds, must now be deducted from total own funds. Also included the insurers’ solvency margin surplus at the same date is are debt instruments issued by those entities if held in the also recorded. Hence, the total deduction from the BPI investor company’s portfolio. Group’s own funds is 165 M.€.

It will be recalled that prior to this regulatory alteration, Conversely, weighted assets decrease by 283.1 M.€. In participating interests in insurers were included in total, this alteration had an impact of 0.6 percentage weighted assets at the respective balance sheet value. points on the BPI Group’s solvency ratio. The impact on Tier II was a negative 0.7 percentage points, while there At the BPI Group, the participating interests in BPI Vida was no significant impact on Tier I. (100%), Allianz Portugal (35%), Cosec (50%) and BPI Pensões (100%) are covered by the above change.

136 Banco BPI | Annual Report 2006 Consolidated

Own funds Calculated according to Bank of Portugal rules Amounts in M.€ 2005 2006 Basis own funds Share capital, share premium account, reserves (excluding fair value reserve) and retained earnings1 1 053.8 1 229.9 Contributions to the pension funds still not disclosed as a cost (66.8) (0.4) Preference shares 248.2 306.4 Other minority interests 0.0 0.1 Intangible fixed assets (5.9) (8.8) Treasury stock (42.9) (42.9) Insufficiency of provisions (42.9) (82.1) Deferred adjustments resulting from the transition to IAS / IFRS 173.1 166.1 Basis own funds 1 316.7 1 568.2 Complementary own funds Revaluation reserves 7.4 6.8 Perpetual subordinated debtG 54.0 47.8 Preference shares 78.9 0.0 Fair value revaluation reserves 40.9 76.3 Non-perpetual subordinated debt and participating bonds 519.6 485.6 General loan provisions2 138.8 82.1 Deferred adjustments resulting from the transition to IAS / IFRS (fair value revaluation reserves) (13.8) (6.9) Complementary own funds 825.7 691.7 Deductions Deduction of participating interests (31.4) (229.9) Other deductions (12.9) (13.8) Deferred adjustments resulting from the transition to IAS / IFRS (10.0) (5.0) Deductions (54.3) (248.7) Total own funds 2 088.1 2 011.2 1) Net profit after proposed earnings distribution. Table 78 2) General loan provisions, calculated according to Bank of Portugal provisioning rules, are a positive component of own funds until the limit of 1.25% of risk weighted assets.

Report | Financial review 137 Consolidated

Own funds requirements Total own funds requirements increased by 252.6 M.€ by 168% (+1 263.3 M.€), which corresponded to an (+17.4%) relative to 2005, reflecting the loan portfolio’s increase of 101.1 M.€ in own funds requirements. expansion and the larger investment in foreign corporate bonds. It must be noted that the participating interests in BPI Vida and BPI Pensões are recognised using the equity BPI carried out its second mortgage-loan securitisation method solely for purposes of calculating the capital operation in 2006 in the amount of 1 500 M.€, which at ratios, as was the case under the previous Chart of the end of 2006 represented an overall decrease of 50.5 Accounts for the Banking System, notwithstanding the M.€ in own funds requirements (equivalent to a decrease of fact that in the consolidated accounts and in conformity 631.3 M.€ in risk-weighted assets). As regards the amount with IAS / IFRS, these investments are consolidated in of own funds at the end of 2006, the aforementioned full (purchase method). With the coming into force of reduction in requirements represents a positive impact of Notice no. 12 / 06, the amount of these participating 0.3 percentage points on the capital ratio. interests began to be written off from own funds in December 20061. Accordingly, the trend in these The loan portfolio’s expansion, excluding the impact of participating interests’ assets, namely BPI Vida’s portfolio the abovementioned securitisation operation, originated of assets held for dealing which is associated with the growth of 14.8% (+2 068.4 M.€) in risk weighted hedging of capitalisation insurance, is not reflected in assets, which corresponds to an increase of 165.5 M.€ risk-weighted assets. in own funds requirements. The capital required to hedge the risks associated with the For its part, the securities and investments portfolio, as dealing portfolio and the positions in foreign currency, far as the risk-weighted amount is concerned, increased represents only 1.9% of total own funds requirements.

Own funds requirements Calculated according to Bank of Portugal rules Amounts in M.€ 2005 2006 Assets Weighted Risk-weighted Assets Weighted Risk-weighted (balance sheet average assets (balance sheet average assets net value) coefficient net value) coefficient Liquid assets 956.4 7.0% 67.4 930.3 7.9% 73.9 Loans to credit institutions 687.4 21.3% 146.5 850.1 23.6% 201.0 Loans to Customers 19 068.0 73.3% 13 977.3 21 182.1 72.8% 15 414.4 Bonds, equities portfolio and investments 1 383.5 54.2% 750.0 2 621.7 76.8% 2 013.3 Tangible fixed assets 275.1 100.0% 275.1 289.2 100.0% 289.2 Sundry assets 276.4 68.2% 188.6 377.8 57.8% 218.3 Assets 22 646.7 68.0% 15 404.8 26 251.2 69.4% 18 210.0 Off-balance sheet items 2 248.2 2 277.6 (-) Provisions for general credit risks1 (56.4) (25.0) Risk weighted assets 17 596.6 20 462.6 Credit risks (weighted assets x 8%) 1 407.7 1 637.0 Securitisation operations 17.8 34.3 Market risks 25.2 32.1 Total own funds requirements 1 450.8 1 703.4 Total requirements x 12.5 18 134.5 21 292.0 1) Amount not included in own funds. Table 79

1) Stipulates that the value of participating interests amounting to more than 20% in insurance and reinsurance undertakings, as well as in insurance holding companies, must be deducted from Tier II.

138 Banco BPI | Annual Report 2006 Consolidated

Ratio of own funds requirements At 31 December 2006, the ratio of own funds Consolidated own funds requirements based on the Bank of Portugal’s rules was requirements ratio According to Bank of Portugal rules situated at 9.4% and the Tier I ratio at 7.4%. The core % capital (basis own funds less preference shares) 11.5 corresponded to 5.9% of risk-weighted assets. 10.2 9.9 9.8 9.4 The entry into force in December 2006 of Bank of 4.3 2.9 Portugal Notice No. 12 / 06 – which prescribes the 3.2 3.3 2.1 deduction from complementary own funds of participating interests amounting to more than 20% in insurance and 1.4 1.4 1.4 1.4 1.4 reinsurance undertakings, as well as in insurance holding companies – had a negative impact of 0.6 percentage points on the capital ratio. The Tier II impact was a 5.9 5.9 5.9 5.3 5.1 negative 0.7 p.p., with no significant impact on core Tier I Tier II or on Tier I. Preference shares Core capital Tier I

At 31 December 2006, the negative impact of the 02 03 0405 06 Chart 84 transition to IAS / IFRS that still had to be recognised corresponded to 0.7% of risk-weighted assets. This impact will be recognised up to and including 2011.

Own funds requirements ratio Calculated according to Bank of Portugal rules Amounts in M.€ 2005 2006 Basis own funds 1 316.7 1 568.2 of which: Core capital 1 068.5 1 261.7 of which: Preference shares 248.2 306.4 Complementary own funds, deductions and supplementary own funds 771.4 443.0 Total own funds 2 088.1 2 011.2 Total own funds requirements 1 450.8 1 703.4 Risk weighted assets1 18 134.5 21 292.0 Total ratio2 11.5% 9.4% Tier I2 7.3% 7.4% Core Tier I (excluding preference shares) 5.9% 5.9% Preference shares as % of Tier I 18.8% 19.5% 1) Own funds requirements x 12.5. Table 80 2) Calculated according to the Bank of Portugal Instruction 16 / 2004.

Report | Financial review 139 Consolidated

TRANSITION TO IAS / IFRS – IMPACT ON SHAREHOLDERS’ EQUITY AND OWN FUNDS

The application of IAS / IFRS had a negative impact on There was a negative impact of 143.8 M.€ on own funds. shareholders’ equity of 256.2 M.€ at 1 January 2005. The This figure is being recognised gradually in own funds for balances of the principal differences in relation to the purposes of calculating the own funds requirements ratio Chart of Accounts for the Banking System were disclosed over a period of three to seven years, in accordance with in retained earnings. the requirements laid down by the Bank of Portugal for accommodating the impacts on own funds of the transition to IAS / IFRS.

Impact of the transition to IAS / IFRS Amounts in M.€ Impact on Impact on own funds Recognition shareholders' equity period for the and minority Basis own Complementary Total impact on own interests at funds (Tier I) own funds funds 31 Dec. 04 (Tier II) Changes resulting from the adoption of IAS / IFRS Pension liabilities (514.0) (332.1) - (332.1) - Recognition of liabilities with medical care benefits on retirement (SAMS) and change in the mortality table (160.8) (160.8) - (160.8) 7 years Increase in liabilities resulting from the recognition of death subsidy and change in the discount rate (130.4) (130.4) - (130.4) 5 years Directors pension liabilities (1.1) (1.1) - (1.1) 5 years Disability decreasesG (83.0) (83.0) - (83.0) 5 years Corridor and other 43.2 43.2 - 43.2 5 years Increase in pension liabilities (due to early retirements and other) not yet recognised as a cost1 (181.9) - - - - Impairments in the portfolio of financial assets available for sale (42.5) (42.5) - (42.5) 3 years Antiquity bonus to Employees (18.6) (18.6) - (18.6) 3 years Accrual accounting of commissions and fees (18.7) (18.7) - (18.7) 3 years Tangible assets available for sale (2.0) (2.0) - (2.0) 3 years Deferred taxes 207.7 207.7 - 207.7 3 years Fair value reserve (net of taxes) 36.2 (0.3) 20.6 20.4 3 years Variable remuneration in shares and options (RVA Programme)2 12.1 12.1 - 12.1 3 years Associated companies 8.4 8.4 - 8.4 3 years Hedging accounting 6.5 6.5 - 6.5 3 years GoodwillG recorded on SIC and InterRisco shareholdings 126.9 - - - - Intangible fixed assets (13.7) - - - - Preference shares in BPI Vida's portfolios and preference shares dividends (24.6) - - - - Treasury stock2 (23.2) - - - - Loan impairments 3.2 - - - - Other (0.0) - - - - Adding back the amount of unrealised capital losses in shareholdings according to Bank of Portugal Notice 4 / 2002 - - 15.1 15.1 3 years Total (256.2) (179.5) 35.7 (143.8)

1) According to the previous rules of the Chart of Accounts for the Banking System, at 31 December 2004, 182 M.€ corresponding to the additional Table 81 pension obligations (for early retirements concluded and other) were being recognised in the income statement (and consequently in the shareholders’ equity) over a maximum period of ten years. For purposes of calculating regulatory own funds, this amount was already deducted from basis own funds. With the transition to IAS / IFRS, this amount was fully recognised in retained earnings but had no impact on own funds. 2) The caption VARIABLE REMUNERATION IN SHARES (Portuguese initials – RVA) includes gains in the year and the hedging of the RVA share options programme.

140 Banco BPI | Annual Report 2006 Consolidated

Impact on shareholders’ equity The transition to IAS / IFRS, including the application of ᭿ the recognition in the fair value reserve of unrealised IAS 32, IAS 39 and IFRS 4, had a negative impact on gains of 36.2 M.€ (net of losses) on the available-for-sale shareholders’ equity of 256.2 M.€ as at 1 January 2005. portfolio;

The negative impact relating to pension obligations was ᭿ the add-back to shareholders’ equity of goodwill of 126.9 514.0 M.€: that relating to Employees’ pensions was M.€ relating to the consolidation of SIC. Under PCSB, 512.9 M.€, and that relating to Directors’ pensions was this amount had been written off in full against 1.1 M.€. shareholders’ equity at the time of consolidating for the first time (in June 2004) this participating interest. The negative impact of 292.3 M.€ corresponded to the increase in liabilities resulting from the recognition of Impact on own funds medical-assistance benefits, the recognition of the death The transition to IAS / IFRS (including the application of subsidy on retirement, the alteration to the female IAS 32, IAS 39 and IFRS 4) generated a negative impact mortality table and the change to the discount rates, as of 143.8 M.€ on own funds. well as to the salary and pension growth rates. However, the utilisation of the corridor’s 43.2 M.€ to accommodate The impact associated with pension obligations was the additional liabilities, meant that the combined impact negative in the amount of 332.1 M.€. Of the impact on on shareholders’ equity was negative in the amount of shareholders’ equity of 514.0 M.€, 181.9 M.€. had 249.1 M.€. already been written off basis own funds for purposes of calculating regulatory own funds under the Bank of Moreover, the pension obligations that still had to be Portugal’s previous rules. They corresponded to the recognised as cost and which are indicated below were increase in pension obligations (early retirements recognised in full in the balance sheet by way of a direct concluded and others) still not recognised as a cost. charge to shareholders’ equity. The recognition of unrealised gains (net of deferred taxes) on ᭿ The additional pension obligations due to the non the portfolio of assets available for sale (recorded in the fair utilisation of the infirmity decreases G, in the amount of value reserve) for purposes of calculating own funds was only 83.0 M.€. These liabilities resulted from the coming into considered to the extent of 45% of their amount1. Hence, effect, at the end of 2001, of a new regulatory framework the positive impact on own funds was 20.4 M.€. This figure (Bank of Portugal Notice no. 12 / 2001). They were being is included in complementary own funds (Tier II). recognised in the financial statements and being funded over a maximum period of 20 years. Other impacts on shareholders’ equity with no repercussions on own funds were: ᭿ The additional pension obligations for early retirements, in the amount of 181.9 M.€. This figure was being ᭿ the add-back to shareholders’ equity of the goodwill recognised as a cost in the income statement over a relating to the consolidation of SIC. For purposes of maximum period of ten years. determining own funds, this amount was only added to own funds with the sale of the aforementioned holding, The recognition of impairment charges of 42.5 M.€ which was concluded in the first quarter of 2005; relating to the portfolio of available-for-sale assets also had a negative impact on shareholders’ equity. ᭿ a negative impact on shareholders’ equity of 36.9 M.€. This figure corresponds to the value of own shares The main positive impacts on shareholders’ equity resulted (treasury stock) which under IAS / IFRS must now be from: deducted from shareholders’ equity, instead of being shown as an asset, as was the treatment under the PCSB, ᭿ the recognition of deferred taxes in the amount of 207.7 and to the reclassification as a cost for the year of M.€, of which 151.6 M.€ refers to adjustments amounts recorded under the PCSB as being intangible associated with pension obligations; assets. Under the Bank of Portugal’s previous rules, these amounts were already being written off basis own funds for purposes of calculating regulatory own funds;

1) In calculating own funds according to the Bank of Portugal’s rules, the unrealised gains on the portfolio of available-for-sale assets, net of deferred taxes, which are recognised under the fair value reserve, are included in complementary own funds to the extent of 45% of their amount. Unrealised losses, net of deferred taxes, are also deducted from basis own funds.

Report | Financial review 141 Consolidated

᭿ the deduction from shareholders’ equity (from the Recognition period for impacts on own funds minority shareholders’ component) of 24.6 M.€ in For purposes of determining own funds, the Bank of preference shares (and dividends) issued by BPI Capital Portugal defined a transition period for the recognition of Finance and held by BPI Vida. This adjustment, arising the accounting impacts stemming from the transition to the from the elimination of intra-group balances, results from international accounting standards. Impacts relating to the alteration to the method of BPI Vida’s consolidation, retirement pensions are recognised, in the case of the from the application of the equity method under the SAMS medical-care benefits and the change to the PCSB to full consolidation under IAS / IFRS. However mortality table, over seven years, and the rest relating to and solely for purposes of calculating own funds and own pensions over five years, while the other impacts on own funds requirements, this investment continues to be funds will be recognised over three years. restated using the equity method, with the result that this adjustment is not reflected in own funds. The application of the periods defined for recognition of the various impacts will mean the earlier recognition of positive On the other hand, an addition of 15.1 M.€ to own funds impacts (in 3 years), given that roughly 80% of the negative was recorded with no impact on shareholders’ equity. This impacts are associated with pension obligations, where the figure corresponds to the unrealised losses on participating recognition period is longer (5 and 7 years). In aggregate interests which, according to the previous regime for the terms, this results in the recognition in the first three years treatment of unrealised losses on participating interests of a positive annual impact of 5.5 M.€, while in the prescribed by the Bank of Portugal (Notice 4 / 2002)1, following years the impact is negative to the extent of 57.2 were written off complementary own funds. Under IAS / M.€ in 2008 and 2009 and 23.0 M.€ in 2010 and 2011. IFRS unrealised losses on assets available for sale are reflected in full in shareholders’ equity and in basis own funds via the fair value reserve or by way of the recognition of impairments.

Recognition of the impact of the transition to IAS / IFRS on own funds2 Amounts in M.€ 2005 2006 2007 2008 2009 2010 2011 Total Impact on Tier I Pension obligations (57.2) (57.2) (57.2) (57.2) (57.2) (23.0) (23.0) (332.1) Recognition of liabilities with medical care benefits on retirement (SAMS) and change in the mortality table (23.0) (23.0) (23.0) (23.0) (23.0) (23.0) (23.0) (160.8) Other (34.3) (34.3) (34.3) (34.3) (34.3) - - (171.4) Impairments in the portfolio of financial assets available for sale (14.2) (14.2) (14.2) ----(42.5) Deferred taxes 69.2 69.2 69.2 ----207.7 Other (4.2) (4.2) (4.2) ----(12.6) Impact on Tier I (6.4) (6.4) (6.4) (57.2) (57.2) (23.0) (23.0) (179.5) Impact on Tier II Fair value reserve (net of taxes) 6.9 6.9 6.9 ----20.6 Other 5.0 5.0 5.0 ----15.1 Impact on Tier II 11.9 11.9 11.9 ----35.7 Total 5.5 5.5 5.5 (57.2) (57.2) (23.0) (23.0) (143.8) Table 82

1) According to Bank of Portugal Notice 4 / 2002, of the amount of unrealised losses which exceeded 15% of the acquisition price, a minimum of 40% was covered by provisions and therefore reflected in shareholders’ equity, while the balance was subtracted from own funds for purposes of calculating own funds requirements. 2) Annual amortisation with reference to 1 January 2005 of the impact on own funds resulting from the transition to IAS / IFRS.

142 Banco BPI | Annual Report 2006 Risk management

At the BPI Group, risk management is founded on the default”), estimating the exposure in each operation, the ongoing identification and analysis of the exposure to the correlations, the statistical provisions for impairment and different risks (counterparty risk, country risk G, market the selection of portfolios for securitisation. The Risk risks, liquidity risk, operating and legal risks); and on the Analysis and Control Division is also responsible for the execution of strategies aimed at maximising the results analysis of global risks (market, credit, country, liquidity vis-à-vis risks, within predefined and duly supervised and operating risks). limits. Risk management is complemented by the analysis à posteriori of performance indicators. In the specific sphere of credit risks, the Credit Risk Division is responsible for ensuring an independent vision ORGANISATION of the risk of the various proponents or guarantors – The Bank has a centralised and independent unit Small Businesses and Individuals – and of the dedicated to risk analysis and control, adopting the best characteristics of the operations in the relevant segments. organisation practices in this domain and the It also undertakes the management of debt-recovery requirements of the new Basle Accord. proceedings in the case of default. For the specific segments, such as home loans, international operations, The Risk Analysis and Control Division is responsible for institutional clients, project finance or derivatives, there the management of the risk data mart for the whole are risk-analysis areas which carry out similar functions in Group, the production of rating and scoring G models, the parallel with the Credit Risk Division and the Individuals calculation of default probabilities, of losses (“loss given Credit Risk Division.

Selected indicators 2005 2006

Consolidated Domestic International Consolidated activity activity Loans in arrears for more than 90 days, as percentage of total loan portfolio 1.3% 1.0% 1.4% 1.1% Loan impairments (accumulated in the balance sheet), as percentage of total loan portfolio 1.6% 1.2% 5.7% 1.4% Loans in arrears for more than 90 days and doubtful loans1, as percentage of total loan portfolio2 1.3% 1.1% Loans in arrears for more than 90 days and doubtful loans, net of specific loan provisions, as percentage of total net loan portfolio2 0.5% 0.4% Increase in loans in arrears (for more than 90 days), adjusted by write-offs as percentage of the performing loan portfolio 0.63% 0.05% 0.94% 0.07% Increase in loans in arrears (for more than 90 days), adjusted by write-offs and deducted of recoveries of loans and interests written-off, as percentage of the performing loan portfolio 0.54% (0.04%) 0.94% (0.02%) Loan impairments in the year as percentage of the performing loan portfolio 0.33% 0.18% 3.57% 0.25% Loan impairments in the year deducted of recoveries of loans and interests written-off, as percentage of the performing loan portfolio 0.24% 0.08% 3.57% 0.16% Country-risk exposure, net of provisions (M.€) 2 802.0 2 421.0 As percentage of total assets (net) 9.3% 6.8% Market risk (VaR) Maximum (M.€) 1.3 3.3 Monthly average (M.€) 4.4 7.7 Loans as percentage of total Customer resources 85.4% 91.0% 45.6% 88.7% Loans as percentage of stable resources3 79.7% 73.3% 1) Doubtful loans treated as being in arrears for purposes of provisioning. Table 83 2) Calculated according to the Bank of Portugal Instruction 16 / 2004. 3) Stable resources in accordance with the definition laid down in Bank of Portugal Instruction 1 / 2000: Customer deposits, participating securities, provisions for loans (specific and general), loans (certificated or not) with a residual maturity term of more than one year, minority shareholders’ interests and shareholders’ equity, after deducting the profits to be distributed by way of dividends.

Report | Risk management 143 CREDIT RISK Management process Credit risk associated with the possibility of actual On the commercial front, the operations or default by a counterparty (or with the change in the globally-evaluated Customers must conform to the desired economic value of a given instrument or portfolio levels of return on the capital employed. stemming from a deterioration in the risk quality of a counterparty) constitutes the primary risk factor inherent For each one of the different divisions involved, the in the BPI Group’s business spectrum. relevant hierarchical levels for the approval of credit according to their risk or commercial characteristics have Exposure to this risk is evaluated using different been defined with the object of decentralising decisions complementary methods (expert system, ratings, scorings, and, therefore, ensuring processing speed and efficacy. replacement values and add-ons for derivatives, others). Notwithstanding the use of certain scorings, ratings or Subsequently, the Bank maintains constant vigilance over “loss given default” models, BPI will under regulatory the evolution of its exposure to the different requirements adopt with effect from the second half of counterparties, the evolution of its portfolio 2007 and in the coming years the standard method for (diversification by geographical area, sector, segment, measuring credit risks contemplated in the Basle II Accord. counterparty and maturity), and the profitability results and indices achieved vis-à-vis the risks assumed. After an evaluation of exposure, specific approval for credit operations follows the principles and procedures Moreover, problematic credit situations, provisioning laid down in the Credit Regulations. The approval or cover indices, write-offs and recoveries are analysed every rejection of operations is founded on: month. The alert signalling non-performing loans is available on-line via the internal network for the ᭿ Rejection filters based on the existence of incidents and information of the Bank’s managers. defaults. An estimate is also made of the provisions for impairment ᭿ Explicit or implicit evaluation of: losses, involving both a statistical calculation for performing loans with incidents or in default, and an ᭿ probability of default by the counterparties (or their evaluation of the same impairment by expert systems for guarantors); all the larger loans. The impairment losses and provisions are the object of a monthly assessment by the Board of ᭿ the expected loss from the operations (taking into Directors’ Executive Committee (Executive Committee for consideration any real guarantees, margins, periodic Credit Risks), and are reviewed every six months by the payment / repayment schemes, legal priority clauses external auditors. These reports are also reviewed ISDA – International Swaps and Derivatives regularly by the Audit Committee. Association and CSA-Credit Support Annex guarantees in derivatives); Functioning as agents controlling this entire management process, in addition to the Board of Directors, the Audit ᭿ in addition, the unexpected loss may be calculated Committee and the Executive Committee for Credit Risks, (capital at risk / regulatory). are the Risk Analysis and Control Division, the Internal and External Auditors and the Bank of Portugal. ᭿ Assessment of the ability to service the debt and setting of the corresponding limits.

144 Banco BPI | Annual Report 2006 Evaluation of credit risk exposure Companies, institutionals and specialised finance The default probability of the “Companies” portfolio from Loans to companies, institutional and project finance a one-year perspective weighted by the amount of clients are evaluated by specialist analysts. liabilities stood at 4.11% at 31 December 2006.

BPI uses an internal rating system for companies with 14 This analysis is complemented by a review of the classes (E1 to E14), plus three classes in the case of information concerning the expected or potential loss in incidents / default (ED1 to ED3). Each classification has the case of default. It is these analyses which serve as associated with it default probabilities for the evaluation the bases for ascertaining the need for security in the of credit, guarantees and the securities of medium and form of real / collateral guarantees. large-sized companies. The classification is determined by a rating committee (larger exposures) or by the Credit These systems for evaluating counterparty risk are Risk Division, based on a quantitative model and on complemented by others, in particular, by identifying the economic-financial information, as well as on indicators concentration of exposure to a counterparty or group that take into account the quality of management, the (“large exposures”), and by the calculation of the capital commercial and risk relationship in the sectors in which at risk, in accordance with the assessment enshrined in the company operates. regulations governing solvency ratios or a variation thereof. At global level, the portfolio is also evaluated Internal rating of companies according to its geographical or sectorial diversification Breakdown of exposure by risk classes in 2006 and to maturities or currencies. Risk classes % One-year default portfolio amount probability E1 6.68% 0.03% E2 11.21% 1.12% E3 16.20% 1.66% E4 19.54% 1.80% E5 9.37% 2.34% E6 1.39% 3.52% E7 2.80% 4.16% E8 10.80% 5.30% E9 8.96% 6.16% E10 0.69% 7.32% E11 1.15% 9.25% E12 1.45% 9.97% E13 0.70% 12.83% E14 0.43% 15.78% Without rating 4.05% 4.5% ED1 0.66% 57.66% ED2 0.86% 81.96% ED3 (default) 3% 100% Note: the portfolio includes bonds and commercial paper of the Table 84 “Companies” segment. The calculation of the portfolio’s average default probabilities naturally excludes the ED3 class (in default for more than 90 days or in legal-recovery process) and does not take into account any bank guarantees.

Report | Risk management 145 Individuals and small businesses Securities portfolio In the individuals segment, there are different Customer Turning to the evaluation of risks stemming from its scorings and selection filters. In the case of loans backed securities portfolio, BPI resorts primarily to information by specific guarantees (housing, motor car), the probable obtained from external rating reports. The investment loss is low by virtue of the relationship between the portfolio is predominantly composed of the securities of amount financed and the relevant security. BPI low credit-risk issuers. prescribes a financing / mortgage ratio for home loans that has a maximum ceiling of 90% or 100% in the case Bonds and fixed-interest securities’ investment 1 there is a personal protection insurance or a protection of portfolio Breakdown of exposure by classes the recoverable amount. of risk (external rating) Amounts in M.€ Rating 2005 % 2006 % As concerns other loans to individuals, Customer selection Aaa 32.8 2.2% 18.3 0.5% is primarily based on the assessment of default Aa 518.5 35.3% 521.3 15.4% probabilities by recourse to scoring or expert systems, A 22.9 1.6% 224.8 6.7% while credit is advanced within predetermined limits. In Baa 55.1 3.8% 928.7 27.5% order to reduce the probability of default, credit-protection Ba 189.5 12.9% 482.8 14.3% insurance is required (with unemployment and Not rated (NR) 113.2 7.7% 123.2 3.6% hospitalisation cover) for Crédito Pessoal BPI (BPI Commercial paper with guarantees from Personal Loans). Overall Customer acceptance or rejection credit institutions 16.6 1.1% 57.3 1.7% indices are associated with the minimum desired Commercial paper without guarantees 520.5 35.4% 1 020.5 30.2% profitability levels taking into account the inherent risks. Total 1 469.1 100.0% 3 376.9 100.0% 1) Includes preference shares which are recorded in the equities portfolio. Table 86 Default probabilities of loans to individuals In 2006 Risk class Probability of enter in default in one year span, weighted by the loan book Bonds investment portfolio in 2006 Breakdown of exposure by classes of risk (external rating) Housing loans 1.77% Not rated Commercial paper Personal loans 1.44% 3.6% 31.9% Car finance 3.82% Ba Credit cards 4.52% 14.3% Note: the average default probability includes loans in arrears up to 90 days. Table 85

The implicit or explicit evaluation of the probability of default is complemented by the fixing of restrictions on Aaa, Aa the amount of borrowing in accordance with the Baa 16% 27.5% A calculation of the net disposable income of the 6.7% proponents and the guarantors. Chart 85 The analysis of exposure to counterparty risk in the small business segment is conducted by recourse to a non-empirical scoring and an expert system. Besides the analysis of any collateral, this procedure also involves the scrutiny of different indicators and the issue of a subjective opinion on the possibility of default by the counterparty or the entity providing the guarantee.

146 Banco BPI | Annual Report 2006 Derivative operations Default, provisioning and recovery levels Given the specific manner in which they are valued, At the end of 2006, Customer loans in arrears for more credit risk stemming from derivative operations is than 90 days amounted to 263.6 M.€, which accorded special treatment. This has as its base the corresponded to 1.1% of the gross loan portfolio. concept of the substitution value, which is estimated daily by the Risk Analysis and Control Division. In domestic operations, loans in arrears for more than 90 days totalled 254.5 M.€, which corresponded to a loans In order to mitigate derivatives credit risk, besides in arrears ratio of 1.0%, while in international operations, resorting to contracts containing clauses which permit the loans in arrears for more than 90 days amounted to 9.1 setting off of obligations in the event of default (even in M.€, giving a loans in arrears ratio of 1.4%. the case of insolvency), the Group has entered into credit-risk limitation agreements with its most important At 31 December 2006, impairment losses (accumulated) counterparties in these markets. These agreements, recognised in the consolidated balance sheet totalled which entail the receipt (and payment) of collateral 341.0 M.€, which corresponded to 1.4% of the gross amounts for hedging risks between counterparties, loan portfolio. permitted a reduction in the substitution value of the derivatives portfolio from 311 M.€ (gross amount) to The non-performing loan ratio calculated in accordance 96.8 M.€ (net amount) at the end of 2006. with the criteria prescribed in Bank of Portugal letter-circular no. 99 / 2003 was 1.1%. Besides loans in Current credit risk arrears for more than 90 days, the aforesaid ratio Substitution value of derivatives includes doubtful debts, which are treated as being in by type of counterparty Amounts in M.€ arrears for provisioning purposes. At 31 December 2006, 2005 % 2006 % doubtful loans totalled 3.3 M.€. Banks 68.3 75.5% 75.0 77.5% Unit trust and pension funds 3.4 3.8% 10.0 10.3% Ratio of loans in arrears Companies 17.9 19.8% 0.2 0.2% % Individuals 0.9 0.9% 0.2 0.2% 3.0 Stock exchange 0.0 0.0% 11.5 11.8% Total 90.5 100.0% 96.8 100.0% Note: the total substitution value is the sum of the substitution values Table 87 of the counterparties, when positive. It does not include options inserted into bonds issued or bought. The substitution value incorporates 2.0 the effect of the risk reduction that results from the set-off of credit and debit balances between the same counterparties and agreements with counterparties, 1.5 which serve as guarantee for compliance with obligations. 1.3 1.4 1.2 1.1 Loans in arrears for more than 1.3 1.3 1.0 1.2 30 days This form of evaluating exposure to counterparty risk is 1.1 1.1 Loans in arrears for more than supplemented by the traditional regulatory approach and 90 days anticipates, to a certain extent, the best practices Note: from 2002 until 2004 under embodied in the new Basle accord. PCSB. 0 02 03 0405 06 Chart 86

Report | Risk management 147 Loans to Customers in arrears, provisions and impairments Amounts in M.€ PCSB IAS / IFRS 2002 2003 2004 2005 2006 Customer loan portfolio at the end of the year (gross) 16 615.2 17 783.0 19 021.1 21 270.4 24 941.4 Loans in arrears Loans in arrears for more than 90 days1 216.3 212.0 202.4 278.0 263.6 Loans in arrears for more than 30 days1 254.0 239.2 220.8 295.7 277.6 Doubtful loans2 - 22.2 8.6 5.4 3.3 Loan impairments - - - 335.1 341.0 Total loan provisions 331.0 314.6 325.0 - - Ratio of loans in arrears and doubtful loans Loans in arrears for more than 90 days, as percentage of total loan portfolio 1.3% 1.2% 1.1% 1.3% 1.1% Loans in arrears for more than 90 days and doubtful loans2, as percentage of total loan portfolio3 - 1.3% 1.1% 1.3% 1.1% Loans in arrears for more than 30 days, as percentage of total loan portfolio 1.5% 1.3% 1.2% 1.4% 1.1% Loan impairments (accumulated in the balance sheet) Loan impairments, as percentage of total loan portfolio - - - 1.6% 1.4% Loan impairments, as percentage of loans in arrears for more than 90 days - - - 120.5% 129.3% Provisioning cover (according to Bank of Portugal Notice 3 / 1995) Loans in arrears for more than 90 days 153.0% 148.4% 160.6% - - Loans in arrears for more than 90 days and doubtful loans2 - 134.4% 154.0% - - Loans in arrears for more than 30 days 130.3% 131.5% 147.2% - - Note Write-offs 28.5 75.6 64.0 48.3 30.5 Recovery of loans and interests in arrears written-off 14.7 20.6 15.3 17.6 21.0 1) Includes interests in arrears. Table 88 2) Doubtful loans treated as being in arrears for purposes of provisioning. 3) Calculated according to the Bank of Portugal Instruction 16 / 2004.

The increase in Customer loans in arrears for more than Deducting the arrear loans and interest recoveries from 90 days (adjusted for write-offs) was 16.1 M.€, which the variation in loans in arrears (for more than 90 days) corresponded to 0.07% of the performing loan portfolio. in the year, adjusted for write-offs and excluding the This trend benefited in 2006 from the restructuring of default situation and the restructuring referred to above, loans granted in domestic activity in the amount of we arrive at a loan loss of 63.5 M.€ in 2005 (0.32% of 43.3 M.€ relating to a single default situation that the average loan portfolio) and of 38.4 M.€ in 2006 occurred in 2005. (0.17% of the average loan portfolio).

The variation in loans in arrear (for more than 90 days), In domestic operations, this indicator declined from adjusted for write-offs and excluding the impact of the 59.5 M.€ in 2005 (0.31% of the loan portfolio) to aforementioned default situation which was subsequently 33.7 M.€ in 2006 (0.15% of the loan portfolio). restructured, decreased from 81.1 M.€ in 2005 (0.41% of the average performing loan portfolio) to 59.4 M.€ in In international operations (Angola), the variation in loans in 2006 (0.27% of the average performing loan portfolio). arrears (for more than 90 days) in the year, adjusted for write-offs was 4.7 M.€ in 2006, which corresponded to In 2006, 21.0 M.€ in arrear loans and interest was 0.94% of the performing loan portfolio. This indicator recovered, which is 19.1% more than in 2005. benefits from the fact that the loan book is relatively recent due to the large expansion recorded in recent years.

148 Banco BPI | Annual Report 2006 The cost of credit risk in the year (measured by loan Cost of risk1 impairment losses recognised in the year and after As % of the average performing loan portfolio deducting recoveries of arrear loans previously written off % 0.8 from assets) amounted to 35.5 M.€, which corresponds to 0.16% of the performing loan portfolio. 0.6

In domestic operations, the risk cost represented 0.08% 0.40 of the loan portfolio, while in international operations, it 0.4 0.31 0.33 0.28 was situated at 3.57%, which primarily reflects general 0.24 0.25 0.24 loan impairments of 4% of loans and guarantees granted. 0.2 0.13 0.16 0.10

0.0 97 98 99 00 01 02 032 04 05 06

1) Loan provisions (PCSB until 2004) and loan impairments Chart 87 (in 2005 and 2006) recognised in the year and after deducting recoveries of loans and interests in arrears previously written off. 2) In 2003, 27.2 M.€ of generic provisions were reversed. It corresponded to the excess of provisions resulting from the application of the new Bank of Portugal provisioning rules. This amount represented 0.16% of the average loan portfolio.

Credit loss and cost of risk Amounts in M.€ Domestic activity International activity BPI Group (consolidated) 2005 2006 2005 2006 2005 2006 Performing loan portfolio (average balance) 19 456.1 21 735.8 302.8 503.7 19 758.9 22 239.5 Change in loans in arrears Increase in loans in arrears (for more than 90 days), adjusted by write-offs 120.4 11.4 4.0 4.7 124.4 16.1 as percentage of the performing loan portfolio (average balance) 0.62% 0.05% 1.31% 0.94% 0.63% 0.07% - Recovery of loans and interests in arrears written-off 17.6 21.0 - - 17.6 21.0 = Increase in loans in arrears (for more than 90 days), adjusted by write-offs and deducted of recoveries of loans and interests written-off 102.8 (9.6) 4.0 4.7 106.8 (4.9) as percentage of the performing loan portfolio (average balance) 0.53% (0.04%) 1.31% 0.94% 0.54% (0.02%) Cost of risk Loan impairments in the year (in the income statement) 54.2 38.5 10.5 18.0 64.7 56.5 as percentage of the performing loan portfolio (average balance) 0.28% 0.18% 3.46% 3.57% 0.33% 0.25% - Recovery of loans and interests in arrears written-off 17.6 21.0 - 17.6 21.0 = Cost of risk 36.6 17.5 10.5 18.0 47.1 35.5 as percentage of the performing loan portfolio (average balance) 0.19% 0.08% 3.46% 3.57% 0.24% 0.16% Table 89 At the end of 2006, accumulated impairment losses In international operations, accumulated specific reflected in the balance sheet for domestic operations impairment losses in the balance sheet for loans in (defined as the estimated loss on loans already arrears represented 1.1% of the gross loan portfolio at recognised in the financial statements) represented 1.2% the end of 2006 (0.9% in 2005), which corresponded to of the gross loan portfolio (1.5% in 2005). It should be 80% cover of loans in arrears for more than 90 days. noted that in the case of mortgage loans, the expected loss is very low – 0.6% of the loan portfolio – given the existence of the tangible security and the extremely low historical levels of actual losses.

Report | Risk management 149 In addition there were accumulated collective The following table presents the ratios for loans in arrears impairments in the balance sheet corresponding to 4.6% for more than 90 days and impairment losses (by market of the gross loan portfolio at the close of 2006 (4.5% in segments) carried in the balance sheet, as well as each 2005). Accordingly, at the end of 2006, total impairment segment’s contribution to the gross loan portfolio. adjustments in the balance sheet (specific and collective) meant that loans in arrears for more than 90 days were covered to the extent of 415%.

Loans in arrears and impairments accumulated in the balance sheet, by market segment 2005 2006 Loan portfolio Ratio of loans Loan impairments Loan portfolio Ratio of loans Loan impairments (gross) as % of in arrears for (accumulated in the (gross) as % of in arrears for (accumulated in the the consolidated more than balance sheet) as % of the consolidated more than balance sheet) as % of loan portfolio 90 days the gross loan portfolio loan portfolio 90 days the gross loan portfolio Domestic activity Corporate banking, Institutional banking and Project Finance 38% 1.2% 2.1% 42% 0.6% 1.5% Individuals and small businesses banking Mortgage loans 43% 1.2% 0.6% 40% 1.3% 0.6% Loans to individuals – other purposes 5% 2.4% 4.0% 4% 2.6% 3.5% Loans to small businesses 9% 1.5% 1.8% 9% 1.4% 1.7% Individuals and small businesses banking 57% 1.4% 1.1% 53% 1.4% 1.0% Other 3% 2.3% 1.8% 3% 1.9% 2.1% Domestic activity 98% 1.3% 1.5% 97% 1.0% 1.2% International activity 2% 1.2% 5.4% 3% 1.4% 5.7% Total 100% 1.3% 1.6% 100% 1.1% 1.4% Table 90 It should be noted that, at the time of the SME and home-loan debt securitisation operations launched in 2005 and 2006, studies of the history of the portfolio’s default frequency were conducted which confirmed a favourable evolution over time in its frequency.

150 Banco BPI | Annual Report 2006 COUNTRY RISK Country risk is very similar in terms of its respective Country risk exposure effects to counterparty risk and is associated with the At 31 December 2006 Amounts in M.€ Rating Gross Guaran- Exposure changes or specific turmoil of a political, economic or Country exposure1 tees net of financial nature in those places where the counterparties guarantees operate (or, more rarely, in a third country where the Angola N.R. 254.9 14.5 240.4 business transaction takes place), which impede full Dutch Antilles N.R. 5.8 5.8 compliance with the contract, irrespective of the Bermuda Islands N.R. 3.3 3.3 counterparties’ will or capacity. The “country-risk” Brazil BB 502.9 502.9 Kazakhstan BBB 56.1 56.1 designation is also used to classify the counterparty risk Bailiwick of Jersey N.R. 3.8 3.8 involved in loans to state entities, given the similarity Cayman Islands AAA 1 294.1 1 294.1 between the analysis methods for country risk and those Luxembourg AAA 145.7 145.7 for a state’s counterparty risk (sovereign risk). Mozambique B 18.4 4.9 13.4 Morocco BB+ 1.0 1.0 Individual evaluation of each country’s risk is performed Russia BBB+ 59.8 59.8 with recourse to external ratings, external studies (IIF, Turkey BB- 88.1 0.05 88.1 others) and reports prepared by the International Division. Ukraine BB- 1.9 1.9 The Board of Directors’ Executive Committee approves Venezuela BB- 1.9 1.9 the list of countries in respect of which country-risk Other countries 3.6 0.7 2.9 exposure is authorised. Eligible countries considered are Total 2 441.2 20.2 2 421.0 1) Gross exposure includes on-balance sheet and off-balance sheet Table 91 large-sized emerging markets which embrace market operations (converted to loan-equivalent figures). economy principles, are open to international trade and are of strategic importance within the framework of The country-risk table also includes exposure through the international politics. holding of international participating interests (Banco de Fomento Angola and the 30% interest in BCI Fomento in In addition, the operations defined as eligible are Mozambique). short-term financing for external trade, the loans of certain multilateral banks, certain medium-term Direct exposure to country risk through trading activity is operations with political risk hedging or which, due to described in the section dealing with market risks. their structuring, are not subject to transfer risk.

In 2006, this activity was concentrated on Brazil, Turkey and Russia.

Report | Risk management 151 MARKET RISKS Market or price risk (interest rates, foreign exchange Foreign exchange rate risk rates, equity prices, commodity prices, others) is defined Structural position at 31 December 2006 Amounts in M.€ as the possibility of incurring losses due to unexpected Sight Term Global variations in the price of instruments or operations. AZK1 193.3 193.3 USD (862.0) 852.2 (9.8) The assessment of treasury positions (short term) and GBP (147.7) 148.7 1.0 JPY (208.7) 201.5 (7.1) structural risk positions relating to interest or foreign Other (96.4) 109.7 13.3 exchange rates (long term) is based on gap schedules Position 1 190.8 (currency gaps, repricing gaps G, duration gaps). Position 2 224.5 Position 3 207.6 The Bank is structurally exposed to the risk of a fall in Position 1: algebraic sum of the positions in each currency. Table 93 interest rates, with an amount of capital at risk of 41.2 Position 2: sum in module. Position 3: highest absolute value between the sum of all the long positions vs. sum of all M.€ associated with the classical stress test of a 200 the short positions. b.p. fall in interest rates. 1) Correspond to the shareholders’ equity of BFA at 31 December 2006. This exposure is partially covered at the Angolan subsidiary via the provision for the maintenance of own funds. Interest rate risk Repricing gaps at 31 December 20061 Amounts in € Value at Risk (VaR) 1 Year 1 to 2 2 to 5 5 to 7 7 to 15 > 15 M.€ Years Years Years Years Years Accumulated gap 1 174 1 250 1 451 1 574 1 603 1 638 20.8 1) Non-remunerated sight deposits are graded in the following manner: Table 92 € 50 M. in the over-night market; the remainder were considered as 18.3 non-sensitive to interest rate. There are available alternative analysis with 17.8 other assumptions.

From the perspective of market risk, the management of positions of up to one year has been delegated to the Finance Division within limits fixed by the Executive 7.7 Committee for Market Risks. Long-term structural positions are managed in accordance with the norms laid 9.8 4.4 down by the Executive Committee for Market Risks. 6.1 Maximum VaR 4.1 3.3 Monthly average VaR 1.3 In the currency arena, the financial holdings are taken 02 03 04 05 06 Chart 88 into account in the structural position, including the currency position in kwanza associated with BFA’s shareholders’ equity. The positions in the remaining currencies are of minor significance.

152 Banco BPI | Annual Report 2006 In evaluating exposure under trading operations, this LIQUIDITY RISK function is carried out on a daily basis by the Risk Liquidity risk is monitored in terms of its two Analysis and Control Division, which calculates the VaR – components: i) in the tradability of the different assets; Value at Risk G – according to standardised assumptions, ii) in its overall context, whereby liquidity risk is defined which as a rule are consistent with the BIS’s set of at grassroots level as the (in)ability to monitor the asset’s recommendations. Exposure arising from options is growth and to satisfy treasury requirements without controlled by recourse to specific models. The incurring abnormal losses. information generated by the risk evaluation and control system is available online to authorised users. In terms of the different assets, the various managers keep a constant watch over the transaction levels of the Market risk in trading books1 Amounts in m.€ various instruments in accordance with a variety of 1st 2nd 3rd 4th 2006 indicators (BPI’s market share, number of days to unwind quarter quarter quarter quarter positions, size and volatility of spreads, etc.), although VaR (monthly average) 3 311 3 140 3 516 3 206 3 293 always observing the operating limits set for each market. Interest rate risk 1 448 1 624 1 873 1 588 1 633 Currency risk 1 722 1 055 1 726 1 060 1 391 The evaluation of overall exposure is carried out by the Equities risk 2 382 2 021 1 613 2 978 2 249 Risk Analysis and Control Division by means of tables Commodities 403 277 238 138 264 showing the expected evolution of liquidity (thus Spread 115 158 718 7 250 VaR (maximum) 6 331 5 780 5 758 7 662 7 662 permitting the timely identification of gaps and their 1) Maximum potential loss with a 99% confidence level resulting from Table 94 dynamic hedging, as well as by way of stress test tables an adverse movement in prices, indices and interest rates over a period (monitored by the Bank of Portugal). of two weeks, taking into consideration in the calculation of the overall risk the effect of the correlation of returns. A normal distribution of returns is assumed. Liquidity risk 1 Trading positions are managed autonomously by the Gaps at 31 December 2006 Amounts in M.€ traders and maintained within the exposure limits (by Up to 1 year 1 to 2 years 2 to 5 years > 5 years market or by product) which are fixed and periodically Gap (2 515) (1 161) (4 305) (1 092) revised. There are varying exposure limits, including Accumulated gap (2 515) (3 676) (7 981) (9 072) overall VaR limits laid down by the Executive Committee 1) The Gap includes all currencies. It does not include the activity of Table 95 the offshore financial branches. Growth over the next 12 months in loans for Market Risks. These are then distributed and balance sheet Customer’ resources was taken into account. autonomously amongst the various books by the divisions Equities and trading operations were deemed to be “without term”. involved in trading activity. In addition, stop-loss G limits are defined. The value of the 1-year gap (and beyond) is comfortable when weighed against the short-term positions on the As regards the structural position resulting from the interbank market at the end of the year (only 770 M.€); investments portfolio, the attendant market risk is not if we consider the possibility of BPI resorting to eligible easily measurable by recourse to traditional assets from the System of European Central Banks (440 methodologies such as VaR in view of the investment’s M.€ at year end); and securitisation operations. The gap holding period, the importance of the positions or the is also comfortable vis-à-vis the indicators for funding absence of a quoted price on the equities market. diversification by counterparties, maturities and financial markets. Towards the close of the year, BPI maintained some 16 active counterparties in the interbank money market out of a total of 74 potential parties with whom it maintains or maintained relations in the recent past (last 12 months). At the end of the year, the five biggest creditors represented 66% of the total, although the

Report | Risk management 153 composition thereof rotated during the course of the year. OPERATING RISKS From a country perspective, the main relative shares were Operating risks are defined as possible unexpected losses Germany (32%), Luxembourg (16%) and United Kingdom arising from human failure, shortcomings in internal (14%). control procedures, failures in the information systems or from external causes. The definition excludes strategic Responsibility for this risk category’s management strategy errors or reputation risks. is vested in the Executive Committee for Market Risks and the Group’s Finance Division. The slow evolution in In 2006, according to the basic method for analysing Customer deposits, which contrasted with the more rapid operating risks, the value / capital at operating risk at BPI expansion in medium and long-term loans (in particular, was situated slightly below 135 M.€. home loans), contributed to the continued adherence to a strategy of reinforcing long-term funding (attained 7.5 In the quest to adopt the best practices which already thousand M.€ at the end of 2006). The transformation form part of the regulatory project known as “Basle II”, rate for stable resources into loans was situated at around BPI has a system for gathering information concerning the 73.3% mark. operating risks from the various Divisions, identifying the frequency and severity of the losses which are classified Liquidity risk into 7 risk categories or factors (damages to physical Sundry indicators assets, failures in IT systems, failure in the management December 2006 and execution of processes, external fraud, internal fraud, Degree of transformation of deposits into loans 169.6% violation of professional duties and contravention of Degree of transformation of total Customer resources into loans 150.9% labour norms). The gathering of this information by the 1 Degree of transformation of stable resources into loans 73.3% various divisions is attainable by means of the proper 1) Stable resources as defined in Bank of Portugal Instruction 1 / 2000. Table 96 training of the designated operating risk pivots. Identification of this data will in the future enable the Risk Analysis and Control Division to test the most advanced measures for controlling exposure to this risk, in parallel with the application of the basic method.

This information will also help formulate the management strategy for operating risk. In this domain and under the Executive Committee’s supervision, the Organisation Division and, of course, all the Divisions where factors critical to operating risk have been identified, assume a crucial role.

154 Banco BPI | Annual Report 2006 LEGAL RISKS In this regard, management is primarily focused on the Legal risks are related to the unexpected losses training / quality of human resources and their proper associated with shortcomings in the legal situation organisation. This entails aspects such as the segregation applicable to contracts / positions to be established or of functions, definition of responsibility, procedures and any changes to this legal context. supervision. This supervision is also underpinned by the initiatives of the internal and external audit teams and Particular attention is paid in the sphere of legal risks to the centralised management of alerts. reviewing the legal situation and the identification of any regulatory discrepancy; to analysing the prospects of There is also in place a Business Continuity Plan altering the legal framework and respective anchored to the contingency programmes for the most consequences; to clarifying the nature of contractual crucial central information systems. In the case of relations and their interpretation by counterparties; necessity caused by equipment breakdown or by a major product analysis, their legal status, centralisation of incident, it is possible to recoup these systems on site or communications with supervisory entities and the drawing at an alternative location after a period of time that varies up of the respective processes with these entities; and to with the type of risk. Also guaranteed – even under the identification / proposal of the measures capable of extreme conditions – is minimum functioning under an minimising risks of litigation. exceptional situation. The same method is employed in the case of the telecommunications equipment. The voice and data services at the BPI Group’s main buildings are guaranteed through the recourse to alternative equipment, in accordance with formal disaster-recovery processes. The BPI Group has also identified alternative procedures for each one of its most critical operations. A data base is on stand-by which identifies all these procedures, thereby enabling these to be activated at any point in time. These disaster-recovery schemes are tested and subjected to periodic reviews.

Finally, the BPI Group annually reviews its insurance cover, adjusting cover to operating requirements and market conditions, with the object of obtaining an appropriate level of outside protection against operating risk.

Report | Risk management 155 Banco BPI shares

Stock market performance the PSI-20 (12.2%) and comparable Iberian banks BPI shares appreciated by 53.1% in 2006, closing the (10.2%), notwithstanding the BPI share’s pattern of last session of the year at a price of 5.91 euro. On 12 long-term out-performance. In fact, in the last five years March 2007 (date on which this report was closed), the (2001 to 2006), BPI shares have risen by 175%, in BPI share price was fixed at 6.70 euros, accumulating an marked contrast to the gains posted by the PSI-20 additional gain of 13.4%. (+43%) and the DJ Europe Stoxx Banks (+41%).

Since 13 March 2006, BPI’s stock market behaviour has Since 10 March, with the exception of one single been influenced by the fact that on that particular date a session, BPI shares have been systematically quoted takeover bid was launched for the Bank’s shares (at a above the takeover bid price (5.70 euro), and have price of 5.70 euro per share). appreciated by an additional 23.4% till the end of the year. They have outstripped the market behaviour Up till the close of the stock exchange session recorded by both the PSI 20 and the European (+15.7% immediately before the preliminary announcement of the and 8.8%, respectively), while posting gains in line with bid, (10 March: 4.79 euro), BPI shares had posted an those of comparable Iberian banks in the same period advance of 24.1%, outperforming other European banks (+23.9%). by an expressive margin (DJ Europe Stoxx Banks: 9.1%),

Banco BPI shares’ evolution

Share price; € 7.2 +24% BPI +40% 73.6% +10% Iberian Banks +30% 6.7 53.1% +12% PSI-20 2 +21% 3 until 12 Mar. 07 until 12 Mar. until 10 Mar. 06 until 10 Mar. +9% DJ Europe Stoxx Banks +8%

6.2 06 From 10 Mar. From 31 Dec. 05

5.7

5.2

4.7 1

4.2

3.7

Traded; x106 shares 210 M.€ 70

53

35

18

0 Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. 2006 2007 (31 December 2005 – 12 March 2007)

Banco BPI Chart 89 Comparable Iberian banks4 PSI-20 DJ Europe STOXX Banks

1) Before the announcement of the takeover bid launched by BCP: €4.79 (10 March 2006). 2) Maximum in 2006: €6.05 (4 July). 3) Closing price: €5.91 (end of 2006). 4) Comparable Iberian banks: Banesto, Bankinter, BES, Pastor, Popular and Sabadell.

156 Banco BPI | Annual Report 2006 Liquidity In 2006, Banco BPI shares originated a trading volume of 2 677 M.€. The daily average trading volume amounted BANCO BPI SHARES € to 10.5 M. , which represents growth of 181% relative to Banco BPI’s share capital comprises 760 million the volume of deals recorded in the preceding year. nominative and dematerialised (book entry) ordinary Capital rotation G stood at 54.8%. shares with a nominal value of one euro each. All the shares are entitled to the full dividend relating to On the date of the takeover bid announcement and the 2006 and following years. All the shares are listed on the Euronext market. four days that followed, BPI shares worth 667.6 M.€ were traded, which represents 25% of the total volume of Index weighting dealings in the year. ᭿ PSI-20: 7.758%; #5 ᭿ Euronext 100: 0.207% Market multiples ᭿ Dow Jones Europe STOXX Bank: 0.147% The P / E ratio (share price over the expected earnings Codes and tickers per BPI share for 2007) at 31 December 2006 was ᭿ ISIN and Euronext code: PTBPI0AM004 situated at 14.0x, that is, below the figure for the PSI-20 ᭿ Reuters: BPI.LS (15.9x) and the average for Iberian banks (14.6x), ᭿ Bloomberg: BPIN PL although slightly higher than that for the DJ Europe Stoxx Banks (12.0x).

BPI’s earnings per share in 2006 were 0.414 euro, which corresponds to an improvement of 23.4% relative to 2005. The book value per share was situated at 1.94 euro at the end of 2006.

Banco BPI shares’ evolution over the last five years

Share price; € 6.2 175%

5.5 +1% +34% +2% +30% +53% -26% +16% +13% +13% +30% 2003 2004 2005 2006 2002 4.8 -27% +22% +10% +21% +19% 4.1 2

3.5 43% 1 2.8 41% 2.1

1.4 2002 2003 2004 2005 2006

Banco BPI Chart 90 PSI-20 DJ Europe STOXX Banks

1) 2001 closing price: €2.15. 2) Before the announcement of the takeover bid launched by BCP: €4.79 (10 March 2006).

Report | Banco BPI shares 157 Banco BPI shares Principal indicators Amounts in M.€ 2002 2003 2004 2005 2006

Stock exchange price of Banco BPI shares (€) Highest price 2.63 2.95 3.32 3.93 6.05 Average price 2.34 2.45 3.07 3.34 5.43 Lowest price 1.74 1.96 2.73 2.98 3.83 Closing price 2.18 2.92 2.98 3.86 5.91 Data per share (euro) Cash flow after taxation 0.356 0.388 0.399 0.522 0.550 Net profit 0.193 0.218 0.256 0.335 0.414 Dividend 0.08 0.09 0.10 0.12 0.16 Book value 1.538 1.615 1.620 1.582 1.940 Weighted average no. of shares (in millions) 726.1 753.3 753.3 747.9 746.2 Market valuation Price as multiple of: Cash flow after taxation (PCF) 6.1 7.5 7.5 7.4 10.7 Net profit (P / E) 11.3 13.4 11.6 11.5 14.3 Book value (PBV) 1.4 1.8 1.8 2.4 3.0 Earnings yield 9.0% 10.0% 8.8% 11.3% 10.7% Stock market capitalisation (M.€) 1 656.8 2 219.2 2 264.8 2 933.6 4 491.6 Liquidity Annual trading volume (M.€) 602.0 602.1 625.3 954.0 2 677.0 Daily average trading volume (M.€) 2.4 2.4 2.4 3.7 10.5 Daily average trading quantity (x 1 000) 1 043.2 961.5 786.1 1 102.0 1 932.7 Share capital rotation 36.4% 32.3% 26.8% 37.6% 64.8% Dividends Net profit (M.€) 140.1 163.8 192.7 250.8 308.8 Distributed earnings (M.€) 60.8 68.4 76.0 91.2 121.6 Pay-out ratio G 43.4% 41.7% 39.4% 36.4% 39.4% Dividend per share (euro) 0.083 0.09 0.10 0.12 0.16 Dividend yield 3.9% 4.1% 3.4% 4.0% 4.1% Table 97

158 Banco BPI | Annual Report 2006 Treasury shares In 2006, Banco BPI traded both on and off the stock of shares and share options (Portuguese initials – RVA). exchange 19 306 923 own shares, which corresponded to For its part, Banco Português de Investimento, S.A., – 2.54% of the share capital. These transactions were the entity 100% held by Banco BPI – traded 1 440 257 earmarked for the execution of the variable-remuneration Banco BPI shares, that is, 0.19% of the latter’s share scheme for Employees and Directors, through the granting capital.

Treasury shares transactions in 2006 Purchase Sell Total traded Quantity Amount Unitary ave- Quantity Amount Unitary ave- Quantity As % of (number) (€) rage price (€) (number) (€) rage price (€) (number) share capital Banco BPI Stock exchange market 9 310 104 44 244 681 4.75 807 3 672 4.55 9 310 911 1.23% Over-the-counter market 17 392 72 810 4.19 9 978 620 52 178 566 5.23 9 996 012 1.32% 9 327 496 44 317 492 4.75 9 979 427 52 182 238 5.23 19 306 923 2.54% Banco Português de Investimento Stock exchange market 666 707 3 086 980 4.63 731 166 3 503 543 4.79 1 397 873 0.18% Over-the-counter market 42 384 243 986 5.76 0 0 42 384 0.01% 709 091 3 330 967 4.70 731 166 3 503 543 4.79 1 440 257 0.19% Total Stock exchange market 9 976 811 47 331 661 4.74 731 973 3 507 215 4.79 10 708 784 1.41% Over-the-counter market 59 776 316 797 5.30 9 978 620 52 178 566 5.23 10 038 396 1.32% 10 036 587 47 648 458 4.75 10 710 593 55 685 782 5.20 20 747 180 2.73% Table 98

At 31 December 2006, Banco BPI held 10 879 288 own The number of own shares referred to does not include shares1, that is, 1.43% of its capital. These shares were shares granted under condition subsequent, nor does it earmarked to cover the options granted to Employees include those not yet granted under the RVA scheme. under the variable component of remuneration packages Transfer of the ownership of the shares granted under the – the share incentive and options scheme – RVA – in RVA scheme is effected in full on the grant date, force at the Group since 2001. For its part, Banco although their free disposability is dependent on the Português de Investimento held at 31 December 2006, Employee’s continued employment at the BPI Group. For 73 865 Banco BPI shares1, or 0.01% of share capital, all accounting purposes, the shares remain in Banco BPI’s of which were held for hedging positions in PSI-20 portfolio of own shares up until the date they become futures G. freely disposable.

The other subsidiaries over which Banco BPI exercises Other information effective management control did not acquire or sell any At 31 December 2006, the Banco BPI Employees’ shares representing its share capital and, at the end of pension fund held 3 819 777 Banco BPI shares, December 2006, did not hold any Banco BPI shares in corresponding to 0.5% of the Bank’s capital. their portfolios.

1) The number of own shares registered at the securities clearing house (held by Banco BPI and by Banco Português de Investimento) at 31 December 2006 was 11 004 068. This figure differs from that presented because, for purposes of registration at the securities clearing house, what counts is the settlement date and not the transaction date.

Report | Banco BPI shares 159 AUTHORISATION FOR ACQUISITION AND SALE OF TREASURY SHARES Since the beginning of 2001, the BPI Group has Accordingly, the Board of Directors submits regularly to the implemented a variable-remuneration scheme (Portuguese General Meeting a request for authorisation to acquire own initials RVA) which consists of the granting annually of shares up to the legal limit of 10% of the capital. Banco BPI shares and options to buy Banco BPI shares as part of the variable-remuneration package. RVA RELATING TO 2006 Taking into account the fact that BPI is – at the moment The execution of the RVA scheme does not contemplate when in accordance with normal practice the execution of the issue of capital, with the result that for purposes of the the 2006 RVA would be taking place, – the object of a granting of shares, meeting the options plan and the takeover bid for all its shares, the conclusion date of which exercise of options, BPI constitutes portfolios of treasury is unknown, but which could occur way beyond the normal shares earmarked exclusively for this end. period for the granting of the RVA, BPI’s Board of Directors believes that it is preferable to refrain from executing the BPI can also carry out transactions in own shares for RVA relating to 2006. reasons other than the execution of the RVA programme.

160 Banco BPI | Annual Report 2006 Rating

The BPI Group’s strategy, competitive position, solid Banco BPI rating classifications financial base and capacity to generate earnings Fitch Moody's Standard continued to merit high credit ratings from independent Ratings & Poor's and reputable entities – Fitch Ratings, Moody’s and Long term A+ A2 A- Standard & Poor’s – an assessment that has materialised Short term F1 P-1 A-2 Outlook Stable Positive Positive in high rating classifications. Rating attribution: Initial date 31 Oct. 961 1 Nov. 962 27 Apr. 99 Notwithstanding the adverse economic backdrop, the Last report 25 Jul. 06 17 Jan. 07 26 Jan. 07 strong economic deceleration and the mounting credit 1) Rating notation attributed to all banks that composed BPI Group Table 99 risk in the Portuguese economy in recent years, the BPI at that date. G 2) Rating notation attributed to BFB. Group maintained its ratings notations, at the same Moody’s: time as Moody’s and Standard & Poor’s upgraded their A2 Bonds which are rated “A” possess very favourable attributes and are considered as superior-medium grade investments. outlook for future rating to positive. (the modifier 2 denotes a middle position in category A). Fitch Ratings: A+ High credit quality. A ratings denote a low expectation of credit risk. (the modifier + denotes a higher position within category A). Standard & Poor’s: A– An entity with an A rating possesses a strong capacity to meet its financial commitments. (the modifier – denotes a lower position in category A).

Fitch Ratings Moody's Standard & Poor's

Banco BPI Banco BPI Banco BPI Credit rating (LT / ST) A+ / F1 Bank deposits (LT / ST) A2 / P-1 Counterparty credit (LT / ST) A- / A-2 Outlook Stable Outlook Positive Outlook Positive Individual B Bank financial strength C+ Certificate of deposit (LT / ST) A- / A-2 Support 2 Issuer rating A2

Senior unsecured (LT) A+ Senior unsecured Senior unsecured (domestic currency) A- Senior unsecured (ST) F1 (domestic currency) A2 Short-term debt (domestic currency) A-2 Subordinated (LT) A Other short term Subordinated (domestic currency) BBB+ (domestic currency) P-1 Junior subordinated Subordinated MTN (domestic currency) BBB (domestic currency) A3

Preference stock (LT) A Preference stock Baa1 Preference stock BBB

Sovereign rating – Portuguese Republic Sovereign rating – Portuguese Republic Sovereign rating – Portuguese Republic Long term (foreign currency) AA Long term (foreign currency) Aa2 Long term / Short term AA- / A-1 + Long term (domestic currency) AA Long term (domestic currency) Aa2 Outlook Negative Outlook Stable Outlook Stable

Figure 8

Report | Rating 161 RATING REPORTS

Moody’s, 17 January 2007 Standard & Poor’s, 26 January 2007 “The positive outlook on the bank’s A2 long term and C+ “The ratings on Portugal-based Banco BPI S.A., which financial strength ratings reflect BPI’s resilience in the were placed on CreditWatch with positive implications on face of a difficult operating environment and success in March 14, 2006, are supported by the bank’s good maintaining its position within its increasingly competitive position in Portugal, skilled management, good and better domestic market.” than domestic peers’ asset quality track record, and sound and improving financial performance.” Fitch Ratings, 25 July 2006 “Banco BPI's ratings reflect management's track record in “Under the direction of a skilled management team, BPI delivering consistently good results, its sound asset quality, executed a successful growth strategy over the past generally conservative risk profile and strong franchise in decade, becoming one of the most flexible and innovative certain business areas.” institutions in the Portuguese financial system.”

“The Stable Outlook reflects Fitch's expectations that “Asset quality indicators have been sound throughout the Banco BPI's consistent profitability and satisfactory asset cycle, outperforming those of BPI’s closest competitors quality over the economic cycle will be maintained in the thanks to the bank’s well-diversified loan book, limited medium term.” exposure to riskier industries, and skilled credit risk management.”

162 Banco BPI | Annual Report 2006 Final acknowledgements

2006 was a particularly demanding year for BPI in Portugal and in Angola, as the present Report recounts. The activity carried out and the results achieved exceeded the objectives set and constitute a commendable display of our Employees’ dedicated commitment and the reiterated trust of our Customers. The support of the Shareholders was also a crucial factor and was visibly expressed at various decisive moments, amongst which at the General Meetings.

Following the alteration to BPI’s shareholder structure, the number of members of the Board of Directors was increased, at the same time as a new body was included – the Audit Committee, while the Audit Board ceased to exist. Accordingly, two new independent Directors were elected – Prof. Jorge Figueiredo Dias and Eng. Carlos Moreira da Silva. With the disappearance of the Audit Board, Mr José Ferreira Amorim ceased to form part of the Bank’s governing bodies. The great dedication and responsiveness with which he performed his functions as a member of the Audit Board over the past seven years merit our respect and our gratitude.

Last December while on his way to Lisbon to attend a meeting of the Board of Directors, Dr. Klaus Dührkop fell victim to a serious health accident from which he is recuperating well. We sincerely wish him a speedy recovery and express the hope that we can count on his enlightened contribution soon.

Finally, we must mention the cooperation received from the monetary, financial and supervision authorities within the scope of their respective duties.

Oporto, 12 March 2007

Board of Directors

Report | Final acknowledgements 163 Proposed appropriation of net profit

Banco BPI, S.A. made a consolidated net profit in 2006 of EUR 308 757 519 and an individual net profit of EUR 157 019 833.76.

The Board of Directors proposes that, in relation to the 2006 financial year, a dividend of EUR 0.16 (16 euro cents) be distributed for each one of the 760 000 000 shares representing the issued share capital at 31 December 2006.

The proposed dividend per share represents an 33.3% improvement on the 2005 dividend distribution and corresponds to 39.4% of consolidated net profit for the year.

In the individual accounts, Banco BPI must, in terms of article 97(1) of the General Regime for Credit Institutions and Financial Companies, transfer 10% of net profit to the legal reserve.

Accordingly, in the exercise of the powers conferred on it by article 16(2)(b) of the Statutes, the Board of Directors proposes the following appropriation of individual net profit for the financial year:

Transfer to the Legal Reserve (article 97 (1) of the GRCIFC) EUR 15 701 983.38 Dividends EUR 121 600 000.00 Transfer to Free Reserves EUR 19 717 850.38 Total EUR 157 019 833.76

Oporto, 12 March 2007

The Board of Directors

164 Banco BPI | Annual Report 2006 Consolidated financial statements CONSOLIDATED BALANCE SHEETS AS OF 31 DECEMBER, 2006 AND 2005

(Amounts expressed in thousands of euro)

31 Dec. 06 31 Dec. 05 NotesAmounts before Impairment and Net Net impairment and depreciation and depreciation and amortisation amortisation ASSETS Cash and deposits at central banks 5.1 559 940 559 940 617 983 Loans and advances to other credit institutions repayable on demand 5.2 369 483 369 483 338 483 Financial assets held for trading and at fair value through profit or loss 5.3 / 5.4 4 345 057 4 345 057 4 184 885 Financial assets available for sale 5.5 3 150 557 85 646 3 064 911 1 571 768 Loans and advances to credit institutions 5.6 906 760 13 906 747 918 995 Loans and advances to customers 5.7 24 941 380 311 294 24 630 086 20 963 247 Hedging derivatives 5.4 407 520 407 520 338 941 Other tangible assets 5.8 706 300 416 992 289 308 275 236 Intangible assets 5.9 71 023 62 220 8 803 5 855 Investments in associated companies and jointly controlled entities 5.10 141 768 141 768 132 770 Tax assets 5.11 133 366 133 366 214 002 Other assets 5.12 / 5.25 723 349 14 855 708 494 596 543 Total assets 36 456 503 891 020 35 565 483 30 158 708 LIABILITIES Resources of central banks 5.13 53 881 Financial liabilities held for trading 5.14 / 5.4 201 847 315 359 Resources of other credit institutions 5.15 3 960 247 2 523 443 Resources of customers and other debts 5.16 16 235 505 14 028 451 Debt securities 5.17 5 464 566 5 075 493 Financial liabilities relating to transferred assets 5.18 3 368 059 2 000 352 Hedging derivatives 5.4 480 806 388 055 Provisions 5.19 54 869 50 654 Technical provisions 5.20 2 811 111 2 925 635 Tax liabilities 5.21 85 721 69 642 Participating bonds 5.22 27 222 26 457 Subordinated debt 5.23 588 890 653 390 Other liabilities 5.24 / 5.25 559 337 560 230 Total liabilities 33 838 180 28 671 042 SHAREHOLDERS' EQUITY Subscribed share capital 5.26 760 000 760 000 Share premium account 5.27 231 306 231 306 Other equity instruments 5.28 8 714 12 341 Revaluation reserves 5.29 126 356 66 964 Other reserves and retained earnings 5.30 67 091 (97 088) (Treasury shares) 5.28 (51 659) (42 925) Consolidated net income of the BPI Group 5.45 308 758 250 816 Shareholders' equity attributable to the shareholders of BPI 1 450 566 1 181 414 Minority interest 5.31 276 737 306 252 Total shareholders' equity 1 727 303 1 487 666 Total liabilities and shareholders' equity 35 565 483 30 158 708

OFF BALANCE SHEET ITEMS Guarantees given and other contingent liabilities 5.32 3 321 665 3 138 808 Of which: [Guarantees and sureties] [3 113 883] [3 007 443] [Others] [207 782] [131 365] Commitments 5.32 4 297 180 4 001 700 The accompanying notes form an integral part of these balance sheets.

The Accountant The Board of Directors

166 Banco BPI | Annual Report 2006 CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED 31 DECEMBER, 2006 AND 2005

(Amounts expressed in thousands of euro)

Notes 31 Dec. 06 31 Dec. 05

Interest and similar income 1 693 353 1 508 897 Interest and similar expenses (1 152 643) (997 367) Financial margin (narrow sense) 5.33 540 710 511 530 Gross margin on unit links 5.34 7 516 3 166 Income from equity instruments 5.35 14 747 17 749 Net commission relating to amortised cost 5.36 18 373 13 941 Financial margin 581 346 546 386 Technical result of insurance contracts 5.37 3 265 11 919 Commissions received 285 112 246 708 Commissions paid (27 257) (19 230) Other income, net 44 008 44 005 Net commission income 5.38 301 863 271 483 Gain and loss on operations at fair value 65 275 52 566 Gain and loss on assets available for sale 44 332 28 374 Interest and financial gain and loss with pensions 5.25 14 216 (5 804) Net income on financial operations 5.39 123 823 75 136 Operating income 24 004 11 123 Operating expenses (12 251) (14 176) Other taxes (3 964) (3 054) Net operating (income) / expenses 5.40 7 789 (6 107) Operating income from banking activity 1 018 086 898 817 Personnel costs 5.41 (339 228) (303 017) General administrative costs 5.42 (198 094) (176 877) Depreciation and amortisation 5.8/5.9 (39 042) (39 446) Overhead costs (576 364) (519 340) Recovery of loans, interest and expenses 21 015 17 641 Impairment losses and provisions for loans and guarantees, net 5.19 (56 488) (64 717) Impairment losses and other provisions, net 5.19 (5 997) (35 571) Net income before income tax 400 252 296 830 Income tax 5.43 (100 273) (59 813) Earnings of associated companies (equity method) 5.44 22 069 24 660 Global consolidated net income 322 048 261 677 Income attributable to minority interest 5.31 (13 290) (10 861) Consolidated net income of the BPI Group 5.45 308 758 250 816

Earnings per share (in euro) Basic 0.414 0.335 Diluted 0.406 0.330 The accompanying notes form an integral part of these statements.

The Accountant The Board of Directors

Consolidated financial statements 167 STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED 31 DECEMBER, 2006 AND 2005

Share premium Other equity Revaluation Capital account instruments reserves Balances at 31 December, 2004 (PCSB) 760 000 231 306 Changes in accounting policies to IAS / IFRS (note 3) Liability for retirement pensions Deferred taxes Goodwill of SIC and InterRisco Other adjustments 10 212 9 434 Balances at 31 December, 2004 (Pro forma IAS/IFRS) 760 000 231 306 10 212 9 434 First aplication of IAS 32 and 39 (Note 3) Impairment losses on securities Revaluation of financial assets available for sale 38 729 Treasury shares Others 2 Balances at 1 January, 2005 (IAS / IFRS) 760 000 231 306 10 212 48 165 Dividends distributed in 2005 Appropriation of net income for 2004 to reserves Dividends paid on preference shares Variable Remuneration Program (RVA) 2 129 Purchase (sale) of treasury shares Issuance of preference shares Purchase (sale) of preference shares Foreign exchange differences Revaluation of financial assets available for sale 18 799 Revaluation of assets of associated companies Net income for 2005 Others Balances at 31 December, 2005 760 000 231 306 12 341 66 964 Dividends distributed in 2006 Appropriation of net income for 2005 to reserves Dividends paid on preference shares Variable Remuneration Program (RVA) (3 627) Purchase (sale) of treasury shares Purchase (sale) of preference shares Foreign exchange differences (9 689) Revaluation of financial assets available for sale 69 081 Revaluation of assets of associated companies Net income for 2006 Others Balances at 31 December, 2006 760 000 231 306 8 714 126 356

The Accountant

168 Banco BPI | Annual Report 2006 (Amounts expressed in thousands of euro) Other reserves and Treasury Net Minority Shareholders' retained earnings shares income interest equity 47 511 192 718 259 570 1 491 105

(472 503) (40 397) (512 900) 189 064 6 947 196 011 126 516 387 126 903 (39 732) (357) (24 590) (45 033) (149 144) 159 298 234 980 1 256 086

(33 447) (33 447) (2 488) 36 241 263 (25 916) (25 653) 1 676 1 678 (183 140) (25 916) 159 298 234 980 1 234 905 (74 986) (74 986) 84 312 (84 312) (10 390) (10 390) 1 329 (18 543) (15 085) 56 1 534 1 590 300 000 300 000 (228 743) (228 743) (1 011) (437) (1 448) 18 799 1 493 1 493 250 816 10 861 261 677 (127) (19) (146) (97 088) (42 925) 250 816 306 252 1 487 666 (89 609) (89 609) 161 207 (161 207) (12 782) (12 782) (151) (8 682) (12 460) 183 (81) 102 (30 023) (30 023) 979 (8 710) 69 081 1 882 1 882 308 758 13 290 322 048 79 29 108 67 091 (51 659) 308 758 276 737 1 727 303 The accompanying notes form an integral part of these statements.

The Board of Directors

Consolidated financial statements 169 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED 31 DECEMBER, 2006 AND 2005

31 Dec. 06 31 Dec. 05

Operating activities Interest, commissions and similar income received 2 859 423 3 509 945 Interest, commissions and similar expenses paid (1 797 612) (2 420 116) Recovery of loans and interest in arrears 21 015 17 641 Payments to personnel and suppliers (514 374) (457 723) Net cash flow from income and expenses 568 452 649 747 Decrease (increase) in: Financial assets held for trading and available for sale (1 475 268) (1 997 809) Loans and advances to credit institutions 25 837 184 881 Loans and advances to customers (3 687 928) (1 959 494) Other assets (183 026) 256 509 Net cash flow from operating assets (5 320 385) (3 515 913) Increase (decrease) in: Resources of central banks and other credit institutions 1 379 919 (660 873) Resources of customers 2 063 269 2 661 910 Financial liabilities held for trading (113 512) 66 296 Other liabilities 72 642 (142 096) Net cash flow from operating liabilities 3 402 318 1 925 237 Contributions to the pension funds (36) (626 676) Income tax paid (12 524) (40 239) (1 362 175) (1 607 844) Investing activities Purchase / incorporation of subsidiaries and associated companies: BPI Fiduciaire (64) Sales of subsidiaries and associated companies SIC – Sociedade Independente de Comunicação, S.A. 128 741 Promática – Sociedade de Informação e de Organização de Empresas, S.A. 678 Purchase of other tangible and intangible assets (74 067) (41 122) Sale of other tangible assets 1 244 1 289 Dividends received and other income 28 053 27 120 (44 770) 116 642 The accompanying notes form an integral part of these statements.

The Accountant The Board of Directors

170 Banco BPI | Annual Report 2006 (Amounts expressed in thousands of euro)

31 Dec. 06 31 Dec. 05

Financing activities Liability for assets not derecognised 1 357 032 1 997 206 Issuance of debt securities and subordinated debt 1 898 070 2 203 037 Redemption of debt securities (1 298 677) (1 935 551) Purchase and sale of own debt securities and subordinated debt (220 873) (253 010) Issuance of preference shares 300 000 Purchase and sale of preference shares (30 023) (228 743) Interest on debt securities and subordinated debt (209 443) (288 808) Dividends paid on preference shares (12 782) (10 390) Dividends distributed (89 609) (74 986) Purchase and sale of treasury shares (13 914) (20 391) 1 379 781 1 688 364 Net increase (decrease) in cash and equivalents (27 164) 197 162 Cash and equivalents at the beginning of the year 956 105 758 943 Cash and equivalents at the end of the year 928 941 956 105 The accompanying notes form an integral part of these statements.

The Accountant The Board of Directors Alberto Pitôrra President Artur Santos Silva Vice-Presidents Carlos da Câmara Pestana Fernando Ulrich Ruy Octávio Matos de Carvalho Members Alfredo Rezende de Almeida António Domingues António Farinha Morais Armando Leite de Pinho Carlos Moreira da Silva Edgar Alves Ferreira Herbert Walter Isidro Fainé Casas Jorge de Figueiredo Dias José Pena do Amaral Klaus Dührkop Manuel Ferreira da Silva Marcelino Armenter Vidal Maria Celeste Hagatong Pedro Bissaia Barreto Roberto Egydio Setúbal Tomaz Jervell

Consolidated financial statements 171

Notes to the consolidated financial statements Notes to the consolidated financial statements as of 31 December 2006 and 2005 (Unless otherwise indicated, all amounts are expressed in thousands of euro – th. euro)

1. THE FINANCIAL GROUP

Banco BPI is the central entity of a multi-specialised financial At 31 December, 2006 the Group’s banking operations were group dedicated to the banking activity, which provides a broad carried out principally through Banco BPI in the commercial range of banking services and products to companies, banking area and through BPI Investmentos in the investment institutional investors and private individuals. Banco BPI has banking area. The BPI Group is also the sole shareholder of been listed on the Stock Exchange since 1986. Banco de Fomento, S.A.R.L. which operates as a commercial bank in Angola. The BPI Group started operating in 1981 with the foundation of SPI – Sociedade Portuguesa de Investimentos, S.A.R.L. By In 2004 the BPI Group held, directly and indirectly through Solo public deed dated December 1984, SPI – Sociedade Portuguesa – Investimentos em Comunicação, SGPS, S.A., 41.4% of the de Investimentos, S.A.R.L. changed its corporate name to BPI – share capital of SIC. During 2005 the BPI Group sold its direct Banco Português de Investimento, S.A., which was the first participation in SIC, together with its 100% participation in private investment bank created after the re-opening, in 1984, Solo. of the Portuguese banking sector to private investment. On 30 November, 1995 BPI – Banco Português de Investimento, S.A. In 2005 Banco BPI sold its 100% participation in the share (BPI Investimentos) was transformed into BPI – SGPS, S.A., capital of Promática – Sociedade de Informação e de which operated exclusively as the BPI Group’s holding company, Organização de Empresas, S.A. and BPI Investimentos was founded to act as the BPI Group’s investment banking company. On 20 December, 2002, BPI SGPS, S.A. incorporated, by merger, the net assets and operations of Banco BPI and changed its corporate name to Banco BPI, S.A.

174 Banco BPI | Annual Report 2006 At 31 December, 2006 the BPI Group was made up of the following companies:

Head Share- Total Net income Direct Effective Consolidation / Office holders’ assets (loss) for the participa- participa- Recognition equity period tion tion method Banks Banco BPI, S.A. Portugal 1 251 147 31 257 668 157 020 Banco Português de Investimento, S.A. Portugal 72 826 1 847 480 19 685 100.00% 100.00% Full consolid. Banco Comercial e de Investimentos, S.A.R.L. Mozambique 39 405 409 687 14 962 29.40% 30.00% Equity method Banco de Fomento, S.A.R.L. (Angola)1 Angola 193 325 1 760 564 65 711 100.00% 100.00% Full consolid. Banco BPI Cayman, Ltd. Cayman Islands 153 872 768 249 9 197 100.00% Full consolid. Specialised loan companies BPI Rent – Comércio e Aluguer de Bens, Lda. Portugal 3 783 39 365 7 763 100.00% 100.00% Full consolid. Eurolocação – Comércio e Aluguer de Veículos e Equipamento, S.A. Portugal 364 490 (12) 100.00% 100.00% Full consolid. BPI Locação de Equipamentos, Lda. Portugal 1 493 12 352 553 100.00% 100.00% Full consolid. Asset management companies and dealers BPI Dealer – Sociedade Financeira de Corretagem (Moçambique), S.A.R.L. Mozambique 85 85 9 13.00% 92.70% Full consolid. BPI Gestão de Activos – Gestão de Fundos de Investimento Mobiliários, S.A Portugal 30 358 45 222 20 072 100.00% 100.00% Full consolid. BPI – Global Investment Fund Management Company, S.A. Luxembourg 1 383 1 644 1 118 100.00% 100.00% Full consolid. BPI Pensões – Sociedade Gestora de Fundos de Pensões, S.A. Portugal 6 933 7 953 2 990 100.00% 100.00% Full consolid. Sofinac – Sociedade Gestora de Fundos de Investimento Imobiliário, S.A Portugal 1 375 1 578 369 100.00% 100.00% Full consolid. BPI (Suisse), S.A.2 Switzerland 82 2 233 102 99.90% Full consolid. Venture capital companies F. Turismo – Capital de Risco, S.A. Portugal 5 365 5 478 105 25.00% 25.00% Equity method Inter-Risco – Sociedade de Capital de Risco, S.A. Portugal 21 038 26 341 1 802 100.00% 100.00% Full consolid. Insurance companies BPI Vida – Companhia de Seguros de Vida, S.A. Portugal 173 522 4 375 582 23 638 100.00% 100.00% Full consolid. Cosec – Companhia de Seguros de Crédito, S.A. Portugal 52 269 104 780 2 680 50.00% 50.00% Equity method Companhia de Seguros Allianz Portugal, S.A. Portugal 186 437 1 092 774 36 527 35.00% 35.00% Equity method Other BPI Capital Finance Ltd.3 Cayman Islands 550 725 550 722 20 588 100.00% 100.00% Full consolid. BPI, Inc.4 U.S.A. 492 498 11 100.00% 100.00% Equity method BPI Madeira, SGPS, Unipessoal, S.A. Portugal 160 353 160 385 8 560 100.00% 100.00% Full consolid. Douro – Sociedade Gestora de Participações Sociais, S.A.5 Portugal 4 300 4 628 218 100.00% 100.00% Full consolid. Finangeste – Empresa Financeira de Gestão e Desenvolvimento, S.A. Portugal 49 010 56 303 3 696 32.80% 32.80% Equity method Simofer – Sociedade de Empreendimentos Imobiliários e Construção Civil, Lda. Portugal (5 111) 1 833 (36) 100.00% 100.00% Equity method Viacer – Sociedade Gestora de Participações Sociais, Lda. Portugal 81 357 81 369 6 864 26.00% 26.00% Equity method Note: Unless otherwise indicated, all amounts are as of 31 December, 2006 (accounting balances before consolidation adjustments). 1) Banco BPI holds 1 305 297 shares, the share capital of this company being made up of 1 305 561 shares, fully owned by the BPI Group. 2) The amounts refer to the consolidated financial statements with BPI Fiduciaire, S.A., a wholly owned subsidiary of BPI (Suisse), S.A. 3) The share capital is made up of 5 000 ordinary shares with a nominal value of 1 euro each, and 550 000 000 non-voting preference shares with a nominal value of 1 euro each. The BPI Group’s effective participation corresponds to 0.001% considering the preference shares. 4) Amounts for 30 September, 2006 result from the translation of US dollars at the exchange rate as of 31 December, 2006. 5) The amounts refer to the consolidated financial statements with Sucessa – Sociedades de Investimentos e Construções Urbanas, S.A. and Douro Fundiários, S.A., which are fully owned by Douro – Sociedade Gestora de Participações Sociais, S.A.

Consolidated financial statements | Notes 175 2. BASIS OF PRESENTATION AND PRINCIPAL ACCOUNTING POLICIES

A) BASES OF PRESENTATION The consolidated financial statements were prepared from the Associated companies are recorded in accordance with the accounting records of Banco BPI and its subsidiary and equity method of accounting. In accordance with this method, associated companies in conformity with International the amount of the investment, which is initially recognised at Accounting Standards / International Financial Reporting cost, is adjusted by post-acquisition changes in the net asset Standards (IAS / IFRS), as adopted by the European Union in value of the associated companies, in proportion to the Group’s accordance with Regulation (EC) 1606 / 2002 of 19 July of the participation. European Parliament and Council and incorporated into Portuguese legislation through Bank of Portugal Notice 1 / 2005 Goodwill relating to associated companies is included in the of 21 February. book value of the investment. The book value of associated companies (including goodwill) is subject to impairment tests in B) PRINCIPAL ACCOUNTING POLICIES accordance with IAS 36 and IAS 39. The following accounting policies are applicable to the consolidated financial statements of BPI Group. In accordance with IFRS 1 and the BPI Group’s accounting policies up to the date of transition to IAS / IFRS, goodwill on 2.1 Consolidation of subsidiaries and recognition of associated investments acquired up to 1 January, 2004 was deducted in companies (IAS 27, IAS 28 and IFRS 3) full from shareholders’ equity. Banco BPI has direct and indirect participations in subsidiary and associated companies. Subsidiary companies are entities over Negative goodwill arising from the difference between the cost of which the Bank has control or power to manage their financial acquisition (including expenses) and the fair value of the and operating policies. Associated companies are entities over identifiable assets, liabilities and contingent liabilities of which Banco BPI has direct or indirect significant influence over subsidiary and associated companies as of the date of the first their management and financial policies but over which it does consolidation or the date the equity method is first applied is not have control. As a general rule, it is presumed that significant immediately recognised in the statement of income. influence exists when the participation exceeds 20%. The financial statements of subsidiary or associated companies The financial statements of subsidiary companies are which are inactive or in liquidation were excluded from the consolidated using the full consolidation method. Significant consolidation and from application of the equity method. These inter-group transactions and account balances were eliminated in participations are classified as financial assets available for sale. the consolidation process. The amount of share capital, reserves and net results corresponding to third party participation in Consolidated net income is the sum of the individual net result these subsidiaries is reflected in the caption MINORITY INTEREST. of Banco BPI and the percentage of the net results of subsidiary When necessary, adjustments are made to the subsidiary and associated companies, equivalent to Banco BPI’s effective companies’ financial statements to ensure their consistency with participation in them, considering the period the participations the BPI Group’s accounting policies. are held for, after elimination of income and expenses resulting from inter-group transactions. Goodwill arising from the difference between the cost of acquisitions (including expenses) and the fair value of the Foreign currency subsidiary and associated companies (IAS 21 identifiable assets, liabilities and contingent liabilities of and IAS 29) subsidiary companies as of the date of the first consolidation are The financial statements of subsidiary and associated companies recorded as assets and are subject to impairment tests. When a expressed in foreign currencies were included in the subsidiary company is sold, net goodwill is included in consolidation after being translated to Euro at the exchange determining the gain or loss on the sale. rates published by the Bank of Portugal:

᭿ assets and liabilities expressed in foreign currencies are translated to Euro using the exchange rates in force at the balance sheet date;

176 Banco BPI | Annual Report 2006 ᭿ income and expenses expressed in foreign currencies are Fair value is determined based on: translated to Euro using the exchange rates in force in the months in which they are recognised; and, ᭿ the price in an active market, or

᭿ exchange differences resulting from the translation to Euro are ᭿ valuation methods and techniques (when there is not an active recognised directly in shareholders’ equity, in the caption market) supported by:

REVALUATION RESERVES. – mathematical calculations based on recognised financial Until 30 June, 2006 (inclusive), the financial statements of theories; or Banco de Fomento Angola were translated to Euro in accordance with IAS 29 – Financial Reporting in Hyperinflationary – prices calculated based on similar assets or liabilities traded economies: in active markets or based on statistical estimates or other quantitative methods. ᭿ the gain or loss in the net monetary position was included in

the statement of income caption GAIN AND LOSS ON FOREIGN A market is considered to be active, and therefore liquid, if it is

EXCHANGE OPERATIONS; traded on a regular basis. Generally, there are market prices for securities and derivatives (futures and options) that are traded ᭿ non-monetary assets and liabilities were revalued in on stock exchanges. accordance with the general price index, determined based on the evolution of the Angolan Kwanza in relation to the Euro. 2.2.1. Financial assets held for trading and at fair value through profit or loss and financial liabilities held for trading Following the decrease in the inflation rate in Angola, the These captions include: Angolan economy stopped being considered as hyperinflationary as from the second half of 2006. Therefore, the financial ᭿ fixed income securities and variable-yield securities traded on statements of Banco de Fomento Angola, prepared in kwanzas, active markets, including long (purchased securities) or short started being translated to Euro in accordance with the (short selling of securities) positions, and derivatives purchased principles described in the preceding paragraph. by the BPI Group for sale or repurchase in a very short period of time; 2.2. Financial assets and liabilities (IAS 32 and IAS 39) Financial assets and liabilities are recognised in the BPI Group’s ᭿ securities related to capitalisation insurance portfolios; and, balance sheet on the trade or contracting date, unless there is an express contractual stipulation or applicable legal or ᭿ fixed income securities and variable-yield securities traded on regulation regime under which the transactions’ inherent rights active markets, which the Bank has opted, on the recognition and obligations are transferred at a different date, in which case date, to record and value at fair value through profit or loss. the latter date is applicable. Such assets and liabilities are valued daily at fair value. The Financial assets and liabilities are initially recorded at fair value book value of bonds and other fixed income securities includes plus direct transaction costs, except for assets and liabilities accrued interest. that have been recognised at fair value through profit or loss, in which case the transaction costs are immediately recorded in the Gains and losses resulting from changes in fair value are statement of income. recognised in the statement of income.

Fair value is the amount for which an asset could be exchanged, or a liability settled, between equally knowledgeable, willing parties. On the date of contracting or starting an operation, fair value is generally the amount of the transaction.

Consolidated financial statements | Notes 177 2.2.2. Financial assets available for sale This caption includes: Exchange differences of non monetary assets (equity instruments) classified in the available-for-sale portfolio are ᭿ fixed income securities that have not been classified in the recognised in the exchange difference revaluation reserve. trading or loan portfolios; Exchange differences on other securities are recorded in the statement of income. ᭿ variable yield securities available for sale; and Assets available for sale, designated as hedged assets, are ᭿ shareholders’ loans and supplementary capital contributions in valued as explained in note 2.2.6. Hedge Accounting – financial assets available for sale. derivatives and hedged instruments.

Assets classified as available for sale are valued at fair value, 2.2.3. Loans and other receivables except for equity instruments that are not traded in active Loans and other receivables include loans and advances made markets and for which their fair value cannot be reliably by the Bank to Customers and to credit institutions, including measured or estimated. In this case they remain recorded at finance lease operations, factoring operations, participation in cost. syndicated loans and securitised loans (commercial paper and bonds issued by companies) that are not traded on an active Gains and losses resulting from changes in the fair value of market and which are not intended to be sold. financial assets available for sale are recognised directly in the shareholders’ equity caption FAIR VALUE REVALUATION RESERVE, Loans and securitised loans traded on active markets are except for impairment losses and exchange gains and losses on included in the caption FINANCIAL ASSETS AVAILABLE FOR SALE. monetary assets, until the asset is sold. At this time, the gain or loss previously recognised in shareholders’ equity is transferred At the inception date, loans and other receivables are recognised to the statement of income. at fair value. In general, fair value at the inception date corresponds to the amount of the transaction and includes Interest accrued on bonds and other fixed income securities and commission, taxes and other costs and income relating to credit differences between their cost and nominal value (premium or operations. discount) are recorded in the statement of income using the effective interest rate method. Loans and other receivables are subsequently valued at amortised cost, using the effective interest rate method and are Income from variable-yield securities (dividends in the case of subject to impairment tests. shares) is recorded as income when it is attributed or received. In accordance with this procedure, interim dividends are Interest income, commission, fees and other costs and income recorded as income in the period in which they are declared. on credit operations are recognised on an accruals basis over the period of the operations, regardless of when they are received or In the case of objective evidence of impairment, resulting from a paid. Commission received relating to credit commitments is significant and extended decrease in the fair value of a security deferred and recognised on a straight-line basis over the period or financial difficulty of the issuer, the accumulated losses in of the commitment. the fair value revaluation reserve are transferred from shareholders’ equity to the statement of income. The Bank classifies as overdue credit, instalments of principal and interest overdue for more than 30 days. Credits under legal Impairment losses recorded on fixed income securities are collection procedures include the full amount of the principal reversed through the statement of income if there is a positive (both overdue and not yet due). Mortgage loans are considered change in the fair value of the security resulting from an event to be under legal collection procedures when the petition to which has occurred after determination of the impairment. execute is delivered to the court, which is usually 150 days after Impairment losses on variable-yield securities cannot be the first default. reversed. In the case of securities for which impairment losses have been recognised, subsequent negative changes in fair value The BPI Group writes off loans on operations considered to be are always recognised in the statement of income. unrecoverable, for which provisions (in accordance with the Adjusted Accounting Standards (Normas de Contabilidade Ajustadas – NCA) established by Bank of Portugal Notice 1 /

178 Banco BPI | Annual Report 2006 2005) and impairment losses have been recorded for the full Credits sold that have not been derecognised are recorded in the amount in the month preceding the write-off. caption NON-DERECOGNISED SECURITISED ASSETS and are subject to the accounting principles used for other credit operations. Loans designated as hedged assets are valued as explained in Interest, commission and fees relating to the securitised loan note 2.2.6. Hedge Accounting – derivatives and hedged portfolio are accrued over the period of the credit operation. instruments. Amounts received relating to securitisation operations are

Finance leasing (IAS 17) recorded, at the settlement date, under the caption FINANCIAL

Lease operations in which the Bank transfers substantially all the LIABILITIES RELATING TO TRANSFERRED ASSETS. The respective interest, risks and rewards of ownership of an asset to a Customer or to a commission and fees are accrued based on the remuneration third party, are reflected on the balance sheet, at the inception ceded by the Bank, in accordance with the expected average life date, as loans granted, at the net amount paid to acquire the of the securitisation operation at the launching date. leased asset. Lease instalments are composed of an interest income component and a principal repayment component. The Securities under repurchase and resale agreements interest income component for each period reflects a constant rate Securities purchased with resale agreements are not recorded in of return on the outstanding amount of principal. the securities portfolio. Funds paid are recorded as loans at the settlement date, while interest is accrued. Factoring Assets resulting from factoring operations with recourse are Securities sold with repurchase agreements are maintained in their recorded on the balance sheet as loans granted, by the amount original securities portfolio. Funds received are recorded in the advanced on account under the terms of the corresponding corresponding liability caption at the settlement date, while interest contracts. is accrued.

Assets resulting from factoring operations without recourse are Guarantees given and irrevocable commitments recorded on the balance sheet as loans granted, by the amount Guarantees given and irrevocable commitments are recorded in of the credit taken, with a corresponding entry to the liability off-balance sheet accounts by the amount at risk, while interest, caption CREDITORS FOR FACTORING OPERATIONS. Amounts advanced commission, fees and other income are recorded in the statement under the contracts are debited to the caption CREDITORS FOR of income over the period of the operations. These operations are

FACTORING OPERATIONS. subject to impairment tests.

Invoices received under factoring contracts with recourse, in Impairment which amounts are not advanced, are recorded in the off-balance Loans, other receivables and guarantees given are subject to sheet caption, CONTRACTS WITH RECOURSE – INVOICES NOT FINANCED, monthly impairment tests. Impairment losses identified are by the amount of the invoices received. The balance of this recorded by corresponding charge to the statement of income for caption is reduced as the invoices are settled. the year. If, in subsequent periods, there is a decrease in the estimated impairment loss, the impairment loss initially recorded Commitments resulting from unused credit lines negotiated with is reversed by credit to the statement of income. Customers are recorded as off-balance sheet items. In accordance with IAS 39 a financial asset is considered to be Securitised credit not derecognised impaired when there is evidence that one or more loss events The Bank does not derecognise credits sold in securitisation have occurred after initial recognition of an asset, and such processes, considering that: events have an impact on the estimated recoverable value of the future cash flows of the financial asset considered. ᭿ it retains control over the operations; IAS 39 defines some events that may be considered as objective ᭿ it continues to receive a substantial part of the remuneration; evidence of impairment (breach of contract, such as delay in the and, payment of principal or interest; probability that the borrower will become bankrupt, etc.). However, in certain circumstances ᭿ it retains a substantial part of the risk on the credits transferred. determination of impairment loss requires professional judgement.

Consolidated financial statements | Notes 179 Objective evidence of impairment situations is assessed as of the ᭿ notation of Client risk determined based on a calculation date of the financial statements. system implemented by the BPI Group. The risk notation includes, among others, the following characteristics: Impairment assessment is made based on individual credits where they are significant in amount and on an individual or collective ᭿ financial situation of the Customer; basis where the credits are not significant in amount. ᭿ risk of the business sector in which the Customer operates; BPI’s loan portfolio is segmented as follows for purposes of determining impairment: ᭿ quality of management of the Customer, measured by the experience in the relationship with the BPI Group and the ᭿ Corporate Banking; existence of incidents;

᭿ Private individuals and small businesses; ᭿ quality of the accounting information presented;

᭿ specialised credit: housing loans, equipment leasing, real ᭿ nature and amount of the guarantees relating to the estate leasing, vehicle financing, consumer credit and credit liabilities contracted with the Bank; cards; ᭿ non performing credit for a period exceeding 30 days. ᭿ commercial portfolio: discounts, credit with a plan, credit without a plan and overdrafts; In such situations the amount of the loss is calculated based on the estimated recoverable amount of the credit, after recovery ᭿ Institutional Banking and the State Business Sector; costs, discounted at the effective rate of interest during the period from the date the impairment is calculated to the ᭿ others. expected date of recovery.

Impairment losses relating to the Banks and Companies and The expected recoverable amount of the credit reflects the cash Institutional Banks and the State Business Sector segments are flows that can result from execution of the guarantees or determined on an individual basis whenever the credits show collateral relating to the credit granted, less costs of the recovery signs of impairment or are in a default. Credit operations in process. these segments that do not show signs of impairment, as well as operations of the other segments are subject to collective Assets valued individually, for which there are no objective signs assessments to determine the amount of the related impairment. of impairment, are included in a group of assets with similar credit risks, and impairment losses are assessed collectively. Individual assessment In the case of assets for which there is objective evidence of Impairment for these groups of assets is assessed as explained impairment on an individual basis, impairment is calculated in the following section – Collective assessment. operation by operation, based on the information included in the Bank’s credit risk analysis models which consider, among others, Assets assessed individually, for which an impairment loss is the following factors: recognised, are excluded from the collective assessment.

᭿ overall exposure of the Customer and nature of the liabilities Collective assessment contracted with the Bank: financial or non financial operations Future cash flows of groups of credit subject to collective (namely, liabilities of a commercial nature or performance impairment assessment are estimated based on the past guarantees); experience of losses on assets with similar credit risk characteristics.

180 Banco BPI | Annual Report 2006 Collective assessment involves estimating the following risk 2.2.5. Debt securities issued by the Bank factors: Debt securities issued by the Bank are recorded under the

captions SUBORDINATED DEBT and DEBT SECURITIES. ᭿ the possibility of a performing operation or Customer coming to show signs of impairment through delays arising during the At the date of issue, debt securities are recorded at fair value emergency period (period between the occurrence of a loss event (issue value), including transaction expenses, commissions and and identification of that event by the Bank); fees, and subsequently valued at amortised cost using the effective interest rate method. ᭿ in accordance with IAS 39 these situations correspond to losses incurred but not reported, that is cases in which, for part of the Derivatives embedded in bonds are recorded separately and credit portfolio the loss event has already occurred, but the Bank revalued at fair value through the statement of income. has not yet identified it; Bonds designated as hedged liabilities are valued as explained in ᭿ the possibility of an operation or Customer that has already had note 2.2.6, Hedge Accounting – derivatives and hedged delays, going into default (situations of legal collection) during instruments. the remaining period of the operation; Bonds issued by the Bank can be listed, or not, on the Stock ᭿ financial loss on operations in default. Exchange.

For purposes of determining the percentage of estimated loss on Secondary market transactions operations or Customers in default, the Bank considers payments The Bank guarantees the liquidity of bonds issued. Purchases by Customers after default, less direct costs of the recovery and sales of these debt securities are included proportionately in process. The flows considered are discounted at the rate of the respective captions of debt issued (principal, interest, interest of the operations and compared to the exposure at the commissions, fees and derivatives), and the differences between time of default. the amount liquidated and the decrease or increase in the amount of the liability are immediately recognised in the The inputs used for calculating collective impairment are statement of income. determined based on statistical models for credit groups and revised regularly to approximate the estimated amounts to the 2.2.6. Hedge accounting – derivatives and hedged instruments actual amounts. The BPI Group carries out derivative operations in the normal course of its business, managing its own positions based on the For exposures with objective evidence of impairment, the amount expected evolution of the markets (trading), to meet the specific of the loss results from a comparison of the book value with the needs of its Customers, or to hedge its exposure (hedging). present value of the estimated future cash flows. The rate of interest of the operations at the date of the assessment is used to All derivative instruments are recorded at fair value, the changes calculate the present value of the future cash flows. in fair value being recognised in the statement of income.

2.2.4. Deposits and other resources Financial derivative transactions in the form of foreign exchange After initial recognition, deposits and other financial resources of contracts, interest rate contracts, contracts on shares or share costumers and credit institutions are valued at amortised cost, indices, inflation contracts or a combination of these, are carried using the effective interest rate. out in over-the-counter (OTC) markets and in organised markets (especially stock exchanges). The majority of over-the-counter This category includes life capitalisation insurance without a derivatives, swaps, fras, caps, floors and options are traded on discretionary participation feature. active markets, and are valued based on generally accepted methods (discounting cash flows, Black-Scholes method, etc.) Deposits designated as hedged liabilities are valued as explained and market prices for similar assets. The amount obtained is in note 2.2.6 Hedge Accounting – derivatives and hedged adjusted based on liquidity and credit risk. instruments.

Consolidated financial statements | Notes 181 Derivatives are also recorded in off balance sheet accounts at If the hedging relationship ceases to exist as a result of the their theoretical value (notional amount), except for futures relationship between the fair value changes of the derivatives which are recorded in off balance sheet accounts at their daily and the hedged instruments being outside the 80% to 125% adjusted market value. range, the derivatives are reclassified as trading instruments and the amount of the revaluation of the hedged instruments is Hedge accounting recognised in the statement of income for the remaining period The BPI Group carries out derivative operations to hedge interest of the operation. rate and foreign exchange rate risk (fair value hedge operations) on financial assets and liabilities identified individually (bond Hedging effectiveness tests are duly documented on a monthly portfolio, issuance of own debt securities and loans), and on basis, thus ensuring the realisation of comparisons during the groups of operations (term deposits and fixed rate loans). period of the operation.

The BPI Group has formal documentation of the hedge 2.2.7 Foreign currency assets and liabilities relationship identifying, at the inception of the transaction, the Foreign currency financial assets and liabilities are recorded in instrument (or part of the instrument, or part of the risk) that is conformity with the multi-currency system, that is in their being hedged, the strategy and type of risk being hedged and original currencies. the methods used to demonstrate the effectiveness of the hedge. Foreign currency assets and liabilities are translated to Euro at Monthly, the Bank tests the effectiveness of the hedge by the official market rates published by the Bank of Portugal. comparing changes in the fair value of the hedged instrument, attributable to the hedged risk, with variations in the fair value Foreign currency income and expenses are translated to Euro at of the hedging derivative, the relationship between them being the exchange rates in force on the dates they are recognised. within the range of 80% to 125%. 2.3. Tangible assets (IAS 16) Gains and losses resulting from the revaluation of hedging Tangible assets used by the Bank in its operations are stated at derivatives are recognised in the statement of income. Gains and cost (including directly attributable costs) less accumulated losses resulting from changes in the fair value of hedged depreciation and impairment losses. financial assets or liabilities, attributable to the hedged risk, are also recognised in the statement of income, by corresponding Depreciation of tangible assets is recorded on a straight-line basis entry to the book value of the hedged asset or liability in the over their estimated useful lives, which corresponds to the period case of operations at amortised cost (loans, deposits and debt the assets are expected to be available for use: issued) or to the fair value revaluation reserve in case of Useful life (years) available-for-sale assets (bonds portfolio). Premises 20 to 50 Improvements in pemises for own use 10 to 50 A hedged asset or liability may have only one part or one Non-recoverable expenditure capitalised on leasehold buildings 3 to 10 component of its fair value hedged (interest rate risk, foreign Equipment 3 to 12 exchange rate risk or credit risk), provided that the effectiveness Other tangible assets 3 to 10 of the hedge can be measured separately.

182 Banco BPI | Annual Report 2006 Non-recoverable expenditure on improvements in leasehold Unrealised gains on other assets are not recognised on the buildings is depreciated in accordance with its estimated useful balance sheet. life or the remaining period of the lease contract. 2.5. Intangible assets (IAS 38) As established in IFRS 1, tangible assets acquired by the BPI The Bank recognises, in this caption, expenses relating to the Group up to 1 January, 2004 have been recorded at their book development stage of projects implemented and to be value at the date of transition to IAS / IFRS, which corresponds implemented, as well as the cost of acquiring software, in both to cost adjusted for revaluations recorded in accordance with the cases where the impact extends beyond the financial year in legislation, based on price level indices. In accordance with which the cost is incurred. current tax legislation, 40% of the additional depreciation charge resulting from such revaluations is not deductible for Intangible assets are amortised on a straight-line monthly basis income tax purposes, the resulting deferred tax liability being over the estimated period of useful life of the assets which, in recognised. general, corresponds to a period of three years.

Tangible assets acquired under finance lease To date the Bank has not recognised any intangible assets Tangible assets acquired under finance lease operations, in generated internally. which the Bank has all the risks and rewards of ownership, are depreciated in accordance with the procedures explained in the 2.6. Retirement and survivor pensions (IAS 19) preceding section. The majority of Employees of the BPI Group are not covered by the Portuguese Social Security system. The BPI Group Lease instalments comprise an interest charge and a principal companies that have adhered to the Collective Vertical Labour repayment component. The liability is reduced by the amount Agreement (Acordo Colectivo de Trabalho Vertical) for the corresponding to the principal repayment component of each of Portuguese Banking Sector have assumed the commitment to the instalments and the interest is reflected in the statement of pay their Employees or their families, pensions for retirement income over the term of the lease. due to age or incapacity, pensions for early retirement or survivor pensions (defined benefit plan). The pensions consist of a 2.4. Tangible assets available for sale percentage, which increases with the number of years of service Assets (property, equipment and other assets) received as of the Employees, applied to their salaries. settlement of loan operations are recorded in the caption OTHER

ASSETS as they are not always in condition to be sold immediately Annually, the BPI Group determines the amount of its past and may be held for periods in excess of one year. Such assets service liability by actuarial calculation using the “Projected Unit are recorded at the amount stated in the settlement agreement, Credit” method in the case of retirement due to age, and the which is the lower of the amount of the outstanding debt or the “Single Successive Premiums” method in the case of retirement appraised value as of the date of the agreement. Such property due to incapacity and survivor benefits. The actuarial is subject to periodic appraisals, with impairment losses being assumptions used (financial and demographic) are based on the recorded whenever the appraised value (net of costs to sell) is expectations, as of the balance sheet date, regarding salary and lower than its book value. pension increases, using mortality tables adapted to the Bank’s population. The discount rate is determined based on market

The caption OTHER ASSETS also includes the Bank’s tangible assets rates for high quality corporate bonds with similar terms to those retired from use (unused property and equipment) which are in of the related pension liability. The assumptions are mutually the process of sale. Such assets are transferred from tangible compatible. In 2006 the BPI Group updated the actuarial assets at their book value in accordance with IAS 16 (cost less assumptions as of 30 June and 31 December, this being accumulated depreciation and impairment losses) when they reflected prospectively in pension costs and in determining and become available for sale, and are subject to periodic appraisals amortising the actuarial deviations that exceed the corridor. The with impairment losses being recorded whenever the appraised amount of the liability includes, in addition to the retirement value (net of selling costs) is lower than their book value. pension benefits, post-employment healthcare benefits (SAMS) and death subsidy during retirement.

Consolidated financial statements | Notes 183 The BPI Group recognises, under the caption OTHER ASSETS or At 31 December, 2005 the Bank opted to fund the full amount

OTHER LIABILITIES – ACTUARIAL DEVIATIONS, the net accumulated of the liability for retirement pensions of its Employees and so is amount (after 1 January, 2004) of actuarial gains and losses not applying the uniform amortisation plan allowed by the Bank resulting from changes in the actuarial and financial of Portugal. assumptions, as well as differences between the actuarial and financial assumptions used and the actual amounts. A corridor The past service liability for retirement pensions net of the has been established to absorb accumulated actuarial gains and amount of the pension fund is recorded in the BPI Group’s losses of up to 10% of the higher of the present value of the financial statements under the caption OTHER LIABILITIES past service liability or the amount of the pension fund. Amounts (insufficient coverage) or OTHER ASSETS (excess coverage). that exceed the corridor are amortised against the statement of income over the average period up to the expected retirement The following costs relating to retirement and survivor pensions age of the Employees covered by the plan. are included in the consolidated statement of income of the BPI Group: The increase in the past service liability resulting from early retirements is fully recognised as cost in the statement of ᭿ current service cost (cost for the year); income for the year. ᭿ interest cost on the total liability; Increases in the past service liability resulting from changes in the conditions of the pension plans are recognised in full as ᭿ expected income of the pension funds; costs in the case of vested benefits, or amortised over the period up to the time the benefits become vested. The amount of the ᭿ cost relating to the increase in the past service liability due to liabilities not yet recognised as cost is reflected in the caption early retirements;

OTHER ASSETS. ᭿ amortisation of the actuarial deviations or changes in The past service liability (post employment benefits) is covered assumptions outside the corridor; by pension funds. The value of the pension funds corresponds to the fair value of their assets at the balance sheet date. ᭿ cost (or amortisation) resulting from changes in the conditions of the pension plan. The funding requirements of the pension fund are defined in Bank of Portugal Notice 4 / 2005, which determines: At the transition date, the BPI Group adopted the option, allowed under IFRS 1, of not recalculating actuarial gains and losses ᭿ the requirement to fully fund pensions under payment and a deferred since the inception of the pension plans (reset option). minimum of 95% of the past service liability for current Consequently, deferred actuarial gains and losses reflected in the personnel; BPI Group’s financial statements as of 31 December, 2003 were reversed by corresponding entry to retained earnings at the ᭿ the establishment of a transitory period to fund the increase in transition date (1 January, 2004). the liability resulting from application of IAS 19 at 31 December, 2004. The increase in the liability can be funded 2.7. Long service premiums (IAS 19) through a plan to amortise the liability in uniform instalments up The BPI Group companies that have adhered to the Collective to 31 December, 2009, expect for the part relating to the Vertical Labour Agreement (Acordo Colectivo de Trabalho liability for post-employment healthcare benefits and changes in Vertical) for the Portuguese Banking Sector have assumed the the actuarial assumptions related to the mortality table, in which commitment to pay current Employees that have fifteen, twenty case the funding plan can be extended to 31 December, 2011. five or thirty years of good service to the Group companies, a long service premium corresponding, respectively, to one, two or three months of their effective monthly remuneration (in the year the premium is attributed).

Annually, the BPI Group determines the present value of the liability for long service premiums by actuarial calculation using the “Projected Unit Credit” method. The actuarial assumptions

184 Banco BPI | Annual Report 2006 used (financial and demographic) are based on the expectations, Costs relating to the share-based payment program (RVA as of the balance sheet date, regarding salary increases, using program) are accrued under the caption PERSONNEL COSTS with a mortality tables adapted to the Bank’s population. The discount corresponding entry to OTHER EQUITY INSTRUMENTS, as established rate used is determined based on market rates for high quality by IFRS 2 for share-based payments. The cost of the shares and corporate bonds with similar terms to those of payment of the option premiums, as of the date they are granted, is accrued on liability. The assumptions are mutually compatible. a straight-line basis from the beginning of the year of the program (1 January) to the moment they become available to the The liability for long service premiums is reflected under the Employees. caption OTHER LIABILITIES. For the purpose of share-based payments, the Bank has created The following costs relating to the liability for long service a portfolio of BPI shares transferring ownership of the shares to premiums are included in the consolidated statement of income Employees on the grant date. However, for accounting purposes, of the BPI Group: the shares remain in the Bank’s treasury share portfolio until the date they are made available. The shares are then derecognised ᭿ current service cost (cost for the year); by corresponding entry to the amounts accumulated under the

caption OTHER EQUITY INSTRUMENTS. ᭿ interest cost; For purposes of the share-based payment in options, the BPI ᭿ gain and loss resulting from actuarial deviations, changes in Group has created a portfolio of BPI shares in order to hedge the assumptions or changes in the conditions of the benefits. liability resulting from issuing call options over the BPI shares, following a delta hedging strategy (determined using a model to 2.8. Treasury shares (IAS 32) evaluate the BPI share options, developed in-house based on Treasury shares are recorded at cost in equity captions and are Black-Scholes methodology). not subject to revaluation. Realised gains and losses, as well the resulting taxes, are recorded directly in shareholders’ equity, not This strategy corresponds to the creation of a portfolio with delta affecting net income for the year. shares for each option granted, delta corresponding to the relationship between evolution of the price of an option and 2.9. Share-based payments (Remuneração variável em acções – evolution of the price of the underlying shares. The treasury RVA) (IFRS 2) shares held to hedge the risk of variation in the value of the

The share-based payment program (Remuneração Variável em options sold are recorded under the caption TREASURY SHARES

Acções – RVA) is a remuneration plan under which part of the HEDGING THE SHARE-BASED PAYMENT PROGRAM, where they remain variable remuneration of Executive Directors and Employees of while they are held for that purpose. the BPI Group with variable remuneration equal to or greater than 2 500 euro is paid in BPI shares and BPI shares options. When the options are exercised, the treasury shares are Remuneration under the RVA program varies from 10% to 50% derecognised together with transmission of their ownership to of the total variable remuneration, the percentage increasing as the Employees. At that time the Bank recognises a gain or loss the responsibility level of the Director or Employee increases. resulting from the difference between the exercise price and the average cost of the treasury share portfolio hedging each The shares granted under the RVA program become available to program, less the cost of the option premiums accumulated in the beneficiary on a gradual basis: 25% on the date they are the caption OTHER EQUITY INSTRUMENTS. granted and 25% in each of the three following years. As from 2002 ownership of the shares granted under the RVA program Realised gains and losses on treasury shares in the coverage and has been fully transferred on the date the shares are granted. exercise of the options of the share-based payment program, as Call options over the shares can be exercised between the first well as the related taxes, are recorded directly in shareholders’ and the fifth year, as from the date they are granted. The shares equity, not affecting net income for the year. become available (in the 3 years following the year in which they are granted) and the options become available (up to 2005, in the year following that in which they were granted, and as from 2005 in the 90 days following the grant date) subject to the beneficiaries remaining with the BPI Group.

Consolidated financial statements | Notes 185 2.10. Technical provisions (IFRS 4) 2.12. Income taxes (IAS 12) The BPI Group sells capitalisation life insurance products All the Group companies are taxed individually. through its subsidiary BPI Vida. Capitalisation insurance products without discretionary participation features are recorded Banco BPI and its subsidiary and associated companies with in accordance with IAS 39 and included in the caption head offices in Portugal are subject to the tax regimes

RESOURCES OF CUSTOMERS AND OTHER DEBTS. Capitalisation established in the Corporate Income Tax Code (Portuguese insurance products with discretionary participation features are initials – CIRC) and in the Statute of Tax Benefits. recorded in accordance with IFRS 4, in the caption TECHNICAL

PROVISIONS. The Madeira and Santa Maria off-shore financial branches of Banco BPI are exempt from corporate income tax up to 31 The technical provisions recorded for life insurance contracts December, 2011, in accordance with article 31 of the Statute of represent, collectively, the liability to the insured Customers and Tax Benefits. Under the provisions of Ministerial Order 555 / include: 2002 of 4 June, for the purpose of applying this exemption, at least 80% of the taxable income from Banco BPI’s global ᭿ Mathematical provisions determined using prospective actuarial operations is considered to result from activities outside the methods in accordance with the technical bases of each institutional scope of the Madeira and Santa Maria Free Trade product. Zones. This regime came into force on 1 January, 2003.

They also include a provision for rate commitments, which is Current taxes are calculated based on the legal tax rates in force recorded when the effective profitability rate of the assets in the countries in which the Bank operates during the reporting which represent the mathematical provisions of a certain period. product is lower than the technical interest rate used to calculate the mathematical provisions. Deferred tax assets and liabilities correspond to the tax recoverable and payable in future periods resulting from ᭿ Provision for participation in profits to be attributed to the temporary differences between the carrying value of assets and contracts in force at the end of each year. The amount is liabilities and their respective tax bases. Tax losses carried calculated in accordance with the technical bases of each forward and tax credits are also recognised as deferred tax contract, duly approved by the Portuguese Insurance Institute assets. (Instituto de Seguros de Portugal), using the profitability rates for investments covering the respective mathematical Deferred tax assets are recognised only to the extent of the provisions; probable existence of sufficient expected future taxable income to absorb the deductible temporary differences. ᭿ Provision for claims to cover indemnities payable relating to claims incurred but not yet settled. Since the BPI Group does Deferred tax assets and liabilities have been calculated using the not commercialise risk insurance, no provision has been tax rates in force for the period in which the respective assets or recorded for claims incurred but not yet reported (IBNR). liabilities are expected to be realised.

2.11. Provisions for other risks and charges (IAS 37) Current and deferred taxes are recognised in the statement of This caption includes provisions to cover other specific risks, income, except for those relating to amounts recorded directly in namely tax contingencies, legal processes and other losses shareholders’ equity (namely gains and losses on treasury shares arising from the operations of the BPI Group. and securities available for sale).

186 Banco BPI | Annual Report 2006 The BPI Group does not record deferred tax assets and liabilities 2.14. Principal estimates and uncertainties regarding the on temporary taxable differences relating to investments in application of the accounting standards subsidiary and associated companies, as these differences are The BPI Group’s financial statements have been prepared using not expected to revert in the foreseeable future, except for the estimates and expected future amounts in the following areas: following: Retirement and survivor pensions ᭿ deferred tax assets relating to the investment in SIC were Retirement and survivor pensions have been estimated based on recognised; actuarial tables and pension and salary growth assumptions. These assumptions are based on the BPI Group’s expectations ᭿ deferred tax liabilities relating to the estimated dividends that regarding the period during which the liabilities will be settled. Banco de Fomento Angola is expected to pay to the BPI Group companies are recognised; Loan impairment Loan impairment has been determined based on expected future ᭿ deferred tax liabilities relating to the undistributed profits of cash flows and estimated recoverable amounts. The estimates Banco Comercial e de Investimentos, are recognised. are made using assumptions based on the available historical information and assessment of the situation of the Customers. Net income distributed to Banco BPI by subsidiary and Possible differences between the assumptions used and the associated companies in Portugal are not taxed in Banco BPI as actual future behaviour of the loans and changes in the a result of application of the regime established in article 46 of assumptions used by the BPI Group have an impact on the the Corporate Income Tax Code, which provides for the estimates. elimination of double taxation of net income distributed. Fair value of derivatives and unlisted financial assets 2.13. Preference shares (IAS 32 and IAS 39) The fair value of derivatives and unlisted financial assets was Preference shares are classified as equity instruments when: estimated based on valuation methods and financial theories, the results of which depend on the assumptions used. ᭿ there is no contractual obligation for the BPI Group to redeem the preference shares acquired by a holder (in cash or in Income taxes another financial asset); The Bank of Portugal has changed the accounting rules for preparing non consolidated financial statements, which are those ᭿ remission or early redemption of the preference shares can used for tax purposes. As from 1 January, 2005 the non only be made at the option of the BPI Group; consolidated financial statements of Banco BPI have been prepared in accordance with the Adjusted Accounting Standards ᭿ dividends distributed by the BPI Group to the preference (Normas de Contabilidade Ajustadas – NCA) established by Bank shareholders are discretionary. of Portugal Notice 1 / 2005. Consequently, current and deferred tax relating to the impact of some transition adjustments to the The BPI Group classified the preference shares issued by BPI new accounting rules have been calculated based on Capital Finance Ltd. as equity instruments. The payment of assumptions that may or may not be confirmed by the tax dividends and redemption of the shares are guaranteed by authorities in the future. Banco BPI. Additionally, deferred tax assets are recognised based on the The preference shares classified as equity instruments, held by assumption of the existence of future taxable income. third parties, are presented in the consolidated financial statements in the caption MINORITY INTEREST. Deferred tax assets and liabilities have been recognised based on the tax legislation currently in force for the BPI Group companies or on legislation already published for future application. Different interpretations of tax legislation can influence the amount of income taxes.

Consolidated financial statements | Notes 187 3. INTRODUCTION OF THE INTERNATIONAL ACCOUNTING STANDARDS

3.1. Impact on shareholders’ equity and results at 31 December, 2004 of the transition to IAS / IFRS Application of the International Accounting Standards to the ᭿ the changes with effect as from 1 January, 2004 resulted in a consolidated financial statements had an overall negative impact decrease of 235 019 th. euro in shareholders’ equity as of 31 of 256 201 th. euro on the BPI Group’s shareholders’ equity as December, 2004; of 1 January, 2005 compared to the amount presented in the last financial statements prepared in accordance with the ᭿ additionally, the introduction of IAS 32, IAS 39 and IFRS 4 on Portuguese Chart of Accounts for the Banking Sector 1 January, 2005 had a negative impact of 21 182 th. euro. (Portuguese initials PCSB) (including minority interest):

Shareholders' equity Net income Shareholders' equity Transition adjustments at 1 Jan. 04 for 2004 at 31 Dec. 04 Amounts in accordance with PCSB1 1 490 237 192 718 1 491 105 Changes resulting from the introduction of IAS / IFRS IAS 19 Pension Liability – Employees (472 503) (40 397) (512 900) IAS 19 Pension Liability – Executive Directors (1 983) 856 (1 127) IAS 19 Long service premium (18 170) (446) (18 616) IFRS 2 Share-based payment program – RVA 13 516 457 14 554 IAS 38 Intangible assets (14 260) 556 (13 704) IAS 16 Tangible fixed assets available for sale (1 639) (349) (1 988) IAS 12 Deferred Taxes 189 064 6 947 196 011 IFRS 3 Goodwill on SIC and negative goodwill on InterRisco 387 126 903 IAS 21 Exchange difference in associated companies (1 202) IFRS 1 Associated companies 2 038 (227) 478 IAS 22 Preference shares in BPI Vida's Portfolio (14 636) (16 305) IAS 1 Interim dividends on preference shares (8 248) (8 286) Other (17) (2) (40) (326 838) (33 420) (235 019) Amounts in accordance with IAS / IFRS 1 163 399 159 298 1 256 086 Changes resulting from the adoption of IAS 32, IAS 39 and IFRS 4 on 1 Jan. 05 IAS 32 Treasury shares (25 653) IAS 39 Accrued commissions (13 661) IAS 39 Hedge Accounting – Derivatives and hedged instruments 4 195 IAS 39 Fair Value Revaluation Reserve 36 241 IAS 39 Impairment loss on the securities available for sale portfolio (33 447) IAS 39 Loan impairment 3 241 IAS 32 / 39 / IFRS 4 Associated companies 7 900 Other 2 (21 182) Shareholder's Equity as of 1 January, 2005 after adopting IAS 32, IAS 39 and IFRS 4 1 234 904 1) Shareholders' equity including minority interest. In accordance with PCSB, minority interest was recorded in a separate caption, while in accordance with IAS minority interest is included in shareholders' equity.

Pension liability – Employees (IAS 19) The overall impact, on shareholders’ equity of the BPI Group, of the changes in recognising the pension liability is made up as follows:

Shareholders' equity Net income Shareholders' equity Pension liability at 1 Jan. 04 for 2004 at 31 Dec. 04 Increase in liability (219 263) (291 158) Incapacity decreases (85 529) (83 014) Corridor / actuarial deviations (25 637) 43 163 (330 429) (331 009) Early retirements (138 513) (177 254) Change in conditions of the pension plan (3 561) (4 637) Total impact of the retirement pension plan (472 503) (40 397) (512 900)

188 Banco BPI | Annual Report 2006 Application of IAS 19 resulted in an increase of 291 158 Long service Premiums (IAS 19) th. euro in the liability for retirement pensions of the BPI The present value of the past service liability for long service Group’s Employees as of 31 December, 2004, of which 117 049 premiums payable in the future as of 31 December, 2004 was th. euro results from the introduction of the liability for calculated at 18 616 th. euro for the BPI Group and recognised healthcare (SAMS), 95 414 th. euro results from a change in in full by corresponding charge to retained earnings. In the discount rate and growth rate of salaries and pensions, accordance with the PCSB standards these premiums were 43 724 th. euro results from changes in the mortality table for recognised as cost when paid. women and 34 791 th. euro results from inclusion of the death subsidy during retirement. Share-based payments (Remuneração variável em acções – RVA)

Actuarial assumptions (IFRS 2) In accordance with PCSB standards, share-based payments were PCSB IAS / IFRS accrued in full by charge to personnel costs in the year to which Discount rate 31 Dec. 2003 7.00% 5.50% they refer. The shares already attributed but not yet made 31 Dec. 2004 7.00% 5.25% available were recorded in the portfolio of Employees’ securities. Salary increase rate 4.00% 2.75% The premium on options not exercised, as well as the gains and Pension increase rate 3.00% 1.75% losses realised in covering and exercising the options, were being Expected fund income 7.00% 6.00% recorded in liability accruals, deferrals and others captions up to Mortality table TV73 / 77 TV73 / 77 M the end of the program. TV88 / 90 W In accordance with IAS the cost of the share-based payment

Increase in liability 31 Dec. 04 program (RVA) is accrued in personnel costs as from the SAMS 117 049 beginning of the year to which the program relates, up to the Discount, salary and pension increase rates 95 414 date the shares and options become available, by corresponding Mortality table 43 724 entry to the shareholders’ equity caption – OTHER EQUITY Death subsidy 34 971 INSTRUMENTS. Shares already granted to the beneficiaries but not Total 291 158 yet made available are recorded in the Bank’s own portfolio.

Recognition of the unfunded incapacity decreases and changes Application of IFRS 2 resulted in an increase of 14 554 th. euro in the value of the corridor (IAS vs. PCSB) has generated a in shareholders’ equity of the BPI Group as of 31 December, negative impact of 83 014 th. euro and a positive impact of 2004, an increase of 4 273 th. euro in the treasury share

43 163 th. euro, respectively, in retained earnings. In portfolio and a decrease of 10 280 th. euro in OTHER LIABILITIES. compliance with the PCSB standards, and as authorised by the Impact of RVA at Bank of Portugal, the incapacity decreases were being amortised Share-based payment – RVA 1 Jan. 04 31 Dec. 04 and funded through a plan of uniform annual instalments during Treasury shares 3 117 4 273 a period of 20 years starting in 2002. Other liabilities – Provision for RVA for the year (5 474) (6 003) Other liabilities – Premiums on options not exercised (4 924) (4 277) The increase in the liability due to early retirements (177 254 Equity instruments 9 630 10 212 th. euro) and the actuarial deviations resulting from changes in Retained earnings 3 885 3 885 the assumptions (4 637 th. euro), that were being amortised Net income for 2004 - 457 over 10 years in accordance with the Bank of Portugal’s rules, Total impact on shareholders' equity 13 516 14 554 were also recognised in the transition, by charge to shareholders’ equity. Intangible assets (IAS 38) The impact of IAS on intangible assets of the BPI Group is as Pension liability – Executive Directors (IAS 19) follows: Calculation of the pension liability of the BPI Group’s Executive Intangible assets Shareholders' Net income Shareholders' equity Directors in accordance with IAS 19 resulted in an increase of (th. euro) equity 1 Jan. 04 2004 31 Dec. 04 1 127 th. euro in the liability in relation to the provision existing Advertising campaigns (11 217) (1 191) (12 408) at 31 December, 2004. This increase resulted from the change Other intangible assets (3 043) 1 747 (1 296) in actuarial assumptions as mentioned in the preceding item, Total (14 260) 556 (13 704) and was recognised in full by charge to retained earnings.

Consolidated financial statements | Notes 189 The definition of intangible assets in accordance with IAS 38 is Shareholders' Net income Shareholders' equity Deferred taxes stricter than under PCSB standards, requiring a greater number equity 1 Jan. 04 2004 31 Dec. 04 of expenses to be fully expensed in the year they are incurred Pension liability 144 383 7 198 151 581 (advertising, research and investigation, training, start-up, SIC 24 450 10 263 34 713 reorganisation costs, etc.). Other taxed provisions 19 486 (9 427) 10 058 Revaluation of tangible fixed assets (5 548) 208 (5 340) The deferred balance of advertising campaigns to be amortised Long service premium 4 967 121 5 088 at 31 December, 2004 totalled 12 408 th. euro, having been Other deferred taxes 1 326 (1 416) (90) charged in full to retained earnings. In accordance with PCSB Total deferred tax assets standards, these campaigns were being amortised over 3 years. and liabilities 189 064 6 947 196 011 On transition adjustments 152 644 7 139 159 783 Not recognised under PCSB 36 420 (192) 36 228 The amount of 1 296 th. euro relating to other costs to be amortised, that in accordance with IAS do not qualify as For purposes of calculating deferred taxes, the average tax rate intangible assets, was also written off. of 27.34% was used by Banco BPI and 27.5% by the remaining subsidiary and associated companies subject to the recognition Tangible assets available for sale (IAS 16) of deferred taxes. The BPI Group transferred buildings and inactive equipment in the amount of 7 572 th. euro, from tangible assets to other Goodwill in SIC and negative goodwill in InterRisco (IFRS 3) assets. Impairment losses of 1 988 th. euro were recognised on In accordance with IFRS 3, goodwill generated in business these assets as of 31 December, 2004, based on their estimated combinations is subject to impairment tests. Amortisation of realisable value. goodwill to shareholders’ equity, immediately or in instalments, is not permitted. On the other hand, negative goodwill is Deferred taxes (IAS 12) recognised when generated, in the statement of income. In accordance with PCSB standards, deferred tax assets were not recognised. Deferred tax liabilities were only recognised in the In June 2004 the BPI Group started recording the investment in case of gains in process on operations only recognised for tax SIC in accordance with the equity method, having written off purposes in the year in which they were settled and on goodwill of 126 517 th. euro to reserves (in the PCSB temporary differences between the accounting results and tax accounts). Upon transition to IAS goodwill on the investment in results of lease contracts. SIC was included in the book value of the investment with a corresponding positive impact on shareholders’ equity. Deferred taxes resulting from the transition adjustments to IAS / IFRS were recognised. Deferred tax assets and liabilities not In 2004 the BPI Group acquired a 16.3% participation in recognised in accordance with PCSB standards were also Inter-Risco, this having generated negative goodwill of 387 recognised. th. euro. In accordance with PCSB standards negative goodwill was reflected in a specific liability caption. In compliance with IAS, The most significant impact of the transition adjustments relates negative goodwill generated on the acquisition of the participation to the pension liability. Other significant items are the tax effect in Inter-Risco was recognised in net income for the year. of the provisions recorded for the participation in SIC, and other provisions with a deferred tax impact. Exchange differences on associated companies (IAS 21) With the introduction of IAS, exchange differences resulting from the translation of the foreign currency financial statements of BCI Fomento (Mozambique), BPI Dealer Mozambique, BPI Suisse and BPI Inc. started being recognised directly in reserves, while in accordance with PCSB standards they were recognised in the statement of income.

190 Banco BPI | Annual Report 2006 IAS impact on associated companies (IFRS 1) dividends are deducted from shareholders’ equity as, in The transition adjustments of Cosec to IAS (excluding IAS 32, accordance with IAS 32, minority interest has started being IAS 39 and IFRS 4) at 31 December, 2004 amounted to 478 considered as an integral part of the Group’s shareholders’ th. euro and correspond essentially to pension liabilities and the equity. recognition of deferred taxes. In the transition to IAS, the amount of interim dividends paid on

Preference shares in the BPI Vida portfolio (IAS 22) preference shares was deducted from the MINORITY INTEREST The change in the method of consolidating BPI Vida, from the caption (8 286 th. euro at 31 December, 2004). equity method under PCSB standards to full consolidation under IAS, resulted in reversal of the preference shares issued by BPI Financial Instruments and Insurance Contracts (IAS 32, IAS 39 Capital Finance, included in the securities portfolio of BPI Vida. and IFRS 4) The introduction of IAS 32, IAS 39 and IFRS 4 on 1 January, Interim dividends on preference shares (IAS 1) 2005 had a negative impact of 21 182 th. euro on shareholders’ In accordance with PCSB standards, interim dividends on equity of the BPI Group. Excluding the reclassification of Banco preference shares were recognised in ACCRUALS, DEFERRALS AND BPI’s treasury shares (25 653 th. euro), the remaining changes

OTHERS asset accounts. In accordance with IAS, interim had a positive impact of 4 470 th. euro.

Gross Taxes Net Introduction of IAS 32, IAS 39 and IFRS 4 amount amount Shareholders’ equity at 31 Dec. 2004 in accordance with IAS / IFRS 1 256 086 Changes resulting from the adoption of IAS 32, IAS 39 and IFRS 4 on 1 Jan. 2005 Treasury shares (25 653) (25 653) Accrual of commissions (18 717) 5 056 (13 661) Hedge accounting – Derivatives and hedged instruments 6 546 (2 350) 4 195 Fair value revaluation reserve 45 317 (9 076) 36 241 Impairment in the available-for-sale portfolio (42 483) 9 035 (33 447) Loan impairment 3 241 3 241 Associated companies 7 900 7 900 Others 112 Total (23 848) 2 665 (21 182) Shareholders’ equity at 1 Jan. 2005 after adopting IAS 32, IAS 39 and IFRS 4 1 234 904

Consolidated financial statements | Notes 191 (i) Treasury shares (IAS 32) (iii) Hedge accounting – derivatives and hedged instruments In accordance with IAS treasury shares and gains and losses International accounting standards require that all derivatives, realised on the sale of treasury shares, net of taxes, are whether they are hedging instruments or embedded in other recognised directly in shareholders’ equity. In accordance with instruments, be recorded at fair value. The hedging relationship PCSB standards, treasury shares were recognised as assets and must be formally documented, its effectiveness being tested in gains realised on treasury shares relating to the share-based each period. Where there is a fair value hedging relationship, the payment program (RVA) (net of taxes) were included in the changes in fair value of the hedged instrument must also be caption OTHER LIABILITIES – AMOUNTS TO BE SETTLED. recognised in the statement of income (in the proportion hedged).

At 31 December, 2004 (PCSB) Banco BPI had treasury shares The revaluation of derivatives and hedged instruments under hedge totalling 23 153 th. euro. The recording of the share-based accounting at 1 January, 2005 resulted in a positive impact of payment program (RVA) in accordance with IAS in 2004 6 546 th. euro before taxes (4 195 th. euro after taxes) on increased the amount of the treasury shares recognised as assets shareholders’ equity. to 27 426 th. euro, as the transfer of share ownership only takes Derivative Instrument Total Hedge accounting place when the shares are made available. hedged Treasury bonds (38 648) 38 578 (71) With the introduction of IAS 32 on 1 January, 2005, the cost of Loans (3 780) 3 622 (158) treasury shares started being deducted from shareholders’ equity, Deposits 11 824 (7 261) 4 562 and the capital gain realised during the year on the exercise and Others 13 549 (11 337) 2 212 hedge of the options under the share-based payment program (17 056) 23 601 6 546 (RVA) was recognised in shareholders’ equity. The net impact of the treasury shares on the Group’ shareholders’ equity amounted (iv) Fair value revaluation reserve to (25 653) th. euro. In accordance with IAS 39, assets available for sale are revalued

Treasury shares th. euro to fair value, unrealised gains and losses (net of taxes) being Treasury shares recorded in assets (27 426) recognised in the shareholders’ equity caption – FAIR VALUE Reversal of unrealised gain on the REVALUATION RESERVE. treasury share portfolio – RVA 1 510 Gain realised in exercising and hedging RVA options 263 At 1 January, 2005 the BPI Group’s positive fair value reserve1 Total impact on shareholders' equity at 1 Jan. 2005 (25 653) amounted 45 682 th. euro and negative fair value reserve amounted to 545 th. euro. The net amount of the reserve before (ii) Accrual of commissions deferred taxes was 45 317 th. euro.

In accordance with IAS, income and costs relating to financial Fair value reserve Positive FVR Negative FVR assets and liabilities recorded at amortised cost are accrued over Bonds the period of the operations. Domestic public issuers 3 453 Foreign public issuers 1 552 Commissions recognised in full as income up to 31 December, Other domestic issuers 31 Other foreign issuers 3 686 (6) 2004, but which in accordance with IAS should be recognised Shares over the period of the operations, were written off to retained Domestic earnings (-18 717 th. euro before taxes) on 1 January, 2005. Auto-estradas do Oeste 15 875 Banco Comercial Português 5 765 Fernando & Irmão SGPS 3 948 Cofina SGPS 3 028 Conduril – Construtora Duriense, S.A. 2 463 Companhia Aurifícia 1 293 Whatevernet 957 Ibersol SGPS 747 Other domestic shares 1 467 (210) Foreign Arco Bodegas Unidas 726 Other foreign shares 753 (81) Participating Units 119 (248) Total 45 862 (545)

1) Without considering unrealised gain of 15 469 th. euro before taxes (11 220 th. euro after taxes) on financial assets available for sale, included in BPI Vida’s reserves.

192 Banco BPI | Annual Report 2006 The fair value reserve net of deferred taxes amounted to 36 241 (vi) Loan impairment th. euro. In accordance with IAS, impairment losses are calculated based on the amount of the loan which is expected to be recovered, (v) Impairment of the available-for-sale portfolio after recovery costs, discounted at the effective interest rate In situations of impairment the accumulated unrealised loss on during the period from the date of calculation of the impairment an asset available for sale must be recognised in the statement of to the expected date of recovery. income and removed from the fair value revaluation reserve. In transition to IAS, the BPI Group recognised impairment on its In accordance with PCSB standards, loan impairment is investments in Portugal Telecom (31 185 th. euro), Impresa determined based on the amount of the provisions for credit in (6 047 th. euro) and Vista Alegre (6 044 th. euro). arrears and doubtful debts and provisions for general credit risks recorded in accordance with Bank of Portugal Notice 3 / 95 Net book Fair value Impairment value1 (31-12-04) (with the amendments introduced by the Bank of Portugal Portugal Telecom 219 950 188 765 (31 185) Notices 2 / 99 and 8 / 03). Impresa 47 093 41 046 (6 047) Vista Alegre 6 044 0 (6 044) Impairment losses on the BPI Group’s portfolio of loans and 273 088 229 811 (43 277) guarantees at 1 January, 2005 amounted to 3 241 th. euro less Other securities 794 than the specific and general provisions for loans. This Total (42 483) difference was added to shareholders’ equity of the BPI Group at 1) Net of provisions recorded up to 31 December, 2004. 1 January, 2005. In addition, the BPI Group reversed provisions of 794 th. euro for financial investments that were not impaired, that had been (vii) Associated companies recorded in accordance with Bank of Portugal Notice 4 / 2002. Reversal of Cosec’s provision for claim deviations (IFRS 4) and application of IAS 39 to its securities portfolio resulted in an increase of 7 900 th. euro in the book value of the investment and shareholders’ equity of the BPI Group.

Consolidated financial statements | Notes 193 4. SEGMENT REPORTING

4.1. Geographical segments Geographical segments are the main basis for segmentation of including the emigrant community and subsidiaries of the consolidated financial statements, and coincide with the first Portuguese companies. level of management segmentation and of the Group’s information. International operations International operations correspond to commercial banking The BPI Group’s segment reporting is based on the location of operations carried out in Angola by Banco de Fomento, S.A.R.L. the units, and is divided into two main segments: and in Mozambique by Banco Comercial e de Investimentos, S.A.R.L. and BPI Dealer – Sociedade Financeira de Corretagem, Domestic operations S.A.R.L. Domestic operations correspond to the commercial banking operations carried out by the Group entities with head offices in The BPI Group’s balance sheet as of 31 December, 2006 and Portugal, the Rest of Europe (Spain, France and Switzerland) investments made in tangible and intangible assets during the and the Rest of the World (Cayman, Macao and North America) year, by geographical segments, are as follows: relating to banking services provided to domestic Customers,

Domestic Operations

Portugal Rest of Rest of Inter segment Total Europe the World operations ASSETS Cash and deposits at central banks 402 026 9 425 16 411 467 Loans and advances to other credit institutions repayable on demand 492 404 18 458 30 551 (182 314) 359 099 Financial assets held for trading and at fair value through profit or loss 4 157 044 4 368 257 186 (370 507) 4 048 091 Financial assets available for sale 2 813 687 3 695 586 (551 806) 2 957 470 Loans and advances to credit institutions 3 680 139 172 341 8 684 708 (11 624 615) 912 573 Loans and advances to Customers 21 960 716 1 698 046 493 208 (145 728) 24 006 242 Hedging derivatives 480 893 93 989 (167 362) 407 520 Other tangible assets 229 710 3 407 180 233 297 Intangible assets 7 187 1 254 19 8 460 Investment in associated companies and jointly controlled entities 129 948 129 948 Tax assets 131 983 1 374 2 133 359 Other assets 732 829 9 801 (291) (35 335) 707 004 Total assets 35 218 566 1 918 477 10 255 154 (13 077 667) 34 314 530 LIABILITIES Resources of central banks Financial liabilities held for trading 197 908 4 137 3 503 (3 701) 201 847 Resources of other credit institutions 12 756 121 1 549 925 1 463 324 (11 357 700) 4 411 670 Resources of Customers and other debts 12 864 744 292 696 2 086 296 (463 954) 14 779 782 Debt securities 923 801 4 587 422 (46 657) 5 464 566 Financial liabilities relating to transferred assets 3 368 059 3 368 059 Hedging derivatives 526 120 125 490 (170 804) 480 806 Provisions 25 482 18 787 2 281 46 550 Technical provisions 2 811 111 2 811 111 Tax liabilities 65 425 940 6 66 371 Participating bonds 28 486 (1 264) 27 222 Subordinated debt 106 104 1 965 1 193 381 (712 560) 588 890 Other liabilities 558 888 12 552 294 788 (321 027) 545 201 Total liabilities 34 232 249 1 881 002 9 756 491 (13 077 667) 32 792 075 SHAREHOLDERS' EQUITY Shareholders' equity attributable to the shareholders of BPI 986 317 37 475 221 932 1 245 724 Minority interest 276 731 276 731 Total shareholders' equity 986 317 37 475 498 663 1 522 455 Total liabilities and shareholders' equity 35 218 566 1 918 477 10 255 154 (13 077 667) 34 314 530 Investments made in: Property 151 48 199 Equipment and other tangible assets 25 474 62 11 25 547 Intangible assets 5 189 7 5 196

194 Banco BPI | Annual Report 2006 International operations Inter segment BPI Group operations Angola Mozambique Total

148 473 148 473 559 940

18 852 20 18 872 (8 487) 369 484

296 909 57 296 966 4 345 057 107 441 107 441 3 064 911 461 656 1 461 657 (467 484) 906 746 623 844 623 844 24 630 086 407 520 56 011 56 011 289 308 343 343 8 803 11 820 11 820 141 768 7 7 133 366 1 490 1 490 708 494 1 715 019 11 905 1 726 924 (475 971) 35 565 483

201 847 12 611 12 611 (464 034) 3 960 247 1 455 723 1 455 723 16 235 505 5 464 566 3 368 059 480 806 8 319 8 319 54 869 2 811 111 18 969 381 19 350 85 721 27 222 588 890 26 073 26 073 (11 937) 559 337 1 521 695 381 1 522 076 (475 971) 33 838 180

193 324 11 518 204 842 1 450 566 6 6 276 737 193 324 11 524 204 848 1 727 303 1 715 019 11 905 1 726 924 (475 971) 35 565 483

3 527 3 527 3 726 25 459 25 459 51 006 2 772 2 772 7 968

Consolidated financial statements | Notes 195 The BPI Group’s statement of income for the year ended 31 December, 2006, by geographical segments, is as follows:

Domestic operations

Portugal Rest of the Rest of the Inter segment Total Europe World operations Financial margin (narrow sense) 402 348 15 161 36 491 178 454 178 Gross margin on unit links 7 516 7 516 Income from equity instruments 14 747 14 747 Net commission relating to amortised cost 18 524 (159) 8 18 373 Financial margin 443 135 15 161 36 332 186 494 814 Technical result of insurance contracts 3 265 3 265 Commissions received 259 191 11 952 1 740 (1 356) 271 527 Commissions paid (25 672) (1 770) 973 (26 469) Other income, net 24 006 26 3 24 035 Net commission income 257 525 10 208 1 743 (383) 269 093 Gain and loss on operations at fair value 48 701 1 519 (4 031) 46 189 Gain and loss on assets available for sale 40 244 (1) (2) 40 241 Interest and financial gain and loss with pensions 14 216 14 216 Net income on financial operations 103 161 1 518 (4 033) 100 646 Operating income 19 668 1 936 274 21 878 Operating expenses (11 203) (248) (9) (11 460) Other taxes (2 448) (294) (147) (2 889) Net operating expenses 6 017 1 394 118 7 529 Operating income from banking activity 813 103 28 281 34 160 (197) 875 347 Personnel costs (309 716) (9 151) (295) (319 162) General administrative costs (171 952) (5 122) (215) 197 (177 092) Depreciation and amortisation (32 925) (771) (33) (33 729) Overhead costs (514 593) (15 044) (543) 197 (529 983) Recovery of loans, interest and expenses 21 015 21 015 Impairment losses and provisions for loans and guarantees, net (38 830) 338 (38 492) Impairment losses and other provisions, net (5 281) (281) 180 (5 382) Net income before income tax 275 414 12 956 34 135 322 505 Income tax (84 171) (953) (85 124) Earnings of associated companies (equity method) 17 444 17 444 Global consolidated net income 208 687 12 003 34 135 254 825 Income attributable to minority interest (13 289) (13 289) Consolidated net income of the BPI Group 208 687 12 003 20 846 241 536 Cash flow after taxes 285 723 13 055 20 361 319 139 Overheads as a % of operating income from banking 63% 53% 2% 61%

196 Banco BPI | Annual Report 2006 International operations Inter segment BPI Group operations Angola Mozambique Total

86 522 10 86 532 540 710 7 516 14 747 18 373 86 522 10 86 532 581 346 3 265 14 835 14 835 (1 250) 285 112 (2 038) (2 038) 1 250 (27 257) 19 973 19 973 44 008 32 770 32 770 301 863 19 086 19 086 65 275 4 091 4 091 44 332 14 216 23 177 23 177 123 823 2 125 1 2 126 24 004 (790) (1) (791) (12 251) (1 075) (1 075) (3 964) 260 260 7 789 142 729 10 142 739 1 018 086 (20 066) (20 066) (339 228) (21 002) (21 002) (198 094) (5 313) (5 313) (39 042) (46 381) (46 381) (576 364) 21 015 (17 996) (17 996) (56 488) (615) (615) (5 997) 77 737 10 77 747 400 252 (14 756) (393) (15 149) (100 273) 4 625 4 625 22 069 62 981 4 242 67 223 322 048 (1) (1) (13 290) 62 981 4 241 67 222 308 758 86 905 4 241 91 146 410 285 32% 32% 57%

Consolidated financial statements | Notes 197 The BPI Group’s balance sheet as of 31 December, 2005 and investments made in tangible and intangible assets during the year, by geographical segments, are as follows:

Domestic operations

Portugal Rest of Rest of the Inter segment Total Europe World operations ASSETS Cash and deposits at central banks 461 966 7 062 14 469 042 Loans and advances to other credit institutions repayable demand 496 939 17 285 15 060 (194 233) 335 051 Financial assets held for trading and at fair value through profit or loss 4 265 711 2 206 34 736 (396 854) 3 905 799 Financial assets available for sale 1 490 644 5 555 863 (546 117) 1 500 395 Loans and advances to credit institutions 3 613 109 341 393 7 710 051 (10 734 536) 930 017 Loans and advances to Customers 19 716 170 519 094 447 766 (138 777) 20 544 253 Hedging derivatives 258 415 684 85 540 (5 698) 338 941 Other tangible assets 238 343 2 569 281 241 193 Intangible assets 4 513 839 5 352 Investment in associated companies and jointly controlled entities 120 739 64 120 803 Tax assets 212 625 1 371 213 996 Other assets 669 639 18 205 36 186 (128 183) 595 847 Total assets 31 548 813 910 777 8 885 497 (12 144 398) 29 200 689 LIABILITIES Resources of central banks 54 201 (320) 53 881 Financial liabilities held for trading 326 838 1 355 1 921 (14 755) 315 359 Resources of other credit institutions 11 818 307 609 360 1 058 853 (10 639 396) 2 847 124 Resources of Customers and other debts 11 415 647 234 067 1 580 184 (297 920) 12 931 978 Debt securities 923 068 4 246 861 (94 436) 5 075 493 Financial liabilities relating to transferred assets 2 000 352 2 000 352 Hedging derivatives 260 136 684 137 476 (10 241) 388 055 Provisions 37 130 6 914 1 943 45 987 Technical provisions 2 925 635 2 925 635 Tax liabilities 53 150 2 013 2 55 165 Participating bonds 27 716 (1 259) 26 457 Subordinated debt 276 530 2 030 1 093 146 (718 316) 653 390 Other liabilities 646 799 17 133 246 454 (367 755) 542 631 Total liabilities 30 765 509 873 556 8 366 840 (12 144 398) 27 861 507 SHAREHOLDERS' EQUITY Shareholders' equity attributable to the shareholders of BPI 783 304 37 221 212 411 1 032 936 Minority interest 306 246 306 246 Total shareholders' equity 783 304 37 221 518 657 1 339 182 Total liabilities and shareholders' equity 31 548 813 910 777 8 885 497 (12 144 398) 29 200 689 Investments made in: Property 166 166 Equipment and other tangible assets 23 651 139 0 23 789 Intangible assets 2 942 2 942

198 Banco BPI | Annual Report 2006 International operations Inter segment BPI Group operations Angola Mozambique Total

148 941 148 941 617 983

12 900 3 12 903 (9 471) 338 483

279 007 79 279 086 4 184 885 71 373 71 373 1 571 768 327 062 327 062 (338 084) 918 995 418 994 418 994 20 963 247 338 941 34 043 34 043 275 236 503 503 5 855 11 967 11 967 132 770 6 6 214 002 694 2 696 596 543 1 293 517 12 057 1 305 574 (347 555) 30 158 708

53 881 315 359 (323 681) 2 523 443 1 096 473 1 096 473 14 028 451 5 075 493 2 000 352 388 055 4 667 4 667 50 654 2 925 635 14 476 1 14 477 69 642 26 457 653 390 41 473 41 473 (23 874) 560 230 1 157 089 1 1 157 090 (347 555) 28 671 042

136 428 12 050 148 478 1 181 414 6 6 306 252 136 428 12 056 148 484 1 487 666 1 293 517 12 057 1 305 574 (347 555) 30 158 708

4 726 4 726 4 892 9 159 9 159 32 948 339 339 3 281

Consolidated financial statements | Notes 199 The BPI Group’s statement of income for the year ended 31 December, 2005, by geographical segments, is as follows:

Domestic operations

Portugal Rest of Rest of the Inter segment Total Europe World operations Financial margin (narrow sense) 395 170 10 016 35 115 174 440 475 Gross margin on unit links 3 166 3 166 Income from equity instruments 17 749 17 749 Net commission relating to amortised cost 14 175 (1) (241) 8 13 941 Financial margin 430 260 10 015 34 874 182 475 331 Technical result of insurance contracts 11 919 11 919 Commissions received 224 912 9 025 1 369 (1 160) 234 146 Commissions paid (16 921) (1 558) (34) 933 (17 580) Other income, net 28 963 79 5 29 047 Net commission income 236 954 7 546 1 340 (227) 245 613 Gain and loss on operations at fair value 12 840 1 343 14 409 28 592 Gain and loss on assets available for sale 25 321 25 321 Interest and financial gain and loss with pensions (5 804) (5 804) Net income on financial operations 32 357 1 343 14 409 48 109 Operating income 9 735 406 401 10 542 Operating expenses (13 129) (106) (5) (13 240) Other taxes (2 275) (240) (148) (2 663) Net operating expenses (5 669) 60 248 (5 361) Operating income from banking activity 705 821 18 964 50 871 (45) 775 611 Personnel costs (280 153) (8 721) (219) (289 093) General administrative costs (160 694) (4 512) (343) 45 (165 504) Depreciation and amortisation (33 709) (1 004) (20) (34 733) Overhead costs (474 556) (14 237) (582) 45 (489 330) Recovery of loans, interest and expenses 17 605 36 17 641 Impairment losses and provisions for loans and guarantees, net (53 922) (316) (54 238) Impairment losses and other provisions, net (31 206) (195) (1 920) (33 321) Net income before income tax 163 742 4 568 48 053 216 363 Income tax (46 437) (2 013) (48 450) Earnings of associated companies (equity method) 22 257 22 257 Global consolidated net income 139 562 2 555 48 053 190 170 Income attributable to minority interest (10 861) (10 861) Consolidated net income of the BPI Group 139 562 2 555 37 192 179 309 Cash flow after taxes 258 399 3 754 39 448 301 601 Overheads as a % of operating income from banking 67% 75% 1% 63%

200 Banco BPI | Annual Report 2006 International operations Inter segment BPI Group operations Angola Mozambique Total

71 046 9 71 055 511 530 3 166 17 749 13 941 71 046 9 71 055 546 386 11 919 12 562 12 562 246 708 (1 650) (1 650) (19 230) 14 958 14 958 44 005 25 870 25 870 271 483 23 974 23 974 52 566 3 053 3 053 28 374 (5 804) 27 027 27 027 75 136 581 581 11 123 (935) (1) (936) (14 176) (389) (2) (391) (3 054) (743) (3) (746) (6 107) 123 200 6 123 206 898 817 (13 924) (13 924) (303 017) (11 373) (11 373) (176 877) (4 713) (4 713) (39 446) (30 010) (30 010) (519 340) 17 641 (10 479) (10 479) (64 717) (2 250) (2 250) (35 571) 80 461 6 80 467 296 830 (10 798) (565) (11 363) (59 813) 2 403 2 403 24 660 69 663 1 844 71 507 261 677 (10 861) 69 663 1 844 71 507 250 816 87 105 1 844 88 949 390 550 24% 24% 58%

Consolidated financial statements | Notes 201 4.2. Business segments The BPI Group’s business segment reporting is made up of three Equity participations and others main segments: This segment includes essentially Private Equity operations, which are carried out mainly by Inter-Risco, a fully owned Commercial banking subsidiary of the Group. This company invests in unlisted The BPI Group’s operations are focused mainly on commercial companies with the following objectives: the development of new banking. Commercial banking includes: products and technologies, financing of investments in working capital, acquisitions and the strengthening of financial ᭿ Retail banking – Retail banking includes commercial autonomy. operations with private Clients, businesses and sole traders with turnover of up to 2.5 million euro through a multi-channel This segment includes the Bank’s residual activity, the segments distribution network made up of commercial branches, which represent individually less than 10% of turnover, net investment centres, home banking services (BPI Net), profit and assets of the Group. telephone banking (BPI Directo), specialised branches and a network of external promoters.

᭿ Corporate banking – Corporate banking includes commercial operations with private, public and municipal companies and public sector organisations (including the Central and Local Administration), as well as Foundations and Associations. Corporate banking also includes Project Finance and Public- Private Partnership operations in the commercial promotion area, structuring and organising financial operations and consultancy services relating to this area.

Investment banking Investment banking covers the following business areas:

᭿ Brokerage – includes brokerage (purchase and sale of securities) on account of Customers;

᭿ Private Banking – Private Banking is responsible for implementing strategies and investment proposals presented to Customers and managing all or part of their financial assets under management mandates given to the Bank. In addition, Private Banking provides asset management, tax information and business consulting services.

᭿ Corporate finance – This includes rendering consultancy services relating to the analysis of investment projects and decisions, market privatisation operations and the structuring of merger and acquisition processes.

202 Banco BPI | Annual Report 2006 The BPI Group’s balance sheet as of 31 December, 2006 and investments made in tangible and intangible assets during the year, by business segment, are as follows:

Domestic operations International Inter BPI Group operations segment Commer- Investment Equity Inter Total operations cial banking investments segment banking and others operations ASSETS Cash and deposits at central banks 388 648 22 817 2 411 467 148 473 559 940 Loans and advances to other credit institutions repayable on demand 423 553 99 052 7 286 (170 792) 359 099 18 873 (8 488) 369 484 Financial assets held for trading and at fair value through profit or loss 2 618 022 1 797 286 (367 217) 4 048 091 296 966 4 345 057 Financial assets available for sale 2 841 380 129 824 538 072 (551 806) 2 957 470 107 441 3 064 911 Loans and advances to credit institutions 2 107 162 1 458 339 (2 652 928) 912 573 461 656 (467 483) 906 746 Loans and advances to Customers 24 002 076 149 894 (145 728) 24 006 242 623 844 24 630 086 Hedging derivatives 385 956 18 135 3 429 407 520 407 520 Other tangible assets 228 872 3 847 578 233 297 56 011 289 308 Intangible assets 8 403 57 8 460 343 8 803 Investment in associated companies and jointly controlled entities 66 595 63 353 129 948 11 820 141 768 Tax assets 131 487 1 857 15 133 359 7 133 366 Other assets 675 312 59 762 550 (28 620) 707 004 1 490 708 494 Total assets 33 877 466 3 740 870 609 856 (3 913 662) 34 314 530 1 726 924 (475 971) 35 565 483 LIABILITIES Resources of central banks Financial liabilities held for trading 192 177 10 080 (410) 201 847 201 847 Resources of other credit institutions 6 000 882 416 415 368 681 (2 374 308) 4 411 670 12 611 (464 034) 3 960 247 Resources of Customers and other debts 13 382 793 1 860 076 867 (463 954) 14 779 782 1 455 723 16 235 505 Debt securities 5 534 698 (23 475) (46 657) 5 464 566 5 464 566 Financial liabilities relating to transferred assets 3 368 059 3 368 059 3 368 059 Hedging derivatives 476 899 3 922 (15) 480 806 480 806 Provisions 45 847 469 234 46 550 8 319 54 869 Technical provisions 1 453 446 1 206 037 151 628 2 811 111 2 811 111 Tax liabilities 56 011 10 360 66 371 19 350 85 721 Participating bonds 28 485 (1 263) 27 222 27 222 Subordinated debt 1 259 396 42 055 (712 561) 588 890 588 890 Other liabilities 791 954 63 811 3 930 (314 494) 545 201 26 073 (11 937) 559 337 Total liabilities 32 590 647 3 589 750 525 340 (3 913 662) 32 792 075 1 522 076 (475 971) 33 838 180 SHAREHOLDERS' EQUITY Shareholders' equity attributable to the shareholders of BPI 1 010 088 151 120 84 516 1 245 724 204 842 1 450 566 Minority interest 276 731 276 731 6 276 737 Total shareholders' equity 1 286 819 151 120 84 516 1 522 455 204 848 1 727 303 Total liabilities and shareholders' equity 33 877 466 3 740 870 609 856 (3 913 662) 34 314 530 1 726 924 (475 971) 35 565 483 Investments made in: Property 152 48 199 3 527 3 726 Equipment and other tangible assets 25 439 108 25 547 25 459 51 006 Intangible assets 5 182 14 5 196 2 772 7 968

Consolidated financial statements | Notes 203 The BPI Group’s statement of income for the year ended 31 December, 2006, by business segment, is as follows:

Domestic operations International Inter BPI Group operations segment Commer- Investment Equity Inter Total operations cial banking investments segment banking and others operations Financial margin (narrow sense) 462 533 4 344 (12 699) 454 178 86 532 540 710 Gross margin on unit links 4 107 3 409 7 516 7 516 Income from equity instruments 2 937 123 11 687 14 747 14 747 Net commission relating to amortised cost 18 373 18 373 18 373 Financial margin 487 950 7 876 (1 012) 494 814 86 532 581 346 Technical result of insurance contracts 1 785 1 480 3 265 3 265 Commissions received 254 238 40 383 988 (24 082) 271 527 14 835 (1 250) 285 112 Commissions paid (41 942) (8 605) (4) 24 082 (26 469) (2 038) 1 250 (27 257) Other income, net 24 001 34 24 035 19 973 44 008 Net commission income 236 297 31 812 984 269 093 32 770 301 863 Gain and loss on operations at fair value 26 011 20 178 46 189 19 086 65 275 Gain and loss on assets available for sale 7 046 3 405 29 790 40 241 4 091 44 332 Interest and financial gain and loss with pensions 14 281 (66) 1 14 216 14 216 Net income on financial operations 47 338 23 517 29 791 100 646 23 177 123 823 Operating income 21 113 752 13 21 878 2 126 24 004 Operating expenses (11 014) (440) (6) (11 460) (791) (12 251) Other taxes (2 535) (316) (38) (2 889) (1 075) (3 964) Net operating expenses 7 564 (4) (31) 7 529 260 7 789 Operating income from banking activity 780 934 64 681 29 732 875 347 142 739 1 018 086 Personnel costs (299 641) (18 458) (1 063) (319 162) (20 066) (339 228) General administrative costs (166 936) (9 686) (470) (177 092) (21 002) (198 094) Depreciation and amortisation (31 537) (2 062) (130) (33 729) (5 313) (39 042) Overhead costs (498 114) (30 206) (1 663) (529 983) (46 381) (576 364) Recovery of loans, interest and expenses 21 015 21 015 21 015 Impairment losses and provisions for loans and guarantees, net (38 035) (457) (38 492) (17 996) (56 488) Impairment losses and other provisions, net 1 599 (115) (6 866) (5 382) (615) (5 997) Net income before income tax 267 399 33 903 21 203 322 505 77 747 400 252 Income tax (74 295) (9 140) (1 689) (85 124) (15 149) (100 273) Earnings of associated companies (equity method) 12 810 4 634 17 444 4 625 22 069 Global consolidated net income 205 914 24 763 24 148 254 825 67 223 322 048 Income attributable to minority interest (13 289) (13 289) (1) (13 290) Consolidated net income of the BPI Group 192 625 24 763 24 148 241 536 67 222 308 758 Cash flow after taxes 260 598 27 397 31 144 319 139 91 146 410 285 Overheads as a % of operating income from banking 64% 47% 6% 61% 32% 57%

204 Banco BPI | Annual Report 2006 The BPI Group’s balance sheet as of 31 December, 2005 and investments made in tangible and intangible assets, by business segment, are as follows:

Domestic operations International Inter BPI Group operations segment Commer- Investment Equity Inter Total operations cial banking investments segment banking and others operations ASSETS Cash and deposits at central banks 441 425 27 615 2 469 042 148 941 617 983 Loans and advances to other credit institutions repayable on demand 456 030 55 173 5 548 (181 700) 335 051 12 903 (9 471) 338 483 Financial assets held for trading and at fair value through profit or loss 3 509 140 793 056 (396 397) 3 905 799 279 086 4 184 885 Financial assets available for sale 1 545 276 58 443 442 793 (546 117) 1 500 395 71 373 1 571 768 Loans and advances to credit institutions 2 060 270 1 939 075 (3 069 328) 930 017 327 062 (338 084) 918 995 Loans and advances to Customers 20 562 183 120 847 (138 777) 20 544 253 418 994 20 963 247 Hedging derivatives 298 080 41 737 (876) 338 941 338 941 Other tangible assets 235 828 4 762 603 241 193 34 043 275 236 Intangible assets 5 217 135 5 352 503 5 855 Investment in associated companies and jointly controlled entities 56 699 64 64 040 120 803 11 967 132 770 Tax assets 211 579 2 408 9 213 996 6 214 002 Other assets 591 622 56 227 3 729 (55 731) 595 847 696 596 543 Total assets 29 973 349 3 099 542 516 724 (4 388 926) 29 200 689 1 305 574 (347 555) 30 158 708 LIABILITIES Resources of central banks 53 881 53 881 53 881 Financial liabilities held for trading 325 395 4 263 (14 299) 315 359 315 359 Resources of other credit institutions 5 048 858 344 862 415 858 (2 962 454) 2 847 124 (323 681) 2 523 443 Resources of Customers and other debts 11 208 194 2 020 837 867 (297 920) 12 931 978 1 096 473 14 028 451 Debt securities 5 169 530 399 (94 436) 5 075 493 5 075 493 Financial liabilities relating to transferred assets 2 000 352 2 000 352 2 000 352 Hedging derivatives 391 513 1 961 (5 419) 388 055 388 055 Provisions 45 047 886 54 45 987 4 667 50 654 Technical provisions 2 380 218 545 417 2 925 635 2 925 635 Tax liabilities 51 086 4 078 1 55 165 14 477 69 642 Participating bonds 27 716 (1 259) 26 457 26 457 Subordinated debt 1 332 580 39 126 (718 316) 653 390 653 390 Other liabilities 755 035 54 818 27 602 (294 824) 542 631 41 473 (23 874) 560 230 Total liabilities 28 789 405 3 016 647 444 381 (4 388 926) 27 861 507 1 157 090 (347 555) 28 671 042 SHAREHOLDERS' EQUITY Shareholders' equity attributable to the shareholders of BPI 877 698 82 895 72 343 1 032 936 148 478 1 181 414 Minority interest 306 246 306 246 6 306 252 Total shareholders' equity 1 183 944 82 895 72 343 1 339 182 148 484 1 487 666 Total liabilities and shareholders' equity 29 973 349 3 099 542 516 724 (4 388 926) 29 200 689 1 305 574 (347 555) 30 158 708 Investments made in: Property 166 166 4 726 4 892 Equipment and other tangible assets 23 488 300 1 23 789 9 159 32 948 Intangible assets 2 909 33 2 942 339 3 281

Consolidated financial statements | Notes 205 The BPI Group’s statement of income for the year ended 31 December, 2005, by business segment, is as follows:

Domestic operations International BPI Group operations Commer- Investment Equity Inter Total cial banking investments segment banking and others operations Financial margin (narrow sense) 444 301 6 367 (10 193) 440 475 71 055 511 530 Gross margin on unit links 2 576 590 3 166 3 166 Income from equity instruments 2 106 188 15 455 17 749 17 749 Net commission relating to amortised cost 13 942 (1) 13 941 13 941 Financial margin 462 925 7 144 5 262 475 331 71 055 546 386 Technical result of insurance contracts 9 697 2 222 11 919 11 919 Commissions received 220 056 25 767 15 (11 692) 234 146 12 562 246 708 Commissions paid (24 636) (3 959) (677) 11 692 (17 580) (1 650) (19 230) Other income, net 29 018 29 29 047 14 958 44 005 Net commission income 224 438 21 837 (662) 245 613 25 870 271 483 Gain and loss on operations at fair value 18 341 10 251 28 592 23 974 52 566 Gain and loss on assets available for sale 22 488 387 2 446 25 321 3 053 28 374 Interest and financial gain and loss with pensions (5 479) (322) (3) (5 804) (5 804) Net income on financial operations 35 350 10 316 2 443 48 109 27 027 75 136 Operating income 10 055 438 49 10 542 581 11 123 Operating expenses (12 579) (636) (25) (13 240) (936) (14 176) Other taxes (2 276) (376) (11) (2 663) (391) (3 054) Net operating expenses (4 800) (574) 13 (5 361) (746) (6 107) Operating income from banking activity 727 610 40 945 7 056 775 611 123 206 898 817 Personnel costs (273 002) (15 217) (874) (289 093) (13 924) (303 017) General administrative costs (156 154) (8 881) (469) (165 504) (11 373) (176 877) Depreciation and amortisation (32 444) (2 083) (206) (34 733) (4 713) (39 446) Overhead costs (461 600) (26 181) (1 549) (489 330) (30 010) (519 340) Recovery of loans, interest and expenses 17 641 17 641 17 641 Impairment losses and provisions for loans and guarantees, net (53 017) (1 221) (54 238) (10 479) (64 717) Impairment losses and other provisions, net (3 584) 1 344 (31 081) (33 321) (2 250) (35 571) Net income before income tax 227 050 14 887 (25 574) 216 363 80 467 296 830 Income tax (51 092) (4 391) 7 033 (48 450) (11 363) (59 813) Earnings of associated companies (equity method) 12 663 9 594 22 257 2 403 24 660 Global consolidated net income 188 621 10 496 (8 947) 190 170 71 507 261 677 Income attributable to minority interest (10 861) (10 861) (10 861) Consolidated net income of the BPI Group 177 760 10 496 (8 947) 179 309 71 507 250 816 Cash flow after taxes 266 805 12 456 22 340 301 601 88 949 390 550 Overheads as a % of operating income from banking 63% 64% 22% 63% 24% 58%

206 Banco BPI | Annual Report 2006 5. NOTES

5.1. Cash and deposits at central banks 5.3. Financial assets held for trading and at fair value through This caption is made up as follows: profit or loss This caption is made up as follows: 31 Dec. 06 31 Dec. 05

Cash 231 015 192 277 31 Dec. 06 31 Dec. 05 Demand deposits at the Bank of Portugal 227 654 323 680 FINANCIAL ASSETS HELD FOR TRADING Demand deposits at foreign central banks 100 825 101 686 Debt instruments Accrued interest 446 340 Listed securities 559 940 617 983 Bonds issued by Portuguese government entities Fixed rate 7 239 37 594

The caption DEMAND DEPOSITS AT THE BANK OF PORTUGAL includes Bonds issued by foreign government entities 428 124 908 280 deposits made to comply with the minimum cash reserve Bonds issued by other Portuguese entities Non-subordinated debt 132 922 140 656 requirements of the European Central Bank System (ECBS). Subordinated debt 26 931 41 043 These deposits bear interest and correspond to 2% of the Bonds issued by foreign financial entities 25 114 16 532 amount of Customers’ deposits and debt securities maturing in Bonds issued by other foreign entities up to 2 years, excluding deposits and debt securities of entities Non-subordinated debt 1 960 882 1 605 101 subject to the ECBS minimum cash reserves regime. Subordinated debt 256 744 243 475 Unlisted securities 5.2. Loans and advances to credit institutions repayable on Bonds issued by foreign government entities 296 909 279 007 demand Bonds issued by other foreign entities This caption is made up as follows: Non-subordinated debt 20 409 32 344 3 155 274 3 304 032 31 Dec. 06 31 Dec. 05 Equity instruments Domestic credit institutions Listed securities Demand deposits 2 468 7 860 Of Portuguese entities Cheques for collection 275 150 229 478 Shares 100 944 38 108 Other 1 576 11 527 Of foreign entities Foreign credit institutions Shares 321 050 144 677 Demand deposits 82 168 83 320 421 994 182 785 Cheques for collection 8 085 6 277 Other securities Accrued interest 36 21 Listed securities 369 483 338 483 Participating units 545 615 528 346 545 615 528 346 4 122 883 4 015 163 Cheques for collection from domestic credit institutions FINANCIAL ASSETS AT FAIR VALUE correspond to cheques drawn by third parties against domestic THROUGH PROFIT OR LOSS credit institutions, which in general do not remain in this Equity instruments account for more than one business day. Listed securities Of foreign entities Shares 50 917 35 493 50 917 35 493 DERIVATIVE INSTRUMENTS WITH POSITIVE FAIR VALUE (NOTE 5.4) 171 257 134 229 4 345 057 4 184 885

Consolidated financial statements | Notes 207 This caption includes the following assets hedging capitalisation insurance products issued by BPI Vida:

31 Dec. 06 31 Dec. 05

Debt instruments Of public entities 341 008 679 668 Other entities 2 352 930 1 998 119 Equity Instruments 204 275 101 100 Other securities 545 384 527 496 Derivative instruments with positive fair value 3 540 3 633 3 447 137 3 310 016

5.4. Derivatives

The caption DERIVATIVE INSTRUMENTS HELD FOR TRADING (notes 5.3 and 5.14) is made up as follows:

31 Dec. 06 31 Dec. 05

Notional Book value Notional Book value value1 value1 Assets Liabilities Assets Liabilities

Listed instruments Foreign exchange rate contracts Futures 288 936 23 441 55 204 38 45 Options 132 Interest rate contracts Futures 714 146 82 315 32 338 475 21 Options 1 321 3 266 3 220 Contracts over shares Futures 321 897 1 444 2 152 105 544 462 1 674 Options 118 748 23 110 2 290 Contracts over goods Futures 893 59 3 139 50 23 Over-the-counter market Exchange rate contracts Forwards 1 206 479 845 431 2 690 1 532 Swaps 171 840 6 672 4 946 47 730 579 1 319 Interest rate contracts Swaps 7 102 920 145 980 96 529 5 179 291 120 259 60 819 FRA 200 000 4 Options 65 597 3 921 578 16 347 161 161 Contracts over shares Swaps 26 124 895 895 Options 89 059 12 240 4 273 136 154 4 001 465 Contracts over other underlying items Others 121 10 108 092 171 257 110 309 6 647 554 134 229 66 059 1) In the case of swaps and forwards only the asset amounts were considered.

208 Banco BPI | Annual Report 2006 The caption DERIVATIVE INSTRUMENTS HELD FOR HEDGING is made up as follows:

31 Dec. 06 31 Dec. 05

Notional Book value Notional Book value value1 value1 Assets Liabilities Assets Liabilities

Over-the-counter market Exchange rate contracts Forwards 2 831 Swaps 86 171 1 643 1 108 162 471 1 900 1 354 Interest rate contracts Swaps 5 966 200 129 226 185 470 5 992 746 174 605 193 222 Options 29 033 249 878 247 567 62 216 130 182 128 166 Forward 9 018 195 Contracts over shares Swaps 420 388 530 454 394 227 525 3 251 Options 192 830 7 087 4 218 248 475 4 291 5 552 Contracts over other underlying items Swaps 669 095 22 833 624 830 30 009 Others2 Options 4 091 978 19 156 19 156 3 670 213 27 438 26 306 11 458 526 407 520 480 806 11 164 196 338 941 388 055 1) In the case of swaps and forwards only the asset amounts were considered. 2) Parts of operations which are autonomous for accounting purposes, commonly referred to as “embeded derivatives”.

The BPI Group’s operations include carrying out derivative Derivative contracts can also include an agreement to transactions to manage its own positions based on expectations collateralise the credit risk generated by the transactions covered regarding market evolution (trading), meet the needs of its by them. Derivative contracts between two parties normally Customers or hedge positions of a structural nature (hedging). include all the derivative OTC transactions carried out between the two parties, irrespective of whether they are for hedging The BPI Group carries out financial derivative transactions in the purposes or not. form of contracts over exchange rates, interest rates, shares or share indices, inflation or a combination of these. These In accordance with IAS / IFRS, the parts of operations normally transactions are realised in over-the-counter (OTC) markets and known as “embedded derivatives” are also treated separately and in organised markets (especially stock exchanges). recorded as derivatives, in order to recognise, in net income, the fair value of these operations. Derivatives traded on organised markets follow the standards and rules of these markets. All derivatives (embedded or autonomous) are recorded at market value. Derivatives traded on the over-the-counter (OTC) markets are normally based on a standard bilateral contract that covers the Notional value is the reference value for purposes of calculating group of operations over derivatives between the parties. In the the flow of payments and receipts resulting from the operation case of inter-professional relationships, there is an ISDA – and is recognised in off balance sheet accounts. International Swaps and Derivatives Association Master Agreement. In the case of relations with Customers there is a Market value (fair value) corresponds to the value of the BPI contract. derivatives if they were traded on the market on the reference date. Changes in the market value of derivatives are recognised These types of contract include offsetting responsibilities in the in the appropriate balance sheet accounts and have an event of non compliance (the scope of the offsetting is immediate effect on net income. established in the contract itself and is regulated by Portuguese legislation and, in the case of contracts with foreign counterparties or subject to foreign legislation, by the appropriate legislation).

Consolidated financial statements | Notes 209 In contrast to traditional mutual operations, where the market responsibilities, the amount of the exposure equal to the sum of value is related directly to the amount of the principal loaned, in the market values of each individual transaction, if positive. The derivative operations different situations can occur: scope of the compensation clauses, in the case of default, is considered by the BPI Group on a conservative perspective, ᭿ market value can be determined based on market price (ex. considering that, in the case of doubt, compensation does futures); not exist.

᭿ the present value of future flows (cash flows), based on the The potential loss in a group of derivative operations on a given relevant interest rates at the computing date (mark to market: date corresponds to the amount of the exposure on that date. In ex. swaps) or; futures contracts, the stock markets being the counterparties for the BPI Group’s operations, the credit risk is eliminated daily ᭿ determined using models that have the objective of calculating through financial settlement. For medium and long term the price based on statistical models in accordance with derivatives, contracts usually provide for the netting of generally accepted principles in the market (mark to model: ex. outstanding balances with the same counterparty, which options). eliminates or reduces the credit risk. Additionally, in order to control the credit risk in OTC derivatives, some agreements have The amount of the exposure corresponds to the present value of also been signed under which the Bank receives from, or the estimated loss, in the case of counterparty’s default. In the transfers to, the counterparty, assets (in cash or in securities) to case of a derivative contract that establishes the compensation guarantee fulfilment of the obligations. of responsibilities in the event of non-compliance, the amount of the exposure is the sum of the market values of the operations At 31 December, 2006 the notional value, by term remaining to covered by the contract, when positive. In the case of operations maturity, was as follows: for which the contract does not establish the compensation of

<= 3 months > 3 months > 6 months > 1 year > 5 years Total <= 6 months <= 1 year <= 5 years Over-the-counter market Foreign exchange rate contracts 1 402 815 54 084 10 422 1 467 321 Forwards 1 190 771 8 166 10 373 1 209 310 Swaps 212 044 45 918 49 258 011 Interest rate contracts 313 667 267 066 1 083 529 4 578 489 6 920 999 13 163 750 Swaps 313 667 267 066 1 083 529 4 535 737 6 869 121 13 069 120 Options 42 752 51 878 94 630 Contracts over indexes and shares 104 868 154 552 37 299 386 423 45 259 728 401 Swaps 58 568 3 228 9 459 329 998 45 259 446 512 Options 46 300 151 324 27 840 56 425 281 889 Contracts over other underlying items 616 545 52 550 669 095 Swaps 616 545 52 550 669 095 Others 99 089 97 509 457 717 2 496 859 940 804 4 091 978 Options 99 089 97 509 457 717 2 496 859 940 804 4 091 978 1 920 439 573 211 1 588 967 8 078 316 7 959 612 20 120 545 Listed instruments Foreign exchange rate contracts 288 936 132 289 068 Futures 288 936 288 936 Options 132 132 Interest rate contracts 633 336 12 902 59 556 8 352 1 321 715 467 Futures 633 336 12 902 59 556 8 352 714 146 Options 1 321 1 321 Contracts over indexes and shares 328 938 20 020 46 741 22 316 22 630 440 645 Futures 321 897 321 897 Options 7 041 20 020 46 741 22 316 22 630 118 748 Contracts over other underlying items 893 893 Futures 893 893 1 252 103 32 922 106 297 30 668 24 083 1 446 073 3 172 542 606 133 1 695 264 8 108 984 7 983 695 21 566 618

210 Banco BPI | Annual Report 2006 At 31 December, 2006 the profile of derivative operations, by counterparty, was as follows:

31 Dec. 06

Notional Net % of Notio- Value1 exposure2 nal value Over-the-counter market 16 028 567 85 307 91.7% OTC with Financial Institutions 13 242 925 74 978 75.8% OTC with Investment / Pension funds 1 583 051 10 002 9.1% OTC with Companies 1 168 980 164 6.7% OTC with Individuals 33 611 163 0.2% Regulated markets 1 446 073 11 456 8.3% Stock exchange 1 446 073 11 456 8.3% 17 474 640 96 763 100.0%

1) Does not include embedded derivates in the amount of 4 091 978 th. euro. 2) Exposure amount considering netting agreements and collaterals.

At 31 December, 2006 the profile of derivative operations, by counterparty external rating, is as follows:

31 Dec. 06

Notional Gross Exposure consi- Net Value1 exposure2 dering netting3 exposure4 Over-the-counter market (OTC) AAA 14 047 93 AA 11 163 580 245 323 144 261 62 245 A 2 237 162 41 238 27 536 10 979 N.R. 2 613 778 12 745 20 337 12 083 16 028 567 299 399 192 134 85 307 Traded on the stock exchange Futures5 1 325 872 Options 120 201 11 456 11 456 11 456 1 446 073 11 456 11 456 11 456 17 474 640 310 855 203 590 96 763 Note: The amounts were accumulated by rating levels of the counterparties, considering the senior medium and long term debt ratings attributed by the Moody, Standard & Poor and Fitch agencies as of the reference date. The selection of a rating for a given counterparty follows the rules recommended by the Basel Committee in force on the reference date (where there are diverging ratings the second best was selected). The operations with entities without ratings (N.R.) correspond essentially to Customers subject to internal ratings. 1) Does not include embedded derivates in the amount of 4 091 978 th. euro. 2) Exposure without considering netting agreements and collaterals. 3) Exposure value without considering collaterals. 4) Exposure considering netting agreements and collaterals. 5) The exposure of the futures is nil, because they are traded on organised stock exchanges and there is daily financial settlement.

Consolidated financial statements | Notes 211 5.5. Financial assets available for sale This caption is made up as follows: In 2006, Banco BPI acquired a portfolio of fixed rate bonds, issued by national and international entities, which interest rate 31 Dec. 06 31 Dec. 05 risk is hedged by derivative instruments. Debt instruments Listed securities Bonds issued by Portuguese government entities 538 748 565 294 The caption LOANS AND OTHER RECEIVABLES corresponds to Bonds issued by foreign government entities 499 914 308 705 shareholders’ loans to, and supplementary capital contributions Bonds issued by other Portuguese entities in, companies classified as financial assets available for sale. Non-subordinated debt 79 023 33 093 Subordinated debt 9 564 9 521 The changes in impairment losses in 2006 and 2005 are Bonds issued by other foreign entities Non-subordinated debt 1 145 519 10 402 presented in note 5.19. Subordinated debt 24 635 Unlisted securities Bonds issued by foreign government entities 107 214 71 372 Bonds issued by other Portuguese entities Non-subordinated debt 63 818 74 780 Bonds issued by other foreign entities Non-subordinated debt 4 615 23 806 Impairment (439) (619) 2 472 611 1 096 354 Equity instruments Listed securities Shares issued by Portuguese entities 532 910 412 356 Impairment (33 854) (31 525) Shares issued by foreign entities 3 300 Unlisted securities Issued by Portuguese entities Shares 37 509 34 625 Impairment (6 482) (10 097) Quotas 1 1 Shares issued by foreign entities 26 206 27 475 Impairment (14 852) (15 248) 541 438 420 887 Other securities Listed securities Participating units 1 458 1 427 Unlisted securities Participating units 51 020 52 140 Impairment (4 439) (4 229) 48 039 49 338 Loans and other receivables 28 402 12 425 Impairment (25 579) (7 236) 2 823 5 189 3 064 911 1 571 768

212 Banco BPI | Annual Report 2006 At 31 December, 2006 this caption was made up as follows:

Quantity Amounts per unit Cost Book Gain2 Loss2 Impairment value / Nature and type of security Nominal Listing / fair value1 Price SECURITIES Debt instruments Issued by Portuguese entities Portuguese public debt Treasury Bonds OT 3.95% July 1999 / 2009 343 632 0.01 0.01 351 350 6 OT 5% June 2002 / 2012 500 000 000 0.01 0.01 508 802 537 430 3 939 OT 5.15% June 2001 / 2001 850 000 0.01 0.01 923 913 22 OT 5.375% June 1998 / 2008 52 945 0.01 0.01 53 55 1 510 129 538 748 3 940 28 Other residents Non-subordinated debt Bonds Banco Investimento / 2005 Ob. cx. 1.ª em. 5 000 000 1 000.00 1 000.15 5 000 5 006 1 Brisa – 4.5% – 05-12-2016 15 000 000 50 000.00 49 435.00 14 946 14 879 195 EDP – 25.ª Em. / 1998 – Tx. Vr. 16 604 405 0.01 16 499 16 685 104 GDL / 1998 8 166 983 0.01 0.01 8 167 8 232 46 Jerónimo Martins – 2003 2 500 000 5.00 5.00 2 500 2 530 JMR-SGPS / 2003 – Tx. Vr. 9 660 000 5.00 5.01 9 660 9 705 20 Medinfar / 2003 – Tx.Vr. (15-12-2008) 737 650 5.00 5.00 738 740 Mota Engil – Tx. Vr. (09-12-2010) 13 600 000 800.00 800.00 13 600 13 646 Portucel Tv 27-10-2012 15 000 000 1 000.00 1 004.70 14 993 15 200 77 Sagres STC S.A. / Douro – Sr. 1 Cl. C (21-11-39) 24 000 000 10 000.00 24 000 24 123 Sagres STC S.A. / Douro – Sr. 1 Cl. D (21-11-39) 5 010 000 10 000.00 5 010 5 010 Sagres STC S.A. / Douro – Sr. 1 Cl. E (21-06-56) 9 000 000 50 000.00 9 000 9 000 Sagres STC S.A. / Douro – Sr. 2 Cl. E (21-04-59) 9 000 000 1 000.00 9 000 9 000 Salvador Caetano / 2002 1.ª em. 1 250 000 2.50 2.50 1 250 1 253 Semapa / 2006 / 2016 2.ª 7 719 894 0.01 0.01 7 720 7 832 142 083 142 841 397 46 Subordinated debt Bonds Banco Nacional Ultramarino / 1998 – OC 9 477 160 0.01 0.01 9 472 9 564 10 1 9 472 9 564 10 1 Issued by non residents By foreign public issuers Bonds Fed. Republic of Brasil – 7.375% (03-02-2015) 55 000 000 1 000.00 1 156.10 64 020 67 264 843 Fed. Republic of Brasil – 7.375% (03-02-2015) 90 500 000 1 000.00 1 156.10 107 363 110 680 2 600 Fed. Republic of Brasil – 8.5% (24-09-2012) 168 000 000 1 000.00 1 177.00 204 643 201 570 4 699 Fed. Republic of Brasil – 9.5% (24-01-2011) 20 000 000 1 000.00 1 176.00 23 710 25 295 141 Fed. Republic of Brasil – 9.5% (24-01-2011) 38 000 000 1 000.00 1 176.00 46 063 48 061 982 Rep. Brasil – 11% (26-06-2017) 31 000 000 1.00 1.46 45 283 47 044 635 Obrigações do Tesouro (Angola) 259 461 1 891.93 107 759 107 214 598 841 607 128 9 900 By other non residents Non-subordinated debt Bonds Altadis Emis. Finance – 4% (11-12-2015) 35 000 000 1 000.00 941.35 33 026 33 024 227 Altadis Emis. Finance – 4% (11-12-2015) 15 000 000 1 000.00 941.35 13 757 14 153 171 Autostrade SPA – Tx. Vr. (09-06-2011) 5 000 000 100 000.00 100 520.00 5 011 5 037 16 Euro-Vip 1990 4 555 809 759.30 4 556 4 176 439 BAT HOLDINGS BV – 4.375% (15-09-2014) 30 000 000 1 000.00 981.60 29 797 29 906 366 1) Net of impairment. 2) Amount recorded in revaluation reserves after recognising the effect of the hedging operations in the statement of income (note 5.29).

Consolidated financial statements | Notes 213 Quantity Amounts per unit Cost Book Gain2 Loss2 Impairment value / Nature and type of security Nominal Listing / fair value1 Price By other non residents (cont.) Non-subordinated debt (cont.) Bonds (cont.) Bayer AG – Tx. Vr. (25-05-2009) 10 000 000 50 000.00 50 068.50 10 001 10 050 13 Brisa Finance BV – 4.797% (26-09-2013) 10 000 000 1 000.00 1 008.48 10 213 10 211 3 Brisa Finance BV – 4.797% (26-09-2013) 10 000 000 1 000.00 1 008.48 10 026 10 211 31 Cadbury Schweppes Inv – Tx. Vr. (29-06-2007) 10 000 000 1 000.00 1 000.80 10 015 10 010 2 Casino Guichard Perrachon – 6% (27-02-2012) 12 500 000 1 000.00 1 052.25 13 354 13 784 10 Casino Guichard Perrachon – 6% (27-02-2012) 12 500 000 1 000.00 1 052.25 13 131 13 784 95 CIMPOR FINANCIAL OPERTNS – 4.5% (27-05-2011) 2 500 000 1 000.00 989.61 2 492 2 541 11 CIMPOR FINANCIAL OPERTNS – 4.5% (27-05-2011) 36 500 000 1 000.00 989.61 36 484 37 102 249 Daimlerchrysler Na HLDG – Tv. (28-11-2008) 10 000 000 1 000.00 1 001.00 10 018 10 046 5 Deutsch Telekm Int. F – Tv. (08-12-2009) 5 000 000 1 000.00 1 001.15 5 010 5 018 2 Deutsche Telekom Int. F – 4.5% (25-10-2013) 25 000 000 1 000.00 986.10 24 760 24 859 69 DONG A / S – 5.5% (29-06-3005) 75 000 000 1.00 1.00 74 742 77 368 2 187 Dresdner Bank / 1998-2013 – PTE – C. Zero 5 000 449 498.80 869.16 7 821 8 713 513 Edison SPA – Tx. Vr. (19-07-2011) 5 000 000 1 000.00 1 013.65 5 079 5 110 3 EDP Finance BV (14-06-2010) 5 000 000 1 000.00 998.91 4 995 5 004 1 EDP Finance BV – 4.25% (12-06-2012) 20 000 000 1 000.00 994.56 19 961 20 362 120 EDP Finance BV – 4.625% (13-06-2016) 30 000 000 1 000.00 1 007.24 29 805 30 985 477 ELM BV (Swiss Rein Co) – TV – Perpétua 25 000 000 50 000.00 50 310.00 25 160 25 285 207 France Telekom – Tx. Vr. (09-06-2010) 5 000 000 50 000.00 50 062.50 5 006 5 017 1 Generali Finance BV – 5.317% – Perpétuas 25 000 000 50 000.00 50 170.00 24 594 25 806 196 Henkel KGAA – T.V. (25.11.2104) 25 000 000 1 000.00 955.68 22 749 24 025 804 Koninklijke KPN NV – Tx. Vr. (21-07-2009) 5 000 000 1 000.00 1 003.70 5 004 5 056 15 Koninklijke KPN NV – Tx. Vr. (22-06-2015) 50 000 000 1 000.00 923.30 45 317 47 217 273 LAFARGE – 4.25% (23-03-2016) 17 500 000 1 000.00 958.70 16 854 17 354 78 LAFARGE – 4.25% (23-03-2016) 50 000 000 1 000.00 958.70 47 869 49 583 714 LAFARGE – 6.5% (15-07-2016) 6 833 713 759.30 788.67 7 027 7 298 9 Metro AG – TV. (07-10-2009) 5 000 000 1 000.00 1 004.72 5 029 5 068 1 Morgan Guar. Trust. C.ª N. Y. / 97-2007 TV 1 482 926 4.99 4.99 1 485 1 504 Morgan Guar. Trust. C.ª N. Y. / 97-2017 C. Zero 9 975 958 498.80 958.39 18 480 19 168 373 OTE PLC – 4.625% (20-05-2016) 25 000 000 50 000.00 49 015.00 24 888 24 634 98 PEMEX PROJ. FDG MAST. TR – 6.375% – 2016 25 000 000 1 000.00 1 110.80 27 217 28 421 930 PORT. TELECOM INT. FIN. – 3.75% (26-03-2012) 12 000 000 1 000.00 922.84 11 072 11 419 73 PORT. TELECOM INT. FIN. – 3.75% (26-03-2012) 40 000 000 1 000.00 922.84 37 574 38 064 226 Solvay Finance – 6.375% (02-06-2104) 25 000 000 1 000.00 1 041.60 25 059 26 966 782 Swiss RE Capital I LP – 6.854% (29-05-2049) 22 779 043 759.30 795.98 22 653 24 031 583 TELECOM ITALIA SPA. (09-06-2008) 10 000 000 50 000.00 49 975.00 10 010 10 017 12 TELECOM ITALIA SPA. (06-12-2012) 5 000 000 50 000.00 49 613.50 4 999 4 976 37 TELECOM ITALIA FIN. – 7.25% (24-04-2012) 12 500 000 1 000.00 1 106.40 14 648 14 453 42 TELECOM ITALIA SPA. – 4.75% (19-05-2014) 62 500 000 50 000.00 48 925.00 62 005 62 994 564 TELEFONICA EMISIONES – 4.375% (02-02-2016) 100 000 000 1 000.00 965.30 98 629 100 509 1 665 1 Telefonica Europe – 5.125% (14-02-2013) 55 000 000 1 000.00 1 024.72 56 775 58 831 39 Telekom Finanzmanagement – 4.25% (27-01-2017) 25 000 000 1 000.00 942.50 23 118 24 546 118 Vale Overseas Lim (CAY) – 6.25% (11-01-2016) 15 186 029 759.30 769.55 15 101 15 837 107 Vale Overseas Lim (CAY) – 6.25% (11-01-2016) 3 796 507 759.30 769.55 3 706 3 959 3 VATTENFALL TREASURY AB – TV. PERP. 75 000 000 1 000.00 987.96 74 387 76 093 1 331 Vivendi Univers. – Tv. (12-07-2007) 10 000 000 1 000.00 1 002.00 10 037 10 110 4 1 120 506 1 149 695 12 931 926 439 1) Net of impairment. 2) Amount recorded in revaluation reserves after recognising the effect of the hedging operations in the statement of income (note 5.29).

214 Banco BPI | Annual Report 2006 Quantity Amounts per unit Cost Book Gain2 Loss2 Impairment value / Nature and type of security Nominal Listing / fair value1 Price Subordinated debt Bonds Old Mutual PLC – Ob. Perpetua 25 000 000 1 000.00 977.60 24 324 24 635 47 24 324 24 635 47 Equity instruments Issued by residents Shares Agrogarante, S.A. 100 000 1.00 100 100 Alberto Gaspar, S.A. 60 000 5.00 141 141 Alar – Emp. Ibérica de Material Aeronautico, S.A. 2 200 4.99 20 20 Ambelis – Agência p/ Modernização Economica de Lisboa, S.A. 400 6.85 20 13 7 Apis – Soc. Ind. Parquetes Azarujense 65 000 4.99 Apor – Agência p/ Modernização do Porto – Cl. B 2 877 5.00 12 12 Banco Comercial Português 160 517 938 1.00 2.80 336 209 449 450 113 241 Boavista Futebol Clube 21 900 5.00 110 110 Buciqueira – SGPS – Cap. Red. – em. 2001 8 5.00 1 1 Caderno Verde – Comunicação (C) 134 230 1.00 967 967 Caravela Gest, SGPS, S.A. 2 000 5.00 542 38 503 Carmo & Braz 65 000 4.99 Casa Hipólito, S.A. 17 789 4.99 89 89 Cimpor – Cimentos de Portugal, S.A. 3 565 1.00 6.29 7 23 16 Cofina SGPS 5 156 614 0.25 1.82 5 329 9 385 4 057 Coimbravita – Agência Desenvolvimento Regional 15 000 4.99 75 75 Companhia Águas da Fonte Santa de Monfortinho, S.A. 10 5.00 Companhia Aurifícia, S.A. 578 14.00 24 1 284 1 260 Companhia Aurifícia, S.A. (Valor Nominal 7 EUR) 30 7.00 1 33 33 Companhia de Diamantes de Angola 167 716 2.49 Companhia de Fiação e Tecidos de Fafe, S.A. 240 4.99 Companhia Portuguesa do Cobre – Imobiliária, S.A. 57 200 4.99 4 4 Companhia Prestamista Portugueza 10 1.00 Comundo – Consórcio Mundial de Import.e Export., S.A. 3 269 0.50 6 2 4 Conduril – Construtora Duriense, S.A. 184 262 5.00 806 6 468 5 663 Corticeira Amorim – SGPS 127 419 1.00 1.96 315 250 115 180 Digitmarket – Sistemas de Informação, S.A. 4 950 1.00 743 743 Douro Azul – Soc. Marítimo Turística, S.A. 1 000 000 1.00 1 000 812 53 241 EIA – Ensino, Investigação e Administração, S.A. 10 000 4.99 50 34 16 Empresa Cinematográfica S. Pedro – Águeda 100 4.99 Empresa O Comércio do Porto, S.A. 50 2.49 1 1 Esence – Soc. Nac. Corticeira – Nom. 54 545 4.99 Estamparia Império – Emp.Industriais e Imobiliários, S.A. 170 4.99 1 1 Eurodel – Ind. Metalúrgicas e Participações 23 5.00 Eurofil – Ind. de Petróleos, Plástico e Filamentos, S.A. 11 280 4.99 25 25 Fábricas Vasco da Gama – Ind. Transformadoras, S.A. 33 4.99 1 1 Fernando & Irmão, Lda. 20 692 100.00 2 069 5 300 3 231 Fit – Fomento e Industria do Tomate, S.A. 148 4.99 3 3 Futebol Clube do Porto 105 000 5.00 2.53 539 266 4 278 Gap – Gestão Agro-Pecuária, SGPS, S.A. 548 4.99 3 3 Garval – Sociedade de Garantia Mutua 1 400 1.00 1 1 GEIE – Gestão de Espaços de Incub.Empres. S.A. 12 500 1.00 13 13 Gestinsua – Aq. Al. Patrimonio 430 5.00 2 2 Gregório & Ca. 1 510 4.99 4 4 1) Net of impairment. 2) Amount recorded in revaluation reserves after recognising the effect of the hedging operations in the statement of income (note 5.29).

Consolidated financial statements | Notes 215 Quantity Amounts per unit Cost Book Gain2 Loss2 Impairment value / Nature and type of security Nominal Listing / fair value1 Price Equity instruments (cont.) Issued by residents (cont.) Shares (cont.) Ibersol – SGPS, S.A. 1 000 000 1.00 9.75 4 300 9 750 5 450 Impresa – SGPS 5 941 263 1.00 4.68 43 680 27 805 2 555 18 429 Incal – Indústria e Comércio de Alimentação, S.A. 2 514 1.13 2 2 Intersis, S.A. 42 147 4.99 1 307 1 307 J. Soares Correia – Armazéns de Ferro, S.A. 84 5.00 2 2 Jotocar – João Tomás Cardoso, S.A. 3 020 4.99 8 8 Lisgarante – Soc. de Garantia Mutua 200 1.00 Lisnave – Est. Navais 180 5.00 1 1 Margueira – Sociedade Gestora de Fundos Investimento Imobiliário, S.A. 3 511 5.00 18 18 Matur – Sociedade de Empreend. Tur. da Madeira, S.A. 13 435 5.00 146 146 Matur – Sociedade de Empreend. Tur. da Madeira, S.A. 4 5.00 Maxstor 8 190 4.99 41 41 Metalurgia Casal, S.A. 128 4.99 1 1 Mimalha, S.A. 40 557 4.99 336 336 NET – Novas Empresas e Tecnologias, S.A. 10 539 4.99 25 49 23 Norgarante – Soc. de garantia Mutua 944 400 1.00 944 944 Nutroton – Indústrias da Avicultura 11 395 5.00 50 50 Oficina da Inovação 10 000 5.00 50 49 2 3 Pema, S.A. 532 3.25 Plastrade – Comércio Intern. Plásticos – N 19 200 5.00 96 113 17 PME Capital – Sociedade Portuguesa de Capital de Risco, S.A. 241 527 5.00 1 205 1 236 32 Porto de Cavaleiros, SGPS 2 4.99 Primus – Prom. e Desenvolvimento Regional, S.A. 8 000 4.99 40 16 24 Salvor – Soc. Investimentos Hoteleiros, S.A. 10 5.00 Sanjimo – Sociedade Imobiliária 1 620 4.99 8 8 SDEM – Soc. de Desenv. Empr. Madeira, SGPS – N 937 500 1.00 938 778 159 Secca – Construções Metálicas – Ac. Ord. Em. 92 3 627 4.99 18 18 Secca – Pref. S/ Voto – Em. 92 3 627 4.99 18 18 Senal – Soc. Nacional de Promoção de Empresas, S.A. 450 0.50 SIBS – Sociedade Interbancária de Serviços, S.A. 738 455 5.00 3 115 3 115 Soc. Port. Inovação, Consul. Empres. Fom. Inovação, S.A. 1 500 5.00 7 7 Sociedade de Construções ERG 50 4.99 Sociedade de Construções ERG (Em. 93) – IR C 6 4.99 Sociedade Industrial Aliança, S.A. 1 2.49 Sodimul – Soc. de Comércio e Turismo 25 14.96 2 2 Somotel – Soc. Portuguesa de Moteis, S.A. 1 420 2.50 Sonae SGPS 51 868 1.00 1.51 109 78 46 77 Sonae Industria SGPS 3 516 5.00 7.50 23 26 3 Sopeal – Soc. Promoção Educacional Alcacerense, S.A. 100 4.99 Sorefame – Socs. Reunidas Fabricações Metálicas, S.A. 31 5.00 SPGM – Sociedade de Investimento – N 620 730 1.00 619 621 1 Spidouro – Sociedade Promoção e Investimento Douro e Trás-os-Montes 15 000 4.99 75 21 54 Sport Lisboa e Benfica (Pub. Geral) 16 010 5.00 80 80 Star – Turismo, S.A. 533 4.99 3 3 SVB, SGPS, S.A. 1 250 5.00 6 6

1) Net of impairment. 2) Amount recorded in revaluation reserves after recognising the effect of the hedging operations in the statement of income (note 5.29).

216 Banco BPI | Annual Report 2006 Quantity Amounts per unit Cost Book Gain2 Loss2 Impairment value / Nature and type of security Nominal Listing / fair value1 Price Equity instruments (cont.) Issued by residents (cont.) Shares (cont.) Tagusparque – Sociedade de Promoção e Desenvolvimento do Parque, S.A. 480 000 5.00 2 394 2 394 TECMIC 11 324 5.00 1 372 1 173 144 342 Telecine Moro, S.A. 170 4.99 1 1 Terologos – Tecnologias de Manutenção – P 7 960 4.99 40 40 Textil Lopes da Costa, S.A. 4 900 4.99 8 8 Turopa – Operadores Turisticos, S.A. 5 4.99 TVTEL – G. P. 191 250 4.98 1 374 1 544 1 544 1 374 Unicer – União Cervejeira, S.A. 1 002 1.00 8 8 Unicre – Cartão Internacional de Crédito 352 076 5.00 1 057 1 057 VAA – Vista Alegre Atlantis SGPS (Fusão) 13 745 907 0.20 0.13 12 210 1 787 1 787 12 210 VAA – Vista Alegre Atlantis SGPS 1 574 626 0.20 0.15 2 680 236 236 2 680 VAA – Vista Alegre Atlantis SGPS – Emissão 2006 9 700 000 0.20 1 940 1 261 679 ViaLitoral – Conc. Rodoviária da Madeira 4 750 161.25 792 2 000 1 208 Xelb Cork – Co. e Ind. Cortiça 87 4.99 430 382 530 083 140 721 679 40 336 Quotas Propaço – Soc. Imob. de Paço D' Arcos 1.00 1 1 1 1 Rights over equity operations Fabricas Triunfo – Dir. redução Em. 2001 8 1.00 Oliva – Ind. Metalúrgicas – Direitos de redução 100 1.00 Others Participating Units Associação para Escola Gestão do Porto / 2000 2 4.99 50 33 17 Citeve – Cent. Tec. Ind. Tex. Vest. Portugal 20 498.80 10 10 Frie – PME Capital 115 24 939.89 2 868 1 642 86 1 312 Frie – PME Capital – Retex 40 24 939.89 998 900 6 103 Frie Inter-Risco 120 24 939.89 2 993 587 126 2 533 Fun. Cap. Risco P / Invest. Qual. FCR – F. FIQ – F. Turismo 164 24 939.89 3 568 3 103 3 467 Fun. Cap. Risco P / Inv. Qual – API CAPITAL FIEP 9 945 1 000.00 9 945 10 141 196 Fun. Cap. Risco P / Inv. Qual – API CAPITAL II 40 4 987.98 200 209 17 7 Fundo BPI – América 200 000 0.01 5.53 998 1 106 108 Fundo Caravela 3 000 5 000.00 15 000 14 163 837 Fundo Inv. Imobiliário Margueira Cap. 3 080 491 4.99 15 365 15 365 Grupo BFE Imobiliário 73 707 4.99 371 428 57 52 366 47 687 599 837 4 439 Equity instruments Issued by non residents Shares Altitude Software 5 984 560 0.04 13 810 13 810 Amsco – African Management Services Com 1 807 759.30 759 759 Arco Bodegas Unidas 63 382 4 399 3 942 458 Club Financiero Vigo 1 15 626.31 18 12 6 European Investment Fund 6 1 000 000 6 000 6 774 774 Growela Cabo Verde 19 000 9.07 172 172 International Factors Group, S.C. 12 50.00 1 1 Nasdaq Europe S.A. / VN 100 49.96 25 4 21 Parque Industrial da Matola – MZM 1 920 000 0.03 56 56

1) Net of impairment. 2) Amount recorded in revaluation reserves after recognising the effect of the hedging operations in the statement of income (note 5.29).

Consolidated financial statements | Notes 217 Quantity Amounts per unit Cost Book Gain2 Loss2 Impairment value / Nature and type of security Nominal Listing / fair value1 Price Equity instruments (cont.) Issued by non residents (cont.) Shares (cont.) Swift – Society for Worldwide Inf. Dev 63 123.95 79 79 Tharwa Finance (dirhams) 20 895 8.96 187 187 Unirisco Galicia 80 1 202.02 96 69 27 CLD – Credit Logement Developpment 100 15.25 2 2 Emis – Empresa Interbancária de Serviços 281 224 57 IMC – Instituto de Mercado de Capitais 3 3 Sofaris 13 107.89 1 1 25 889 11 354 774 458 14 852 Others Participating Units Fundo BPI – Europa (Luxemburg) 23 405 0.01 15.03 171 352 180 171 352 180 Loans and other receivables Loans and shareholders' loans GEIE 23 23 Intersis 50 50 Maxstor 973 973 Propaço – Imob. Paços d' Arcos 5 112 1 323 3 788 SVB 2 301 807 1 494 Vialitoral 104 104 Caravela Gest 1 354 235 1 119 Emis – Empresa Interbancária de Serviços 84 85 Digitmarket 879 879 Petrocer 200 200 Plastrade 154 154 Vista Alegre Atlantis SGPS 17 168 17 168 28 402 2 823 25 579 2 918 242 3 064 911 169 452 2 975 85 645 1) Net of impairment. 2) Amount recorded in revaluation reserves after recognising the effect of the hedging operations in the statement of income (note 5.29).

218 Banco BPI | Annual Report 2006 5.6. Loans and advances to credit institutions 5.7. Loans and advances to Customers This caption is made up as follows: This caption is made up as follows:

31 Dec. 06 31 Dec. 05 31 Dec. 06 31 Dec. 05

Loans and advances to other Portuguese Loans credit institutions Domestic loans Inter-bank money market 10 000 10 000 Companies Very short term loans and advances 31 164 46 000 Discount 482 647 492 725 Deposits 47 082 51 277 Loans 4 330 077 3 537 910 Loans 121 219 73 200 Commercial lines of credit 1 764 376 1 855 834 Other loans and advances 15 Demand deposits – overdrafts 504 676 353 844 Accrued interest 946 846 Invoices received – factoring 691 868 527 671 210 426 181 323 Finance leasing 654 561 610 431 Loans and advances to other foreign Real estate leasing 617 744 548 441 credit institutions Other loans 54 431 62 237 Very short term loans and advances 234 526 124 280 Loans to individuals Deposits 348 555 327 484 Housing 9 678 036 8 932 457 Loans 979 20 575 Consumer 881 694 895 961 Deposit securities sold with repurchase agreement 56 098 243 938 Other loans 780 790 722 030 Other loans and advances 57 742 36 391 Foreign loans Accrued interest 4 277 4 442 Companies Discount 3 969 3 014 702 177 757 110 Loans 2 410 536 1 293 524 Correction of the amount of hedged assets 20 92 Commercial lines of credit 143 989 171 834 Commission relating to amortised cost (net) (5 863) (19 516) Demand deposits – overdrafts 23 108 9 389 (5 843) (19 424) Invoices received – factoring 182 123 906 760 919 009 Other loans 120 948 95 763 Impairment (13) (14) Loans to individuals 906 747 918 995 Housing 108 756 73 605 Consumer 18 478 43 349 The changes in impairment losses and provisions during 2006 Other loans 32 447 9 231 and 2005 are presented in note 5.19. Accrued interest 103 952 60 107 23 407 265 20 299 480 Securities Issued by Portuguese entities Non subordinated debt securities Bonds 105 243 102 931 Commercial paper 1 077 866 537 048 Issued by foreign entities Foreign government entities 787 Non subordinated debt securities Bonds 92 547 35 899 Commercial paper 7 593 12 715 Subordinated debt securities 3 797 4 238 Accrued interest 5 740 1 770 1 293 573 694 601 Correction of the amount of hedged assets 1 191 5 320 Commission relating to amortised cost (net) (38 278) (24 678) 24 663 751 20 974 723 Overdue loans and interest 277 629 295 667 Loan impairment (311 294) (307 143) 24 630 086 20 963 247

Consolidated financial statements | Notes 219 The caption of LOANS TO CUSTOMERS includes the following non-derecognised securitised assets:

31 Dec. 06 31 Dec. 05

Non-derecognised securitised assets Loans Housing 2 816 098 1 476 677 Loans to SME's 477 992 478 360 Accrued interest 9 482 4 087 3 303 572 1 959 124

In 2005 Banco BPI carried out two securitisation operations totalling 2 000 million euro. The first amounted to 500 million euro and consisted of approximately 5 500 loans to small and medium size companies. The second securitisation operation, totalling 1 500 million euro, consisted on housing loans. In 2006, Banco BPI carried out a securitisation operation over housing loans totalling 1 500 million euro. These loans were not derecognised in the BPI Group’s balance sheet and are recorded in the caption NON-DERECOGNISED SECURITISED ASSETS. The amounts received by Banco BPI under these operations were recorded in the caption LIABILITIES RELATING TO ASSETS NOT

DERECOGNISED IN SECURITISATION OPERATIONS (notes 2.2.3 and 5.18).

The changes in impairment losses during 2006 and 2005 are presented in note 5.19.

220 Banco BPI | Annual Report 2006 The BPI Group’s portfolio of loans and advances to Customers and guarantees given at 31 December, 2006, by business sector, is made up as follows:

Loans1 Guarantees given2

Amount % Amount % Residents: Agriculture, animal production and hunting 111 092 0.5 2 940 0.1 Forestry and forest operations 8 221 0.0 2 122 0.1 Fishing 9 665 0.0 1 118 0.0 Mining 47 651 0.2 5 653 0.2 Manufacturing industries Beverage, tobacco and food 440 723 1.8 37 648 1.1 Textiles and clothing 193 673 0.8 30 537 0.9 Leather and related products 30 478 0.1 1 854 0.1 Wood and cork 134 853 0.5 20 929 0.6 Pulp, paper and cardboard and graphic arts 125 432 0.5 24 998 0.8 Coke, oil products and nuclear fuel 1 142 0.0 2 914 0.1 Chemical and synthetic or artificial fibres 68 655 0.3 12 511 0.4 Rubber and plastic materials 53 249 0.2 13 156 0.4 Other mineral non-metallic products 353 587 1.4 62 918 1.9 Metalworking industries 185 927 0.8 59 104 1.8 Manufacturing of machinery and equipment 80 035 0.3 38 330 1.2 Manufacturing of electrical and optical equipment 52 630 0.2 37 711 1.1 Manufacturing of transport material 48 657 0.2 49 074 1.5 Other manufacturing industries 90 086 0.4 14 660 0.4 Electricity, gas and water 343 504 1.4 266 315 8.0 Construction 957 675 3.9 862 875 26.0 Wholesale and retail trading 1 803 023 7.3 251 105 7.6 Restaurants and hotels 266 443 1.1 41 358 1.2 Transport, warehousing and communications 1 023 537 4.2 355 298 10.7 Banks 2 793 0.0 26 272 0.8 Other credit institutions 19 758 0.6 Other financial institutions and insurance companies 66 278 0.3 3 869 0.1 Investment holding companies 483 092 2.0 145 894 4.4 Real estate, rental and services provided to companies 1 309 144 5.3 217 273 6.5 Public administration, defence and mandatory social security 1 081 222 4.4 43 523 1.3 Education 35 010 0.1 1 102 0.0 Healthcare and welfare 259 959 1.1 50 753 1.5 Leisure, cultural and sports activities 275 434 1.1 40 019 1.2 Other service companies 114 528 0.5 19 632 0.6 Individuals Housing loans 9 679 677 39.4 Others 1 668 334 6.8 67 107 2.0 Multinational financial institutions 18 698 0.1 14 0.0 Other sectors 198 924 0.8 208 0.0 Non-residents: Central banks 7 312 0.0 Financial and credit institutions 1 437 0.0 25 936 0.8 Multinational Financial Institutions 141 977 0.6 31 242 0.9 Administrative public sector 41 0.0 Non-financial companies 2 524 390 10.3 433 094 13.0 Individuals 292 958 1.2 841 0.0 24 591 146 100.0 3 321 665 100.0 1) Excluding overdue loans, securities and interest, accrued interest, correction of the amount of hedged assets and commission relating to amortised cost. 2) Includes guarantees and sureties, stand-by letters of credit, open documentary credits and surety bonds and indemnities.

Consolidated financial statements | Notes 221 5.8. Other tangible assets The changes in other tangible assets in 2006 were as follows:

Gross Balance at Purchases Sales and Transfers and Foreign Balance at 31 Dec. 05 write offs others exchange 31 Dec. 06 differences Premises Premises for own use 216 624 188 (1 839) 8 375 82 223 430 Other premises 3 146 (92) 403 3 457 Leasehold improvements 96 694 3 538 (2 802) 3 881 30 101 341 316 464 3 726 (4 733) 12 659 112 328 228 Equipment Furniture and fixtures 40 779 1 838 (389) 201 (11) 42 418 Machinery and tools 12 610 680 (217) 45 30 13 148 Computer hardware 137 281 8 096 (5 015) 4 666 (249) 144 779 Interior installations 102 656 649 (441) 12 571 (153) 115 282 Vehicles 10 656 620 (4 330) 270 (14) 7 202 Security equipment 18 960 1 384 (305) 679 2 20 720 Other equipment 295 11 (5) 301 323 237 13 278 (10 702) 18 432 (395) 343 850 Equipment under finance lease 1 039 (995) 44 Tangible assets in progress 16 966 37 690 (33 062) (690) 20 904 Other tangible assets 12 907 40 (79) 406 13 274 30 912 37 730 (79) (33 651) (690) 34 222 670 613 54 734 (15 514) (2 560) (973) 706 300

The gross amount of transfers and others includes 1 126 th. euro relating to a transfer to intangible assets.

The changes in other tangible assets in 2005 were as follows:

Gross Balance at Purchases Sales and Transfers and Foreign Balance at 31 Dec. 04 write offs others exchange 31 Dec. 05 Pro forma differences Premises Premises for own use 210 027 2 698 (477) 4 437 (61) 216 624 Other premises 7 458 (529) (3 873) 90 3 146 Leasehold improvements 97 916 2 194 (3 930) 541 (27) 96 694 315 401 4 892 (4 936) 1 105 2 316 464 Equipment Furniture and fixtures 39 750 1 358 (479) 146 4 40 779 Machinery and tools 12 128 1 008 (276) (246) (4) 12 610 Computer hardware 135 625 6 128 (5 362) 945 (55) 137 281 Interior installations 100 100 789 (1 134) 2 908 (7) 102 656 Vehicles 13 543 1 251 (4 081) (57) 10 656 Security equipment 19 059 448 (528) (19) 18 960 Other equipment 294 2 (1) 295 320 499 10 984 (11 861) 3 734 (119) 323 237 Equipment under finance lease 1 616 44 (621) 594 1 633 Tangible assets in progress 3 365 21 840 (8 833) 16 372 Other tangible assets 13 057 80 (262) 32 12 907 18 038 21 964 (883) (8 801) 594 30 912 653 938 37 840 (17 680) (3 962) 477 670 613

222 Banco BPI | Annual Report 2006 Depreciation Net Balance at Depreciation Sales and Transfers and Foreign Balance at Balance at Balance at 31 Dec. 05 for the year write offs others exchange 31 Dec. 06 31 Dec. 06 31 Dec. 05 differences

70 864 3 791 (653) (96) 4 73 910 149 520 145 760 836 53 (61) 96 924 2 533 2 310 70 748 7 457 (2 354) (10) 6 75 847 25 494 25 946 142 448 11 301 (3 068) (10) 10 150 681 177 547 174 016

31 379 2 502 (372) 3 (4) 33 508 8 910 9 400 10 395 723 (216) 2 10 904 2 244 2 215 118 537 9 780 (5 015) 995 (270) 124 027 20 752 18 744 59 271 7 420 (373) 2 66 320 48 962 43 385 8 838 1 152 (4 330) (12) 5 648 1 554 1 818 15 414 1 428 (282) 1 16 561 4 159 3 546 274 5 (5) 274 27 21 244 108 23 010 (10 593) 998 (281) 257 242 86 608 79 129 1 018 18 (995) 41 3 21 20 904 16 966 7 803 1 288 (63) 9 028 4 246 5 104 8 821 1 306 (63) (995) 9 069 25 153 22 091 395 377 35 617 (13 724) (7) (271) 416 992 289 308 275 236

Depreciation Net Balance at Depreciation Sales and Transfers and Foreign Balance at Balance at Balance at 31 Dec. 04 for the year write offs others exchange 31 Dec. 05 31 Dec. 05 31 Dec. 04 Pro forma differences Pro forma

67 249 3 719 (100) 4 (8) 70 864 145 760 142 778 885 45 (90) (6) 2 836 2 310 6 573 65 110 8 367 (2 699) (1) (29) 70 748 25 946 32 806 133 244 12 131 (2 889) (3) (35) 142 448 174 016 182 157

29 097 2 559 (460) 187 (4) 31 379 9 400 10 653 10 112 745 (275) (183) (4) 10 395 2 215 2 016 114 840 9 043 (5 338) 7 (15) 118 537 18 744 20 785 48 770 6 954 (671) 4 223 (5) 59 271 43 385 51 330 11 213 1 624 (3 749) (250) 8 838 1 818 2 330 14 347 1 577 (528) (19) 37 15 414 3 546 4 712 269 6 (1) 274 21 25 228 648 22 508 (11 022) 4 215 (241) 244 108 79 129 91 851 1 616 23 (621) 1 018 615 16 372 3 365 10 923 1 276 (177) (4 271) 52 7 803 5 104 2 134 12 539 1 299 (798) (4 271) 52 8 821 22 091 5 499 374 431 35 938 (14 709) (59) (224) 395 377 275 236 279 507

Consolidated financial statements | Notes 223 5.9. Intangible assets The changes in intangible assets in 2006 were as follows:

Gross Balance at Purchases Sales and Transfers and Foreign Balance at 31 Dec. 05 write offs others exchange 31 Dec. 06 differences Software 53 538 904 (5 509) 1 997 (69) 50 861 Other intangible assets 16 491 5 538 (755) (2 494) (158) 18 622 70 029 6 442 (6 264) (497) (227) 69 483 Intangible assets in progress 885 1 525 (870) 1 540 70 914 7 967 (6 264) (1 367) (227) 71 023

At 31 December, 2006 and 2005 the caption OTHER INTANGIBLE ASSETS includes 3 284 th. euro and 1 749 th. euro, respectively, relating to the net amount of rights to lease property for the installation of branches.

The gross amount of transfers and others includes 1 126 th. euro relating to a transfer from other tangible assets in progress.

The changes in intangible assets in 2005 were as follows:

Gross Balance at Purchases Sales and Transfers and Foreign Balance at 31 Dec. 04 write offs others exchange 31 Dec. 05 Pro forma differences Software 52 456 874 (3) 111 100 53 538 Other intangible assets 22 515 1 505 (7 855) 128 198 16 491 74 971 2 379 (7 858) 239 298 70 029 Intangible assets in progress 224 903 (242) 885 75 195 3 282 (7 858) (3) 298 70 914

5.10. Investments in associated companies and jointly controlled entities Investments in associated companies and jointly controlled entities, recorded in accordance with the equity method, are as follows:

Effective participation (%) Book value

31 Dec. 06 31 Dec. 05 31 Dec. 06 31 Dec. 05

Banco Comercial e de Investimentos, S.A.R.L. 30.0 30.0 11 820 11 968 Companhia de Seguros Allianz Portugal, S.A. 35.0 35.0 65 253 55 337 Cosec – Companhia de Seguros de Crédito, S.A. 50.0 50.0 26 134 25 419 F. Turismo – Capital de Risco, S.A. 25.0 25.0 1 341 1 362 Finangeste – Empresa Financeira de Gestão e Desenvolvimento, S.A. 32.8 32.8 16 067 14 775 Viacer – Sociedade Gestora de Participações Sociais, Lda. 26.0 26.0 21 153 23 845 BPI Fiduciaire1 64 141 768 132 770 1) In 2006 the investment in BPI Fiduciaire was included in the consolidated financial statements of BPI Suisse by the full consolidation method.

224 Banco BPI | Annual Report 2006 Depreciation Net Balance at Depreciation Sales and Foreign Balance at Balance at Balance at 31 Dec. 05 for the year write offs exchange 31 Dec. 06 31 Dec. 06 31 Dec. 05 differences 51 488 1 886 (5 509) (47) 47 818 3 043 2 050 13 571 1 539 (617) (91) 14 402 4 220 2 920 65 059 3 425 (6 126) (138) 62 220 7 263 4 970 1 540 885 65 059 3 425 (6 126) (138) 62 220 8 803 5 855

Depreciation Net Balance at Depreciation Sales and Transfers and Foreign Balance at Balance at Balance at 31 Dec. 04 for the year write offs others exchange 31 Dec. 05 31 Dec. 05 31 Dec. 04 Pro forma differences Pro forma 49 414 2 008 (1) 67 51 488 2 050 3 042 19 784 1 500 (7 848) (5) 140 13 571 2 920 2 731 69 198 3 508 (7 849) (5) 207 65 059 4 970 5 773 885 224 69 198 3 508 (7 849) (5) 207 65 059 5 855 5 997

Consolidated financial statements | Notes 225 5.11. Tax assets 5.12. Other assets This caption is made up as follows: This caption is made up as follows:

31 Dec. 06 31 Dec. 05 31 Dec. 06 31 Dec. 05

Current tax assets Debtors, other applications and other assets Corporate income tax recoverable 3 572 14 784 Debtors for future operations 47 967 30 511 Others 328 278 Collateral accounts 1 585 778 3 900 15 062 Other aplications 1 052 845 Deferred tax assets VAT recoverable 3 818 4 422 Due to temporary differences 118 428 173 016 Debtors for loan interest subsidy receivable 16 231 15 792 Due to tax losses carried forward 11 038 25 924 Other debtors 24 810 33 719 129 466 198 940 Overdue debtors and other applications 1 749 1 037 133 366 214 002 Impairment (1 620) (1 582) Other assets Gold 459 924 Details of deferred tax assets are presented in note 5.43. Other available funds and other assets 927 980 96 978 87 426 Tangible assets available for sale 59 216 61 905 Impairment (13 235) (18 423) 45 981 43 482 Accrued income For irrevocable commitments assumed in relation to third parties 122 124 For banking services rendered to third parties 9 410 4 940 Other accrued income 18 637 18 503 28 169 23 567 Deferred expenses Insurance 312 9 Rent 3 289 3 261 Other deferred expenses 3 162 4 833 6 763 8 103 Liability for pensions and other other benefits (note 5.25) Net assets of the pension fund Pensioners and Employees 2 470 458 Directors 21 941 Past service liabilities Pensioners and Employees (2 230 837) Directors (21 931) Actuarial deviations Employees 42 561 291 441 Directors (1 126) 3 794 Changes in the pension plan conditions to be amortised Employees 340 1 101 Directors 109 136 281 515 296 472 Other accounts Exchange operations pending settlement 4 706 Stock exchange transactions pending settlement 90 706 7 164 Non Stock exchange transactions pending settlement 5 476 Operations on assets pending settlement 152 906 125 623 249 088 137 493 708 494 596 543

226 Banco BPI | Annual Report 2006 The changes in tangible assets available for sale in 2006 were as follows:

Balance at 31 Dec. 05 Aquisi- Sales Increase / Balance at 31 Dec. 06 tions Reversals Gross Impairment Net Gross Impairment of impair- Gross Impairment Net ment Assets received in settlement of defaulting loans Real estate 47 729 (12 991) 34 738 10 934 (9 202) 1 113 3 518 49 461 (8 360) 41 101 Equipment 4 756 (3 282) 1 474 1 886 (1 310) (720) 5 332 (4 002) 1 330 Others 60 (60) 1 61 (60) 1 Other tangible assets Real estate 7 573 (2 090) 5 483 (4 998) 358 919 2 575 (813) 1 762 Others 1 787 1 787 1 787 1 787 61 905 (18 423) 43 482 12 821 (15 510) 1 471 3 717 59 216 (13 235) 45 981

The changes in tangible assets available for sale in 2005 were as follows:

Balance at 31 Dec. 04 Pro forma Aquisi- Sales Increase / Balance at 31 Dec. 05 tions Reversals Gross Impairment Net Gross Impairment of impair- Gross Impairment Net ment Assets received in settlement of defaulting loans Real estate 38 917 (7 640) 31 277 15 280 (6 468) 570 (5 921) 47 729 (12 991) 34 738 Equipment 4 658 (3 232) 1 426 1 784 (1 686) 144 (194) 4 756 (3 282) 1 474 Others 60 (60) 60 (60) Other tangible assets Real estate 7 573 (1 988) 5 585 (127) 25 7 573 (2 090) 5 483 Others 1 787 1 787 1 787 1 787 52 995 (12 920) 40 075 17 064 (8 154) 587 (6 090) 61 905 (18 423) 43 482

The caption OTHER ACCRUED INCOME at 31 December, 2006 and 5.13. Resources of central banks 2005 includes 11 385 th. euro and 9 799 th. euro, This caption is made up as follows: respectively, relating to accrued commission for participating 31 Dec. 06 31 Dec. 05 in profits of Allianz insurance contracts. Resources of the Bank of Portugal Deposits 53 616 The balance of the caption OPERATIONS ON ASSETS PENDING Accrued interest 265 SETTLEMENT at 31 December, 2006 and 2005 includes 53 881 17 148 th. euro and 18 313 th. euro, respectively, relating to taxes to be settled, of which 12 916 th. euro and 14 082 5.14. Financial liabilities held for trading th. euro, respectively, relate to taxes in litigation which were paid This caption is made up as follows: under the provisions of Decree-Law 248-A / 02 of 14 November. 31 Dec. 06 31 Dec. 05

Short selling of securities This caption at 31 December, 2006 and 2005 also includes Debt instruments 92 117 th. euro and 58 535 th. euro, respectively, relating to Bonds issued by foreign government entities 91 051 249 300 securitisation operations carried out by the BPI Group (notes 5.7 Equity Instruments 487 and 5.18), resulting from timing differences between the Derivative instruments with negative fair value (note 5.4) 110 309 66 059 settlement of the loans (securitised assets not derecognised) 201 847 315 359 and settlement of the liability for assets not derecognised.

The changes in impairment losses and provisions in 2006 and 2005 are presented in note 5.19.

Consolidated financial statements | Notes 227 5.15. Resources of other credit institutions 5.16. Resources of Customers and other debts This caption is made up as follows: This caption is made up as follows:

31 Dec. 06 31 Dec. 05 31 Dec. 06 31 Dec. 05

Resources of Portuguese credit institutions Demand deposits 6 073 039 6 111 873 Inter-bank money market 100 000 90 000 Term deposits 7 923 245 6 059 116 Deposits 97 564 52 722 Savings deposits 665 439 743 829 Other resources 262 767 Compulsory deposits 4 709 5 653 Accrued interest 490 664 Cheques and orders payable 59 959 102 232 198 316 144 153 Deposit securities sold with repurchase agreements 71 861 65 620 Resources of foreign credit institutions Other resources of Customers 27 319 17 543 Deposits of international financial organisations 349 517 327 166 Capitalisation insurance products – Unit links 1 108 105 628 395 Very short term resources 768 000 216 557 Capitalisation insurance products – guaranteed rate 240 693 256 896 Deposits 1 167 132 1 641 385 16 174 369 13 991 157 Deposit securities sold with repurchase agreements 1 328 392 56 423 Accrued interest 68 677 39 371 Other resources 132 220 126 898 Correction of the amount of hedged liabilities (7 541) (2 121) Accrued interest 15 728 13 038 Commission relating to amortised cost (net) 44 Deferred costs (722) 16 235 505 14 028 451 3 760 989 2 380 745 Correction of the amount of hedged liabilities 942 (1 455) 3 960 247 2 523 443 At 31 December, 2006 and 2005, this caption includes 348 174 th. euro and 841 973 th. euro, respectively, relating to

The caption of DEPOSIT SECURITIES SOLD WITH REPURCHASE deposits of investment funds managed by BPI Group.

AGREEMENTS at 31 December, 2006 is made up essentially of bonds purchased in 2006.

228 Banco BPI | Annual Report 2006 5.17. Debt securities This caption is made up as follows:

31 Dec. 06 31 Dec. 05

Issued Repurchased Balance Average Issued Repurchased Balance Average interest rate interest rate Deposit Certificates EUR 309 309 3.7% 364 364 3.5% 309 309 364 364 Fixed rate cash bonds EMTN 283 084 (1 737) 281 347 226 018 (357) 225 661 EUR 155 660 (660) 155 000 3.8% 140 660 140 660 3.6% CZK 18 192 18 192 3.7% USD 24 175 (1 077) 23 098 4.2% 26 989 (357) 26 632 4.2% GBP 59 568 59 568 5.5% 58 369 58 369 5.5% JPY 25 489 25 489 2.5% Cash bonds 284 101 (22 347) 261 754 271 145 (20 356) 250 789 EUR 276 999 (22 246) 254 753 3.1% 271 145 (20 356) 250 789 2.8% USD 7 102 (101) 7 001 4.8% 567 185 (24 084) 543 101 497 163 (20 713) 476 450 Variable rate cash bonds EMTN 3 603 893 (178 830) 3 425 063 3 123 483 (95 117) 3 028 366 EUR 3 515 413 (178 830) 3 336 583 3.7% 3 030 413 (95 117) 2 935 296 2.4% JPY 31 861 31 861 0.5% 35 997 35 997 0.1% CZK 36 383 36 383 2.8% 34 483 34 483 2.0% CAD 10 471 10 471 4.6% 11 658 11 658 3.7% HKD 9 765 9 765 4.3% 10 932 10 932 4.5% Cash bonds 57 551 (3 139) 54 412 59 925 (4 936) 54 989 EUR 57 551 (3 139) 54 412 3.6% 59 925 (4 936) 54 989 2.5% 3 661 444 (181 969) 3 479 475 3 183 408 (100 053) 3 083 355 Variable income cash bonds EMTN 1 029 268 (187 899) 841 369 1 030 837 (103 234) 927 603 EUR 822 028 (160 342) 661 686 782 905 (80 933) 701 972 USD 207 240 (27 557) 179 683 247 932 (22 301) 225 631 Cash bonds 818 933 (164 400) 654 533 737 475 (104 273) 633 202 EUR 771 804 (160 714) 611 090 686 556 (100 936) 585 620 USD 47 129 (3 686) 43 443 50 919 (3 337) 47 582 1 848 201 (352 299) 1 495 902 1 768 312 (207 507) 1 560 805 6 077 139 (558 352) 5 518 787 5 449 247 (328 273) 5 120 974 Correction of the amount of hedged liabilities (41 063) (38 381) Deferred costs (89 041) (63 862) Accrued costs 46 557 38 663 Deferred income 29 326 18 099 (54 221) (45 481) 5 464 566 5 075 493

As part of its medium and long term funding plan, the BPI issuances made under the EMTN program was increased to EUR Group issues bonds under the Euro Medium Term Notes (EMTN) 10 000 000 000. program, as well as cash bonds. Cash bonds can only be issued by institutions under the Bank of The maximum amount that can be issued under the EMTN Portugal’s supervision. They are an instrument currently used by program was increased in 2005 from EUR 5 000 000 000 to the BPI Group to provide investment solutions for its Customers, EUR 7 000 000 000. In 2006 the maximum amount for as an alternative to term deposits.

Consolidated financial statements | Notes 229 Cash bonds and bonds issued under the EMTN program can be to changes depending on the evolution of certain underlying issued in different currencies. assets (indices or indexing rates) announced at the date of issue. Such bonds have embedded derivatives which are The BPI Group issues bonds on a regular basis, with different recorded in specific accounts as required by IAS 39 (note remuneration conditions: 5.4.). In addition, the BPI Group has options to hedge the risks of change in the cost incurred with these bonds. ᭿ fixed rate – bonds issued on which the BPI Group commits itself to pay a previously defined rate of income, calculated The average interest rates mentioned in the previous table were based on a fixed interest rate from the time of issue to calculated based on the interest rate of each issue in relation to maturity; the nominal value of the bonds. It is not possible to calculate the rate for the Variable Income Bonds as the income is only ᭿ variable rate – bonds issued on which the BPI Group commits known when it is due. itself to pay income calculated based on a specified interest rate index published by an outside source (market); The changes in the bonds issued by the BPI Group in 2006 were as follows: ᭿ variable income – bonds issued for which the remuneration is not known, or certain, at the issue date, and can be subjected

Deposit Fixed rate cash Variable rate Variable income Total Certificates bonds cash bonds cash bonds Balance at 31 December, 2005 364 476 450 3 083 355 1 560 805 5 120 974 Bonds issued during the period 148 679 1 239 611 398 266 1 786 556 Bonds redeemed (55) (77 042) (756 985) (289 775) (1 123 857) Repurchases (net of resales) (3 409) (81 917) (147 465) (232 791) Exchange difference (1 577) (4 589) (25 929) (32 095) Balance at 31 December, 2006 309 543 101 3 479 475 1 495 902 5 518 787

The changes in the bonds issued by the BPI Group in 2005 were as follows:

Deposit Fixed rate cash Variable rate Variable income Total Certificates bonds cash bonds cash bonds Balance at 31 December, 2004 420 582 032 2 823 468 1 628 006 5 033 926 Bonds issued during the period 114 476 1 261 146 527 416 1 903 038 Bonds redeemed (56) (227 526) (1 072 500) (635 469) (1 935 551) Repurchases (net of resales) 5 833 66 056 13 524 85 413 Exchange difference 1 635 5 185 27 329 34 149 Balance at 31 December, 2005 364 476 450 3 083 355 1 560 805 5 120 974

230 Banco BPI | Annual Report 2006 Bonds issued by the BPI Group as of 31 December, 2006, by maturity date, are as follows:

Maturity

2007 2008 2009 2010 2011 2012-2015 > 2015 Total

Deposit Certificates EUR 53 51 49 47 45 64 309 53 51 49 47 45 64 309 Fixed rate cash bonds EUR 63 961 147 004 134 317 15 211 8 260 1 000 40 000 409 753 CZK 18 192 18 192 USD 19 478 7 001 3 620 30 099 GBP 59 568 59 568 JPY 25 489 25 489 63 961 166 482 200 886 18 831 26 452 1 000 65 489 543 101 Variable rate cash bonds EUR 529 122 460 432 1 048 981 959 460 278 000 115 000 3 390 995 JPY 31 861 31 861 CZK 36 383 36 383 CAD 10 471 10 471 HKD 9 765 9 765 570 748 496 815 1 059 452 959 460 278 000 115 000 3 479 475 Variable income cash bonds EUR 225 963 543 865 284 997 42 264 75 402 73 285 27 000 1 272 776 USD 57 232 67 357 62 441 33 060 1 518 1 518 223 126 283 195 611 222 347 438 75 324 76 920 73 285 28 518 1 495 902 Total 917 957 1 274 570 1 607 825 1 053 662 381 417 189 349 94 007 5 518 787

Bonds issued by the BPI Group as of 31 December, 2005, by maturity date, are as follows:

Maturity

2006 2007 2008 2009 2010 2011-2015 > 2015 Total

Deposit Certificates EUR 54 53 51 49 47 109 364 54 53 51 49 47 109 364 Fixed rate cash bonds EUR 69 029 66 501 148 848 69 146 16 266 1 660 20 000 391 449 USD 22 515 4 117 26 632 GBP 58 369 58 369 69 029 66 501 171 363 127 514 20 383 1 660 20 000 476 450 Variable rate cash bonds EUR 743 285 537 569 455 932 403 040 745 460 105 000 2 990 286 JPY 35 997 35 997 CZK 34 483 34 483 CAD 11 658 11 658 HKD 10 932 10 932 743 285 584 498 490 415 414 698 745 460 105 000 3 083 355 Variable income cash bonds EUR 148 012 252 178 535 722 221 263 41 758 78 159 10 500 1 287 592 USD 12 715 63 641 76 614 84 262 35 981 273 213 160 727 315 819 612 335 305 525 77 740 78 159 10 500 1 560 805 Total 973 096 966 871 1 274 163 847 785 843 630 184 929 30 500 5 120 974

Consolidated financial statements | Notes 231 5.18. Financial liabilities relating to transferred assets This caption is made up as follows:

31 Dec. 06 31 Dec. 05

Liabilities relating to assets not derecognised in securitisation operations (note 5.7) Loans Housing loans 2 857 131 1 500 005 Loans to SME's 497 106 497 201 Deferred costs (2 763) (2 169) Accrued costs 16 585 5 315 3 368 059 2 000 352

On 6 April, 2005 Banco BPI launched its first securitisation operation, under the name Douro SME Series 1.A. The operation was issued in 4 lots, the main characteristics being as follows:

Description Amount Estimated average life Rating (Moody’s, Guarantee Spread 31 Dec. 06 (years) S&P, Fitch) ᭿ Class A Notes 445 000 4.0 AAA Not guaranteed 0.10% ᭿ Class B Notes 26 000 6.5 AAA European Investment Fund 0.08% ᭿ Class C Notes 24 000 6.5 Guarantee Fund Securitisation of Loans 1.00% ᭿ Class D Notes 5 010 6.5 Not guaranteed 2.00% Total 500 010 Reserve fund (2 500) Other funds (404) Total 497 106

On 24 November, 2005 Banco BPI launched its first housing loan securitisation operation, under the name Douro Mortgages n.º 1. The operation was issued in 5 lots, the main characteristics being as follows:

Description Amount Estimated Rating (Moody’s,S&P, Spread1 average life Fitch) ᭿ Class A Notes 1 294 128 5.95 Aaa / AAA / AAA 0.14% ᭿ Class B Notes 24 750 7.46 Aa2 / AA / AA 0.17% ᭿ Class C Notes 22 500 7.46 A1 / BBB / A+ 0.27% ᭿ Class D Notes 18 750 7.46 Baa1 / BBB / A- 0.47% ᭿ Class E Notes 9 000 7.46 N.A. Total 1 369 128 Reserve Fund (12 000) Other Funds 3 Total 1 357 131 1) Untill the date of the call option (September 2014); after this date, if the option is not exercised, the spread doubles.

On 28 September, 2006 Banco BPI launched its second housing out in April 2005 (Douro SME Series 1) and the first housing loan loan securitisation operation in the amount of 1 500 000 euros securitisation operation (DOURO Mortgages No. 1) this operation under the name DOURO Mortgages No. 2. As in the case of the was carried out through Sagres – Sociedade de Titularização de small and medium company loan securitisation operation carried Créditos S.A.

232 Banco BPI | Annual Report 2006 The operation was issued in 5 lots, their main characteristics being as follows:

Description Amount Estimated Rating (Moody’s,S&P, Spread1 average life Fitch) ᭿ Class A1 Notes 315 000 1.51 Aaa / AAA / AAA 0.05% ᭿ Class A2 Notes 1 125 000 7.51 Aaa / AAA / AAA 0.14% ᭿ Class B Notes 27 750 7.58 Aa3 / AA / AA 0.17% ᭿ Class C Notes 18 000 7.58 A2 / A- / A+ 0.23% ᭿ Class D Notes 14 250 7.58 Baa2 / BBB / BBB+ 0.48% ᭿ Class E Notes 9 000 N.A. N.A. Total 1 509 000 Reserve Fund (9 000) Total 1 500 000 1) Untill the date of the call option (April 2015); after this date, if the option is not exercised, the spread doubles.

5.19. Provisions and impairment losses The changes in provisions and impairment losses in 2006 were as follows:

Balance at Increases Decreases Utilisation Exchange Balance at 31 Dec. 05 and reversals differences 31 Dec. 06 and others Impairment losses on loans and advances to credit institutions (note 5.6) 14 (1) 13 Impairment losses on loans and advances to Customers (note 5.7) 307 143 68 480 (14 046) (29 460) (20 823) 311 294 Impairment losses on financial assets available for sale (note 5.5) Debt instruments 619 (180) 439 Equity instruments 56 870 5 512 (7 085) (108) 55 189 Other securitites 4 229 210 4 439 Loans and other receivables 7 236 1 184 17 159 25 579 Impairment losses on other assets (note 5.12) Tangible assets held for sale 18 423 3 965 (7 682) (1 471) 13 235 Debtors, other applications and other assets 1 582 214 (82) (94) 1 620 Impairment losses and provisions for guarantees and commitments 27 993 3 167 (1 113) (385) 29 662 Other provisions 22 661 6 372 (3 515) (1 953) 1 642 25 207 Total 446 770 89 104 (26 619) (40 063) (2 515) 466 677

Utilisation of impairment losses on loans and advances to 17 168 th. euro relating to reclassification of an impairment loss Customers corresponds to write offs recorded in 2006. on an operation relating to the conversion of credits into supplementary capital contributions. The amounts in the column exchange differences and others relating to impairment losses on loans and advances to Customers The caption OTHER PROVISIONS at 31 December, 2006 includes and impairment losses on financial assets available for sale – loans provisions for tax contingencies and litigation in process. and other receivables include, respectively, -17 168 th. euro and

Consolidated financial statements | Notes 233 The changes in provisions and impairment losses in 2005 were as follows:

Balance at Impact of Increases Decreases Utilisation Exchange Balance at 31 Dec. 04 IAS 32 and reversals differences 31 Dec. 05 Pro forma and 39 and others Impairment losses on loans and advances to credit institutions (note 5.6) 18 (4) 14 Impairment losses on loans and advances to Customers (note 5.7) 291 163 (7 686) 101 948 (31 655) (48 333) 1 706 307 143 Impairment losses on financial assets available for sale (note 5.5) Debt instruments 491 (6) 134 619 Equity instruments 53 291 42 157 30 710 (69 433) 145 56 870 Other securitites 3 891 327 11 4 229 Loans and other receivables 7 470 (79) 76 (79) (258) 106 7 236 Impairment losses on associated companies and jointly controlled entities 48 653 (48 653) Impairment losses on other assets (note 5.12) Tangible assets held for sale 12 920 6 115 (25) (587) 18 423 Debtors, other applications and other assets 1240 80 594 (239) (93) 1 582 Impairment losses and provisions for guarantees and commitments 28 607 4 708 1 384 (6 960) 254 27 993 Other provisions 27 626 (234) 4 505 (6 227) (2 069) (940) 22 661 Total 475 370 39 267 145 477 (45 189) (169 333) 1 178 446 770

Utilisation of impairment losses on loans and advances to 5.20. Technical provisions Customers corresponds to write offs recorded in 2005. This caption is made up as follows:

31 Dec. 06 31 Dec. 05 The increase in impairment losses on financial assets available for Immediate Life Annuity / Individual 7 7 sale includes 24 296 th. euro and 5 742 th. euro relating to Immediate Life Annuity / Group 54 64 investments in Portugal Telecom and Impresa, respectively. Family Savings 486 807 New Family Savings 2 115 939 2 295 338 Utilisation of the impairment losses on financial assets available for BPI Retirement Guaranteed 59 965 39 119 sale includes 58 748 th. euro used when the shares of Portugal Retirement Savings 373 836 177 305 Telecom were sold. Non resident savings 260 824 412 995 2 811 111 2 925 635 Impairment losses in associated companies at 31 December, 2004 relates to the investment in SIC. The provision was used in 2005 The mathematical provisions were computed on a prospective when the investment was sold. The Group sold its direct and actuarial basis, contract by contract, in accordance with the indirect participation in SIC – Sociedade Independente de technical bases of the products:

Comunicação, S.A. for 128 741 th. euro. The sale did not result in Immediate income the recognition of a gain or loss in 2005, as the amount of the Individual Interest Rate 6% transaction was established in 2004 and the impairment of the Mortality Table PF 60 / 64 investment was recorded based on the selling price then agreed. Group Interest Rate 6% Mortality Table PF 60 / 64 Deferred capital with Counterinsurance The caption OTHER PROVISIONS at 31 December, 2005 includes with Participation in Results provisions for tax contingencies and litigation in process. Group Interest Rate 4% and 0% Mortality Table PF 60 / 64, TV 73-77 and GRF 80

The mathematical provisions also include a provision for rate commitments, which is recorded when the effective profitability of the assets that represent the mathematical provisions of a determined product is lower than the technical interest rate used to calculate the mathematical provisions.

234 Banco BPI | Annual Report 2006 The New Family Savings, Retirement Savings and Non Resident Savings are capitalisation products with guaranteed capital and participation in the results.

5.21. Tax liabilities This caption is made up as follows:

31 Dec. 06 31 Dec. 05

Current Tax Liability Corporate income tax payable 32 529 18 201 Other 6 2 32 535 18 203 Deferred Tax Liability On temporary differences 53 186 51 439 53 186 51 439 85 721 69 642

Details of the deferred tax liability are presented in note 5.43.

5.22. Participating bonds This caption is made up as follows:

31 Dec. 06 31 Dec. 05

Issued Repurchased Balance Average Issued Repurchased Balance Average interest rate interest rate Participating bonds EUR 28 081 (1 240) 26 841 3.9% 28 081 (1 859) 26 222 2.4% 28 081 (1 240) 26 841 28 081 (1 859) 26 222 Accrued costs 381 235 27 222 26 457

The changes in debt issued by the BPI Group in 2006 were as follows:

Participating bonds

Balance at 31 December, 2005 26 222 Repurchases (net of resales) 619 Balance at 31 December, 2006 26 841

The changes in debt issued by the BPI Group in 2005 were as follows:

Participating bonds

Balance at 31 December, 2004 26 552 Repurchases (net of resales) (330) Balance at 31 December, 2005 26 222

The participating bonds can be redeemed at par at the request of the participants with the approval of the Bank or at the initiative of the Bank with six months notice.

Consolidated financial statements | Notes 235 5.23. Subordinated debt This caption is made up as follows:

31 Dec. 06 31 Dec. 05

Issued Repurchased Balance Average Issued Repurchased Balance Average interest rate interest rate Cash bonds EMTN 511 515 (44 376) 467 139 400 000 (36 942) 363 058 EUR 400 000 (44 376) 355 624 3.8% 400 000 (36 942) 363 058 3.7% JPY 111 515 111 515 2.8% Others 74 820 (14 895) 59 925 249 639 (33 628) 216 011 EUR 74 820 (14 895) 59 925 3.8% 249 639 (33 628) 216 011 2.8% 586 335 (59 271) 527 064 649 639 (70 570) 579 069 Perpetual bonds EMTN 707 792 (660 000) 47 792 713 996 (660 000) 53 996 EUR 660 000 (660 000) 3.5% 660 000 (660 000) 3.2% JPY 47 792 47 792 4.0% 53 996 53 996 4.0% 707 792 (660 000) 47 792 713 996 (660 000) 53 996 1 294 127 (719 271) 574 856 1 363 635 (730 570) 633 065 Correction of the amount of hedged liabilities 9 725 17 834 Deferred costs (2 469) (4 301) Accrued costs 6 606 6 590 Deferred income 172 202 14 034 20 325 588 890 653 390

The changes in debt issued by the BPI Group in 2006 were as Debt issued by the BPI Group at 31 December, 2006 is made follows: up as follows, by residual term to maturity:

Cash Perpetual Total Maturity bonds bonds 2007 2011-2015 > 2015 Total Balance at 31 December, 2005 579 069 53 996 633 065 Cash Bonds Bonds issued during the year 111 515 111 515 EUR 59 924 355 625 415 549 Bonds redeemed (174 819) (174 819) JPY 111 515 111 515 Repurchases (net of resales) 11 299 11 299 59 924 355 625 111 515 527 064 Exchange difference (6 204) (6 204) Perpetual Bonds Balance at 31 December, 2006 527 064 47 792 574 856 JPY1 47 792 47 792 47 792 47 792 Total 59 924 403 417 111 515 574 856 The changes in debt issued by the BPI Group in 2005 were as 1) Date of the call option (November 2011); after that date, if the option is not exercised, follows: the remuneration increases.

Cash Perpetual Total bonds bonds Debt issued by the BPI Group at 31 December, 2005 is made Balance at 31 December, 2004 617 402 53 705 671 107 up as follows, by residual term to maturity: Bonds issued during the year 300 000 300 000 Maturity Repurchases (net of resales) (338 333) (338 333) 2006 2007 2011-2015 Total Exchange difference 291 291 Balance at 31 December, 2005 579 069 53 996 633 065 Cash Bonds EUR 156 087 59 924 363 058 579 069 156 087 59 924 363 058 579 069 Perpetual Bonds JPY1 53 996 53 996 53 996 53 996 Total 156 087 59 924 417 054 633 065 1) Date of the call option (November 2011); after that date, if the option is not exercised, the remuneration increases.

236 Banco BPI | Annual Report 2006 5.24. Other liabilities

This caption is made up as follows: The caption SECURITIES OPERATIONS PENDING SETTLEMENT – NON STOCK

EXCHANGE OPERATIONS at 31 December, 2005 includes 46 032 31 Dec. 06 31 Dec. 05 th. euro relating to securities transactions carried out by BPI Creditors and other resources Creditors for futures operations 27 245 20 228 Vida for its portfolio, which represents financial products and Consigned resources 18 394 17 861 insurance managed by that company. Captive account resources 11 901 14 441 Subscription account resources 542 5 250 5.25. Liability for pensions and other benefits Guarantee account resources 27 032 38 214 The past service liability relating to pensioners and personnel State administrative sector 1 Value Added Tax (VAT) payable 822 626 that are, or have been, Employees of BPI Group companies , and Tax withheld at source 14 601 13 072 are covered by pension Funds, is calculated in accordance with Social Security contributions 1 956 1 884 IAS 19. Other 218 677 Contributions to other health systems 1 156 1 098 BPI Pensões is the entity responsible for the actuarial calculations Creditors under factoring contracts 6 219 9 571 used to determine the amounts of the retirement and survivor Creditors for the supply of assets 29 820 26 136 Other creditors 73 718 66 863 pension liabilities, as well as for managing the respective pension Deferred costs (3 688) (55) funds. 209 936 215 866 Liability for pensions The “Projected Unit Credit” method was used to calculate the and other benefits (note 5.25) Past service liabilities normal cost and past service liability due to age, and the “Single Pensioners and Employees 2 269 510 Successive Premiums” method was used to calculate the cost of Directors 23 853 the incapacity and survivor benefits. Net assets of the pension fund (2 273 334) 20 029 The main actuarial and financial assumptions used to calculate Accrued costs Creditors and other resources 340 349 the pension liability are as follows: Personnel costs 107 546 91 602 Assumptions Actual General administrative costs 25 203 23 636 2006 2005 2006 2005 Others 1 049 684 134 138 116 271 Demographic assumptions: Mortality table TV 73 / 77-M TV 73 / 77-M - - Deferred income TV 88 / 90-W TV 88 / 90-W On guarantees given and other contingent liabilities 6 464 6 905 Incapacity table EKV 80 EKV 80 - - Others 3 842 10 520 Personnel turnover 0% 0% - - 10 306 17 425 Decreases By By - - Other accounts mortality mortality Foreign exchange transactions pending settlement 36 897 Financial assumptions: Securities operations pending Discount rate 4.75% 4.50% - - settlement – non stock exchange operations 43 937 Pension fund income rate 5.25% 5.25% 13.63% 11.05% Liabilities pending settlement 151 282 134 169 Pensionable salary 1 Other operations pending settlement 16 778 12 533 increase rate 2.75% 2.75% 5.17% 5.40% 2 204 957 190 639 Pension increase rate 2.00% 2.00% 2.50% 2.50% 559 337 560 230 1) Calculated based on the changes in the pensionable wages of the Employees serving in the Group companies in the beginning and end of the year (includes changes in remuneration levels and does not reflect personnel changes). 2) Corresponds to the ACTV table update rate. The caption LIABILITIES PENDING SETTLEMENT at 31 December, 2006 includes interbank electronic transfers and ATM / POS transactions to be settled with SIBS in the amounts of 53 364 th. euro and 19 157 th. euro, respectively (42 574 th. euro and 18 950 th. euro, respectively at 31 December, 2005).

1) Companies consolidated by the full consolidation method (Banco BPI, BPI Investimentos, BPI Gestão de Activos, Inter-Risco and BPI Vida).

Consolidated financial statements | Notes 237 At 31 December, 2006 and 2005 the number of pensioners and The changes in the pension funds in 2006 and 2005 were as Employees covered by the pension funds was as follows: follows:

31 Dec. 06 31 Dec. 05 31 Dec. 06 31 Dec. 05

Retirement pensioners 6 141 6 181 Net assets of the pension fund at the beginning of the year 2 273 334 1 581 855 Survivor pensioners 979 909 Contributions made: Current Employees 6 835 6 574 By the BPI Group 36 626 676 Former Employees (clauses 137 A and 140 of the ACTV) 2 177 1 981 By the Employees 2 391 2 075 16 132 15 645 Pension fund income (net) 309 914 174 778 Pensions paid by the pension funds (115 217) (112 050) Net assets of the pension fund at the The past service liability for pensioners and Employees of the end of the year 2 470 458 2 273 334 BPI Group and respective coverage by the pension fund at 31 December, 2006 and 2005 are as follows: Contributions to the pension funds in 2006 and 2005 were made in cash. 31 Dec. 06 31 Dec. 05

Total past service liability Liability for pensions under payment 1 730 539 1 791 419 Of which: [increase in the liability resulting from early retirements during the year] [271] [604] Past service liability of current and former Employees 500 298 478 091 2 230 837 2 269 510 Net assets of the pension funds 2 470 458 2 273 334 Excess / (Insufficient) cover 239 621 3 824 Degree of coverage 111% 100%

The changes in the present value of the past service liability during 2006 and 2005 were as follows:

31 Dec. 06 31 Dec. 05

Liability at the beginning of the year 2 269 510 1 950 619 Current cost: Of the BPI Group 27 471 19 690 Of the Employees 2 391 2 093 Interest cost 101 835 100 612 Actuarial (gain) and loss in the liability (55 388) 307 890 Early retirements 271 604 Changes in the conditions of the pension plan (698) Pensions payable (estimate) (114 555) (111 998) Liability at the end of the year 2 230 837 2 269 510

238 Banco BPI | Annual Report 2006 The changes in 2006 in the fair value of the pension fund assets used by entities of the BPI Group or representing securities issued by these entities were as follows::

31 Dec. 05 Purchases Changes in Sales 31 Dec. 06 fair value Fair value of the plan assets: Financial instruments issued by the BPI Group Shares 41 228 16 396 3 936 38 985 22 575 Bonds 6 352 21 6 373 47 580 16 396 3 957 38 985 28 948 Premises used by the BPI Group 102 196 7 923 1 051 11 194 99 976 149 776 24 319 5 008 50 179 128 924

The changes in 2005 in the fair value of the pension fund assets used by entities of the BPI Group or representing securities issued by these entities were as follows:

31 Dec. 04 Purchases Changes in Sales 31 Dec. 05 fair value Fair value of the plan assets: Financial instruments issued by the BPI Group Shares 41 425 3 610 8 560 12 367 41 228 Bonds 8 642 (2 290) 6 352 41 425 12 252 6 270 12 367 47 580 Premises used by the BPI Group 96 934 4 171 1 091 102 196 138 359 16 423 7 361 12 367 149 776

The pension liability not yet recognised as cost at 31 December, The consolidated financial statements as of 31 December, 2006

2006 and 2005 was as follows: and 2005 include, in the captions INTEREST AND FINANCIAL GAIN

AND LOSS WITH PENSIONS and PERSONNEL COSTS (note 5.41), the 31 Dec. 06 31 Dec. 05 following amounts relating to coverage of the pension liability: Actuarial deviations Within the corridor (42 610) (227 306) 31 Dec. 06 31 Dec. 05

Outside the corridor 49 (64 135) Interest and financial gain and loss with pensions (42 561) (291 441) Interest cost 101 835 100 612 Changes in the conditions of the pension plan (340) (1 101) Expected Fund income (117 156) (95 767) (42 901) (292 542) (15 321) 4 845 Personnel costs The changes in actuarial deviations1 in 2005 and 2006 were as Current service cost 27 471 19 690 follows: Amortisation of deviations outside the corridor 1 398 Amount at 31 December, 2004 (62 509) Increase in the liability for early retirements 271 604 Adjustment in excess of that established in the ACTV Table (14 707) Compensation due to early retirements (419) Change in the actuarial and financial assumptions (276 796) Change in the conditions of the pension plan 64 236 Deviation in pension fund income 79 011 28 785 20 530 Deviation in pensions paid (53) Other deviations (16 387) Amount at 31 December, 2005 (291 441) Amortisation of deviations outside the corridor 1 398 Adjustment in excess of that established in the ACTV Table (11 391) Change in the actuarial and financial assumptions 79 012 Deviation in pension fund income 192 758 Deviation in pensions paid (664) Others (12 233) Amount at 31 December, 2006 (42 561) 1) Actuarial loss due to differences between the actuarial and financial assumptions and the amounts effectively realised and changes in the actuarial and financial assumptions.

Consolidated financial statements | Notes 239 The Members of the Executive Board of Banco BPI, S.A. and the The changes in actuarial deviations in 2005 and 2006 were as remaining Board Members of BPI Investmentos benefit from a follows: supplementary retirement and survivor pension plan. At 31 Change in actuarial and financial assumptions (3 299) December, 2006 a pension fund was constituted to cover these Deviation in pensions paid (72) liabilities. At 31 December, 2006 and 2005 the past service Other deviations (423) liability of this plan and respective coverage by the pension fund Amount at 31 December, 2005 (3 794) were as follows: Amortisation of deviations outside the corridor 62 Deviation in pension fund income 10 31 Dec. 06 31 Dec. 05 Change in actuarial and financial assumptions 872 Present value of the past service liability Deviation in pensions paid (3) Liability for pensions under payment 4 507 4 519 Change in the retirement age of Banco Português Past service liabilty relating to the current de Investimento's Executive Directors 3 922 and former directors 17 424 19 334 Others 57 21 931 23 853 Amount at 31 December, 2006 1 126 Net assets of the pension fund 21 941

Excess / (Insufficient) cover 10 The consolidated financial statements as of 31 December, 2006 Degree of coverage 100% and 2005 include, in the captions INTEREST AND FINANCIAL GAIN

AND LOSS WITH PENSIONS and PERSONNEL COSTS (note 5.41), the The changes in the present value of the past service liability of following amounts relating to coverage of the pension liability for the plan in 2006 and 2005 were as follows: Executive Directors:

31 Dec. 06 31 Dec. 05 31 Dec. 06 31 Dec. 05

Liability at the beginning of the year 23 853 17 055 Interest and financial gain and loss with pensions Current service cost 2 208 1 391 Interest cost 1 105 959 Interest cost 1 105 959 1 105 959 Actuarial (gain)/loss in the liability (4 851) 3 794 Personnel costs Change in the conditions of the pension plan 1 085 Current service cost 2 208 1 391 Pensions payable (estimate) (384) (431) Amortisation of deviations outside the corridor 62 Liability at the end of the year 21 931 23 853 Change in the pension plan conditions 27 950 2 297 2 341 The changes in the pension fund in 2006 were as follows: 5.26. Capital 31 Dec. 06 At 31 December, 2006 Banco BPI’s share capital was made up Contributions made 21 931 of 760 000 000 fully paid shares with a nominal value of 1 euro Pension fund income (net) 10 each. Net assets of the pension fund at the end of the year 21 941

The Shareholders’ General Meeting held on 20 April, 2005 The pension liability for the Executive Directors at 31 December, empowered Banco BPI’s Board of Directors to do the following 2006 and 2005 not recognised as cost is as follows: during a period of eighteen months:

31 Dec. 06 31 Dec. 05 a) to purchase treasury shares of up of to 10% of Banco BPI’s Actuarial deviations – Executive Directors Within the corridor 936 (2 385) share capital, provided that: Outside the corridor 190 (1 409) 1 126 (3 794) i) the treasury shares are purchased on a market registered by Changes in the conditions of the the Securities Market Commission (Comissão do Mercado de Executive Directors' pension plan (109) (136) Valores Mobiliários – CMVM), at a price not exceeding 1 017 (3 930) 110% of the weighted average of the weighted daily average prices of Banco BPI shares on the 10 official price market sessions managed by Euronext Lisboa – Sociedade Gestora de Mercados Regulamentados, S.A. preceding the date of purchase, and a minimum of 1 euro; or

240 Banco BPI | Annual Report 2006 ii) the purchases result from repurchase operations or the loan 5.28. Other equity instruments and treasury shares of Banco BPI shares, provided that such operations are These captions are made up as follows: registered at Euronext Lisboa – Sociedade Gestora de 31 Dec. 06 31 Dec. 05 Mercados Regulamentados, S.A.; or Other equity instruments Cost of shares to be made available iii) the purchases result from agreements to settle obligations to Group Employees arising from loan agreements entered into by Banco BPI, RVA 2002 605 RVA 2003 800 1 405 provided that the value attributed, for that purpose, to the RVA 2004 1 591 1 954 shares does not exceed the value determined by RVA 2005 1 995 2 037 application of the criteria defined in (i) above, with Costs of options not exercised (premiums) reference to the settlement agreement date; RVA 2001 167 380 RVA 2002 217 553 b) to sell Banco BPI shares provided that: RVA 2003 595 1 620 RVA 2004 848 2 007 RVA 2005 2 501 1 780 i) the shares and options to purchase shares of Banco BPI are 8 714 12 341 sold to Employees and Directors of Banco BPI and Treasury shares subsidiaries, as share-based payments under the terms and Shares to to be made available to Group Employees conditions established in the Variable Remuneration RVA 2002 585 RVA 2003 756 1 531 Program (RVA) regulations; or RVA 2004 1 883 2 855 RVA 2005 2 963 ii) the shares are sold to third parties under the following Shares hedging RVA options conditions: RVA 2001 938 1 942 RVA 2002 2 044 5 042 – the shares are sold in a market registered at the RVA 2003 3 122 10 762 RVA 2004 8 222 19 843 Securities Market Commission (CMVM); and RVA 2005 31 314 – the shares are sold at a price not less than 90% of the Other treasury shares 417 365 weighted average of the daily weighted average prices of 51 659 42 925 Banco BPI shares on the 20 official price market sessions

managed by Euronext Lisboa – Sociedade Gestora de The caption OTHER EQUITY INSTRUMENTS includes accrued share- Mercados Regulamentados, S.A. preceding the date of based payment program (RVA) costs relating to shares to be sale; or, made available and options not yet exercised.

iii) the shares are sold to third parties as a result of resale Details of the share-based Variable Remuneration Program (RVA) agreements or loan operations of Banco BPI shares, and are included in note 5.48. the operations are registered at Euronext Lisboa – Sociedade Gestora de Mercados Regulamentados, S.A. At 31 December, 2006 and 2005 the Bank held, respectively, 12 469 348 and 13 310 901 treasury shares, including Following the public share purchase offering over Banco BPI, 1 516 195 and 1 683 200 treasury shares to be made available launched on 13 March, 2006, the Board of Directors decided under the RVA program for which the respective ownership was not to present, to the Shareholders’ Annual General Meeting transferred to the Employees on the grant date. held on 20 April, 2006, the usual annual request to renew the authorisation to trade treasury shares and so at this time Banco In 2006 the Bank recognised directly in shareholders’ equity, a BPI does not have this authorisation. loss of 209 th. euro on the sale of treasury shares hedging the variable remuneration (RVA) program and a gain of 253 th. euro 5.27. Share Premium account on the sale of other treasury shares. In 2005 the Bank At 31 December, 2006 and 2005 the balance of the caption recognised a gain of 2 187 th. euro relating to the hedge of the

SHARE PREMIUM ACCOUNT amounted to 231 306 th. euro. variable remuneration (RVA) program and a gain of 48 th. euro on the sale of other treasury shares. In accordance with Ministerial Order 408 / 99 of 4 June, published in Diário da República – 1st B Series, n.º 129, the share premium account may not be used to pay dividends or to acquire treasury shares.

Consolidated financial statements | Notes 241 5.29. Revaluation reserves This caption is made up as follows: In accordance with Article 97 of the General Regime for Credit Institutions and Financial Companies, approved by Decree-Law 31 Dec. 06 31 Dec. 05 298 / 91 of 31 December and amended by Decree-Law 201 / Revaluation reserves 2002 of 25 September, Banco BPI must appropriate at least Reserves resulting from valuation to fair value of financial assets available for sale (note 5.5): 10% of its net income each year to a legal reserve until the Debt Instruments 26 224 6 159 amount of the reserve equals the greater of the amount of share Equity Instruments 140 358 82 750 capital or the sum of the free reserves plus retained earnings. Other (58) (449)

Reserve for foreign exchange difference At 31 December, 2006 and 2005 the share premium account on investments in foreign entities Subsidiary or associated companies (9 690) and legal reserve of the companies included in the consolidation Equity instruments available for sale (100) (83) of the BPI Group which, under the applicable regulations may Legal revaluation reserve 703 703 not be distributed, amounted to 144 617 th. euro and 126 226 157 437 89 080 th. euro, respectively, which, adjusted by Banco BPI’s effective Deferred tax reserve percentage participation in these companies, amounted to Resulting from valuation to fair value 72 593 th. euro and 56 915 th. euro, respectively. These of financial assets available for sale: reserves are included in the caption CONSOLIDATION RESERVES. Tax assets 467 334 Tax liabilities (31 548) (22 461) Resulting from foreign exchange difference The caption CONSOLIDATION RESERVES at 31 December, 2006 and on investments in foreign entities: 2005 includes 11 344 th. euro and 9 506 th. euro, Tax assets 11 respectively, relating to the amount of the revaluation reserves of (31 081) (22 116) the companies recorded in accordance with the equity method, 126 356 66 964 weighted by Banco BPI’s (effective) participation in them.

5.30. Other reserves and retained earnings This caption is made up as follows:

31 Dec. 06 31 Dec. 05

Legal reserve 63 961 52 711 Merger reserve (2 463) (2 463) Other reserves 135 661 124 023 197 159 174 271 Consolidation reserves and retained earnings (131 723) (273 012) Gain on treasury shares 2 279 2 264 Taxes relating to gain on treasury shares (624) (611) 67 091 (97 088)

242 Banco BPI | Annual Report 2006 5.31. Minority interest This caption is made up as follows:

Balance sheet Statement of income

31 Dec. 06 31 Dec. 05 31 Dec. 06 31 Dec. 05 Minority shareholders in: BPI Capital Finance Ltd. 276 731 306 245 13 289 10 861 BPI Dealer – Sociedade financeira de Corretagem (Moçambique), S.A.R.L. 6 7 1 276 737 306 252 13 290 10 861

At 31 December 2006 and 2005 the minority interest in BPI Capital Finance included 275 172 th. euro and 304 063 th. euro, respectively, relating to preference shares:

31 Dec. 06 31 Dec. 05

Issued Repurchased Balance Issued Repurchased Balance “C” Series Shares 250 000 (35 222) 214 778 250 000 (24 888) 225 112 “D” Series Shares 200 000 (158 369) 41 631 200 000 (144 483) 55 517 “E” Series Shares 100 000 (81 237) 18 763 100 000 (76 566) 23 434 550 000 (274 828) 275 172 550 000 (245 937) 304 063

The C, D and E series correspond to preference shares with a BPI Capital Finance, Ltd. will not pay any dividend on the nominal value of 1 000 euros each, issued in August 2003, preference shares if, during the fiscal year or the quarter in June 2005 and June 2005, respectively. progress, such dividend plus amounts already paid exceed Banco BPI’s distributable funds. The payment of dividends and redemption of the preference shares are guaranteed by Banco BPI. The C Series preference shares are redeemable in whole or in part at their nominal value, at the option of BPI Capital Finance, The C Series preference shares entitle the holders to a Ltd. on any dividend payment date as from August 2013, non-cumulative preference dividend, if and when declared by the subject to prior consent of the Bank of Portugal and Banco BPI. Directors of BPI Capital Finance, Ltd., at an annual rate equal to The C series preference shares are also redeemable in whole, but the three month Euribor rate plus a spread of 1.55 percentage not in part, at the option of BPI Capital Finance, Ltd., with prior points up to 12 August, 2013 and thereafter to a non-cumulative approval of the Bank of Portugal and Banco BPI, if a preference dividend at a rate equal to the three month Euribor disqualifying capital event or tax event occurs. rate plus a spread of 2.55 percentage points. The dividends are payable quarterly on 12 February, 12 May, 12 August and The D and E Series preference shares are redeemable in whole, 12 November of each year. but not in part, at their nominal value, at the option of BPI Capital Finance, Ltd., on any dividend payment date as from The D Series preference shares entitle the holders to a June 2010, subject to prior consent of the Bank of Portugal and non-cumulative preference dividend, if and when declared by the Banco BPI. The D and E series preference shares are redeemable Directors of BPI Capital Finance, Ltd., at an annual rate equal to in whole, but not in part, at their nominal value, at any time prior the three month Euribor rate plus a spread 0.075 percentage to 30 June, 2010 at the option of BPI Capital Finance, Ltd., points over their nominal value. The dividends are payable subject to prior consent of the Bank of Portugal and Banco BPI, quarterly on March 30, June 30, September 30 and December if a disqualifying capital event or tax event occurs. 30 of each year. These shares are subordinated to all liabilities of Banco BPI and The E Series preference shares entitle the holders to a pari passu with any other preference shares that might be issued non-cumulative preference dividend, if and when declared by the by the Group in the future. Directors of BPI Capital Finance, Ltd., at an annual rate equal to the three month Euribor rate over their nominal value. The dividends are payable quarterly on March 30, June 30, September 30 and December 30 of each year.

Consolidated financial statements | Notes 243 5.32. Off balance sheet items

This caption is made up as follows: The COMMITMENT TO THE INVESTOR INDEMNITY SYSTEM caption at 31 December, 2006 and 2005 corresponds to BPI’s irrevocable 31 Dec. 06 31 Dec. 05 commitment, legally required under the applicable legislation, Guarantees given and other contingent liabilities to pay the System, if required to do so, its share of the amounts Guarantees and sureties 3 113 883 3 007 443 necessary to indemnify investors. Stand-by letters of credit 12 475 18 733 Documentary credits 195 254 112 579 Sureties and indemnities 53 53 The OPTIONS ON ASSETS caption at 31 December, 2006 and 2005 3 321 665 3 138 808 corresponds to share options issued by the BPI Group under the Assets given as collateral 367 378 274 105 share-based payments program (RVA). Commitments to third parties Irrevocable commitments At 31 December, 2006 the BPI Group managed the following Options on assets 39 399 38 036 third party assets: Forward operations – Sale of securities 9 018 9 018 Investment funds and PPRs 4 744 006 Irrevocable credit lines 24 504 25 339 Pension funds1 3 494 406 Term commitment to make annual contributions to the Deposit Guarantee Fund 36 541 36 124 1) Includes the Group companies's pension funds. Commitment to the Investor Indemnity System 16 536 14 410 Other irrevocable commitments 164 1 250 5.33. Financial margin (narrow sense) Revocable commitments 4 171 018 3 877 523 This caption is made up as follows: 4 297 180 4 001 700 31 Dec. 06 31 Dec. 05 Responsability for services provided Custody and safekeeping 33 440 343 26 553 777 Interest and similar income Amounts for collection 311 464 336 508 Interest on deposits with banks 3 612 2 097 Assets managed by the institution 9 950 968 9 287 719 Interest on placements with credit institutions 56 614 36 203 43 702 775 36 178 004 Interest on loans to Customers 887 253 747 491 Interest on credit in arrears 7 405 6 963 Interest on securities held for trading and available for sale 132 379 101 532 The caption ASSETS GIVEN AS COLLATERAL at 31 December, 2006 Interest on securitised assets not derecognised 95 755 27 278 includes: Interest on derivatives 504 090 580 774 Interest on debtors and other applications 643 1 128 ᭿ 316 694 th. euro relating securities given in guarantee to the Other interest and similar income 5 602 5 431 Bank of Portugal to operate on the System for Settlement of 1 693 353 1 508 897 Large Transactions (Sistema de Pagamento de Grandes Interest and similar expense Transacções); Interest on resources Of central banks 34 1 390 ᭿ 8 797 th. euro relating to securities given in guarantee to the Of other credit institutions 128 005 69 544 Securities Market Commission (Comissão do Mercado de Deposits from Customers 236 316 168 905 Valores Mobiliários – CMVM) under the Investor Indemnity Other resources of Customers 6 125 22 965 System (Sistema de Indemnização aos Investidores); Debt securities 178 027 216 843 Interest from short selling 8 509 9 083 Interest on derivatives 499 034 465 456 ᭿ 36 963 th. euro relating to securities given in guarantee to the Interest on liabilities relating to assets Deposit Guarantee Fund; not derecognised on securitised operations 68 194 13 237 Interest on subordinated debt 27 113 24 681 ᭿ 4 527 th. euro relating to securities given in guarantee to Other interest and similar expenses 1 286 5 263 Euronext to carry out derivative operations. 1 152 643 997 367

The TERM COMMITMENT TO MAKE ANNUAL CONTRIBUTION TO THE DEPOSIT

GUARANTEE FUND caption at 31 December, 2006 and 2005 corresponds to BPI’s legally required irrevocable commitment, to pay to the Fund, upon request by it, the amount of the annual contributions not yet paid.

244 Banco BPI | Annual Report 2006 5.34. Gross margin on unit links 5.38. Net commission income This caption is made up as follows: This caption is made up as follows:

31 Dec. 06 31 Dec. 05 31 Dec. 06 31 Dec. 05

Income from financial instruments 46 762 29 795 Commissions received Interest on capitalisation insurance (39 246) (26 629) On guarantees provided 27 512 27 398 7 516 3 166 On commitments to third parties 2 929 2 314 On banking services rendered 221 903 179 612 On operations realised on behalf of third parties 26 215 20 912 5.35. Income from equity instruments Other 6 553 16 472 This caption is made up as follows: 285 112 246 708 Commissions paid 31 Dec. 06 31 Dec. 05 On guarantees received 28 41 Banco Comercial Português 11 314 7 531 On commitments to third parties 19 Portugal Telecom 7 262 On financial instrument operations 612 377 SIBS 687 1 269 On banking services rendered by third parties 23 570 16 477 Unicre 1 796 569 On operations realised by third parties 2 470 1 903 Others 950 1 118 Other 558 432 14 747 17 749 27 257 19 230 Other income, net 5.36. Net commission relating to amortised cost Refund of expenses 28 303 30 633 This caption is made up as follows: Income from banking services 21 553 18 680 Charges similar to fees (5 848) (5 308) 31 Dec. 06 31 Dec. 05 44 008 44 005 Commission received relating to amortised cost Loans to Customers 19 725 14 425 5.39. Net income on financial operations Others 1 981 2 436 Commission paid relating to amortised cost This caption is made up as follows:

Loans to Customers (2 699) (2 482) 31 Dec. 06 31 Dec. 05 Others (634) (438) Gain and loss on operations at fair value 18 373 13 941 Foreign exchange gain, net 28 504 32 194 Gain and loss on financial assets held for 5.37. Technical result of insurance contracts for trading and derivatives Debt instruments (15 069) 6 371 31 Dec. 06 31 Dec. 05 Equity instruments 61 570 14 476 Premiums 479 502 1 559 912 Other securities 22 Income from financial instruments 77 674 60 824 Derivative instruments 24 533 73 856 Cost of claims, net of reinsurance (668 827) (209 162) Gain and loss on other financial assets valued Changes in technical provisions, net of reinsurance 178 701 (1 356 857) at fair value through profit or loss 3 897 872 Participation in results (63 785) (42 798) Gain and loss on financial liabilities held for trading 10 509 (979) 3 265 11 919 Other gain and loss on financial operations (48 691) (74 224) 65 275 52 566 This caption includes the result of capitalisation insurance with Gain and loss on assets available for sale discretionary participation feature (IFRS 4). Participation in the Gain and loss on the sale of loans and advances to Customers 244 (154) results of capitalisation insurance is attributed at the end of Gain and loss on financial assets available for sale: each year and is calculated in accordance with the technical Debt instruments 10 283 8 310 bases of each product, duly approved by the Portuguese Equity instruments 33 805 19 015 Insurance Institute. Other securities 94 Loans and other receivables 1 109 In 2006 the interest rate markets, on which the low risk 44 332 28 374 capitalisation insurance investments are based, were in Interest and financial gain and loss with pensions (note 5.25) recession and therefore the BPI Group decided to reduce its Interest cost (102 940) (101 571) margin on the results of the insurance products in order to have Expected fund income 117 156 95 767 no effect on the income distributed to Customers. 14 216 (5 804)

Consolidated financial statements | Notes 245 The gain and loss on equity instruments available for sale at 31 The caption REMUNERATION at 31 December, 2006 and 2005 December, 2005 includes 16 985 th. euro relating to a gain on includes the following costs relating to remuneration attributed the sale of shares in Auto-Estradas do Oeste, S.A. in January to the members of Banco BPI’s Board of Directors: 2005. ᭿ 7 157 th. euro and 4 702 th. euro, respectively, relating to

The caption OTHER GAIN AND LOSS ON FINANCIAL OPERATIONS at 31 remuneration paid in cash; December, 2006 and 2005 includes a net loss of 37 917 th. euro and 66 050 th. euro, respectively, relating to the ᭿ 586 th. euro and 1 790 th. euro, respectively, relating to the revaluation of assets and liabilities hedged by derivatives. accrued cost of the share-based remuneration program (RVA) in accordance with IFRS 2. Following the public share 5.40. Net operating expenses purchase offering currently outstanding, the variable

The caption NET OPERATING EXPENSES is made up as follows: remuneration for 2006 were attributed in full in cash. Therefore, no shares or options over shares were attributed 31 Dec. 06 31 Dec. 05 for 2006. Operating income Gain on the sale of investments in subsidiaries and associated companies 89 3 206 The caption PENSION FUND at 31 December, 2006 and 2005 Gain on tangible assets held for sale 8 011 1 605 includes 1 259 th. euro and 356 th. euro relating to costs of the Gain on other tangible assets 3 737 2 454 Defined Contribution Pension Plan for Employees of Banco de Other operating income 12 167 3 858 Fomento Angola. 24 004 11 123 Operating expenses The caption COST OF EARLY RETIREMENTS at 31 December, 2006 Subscriptions and donations 3 013 2 969 includes (419) th. euro relating to the reversal of compensation Contributions to the Deposit Guarantee Fund 2 361 2 243 for early retirements recorded in preceding years. Loss on investments in subsidiaries and associated companies 38 Loss on tangible assets held for sale 719 200 5.42. Administrative Costs Loss on other tangible assets 2 140 4 504 This caption is made up as follows: Other operating expenses 4 018 4 222 31 Dec. 06 31 Dec. 05 12 251 14 176 Other taxes Administrative costs Indirect taxes 2 821 2 361 Supplies Direct taxes 1 143 693 Water, energy and fuel 7 459 7 131 3 964 3 054 Consumable material 1 858 1 813 Other 2 257 1 191 Services The caption GAIN ON THE SALE OF INVESTMENTS IN SUBSIDIARIES AND Rentals and leasing 28 255 28 216

ASSOCIATED COMPANIES at 31 December, 2005 includes Communications and computer costs 34 289 32 272 3 013 th. euro relating to compensation for the sale, in 2003, Travel, lodging and representation 8 553 7 337 of the position held in Banc Post. Publicity 29 666 22 577 Maintenance and repairs 13 542 12 878 Insurance 4 586 4 570 The caption OTHER OPERATING INCOME at 31 December, 2006 Fees 5 743 5 577 includes 4 921 th. euro relating to the settlement of loan Legal expenses 2 027 1 773 processes of the former Portuguese Colonies. Security and cleaning 7 973 7 247 Information services 3 105 2 904 5.41. Personnel costs Temporary labour 3 292 3 204 This caption is made up as follows: Studies, consultancy and auditing 8 321 4 947 SIBS 9 110 7 487 31 Dec. 06 31 Dec. 05 Other services 28 058 25 753 Remuneration 258 176 232 624 198 094 176 877 Long service premium (note 2.7) 2 503 4 059 Pension fund (note 5.25) 32 346 22 824 Early retirements (note 5.25) (148) 604 Mandatory social charges 38 013 35 530 Other personnel costs 8 338 7 376 339 228 303 017

246 Banco BPI | Annual Report 2006 5.43. Income tax Income tax recognised in the statements of income for the years corrections of taxes paid in excess in the years 2003 and 2004, ended 31 December, 2006 and 2005, as well as the tax burden, due to not considering the tax benefits on Angolan public debt measured by the relationship between the tax charge and profit income. before tax, are as follows: Following the coming into force of Law 2 / 2007, which 31 Dec. 06 31 Dec. 05 approved the new Local Finances Law, Municipal Surcharge Current income tax became based on taxable income subject and not exempt from For the year 45 080 27 586 income tax, at a maximum rate of 1.5%. Consequently, the BPI Correction of prior years (7 060) (28) 38 020 27 558 Group’s deferred taxes were adjusted, resulting in the effect Deferred tax reflected in the deferred tax caption CHANGE IN TAX RATE. Recognition and reversal of temporary differences 42 508 58 159 Change in tax rate 4 859 20 In addition, in 2006 and 2005 the Bank recorded, directly in On tax losses carried forward 14 886 (25 924) shareholders’ equity, income tax of 13 th. euro and 611 62 253 32 255 th. euro, respectively, on net gain on treasury shares (note 5.28). Total tax charged to the statement of income 100 273 59 813 1 Net income before income tax 400 252 296 830 Following are reconciliations between the nominal rate of income Tax burden 25.1% 20.2% tax and the tax burden for the years 2006 and 2005, as well as 1) Considering net income of the BPI Group plus income tax and minority interest less the results of subsidiaries excluded from the consolidation. between the tax cost and the product of the accounting profit times the nominal tax rate:

The items CURRENT INCOME TAX / CORRECTION OF PRIOR YEARS at 31 December, 2006 includes 7 125 th. euro relating to

31 Dec. 06 31 Dec. 05

Tax rate Amount Tax rate Amount Net income before income tax 400 252 296 830 Income tax computed based on the nominal tax rate 28.9% 115 491 29.4% 87 408 Effect of tax rates applicable to foreign branches 0.2% 953 0.7% 2 013 Income exempt from income tax (SFE's) -0.3% (1 329) -0.3% (1 035) Capital gains and impairment of investments (net) 0.5% 2 079 -0.4% (1 157) Capital gain of tangible assets (net) -0.5% (2 014) -0.1% (150) Interest on Angolan public debt1 -3.6% (14 303) -4.2% (12 562) Exchange differences of BFA 0.5% 1 851 -1.6% (4 802) Non taxable dividends -1.0% (3 897) -1.6% (4 752) Tax on dividends of subsidiary and associated companies 0.1% 540 0.4% 1 303 Tax benefits -0.3% (1 298) -0.4% (1 055) Impairment and provisions for loans -1.2% (3 613) Non tax deductible pension costs 0.2% 975 0.3% 1 014 Interest recognised in minority interest -0.9% (3 668) -1.0% (2 987) Other non taxable income and expenses 0.1% 221 0.2% 488 Tax losses used -0.2% (683) -0.2% (800) Effect of change in the rate of deferred taxes 1.2% 4 859 0.0% 20 Autonomous taxation 0.1% 496 0.2% 480 25.1% 100 273 20.2% 59 813 1) Income from Angolan public debt securities, obtained on Treasury Bonds and Treasury Bills issued by the Angolan State, covered by Regulamentary Decrees 51 / 03 and 52 / 03 of 8 July, benefits from tax exemption in Angola. In 2006, this caption includes 7 125 th. euro relating to corrections for prior years.

Consolidated financial statements | Notes 247 Current taxes are calculated based on the nominal tax rates legally in force in the countries in which the Bank operates.

31 Dec. 06 31 Dec. 05

Net income before Tax rate Net income before Tax rate income tax income tax Companies with tax rate of 25% and Municipal Surcharge of 10% 111 393 27.5% 64 289 27.5% Companies with tax rate of 25% and Municipal Surcharge of 9% 211 121 27.3% 152 080 27.3% Companies with tax rate of 35% (Angola) 77 737 35.0% 80 461 35.0% 400 252 28.9% 296 830 29.4%

Deferred tax assets and liabilities correspond to the amount of Deferred tax assets and liabilities at 31 December, 2006 and tax recoverable and payable in future periods resulting from 2005 are as follows: temporary differences between the amount of assets and 31 Dec. 06 31 Dec. 05 liabilities in the balance sheet and their tax base. Deferred tax Deferred tax assets are also recognised on tax losses carried forward and Assets (note 5.11) 129 466 198 940 tax credits. Liabilities (note 5.21) (53 186) (51 439) 76 280 147 501 Profits distributed to Banco BPI by subsidiary and associated Recorded by corresponding entry to: companies in Portugal are not taxed in Banco BPI as a result of Retained earnings 169 614 200 936 applying the regime established in article 46 of the Corporate Fair value reserve1 (note 5.29) (31 081) (21 180) Income Tax Code, which eliminates double taxation of profits Financial instruments available for sale (31 081) (21 191) distributed. Exchange differences 11 Net income (62 253) (32 255)

Deferred tax assets and liabilities are calculated using the tax 76 280 147 501 1) At 31 December, 2005 this does not include current tax of 936 th. euro on gain on rates decreed for the periods in which they are expected to financial instruments available for sale. reverse. Deferred tax assets are recognised up to the amount expected to be realised through future taxable profits.

248 Banco BPI | Annual Report 2006 The changes in deferred taxes in 2006 are as follows:

Balance at Corresponding entry Corresponding entry to reserves Balance at 31 Dec. 05 to net income and ret. earnings 31 Dec. 06

Costs Income Increases Decreases Deferred tax assets Pension liability 80 396 (17 833) 26 62 589 Early retirements 50 220 (10 185) 40 035 Advertising campaigns 3 190 898 4 088 Intangible assets 95 (91) 4 “Taxa garantida” operations 3 233 (2 581) 652 Revaluation of assets and liabilities hedged by derivatives 20 181 (20 180) 1 Prepaid fees 4 240 (4 240) Taxed provisions and impairments 5 466 (1 096) 48 4 418 Long service premium 5 683 (141) (30) 5 512 Tax losses 25 924 (14 886) 11 038 Financial instruments available for sale 296 (319) 462 439 Exchange differences 11 (11) Tax deferral of the impact of transition to NCA 689 689 Others 5 66 (70) 1 198 940 (70 863) 1 008 462 (81) 129 466 Deferred tax liabilities Revaluation of tangible fixed assets (5 121) 815 (4 306) “Taxa garantida” operations (3 202) (31) 2 581 (652) Derivatives (7 662) 6 809 (853) Revaluation of assets and liabilities hedged by derivatives (234) (1 026) 151 (1 109) Provisions for equity investments (5 088) 5 088 Dividends to be distributed by subsidiary and associated companies (905) (393) 905 12 (381) RVA's (365) (53) 356 57 (5) Loan impairment (6 738) (1 935) (8 673) Financial instruments available for sale1 (21 830) (7 599) 2 100 458 (9 874) (36 745) Tax deferral of the impact of transition to NCA (423) 4 (419) Others (294) (35) 288 (2) (43) (51 439) (6 407) 14 009 527 (9 876) (53 186) 147 501 (77 270) 15 017 989 (9 957) 76 280 1) At 31 December, 2005 does not include current tax of 593 th. euro on gain on financial instruments available for sale.

Consolidated financial statements | Notes 249 The changes in deferred taxes in 2005 are as follows:

Balance at IAS 32 Corresponding entry Corresponding entry to reserves Balance at 31 Dec. 04 and 39 to net income and ret. earnings 31 Dec. 05 Pro forma IFRS 4 Costs Income Increases Decreases Deferred tax assets Pension liability 91 754 (2 197) (9 161) 80 396 Early retirements 59 827 (9 607) 50 220 Advertising campaigns 3 393 (203) 3 190 Intangible assets 354 (259) 95 “Taxa garantida” operations 3 203 (1 302) 1 332 3 233 Revaluation of assets and liabilities hedged by derivatives 10 740 (1 963) 11 404 20 181 Prepaid fees 5 056 (816) 4 240 Taxed provisions and impairments 46 883 9 035 (50 466) 14 5 466 Long service premium 5 088 (13) 608 5 683 Tax losses 25 924 25 924 Real estate held for sale 543 (543) Financial instruments available for sale 943 31 (678) 296 Exchange differences 10 1 11 Others (8) 4 9 5 207 842 28 987 (67 377) 30 125 41 (678) 198 940 Deferred tax liabilities Revaluation of tangible fixed assets (5 340) 219 (5 121) Operating leases (1 010) 1 010 “Taxa garantida” operations (3 203) (1 333) 1 334 (3 202) Derivatives (5 183) (536) (4 447) 2 504 (7 662) Revaluation of assets and liabilities hedged by derivatives (12 386) 11 402 750 (234) Provisions for equity investments (2 110) (2 978) (5 088) Dividends to be distributed by subsidiary and associated companies (3 224) (558) 2 863 14 (905) RVA's (1 274) (7) 1 413 101 (598) (365) Loan impairment (6 738) (6 738) Financial instruments available for sale1 (3 312) (10 029) (344) 344 (8 489) (21 830) Others (41) (168) (93) 11 (3) (294) (21 494) (26 322) (5 003) 10 000 470 (9 090) (51 439) 186 348 2 665 (72 380) 40 125 511 (9 768) 147 501 1) At 31 December, 2004 and 2005 does not include current tax of 936 th. euro and 593 th. euro, respectively, on gain on financial instruments available for sale.

The BPI Group does not recognise deferred tax assets and 5.44. Earnings of associated companies (equity method) liabilities on temporary taxable differences relating to This caption is made up as follows: investments in subsidiary and associated companies as it is 31 Dec. 06 31 Dec. 05 improbable that such differences will revert in the foreseeable Banco Comercial e de Investimentos, S.A.R.L. 4 625 2 403 future, except as follows: Companhia de Seguros Allianz Portugal, S.A. 12 784 12 610 Cosec – Companhia de Seguros de Crédito, S.A. 1 340 1 811 ᭿ deferred tax liabilities are recognised on the amount of F. Turismo – Capital de Risco, S.A. 26 54 estimated dividends to be distributed by Banco de Fomento Finangeste – Empresa Financeira de Gestão Angola to the BPI Group; e Desenvolvimento, S.A. 1 509 1 467 Viacer – Sociedade Gestora de Participações Sociais, Lda. 1 785 6 315 ᭿ deferred tax liabilities are recognised on the undistributed 22 069 24 660 profits of Banco Comercial e de Investimentos.

250 Banco BPI | Annual Report 2006 5.45. Consolidated net income of the BPI Group Contribution of Banco BPI and subsidiary and associated companies to consolidated net income for 2006 and 2005 are as follows:

31 Dec. 06 31 Dec. 05

Amount % Amount % Banks Banco BPI, S.A.1 145 287 47.1 109 979 43.9 Banco Português de Investimento, S.A.1 19 056 6.2 12 107 4.8 Banco de Fomento S.A.R.L. (Angola)1 62 981 20.4 69 663 27.8 Banco Comercial e de Investimentos, S.A.R.L.1 4 231 1.4 1 844 0.7 Banco BPI Cayman, Ltd. 9 197 3.0 6 997 2.8 Specialised credit BPI Locação de Equipamentos, Lda. 260 0.1 294 0.1 BPI Rent – Comércio e Aluguer de Bens, Lda.1 2 010 0.6 807 0.3 Eurolocação – Comércio e Aluguer de Veículos e Equipamentos, S.A. (12) 0.0 7 0.0 Asset management and brokerage BPI Dealer – Sociedade Financeira de Corretagem (Moçambique), S.A.R.L. 10 0.0 (1) 0.0 BPI Gestão de Activos – Sociedade Gestora de Fundos de Investimento Mobiliários, S.A. 20 068 6.5 14 895 6.0 BPI – Global Investment Fund Management Company, S.A. 1 118 0.4 416 0.2 BPI Pensões – Sociedade Gestora de Fundos de Pensões, S.A. 2 990 1.0 2 515 1.0 Sofinac – Sociedade Gestora de Fundos de Investimento Imobiliário, S.A. 364 0.1 314 0.1 BPI (Suisse), S.A.1 118 0.0 (100) 0.0 Venture capital / development F. Turismo – Capital de Risco, S.A. 26 0.0 54 0.0 Inter-Risco – Sociedade de Capital de Risco, S.A.1 (264) (0.1) 492 0.2 Insurance BPI Vida – Companhia de Seguros de Vida, S.A. 23 638 7.6 8 303 3.3 Cosec – Companhia de Seguros de Crédito, S.A. 1 340 0.4 1 811 0.7 Companhia de Seguros Allianz Portugal, S.A. 12 784 4.1 12 610 5.0 Others BPI, Inc.1 12 0.0 (7) 0.0 BPI Madeira, SGPS, Unipessoal, S.A.1 40 0.0 63 0.0 BPI Capital Finance 0 0.0 0 0.0 Douro SGPS, S.A.1 249 0.1 29 0.0 Finangeste – Empresa Financeira de Gestão e Desenvolvimento, S.A.1 1 509 0.5 1 467 0.6 Simofer – Sociedade de Empreendimentos Imobiliários e Construção Civil, Lda. (39) 0.0 (58) 0.0 Viacer – Sociedade Gestora de Participações Sociais, Lda. 1 785 0.6 6 315 2.5 308 758 100.0 250 816 100.0 1) Adjusted net income.

5.46. Personnel The number of Employees1 at 31 December, 2006 and 2005 and average for the years then ended were as follows:

31 Dec. 06 31 Dec. 05

Average for the year End of year Average for the year End of year Executive directors2 14 14 14 14 Management staff 583 589 544 542 Other staff 3 112 3 625 3 319 3 381 Other Employees 4 354 4 090 3 463 3 532 8 063 8 318 7 340 7 469 1) Personnel of the fully consolidated Group companies. Includes personnel serving in the foreign branches of Banco BPI. 2) Includes Executive directors of Banco BPI and Banco Português de Investimento.

Consolidated financial statements | Notes 251 5.47. Fair value Fair value of the financial instruments at 31 December, 2006 is made up as follows:

Assets and liabilities recorded at fair value Assets valued Total book at historical value Book value Method used to determine fair value 1 Type of financial instrument cost Active market Valuation Total Difference Book value listings techniques fair value Assets Cash and deposits at central banks 559 940 559 940 559 940 559 940 Deposits in other credit institutions 369 483 369 483 369 483 369 483 Financial assets held for trading and at fair value through profit or loss 4 345 057 3 807 114 537 943 4 345 057 4 345 057 Financial assets available for sale 2 901 644 2 804 762 96 882 2 901 644 163 267 3 064 911 Loans and advances to credit institutions 906 747 913 989 913 989 7 242 906 747 Loans and advances to Customers 24 630 086 24 679 774 24 679 774 49 688 24 630 086 Hedging derivatives 407 520 407 520 407 520 407 520 33 191 054 6 611 876 26 636 108 33 247 984 56 930 163 267 33 354 321 Liabilities Financial liabilities held for trading 201 847 2 967 198 880 201 847 201 847 Resources of other credit institutions 3 960 247 3 970 399 3 970 399 (10 152) 3 960 247 Resources of Customers and other debts 16 235 505 16 225 131 16 225 131 10 374 16 235 505 Debt securities 5 464 566 5 447 626 5 447 626 16 940 5 464 566 Financial liabilities relating to transferred assets 3 368 059 3 396 422 3 396 422 (28 363) 3 368 059 Hedging derivatives 480 806 480 806 480 806 480 806 Technical provisions 2 811 111 2 811 111 2 811 111 2 811 111 Subordinated debt 588 890 595 402 595 402 (6 512) 588 890 Participating bonds 27 222 27 462 27 462 (240) 27 222 33 138 253 2 967 33 153 239 33 156 206 (17 953) 33 138 253 52 801 91 778 38 977 163 267 216 068 Valuation differences in financial assets recognised in revaluation reserves 166 424 Total 205 401 1) Unlisted securities for which it was not possible to determine fair value on a reliable basis.

Whenever possible, the BPI Group has estimated fair value using For captions which are not recorded at fair value, value was prices on active markets or valuation techniques based on determined based on market conditions applicable to similar market data for instruments with similar characteristics to the operations at the end of December 2006, namely: financial instruments held by the Group. However, in certain situations, including Customer credit, resources of Customers ᭿ in interbank operations, market interest and swap rates were and debt securities, there is no active market in Portugal, with used; transactions between equally knowledgeable and willing parties. For these cases, the Bank has developed internal valuation ᭿ in operations with Customers, interest rates at 31 December, techniques to estimate the possible fair value of the financial 2006 for operations of the same term were used. Book value instruments. The valuation techniques used involve certain was used when this was considered to be the most reasonable assumptions that may not necessarily be the same for different estimate of fair value. institutions.

Additionally, the fair value of some of the financial instruments may not be the same as their realisable value in a sale or liquidation scenario.

252 Banco BPI | Annual Report 2006 Changes in the fair value of financial instruments in 2006, In the case of financial instruments recorded at amortised cost, recognised in net income on financial operations and in only the changes in fair value attributable to the risk hedged shareholders’ equity, were as follows: under hedge accounting are recognised, namely in the case of

Changes in fair value loans to Customers, Customers’ deposits, debt securities and subordinated debt. Type of financial instrument Statement of Revaluation income1 reserve2 Assets In 2006 and 2005 no financial instruments for which it was not Financial assets held for trading possible to reliably determine fair value were derecognised, and and at fair value through profit or loss 12 296 so the impact on net income is nil. Financial assets available for sale (2 249) 78 047 Loans and advances to credit institutions 2 Loans and advances to Customers (3 885) Hedging derivatives 62 656 68 820 78 047 Liabilities Financial liabilities held for trading 10 509 Resources of other credit institutions (4 641) Resources of Customers and other debts 5 420 Debt securities (1 074) Financial liabilities relating to to transferred assets 1 861 Participating bonds 11 Subordinated debt (1) 12 086 80 906 78 047 1) Changes in fair value of financial operations for 2006, including realised results, recognised in net income. 2) Change in relation to 31 December, 2005.

Consolidated financial statements | Notes 253 Credit risk Maximum exposure to credit risk at 31 December, 2006, by type of financial instrument, excluding the securities portfolio, was as follows:

Nominal value Gross Impairment Net Type of financial instrument book value book value Balance sheet items Loans and advances to credit institutions 369 447 369 483 369 483 Loans and advances to other credit institutions repayable on demand 907 400 906 760 (13) 906 747 Loans and advances to Customers 24 868 775 24 941 380 (311 294) 24 630 086 Derivatives Hedging derivatives 407 520 407 520 Trading derivatives 171 257 171 257 26 145 622 26 796 400 (311 307) 26 485 093 Off balance sheet items Guarantees given 3 321 665 3 321 665 (29 562) 3 292 103 Irrevocable credit lines 24 504 24 504 (100) 24 404 3 346 169 3 346 169 (29 662) 3 316 507 29 491 791 30 142 569 (340 969) 29 801 600

Overdue loans and interest at 31 December, 2006, by non performing classes, are as follows:

Non performing classes Total

up to 1 from 1 to 3 from 3 months from 1 to 5 more than 5 month months to 1 year years years Loans and advances to Customers Subject to individual assessment Overdue loans and interest 60 4 765 34 358 30 096 5 340 74 619 Impairment (7) (6 448) (21 269) (24 027) (2 529) (54 280) 53 (1 683) 13 089 6 069 2 811 20 339 Subject to collective assessment Overdue loans and interest 367 8 932 46 370 138 725 8 616 203 010 Impairment (53) (1 767) (13 490) (52 345) (2 659) (70 314) 314 7 165 32 880 86 380 5 957 132 696

In addition, at 31 December, 2006 collective impairment of 186 700 th. euro was recognised on performing loans.

254 Banco BPI | Annual Report 2006 Liquidity risk Financial assets and liabilities at 31 December, 2006, by contracted residual period to maturity, are as follows1:

Residual period to maturity

on demand up to 3 from 3 months from 1 to more than undetermined Total months to 1 year 5 years 5 years Assets Cash and deposits at central banks 559 901 39 559 940 Loans and advances to other credit institutions 369 483 369 483 Financial assets held for trading and at fair value through profit or loss 2 863 402 343 490 837 1 196 092 1 234 396 1 018 526 4 345 057 Financial assets available for sale 62 790 21 373 333 928 2 054 067 678 398 3 150 556 Loans and advances to credit institutions 696 556 592 194 325 160 990 912 603 Loans and advances to Customers 11 597 3 282 965 2 663 415 4 225 161 14 503 805 14 034 24 700 977 Hedging derivatives 13 938 140 851 158 314 94 417 407 520 944 540 4 318 667 3 510 801 6 074 485 17 886 685 1 710 958 34 446 136 Liabilities Resources of central banks Financial liabilities held for trading 15 804 18 977 30 312 136 267 487 201 847 Resources of other credit institutions 37 438 2 790 306 192 311 367 979 571 271 3 959 305 Resources of Customers and other debts 5 162 974 5 948 263 3 231 092 748 825 1 151 025 867 16 243 046 Debt securities 540 068 422 814 4 319 957 282 505 5 565 344 Financial liabilities relating to transferred assets 16 585 812 106 2 542 131 3 370 822 Hedging derivatives 6 581 115 969 224 270 133 986 480 806 Technical provisions 22 073 19 915 1 023 554 1 745 569 2 811 111 Participating bonds 381 26 841 27 222 Subordinated debt 8 815 59 924 196 519 316 204 581 462 5 200 412 9 348 876 4 061 002 7 723 522 6 905 799 1 354 33 240 965 1) In the case of financial instruments recorded at fair value, the amounts correspond to book value and in the case of financial instruments recorded at amortised cost they correspond to nominal value plus accrued interest.

Foreign exchange risk Financial assets and liabilities at 31 December, 2006, by currency, are as follows1:

Currency Type of financial instrument EUR USD AON Other currencies Total Assets Cash and deposits at central banks 404 782 30 083 121 418 3 657 559 940 Loans and advances to other credit institutions 329 564 17 911 2 772 19 236 369 483 Financial assets held for trading and at fair value through profit or loss 3 625 472 317 983 296 909 104 693 4 345 057 Financial assets available for sale 2 901 292 91 993 71 188 438 3 064 911 Loans and advances to credit institutions 374 961 401 942 129 844 906 747 Loans and advances to Customers 23 544 503 812 903 35 285 237 395 24 630 086 Hedging derivatives 334 348 31 359 41 813 407 520 31 514 920 1 704 174 527 572 537 077 34 283 744 Liabilities Financial liabilities held for trading 198 735 2 897 215 201 847 Resources of other credit institutions 2 406 554 1 199 274 354 419 3 960 247 Resources of Customers and other debts 14 047 503 1 738 763 350 286 98 953 16 235 505 Debt securities 5 021 591 248 337 194 638 5 464 566 Financial liabilities relating to transferred assets 3 368 059 3 368 059 Hedging derivatives 414 082 42 867 23 858 480 806 Technical provisions 2 811 111 2 811 111 Subordinated debt 424 164 164 726 588 890 Participating bonds 27 222 27 222 28 719 021 3 232 138 350 286 836 809 33 138 253 Forward currency operations 1 704 403 (1 218 065) (453 369) 32 969 1 091 497 (309 899) 177 287 153 637 1 112 522 1) The amounts correspond, in the case of financial instruments recorded at fair value, to book value and, in the case of financial instruments recorded at amortised cost, to nominal value plus accrued interest.

Consolidated financial statements | Notes 255 5.48. Share-based variable remuneration program (Programa de remuneração variável em acções – RVA) The Share-based Variable Remuneration Program (Programa de Except as explained above, the share based remuneration Remuneração Variável em Acções – RVA) is a remuneration program remains in force as regards all its past and future scheme under which part of the variable remuneration of effects, including those resulting from the remuneration granted Executive Directors and Employees of the BPI Group, whose relating to 2001, 2002, 2003, 2004 and 2005. annual variable remuneration is equal to or greater than 2 500 euro, is paid in Banco BPI shares (BPI shares) and options to The shares attributed under the RVA program are made available purchase BPI shares. The portion of the individual variable to the beneficiary on a gradual basis: 25% when they are remuneration that corresponds to the RVA program varies attributed and 25% in each of the three following years. between 10% and 50%, the percentage increasing with the level of responsibility of the Director or Employee. The price of the shares attributed corresponds to the weighted average list price of the BPI shares traded in the last ten stock Considering that at 31 December, 2006 Banco BPI was under a exchange sessions prior to the date the shares are attributed. public share purchase offering launched on 13 March, 2006 The price of the shares attributed also corresponds to the strike and taking into account, on one hand, the interest in price of the options. maintaining the share-based remuneration program (RVA), as the principles underlying its creation and objectives remain valid The shares are made available (in the three years following the and, on the other hand, possible questions that the present date they are attributed) subject to the beneficiaries remaining situation could give rise to by the granting of share-based with the BPI Group. The price of the shares attributed, as well remuneration, BPI’s Board of Directors decided not to carry out as the period in which they are made available are summarised the program for 2006. Therefore variable remuneration for the in the following table: year was paid in full in cash.

Shares

Program Date Exercise Date the lots are made available attributed price 2nd 3rd 4th RVA 2002 22-02-2003 2.14 22-02-2004 22-02-2005 22-02-2006 RVA 2003 23-02-2004 3.13 23-02-2005 23-02-2006 23-02-2007 RVA 2004 28-02-2005 3.10 28-02-2006 28-02-2007 28-02-2008 RVA 2005 23-02-2006 4.44 23-02-2007 23-02-2008 23-02-2009

The share options of the RVA 2001 to RVA 2004 programs are The number of Employees and directors covered by the RVA exercisable between the first and the end of the fifth year 2005 programs was as follows: following the date they are attributed. The share options of the 2005 RVA 2005 program can be exercised between the 90th day and Directors 14 the end of the 5th year following the date they are attributed. The Employees 2 650 share options are made available subject to the beneficiaries 2 664 remaining with the BPI Group. The total cost of the RVA programs is as follows:

The strike price of the options, as well as the period the options Total cost can be exercised, are summarised in the following table: Program Shares Options Total Options RVA 2001 2 478 2 478 4 956 Program Date Exercise Strike period RVA 2002 2 507 2 507 5 014 attributed price From To RVA 2003 3 202 2 272 5 474 RVA 2004 3 834 2 169 6 003 RVA 2001 21-03-2002 2.54 21-03-2003 21-03-2007 RVA 2005 4 006 3 075 7 081 RVA 2002 22-02-2003 2.14 22-02-2004 22-02-2008 16 027 12 501 28 528 RVA 2003 23-02-2004 3.13 23-02-2005 23-02-2009 RVA 2004 28-02-2005 3.10 28-02-2006 28-02-2010 RVA 2005 23-02-2006 4.44 23-05-2006 23-05-2010

256 Banco BPI | Annual Report 2006 MODEL FOR VALUING THE EQUITY INSTRUMENTS GRANTED TO THE EMPLOYEES AND DIRECTORS OF THE BPI GROUP

Shares The Bank, for purposes of the share-based payment program, The changes in the number of shares not yet made available to acquires a portfolio of BPI shares and transfers ownership of the the Employees and directors of the BPI Group in 2005 and shares to the Employees and directors on the date the RVA 2006, as well as the fair value of the respective instruments are remuneration is granted. as follows:

RVA 2002 RVA 2003 RVA 2004 RVA 2005

Number Fair value Number Fair value Number Fair value Number Fair value of shares of shares of shares of shares On the On the On the On the On the On the On the On the date refe- date refe- date refe- date refe- attri- rence attri- rence attri- rence attri- rence buted date buted date buted date buted date Shares attributed up to 2004 1 172 529 2 509 3 494 1 023 547 3 204 3 050 Shares made available up to 2004 581 449 1 244 1 733 256 807 804 765 Shares made available early up to 2004 19 846 42 59 11 601 36 35 Shares refused up to 2004 8 006 17 24 7 686 24 23 Shares not made available at 31 December, 2004 563 228 1 205 1 678 747 453 2 340 2 227 Shares attributed in 2005 1 237 831 3 837 4 778 Shares made available in 2005 276 205 591 1 066 247 435 774 955 311 899 967 1 204 Shares made available early in 2005 12 641 27 49 8 936 28 34 2 064 6 8 Shares refused in 2005 1 126 2 4 1 988 6 8 3 018 9 12 Shares not made available at 31 December, 2005 273 256 585 1 055 489 094 1 531 1 888 920 850 2 855 3 554 Shares attributed in 2006 904 340 4 015 5 345 Shares made available in 2006 729 2 4 1 044 3 6 1 455 6 9 Shares made available early in 2006 271 742 582 1 606 243 662 763 1 440 306 423 950 1 811 229 229 1 018 1 355 Shares refused in 2006 1 442 3 9 3 319 10 20 6 015 19 36 6 285 28 37 Shares not made available at 31 December, 2006 72 0 0 241 384 756 1 427 607 368 1 883 3 590 667 371 2 963 3 944

In the case of death or incapacity of the Employee or director, the The shares refused include shares granted but not made shares not yet made available are made available early, becoming available, to which the Employee or director has lost his / her freely available to the person or to the respective heirs. right because he / she has left the BPI Group.

Consolidated financial statements | Notes 257 Options The changes in the number of share options in circulation, held be exercised) in 2005 and 2006, as well as their respective fair by Employees and directors of the BPI Group (options that can values are as follows:

RVA 2001 RVA 2002

Number of Fair value Number of Fair value options options On the date On the refe- On the date On the refe- attributed rence date attributed rence date Options attributed up to 2004 4 010 664 2 479 1 646 7 597 776 2 507 6 032 Options made available up to 2004 3 972 960 2 455 1 631 7 597 776 2 507 6 032 Options cancelled up to 2004 96 770 60 40 31 263 10 25 Options exercised up to 2004 2 437 371 1 506 1 001 4 417 180 1 458 3 507 Options in circulation and exercisable at 31 December, 2004 1 476 523 912 606 3 149 333 1 039 2 500 Options in circulation at 31 December, 2004 1 476 523 912 1 890 3 149 333 1 039 5 070 Options attributed in 2005 Options made available in 2005 Options cancelled in 2005 13 418 8 17 9 321 3 15 Options exercised in 2005 847 658 524 1 085 1 463 413 483 2 356 Options in circulation and exercisable at 31 December, 2005 615 447 380 788 1 676 599 553 2 699 Options in circulation at 31 December, 2005 615 447 380 2 115 1 676 599 553 6 290 Options attributed in 2006 Options made available in 2006 Options cancelled in 2006 8 885 5 31 13 121 4 49 Options exercised in 2006 336 715 208 1 157 1 007 317 332 3 779 Options in circulation and exercisable at 31 December, 2006 269 847 167 927 656 161 217 2 462

When an Employee or director of the BPI Group leaves the Group In determining the number of options to be granted to the he / she loses the right to the options attributed and not yet Employees and directors, the BPI Group determines the financial made available. In the case of options made available but not value of the options as of the date they are granted. yet exercised, the director or Employee has a maximum period of 30 days from the date the labour relationship terminates to The premium of the options over Banco BPI shares was exercise the option, after which the option expires (options determined in accordance with the following models: cancelled). ᭿ Black-Scholes model for the RVA 2001 and RVA 2002 In the case of death, incapacity or retirement of directors or programs; and Employees, the options attributed become immediately exercisable, having to be exercised within a period of 2 years ᭿ An internally developed model, based on the Black-Scholes from the date of the event, otherwise they expire. Cancelled model for the RVA 2003 to RVA 2005 programs. options include options not exercised within this period. The critical factors of the model used to manage the RVA In 2006 and 2005 the weighted average price of the shares on programs are as follows: the date the options were exercised was as follows:

᭿ Options exercised in 2006 Options exercised in 2005 volatility of Banco BPI shares, determined as follows:

Program Number of Average price Number of Average price options of the shares options of the shares ᭿ 60% of the historical volatility of Banco BPI shares in the RVA 2001 336 715 5.00 847 658 3.24 last 3.33 years; RVA 2002 1 007 317 5.12 1 463 413 3.24 ᭿ 10% of the VIX volatility index; RVA 2003 2 276 815 4.91 1 404 957 3.44 ᭿ 10% of the VDAX volatility index; RVA 2004 4 218 137 5.12 484 3.77 ᭿ 20% of the implicit volatility of the listed options traded in RVA 2005 1 270 079 5.81 n.a. Spain over Spanish banks which are similar to Banco BPI.

258 Banco BPI | Annual Report 2006 RVA 2003 RVA 2004 RVA 2005

Number of Fair value Number of Fair value Number of Fair value options options options On the date On the refe- On the date On the refe- On the date On the refe- attributed rence date attributed rence date attributed rence date 5 050 419 2 273 931

37 990 17 7

6 998 811 2 170 5 459 5 012 429 2 256 3 860 6 751 3 5 25 816 8 20 1 404 957 632 1 082 484 0 0 3 600 721 1 620 2 773 3 600 721 1 620 10 342 6 836 764 3 077 12 383 6 972 511 2 161 19 843 6 836 764 3 077 12 383 1 582 1 5 18 005 6 51 6 336 3 11 2 276 815 1 025 6 539 4 218 137 1 308 12 004 1 270 079 572 2 300 1 322 324 595 3 798 2 736 369 848 7 787 5 560 349 2 502 10 071

᭿ average expected life of the option, which depends, among The number of outstanding options under each RVA Program, as others, on the following factors: well as their respective fair values at 31 December, 2006, are as follows:

᭿ responsibility level of the beneficiaries: Directors and other RVA 2001 RVA 2002 RVA 2003 RVA 2004 RVA 2005 Employees Number of ᭿ ratio between the market price and the strike price; and outstanding options 269 847 656 161 1 322 324 2 736 369 5 560 349 ᭿ volatility of the share price. Strike price 2.54 2.14 3.13 3.10 4.44 Value of option 3.44 3.75 2.87 2.85 1.81 The model also enables the number of shares of Banco BPI necessary to ensure adequate coverage of the inherent risk of The number of outstanding options under each RVA Program, as issuing options under the RVA program to be determined. well as their respective fair values at 31 December, 2005, are as follows:

The parameters used to determine the financial value of the RVA 2001 RVA 2002 RVA 2003 RVA 2004 RVA 2005 options under each RVA program, as of the date the options are Number of attributed, are as follows: outstanding options 615 447 1 676 599 3 600 721 6 972 511 n.a RVA 2001 RVA 2002 RVA 2003 RVA 2004 RVA 2005 Strike price 2.54 2.14 3.13 3.10 n.a BPI listing 2.55 2.16 3.20 3.13 4.47 Value of option 1.28 1.61 0.77 0.78 - Strike price 2.54 2.14 3.13 3.10 4.44 Implicit volatility 29.70% 22.30% 21.50% 17.70% 17.10% Interest rate 5.00% 3.15% 3.00% 2.72% 3.08% Expected dividends 0.09 0.08 0.09 0.10 0.12 Value of the option 0.62 0.33 0.45 0.31 0.45

Consolidated financial statements | Notes 259 ACCOUNTING IMPACT OF THE RVA PROGRAM

Shares In order to cover the share-based payments, the Bank acquires a The book value and fair value of the share component of the RVA portfolio of treasury shares at the time the RVA remuneration is program not yet made available to the Employees / Directors at attributed. The shares remain in Banco BPI’s portfolio until they 31 December, 2006 and 2005 are as follows: are made available to the beneficiaries. At that time they are derecognised by corresponding charge to accumulated costs in the caption OTHER EQUITY INSTRUMENTS.

31 Dec. 06 31 Dec. 05

Shares Program Book Number of Fair Book Number of Fair value shares value value shares value Cost of the shares to be made available RVA 2002 605 to the Group's Employees / directors, RVA 2003 800 1 405 recognised in Shareholders' equity RVA 2004 1 591 1 954 RVA 2005 1 995 2 036 4 386 6 000 Cost of the shares to be made available RVA 2002 50 to the Group's Employees / directors, RVA 2003 23 190 not recognised in Shareholders' equity RVA 2004 302 907 RVA 2005 974 1 970 1 299 3 117 Total 5 685 1 516 195 8 961 9 117 1 683 200 6 497 Treasury shares made available early RVA 2002 70 to the Group's Employees / directors RVA 2003 67 64 RVA 2004 10 6 RVA 2005 6 Total 83 140 Treasury shares to be made available RVA 2002 72 585 273 256 1 055 to the Group's Employees / directors RVA 2003 756 241 384 1 427 1 531 489 094 1 888 RVA 2004 1 883 607 368 3 590 2 855 920 850 3 554 RVA 2005 2 963 667 371 3 944 Total 5 602 1 516 195 8 961 4 971 1 683 200 6 497

260 Banco BPI | Annual Report 2006 Options The BPI Group has created a portfolio of BPI shares to cover its When the options are exercised, the treasury shares are share-based payment program responsibilities resulting from the derecognised together with transfer of share ownership to the issuance of options to purchase BPI shares in accordance with a Employees / Directors. At that time a gain or loss is recognised, delta strategy (determined in accordance with BPI’s options in the amount corresponding to the difference between the strike evaluation model developed in-house based on the price and the average cost of acquiring the treasury share Black-Scholes model). The strategy corresponds to the creation portfolio covering each of the programs, less the cost of the of a portfolio with delta shares for each option issued, the delta option premiums accumulated in the caption OTHER EQUITY number corresponding to the relationship between the variation INSTRUMENTS. in the price of an option and variation in the price of the underlying share. The treasury shares held to hedge the risk of The book value and fair value of the outstanding option variation in the amount of the options sold are recorded in the component of the RVA program attributed to the Employees / caption TREASURY SHARES HEDGING THE RVA, where they remain Directors at 31 December, 2006 and 2005 are as follows: while they are held for that purpose.

31 Dec. 06 31 Dec. 05

Options Program Book Fair Unrealised Book Fair Unrealised value value gain /(loss) value value gain /(loss) Cost of outstanding options (premiums) RVA 2001 167 380 recognised in Shareholders' equity RVA 2002 217 553 RVA 2003 595 1 620 RVA 2004 848 2 007 RVA 2005 2 502 1 779 4 329 6 339 Cost of outstanding options (premiums) RVA 2004 162 not recognised in Shareholders' equity RVA 2005 1 296 1 458 Total 4 329 25 046 (20 717) 7 797 11 698 (3 901) Treasury shares hedging the RVA options RVA 2001 938 2 063 1 125 1 942 2 515 573 RVA 2002 2 044 4 676 2 632 5 042 6 530 1 488 RVA 2003 3 122 6 167 3 045 10 762 12 205 1 443 RVA 2004 8 222 16 126 7 904 19 843 23 262 3 419 RVA 2005 31 314 42 317 11 003 Total 45 640 71 349 25 709 37 589 44 512 6 923 Unrealised gain / loss 4 992 3 022

The gain and loss realised on treasury shares hedging the exercise of RVA options, as well as the respective taxes, are recorded directly in shareholders’ equity, not affecting net income for the year.

Consolidated financial statements | Notes 261 The gross gain and loss realised in making the shares available 5.49. Related parties and in exercising the options, as well as the corresponding The BPI Group’s related parties at 31 December, 2006 were as hedge, reflected in shareholders’ equity at 31 December, 2006 followed: and 2005, are as followed: Head Effective Direct Name of related entity office participation participation 31 Dec. 31 Dec. Gain / loss Program 06 05 Associated and jointly controled companies Shares In making the shares available RVA 2001 Banco Comercial e de RVA 2002 (184) Investimentos, S.A.R.L. Mozambique 30.0% 29.4% RVA 2003 (67) Companhia de Seguros RVA 2004 (69) Allianz Portugal, S.A. Portugal 35.0% 35.0% RVA 2005 (330) Cosec – Companhia de Seguros de Crédito, S.A. Portugal 50.0% 50.0% (330) (320) F. Turismo – Capital Options In the exercise of options RVA 2001 66 1 432 de Risco, S.A. Portugal 25.0% 25.0% RVA 2002 (509) (1 385) Finangeste – Empresa Financeira RVA 2003 326 655 de Gestão e Desenvolvimento, S.A. Portugal 32.8% 32.8% RVA 2004 197 Unicer – Bebidas de Portugal, SGPS, S.A. Portugal 14.6% RVA 2005 103 Viacer – Sociedade Gestora de 183 702 Participações Sociais, Lda Portugal 26.0% 26.0% On the sale of RVA 2001 498 Pension funds of Employees hedging shares RVA 2002 439 and Directors of the BPI Group RVA 2003 714 Fundo de Pensões Banco BPI Portugal 100.0% RVA 2004 1 206 Fundo de Pensões Aberto BPI Acções Portugal 72.9% RVA 2005 Fundo de Pensões Aberto 1 1 857 BPI Valorização Portugal 51.1% Transaction costs (62) (52) Fundo de Pensões Aberto (208) 2 187 BPI Segurança Portugal 37.6% Fundo de Pensões Aberto BPI Garantia Portugal 95.2% The cost of the share-based remuneration program is accrued in Shareholders of Banco BPI Itaú Group Brazil 17.5% personnel costs, by corresponding entry to the OTHER EQUITY La Caixa Group Spain 25.0% INSTRUMENTS caption, as required by IFRS 2 for share-based Members of the Board of payment programs. The cost of the shares and option premiums Directors of Banco BPI when they are granted, is accrued on a straight-line basis from Artur Santos Silva the beginning of the program (1 January) to the date they are Carlos da Câmara Pestana made available to the Employees / Directors. Fernando Ulrich Ruy Octávio Matos de Carvalho The total cost of the share-based payment program recognised in Alfredo Rezende de Almeida 2006 and 2005 is as followed: António Domingues António Farinha Morais 31 Dec. 06 31 Dec. 05 Program Armando Leite de Pinho Shares Options Total Shares Options Total Caixa Holding S.A., RVA 2001 33 (9) 24 Sociedade Unipessoal – Represented by Marcelino Armenter Vidal RVA 2002 (24) (24) 229 (10) 219 Carlos Moreira da Silva RVA 2003 221 221 597 133 730 Edgar Alves Ferreira RVA 2004 589 149 738 1 106 1 002 2 108 Isidro Fainé Casas RVA 2005 907 1 289 2 196 2 036 1 779 3 815 Jorge de Figueiredo Dias Total 1 693 1 438 3 131 4 001 2 895 6 896 José Pena do Amaral Klaus Dührkop Manuel Ferreira da Silva Maria Celeste Hagatong Pedro Barreto RAS International, N.V. – Represented by Herbert Walter Roberto Egydio Setúbal Tomaz Jervell

262 Banco BPI | Annual Report 2006 Accordingly to IAS 24, related parties are those in which the Bank The total assets, liabilities, income and costs, and off balance has significant influence (direct or indirect) in decisions relating to sheet responsibilities relating to operations with associated and their financial and operating policies – associated and jointly jointly controlled companies and pension funds of Employees and controlled companies and pension funds – and entities which have directors of the BPI Group at 31 December, 2006 are as follows: significant influence in management policy of the Bank – shareholders and members of Banco BPI Board of Directors.

Associated and jointly Pension funds of Employees Total controlled companies and Directors of the BPI Group Assets Financial assets available for sale 8 8 Loans 59 839 59 839 59 847 59 847 Liabilities Financial liabilities held for trading and derivatives 32 32 Deposits and technical provisions 60 588 176 034 236 622 Other financial resources 10 820 10 820 Other amounts payable 58 58 71 498 176 034 247 532 Income Interest and similar income 1 743 1 743 Commissions received 691 691 2 434 2 434 Expenses Interest and similar costs 1 259 343 1 602 1 259 343 1 602 Off balance sheet items Guarantees given and other contingent liabilities Guarantees and sureties 22 406 22 406 Open documentary credits 442 442 Commitments to third parties Revocable commitments 279 279 Responsibilities for services rendered Deposit and safeguard of assets 915 472 2 195 617 3 111 089 Foreign exchange operations and derivative instruments Purchases 10 013 10 013 Sales (20 013) (20 013) 928 599 2 195 617 3 124 216

Consolidated financial statements | Notes 263 The total assets, liabilities, income and costs, and off balance members of the Board of Directors have significant influence at sheet responsibilities relating to operations with shareholders, 31 December, 2006 are as follows: members of the Board of Directors and companies where

Shareholders of Members of the Board of Companies where Members of the Total Banco BPI1 Directors of Banco BPI2 Board of Directors of Banco BPI have significant influence Assets Financial applications 50 151 50 151 Financial assets available for sale 69 600 69 600 Loans 368 14 623 82 772 97 763 Other amounts receivable 15 15 120 134 14 623 82 772 217 529 Liabilities Financial liabilities held for trading and derivatives 2 052 2 052 Deposits and technical provisions 50 841 10 280 6 440 67 561 Other financial resources 1 059 1 059 Other amounts payable 86 86 52 979 11 339 6 440 70 758 Income Interest and similar income 206 2 208 Commissions received 59 59 265 2 267 Expenses Interest and similar costs 339 11 43 393 339 11 43 393 Off balance sheet items Guarantees given and other contingent liabilities Guarantees and sureties 24 213 105 24 318 Responsibilities for services rendered Deposit and safeguard of assets 1 546 823 80 134 87 1 627 044 Foreign exchange operations and derivative instruments Purchases 500 003 500 003 Sales (500 003) (500 003) 1 571 036 80 239 87 1 651 362 1) With significant influence in BPI Group management policy. Usually significant influence exists when the percentage participation exceeds 20%. 2) With an individual role.

264 Banco BPI | Annual Report 2006 The total assets, liabilities, income and costs, and off balance and directors of the BPI Group at 31 December, 2005 are as sheet responsibilities relating to operations with associated and follows: jointly controlled companies and pension funds of Employees

Associated and jointly Pension funds of Employees Total controlled companies and Directors of the BPI Group Assets Financial assets available for sale 8 8 Loans 31 808 31 808 Other amounts receivable 6 6 31 822 31 822 Liabilities Financial liabilities held for trading and derivatives 22 22 Deposits and technical provisions 42 826 584 240 627 066 Other financial resources 8 650 8 650 Other amounts payable 31 31 51 529 584 240 635 769 Income Interest and similar income 415 415 Commissions received 672 672 1 087 1 087 Expenses Interest and similar costs 834 834 Loss on financial operations 12 12 846 846 Off balance sheet items Guarantees given and other contingent liabilities Guarantees and sureties 3 133 3 133 Open documentary credits 59 59 Commitments to third parties Revocable commitments 246 246 Responsibilities for services rendered Deposit and safeguard of assets 849 153 1 757 165 2 606 318 Foreign exchange operations and derivative instruments Purchases 10 000 10 000 Sales (20 000) (20 000) 842 591 1 757 165 2 599 756

Consolidated financial statements | Notes 265 The total assets, liabilities, income and costs, and off balance members of the Board of Directors have significant influence at sheet responsibilities relating to operations with shareholders, 31 December, 2005 are as follows: members of the Board of Directors and companies where

Shareholders of Members of the Board of Companies where Members of the Total Banco BPI1 Directors of Banco BPI2 Board of Directors of Banco BPI have significant influence Assets Financial applications 55 500 55 500 Financial assets held for trading 53 573 53 573 Loans 13 8 002 154 122 162 137 Other amounts receivable 72 72 109 158 8 002 154 122 271 282 Liabilities Financial liabilities held for trading and derivatives 1 400 1 400 Deposits and technical provisions 53 156 16 184 7 277 76 617 Other financial resources 825 825 Other amounts payable 190 190 54 746 17 009 7 277 79 032 Income Interest and similar income 1 1 Commissions received 24 24 25 25 Expenses Interest and similar costs 289 12 1 339 1 640 289 12 1 339 1 640 Off balance sheet items Guarantees given and other contingent liabilities Guarantees and sureties 10 286 10 286 Commitments to third parties Revocable commitments 72 72 Responsibilities for services rendered Deposit and safeguard of assets 963 063 39 484 4 109 1 006 656 Foreign exchange operations and derivative instruments Purchases 501 995 501 995 Sales (501 995) (501 995) 973 421 39 484 4 109 1 017 014 1) With significant influence in BPI Group management policy. Usually significant influence exists when the percentage participation exceeds 20%. 2) With an individual role.

Remuneration attributed to the members of the Board of Under the share-based payment program (RVA), the President of Directors of the BPI Group during the years 2006 and 2005 was the Board of Directors, relating to variable remunerations as follows: received while he was President of the Executive Committee, and the members of the Executive Committee of Banco BPI are 31 Dec. 06 31 Dec. 05 entitled to participate in the loan scheme to purchase BPI Remuneration in cash 7 229 4 714 shares through exercise of the options granted under the Equity-based remuneration 1 607 share-based payment program (RVA), available to all the Banks’ Pensions paid 430 432 7 659 6 753 Employees. Consequently, at 31 December, 2006 the total loans to the President of the Board of Directors and members of the In accordance with the Bank’s policy, the members of the Executive Committee, made by the Group’s banks, amounted to Executive Committee of Banco BPI are entitled to participate in 9 948 th. euro. the Subsidised Housing Loan Scheme available to all the Banks’ Employees. At 31 December, 2006 the outstanding mortgage own housing loans granted to the members of the Executive Committee, by the Group’s banks, amounted to 2 801 th. euro.

266 Banco BPI | Annual Report 2006 In accordance with the terms of article 477 of the Commercial Company Code (Código das Sociedades Comerciais), the shareholdings of the members of the Board of Directors at 31 December, 2006 were as follows:

Shares Options Held at Purcha- Sold Held at Held at Unavai- Pledged RVA Held at Purcha- Exerci- Held at 31 Dec. sed 31 Dec. 31 Dec. lable shares loans 31 Dec. sed sed 31 Dec. 05 06 061 shares 05 06 A B C Artur Santos Silva 1 323 329 347 223 1 670 552 9 873 36 674 737 223 1 939 626 347 223 347 223 Carlos da Câmara Pestana 300 000 300 000 1 773 Fernando Ulrich2 851 436 987 997 1 839 433 10 871 79 194 1 529 107 4 265 696 938 728 486 112 938 728 486 112 Ruy Octávio Matos de Carvalho 120 092 120 092 710 Alfredo Rezende de Almeida 1 700 000 1 700 000 10 047 António Domingues2 364 543 38 007 402 550 2 379 55 038 310 000 706 609 593 191 375 000 968 191 António Farinha Morais2 343 320 253 503 25 000 571 823 3 379 30 078 470 818 1 282 200 235 484 177 778 235 484 177 778 Armando Leite de Pinho Herbert Walter Isidro Fainé Casas José Pena do Amaral2 66 916 18 019 10 000 74 935 443 42 303 177 778 177 778 Klaus Dührkop Manuel Ferreira da Silva2 175 000 18 019 193 019 1 141 28 067 80 000 171 200 465 000 177 778 642 778 Marcelino Armenter Vidal Maria Celeste Hagatong2 563 657 23 649 587 306 3 471 51 069 407 906 942 924 233 334 233 334 Pedro Barreto2 93 669 224 471 10 831 307 309 1 816 26 350 206 452 640 001 206 452 177 778 206 452 177 778 Roberto Egydio Setúbal Tomaz Jervell 8 541 8 541 50 Edgar Alves Ferreira Carlos Moreira da Silva3 1 700 1 700 10 Jorge de Figueiredo Dias3 1) Fair value of the shares. 2) Member of the Executive Committee. 3) The initial amount corresponds to the date he became a Director of Banco BPI, S.A. A – Shares attributed under the RVA program, the availability of which at 31 December, 2006 is subject to a resolutive condition. B – Shares which at 31 December, 2006 were pledged in guarantee of loans to finance their acquisition resulting from the exercise of options granted under the RVA program. C – Amount owed (in euro) at 31 December, 2006, on the loan referred to in B.

ARTUR SANTOS SILVA – On 10 March, 2006 acquired 347 223 price of 4.44 euros, under the RVA 2005 program. shares, through the exercise of share purchase options attributed under the RVA 2003 program. On 27 April, 2006 he was attributed 486 112 share purchase options under RVA 2005 program. The cost of each option was On 2 May, 2005 acquired 231 031 shares through the exercise 0.45 euros and the price of the shares that can be purchased is of share purchase options attributed under the RVA 2001 4.44 euros. program. On 3 May, 2005 acquired 48 388 shares at the price of 3.10 euro, subject to resolutive condition, under the RVA On 31 December, 2006 his spouse held 45 000 shares acquired 2004 program. on 17 February, 2006 at the price of 4.53 euros.

CARLOS DA CÂMARA PESTANA – Did not purchase or sell any shares. RUY OCTÁVIO MATOS DE CARVALHO – Did not purchase or sell any On 31 December, 2006, IPI – Itaúsa Portugal Investimentos, securities. SGPS, Lda., of which he is a member of the Board of Directors, held 133 000 000 shares. ALFREDO REZENDE DE ALMEIDA – Did not purchase or sell any securities.

FERNANDO ULRICH – On 15 February, 2006 acquired 333 889 shares, through the exercise of share purchase options attributed At 31 December, 2006, ARCOtêxteis, S.A. and ARCOfio – under the RVA 2003 program. On 10 March, 2006 acquired Fiação, S.A., of which he is President of the Board of Directors, 604 839 shares, through the exercise of share purchase options and ARCOtinto – Tinturaria, S.A., of which he is Vice President attributed under the RVA 2004 program. On 27 April, 2006 of the Board of Directors, held 1 350 000, 650 000 and acquired 49 269 shares subject to resolutive condition at the 650 000 shares, respectively.

Consolidated financial statements | Notes 267 ANTÓNIO DOMINGUES – On 27 April, 2006 acquired 38 007 shares Did not have any securities at 31 December, 2006. at the price of 4.44 euro, subject to resolutive condition, under the RVA 2005 program. JOSÉ PENA DO AMARAL – On 27 April, 2006 acquired 18 019 shares at the price of 4.44 euro, under resolutive condition, On 27 April, 2006 he was attributed 375 000 share purchase under the RVA 2005 program. options under the RVA 2005 program. The cost of each option was 0.45 euros and the price of the shares that can be Sold on the stock exchange: on 15 February, 2006, 10 000 purchased is 4.44 euros. shares at 4.49 euros.

ANTÓNIO FARINHA MORAIS – On 6 and 13 March, 2006 he acquired On 27 April, 2006 he was attributed 177 778 share purchase 135 484 shares and 100 000 shares, respectively, through the options under the RVA 2005 program. The cost of each option exercise of options attributed under the RVA 2004 program. On was 0.45 euros and the price of the shares that can be 27 April, 2006 he acquired 18 019 shares at the price of 4.44 purchased is 4.44 euros. euros, subject to resolutive condition, through the exercise of options attributed under the RVA 2005 program. KLAUS DÜHRKOP – Is President of the Executive Commission of the Mondial Assistance Group, Executive President of the Europe Sold on the stock exchange: on 27 January, 2006, 10 000 shares Division of Allianz AG and Member of the Board of Directors of at the price of 4.20 euros; on 10 March, 2006, 10 000 and RAS Riunione Adriática di Sicurtá, S.p.A., which has full control 5 000 shares at the prices of 4.72 euros and 4.74 euros, over RAS International III, B.V. respectively. Did not have any securities at 31 December, 2006. On 27 April, 2006, he was attributed 177 778 share purchase options under the RVA 2005 program. The cost of each option was MANUEL FERREIRA DA SILVA – On 27 April, 2006, acquired 18 019 0.45 euros and the price of the shares that can be purchased is shares at the price of 4.44 euro, under resolutive condition, 4.44 euros. under the RVA 2005 program.

ARMANDO LEITE DE PINHO – At 31 December, 2006, he had no shares. On 27 April, 2006, she was attributed 177 778 share purchase options under the RVA 2005 program. The cost of each option At 31 December, 2006 the companies Arsopi – Holding, SGPS, was 0.45 euros and the price of the shares that can be S.A., ROE, SGPS, S.A. and Security, SGPS, S.A., of which he is purchased is 4.44 euros. the President of the Board of Directors, held 2 250 000, 3 397 091 and 2 484 871 shares, respectively. On 31 December, 2006 his spouse held 52 865 shares, of which 9 460 were attributed on 27 April, 2006 under the RVA

HERBERT WALTER – Is President of the Executive Commission of 2005 program; and 409 929 share purchase options, of which Dresdner Bank AG and Member of the Board of Directors of 93 334 were attributed on 27 April, 2006 under the RVA 2005 Allianz AG, which controls RAS Riunione Adriática di Sicurtá, program. S.p.A., which in turn has full control of RAS International III,

B.V. Allianz AG also has control over Companhia de Seguros MARCELINO ARMENTER VIDAL – Is Assistant Director of Caja de Allianz Portugal S.A. Ahorros y Pensiones de Barcelona “la Caixa”, which has full control over Caixa Holding, S.A. Sociedad Unipersonal – of Did not have any securities at 31 December, 2006. which he is General Director – which, in turn, has full control over Catalunya de Valores – SGPS, Unipessoal, Lda. At 31 December, 2006 the company RAS International III B.V. held 65 659 233 shares which were transferred by RAS Did not have any securities at 31 December, 2006. International B.V. At 31 December, 2006 Caixa Holding S.A., Sociedad

ISIDRO FAINÉ CASAS – Is General Director of Caja de Ahorros y Unipersonal and Catalunya de Valores, SGPS, Unipessoal, Lda. Pensiones de Barcelona “la Caixa” which has full control over Caixa held 64 781 544 and 125 218 724 shares, respectively. Holding, S.A. Sociedad Unipersonal which, in turn, has full control over Catalunya de Valores – SGPS, Unipessoal, Lda.

268 Banco BPI | Annual Report 2006 MARIA CELESTE HAGATONG – On 27 April, 2006 acquired 23 649 CARLOS MOREIRA DA SILVA – At 3 June, 2006, the date he took shares at the price of 4.44 euros, under resolutive condition, office as a member of the Board of Directors, he held under the RVA 2005 program. 1 700 shares.

On 27 April, 2006, she was attributed 233 334 share purchase He subsequently did not purchase or sell any securities. options, under the RVA 2005 program. The cost of each option was 0.45 euros and the price of the shares that can be JORGE DE FIGUEIREDO DIAS – At 30 June, 2006, the date he took purchased is 4.44 euros. office as a member of the Board of Directors, he had no shares.

On 31 December, 2006 her husband held 320 546 shares, of He subsequently did not purchase any securities. which 9 460 were attributed on 27 April, 2006 under the RVA 2005 program; and 93 334 share purchase options that were attributed on 27 April, 2006 under the RVA 2005 program. 6. NOTE ADDED FOR TRANSLATION

PEDRO BARRETO – On 10 March, 2006 acquired 206 452 shares These consolidated financial statements are a translation of through the exercise of options attributed under the RVA 2004 financial statements originally issued in Portuguese in program. On 27 April, 2006 acquired 18 019 shares at the conformity with the International Financial Reported Standards price of 4.44 euros, under resolutive condition, under the RVA adopted by the European Union, some of which may not conform 2005 program. to or be required by generally accepted accounting principles in other countries. In the event of discrepancies, the Portuguese Sold on the stock exchange: on 10 March, 2006, 10 831 shares language version prevails. at 4.80 euros.

On 27 April, 2006, he was attributed 177 778 share purchase options under the RVA 2005 program. The cost of each option was 0.45 euros and the price of the shares that can be purchased is 4.44 euros.

ROBERTO EGYDIO SETÚBAL – Is Vice President of the Board of Directors and President and member of the International Consultative Committee of Banco Itaú Holding Financeira, S.A.

Did not have any shares at 31 December, 2006.

TOMAZ JERVELL – Did not purchase or sell any securities.

At 31 December, 2006 the companies Norsócia, SGPS, S.A. and Auto Maquinaria Tea Aloya, SL, of which he is a member of the Boards of Directors, held 6 018 395 and 6 037 256 shares, respectively.

EDGAR ALVES FERREIRA – Did not hold any shares at 31 December, 2006.

At 31 December, 2006 the company HFV – S.G.P.S., S.A., of which he is a member of the Board of Directors, held 21 681 062 shares.

Consolidated financial statements | Notes 269 Legal certification of accounts and audit report

Deloitte & Associados, SROC S.A. Inscrição na OROC n.º 43 Registo na CMVM n.º 231

Edifício Atrium Saldanha Praça Duque de Saldanha, 1 - 6.º 1050-094 Lisboa Portugal

LEGAL CERTIFICATION OF ACCOUNTS AND AUDIT REPORT CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of euros – th. euro)

Introduction 1. In compliance with the applicable legislation we hereby present our Legal Certification of Accounts and Audit Report on the consolidated financial information contained in the Directors’ Report and on the accompanying consolidated financial statements of Banco BPI, S.A. and subsidiaries (“the Bank”) for the year ended 31 December, 2006, which comprise the consolidated balance sheet as of 31 December, 2006 that reflects a total of 35 565 483 th. euro and total shareholders’ equity of 1 727 303 th. euro, including consolidated net income of 308 758 th. euro, the consolidated statements of income, cash flows and changes in shareholders’ equity for the year then ended and the corresponding notes.

Responsibilities 2. The Board of Directors of the Bank is responsible for: (i) the preparation of consolidated financial statements that present a true and fair view of the financial position of the companies included in the consolidation, the consolidated results of their operations and their consolidated cash flows; (ii) the preparation of historical financial information in accordance with the applicable accounting principles and that is complete, true, timely, clear, objective and licit, as required by the Portuguese Securities Market Code (Código dos Valores Mobiliários); (iii) the adoption of adequate accounting policies and criteria and maintenance of appropriate systems of internal control; and (iv) the disclosure of any significant facts that have influenced the operations of the companies included in the consolidation, their financial position or results of operations.

3. Our responsibility is to examine the financial information contained in the documents of account referred to above, including verifying that, in all material respects, the information is complete, true, timely, clear, objective and licit, as required by the Portuguese Securities Market Code, and to issue a professional and independent report based on our work.

A expressão Deloitte refere-se a uma ou várias sociedades que operam ao abrigo de um acordo com a Deloitte Touche Tohmatsu, uma Swiss Verein, bem como às suas respectivas representadas e afiliadas. Deloitte Touche Tohmatsu é uma associação mundial de sociedades dedicadas à prestação de serviços profissionais de excelência, concentradas no serviço ao cliente sob uma estratégia global, aplicada localmente em, aproximadamente, 150 países. Como Swiss Verein (associação), nem a Deloitte Touche Tohmatsu nem qualquer das suas sociedades membro assumem qualquer responsabilidade isolada ou solidária pelos actos ou omissões de qualquer das outras sociedades membro. Cada uma das sociedades membro é uma entidade legal e separada que opera sob a marca “Deloitte”, “Deloitte & Touche”, “Deloitte Touche Tohmatsu” ou outros nomes relacionados.

Capital Social: 500.000,00 euros - Matriculada na CRC de Lisboa e NIPC 501 776 311 Member of Sede: Edifício Atrium Saldanha, Praça Duque de Saldanha, 1 - 6.º, 1050-094 Lisboa Deloitte Touche Tohmatsu Tel.: +(351) 210 427 500 Fax: +(351) 210 427 950 · www.deloitte.com/pt · Porto: Bom Sucesso Trade Center, Praça do Bom Sucesso, 61 - 13º, 4150-146 Porto - Tel.: +(351) 225 439 200 - Fax: +(351) 225 439 650

270 Banco BPI | Annual Report 2006 Deloitte & Associados, SROC S.A. Inscrição na OROC n.º 43 Registo na CMVM n.º 231

Page 2 of 2

Scope 5. Our examination was performed in accordance with the auditing standards (“Normas Técnicas e Directrizes de Revisão / Auditoria”) issued by the Portuguese Institute of Statutory Auditors (“Ordem dos Revisores Oficiais de Contas”), which require that the examination be planned and performed with the objective of obtaining reasonable assurance about whether the consolidated financial statements are free of material misstatement. Our examination included verifying, on a sample basis, evidence supporting the amounts and disclosures in the consolidated financial statements and assessing the estimates, based on judgements and criteria defined by the Board of Directors, used in their preparation. Our examination also included verifying the consolidation procedures used, application of the equity method and verifying that the financial statements of the companies included in the consolidation have been adequately examined, assessing the adequacy of the accounting principles used, their uniform application and their disclosure, taking into consideration the circumstances, verifying the applicability of the going concern concept, assessing the adequacy of the overall presentation of the consolidated financial statements, and assessing if, in all material respects, the consolidated financial information is complete, true, timely, clear, objective and licit. Our examination also included verifying that the consolidated financial information included in the Directors’ Report is consistent with the consolidated financial statements. We believe that our examination provides a reasonable basis for expressing our opinion.

Opinion 6. In our opinion, the consolidated financial statements referred to in paragraph 1 above present fairly, in all material respects, the consolidated financial position of Banco BPI, S.A. and subsidiaries as of 31 December, 2006 and the consolidated results of their operations and their consolidated cash flows for the year then ended in conformity with the International Financial Reporting Standards as adopted by the European Union and the financial information included therein is, in terms of the definitions included in the standards referred to in paragraph 4 above, complete, true, timely, clear, objective and licit.

Porto, 13 March 2007

DELOITTE & ASSOCIADOS, SROC S.A. Represented by Maria Augusta Cardador Francisco

Legal certification of accounts and audit report 271 Audit Committee’s report and opinion

AUDIT COMMITTEE’S REPORT AND OPINION CONSOLIDATED FINANCIAL STATEMENTS

In compliance with the duties and powers vested in it since it commenced its functions on 1 July 2006, the Audit Committee has monitored the evolution of the activity of the Bank and its participated companies, overseeing observance of the law, regulations and company’s articles of association, supervising compliance with the accounting policies and practices, and overseeing the preparation and disclosure of financial information, the statutory audit, the effectiveness of the internal control, risk management and internal audit systems, as well as the independence and activity of the Statutory Auditors.

It also reviewed the work performed up until 1 July 2006 by the Board of Directors’ Audit and Internal Control Committee, which body was dissolved on that date and whose basic responsibilities were assumed by the Committee as regards the verification of the Statutory Auditors’ activity and independence and of the effectiveness of the internal control, risk management and internal audit systems.

The work performed by the Committee during 2006 in the execution of its functions is set out in the report of activity annexed to the present opinion.

The Committee also examined the consolidated balance sheet as of 31 December 2006, the consolidated income statements, the cash flow statements and the changes in shareholders’ equity and the respective notes thereto, as well as the Board of Directors’ Report for the year then ended.

In addition, the Committee reviewed the Statutory Audit and the Audit Report prepared by the Statutory Auditors, with which it is in agreement.

In view of the foregoing, the Committee is of the opinion that the consolidated financial statements and the Board of Directors’ Report, as well as the proposal contained therein, are in accordance with the applicable accounting, legal and statutory provisions, and therefore it recommends that they be approved by the Shareholders’ General Meeting.

Oporto, 12 March 2007

Artur Santos Silva Chairman

Ruy Octávio Matos de Carvalho Deputy-Chairman

Alfredo Resende de Almeida Member

Jorge Figueiredo Dias Member

Marcelino Armenter Vidal Member

272 Banco BPI | Annual Report 2006 BPI Group Corporate Governance Report BPI Group Corporate Governance Report

Declaration of compliance 275

1. Introduction 276 2. Guiding principles of the BPI Group’s corporate governance policy 277 3. Structure, division of duties and functioning of the BPI Group’s principal management and control bodies 278 3.1. Structure of the Group’s governance and supervision 278 3.2. Shareholders’ General Meeting 281 3.3. Board of Directors 291 3.4. Executive Committee of the Board of Directors 298 3.5. Audit Committee 302 3.6. Portuguese Statutory Auditor 310 3.7. Corporate Governance Committee 311 3.8. Nominations, Evaluation and Remuneration Committee 313 3.9. Remuneration Committee 315 3.10. Company Secretary 316 3.11. Board of Directors of Banco Português de Investimento 316 3.12. Board of Directors of Banco de Fomento Angola 317 4. The Group’s functional organisation chart 320 5. Risk management 322 5.1. Risk management principles 322 5.2. Division of responsibilities in risk control and management 322 6. External auditors 323 6.1. Independence 323 6.2. Liability 325 6.3. Remuneration 325 7. Remuneration 326 7.1. Remuneration policy 326 7.2. Remuneration of members of Banco BPI’s governing bodies 327 7.3. Remuneration of members of Banco Português de Investimento’s board of directors 329 7.4. Pension plans for directors of the banks 329 7.5. Loans to members of Banco BPI’s Board of Directors 330 7.6. Insurance of Banco BPI’s Directors 330 7.7. Indemnities and early termination of contracts 331 7.8. Other benefits / compensation 331 8. Share incentive scheme 332 8.1. Concept, Beneficiaries and Objectives 332 8.2. Execution of share incentive scheme 337 8.3. Execution in 2006 342 8.4. Return on the share incentive schemes 343 9. Shareholder control and transferability of shares 344 9.1. Shareholder control 344 9.2. Shareholder agreements relating to the exercise of ownership rights or to the transferability of shares 344 10. Exercise of voting rights and Shareholder representation 345 10.1. Encouraging the exercise of voting rights 345 10.2. Attribution of voting rights 345 10.3. Procedures relating to proxy representation 345 10.4. Procedures relating to postal voting 345 10.5. Procedures relating to electronic means 346 11. Exercise of corporate rights by BPI Group entities 347 12. Code of Ethics and professional conduct 349 12.1. Commitment to strict standards of ethics and professional conduct 349 12.2. Equity and safeguarding against conflict of interest 350 12.3. Violation of professional secrecy and confidentiality 350 12.4. Stock brokerage activity 350 12.5. Communication of irregularities 352 12.6. Combat against money laundering 352 12.7. Prevention of insider trading 353 12.8. Business dealings between Banco BPI and the members of the Board of Directors, the Audit Board and the Audit Committee, the holders of qualified shareholdings or companies belonging to the Group 354 12.9. Accounting transparency 354 12.10. Social responsibility 354 13. Communication with the market 355 13.1. Principles governing financial information disclosure and other important facts 355 13.2. Investor Relations Division 355 13.3. Internet site 356 13.4. Representative for relations with the market 357 14. Banco BPI shares 359 14.1. Shareholder returns 359 14.2. Stock exchange performance and communications to the market 359 15. Dividend policy 361

Appendices ᭿ Experience, professional qualification and other management and oversight positions performed at companies by the members of Banco BPI, S.A.’s Board of Directors 362 ᭿ Equivalence between the CMVM’s regulations and recommendations dealing with corporate governance and the BPI Group’s Report on Corporate Governance 369 ᭿ Main enactments sources regarding corporate governance in Portugal 370 ᭿ Publications, communications and events on 2007 372

274 Banco BPI | Annual Report 2006 Declaration of compliance

BPI complies with the CMVM’s recommendations relating: For its part, the information contained in the report dealing with the Board of Directors remuneration includes, since 2001, the ᭿ to the governance of quoted companies; following details:

᭿ to the exercise of postal voting in open (public held) ᭿ total aggregate amount of all the remuneration earned by the companies; members of the Board of Directors, distinguishing between executive and non-executive members, and between fixed and ᭿ to the disclosure of information via the Internet; variable remuneration;

᭿ to transactions involving treasury and similar shares. ᭿ individualised indication of the percentage of the variable remuneration which the share and options incentive (RVA) Banco BPI has not adopted any defensive clause impeding the scheme represents for each member of the Board of Directors free transferability of the shares and the unrestricted review by Executive Committee in respect of the period covered by the shareholders of the performance of Board members. In Report; particular, there are no financial or shareholder mechanisms which have as their object frustrating hostile takeover bids. ᭿ individualised indication of the number of shares and options attributed to each member of the Board of Directors Executive Banco BPI's statutes stipulate that the votes cast by a single Committee under the share and options incentive scheme shareholder, in his own name or as the representative of another (Programa de Remuneração Variável em Acções – RVA)1. or others, which exceed 17.5% of the company's total votes, representing the share capital, shall not be counted. Any change Considering the interests of BPI and its present and potential to this statutory provision requires the approval of 75% of the Shareholders, market needs and the objectives invoked in the votes cast in General Meeting. CMVM’s recommendations, the Board of Directors Executive Committee is of the opinion that the detailing of the individual The said statutory clause was proposed by the Board of Directors remuneration of its members does not enhance relevant information with the object of promoting a framework conducive to achieving for those interests, needs and objectives vis-à-vis the practices a balanced participation on the part of the key Shareholders in followed by the Bank. It has, however, implemented in essence the the Company’s affairs from the perspective of the Shareholders’ CMVM’s Recommendation no. 8, according to which the long-term interests. In its original formulation, it laid down a remuneration of the members of the management body must be limit of 12.5% and was approved by the Shareholders at the GM structured in such a manner as to permit the alignment of their held on 21 April 1999 by a majority of 90.01% of the votes. It interests with those of the company and must be the object of was altered at the GM of 20 April 2006 where that limit was annual disclosure in individual terms. raised to the present 17.5%, with a majority of 77.4% of the votes cast. Article 28(3) of Banco BPI’s Statutes (approved at the GM of 20 April 2006) attributes to the General Meeting the responsibility for The remuneration system for Banco BPI’s Board of Directors and defining: a) the limit of the fixed annual remuneration of the its public disclosure adhere to the principles and objectives laid members of the Board of Directors; b) the maximum percentage of down in the CMVM’s Recommendations on Corporate annual consolidated net profit which, not exceeding 5%, can be Governance, namely, Recommendation no. 8, without detailing allocated in each year to the variable remuneration of the Executive the individual remuneration of each one of its members. Committee’s members. This must be done at the time of election (every three years) of the Remuneration Committee’s members The current remuneration system, in force since 2001, is (article 28(2) of the Statutes). Since the present term of office of described in a separate chapter of this Report and includes, for BPI’s governing bodies began prior to the entry into force of the the members of the Board of Directors Executive Committee, a said provision and terminates with the approval of the accounts variable component denominated in BPI shares and options with relating to 2007 (scheduled for the second quarter of 2008), only its own rules defined by the Board of Directors and made public when the Governing Bodies are elected for the term 2008-2010 in each financial year1. This component was created with the will a proposal regarding the remuneration policy for BPI’s express object of strengthening the alignment of the Bank’s governing bodies be submitted to the General Meeting. principal executives with the interests of the Institution and its Shareholders.

1) In respect of 2006, the variable remuneration is composed exclusively of cash for the reasons set out in point 8.3 of this report (page 342).

BPI Group Corporate Governance Report 275 1. Introduction

Banco BPI’s Board of Directors hereby submits for the ᭿ an Audit Committee, which shall be composed exclusively of consideration of its Shareholders and the market the BPI Group’s non-executive members of the Board of Directors, the majority Report on Corporate Governance for 20061 in compliance with of whom must be independent, and which shall be responsible, its duty of information and transparency, and in conformity with amongst other aspects, for the supervision of the company’s the rules in force. activity, as well as for overseeing the Portuguese statutory auditor’s (Revisor Oficial de Contas) activity and independence; Refinements to BPI’s corporate governance practices and reporting ᭿ a Portuguese statutory auditor, to be appointed by the General Banco BPI’s Board of Directors has been permanently concerned Meeting following a proposal of the Audit Committee, and with the governance and oversight model implemented by the whose duty is to examine and certify the accounts; Group, as well as with presenting an increasingly more comprehensive corporate governance report. In this manner, it ᭿ a company Secretary; responds to the initiatives of the Securities Market Commission (CMVM), takes advantage of the recent legislative changes ᭿ two new consultative bodies reporting to the Board of (notably the revision of the Companies Code in 2006), and Directors: a Nominations, Evaluation and Remuneration keeps in step with the latest developments and documents Committee and a Corporate Governance Committee. published by various national and European bodies, namely, the Portuguese Corporate Governance Institute2, the European The Meeting also approved the following motions: Commission and the Organisation for Economic Cooperation and Development (OECD). ᭿ the alteration to the limit on the counting of the votes when cast by just one shareholder, on his own behalf, in Against this background, Banco BPI’s Board of Directors representation of another and / or by persons with whom he submitted to the General Meeting of 20 April 2006 a motion to has certain of the relationships contemplated in article 20(1) amend the Company’s statutes in order to incorporate the most of the Portuguese Securities Code (Código dos Valores recent national and international recommendations in the field Mobiliários): the limit increases from 12.5% to 17.5% of the of corporate governance and, therefore, placing the Bank at the votes corresponding to the share capital; forefront in terms of statutory solutions for corporate governance. The proposal advocated by the Board of Directors was structured ᭿ the decrease in the number of shares required in order to vote on three levels: and, therefore, to participate at General Meetings: from 1 000 to 500 shares; ᭿ the adoption of a far-reaching and streamlined management and oversight model; ᭿ the inclusion of a rule requiring the Board of Directors to submit for deliberation of the General Meeting a proposal for a ᭿ the promotion of Shareholders’ participation at general long-term dividend policy; meetings; ᭿ the inclusion of a rule which lays down that, at the time of the ᭿ the attribution of powers to Shareholders deliberate on appointment of the Remuneration Committee by the General Directors’ and the Executive Committee’s compensation and on Meeting, the latter must define for each mandate the limits of dividend policy. the fixed remuneration of all the members of the Board of Directors and the percentage profits that can be allocated to The above motion was approved by the Shareholders in all its the variable remuneration of the members of the Executive points, with the result that effective from 30 June 2006 (date Board. on which the changes came into force) BPI began have at its disposal a new far-reaching and streamlined management and Revocation of the Pre-emption Contract supervision model (more commonly known as the Anglo-Saxon As explained in chapter 9 of this report, the pre-emption model) which envisages the existence of the following governing contract entered into in 1993 between certain of BPI’s most bodies: significant Shareholders was revoked on 13 November 2006. This agreement provided that where any one of the contracting ᭿ a Board of Directors, whose number of members was raised parties wished to transfer for value all or some of the shares from 19 to 21 with the election of two new independent, which covered by the agreement, such party was obliged to give shall delegate the day-to-day management of the company to an preference on selling and upon the same conditions to the other Executive Board; contracting parties.

1) The present document, structured as an annex, forms an integral part of the 2006 Directors’ Report and must be read in conjunction with it, namely, with the chapter in the Directors’ Report devoted to the BPI Group’s governance (pages 16 to 18). 2) Given expression above all in the publication in February 2006 of the “White Paper on Corporate Governance in Portugal”.

276 Banco BPI | Annual Report 2006 2. Guiding principles of the BPI Group’s corporate governance policy

GUIDING PRINCIPLES OF THE BPI GROUP’S GOVERNANCE POLICY

1 Creation of value 5 Loyalty as the primary goal of BPI’s Directors and Employees. through the implementation of mechanisms which impede the occurrence of conflict of interest situations.

2 Transparency in management 6 Efficiency Internal information – in such a manner that the in the functioning and interaction of the company’s non-executive members of the Board of Directors, the governing and supervisory bodies. members of the Audit Committee can carry out their oversight and supervisory functions with facility and 7 Rigour efficacy. in the management of the various risks underlying the External information – in such a manner that the Group’s operations. Shareholders, Authorities, Auditors, Investors and the community can broadly assess the quality and conformity 8 Sharing decision of the information provided and the results attained. through the adoption of committee-type models in decision- -making processes and in the fostering of team spirit.

3 Independence 9 Performance and merit of the executive management vis-à-vis any individual as fundamental criteria governing the remuneration Shareholder or specific interests. policy as concerns Employees and Directors.

4 Equity 10 Harmony in the relationship with Shareholders, Customers and in the alignment between the interests of the Employees. Shareholders and those of Directors and Employees.

BPI Group Corporate Governance Report 277 3. Structure, division of duties and functioning of the BPI Group’s principal management and control bodies

3.1. STRUCTURE OF THE GROUP’S GOVERNANCE AND SUPERVISION Accordingly with the company’s statutes the governing bodies The company shall also have as advisory committees reporting to comprise the General Meeting, the Board of Directors, the Audit the Board of Directors a Nomination, Evaluation and Committee, the Portuguese Statutory Auditor and the Company Remuneration Committee and a Corporate Governance Secretary. Committee.

Shareholders’ General Meeting

Remuneration Portuguese Committee Statutory Auditor

Banco BPI’s Corporate Governance Board of Directors Committee Audit Committee

Nomination, Evaluation and Company Remuneration Committee Secretary

Banco BPI’s Executive Committee

Banco de Fomento Banco Português de Angola’s Executive Investimento’s Executive Committee Committee

BPI Group governing bodies – elected every three years – as well as Executive Committee of the Board of Directors their composition and principal responsibilities are the following. The Executive Committee of Banco BPI’s Board of Directors (Comissão Executiva, CECA) is presently composed of seven Shareholders’ General Meeting professional executive Directors who are independent of any The Shareholders’ General Meeting (SGM) is the governing body shareholders or specific groups. composed of the Shareholders entitled to vote – that is, all shareholders owning at least 500 Banco BPI shares. The General The Executive Committee has the widest management powers to Meeting Committee is composed of a Chairman, a Vice-Chairman conduct the Group’s day-to-day activity, the exercise of which is and two Secretaries and also the Company Secretary, all of them the object of permanent monitoring by the Board of Directors. not being required to be shareholders. Audit Committee The Shareholders deliberate on matters that are specifically The Audit Committee is composed exclusively of non-executive attributed to them by the law or by the Statutes and which do not members of the Board of Directors (minimum of three and fall under the jurisdiction of the company’s other governing maximum of five, the present configuration). The majority of the bodies, as well as on matters relating to the company’s Committee’s members are independent (four in the present management (although in the last-mentioned case, only if so configuration). requested by the Board of Directors). The Audit Committee performs the functions attributed to it by Board of Directors law, the statutes and BPI’s internal regulations. This brief includes Banco BPI’s Board of Directors is presently composed of 21 overseeing the preparation and disclosure of financial information, members, majority of whom is non-executive (14), of which 8 are the effectiveness of the internal control, internal audit and the risk independent. management systems. It evaluates the activity and oversees the independence of the Portuguese Statutory Auditor. The Board of Directors is the governing body that has been vested with the widest powers to manage and represent the Company. It Portuguese Statutory Auditor is responsible for formulating the BPI Group’s major strategic The Portuguese Statutory Auditor is appointed by the General policies. Meeting, following a proposal by the Audit Committee. The Portuguese Statutory Auditor is responsible for performing all the The Board of Directors delegates the company's day-to-day examinations and all the attest work needed to audit and certify management to an Executive Committee. the accounts.

278 Banco BPI | Annual Report 2006 Corporate Governance Committee Company Secretary The Corporate Governance Committee is a consultative body of The Company Secretary is appointed by the Board of Directors, the Board of Directors composed of three to seven members of and besides performing the functions contemplated in the law, is the Board of Directors who do not form part of the Executive responsible for relations with the supervisory and oversight Committee (currently has six members, five of which are authorities, namely, the Bank of Portugal, the Securities Market independent). Commission (CMVM)1, the Insurance Institute of Portugal, the Directorate-General of Taxes and the Inspectorate of Finance. Its function is to make pronouncements on matters within the scope of corporate social responsibility, ethics, professional conduct and environmental protection. The Committee prepares The full version of the regulations of the following bodies can an annual report on the functioning of the company’s corporate be consulted at www.ir.bpi.pt or upon request addressed to the governance structure. Investor Relations Division at [email protected]:

Nominations, Evaluation and Remuneration Committee ᭿ Board of Directors The Nominations, Evaluation and Remuneration Committee is a ᭿ Executive Committee consultative body of the Board of Directors composed of three to ᭿ Audit Committee seven members of the Board of Directors who do not form part of the Executive Committee (currently six, two of which are ᭿ Corporate Governance Committee independent). ᭿ Nominations, Evaluation and Remuneration Committee

Its function is to give opinions on the filling of vacancies that may occur on the governing bodies, on the choice of Directors to be appointed to the Executive Committee and on the appraisal and fixing of this Executive Committee’s compensation.

Remuneration Committee The Remuneration Committee is composed of three shareholders elected by the General Meeting. The Remuneration Committee's function is to fix the remuneration of the members of Banco BPI's governing bodies. Effective from 2008 and insofar as the fixed remuneration of the members of the Board of the Directors and the variable remuneration of the Executive Committee are concerned, it must observe the limits laid down by the General Meeting.

1) In relation with the representative for relations with the Securities Market.

BPI Group Corporate Governance Report 279 ELEGIBILITY FOR MANAGEMENT AND SUPERVISORY BODIES – REQUISITES EMBODIED IN PORTUGUESE LAW Requirements of integrity, professional experience and Professional experience2 availability The RGICSF considers that there is a presumption of The General Regime of Credit Institutions and Financial “adequate experience when the person concerned has Companies (RGICSF) establishes a set of requirements and previously performed functions involving responsibility in the incompatibilities, compliance with which is indispensable so financial field in a competent manner”. that a specified person be eligible for assuming a management or supervisory office at a credit institution or financial Accumulation of positions3 company. The evaluation process is the responsibility of the The Bank of Portugal can oppose situations in which the Bank of Portugal, which for this purpose exchanges information members of the Board of Directors of a bank perform with the Insurance Institute of Portugal (Instituto de Seguros management functions at other companies “where it is of the de Portugal), the Securities Market Commission (Comissão do opinion that the accumulation is capable of prejudicing the Mercado de Valores Mobiliários- CMVM) as well as with foreign exercise of the functions which he is already carrying out, supervision authorities taking into consideration three aspects: namely, because there exist grave conflicts of interest or, in the the integrity of the persons concerned, their professional case of persons who are responsible for the institution’s experience and their availability to exercise the office. day-to-day management, there are significant impediments as concerns their availability for the office”. Integrity of the members of the management and supervisory bodies1 Audit Committee The RGICSF lays down that only “persons whose integrity and The Companies Code stipulates that in the case of companies availability provide guarantees of sound and prudent whose shares are listed on a regulated market, the audit management, taking into account in particular the security of committee must include at least one member who has a the funds entrusted to the institution” can form part the university degree that is commensurate with the exercise of his / management and supervisory bodies of a credit institution or her functions and is well versed in auditing and accountancy. financial company. In appraising integrity, account will be taken In such companies, the majority of the audit committee’s of “the manner in which the person concerned generally members must be independent. manages business enterprises or exercises the profession, especially in aspects where he displays an inability to decide in For this purpose, persons are deemed to be independent if a pondered and scrupulous manner, or a tendency to not they are not associated to any specific interest group in the comply promptly with their obligations, or to behave in a way Company, nor find themselves in a situation capable of that is incompatible with the preservation of the market’s affecting their impartiality of analysis or decision making, in confidence”. Amongst other pertinent circumstances, an particular, by virtue of: indicator of the lack of integrity is the fact that the person has

been judged “responsible for the bankruptcy or insolvency of a ᭿ being the holders of or acting on behalf of or for the account company controlled by him, or in respect of which he was an of holders of a qualified holding of 2% or more of the administrator, director or manager”, or has been found guilty of Company’s share capital; crimes such as favouring creditors, forgery, theft, extortion, ᭿ having been re-elected for more than two terms of office, breach of trust, corruption, issuing cheques without funds, consecutive or interspersed. prejudicial management, false declarations, money laundering, misuse of information, etc.

1) Extracts from Article 30 of Chapter III of the RGICSF. 2) Extracts from Article 31 of Chapter III of the RGICSF. 3) Extracts from Article 33 of Chapter III of the RGICSF.

280 Banco BPI | Annual Report 2006 3.2. SHAREHOLDERS’ GENERAL MEETING The Shareholders’ General Meeting (SGM) is the governing body 3.2.1. Composition composed of the Shareholders entitled to vote – that is, all shareholders owning at least 500 Banco BPI shares. Shareholders holding less than the aforesaid minimum number COMPOSITION OF THE GENERAL MEETING of 500 shares, may pool their shares with other shareholders in Chairman João Vieira de Castro order to reach that number. Deputy-Chairman Manuel Cavaleiro Brandão Secretaries Galucho – Indústrias Metalomecânicas, S.A. Banco BPI's statutes stipulate that the votes cast by a single (represented by Carlos Rosa Justino) shareholder, in his own name or as the representative of another Produtos Sarcol, S.A. or others, which exceed 17.5% of the company's total votes, (represented by M.ª Alexandra Magalhães) representing the share capital, shall not be counted. Company Secretary Manuel Correia de Pinho (member in office) The Shareholders have a number of options available to them to Alexandre Lucena e Vale (alternate member) participate in Meetings: in person, through a representative (by other Shareholders or by third parties), via postal or electronic voting.

3.2.2. Functions

PRINCIPAL FUNCTIONS OF THE SHAREHOLDERS’ GENERAL MEETING

᭿ Election of members of the Board of Directors, the Audit and for the percentage of consolidated profit which, not Committee, the Portuguese Statutory Auditor, the exceeding 5%, may be allocated each year to the variable Remuneration Committee and Chairman, Deputy-Chairman remuneration of the members of the Executive and Secretaries of the Chair of the General Meeting. Committee.

᭿ Consideration of the Board of Directors' annual report, ᭿ Review of the strategic orientation and policies adopted.

discussion and voting on the consolidated and individual ᭿ Deliberation about a long-term dividend policy proposed accounts, as well as on the Portuguese Statutory Auditor by the Board of Directors. opinion. ᭿ Deliberate about the acquisition and sale of treasury stock. ᭿ Evaluation of the Board of Directors' and the Portuguese ᭿ Deliberation about the capital increases and the issue of Statutory Auditor performance. bonds convertible into shares or with the right to ᭿ Deliberation about the appropriation of the annual results. subscribe for shares.

᭿ Definition of a maximum limit for the annual fixed ᭿ Deliberation about changes to the statutes. remuneration of the members of the Board of Directors

1) At the General Meeting held on 20 April 2006, the numbers of shares required to qualify for a vote was reduced from 1 000 to 500.

BPI Group Corporate Governance Report 281 3.2.3. Promotion of shareholder participation at SGM BPI has been permanently concerned with stimulating Inclusion of matters in the order of business Shareholders’ participation in the Company’s affairs, namely at The Shareholder or Shareholders owning shares corresponding to General Meetings. To that end, it actively promotes the exercise at least 5% of the share capital can request that certain matters of voting rights, – in person, by proxy or via postal or electronic be included in the order of business of a General Meeting voting. It makes available to Shareholders – well beyond what is already convened or to be convened. For this purpose, a written required by law – all the information and means needed for their request must be sent to the Chairman of the General Meeting participation at those meetings. All the information is placed at Committee within five days of the last publication of the Shareholders’ disposal simultaneously in Portuguese and respective notice of meeting. English. In chapter 9 of this report, the policy adopted by BPI for promoting Shareholder participation at GM’s is described in Right to information greater detail. During the course of General Meetings, any Shareholder can request that information be supplied so that he can form a The External Auditor, in the person of the partner responsible for substantiated opinion about the matters being deliberated. the audit of Banco BPI’s consolidated financial statements is Notwithstanding the faculty expressed in the previous paragraph, present at the Annual General Meetings, and is available to the motions presented to the Shareholders’ meeting have as rule elucidate Shareholders about any matter relating to the opinions been at the initiative of the Board of Directors. issued on Banco BPI’s individual or consolidated accounts. 3.2.5. Information about GM results 3.2.4. Functioning rules BPI adopts the policy of publicly announcing at the conclusion In terms of the law1, Banco BPI’s Annual General Meeting must of the General Meeting, the results of the Shareholders’ be held before the end of May. deliberations via the announcement publicised on the CMVM’s website (www.cmvm.pt) and BPI’s Investor Relations website Convocation (www.ir.bpi.pt) and sent to the general and specialist media The Committee Chairman must convene an extraordinary General bodies. Meeting whenever this is requested by the Board of Directors, by the Audit Committee, by Shareholders owning shares 3.2.6. Results of the Shareholders’ Meetings held in the last five corresponding to at least 5% of the share capital or in other cases years contemplated in the law. At the GM’s held in the last five years (between 2002 and 2006) Shareholders owning a number of shares corresponding to Constituent Quorum and required majority the following percentages of the capital were present or The General Meeting can deliberate at its first convocation represented: irrespective of the number of Shareholders present or % share capital present Shareholders’ Meetings represented, with the exception of motions relating to alterations or represented to the Bank’s statutes or merger and demerger operations, 3 of April of 2002 57.2% amongst other special situations envisaged in the law. 8 of November of 2002 60.4% 10 of April of 2003 59.3% For these cases it is necessary that Shareholders owning shares 20 of April of 2004 60.9% corresponding to at least one third of the company’s capital must 20 of April of 2005 56.5% be present or represented, and that the motions under 20 of April of 2006 67.5% consideration are approved by two thirds of the votes cast, with the exception of resolutions to amend the Statutes with regards to the limitation of voting rights issued by one single shareholder The motions presented in General Meeting have consistently (article 12(5)(4) and article 30(2)), and to wind up the been approved by all or almost all of the shareholders present or Company, both of which require the approval of 75% of the represented thereat as can be seen from the following table. votes cast. At the second convocation, the Meeting can deliberate irrespective of the number of Shareholders present or represented and the capital represented by them.

1) This is because Banco BPI presents consolidated accounts, otherwise it must meet by the end of March (article 376(1) of the Companies Code).

282 Banco BPI | Annual Report 2006 Results of the motions presented at the Shareholders’ Meetings held in the last five years (until 31 Dec. 2006) 03 Apr. 02 08 Nov. 02 10 Apr. 03 20 Apr. 04 20 Apr. 05 20 Apr.06 Report and accounts 99.84% – 99.986% 99.31% 99.91% 100.00% Appropriation of results 99.83% – 100.000% 99.99% 100.00% 100.00% General appraisal of management and supervision1 99.84% – 99.546% 99.99% 100.00% 100.00% Acquisition and disposal of treasury stock 99.84% – 99.998% 99.99% 99.99% – Three-yearly election of governing bodies 99.84%2 – – – 99.99%2 – Alteration of the statutes – – 100.000% 99.99% – 77.4% to 96.7% Corporate reorganisation – 100.00%3 ––– – Alteration in the composition of the Board of Directors – – 99.998% 99.99%4 – 88.1% to 97.8% To appoint members of the Audit Committee –––––97.4% Capital increase 99.84%–––– – 1) Proposed vote of confidence and praise to the members of the Board of Directors and the Audit Board presented by a Shareholder. 2) Proposed by a Shareholder. 3) At this Meeting, four motions were voted on, all of which relating to the corporate reorganisation concluded at the end of 2002. 4) At this Meeting, a motion was also unanimously approved proposing a vote of congratulations for the way in which the change in the Chairmanship of Banco BPI's Executive Committee took place, and a vote of praise for Artur Santos Silva for the manner in which he performed his functions as the Bank's chief executive since the BPI Group's founding in 1981.

3.2.7. Shareholders’ General Meetings held in 2006 Banco BPI’s Shareholders’ General Meeting met once in 2006, voting rights, with Shareholders having deliberated and approved on 20 April. It was attended by 293 Shareholders or their the following motions. representatives owning shares corresponding to 67.54% of the

ANNUAL GENERAL MEETING (AGM) OF 20 OF APRIL OF 2006

Agenda

᭿ To receive and, if deemed fit, adopt Banco BPI' individual ᭿ To resolve on the amendment to Articles 7.º, 10.º, 11.º, 12.º, and consolidated annual report and accounts for the financial 14.º, 15.º, 16.º, 17.º, 18.º, 20.º and 21.º of the Company's year ended 31 December, 2005. Articles of Association, on the inclusion in Chapter III of three

᭿ To resolve on the proposed appropriation of net income for new sections (Section III – Audit Committee, Section IV – 2005. Statutory Auditor and Section V – Company's Secretary) and the corresponding articles 22.º to 25.º, on the renumbering of ᭿ To generally consider Banco BPI's management and articles 23.º to 29.º to articles 26.º to 32.º and on the supervision. amendment of articles (after its renumbering) 26.º, 28.º, 29.º, ᭿ To ratify the co-optation of a vacancy on the Board of Directors. 30.º and 32.º. ᭿ To resolve on the increase of the number of members of the ᭿ To appoint members of the Audit Committee and whom, Board of Directors from 19 to 21 and the election of two new amongst them, shall perform the duties of chairman of that members to fill vacancies occurring. body. ᭿ To resolve on the fulfilment of a vacancy on the ᭿ To appoint the Statutory Auditor. Remuneration Committee. ᭿ To resolve on the acquisition and disposal of own shares1.

1) Taking into account the interpretation divulged by the CMVM on 6 April 2006 concerning the object of point ten on the order of business, Banco BP’s Board of Directors decided to withdraw the proposal relating to the acquisition and sale of own shares which, within that ambit, it had decided on 9 March to present to the General Meeting. Consequently no resolution was passed with respect to this proposal.

BPI Group Corporate Governance Report 283 Results of the motions presented at the Shareholders’ Meetings held at 20 of April of 2006 Percentage of votes

In favour Against Banco BPI individual and consolidated annual report and accounts for the financial year ended 31 December 2005 100% – Appropriation of net income for 2005, including the payment of a 12 cents dividend per share to be attributed to each of the 760 000 000 shares in issue at 31 December 2005 100% – General appraisal of management and supervision (vote of confidence and praise to the Board of Directors and Audit Board) 100% – Ratification of the co-optation of Eng. Edgar Alves Ferreira 97.44% 2.56% Increasing the number of Board of Directors’ members from 19 to 21 88.09% 11.01% Election of Eng. Carlos Moreira da Silva and Prof. Dr. Jorge de Figueiredo Dias to fill the vacancies created on the Board of Directors 97.81% 2.19% The company HVF, SGPS, S.A., fills the vacancy that occurred on the Remuneration Committee 97.42% 2.58% Alteration of the Statutes (in accordance with the motion presented by the Board of Directors) relating to: a) share capital and the functioning of the GM (except the proposal relating to article 12(4)); 96.73% 3.27% b) number of members of the Board of Directors; 95.94% 4.06% c) management and oversight structure and functioning; 96.73% 3.27% d) regime governing changes to the statutes and proposal with regard to article 12(4); 77.42% 22.58% e) regime governing the retirement of the Executive Committee’s members. 96.72% 3.28% Raising from 12.5% to 17.5%, the limit for the counting of votes cast by a single shareholder, in his own name and as the representative of another or others and by persons with whom he finds himself in any one of the relationships envisaged in article 20(1) of the Securities Code 77.42% 22.58% Appointment of the Audit Committee’s members 97.41% 2.59% Appointment of the Portuguese Statutory Auditors 100% –

3.2.8. Shareholders’ General Meetings held in 2007 3.2.8.1. First shareholders’ General Meeting held on 19 January First General Meeting of 19 January 2007 results 2007 Percentage of votes cast1 The only point on the order of business of BPI’s General Meeting In favour Against held on 19 January 2007, at 10h00, was the election of the Election of the Deputy-Chairman of Deputy-Chairman of the Chair of the GM. the General Meeting – Manuel Eugénio Pimentel Cavaleiro Brandão 99.99% 0.02% 641 Shareholders were present or represented, being the owners 1) Abstentions don’t count as votes cast. of shares corresponding to the voting rights attaching to 77.57% of the share capital. A further 76 Shareholders voted by 3.2.8.2. Second shareholders’ General Meetings held on 19 correspondence (0.43%), with the result that the capital entitled January 2007 to vote totalled 78%. At BPI’s GM held on 19 January 2007 at 11.30 am, 671 Shareholders were present or represented, being the owners of Presences in the first General Meeting of 19 January 2007 shares corresponding to the voting rights attaching to 79.31% of N.º N.º shares Votes % share the share capital. A further 74 Shareholders (0.43%) voted by shareholders (thousand) capital correspondence, with the result that the capital entitled to vote Total 717 592.8 1 185 882 78.0% totalled 79.74%. Present or represented 641 589.5 1 178 827 77.57% Vote by correspondence 76 3.3 6 555 0.43% Presences in the second General Meeting of 19 January 2007 N.º N.º shares Votes % share The Chairman of the General Meeting Committee clarified to the shareholders (thousand) capital Meeting with regard to the fact that, pursuant to the rules Total 745 606.1 1 211 804 79.74% embodied in article12(4) and (5) of the Bank’s Statutes, the Present or represented 671 602.8 1 205 276 79.31% Shareholders Caixa Holding, S.A., Sociedad Unipersonal and Vote by correspondence 74 3.3 6 528 0.43% Catalunya de Valores, SGPS, Unipessoal, Lda., holders respectively of 64 806 544 and 125 218 724 shares, which would have The acts on which the second General Meeting of 19 January corresponded in the case of independent entities to 129 613 and was called to pronounce itself are acts within the scope of the 250 437 votes, saw this number reduced to 90 717 votes, in the Board of Directors’ powers. first case and to 175 283 votes in the second.

284 Banco BPI | Annual Report 2006 However, on that date Banco BPI was the object of a takeover bid Directors to subject the performance of those acts to the General for the shares representing the whole of its share capital and Meeting’s prior authorisation, in terms of the provisions of article doubts could be raise with respect to Point 2 on the Order of 182(3)(b) of the Securities Code. Business whether, bearing in mind the provisions of article 182 of the Companies Code, those acts could be performed by the In terms of the law, the deliberations of the General Meeting Bank’s Board of Directors without the General Meeting’s prior which have as their object authorising the Board of Directors to authorisation (while there is no doubt that, as concerns the perform the acts covered by the provisions of article 182 of the disposal envisaged in point 1, it was subject to this legal regime). Securities Code, can only be adopted by the majority required for altering the statutes; that is, they require the approval of two Accordingly, it was deemed appropriate by the Bank’s Board of thirds of the votes cast at the General Meeting.

Second General Meeting of 19 January 2007 results Percentage of votes cast1

In favour Against To deliberate, in the terms and for purposes of the provisions of article 182(3)(b) of the Securities Code, over a Board of Directors’ proposal that it be authorised to decide upon the disposal of Banco BPI, S.A.’s and BPI Vida – Companhia de Seguros de Vida, S.A.’s participating interests in the share capital of Banco Comercial Português, S.A.2 81.81%3 18.19% To deliberate, in the terms and for purposes of the provisions of article 182(3)(b) of the Securities Code, over a Board of Directors’ proposal relating to the expansion programme for Banco BPI, S.A.’s branch network. 81.80% 18.20% 1) The abstentions do not count as votes cast. 2) The Board of Directors decided to present a new motion to the General Meeting, eliminating the reference to the Bank’s pension fund, bearing in mind the doubts raised by the CMVM with respect to point one of the agenda being able to contain the reference to BPI Pensões which appeared in the original version of the aforesaid document,. The Board of Directors took into account that the inclusion of the abovementioned reference was not aimed at obtaining any type of authorisation for a possible sale by Banco BPI’s Pension Fund of the interest held by it in BCP, but merely to provide a clarification to the Shareholders about the matter given that the decision concerning the sale by the Banco BPI Pension Fund of the interest held by it in BCP falls within the jurisdiction of the Board of Directors of this fund’s management company (BPI Pensões) and not that of Banco BPI and that, in accordance with the regime applicable to Banco BPI’s Pension Fund, any decision to be taken by BPI Pensões regarding the said sale is not subject to any type of Banco BPI authorisation, not even to its opinion; 3) Majority required for approval: two thirds of the votes cast.

The Chairman of Banco BPI’s Board of Directors was given the Committee, to clarify in greater detail the foundation and reach floor, at the invitation of the Chairman of the General Meeting of the motions submitted to the Shareholders’ deliberation.

CHAIRMAN OF BANCO BPI’S BOARD OF DIRECTORS INTERVENTION

“1. First Statement The acts to which these motions report are (in case of the offeror as a relevant change to the assumptions it has assumed motion concerning item 2, pursuant to CMVM) considered as when deciding the launching of that Bid. covered by the so-called “passivity rule”, i.e., the rule that forbids the Board of Directors of the offeree company to do any In this context, Shareholders should consider that the approval act that (i) is likely to change in a material manner the asset of one or both these motions may, prospectively, be invoked by position of the offeree company, (ii) does not reconvey to the BCP to request to CMVM an amendment to or withdrawal of normal business of the company and (iii) which may affect the Offer it has announced.” significantly the aims announced by the offeror. Then, the Chairman of the Board of Directors highlighted that As they are, or may be, covered by the passivity rule, such acts the pending of the takeover bid launched for the shares of the can only be done if, for the purpose, there is an authorisation Bank by Banco Comercial Português, S.A. about ten months of the GM passed by a qualifying majority, identical to that ago restricts severely the management powers of the Board required to amend the articles of association. over which it presides, forcing it to resort to the General Meeting to do all acts object of the motions submitted to the Therefore, the Board of Directors has requested that the GM General Meeting under the two items on the Agenda. Then, he should be summoned. justified the proposal for the disposal of Banco Comercial Português, S.A.’ shares, emphasising that the approval of the 2. Second Statement proposal does not result for the Board which he presides in an In view of the contents of the preliminary announcement of the obligation to do the said act. He also informed of the reason takeover bid released by BCP on 13.03.2006, the approval of and range for the amendment made today to the initial one or both of these motions may be considered by the proposal, as a result of issues raised by the Portuguese Securities Commission. (see note 2 at the table above).

BPI Group Corporate Governance Report 285 Shareholders Banco Comercial Português, S.A. and Banco representative of the first of them had read in full and the text Millennium BCP Investimento, S.A. voted against the proposal that the representative of the second has read in part, which approved and submitted as voting statement the texts that the texts were transcribed into the minute book.

Voting statement of the representative of Shareholders Banco Comercial Português, S.A. and Banco Millennium BCP Investimento, S.A.

Voting statement of the representative of Shareholder Banco The framework, by the management of BPI itself, in this provision of Comercial Português, S.A. the request to summon the general meeting and of the motion “1. I intervene as representative of a shareholder of Banco BPI, acting reflects the recognition, by the said management, that the matter is as shareholder solely, despite the fact that the shareholder whom I objectively likely to jeopardise the subsistence of the tender offer or represent is the offeror in a takeover bid previously announced, aimed to affect the terms thereof. at the shares of this Bank. Shareholders have the right to decide on measures that objectively 2. As laid down in the motion submitted by the Board of Directors to may be subject to that consequence. But it is important that they are this General Meeting in item 1 on the Agenda, Banco BPI, S.A. holds aware of that. shares corresponding to approximately 2.52% of the share capital of Banco Comercial Português, S.A., and BPI-Vida holds shares in the 5. According to the opinion of the shareholder which I represent, the same Bank, corresponding to approximately 1.92%, which brings up issue submitted to resolution should not be decided during the to an aggregate 4.44%. About 2.58% of BCP held by BPI’s Pension process of the takeover bid under way, under penalty of jeopardising Fund are added, which, if it is included in the aggregation, raises the seriously the interests of the shareholders, and, in no case, the total percentage of participating interests to more than 7%, which, at granting of a blank authorisation is, in this juncture, legitimate. the closing level of the exchange yesterday, 18 January, are valued at above 700 million euros, which is equivalent to more than 44% of For these two reasons, each of them enough per se, the shareholder BPI Group’s equity booked on 30 June 2006. As it has been whom I represent will vote against the proposal.” informed, the Board of Directors withdraw the motion concerning the authorisation for the disposal of the shares held by Pension Fund. Voting statement of the representative of Shareholder Banco Millennium BCP Investimento, S.A. BPI Shareholders have never been publicly informed of the reason for “1. The legal provision set forth in Article 182 of the Securities such a high position in BCP’ s share capital, and BCP also ignores it – Code, called on by the management of Banco BPI, S.A., in the this is the only issue that I wish to regret in the relationship with initiative to convene this General Meeting, reflects an essential BPI’ s directors. If the target pursued was merely a financial one, the guideline: the shareholders of the target company, as they are investment of funds in BCP is flattering for BCP, but this is, in that always entitled not to accept the purchase orders directed to it, perspective, BPI’ s own resources clearly excessive under third parties’ have also the right to approve the measures that may jeopardise or management. If the objective was a strategic one, that was never make it fall. disclosed. The situation involved lack of transparency on the part of BPI in the relationship between institutions, to which the attention of These rights of the shareholders are unquestionable and represent the authorities was called. an expression of respect for the ownership right.

3. That Banco BPI wishes to dispose of its stake in BCP it might But the management of the offeree company, because it is not the considered, therefore, positive, in itself. But we cannot disregard addressee of the offer, is not allowed to do acts that may affect the neither the juncture nor the terms for a disposal or the ignorance of offer without the shareholders’ authorisation, being always subject, such terms. Should the shares be “poured out” in the stock exchange under the law, to a duty to act in good faith, exemption and under value? Is there already a buyer with adjustment? In what neutrality, against which the initiative at stake contrasts. conditions? At which cost? What are earnings destined for? 2. The first of the matters in question – the granting of 4. This General Meeting was expressly convened to resolve “on the authorisation so that the governing body may dispose of shares in terms and for the purposes of Article 182 (3) (b) of the Securities Banco Comercial Português, S.A., under the conditions deemed Code”. According to this rule, only upon specific authorisation of convenient – are connected with the notes of particular seriousness, the General Meeting, while a takeover bid previously announced is and which justify the presence in person at this general meeting of pending, may the management do (quote) “acts likely to change in the institutional representatives of BCP at the highest level. a material manner the asset position of the offeree not reconvening to the normal management of the company and which may Banco BPI, S.A.’s management decision was in fact hostile over the significantly change the objectives announced by the offeror” past few years, as it greatly pledged the company’s own resources (unquote). to create and increase unilaterally shareholdings in Banco Comercial Português, S.A. without any agreement or articulation with this latter.

286 Banco BPI | Annual Report 2006 Voting statement of the representative of Shareholders Banco Comercial Português, S.A. and Banco Millennium BCP Investimento, S.A. (continued) This attitude contrasts with the transparency and respect for the 3. Though in a different level, also worth referring is the proposal for shareholders and the market represented by Millennium BCP’s approval by the shareholders of a scheme to open branches that public offer. Banco BPI, S.A’s management:

It is clear that the motions under discussion comprise contents, the ᭿ knows that it was expanded only after the announcement of the purpose of which being opposite to the Offer, and in that sense it is Takeover Bid; justified that you Shareholders may have our standpoint on this ᭿ further knows of the offeror disagreement; matter. The merits of the Offer have already been disclosed: creation ᭿ also knows that it would affect and burden the network of a more relevant size, acquisition of synergies and benefits deriving rationalisation scheme the offeror has expressed and; thereof, increase in the country’s competitive capacity in a growing globalisation context, maintaining its own and autonomous decision ᭿ also knows that it caused CMVM (the Portuguese Securities centres, with advantages for customers, shareholders and employees – Market Commission) to raise the issue that this is an act this is the overview that stimulates the offer, and BCP welcomes forbidden to the management, as it is contrary to the neutrality willingly BPI shareholders who wish to reinvest the value received duties during the offer. under the Offer for shares of the new entity resulting from the merger BCP-BPI. The Project is, therefore, good for Portugal and everybody Once again, the reading of the proposal of Banco BPI, S.A.’ s may participate in it – it is not against anybody. management unveils the purpose to obtain from the shareholders a “blank cheque”, and the careful attitude not to alert the shareholders I repeat – it is not against anybody. for the purposes that the approval of the proposal may imply at the level of deprivation or decrease in the opportunity to divest its shares Therefore, the market, investors and financial analysts, have already in BPI offered by Banco Comercial Português, S.A. recognised the merit of the Offer. All comments match in recognising that it makes sense and creates wealth. Opinion-makers, domestic and 4. In this context, Banco Comercial Português, S.A. is compelled to international, are thus unanimous in respect of capital gains with this vote against both motions, and in the fulfilment of its duty of loyalty operation. We cannot consciously allow that other interest interfere and correctness which has always characterised its performance, with the rational evaluation of what we are proposing. cannot help expressing that it reserves all its rights in full, notably if, though under the formal authorisation of the shareholders, acts are to The merit of the potential integration of the two entities is not of be done by the governing body justifying it, in the use of such today. However, all prior consensus attempts have always resulted authorisation.” inconsequent. In this context, BCP’s Board of Directors deemed to be its duty to submit the issue to Banco BPI’s shareholders, so as to express their opinion thereon at a higher level.

We were not propelled by any hostile intention: it has rather and only to do with the interpretation of our duty to pursue the effort to search for shareholder value creation.

Looking now at the specific proposal under review, it is worth reminding that BCP has always stated that the necessary demobilisation of the shareholding own by Banco BPI would be more appropriately done by the very issuer of the shares after a successful bid, to the interest of all shareholders of both entities.

The initiative taken now by the board of Banco BPI, S.A., represents thus the extension of its hostile conduct, now through the search for a carte blanche, without saying how, when and with whom it will use the authorisation requested to the shareholders.

BPI Group Corporate Governance Report 287 3.2.9. Annual General Meeting – 19 of April of 2007 The Annual General Meeting will be held on 19 April 2007, at 11:00 a.m. at the Fundação de Serralves, in the city of Oporto.

Preparatory information for the Shareholders’ General Meeting of 19 of April 2007 and available information media Communication channels

Made available by BPI Other channels Postal mail

Date available on BPI channels 1 2 CMVM website (www.cmvm.pt) Media E-mail ([email protected]) Internet (www.ir.bpi.pt) Information phone line about the SGM (226 073 333) At BPI’s initiative At shareholder’s request In person

Elements required by law or regulations3 Meeting notice    – 4    14 March 07 Board of Directors’ Proposals Annual report and accounts for the financial year of 20065    – –   – 4 April 07 General appraisal of the company’s management and supervision    – –  – – 4 April 07 Appropriation of net income for 2006    – 4   – 4 April 07      Proposed long-term dividend policy – 4 – 4 April 07      Granting of authorisation to the Board of Directors to acquire and – 4 – 4 April 07 sell own shares upon terms which ensure that such authorisation only produces effect after the closure of the takeover bid for Banco BPI, S.A. shares, the preliminary announcement of which was published on 13 March 2006 by Banco Comercial Português, S.A. Additional elements made available by BPI     Drafts of proxy vote forms – 4 – – 20 March 07     Request for the issue of a registration and mobilisation declaration – 4 – – 20 March 07     Ballot papers for the exercise of postal voting – 4 – – 20 March 07     Drafts forms for the exercise of voting by electronic means – 4 – – 20 March 07 6     Clarification of matters – – – Permanent     Banco BPI’s Statutes and Regulations – – – – Permanent       Results of voting on the proposals – – 19 April 07 1) At Banco BPI’s head office (Investors Relations Division, Rua Tenente Valadim, n.º 284, 3.º andar, Porto). 2) Postal address: Shareholders’ General Meeting – April 2007, Departamento de Títulos – Área de Fundos e Serviços, Rua Tenente Valadim, 284, 4100-476 Porto. 3) Companies Code (article 289) and CMVM Regulation (no. 7 / 2001 – Corporate Governance, with the alterations introduced and re-published by CMVM Regulation no. 11 / 2003, by CMVM Regulation no. 10 / 2005 and by CMVM Regulation no. 3 / 2006). 4) Sent to shareholders entitled to ten or more voting rights. 5) Directors’ Report, individual and consolidated accounts, legal certification of accounts and opinion of the Audit Board. 6) By Investor Relations Division.

288 Banco BPI | Annual Report 2006 Notice of meeting of the Shareholders’ General Meeting – 19 April 2007

SHAREHOLDERS’ GENERAL MEETING NOTICE OF MEETING

At the request of the Board of Directors, notice is hereby given to the Shareholders of Banco BPI, S.A., (the “Bank”) that the Annual General Meeting will be held at Fundação de Serralves Auditorium, Rua D. João de Castro, no. 210, in Porto, at 11.00 a.m. of 19 April 2007, with the following agenda:

᭿ to receive, and if deemed fit, adopt Banco BPI's individual and consolidated annual report and accounts for the financial year ended 31 December 2006;

᭿ to resolve on the proposed appropriation of net income for 2006;

᭿ to generally consider Banco BPI's management and supervision;

᭿ to resolve on a proposal for a long term dividend policy;

᭿ to resolve on the granting of an authorisation to the Board of Directors to acquire and dispose of own shares on such terms as to ensure that such authorisation shall only take effect after the close of the process of the takeover bid for Banco BPI, S.A., which preliminary announcement was released by Banco Comercial Português, S.A., on 13 March 2006.

Shareholders holding at least five hundred (500) shares of the Bank on 12 April 2007 registered in their name shall be entitled to vote. Proof of such registration and corresponding immobilisation must be furnished to the Bank by 6.00 p.m. on 16 April 2007.

Each five hundred (500) shares correspond to one vote.

According to the Bank's Articles and Association, the following votes shall not be counted:

᭿ votes cast by a single Shareholder, in his own name and also as representative of one or more Shareholders, exceeding seventeen and a half percent (17.5%) of all votes corresponding to the share capital;

᭿ votes cast by a single Shareholder, in his own name and also as the representative of one or more Shareholders, as well as votes cast by persons with whom the Shareholder has any of the relationships envisaged in Article 20(1) of the Securities Code, and which, in aggregate, exceed seventeen and a half per cent (17.5%) of all votes corresponding to the share capital.

Where the situation described in sub-paragraph b) above applies, the reduction in the number of votes shall be proportional to the number of votes that each Shareholder would have been entitled to had such reduction not taken place.

Shareholders not holding the minimum number of shares required to exercise their right to vote may join other Shareholders in order to attain this minimum number, in which case they must appoint one member from amongst their number to represent them at the General Meeting.

Shareholders entitled to vote may be represented by another Shareholder or by any other person the law declares is qualified for this purpose; companies shall be represented by whomsoever they appoint for this purpose.

All proxies envisaged in the preceding paragraphs must be notified to the Chairman of the General Meeting in writing: signatures must be legally authenticated, or certified by the Bank where the Shareholder is a customer of the Bank or of Banco Português de Investimento, S.A., and must be received at the Bank's head office by 6.00 p.m. on 12 April 2007.

Postal voting is also permitted. To that effect, 15 days prior to the Meeting date, ballot papers addressed to the Chairman of the General Meeting will be available at the Bank’s head office and at www.ir.bpi.pt: for Shareholders to cast their votes. Each ballot paper must be signed and the respective signature be duly legally certified or certified by the Bank whenever the Shareholder is a customer of the Bank or of Banco Português de Investimento, S.A. Ballot papers must be lodged with the Bank’s head office, at Rua Tenente Valadim, no. 284, 4100-476 Porto, or be registered at the following Internet website www.ir.bpi.pt by 6.00 p.m. on 16 April 2007. Votes cast by post shall be deemed to be negative votes in respect of proposed resolutions submitted after the date on which such votes were cast.

BPI Group Corporate Governance Report 289 Postal votes count towards the quorum for the General Meeting, and the Chairman of the General Meeting shall verify the authenticity and proper state thereof. Postal votes in paper form shall be opened by the Chairman of the General Meeting who shall keep them in his possession, thereby ensuring confidentiality until the time of voting. Votes cast by electronic mail are certainly known to Bank's employees, who are bound to comply with the duty of confidentiality.

Pursuant to Article 12(7) of the Bank's Articles of Association, a postal vote cast by a Shareholder or by his representative who is present at the General Meeting shall be deemed to be revoked.

In the 15 days prior to the Meeting date, the information and elements envisaged in Article 289 of the Portuguese Companies Act shall be available at the Bank's head Office and at www.ir.bpi.pt.

This information (including ballot papers) can also be requested in writing addressed to the postal address “Shareholders' General Meeting – 19 April 2007, 11h00, Rua Tenente Valadim, 284, 4100-476 Porto” or to e-mail address “[email protected]”.

Porto, 14 March 2007

The Chairman of the General Meeting

(João Augusto Esmeriz Vieira de Castro)

290 Banco BPI | Annual Report 2006 3.3. BOARD OF DIRECTORS The Board of Directors is the governing body that has been The Board of Directors is composed of a minimum number of vested with the widest powers to manage and represent the eleven and a maximum number of twenty three members, Company, without prejudice to the specific powers which the law elected by the General Meeting. They shall appoint a Chairman has conferred on the Audit Committee. It is responsible for from amongst their number and if they deem it appropriate, one formulating the BPI Group’s major strategic policies. or more Deputy-Chairmen.

3.3.1. Composition Where a legal person is elected, it shall nominate a natural Banco BPI’s Board of Directors is presently composed of 21 person to exercise the office in his own name, and it shall members, seven of whom make up the Executive Committee. replace such person in the case of definitive impediment, renouncement or removal by the legal person which nominated such person.

Structure of Banco BPI’s Board of Directors At 31 December 2006 Board of Directors Audit Remune- Nationality Committee ration Executive Non-executive directors Date of the End of the Committee3 Committee first appoint- current term Non-independent Independent ment1 of office2 Chairman Artur Santos Silva  06 Oct. 81 AGM in 2008 Chairman Portuguese Deputy-Chairman Carlos da Câmara Pestana  25 Mar. 93 AGM in 2008 Chairman4 Portuguese

Fernando Ulrich Chairman 22 Mar. 85 AGM in 2008 Portuguese

Ruy Octávio Matos de Carvalho  22 Mar. 85 AGM in 2008 Deputy-Chairman Portuguese Members Alfredo Rezende de Almeida  06 Oct. 81 AGM in 2008  Portuguese

António Domingues Deputy-Chairman 27 Mar. 96 AGM in 2008 Portuguese António Farinha Morais  11 Dec. 02 AGM in 2008 Portuguese Armando Leite de Pinho  26 Mar. 87 AGM in 2008 5 Portuguese Carlos Moreira da Silva6  20 Apr. 06 AGM in 2008 Portuguese Edgar Alves Ferreira7  20 Oct. 05 AGM in 2008 8 Portuguese Herbert Walter9  21 Apr. 04 AGM in 2008 Germanic Isidro Fainé Casas  27 Mar. 96 AGM in 2008 Spanish Jorge de Figueiredo Dias10  27 Mar. 96 AGM in 2008  Portuguese José Pena do Amaral  21 Apr. 99 AGM in 2008 Portuguese Klaus Dührkop 11 21 Apr. 99 AGM in 2008 Germanic Manuel Ferreira da Silva  26 Apr. 01 AGM in 2008 Portuguese Marcelino Armenter Vidal12  03 Feb. 05 AGM in 2008  Spanish Maria Celeste Hagatong  27 Sep. 00 AGM in 2008 Portuguese Pedro Barreto  03 Mar. 04 AGM in 2008 Portuguese Roberto Egydio Setúbal  24 Mar. 94 AGM in 2008 Brazilian Tomaz Jervell  26 Mar. 87 AGM in 2008 Portuguese 1) Appointment – direct or in representation of, in office or as alternate – as Member of the Board of Directors, Member of the General Board or Member of the Management Board, of the institution which headed the BPI Group. 2) General Meeting to be held in 2008, at which the 2007 accounts are to be approved. 3) The Remuneration Committee is composed of the shareholders IPI – Itaúsa Portugal Investimentos, SGPS, S.A., Arsopi – Holding, SGPS, S.A., and HVF, SGPS, S.A. (approved at the Shareholders General Meeting held on 20 April 2006 the election to fill the vacancy resulting from the fact that Violas, SGPS, SA. had ceased to be a shareholder of the company.). 4) Representing IPI – Itaúsa Portugal Investimentos, SGPS, S.A. 5) Representing Arsopi – Holding, SGPS, S.A. 6) Elected at the General Meeting of 20 April 2006 (election subject to the suspensive condition of the entry into force of the alterations to the statutes, which occurred on 30 June 2006). 7) Co-opted by the Board of Directors on 20 October 2005 to fill the vacancy left open by the renouncement of Manuel Oliveira Violas, this co-optation was ratified at the General Meeting of 20 April 2006. 8) Representing HVF, SGPS, S.A. 9) Representing RAS International III, B.V. 10) On 21 April 1999, was appointed Chairman of the Audit Board, office which he occupied until 30 June 2006. On 20 April 2006, was appointed by election Member of the Board of Directors, which appointment was subject to the suspensive condition of the entry into force of the alteration to the Statutes deliberated on that date; these alterations came into force on 30 June 2006. 11) Classified as non-independent in the opinion of the Board of Directors by virtue of having been indicated by the shareholder Allianz, whose shareholding (although below the 10% threshold considered to be relevant by the CMVM) is nevertheless significant: 8.8%. 12) Representing Caixa Holding, S.A, Sociedad Unipersonal.

BPI Group Corporate Governance Report 291 3.3.2. Functions

PRINCIPAL FUNCTIONS OF THE BOARD OF DIRECTORS

᭿ Appointing the Executive Committee from amongst their ᭿ to acquire, dispose of or encumber any assets or rights;

members. ᭿ to deliberate, in the terms of paragraph two of Article ᭿ Defining the BPI Group’s general policies: for this purpose, three of the Articles of Association, on the company’s the BPI Group shall mean the group of credit institutions participation in the equity capital of other companies and and financial companies controlled directly or indirectly by in partnership association (joint venture) contracts, in Banco BPI, S.A., including the entities with management complementary corporate groupings and in European contract to be assumed by BPI. economic-interest groupings;

᭿ Approving the strategic plan and operating plans and ᭿ to appoint authorised signatories to perform certain acts budgets, both annual and pluri-annual, and the alterations or categories of acts, defining the extension of the thereto, and to periodically monitor their execution. respective mandates.

᭿ Preparing the documents forming part of the annual report and accounts and the proposed appropriation of net Are also responsibilities of the Board of Directors the income, to be presented at the General Meeting. following:

᭿ Taking the initiative to propose any amendments to the statutes and capital increases, as well as bond issues which ᭿ to delegate to an Executive Committee, composed of do not fall within its powers, presenting the corresponding three to nine members, the day-to-day management of proposals to the General Meeting. the Company, subject to the limits to be fixed in the resolution approving such delegation; ᭿ Approving the code of conduct of the companies controlled fully by the BPI Group. ᭿ to co-opt directors to fill any vacancies that may occur; ᭿ to appoint a Company Secretary and an alternate Furthermore, the Board of Directors is responsible for Secretary; practising all the other acts which are necessary or ᭿ to draw up a set of internal rules of procedure and appropriate for the pursuance of the business activities approve the functioning regulations for the Executive falling within its objects clause and, in particular: Committee to be appointed, as well as for the Audit Committee, the Nomination, Evaluation and ᭿ to represent the company in and out of court, as plaintiff Remuneration Committee and the Corporate Governance and defendant, to institute and contest any legal or Committee; these last two committees must prepare arbitration proceedings, to confess, withdraw or reach a reports (at least annually) for the Board of Directors’ compromise in any legal actions or abide by arbitrators’ review and approval. award;

3.3.3. Chairman of the Board of Directors The Chairman of Banco BPI’s Board of Directors is Artur Santos are approved. This introduction of this age limit into the Bank’s Silva. statutes resulted from a proposal made to the Board of Directors by Artur Santos Silva himself in 1998. Artur Santos Silva was simultaneously Chairman of the Board of Directors and Chairman of the Executive Committee up until the The Chairman of the Board of Directors is responsible for Shareholders’ General Meeting of 20 April 2004. On that date, coordinating the Board’s activity, chairing the respective he ceased executive functions in terms of article 26(3) of the meetings and overseeing the execution of its resolutions. It is Bank’s Statutes, which stipulate that directors who are members also the Chairman’s duty to act as the institution’s front-line of the Executive Committee cease functions on this Committee representative before the public and other authorities. once the accounts for the year in which they reach the age of 62

292 Banco BPI | Annual Report 2006 Artur Santos Silva (Chairman) Birth date 22 May 1941 Academic qualifications 1985: Stanford Executive Program, Stanford University 1963: Law graduate, Coimbra University Management and oversight Chairman of the Board of Directors of Banco BPI positions held at BPI Group Chairman of the Board of Directors of Banco Português de Investimento Chairman of the Board of Directors of Inter-Risco – Sociedade de Capital de Risco, S.A. Director of Banco BPI Cayman, Ltd. Professional experience 1977-78: Deputy-Governor of the Bank of Portugal 1975-76: Secretary of State of the Treasury 1968-75: Manager at Banco Português do Atlântico 1963-67: Assistant lecturer at the Coimbra University Law Faculty in the chairs Public Finance and Political Economics

3.3.4. Independence classification of members of the Board of Directors In terms of the criteria laid down in CMVM Regulation 11 / ᭿ the Directors Isidro Fainé Casas and Marcelino Armenter Vidal 20031 six non-executive Directors of Banco BPI are classified as are, respectively, Managing Director of Caixa de Ahorros y “non independents”. Pensiones de Barcelona “La Caixa” and Managing Director of Caixa Holding, S.A.; All of them are members of Banco BPI’s Board of Directors and represent, by indication or in the interest of, shareholders ᭿ the Director Herbert Walter is Chairman of the Executive owning significant holdings in the Bank’s share capital. Committee of Dresdner Bank AG and non-executive Director of Banco Popular Español S.A. Two situations – those of Itaú, whose shareholding at 31 December 2006 was 17.5%, and of La Caixa, with a In summary, taking into account the two criteria outlined above, the shareholding of 25% on the same date – fall under the following directors are classified as non independent, indicating provisions of CMVM regulation 11 / 2003, paragraph 2(b) on the respective association with the Bank’s shareholders: grounds that these constitute qualified holdings in excess of 10% of Banco BPI’s share capital; ᭿ Roberto Setúbal (Itáu) ᭿ Carlos Câmara Pestana (Itáu) In the case of Allianz, although its shareholding of 8.8% in ᭿ Isidro Fainé Casas (La Caixa) BPI’s capital is below the 10% limit referred to, BPI’s Board of ᭿ Marcelino Armenter Vidal (La Caixa) Directors considers that the relative importance of the holding ᭿ Herbert Walter (Allianz) justifies the classification of the Directors associated with this ᭿ Klaus Dürhkop (Allianz) shareholder as non independent. It should also be noted that: On the other hand, the following exercise management functions at companies which can be considered to be BPI competitors ᭿ the non-executive Director Armando Leite de Pinho, as well as (criteria laid down in paragraph 2c) of CMVM Regulation CMVM persons and entities related to him, hold 2.9% of BPI’s capital; 11 / 2003): ᭿ the non-executive Director Edgar Alves Ferreira is a director of ᭿ the Directors Carlos da Câmara Pestana and Roberto Egydio the company HVF – SGPS, S.A., which has a shareholding of Setúbal are directors of banks belonging to the Itaú Group, 2.9% in BPI; while the latter is Managing Chairman and Managing Director of Banco Itaú, S.A.; ᭿ the non-executive Director Tomaz Jervell is Chairman of the Management Board of Auto Sueco, Lda., a company which controls 1.6% of BPI’s share capital.

1) With the alterations introduced by CMVM Regulations no. 10 / 2005 and no. 3 / 2006.

BPI Group Corporate Governance Report 293 3.3.5. Meetings of the Board of Directors 3.3.7. Functioning of the meetings The Board of Directors shall meet at least every quarter and As the meetings of the Board of Directors shall be presided over always when convened by its Chairman, by two Directors or by by its Chairman and in his absence or impediments by one of the Audit Committee. the Vice-Chairmen, in the order in which the Board was appointed. In their absence, the Board of Directors must choose The meetings shall be held each year on the dates set, at the who must perform the respective functions at such meeting. very latest, at the last meeting of the previous year. Such dates shall be notified immediately in writing to the members who did It is the function of the Chairman of the Board of Directors to not attend the meeting at which they were set. direct the meeting and to formulate in the appropriate manner the proposals to be submitted for the Board’s decision. The meetings shall be convened in writing, with telefaxed messages being acceptable for this purpose, with a minimum Whenever he deems it appropriate, the Chairman or whoever notice period of 10 days, while the notice of the meeting must substitutes him / her can delegate to one of the members the contain the order of business. task of preparing a report on any of the matters submitted for the Board’s consideration. Each one of the directors must notify the Company Secretary up to five days before the appointed date if he / she will be present. The meetings of the Board of Directors shall be held in Portuguese, without prejudice to the organisation of a 3.3.6. Meetings order of business simultaneous translation. The Chairman shall draw up the order of business for each meeting of the Board of Directors which shall be sent to its 3.3.8. Participation at meetings members, together with the respective notice of meeting in the The Directors and senior employees of the Banks or other case of meetings not set in the previous year; in the case of companies of the BPI Group and / or their consultants may be meetings to be held on a date which was set in the previous summoned to attend meetings of the Board of Directors whenever year, the order of business shall be sent at least seven days this is beneficial to the good progress of proceedings. beforehand. The meetings of the Board of Directors shall also be attended by The documents relating to the meetings, except those relating to the Company Secretary or his alternate, whose function it is to financial information, shall be sent up to seven days prior assist the Chairman in formulating the resolutions, organising the thereto in their original version in Portuguese, accompanied by matters to be dealt with at the meetings, in particular, ensuring the respective summaries in the English language. that the pertinent documents are sent to all the members of the Board of Directors, and to draw up the respective minutes. The approval of the minutes of the previous meeting must mandatorily form part of the order of business of each meeting, 3.3.9. Resolutions as well as the review of the information concerning the BPI The Board of Directors shall be deemed to be validly constituted Group’s situation and of the performance of its business. and in conditions to deliberate provided that the majority of its members are present or represented, but none of them can The order of business for the last meeting of each year must represent at each meeting more than one member. The proxy mandatorily include approval of the Annual Operating Plan and shall take the form of a letter addressed to the Chairman and Budget of the BPI Group and the banks controlled by it, as well cannot be used more than once. as the calendar of the meetings for the same period if such has not yet been set. The resolutions of the Board of Directors shall be passed by an absolute majority of the votes cast by the members present or The following must mandatorily form part of the order of represented, with the Chairman having the casting vote in the business of the preparatory meeting of the General Meeting: event of a tie. a) a resolution on the report and accounts relating to the In exceptional circumstances or for reasons of acknowledged previous financial year; urgency, the Chairman of the Board of Directors may resort to resolutions being passed through the circulation of documents b) the drafting of a proposal for the appropriation of net profit to amongst all the Board members, provided that all these give be tabled at the General Meeting. their prior agreement to this form of resolution.

The circulation of documents shall be done by mail, fax or electronic mail, while the response of each member must be given via one of these channels in a reasonable period set by the Chairman in each case, in accordance with the urgency and complexity of the matter for consideration.

294 Banco BPI | Annual Report 2006 3.3.10. Minutes With respect to each meeting of the Board of Directors, the A director may be dismissed by a resolution of the Shareholders Company Secretary or the respective Alternate, shall draw up a General Meeting passed by a simple majority. draft minute which shall contain the proposals presented, the resolutions passed in relation thereto and the votes cast by any Portuguese law does not provide for structures of the “classified” or member during the meeting. The draft minutes shall be written “staggered boards” type, or any other election rules which have as in Portuguese, with an English translation. their prime object making the replacement of the members of the Board of Directors1 a more difficult task. Similarly, the “Cumulative The minutes shall be written up in conformity with applicable Voting”2 system or something similar is not permitted. legal requirements and recorded in a proper minute book. 3.3.13. Induction of new Directors Whenever it becomes necessary to ensure the immediate It is also important to point out that when new directors are production of all its effects, the resolutions of the Board shall be admitted, they are given a summary of the principal legal, reduced immediately to writing. regulatory and administrative procedures required of them within the scope of their new functions. 3.3.11. Information provided to the non-executive members With the object of keeping the non-executive directors 3.3.14. Liability and adherence to the codes of conduct permanently abreast of the Group's affairs, they are sent monthly Portuguese law3 provides that the directors are jointly liable to information concerning the Group's consolidated economic and the company and to the company's creditors4 for culpable non- financial situation, as well as the performance of the principal compliance with legal requirements and statutory duties. business units, including the situation regarding Banco BPI's pension fund. This information gives an account of the most All the members of the Board of Directors are bound by a strict important changes that took place and compares, whenever duty of confidentiality concerning matters discussed at Board of possible, monthly and accumulated trends with budgeted and Directors' meetings. previous-year figures. In parallel, the non-executive directors are regularly informed of the main decisions taken by the Executive The members of the Board of Directors are similarly bound by Committee by way of a document prepared by the Company rigorous duties of information and action with the object of Secretary, who attends and prepares the minutes of all the ensuring that, in the performance of their functions, they are not meetings of the Executive Committee. put in a situation which could indicate the existence or possible existence of conflicts of interests. 3.3.12. Rules relative to election and dismissal Members of the Board of Directors are elected in their personal CONFLICTS OF INTEREST capacity for terms of three years at the Shareholders General (Article 11 of the Board of Directors Regulations)

Meeting, while re-election is always possible. ᭿ Members of the Board of Directors must disclose any interest, direct or indirect, which they, any member of their families or As referred to in chapter 3 (section 3.1), the members of the entities with which they have professional ties, may have in a Board of Directors are subject to the scrutiny of and registration company in respect of which the possibility is being with the Bank of Portugal. If the central bank is of the opinion considered of acquiring a participating interest, or in respect that the candidate member does not meet the integrity, of which the BPI Group’s Banks or companies are considering professional experience and availability requirements that ensure granting a loan or provide any service. “a sound and prudent management taking into consideration in ᭿ In the circumstances referred in the preceding paragraph, particular the security of the funds entrusted”, the Bank of they must declare the nature and extent of any such interest Portugal may turn down his / her registration. and, in the case where this is substantial, they must refrain from taking part in the discussion and / or vote of any It is a practice instituted at BPI that when a Director for proposal that the said operation refers to. whatever reason becomes incapacitated to carry out his functions, or the circumstances that led to the appointment have changed substantially, that director must resign from his office. In the appendix to this report (pages 362 to 368), information is When this occurs, the Board of Directors has to appoint another provided concerning the academic background, professional person to replace him / her by co-optation, such co-optation to experience and a list of the positions held by the members of be ratified at the first Meeting thereafter. Banco BPI’s Board of Directors at the BPI Group or other companies.

1) The law only provides (article 391(2) of the Companies Code) that “the company’s statutes may stipulate that the election of directors must be approved by votes corresponding to a specified percentage of the capital or that the election of some of them, which cannot be more than a third of the total, must also be approved by a majority of the votes attaching to certain shares, but does not permit the attribution to certain categories of shares the right to appoint directors”. 2) Election system which basically allows “subdividing” the voting rights, enabling a Shareholder to concentrate his votes on the election of a specific director. It is therefore a system which facilitates the election of a director representing minority shareholders who may not be aligned with the dominant shareholders. 3) Companies Code – Chapter VII: “Civil responsibility for the constitution, management and supervision of the company”. 4) When the company’s net assets are inadequate to meet the aforementioned debts.

BPI Group Corporate Governance Report 295 3.3.15. Exercise of the Board’s functions in 2006 and until 12 of March of 2007 The Board of Directors met ten times in 2006, and three times During the 2006 financial year and at the three meetings of between 1 of January of 2007 and 12 of March of 2007 having 2007, Banco BPI’s Board of Directors deliberated on and recorded an average attendance rate of 81% excluding approved amongst others the following issues: presences by representation mandate.

Main deliberations of the Board of Directors Dates Deliberations / Matters Approval of the operating plans and budgets 2006: 13 Dec. Review of the estimated results for 2006, analysis and approval of the 2007 Plan and Budget. Annual accounts and report and the proposed appropriation of net income 2006: 26 Jan. and 9 Mar. Analysis and approval of the 2005 consolidated accounts, as well as deliberation on their public disclosure. 2006: 26 Jan. Review and approval of the motion to be tabled at the Shareholders General Meeting of 20 April 2006 that a dividend of 12 cents per share in respect of the 2005 financial year be distributed. 2006: 9 Mar. Approval of the draft Annual Report relating to 2005, to be presented at the Shareholders General Meeting of 20 April 2006. 2006: 26 Apr. Review of the consolidated accounts at 31 March 2006, as well as deliberation on their public disclosure. 2006: 27 Jul. Review of the consolidated accounts at 30 June 2006, as well as deliberation on their public disclosure. 2006: 20 Oct. Review of the consolidated accounts at 30 September 2006, as well as deliberation on their public disclosure. 2007: 25 Jan. Review and approval of the 2006 consolidated accounts, as well as deliberation on their public disclosure. 2007: 25 Jan. Review and approval of the motion to be tabled at the Shareholders General Meeting of 19 April 2007 that a dividend of 16 cents per share in respect of the 2006 financial year be distributed. 2007: 12 Mar. Review and approval of the motion to be tabled at the Shareholders General Meeting of 19 April 2007 that a dividend of 16 cents per share in respect of the 2006 financial year be distributed. 2007: 12 Mar. Approval of the draft Annual Report relating to 2006, to be presented at the Shareholders General Meeting of 19 April 2007. 2007: 12 Mar. Delegation to the Company’s Corporate Governance Committee of the review of the draft “BPI Group’s Corporate Governance Report”. Initiatives for the presentation of proposals to the Shareholders’ General Meeting 2006: 3 Mar. Approval of the proposed Meeting Notices of the Shareholders’ General Meeting to be held on 20 April 2006, as well as of the proposals to be presented by the Board of Directors at those Meetings, namely the proposal of the amendment to the Statutes. 2006: 19 Apr. Preparation for the Shareholders’ General Meeting of 20 April 2006. 2006: 13 Dec. Approval of the request to the Chairman of the General Meeting Committee to convene an extraordinary meeting for the purpose of electing the Deputy-Chairman of the General Meeting Committee. 2007: 12 Mar. Approval of the draft Notice of the Shareholders’ General Meeting to be held on 19 April 2007. 2007: 12 Mar. Approval of the methodology for the formulation of the proposed long-term dividend policy. Analysis of the principal shareholdings and strategic partnerships 2006: 26 Jan., 9 Mar., 26 Apr., Review of the performance of the Bank’s portfolio of financial investments and, in particular, the shareholdings in Millennium 27 Jul., 20 Oct., 13 Dec. BCP and in Viacer. 2007: 25 Jan. Keeping track of the evolution of pension obligations and the assets of the Group’s staff pension funds 2006: 26 Jan., 9 Mar., 26 Apr., Review of retirement and survivors’ pension obligations and the respective cover by the pension fund, as well as the return 27 Jul., 20 Oct., 13 Dec. achieved by the fund. 2007: 25 Jan. and 12 Mar. Monitoring the Bank’s exposure to large-scale risks 2006: 9 Mar. and 27 Jul. Analysis of individual exposures to credit risks in excess of 15% of BPI’s consolidated shareholders’ equity. 2006: 9 Mar. and 27 Jul. Review of the “companies under observation”, that is, corporate Customers which, in view of their performance, are the object of permanent observation by the Bank. 2006: 27 Jul. and 18 Sep. Approval of the alteration to the internal limit set for the maximum credit-risk exposure to any one entity. 2006: 13 Dec. Recognition of a new rating methodology for companies implemented by BPI. 2006: 13 Dec. Review of the credit-risk situation relating to individuals and small businesses. 2007: 12 Mar. Review of the credit-risk exposures of more than 300 million euro.

296 Banco BPI | Annual Report 2006 Main deliberations of the Board of Directors (continued) Dates Deliberations / Matters Issuing bonds 2006: 26 Apr. Approval of the renewal / revision of the “Euro Medium Term Note Programme” (EMTN Programme) and increasing the respective overall amount from 7 to 10 thousand million euro. 2007: 25 Jan. Approval of the renewal / revision of the “Euro Medium Term Note Programme” (EMTN Programme). BCP’s takeover bid for BPI 2006: 15 Mar. Board of Directors’ meeting held by teleconference for the first analysis of the facts relating to the takeover bid preliminarily announced by BCP on the same date and approval of the announcement for public release of BPI’s position. 2006: 6-10 April Review of the draft announcement of the launch and of the draft prospectus of the general and voluntary general public offer for the acquisition of Banco BPI shares by Banco Comercial Português, S.A., as well as the review and approval of the report in which Banco BPI, S.A., makes a pronouncement on the acceptability and conditions of the bid. 2006: 26 Apr., 27 Jul., 20 Oct. and Monitoring the takeover bid process. 13 Dec.; 2007: 19 Jan. and 25 Jan. 2006: 18 Sep. Consideration of the appropriateness of requesting the convening of an extraordinary Shareholders’ General Meeting for the purpose of procuring authorisation for the Board of Directors to sell the participating interest in Banco Comercial Português’s capital. 2006: 13 Dec. Approval of the request to the Chairman of the General Meeting Committee to convene an extraordinary Shareholders’ General Meeting for the purpose of procuring authorisation for the Board of Directors to sell the participating interest in Banco Comercial Português’s capital and to be able to implement the expansion programme for the Bank’s branch network. 2007: 19 Jan. Approval of the alteration to the motion submitted to the Shareholders’ General Meeting at its meeting of 19 January 2007. 2007: 19 Jan. Review of the resolutions passed by the Shareholders’ General Meeting at its meeting of 19 January 2007. 2007: 12 Mar. Study of the Competition Authority’s preliminary decision and approval of BPI’s response. 2007: 12 Mar. Analysis of the CMVM’s deliberations concerning the submissions made BPI and BCP and approval of the subsequent steps. 2007: 12 Mar. Scrutiny of the agreement between BCP and the Santander Group for the sale by the latter of an interest in BPI’s share capital and the approval of the notification to BCP concerning BPI’s understanding as regards the nature of that deal. Internal functioning rules 2006: 26 Jan. Analysis of Banco de Fomento Angola’s net assets situation and its operations. 2006: 26 Jan., 26 Apr. and 27 Jul. Information of the Chairman of the Board of Directors and Chairman of the Audit and Internal Audit Committee / Audit 2007: 25 Jan. Committee regarding this body’s activity. 2006: 9 Mar. Approval of the BPI Group’s Code of Conduct. 2006: 27 Jul. Approval of the alterations to the Board of Directors’ and Audit Committee’s Regulations. Approval of the adoption of the Regulations for the Nominations, Evaluation and Remuneration Committee and for the Corporate Governance Committee. 2006: 27 Jul. Recognition of the alterations to the legal and regulatory framework specifying the duty to communicate share transactions (and related financial instruments) applicable to the members of the Board of Directors. 2006: 13 Dec. Appointment of the members of the Board of Directors who will fill the vacancies on the Nominations, Evaluation and Remuneration Committee and on the Corporate Governance Committee. 2006: 13 Dec. Approval of the timetable for meetings of the Shareholders’ General Meeting, the Board of Directors and the Audit Commission in 2007. 2007: 25 Jan. Analysis of the report of the Nominations, Evaluation and Remuneration Committee submitted to the Remuneration Committee. 2007: 12 Mar. Approval of the alterations to the Regulations of the Audit Committee, the Nominations, Evaluation and Remuneration Committee and the Corporate Governance Committee. 2007: 12 Mar. Approval of the alteration to the dates for the Board of Directors meetings in 2007. Other company’s general interests 2006: 26 Jan., 9 Mar., 27 Jul., 20 Analysis of the behaviour of Banco BPI shares on the stock exchange. Oct. and 13 Dec.; 2007: 25 Jan. 2006: 26 Jan. Participation in the financing of wind farms. 2006: 26 Jan. Assessment of the activity carried out by BPI as an Iberian broker. 2006: 26 Jan. and 9 Mar. Consideration of the consequences of the transposition into Portuguese law of the takeover bid Directive. 2006: 9 Mar. Discussion about the adoption of the alterations to the Bank’s Corporate Governance. 2006: 9 Mar. Review of the consolidated accounts at 31 January 2006. 2006: 26 Apr. Analysis of the business performance during the first quarter of 2006. 2006: 27 Jul. Keeping abreast of the programme for the commemoration of BPI’s 25th anniversary. 2006: 20 Oct. Approval of the programme for the opening of Banco BPI and Banco de Fomento Angola branches in 2007. 2006: 13 Dec. Approval of the principle that the variable remuneration to be paid in 2007 for the performance of the members of the Executive Committee and other Employees in 2006 be made in cash only. 2007: 12 Mar. Review of the consolidated accounts at 31 January 2007. 2007: 12 Mar. Analysis of the behaviour of Banco BPI shares on the stock exchange.

BPI Group Corporate Governance Report 297 3.4. EXECUTIVE COMMITTEE OF THE BOARD OF DIRECTORS 3.4.1. Composition The Executive Committee has the widest management powers to The Executive Committee of Banco BPI’s Board of Directors is conduct the Group’s day-to-day activity, the exercise of which is presently composed of seven professional executive Directors the object of permanent monitoring by the Board of Directors. who are independent of any shareholders or specific groups. Those powers are delegated by the Board of Directors and are specifically set out at any moment in the regulations governing COMPOSITION OF THE EXECUTIVE COMMITTEE the body’s functioning. Hence, the Executive Committee is Chairman Fernando Ulrich barred from performing all the management acts that are not Deputy-Chairman António Domingues contemplated in the list of responsibilities forming part of the Members José Pena do Amaral respective regulation. Maria Celeste Hagatong Manuel Ferreira da Silva António Farinha Morais Pedro Barreto

Experience and professional qualifications of the members of Banco BPI’s Board of Directors Executive Committee

Executive Committee Deputy-Chairman

António Farinha Morais Maria Celeste Hagatong António Domingues

Principal areas of responsibility Real Estate Financing, Personal Corporate Banking network, Financial, Information Systems, at the BPI Group Loans, Cards, Motor Car Finance, Institutional Banking and State International, Banco de Fomento Insurance, Payment systems, Business Sector, Project Finance, Angola. Loans, Leasing and Factoring, Credit risk, Corporate Marketing, Operations, Securities, Office for Angola, Madrid Branch Procurement, Premises and and Building Finance. Fixed Assets, Training.

298 Banco BPI | Annual Report 2006 3.4.2. Chairman of the Board of Directors’ Executive Committee All the members of the Executive Committee play an active role The Chairman of the Board of Directors’ Executive Committee is in the day-to-day management of the Group’s business, and are Fernando Ulrich. He was appointed unanimously by the Board of responsible for one or more specific business areas in Directors on 3 December 2003, such appointment taking effect accordance with their profile and their individual specialist from the General Meeting held on 20 April 2004. areas. Without prejudice to the greater or lesser focus of one or other member in a particular area, the decision-making process The responsibilities of the Chairman of the Board of Directors’ in matters relating to the Group’s strategic direction is Executive Committee and those of the Board of Directors’ undertaken on a collective basis. Chairman are clearly demarcated through the existence of two autonomous regulations which encapsulate the responsibilities of If not a member of the Executive Committee of the Board of each one. Directors, the Chairman of the Board of Directors will be informed beforehand of the meetings and the matters to be dealt with thereat.

In total, the members of the Executive Committee owned 0.8% of the company’s capital at 31 December 2006.

Chairman

Fernando Ulrich José Pena do Amaral Manuel Ferreira da Silva Pedro Barreto

Planning and Accounting, Asset Strategic Marketing, Operational Investment Banking, Private Individuals and Small Businesses, Management, Human Resources, Marketing, Remote Channels, equity, Investor Relations, Risk Loans to Individuals and Small Legal Matters, Audit. Communication, Brand, Quality, Analysis and Control Division, Businesses, Emigration and Protocols. Financial and Economic Studies. External Promoters.

BPI Group Corporate Governance Report 299 3.4.3. Functions

PRINCIPAL FUNCTIONS OF THE EXECUTIVE COMMITTEE

Pursuant to the resolution of the Board of Directors, the ᭿ to exercise disciplinary power and impose sanctions;

current management of the Company shall be vested in the ᭿ to set up or close branches or agencies; respective Executive Committee of the Board of Directors, ᭿ to appoint a person to represent the Bank at general encompassing all management powers necessary or meetings of associated companies, establishing how convenient to conduct banking business under the terms votes shall be cast; and to the extent permitted by law, and namely, such powers to decide and represent the Company in the ᭿ to appoint persons to perform any duty assigned to the following: bank, as well as persons whom the Bank may elect to perform any duty, except for members of the Board of Directors of the banks controlled by the Company; ᭿ credit granting; ᭿ to issue instructions binding the companies forming part ᭿ provision of remunerated personal guarantees; of the group fully controlled by the Company; ᭿ provision of real guarantees for securities, deemed necessary or convenient to pursue all activities comprised ᭿ to represent the Bank in court or elsewhere, actively or in the Company’s object; passively, including to bring and prosecute any suits, confess, admit or waive any proceeding and abide by the ᭿ to carry out exchange transactions; arbitrator’s award; ᭿ to carry out transactions on liabilities; ᭿ to appoint proxies, with or without power of attorney, to ᭿ issue of treasury bonds and financial instruments of a do specific acts or classes of acts, defining the range of similar nature; their terms of office. ᭿ to subscribe, acquire, dispose of or encumber shareholdings in any companies, other than With regard to lending or financing operations and to the shareholdings in banks and insurance companies; remunerated provision of personal guarantees, these cannot ᭿ to acquire, dispose of or encumber any other securities; result in the involvement in relation to a single entity (or if

᭿ to acquire, dispose of and encumber movables and it forms part of a group, in relation to the group) of more immovables; than EUR 300 million.

᭿ to acquire services;

᭿ entries, definition of levels, categories, remuneration conditions and other employee benefits, as well as promotion to executive positions;

3.4.4. Executive Committee meetings 3.4.5. Functioning rules The Executive Committee meets at least once a month for the The Executive Committee can only adopt resolutions when the purpose of dealing with matters of general interest relating to majority of its members are present, with such decisions Banco BPI and its subsidiaries. Normally meets on a weekly requiring an absolute majority of the votes. Proxy voting is not basis. permitted. The Chairman has the casting vote.

During 2006 the Executive Committee met on 48 occasions.

300 Banco BPI | Annual Report 2006 The Chairman of the Executive Committee is responsible for 3.4.6.2. Executive Committee for Market Risks coordinating its activities, chair the Committee's meetings and The Executive Committee for Market Risks is the body charged overseeing the execution of its deliberations. with analysing the conformity of the positions and mechanisms associated with the evaluation of interest, currency and equities In the Chairman’s absence or impediment, the functions referred risks. Besides members of the Executive Committee, this body to in the preceding paragraph will be undertaken by the comprises the heads of the relevant Divisions. Deputy-Chairman, or in his absence, by the longest-serving member and, in the case of equal service periods, by the eldest. Composition of the Executive Committee for Market Risks Executive Committee of Banco BPI When he does not chair the Executive Committee of the Board of Fernando Ulrich Chairman Directors the Chairman of the Board of Directors shall always António Domingues Deputy-Chairman have the right to participate at the first-mentioned’s meetings, José Pena do Amaral but without the right to vote. Maria Celeste Hagatong Manuel Ferreira da Silva The directors who are members of the Executive Committee António Farinha Morais relinquish their positions on the Committee once the accounts Pedro Barreto relating to the financial year in which they celebrate their Rui Martins dos Santos Director of Banco Português de Investimento, responsible for the Risk Analysis and Control sixty-second birthday are approved. Division and Financial and Economic Studies Division 3.4.6. Specialised Executive Committees Isabel Castelo Branco Central Manager responsible for the Financial Divisions of Banco BPI and Banco Português de Bearing in mind the importance that credit and market risks Investimento assume in banking activity, two specialised committees were Henrique Cabral Menezes Central Manager responsible for the Equity created – the Executive Committee for Credit Risk and the Department of Banco Português de Investimento Executive Committee for Market Risk, which comprise, besides José Manuel Toscano Central Manager responsible for the International Division of Banco BPI the members of the Executive Committee, the members of the Group’s senior management responsible for the respective areas The policy, procedures and allocation of powers amongst the 3.4.6.1. Executive Committee for Credit Risks Group’s various bodies and departments on matters relating to The Executive Committee for Credit Risks is the body which the control and management of the Group’s risks – credit risk, monitors and decides on the concession and recovery of loans, market risk, liquidity risk and operational risk – are described in analysing mandatorily all the exposures to any one entity detail in chapter 4 of the present Corporate Governance Report involving more than a defined limit. Besides members of the and in a separate chapter of the Directors’ Report, which must Executive Committee, also participating are the principal staff be read together. members of Corporate Banking.

Composition of the Executive Committee for Credit Risks Executive Committee of Banco BPI Fernando Ulrich Chairman António Domingues Deputy-Chairman José Pena do Amaral Maria Celeste Hagatong Manuel Ferreira da Silva António Farinha Morais Pedro Barreto Luís Câmara Pestana Central Manager of the Credit Risk Division Francisco Costa Director of BPI-BI (Investment Bank) and responsible for the Large Companies Southern Division Maria do Carmo Oliveira Director of BPI-BI (Investment Bank) and responsible for the Large Companies Northern Division João Álvares Ribeiro Central Manager of the Companies Northern Division Pedro Fernandes Central Manager of the Companies Centre Division Joaquim Pinheiro Central Manager of the Companies Southern and Islands Division Miguel Alves Central Manager of the Project Finance / PPP Division Filipe Cartaxo Central Manager of the Institutional Banking / Business Sector Division

BPI Group Corporate Governance Report 301 3.5. AUDIT COMMITTEE The Audit Committee performs the functions attributed to it by At least one of the members of the Audit Committee must have law, the statutes and BPI’s internal regulations. This brief higher education commensurate with the exercise of his / her includes overseeing the preparation and disclosure of financial functions, with competence in the financial, accounting and audit information, the effectiveness of the internal control, internal areas, while another must have operational knowledge of the audit and the risk management systems, as well as overseeing banking trade. the statutory audit. It evaluates and oversees the activity and independence of the Portuguese Statutory Auditor. The majority of the Audit Committee’s members must meet the following requirements: 3.5.1. Composition The Audit Committee is composed exclusively of non-executive a) not be associated with any specific interest group in the members of the Board of Directors (minimum of three and Company; maximum of five, the present configuration). The majority of the Committee’s members must be independent (four are in the b) not find themselves in a situation capable of affecting their present configuration). impartiality of analysis or decision making, namely by reason of being the holders or acting in the name of or on behalf of COMPOSITION OF THE AUDIT COMMITTEE the holders of qualified shareholdings of 2% or more in the Chairman Artur Santos Silva Company. Deputy-Chairman Ruy Octávio Matos de Carvalho Members Alfredo Rezende de Almeida The previous Audit and Internal Control Committee was Jorge de Figueiredo Dias extinguished with the creation of the Audit Committee. The Marcelino Armenter Vidal former committee’s responsibilities were broadly transferred to the Audit Committee, with the exception of the function to evaluate the efficiency of and compliance with the BPI Group’s The Audit Committee’s composition is deliberated in General corporate governance principles. This assessment will be Meeting, and it exercises functions for terms of three years. The undertaken by the Corporate Governance Committee. members of the Audit Committee can only be re-elected for two more consecutive terms of office. The Audit and Internal Control Committee was created within the ambit of the Board of Directors and had been functioning The Audit Committee’s members, including the respective since 1999 under the chair of Artur Santos Silva. In line with Chairman, are appointed simultaneously with the appointment of the present Audit Committee, the Audit and Internal Control the other members of the Board of Directors. The lists of Committee was composed exclusively of non-executive members candidates proposed for this last-mentioned body must indicate of the Board of Directors and the majority of its members were the members who are going to form part of the Audit Committee. independent. The Audit Committee must designate a Deputy-Chairman from amongst its number.

3.5.2. Functions

PRINCIPAL FUNCTIONS OF THE AUDIT COMMITTEE

With a view to complying with the mission entrusted to it, the ᭿ to express an opinion on the report, accounts and Audit Committee was given the following powers and duties: proposals presented by the management;

᭿ to oversee the process involving the preparation and ᭿ to oversee the administration of the company; disclosure of financial information;

᭿ to ensure observance of the legal and regulatory ᭿ to oversee the efficacy of the internal control, internal provisions, the statutes and other regulations issued by audit and risk management systems; the supervisory authorities, as well as of the general ᭿ to review and oversee the statutory auditor’s policies, standards and practices instituted internally; independence, namely, when he / she / they provide ᭿ to verify the appropriateness of and to supervise additional services to the company; compliance with the accounting policies, criteria and ᭿ to receive communications from shareholders, employees practices adopted and the proper state of the supporting or others of irregularities within the company; documents; ᭿ to comply with any other functions attributed to it by law. ᭿ to oversee the statutory audit;

302 Banco BPI | Annual Report 2006 In the performance of the functions referred, namely “to ᭿ the proper state of the books, accounting records and ensure observance of the legal and regulatory provisions, supporting documents;

the statutes and other regulations issued by the supervisory ᭿ the amount of the cash account and the stocks of goods and authorities, as well as of the general policies, standards assets belonging to the company or held by it, when the and practices instituted internally” and “to oversee the Committee deems this appropriate, and in the manner it efficacy of the internal control, internal audit and risk believes adequate; management systems”, is the function of the Audit ᭿ the accuracy of the documents making up the annual report; Committee, in particular: ᭿ the correct valuation of the assets and liabilities and the net profit / loss. ᭿ to promote and assess the pursuance of the fundamental objective fixed in the area of internal control and compliance by the Bank of Portugal and the Securities Market In discharging the function envisaged of “to review and Commission (Comissão do Mercado de Valores Mobiliários – oversee the statutory auditor’s independence, namely, when he CMVM), in the supervision directives directed at credit / she / they provide additional services to the company”, the institutions and financial companies; Audit Committee is responsible for:

᭿ to express an opinion on its oversight work covering the internal control, risk management and internal audit systems ᭿ proposing to the General Meeting the nomination of the of Banco BPI and the BPI Group, which includes a detailed Statutory Auditor; opinion, in the terms laid down by the Bank of Portugal, ᭿ supervising and evaluating the activity of the Statutory concerning the efficacy and adequacy of these systems, Auditor;

which opinion must accompany the Board of Directors’ ᭿ approving the fees payable to the Statutory Auditor for the annual report on the internal control system; provision of the audit service;

᭿ to approve and monitor the activity plans of the internal and ᭿ Carrying out the prior approval of the contracting of external audits, to evaluate the conclusions of the respective additional services to be provided by the Statutory Auditor, audit work and to transmit to the Executive Committee the as well as the respective remuneration terms. recommendations which it considers opportune concerning the areas audited; With respect “to receive communications from shareholders, ᭿ to monitor all the inspections carried out by the Bank of employees or others of irregularities within the company”, the Portugal, the CMVM, the Instituto de Seguros de Portugal Audit Committee shall define the policy for communicating (Insurance Institute of Portugal), the Direcção Geral de irregularities which have occurred within the company, Impostos (the Directorate-General of Taxes) and the indicating the means to be used in this communication, the Inspecção Geral de Finanças (General-Inspectorate of persons with legitimacy to receive them and the treatment Finance); that they will be the object of. ᭿ to be informed of the principal aspects dealt with at the meetings to monitor the rating attributed to Banco BPI. The general lines of this policy are disclosed in the company’s corporate governance report. Included in the functions referred, namely “to verify the appropriateness of and to supervise compliance with the The Audit Committee prepares an annual report on its accounting policies, criteria and practices adopted and the oversight activity. proper state of the supporting documents” and “to oversee the process involving the preparation and disclosure of financial information”, is the verification or the oversight of:

BPI Group Corporate Governance Report 303 3.5.3. Functioning of the Audit Committee The Audit Committee shall meet at least every two months or The Audit Committee has at disposal a secretariat, entrusted to whenever convened by its Chairman. the Central Manager Dra. Maria da Conceição Pizarro Monteiro.

The meetings shall be held in each year on the dates set, at the The Audit Committee may also request the collaboration of a very latest, at the last meeting of the previous year. staff member to lend support to the secretariat in the preparation and holding of meetings, including the proposal of The notice of each meeting to be sent by the Chairman to the topics to be included in the orders of business and the drawing members of the Audit Committee at least seven days in advance up of the respective minutes. must contain the respective order of business. 3.5.5. Responsibility and adherence to the codes of conduct The documents relating to the meeting shall be sent at least Portuguese law1 provides that the Audit Committee is jointly seven days prior to the date set for its realisation. liable to the Company and its creditors2 for the culpable breach of legal provisions and statutory duties. The meetings of the Audit Committee shall be directed by its Chairman, who shall lead its works. The members forming part of the Audit Committee are bound by a strict duty of confidentiality regarding the matters discussed at The meetings of the Audit Committee shall be attended by, the Committee’s meetings. without the right to vote, the Chairman of the Executive Committee of the Board of Directors, the member of the 3.5.6. Activity in 2006 Executive Committee of the Board of Directors responsible for During 2006 and effective from 1 July, the Audit Committee the internal control and audit areas of the BPI Group’s Banks, (and the Audit and Internal Control Committee until its the managers of these same areas and the support staff extinction on that date) each met four times. In addition, already whenever this is considered appropriate. in 2007and up until the date this report was approved, the Audit Committee met twice. The average attendance at the The directors and managers responsible for the areas which are abovementioned two bodies’ meetings was 88%. being reviewed may also be summoned to participate at the meetings of the Audit Committee, whenever this is considered The Audit Committee issues an annual activity report, as well as appropriate for the satisfactory progress of the proceedings. a report and annual opinion on the consolidated accounts and another on the individual accounts. The first of these reports is The presence at the meetings of the Audit Committee of any reproduced in the following section (3.5.7), and the second is other BPI Group staff member shall be agreed beforehand with included in the section of the Annual Report relating to the the Chairman of the Audit Committee. financial statements, respective notes and audit certifications (page 272). 3.5.4. Support structures The Audit Committee can when it deems necessary appoint one or more support elements with experience gained in the areas of his / her expertise, to provide information and carry out work aimed at substantiating the respective analyses and conclusions. The provision of information shall include in particular:

᭿ the progress of the projects and studies relating to the internal control system under way at the BPI Group’s Banks;

᭿ the progress of the initiatives and regulation-setting activity of the national and international banking-supervision institutions in the area of internal control.

1) Companies Code – Chapter VII: “Civil responsibility for the constitution, management and supervision of the company”. 2) Whenever the company assets become insufficient to cover the referred liabilities.

304 Banco BPI | Annual Report 2006 3.5.7. Audit Committee’s Report relating to 2006

REPORT ON THE AUDIT COMMITTEE’S ACTIVITY AND THE AUDIT AND INTERNAL CONTROL COMMITTEE’S ACTIVITY IN 2006

I. INTRODUCTION The Audit Committee was created as part of the alterations Accordingly, the principal functions of the Audit Committee – made to the company’s governance and oversight model described in the respective regulation approved by the Board of approved at the General Meeting of 20 April 2006. Directors on 27 July 2006 – are summarised as follows:

It commenced its functions with effect from 1 July 2006 ᭿ to oversee the company’s management;

following the entry into force of the amendments to the ᭿ to ensure compliance with the law, the standards issued by Companies Code which enshrined the model adopted. the supervisory authorities and the provisions of the statutes;

᭿ to verify compliance with the accounting policies, criteria and The Board of Directors’ Audit and Internal Control Committee practices adopted; (hereinafter referred to simply as the Committee) was ᭿ extinguished on that date, with the Audit Committee assuming to oversee the process involving the preparation and in essence the functions previously attributed to the Committee disclosure of financial information; on issues relating to overseeing the efficiency of the internal ᭿ to oversee the statutory audit;

control systems, risk management and internal audit, as well ᭿ to express an opinion on the report, accounts and proposals as overseeing the external auditors’ activity and independence. presented by the Board of Directors

᭿ to review the effectiveness of the internal control, risk The similarity of the functions attributed to the previous management (in particular, credit, operating, financial, Committee and to the present Audit Committee in the compliance, legal and reputational risks); aforementioned areas, coupled with the very similar composition ᭿ to oversee the effectiveness and to monitor the activity of of the two bodies, enabled the Audit Committee to have at its Internal Audit disposal in-depth knowledge of the reviews undertaken by the Committee up until the date of its disbanding. This permitted ᭿ to propose to the General Meeting the appointment of the familiarisation with the methods and information sources used, Portuguese Statutory Auditor and to evaluate and oversee the thereby ensuring the continuity of those functions. respective independence and activity, approving the fees to be paid for the provision of audit and additional services;

For these reasons, it was deemed appropriate that the present ᭿ to receive reports from shareholders, employees or others of activity report – even though prepared in the discharge of the irregularities1; duty attributed to the Audit Committee under article 423-F(g) ᭿ to prepare the annual report on its activity. of the Companies Code, incorporated into the respective regulation – also cover the activity carried out by the In terms of the aforesaid regulation, the Audit Committee is Committee up till 30 June. presently composed of five non-executive directors, the majority of whom are independent, while one of their number is the It should also be pointed out that of the responsibilities vested Chairman. in the previous Committee, only that relating to the monitoring of compliance with corporate governance principles did not The Committee meets at least every two months or whenever transfer to this Committee, on the grounds that this matter is convened by the Chairman, with the annual timetable for the reserved for the Company’s Corporate Governance Committee – bimonthly meetings being set at the last meeting of the the Board of Director’s consultative organ set up by previous year. deliberation of the General Meeting of 20 April 2006.

Succinct minutes are kept of the meetings, setting out the On the other hand, the Audit Committee’s functions began to principal matters dealt with and the conclusions approved. The include, besides those inherited from the Committee, those Board of Directors is informed of these at the meeting which attributed to it in its capacity as the company’s oversight body follows the Committee meeting to which they refer. by the new provisions of the Companies Code, with emphasis on the oversight of the company’s management and on financial oversight directed at the report and financial statements.

1) Responding positively to the new duty of “describing the general lines of the policy for communicating irregularities which allegedly occurred within the company”, envisaged in CMVM regulation no. 10 / 2005 (Corporate Governance Reporting Scheme, chapter IV, point 6).

BPI Group Corporate Governance Report 305 II. ACTIVITY IN 2006 During 2006, the Audit and Internal Control Committee (until Still in this domain, the Committee and the Audit Committee its extinction on 1 July 2006) and the Audit Committee, with adopted initiatives with a view to monitoring the evolution of effect from that date, each held four meetings. the relevant legal and regulatory provisions for the execution of their functions. These included amongst others the The analyses conducted and the decisions taken by both presentations promoted at various meetings dealing with the bodies were primarily founded on the work carried out by the revised 8th EC Directive (regulation of auditors’ activity), the External Auditors, by the Audit and Inspection Division and by recent alterations to the Companies Code, Bank of Portugal the Bank’s various Divisions within the ambit of their Notice no. 3 / 2006 of 3 May (internal control standards at respective functions. They were also supported where credit institutions and financial companies) and the regulations applicable by the conclusions of the inspections carried out governing operating risk in the Directives 2006 / 48 / CE and and relevant notifications sent by the competent supervisory 2006 / 49 / CE, which transposed the Basle II Accord into the and oversight entities. community’s statute books.

Invited to participate regularly at its meetings, although 2. Supervision of compliance with accounting policies and without the right to vote, were the Chairman of the Board of practices, and overseeing the statutory audit and the process Directors’ Executive Committee, the Director responsible for involving the preparation and disclosure of financial the audit area of the BPI Group’s Banks, the representative of information Deloitte e Associados, S.R.O.C. (the BPI Group’s external Supervision of compliance with accounting policies, criteria Auditor), which is the Portuguese Statutory Auditor, and the and practices and verifying the reliability of the financial central managers responsible for the Audit and Inspection information was also exercised primarily through appraisal of Division and for the Organisation Division. the findings of the audits and reviews of procedures conducted during the year by the external and internal audit teams. Also summoned to attend the meetings were the directors and managers responsible for the areas whose matters are being Moreover, the Committee analysed the principal conclusions of reviewed. the overall audit procedures covering Banco BPI’s and Banco Português de Investimento’s financial statements performed by The activities of the Committee and of the Audit Committee in Deloitte in respect of the 2005 financial year. 2006 within the context of their respective terms of reference are summarised next: For its part the Committee performed an identical examination with respect to the 2006 financial statements. Particular 1. Overseeing observance of the law, the standards of the attention was paid amongst other matters to issues relating to supervisory authorities and the provisions of the company’s the constitution of provisions and the calculation of statutes impairments. Both bodies oversaw, through the analysis of the conclusions of the external and internal audits and the review of procedures Besides this, both bodies monitored at all their bimonthly during the course of the year, compliance with legal, regulatory meetings the evolution of Banco BPI’s Pension Fund, and internal provisions in the various areas covered. acquainting themselves with the investment policy pursued and the actuarial assumptions used in the calculation of the Furthermore, the Committee and the Audit Committee were respective obligations. informed respectively of the results of a tax inspection carried out by the Tax Inspection Department, as well as of an audit conducted by the Inspectorate-General of Finance.

306 Banco BPI | Annual Report 2006 3. Monitoring and overseeing the internal control system The evaluation of the efficacy of the internal control systems Moreover, it reiterated the undertaking to continue monitoring within the BPI Group was a permanent concern of the this issue closely, namely, as regards the guidelines emanating Committee, and subsequently of the Audit Committee. from the Bank of Portugal, in such a manner to ensure that adequate and efficient mechanisms for overseeing internal Based of the guidelines embodied in the rules issued by the control are always in place. Bank of Portugal in this domain (in particular, Instruction no. 72 / 96 and, with effect from May, Notice no. 3 / 2006), the The Committee also issued the abovementioned annual report two bodies regularly evaluated the Group companies’ on the internal control, risk management and internal audit operational procedures, including those of the branches and systems at Banco BPI and the BPI Group, the purpose of subsidiaries, and those instituted with respect to Banco BPI which was to accompany the annual report dealing with the and Banco Português de Investimento areas or specific issues. same subject prepared by the Board of Directors. This report encompassed the Group’s overseas subsidiaries, as envisaged The analysis undertaken was essentially based on the in the aforesaid Notice no. 3 / 2006. conclusions of the procedural reviews conducted of the external auditors, as well as on the findings of Internal Audit’s audit and Still in this area of concern, the Committee considered the inspection work and on the presentations and clarifications annual internal control reports of all the Group companies which are the responsibility of the relevant Boards and Divisions. subject to supervision on a consolidated basis and the opinions of the respective oversight bodies, as well as the respective Within the same orientation, it fell within the Committee’s and statutory auditors’ opinions on the internal control system the Audit Committee’s terms of reference to approve and underlying the preparation and disclosure of financial monitor Internal Audit’s four-monthly activity plans and the information. external auditors’ annual review of procedures, evaluating the respective conclusions and transmitting to the Executive 4. Monitoring and overseeing the effectiveness of the risk Committee the recommendations considered to be relevant. In management process this way, not only were ways sought to promote the efficient Operating risk management of the activities undertaken by the Group, but One of the chief areas of supervisory work covering operating also to ensure the efficacy and the desired extent of the risk conducted by the Committee and the Audit Committee internal and external audits. involved considering the conclusions and recommendations stemming from the external auditors’ review of procedures, The work carried out in these areas will be described in greater together with the heads of the Divisions which were the object detail in the chapters devoted to the oversight of the of those reviews with a view to analysing and improving the effectiveness of risk management and to the monitoring of internal control system instituted. internal audit activity. During 2006, Deloitte’s procedures’ reviews appraised Also the object of close analysis by the Committee was the according to that method focused on the following areas: refinement of the actual overall model for overseeing the internal control system, bearing in mind the Audit Committee’s ᭿ Information Systems Division – Qualification and Planning duty – in its role of oversight body and in terms of Bank of ᭿ Personal loans Portugal Notice no. 3 / 2006 – to issue an annual report on ᭿ BPI Vida’s Capitalisation Insurance and connection with that system’s effectiveness and adequacy, as well as on the risk Banco BPI management and internal audit systems. ᭿ Markets Division – structured products

Thus, after an in-depth study into the matter, at its July ᭿ Banco Português de Investimento’s Equities Division meeting the Committee decided to endorse the oversight model ᭿ BPI Asset Management which in essence has been utilised up till now. That model is ᭿ Functioning of the Offshore Financial Companies founded on the permanent work of the Internal Audit area ᭿ Resource taking at Banco BPI branches (including the monitoring of the external auditors’ recommendations), on the external auditors’ procedural reviews ᭿ Banco Português de Investimento’s Corporate Finance and on the management model for operating risk. In the case ᭿ BFA – Foreign Operations Area of the last-mentioned, this is in the finalisation phase and is based on the self-evaluation of internal control by the Divisions in order to identify the areas with the most operating risk, as well as the control and mitigation of this risk.

BPI Group Corporate Governance Report 307 Another important contribution to the verification of operating Reputational risk risk control was made throughout the year by Internal Audit, As part of the oversight of reputational risk management, special whose activity and respective monitoring will be dealt with in a attention was paid to the trend in the quantity, tendencies and separate chapter. principal causes of complaints lodged by customers, as well as the quality of the treatment accorded to these. The Committee also kept abreast of the aforementioned operating risk management project, having also been informed In this regard, the Committee and the Audit Committee at the September meeting of this project’s most recent analysed in detail, with reference respectively to the 2nd half of development, in particular, as regards computer-support 2005 and the 1st half of 2006, summary reports prepared by applications. the New Channels Division. These contained information (global and broken down by themes) about the main It also analysed the aggregate amounts of the losses suffered characteristics of the complaints received, as well as about the in the 1st half of the year in occurrences resulting from operational alterations introduced or to be introduced in order operating risk. to eliminate the underlying motives, to improve the retrieval and management of complaints system and to reduce the Furthermore, the Internal Audit Division presented to the response time. Committee at the January meeting, and to the Audit Committee at the September meeting, statistics concerning the The conclusions of the monitoring reports prepared by the occurrences which generated loss respectively in the 2nd half of rating agencies Standard & Poor’s, Fitch Ratings and Moody’s 2005 and the 1st half of 2006. relating to 2006 were studied in due course.

Credit risk Compliance risk The analysis of the situation and the liabilities of the economic At its July meeting, the Committee analysed the guidelines groups with exposures of between 5% and 15% of the Bank’s defined by the Bank of Portugal within the ambit of internal shareholders’ equity constituted a regular point on the agendas control insofar as compliance risk is concerned. This is defined of the Committee and the Audit Committee, as well as defaults as the risk of legal or regulatory sanctions and financial or in excess of 100 thousand euro with exposure of more than reputational losses arising from non-compliance with laws, 500 thousand euro. This examination was always backed by regulations or codes of conduct. clarifications given by the Director and the Central Manager responsible for the Credit Risk Division, focusing in particular In similar vein, it was informed about the survey undertaken on those cases displaying greater risk or involving larger into the practice of the leading Portuguese banks with respect amounts. to this risk, having decided that the Executive Committee promote the implantation of a separate structure to exercise The Committee also analysed at the January meeting the model this control. adopted internally for calculating the loan portfolio’s impairment and its principal characteristics. Besides this, it More specifically with respect to the oversight and control of acquainted itself with the exposure, impairments, accounting financial intermediation activities, the Committee was informed provisions and annual loss ratios of the various loan portfolio in detail at the March meeting about the decentralised control segments at the end of 2005, having carried out an individual system conceived internally to meet the new requirements review of Corporate Banking customers with the highest imposed by CMVM Regulation 7 / 2005, which reinforced the impairment values. internal control mechanisms in this type of activity.

At the meeting of 28 November, the Committee resumed the Financial risks same analysis with reference to the end of September, and was At the November meeting, the Committee reviewed the Group’s briefed on the alterations under way to the method for financial risk control and management mechanisms – namely determining impairments for individual and collective analyses. risks attaching to interest rates, markets, liquidity and the credit associated with the derivatives portfolio– through the The Committee also reviewed the reports presented by the presentations made by the Director and Managers responsible external auditors on the quantification of the economic for the Finance Division and for the Risk Analysis and Control provisions in relation to the implicit risk in Banco BPI’s and Division. Banco Português de Investimento’ loan portfolios with reference to 31 December 2005 and 30 June 2006.

308 Banco BPI | Annual Report 2006 The general lines followed in the management of those risks 6. Evaluation and oversight of the Portuguese Statutory were also exposed in the light of the economic situation, as Auditor’s independence and activity and the approval of the were the studies in progress aimed at compliance with the fees for audit and additional services Basle II Accord requirements relating to market and credit Oversight of the Portuguese Statutory Auditor’s independence, risks associated with the derivatives portfolio. namely as regards the provision of additional services, must be assured – in the management and oversight model adopted by It also learnt of the principal aspects of international risk Banco BPI and pursuant to article 423-F(o) of the Companies management, with the Director and Central Manager Code – by the Audit Committee. responsible for the Group’s International Division having given a characterisation of the International Credit Area’s portfolio, In the fulfilment of this legal requirement and within the scope including the indication of the orientation followed as regards of the respective regulation, the Audit Committee was assigned the various markets where it operates and the maturities the task of overseeing and evaluating the independence and practised. activity of Banco BPI’s Portuguese Statutory Auditor (Deloitte & Associados, SROC), and to approve the respective fees for the Legal risk provision of audit services and the contracting of additional During the year, the Committee and the Audit Committee services. analysed, with the support of the Legal Division, certain important situations of legal risk, predominantly of a tax In terms of the respective regulation, this responsibility was nature, having taken decisions on these or formulated already attributed to the previous Audit and Internal Control recommendations regarding the orientation to follow. Committee.

5. Overseeing the efficacy and monitoring the activity of In these terms, both the Committee and the Audit Committee Internal Audit approved Deloitte’s various collaboration proposals during The monitoring of the Audit and Inspection Division and the 2006 for the provision of audit services and non audit-related control over its efficacy were undertaken during the year by the work, as well as the respective fees. Committee and by the Audit Committee, through: As concerns monitoring activity, this was realised as described ᭿ the approval of the four-monthly audit plans; above through the approval of the respective plans, review of

᭿ the review of the activity undertaken by the Division in each the conclusions of the procedural reviews conducted and the half year; follow-up of the implementation of the resulting recommendations. ᭿ the analysis of the principal conclusions of the half-yearly audits. Oporto, 12 of March 2007

In endorsing the audit plans the Committee was concerned to Artur Santos Silva guarantee as regards the central services adequate distribution Chairman of the audit work amongst the major risk areas and, as regards the commercial network, the greatest coverage possible of the Ruy Octávio Matos de Carvalho branches and corporate centres, namely, through distance Deputy-Chairman audits.

Alfredo Rezende de Almeida Attention was also paid to the prevention of money laundering, Member including significant training activity directed at the various hierarchical levels. Jorge Figueiredo Dias Member Besides this, the abovementioned plans included verification that the recommendations issued by Deloitte in the wake of Marcelino Armenter Vidal their review of procedures were implemented. Member

The analysis of the main conclusions of the audits carried out enabled the Committee to identify the most relevant shortcomings and, where applicable, to issue guidelines concerning the issues in question.

BPI Group Corporate Governance Report 309 3.6. PORTUGUESE STATUTORY AUDITOR 3.6.1. Portuguese Statutory Auditor1 The Portuguese Statutory Auditor is responsible for performing In office: Deloitte & Associados, SROC, S.A., represented by all the examinations and all the attest work needed to audit and Augusta Francisco certify the accounts. Alternate: Carlos Luís Oliveira de Melo Loureiro

The Portuguese Statutory Auditor is appointed by the General Meeting, following a proposal by the Audit Committee. This can be a natural person or a firm with the status of Portuguese Statutory Auditor. In addition to the member in office, an alternate member must be appointed.

3.6.2. Functions

PRINCIPAL FUNCTIONS OF THE PORTUGUESE STATUTORY AUDITOR

᭿ Verifying that the books, accounting records and ᭿ Attesting to the accuracy and reliability of the annual supporting documents are in a fit and proper state. report and accounts.

᭿ Examining when deemed necessary and in the manner its ᭿ Checking that the accounting policies and valuation considers appropriate the cash balance and the inventory criteria adopted by the Company result in a true and fair of any type of assets or amounts belonging to the valuation of the assets and liabilities and its profit or loss company or received by it as security, deposit or for for the period. whatever other reason.

3.6.3. Liability and adherence to the codes of conduct (ROC) Portuguese law provides that the Portuguese Statutory Auditor The Portuguese Statutory Auditor is also bound by a duty of (Revisor Oficial de Contas – ROC) is liable to the company as a vigilance: he / she must communicate immediately by registered consequence of culpable conduct, and to the creditors when, by letter to the Chairman of the Board of Directors or of the reason of culpable breach of legal and statutory provisions, the Executive Committee any facts2 that have come to his / her company’s net assets are inadequate to discharge its liabilities. attention that he / she considers reveal grave difficulties in the pursuance of the Company’s objects.

1) Members elected at the Shareholders General Meeting of 20 April 2006 until the end of the 2005 / 2007 mandate. 2) Article 420-A of the Companies Code identifies the principal situations: namely, repeated failure to pay creditors, protested debt notes, the issue of cheques without funds, failure to pay social security contributions or taxes.

310 Banco BPI | Annual Report 2006 3.7. CORPORATE GOVERNANCE COMMITTEE The Corporate Governance Committee is a consultative body of If not a member of the Executive Committee, the Chairman of the Board of Directors. Its function is to make pronouncements the Board of Directors will form part of and chair the Corporate on matters within the scope of corporate social responsibility, Governance Committee, which shall appoint a Deputy-Chairman ethics, professional conduct and environmental protection. The from amongst its members, as well as the Chairman where, in Committee prepares an annual report on the functioning of the relation to the Chairman of the Board of Directors, that situation company’s corporate governance structure. does not apply.

3.7.1. Composition COMPOSITION OF THE CORPORATE GOVERNANCE COMMITTEE The Corporate Governance Committee is composed of three to Chairman Artur Santos Silva seven members of the Board of Directors who do not form part of Deputy-Chairman Armando Leite de Pinho the Executive Committee (provided for in article 16(3)(a) of the Members Carlos Moreira da Silva Company’s Statutes). Edgar Alves Ferreira Klaus Dührkop Tomaz Jervell

3.7.2. Functions

PRINCIPAL FUNCTIONS OF THE CORPORATE GOVERNANCE COMMITTEE

It is the function of the Corporate Governance Committee ᭿ on the definition of policies aimed at the exercise of to support and advise the Board of Directors: corporate responsibility and protection of the environment;

᭿ on the preparation and implementation of rules of ᭿ on refining the BPI Group’s governance and oversight conduct, designed to impose the observance of stringent model, with the object of promoting compliance with the principles of ethics and conduct in the performance of principles and practices which ensure a diligent, effective the functions attributed to the members of the BPI and balanced management of the shareholders’ and other Group’s governing bodies and to employees. stakeholders’ interests; ᭟

In the performance of its duties as regards the refining of ᭿ the promotion of relations with investors and BPI Group’s governance and oversight model, it is the transparency of information to the market,

function of the Corporate Governance Committee, namely: ᭿ to inform the Board of Directors of any situations or occurrences of which it has knowledge and which, in its ᭿ to ensure compliance with the guiding principles of the opinion, amount to non-compliance with the established BPI Group’s governance policy; governance rules and practices or which may prejudice ᭿ to prepare annually for the Board of Directors a report on the application of the respective guiding principles;

the functioning of the governance structure implanted, ᭿ to monitor and analyse latest practices and guidelines on which includes an opinion on this structure’s efficiency corporate governance produced by national and and the performance of the bodies comprising it, as well international bodies with a view to their possible as the proposals which it considers appropriate for its incorporation into the BPI Group’s model. improvement;

᭿ without prejudice to the annual report referred to in the With regard to corporate responsibility and environmental preceding paragraph, to propose to the Board of Directors, protection, the Corporate Governance Committee shall give whenever it deems this appropriate or when solicited, support to the Board of Directors in the definition of the measures directed at refining the corporate governance policy guidelines to be followed in these domains by the model implanted and to facilitate the pursuance of the BPI Group, taking into account their approval by the respective objectives, in particular as concerns: Shareholders’ General Meeting. ᭿ the structure, division of duties and functioning of the governing bodies, It is also responsible for pronouncing, at its initiative or

᭿ the exercise of corporate rights by BPI Group entities, when requested by the Board of Directors, on issues related to these matters, and specifically with the ᭿ the promotion of the right to vote and shareholder execution of the social solidarity, education, research and representation, cultural patronage policies pursued by the BPI Group.

BPI Group Corporate Governance Report 311 Within the ambit of its function of drafting and companies belonging to its universe;

implementing standards of ethical and deontological ᭿ refining and updating the BPI Group’s Code of Conduct, conduct, the Corporate Governance Committee is responsible presenting to the Board of Directors proposals in this for, in particular: regard;

᭿ promoting, guiding and overseeing the effective ᭿ proposing to the Board of Directors the measures it compliance with the BPI Group’s Code of Conduct, as considers adequate for fostering a culture of ethics and well as with the Codes of Conduct of the Professional professional conduct at the heart of the BPI Group, and associations applicable to the BPI Group’s companies or its dissemination to the various hierarchical levels at the their employees.

The Corporate Governance Committee must also collaborate in 3.7.3. Functioning the preparation of the annual corporate governance report as The Corporate Governance Committee shall meet whenever it is regards matters within its jurisdiction. convened by the respective Chairman or by two of its members and, in particular, whenever it has to give an opinion on matters The Corporate Governance Committee shall be responsible for within its jurisdiction, indicated in Article 2(1) of this Regulation. preparing annually a report on the company's governance structure for submission to the Board of Directors, as well as for making The meetings of the Corporate Governance Committee must be pronouncements on matters relating to social responsibility, convened with ten days prior notice, indicating the matters to be professional ethics and conduct and environmental protection. dealt with.

Alternatively, the functions attributed to the Corporate At the meetings of the Corporate Governance Committee the Governance Committee can be entrusted to the Nomination, Company Secretary shall prepare succinct minutes containing Evaluation and Remuneration Committee, in which case the the principal matters addressed and the conclusions drawn. former shall not be appointed.

3.7.4. Activity in the year

ACTIVITY OF THE CORPORATE GOVERNANCE COMMITTEE

19 March 2007 Banco BPI, S.A.’s Corporate Governance Committee met for instituted by the Shareholders’ General Meeting held already in the first time on 19 March 2007. 2006 and that in the short period of time that has elapsed since then, no weaknesses have surfaced in the structure The main purpose of the meeting was to comply with the created and in the performance of the bodies which compose it;

Committee’s obligation to prepare an annual report on the ᭿ in relation to the duty to advise the Board of Directors on the company’s corporate governance. definition of policies aimed at the exercise of corporate social responsibility and protection of the environment, there Within this ambit, the Committee, in accordance with the appear to be no grounds for altering the existing policies of a Board of Directors’ delegation, approved the “BPI Group’s superior standard in the fields of social solidarity and cultural Corporate Governance Report” presented by the Chairman patronage that are narrated in greater detail in a separate following the submission of the various refinement chapter of the Annual Report; and, recommendations by its members and which were incorporated ᭿ as regards the duty to advise the Board of Directors on the into the proposal that the Board of Directors will table at the drafting of standards of conduct designed to impose Shareholders’ General Meeting of 19 April 2007. observance of strict ethical and deontological principles in the performance of the functions attributed to the members At that meeting, the Committee also considered the duties and of the BPI Group’s governing bodies and employees, the BPI powers vested in it pursuant to article 2 of the respective Group’s Code of Conduct ensures the commitment to Regulations approved at the Board of Directors’ meeting of 27 stringent norms of an ethical and deontological nature, to July 2006, while it was recognised that: promote justice and to prevent conflict of interest situations. At the same time it imposes the vigorous defence of ᭿ with respect to the duty to advise the Board of Directors on professional confidentiality and in its new version has only streamlining the BPI Group’s governance model, no reasons about a year’s application. were found to change that model given that it had been

312 Banco BPI | Annual Report 2006 3.8. NOMINATIONS, EVALUATION AND REMUNERATION COMMITTEE The Nomination, Evaluation and Remuneration Committee is a At least one of the Members of the Nomination, Evaluation and consultative body of the Board of Directors and was created in Remuneration Committee must meet the following requirements: 2006. Its function is to give opinions on the filling of vacancies that may occur on the governing bodies, on the choice of ᭿ not be associated with any specific interest group in the Directors to be appointed to the Executive Committee and on the Company; appraisal and fixing of this Executive Committee’s compensation. ᭿ not be in a situation capable of affecting his / her impartiality 3.8.1. Composition of analysis or decision making, namely by reason of being the The Nomination, Evaluation and Remuneration Committee is holder or acting in the name of or on behalf of the holders of composed of three to seven members (currently six) of the Board qualified shareholdings of 2% or more in the Company. of Directors who do not form part of the Executive Committee envisaged in article 16(3)(a) of the Company’s Statutes. COMPOSITION OF THE NOMINATION, EVALUATION AND If not a member of the Executive Committee, the Chairman of REMUNERATION COMMITTEE the Board of Directors will form part of and chair the Chairman Artur Santos Silva Nominations, Evaluation and Remuneration Committee, which Deputy-Chairman Ruy Octávio Matos de Carvalho shall appoint a Deputy-Chairman from amongst its members, as Members Carlos da Câmara Pestana well as the Chairman where, in relation to the Chairman of the Herbert Walter Board of Directors, that situation does not apply. Marcelino Armenter Vidal Roberto Egydio Setúbal

3.8.2. Functions

PRINCIPAL FUNCTIONS OF THE NOMINATION, EVALUATION AND REMUNERATION COMMITTEE

It is the function of the Nomination, Evaluation and ᭿ on the conduct of the process involving the annual Remuneration Committee to support and advise the Board evaluation of the members of the Executive Committee;

of Directors: ᭿ on the preparation of the report to be submitted to the Remuneration Committee envisaged in Article 28(2) of ᭿ on the filling of vacancies occurring on the governing bodies; the Company's statutes, relating to the fixing of the ᭿ on the choice of Directors to be appointed to the variable remuneration of the members of the Executive Executive Committee; ᭟ Committee.

In its support functions for the filling of vacancies on the Within the scope of the annual evaluation and fixing of the governing bodies and for the appointment of Executive variable remuneration of the members of the Executive Directors, the Nomination, Evaluation and Remuneration Committee, the Nomination, Evaluation and Remuneration Committee shall: Committee is responsible for proposing to the Board of Directors the criteria to be used in this process, which ᭿ prepare and update all the qualifications, knowledge and should include proper appraisal of merit, individual professional experience required for the performance of performance and contribution to the Executive Committee’s the functions attributed to the members of the various efficiency. governing bodies and of the Executive Committee;

᭿ monitor the selection and appointment of the senior The Nomination, Evaluation and Remuneration Committee personnel of the BPI group companies in order to ensure is also responsible for reporting to the Board of Directors that there is an available recruitment base of future on the recommendations which the latter makes to the members of governing bodies and Executive Directors; Remuneration Committee envisaged in Article 28(2) of the Companies Statutes relating to the definition and ᭿ prepare a substantiated report for the Board of Directors, alterations to the general remuneration policy of the identifying the persons who in its opinion possess the Executive Committee, as well as to the variable most suitable profile to fill a vacancy whenever this remuneration programmes based on Banco BPI shares or occurs on the governing bodies or on the Executive options (i.e. the share incentive scheme). Committee.

BPI Group Corporate Governance Report 313 The remuneration in force at the BPI Group is more fully The meetings of the Nominations, Evaluation and Remuneration described in chapter 7 of the present report (pages 326 to 331). Committee must be convened with ten days prior notice, which notice must indicate the matters to be dealt with. 3.8.3. Functioning The Nomination, Evaluation and Remuneration Committee meets At the meetings of the Nominations, Evaluation and whenever convened by the respective Chairman or by two of its Remuneration Committee, the Company Secretary shall prepare members and, in particular, whenever it has to give an opinion succinct minutes of the matters dealt with and the respective on matters falling under its terms of reference, as indicated in conclusions arrived at. article 2(1) of this regulation.

3.8.4. Activity in the year

ACTIVITY OF THE NOMINATION, EVALUATION AND REMUNERATION COMMITTEE

24 January 2007 The Committee conducted the annual evaluation of each one of Having heard the Chairman of the Executive Committee, the Banco BPI’s Executive Directors. In future and for that purpose, Committee approved a recommendation concerning the an individual meeting will be held with each one of those variable remuneration of each one of the Executive Directors directors on a annual basis, which will also be accompanied by for their performance in 2006, to be submitted to the a self-assessment of the corresponding Director. Remuneration Committee and to have this approved at a Board of Directors’ meeting at which the members of the Executive The Committee recommended that in fixing the Executive Committee do not participate. Directors’ variable remuneration, the compensation policies adopted by Iberian banks comparable to BPI should be taken as market references, namely, those adopted by the banks Espírito Santo, Santander Totta, Bankinter, Popular, Sabadell, Pastor.

314 Banco BPI | Annual Report 2006 3.9. REMUNERATION COMMITTEE The Remuneration Committee is composed of three shareholders and to members of Banco Português de Investimento's Board of elected by the General Meeting. The Remuneration Committee's Directors. The Committee also carries out the evaluation of the function is to fix the remuneration of the members of Banco members of Banco BPI’s Executive Committee and of Banco BPI's governing bodies. Insofar as the fixed remuneration of the Português de Investimento’s Board of Directors with a view to members of the Board of the Directors and the variable determining their respective annual variable remuneration. remuneration of the Executive Committee are concerned, it must observe the limits laid down by the General Meeting. At the Shareholders General Meeting of 20 April 2006, was deliberated the inclusion of a rule which determines that, at the 3.9.1. Composition time of the appointment of the Remuneration Committee by the The Remuneration Committee is composed of three shareholders General Meeting, the latter shall prescribe for each term the elected for three-year terms by the General Meeting, and who in limits of the fixed remuneration of all the members of the Board turn elect a Chairman (who has the casting vote). of Directors and the percentage of net profit (not exceeding 5%) that can be allocated to the variable remuneration of the The following Shareholders presently comprise the Committee: Executive Committee.

COMPOSITION OF THE REMUNERATION COMMITTEE No Director has the power to fix his / her own remuneration. The Chairman IPI – Itaúsa Portugal Investimentos, SGPS, Lda. principles, criteria and amounts involved in fixing the Members Arsopi – Holding, SGPS, S.A. remuneration of the members of Banco BPI’s governing bodies 1 HVF, SGPS, S.A. are covered in greater detail in chapter seven (“Remuneration”) of the present report. 3.9.2. Functions The Remuneration Committee's function is to fix the 3.9.3. Activity on the year 2006 remuneration of the members of Banco BPI's governing bodies, The three members of the Remuneration Committee were present and to formulate the remuneration policy and the retirement at the following meetings. The attendance level was 100%. regime to apply to members of Banco BPI's Executive Committee

ACTIVITY OF THE REMUNERATION COMMITTEE

On 26 January 2006 ᭿ Deliberated, following a proposal of the Chairman of the Banco BPI, S.A.’s Board of Directors, which are identical to Board of Directors, to fix the amounts of the variable the corresponding conditions set for the remainder of BPI’s remuneration of the members of the Executive Committee Employees. relating to performance in 2005.

᭿ Deliberated to fix the specific conditions (price of the shares On 24 January 2007 to be acquired and the valuation and exercise price G of the ᭿ Taking into consideration the recommendation put forward by share-purchase options) for the application of the 2005 RVA the Nominations, Evaluation and Remuneration Committee’s at to the members of the Executive Committee, which are its meeting of the same date, it deliberated to fix the variable identical to the corresponding conditions set for the remuneration of the members of the Executive Committee remainder of BPI’s Employees. relating to their performance in 2006.

᭿ Taking into consideration the provisions of article 374-A(3) of 9 March 2006 the Companies Code, it deliberated to fix the remuneration of ᭿ Following a proposal of the Chairman of the Board of Directors, the members of Banco BPI, S.A.’s Shareholders General deliberated to fix the amount of the variable remuneration of Meeting Committee. the Directors of Banco Português de Investimento, S.A. who are not members of Banco BPI, S.A.’s Board of Directors for their On 12 March 2007 performance in 2005; and, At its meeting of 12 March 2007, the Remuneration Committee ᭿ Deliberated to fix the specific conditions (price of the shares deliberated to fix the amount of the variable remuneration of to be acquired and price of the share-purchase options) for the members of the Board of Directors of Banco Português de the application of the 2005 RVA to the Directors of Banco Investimento, S.A. who are not members of Banco BPI, S.A.’s Português de Investimento, S.A. who were not members of Board of Directors relating to their performance in 2006.

1) On 30 January 2006, the shareholder Violas – SGPS, S.A. notified the Chairman of Banco BPI’s Board of Directors that, as a result of the demerger-merger operation, Violas – SGPS, S.A transferred all its Banco BPI shares to the company HVF – SGPS, S.A. Since it was no longer a shareholder of Banco BPI, Violas – SGPS, S.A. in terms of article 25(2) of the Bank’s statutes, it automatically ceased to be a member of the Remuneration Committee. At the Shareholders’ General Meeting to be held on 20 April 2006, a proposal is to be made to elect the company HVF, SGPS, S.A. as the new member of the Remuneration Committee, filling the vacancy resulting from the departure of Violas – SGPS, S.A. until the end of the current term of office.

BPI Group Corporate Governance Report 315 3.9.4. Responsibility and adherence to codes of conduct 3.10. COMPANY SECRETARY The members of the Remuneration Committee are bound by a The Company Secretary is appointed by the Board of Directors. strict duty of confidentiality with respect to the matters discussed at the Committee’s meetings. 3.10.1. Company Secretary

In office Manuel Correia de Pinho Alternate Alexandre Lucena e Vale

3.10.2. Functions Besides performing the functions contemplated in the law, the Company Secretary is responsible for relations with the supervisory and oversight authorities, namely, the Bank of Portugal, the Securities Market Commission (CMVM), the Insurance Institute of Portugal, the Directorate-General of Taxes and the Inspectorate of Finance.

Banco BPI’s Secretary is also responsible for preparing the minutes of the Board of Directors’ and of the Executive Committee’s meetings, promoting their circulation to all the members and ensuring that supporting documents are dispatched for the meetings of the Board of Directors.

3.11. BANCO PORTUGUÊS DE INVESTIMENTO’S MANAGEMENT Banco Português de Investimento is the Group unit specialising Banco Português de Investimento’s Board of Directors in investment banking, namely Corporate Finance, Equities and composition Private Banking. Directors Executive Non-executive

Artur Santos Silva Chairman

Banco Português de Investimento’s Board of Directors is made Fernando Ulrich Deputy-Chairman up of 11 members, of whom 6 are non-executive directors, Manuel Ferreira da Silva Chairman including the chairman and deputy-chairman, and five executive Rui de Faria Lélis  directors who constitute the Executive Committee responsible for José Carlos Agrellos  the day-to-day business management. This body is presided over António Borges de Assunção  by Manuel Ferreira da Silva, member of the Banco BPI’s Manuel Maria Meneses  Executive Committee. Maria Celeste Hagatong  Francisco Mendes Costa  The Board of Directors can only pass resolutions when the Maria do Carmo Oliveira  majority of its members are present or represented. Resolutions Rui Martins dos Santos  can only be passed by an absolute majority of votes, with the Chairman having the casting vote. Any member of the Board of Banco Português de Investimento’s Executive Committee Directors can be represented by another Board member, by composition means of a letter addressed to the Chairman, although each Areas of responsibility proxy instrument may not be used more than once. Directors Manuel Ferreira da Silva Chairman As is the case at Banco BPI, all the members of the Board of Rui de Faria Lélis Legal Affairs and Human Resources Directors are bound by strict confidentiality rules concerning the José Carlos Agrellos Private Banking matters discussed at the Board’s meetings, as well as by a set of António Borges de Assunção Asset Management internal rules. These are embodied in a code of conduct aimed Manuel Maria Meneses Organisation, Securities, Audit and Security at safeguarding against conflict of interest or situations involving Central Managers the abuse of privileged information. This issue is dealt with in Henrique Cabral Menezes Equities greater detail under point 12 – Code of Ethics and Professional Carlos Jaime Casqueiro Corporate Finance Conduct, of this report (pages 349 to 354).

316 Banco BPI | Annual Report 2006 3.12. BANCO DE FOMENTO ANGOLA’S MANAGEMENT Structure and functioning rules The Board of Directors, which is attributed the widest powers to Banco de Fomento SARL – 100% held by Banco BPI – is an manage and represent the company, meets every quarter and Angolan-law bank engaged in commercial banking business in whenever convened by its Chairman or at the request of more the Republic of Angola. than half of the Directors. The Executive Committee meets at least once a month. The resolutions of the Board of Directors In terms of the relevant Statutes, Banco de Fomento SARL and the Executive Committee are recorded in the minutes. (Banco de Fomento Angola or BFA) is managed by a Board of Directors composed of an uneven number of members, with a The Board of Directors and the Executive Committee can only minimum of three and a maximum of eleven, which can delegate deliberate in the presence of the majority of their members, with the day-to-day running of the company to an Executive their resolutions being adopted by a majority of votes. The Committee, composed of three or five directors. Chairman has the casting vote.

PRINCIPAL FUNCTIONS OF THE EXECUTIVE COMMITTEE

᭿ Granting of loans, provision of personal guarantees and ᭿ Admissions, definition of Employees’ levels and acquisition, disposal or encumbering of negotiable categories, in the terms envisaged in the budget and in securities, provided that this does not result in an the decisions approved by the Board of Directors.

involvement in one only entity or group of more than USD ᭿ Exercise of disciplinary power and application of any 7.5 million. sanctions.

᭿ Realisation of currency operations. ᭿ Opening or closure of branches or agencies.

᭿ Realisation of deposit-taking operations. ᭿ Representation of BFA in and out of court.

᭿ Acquisition, disposal and encumbering of movable and ᭿ Constitution of authorised signatories for performing immovable assets or the acquisition of services up to an certain acts or categories of acts, defining the extension individual amount of USD 1 million. of the respective mandates.

All the members of Banco de Fomento Angola’s governing bodies The current members of the Executive Committee reside form part of the BPI Group’s Management staff, bound by strict permanently in Angola and are responsible for the following areas. rules of confidentiality and subject to a set of rules designed to prevent the existence of conflicts of interest or the abuse of Banco de Fomento Angola’s Executive Committee composition privileged information, at the same adhering to the best Directors Areas of responsibility practices and principles of good and prudent management. Emídio Pinheiro Chairman of the Executive Committee Finance and Marketing Banco de Fomento Angola’s Board of Directors composition Benjamim Pinho Companies, Human Resources and Legal Affairs Chair of the Board of Executive General Meeting Directors Committee Carlos Ferreira Operations, Information Systems, Organisation, Audit and Inspection, Rui de Faria Lélis Chairman Material Resources

Alexandre Lucena e Vale Secretary Mariana Assis Accounting, Planning and Control

Fernando Ulrich Chairman António Matias Commercial, Loans to Individuals and Small Businesses António Domingues Deputy-Chairman José Pena do Amaral  José Manuel Toscano  In order to facilitate contact between the various members of

Emídio Costa Pinheiro  Chairman BFA’s senior management and Banco BPI, BFA’s head office Benjamim Costa Pinho possesses a video-conferencing system which allows Luanda to Carlos Alberto Ferreira connect to Banco BPI’s main premises in Lisbon and Oporto. Mariana Assis  António Matias 

BPI Group Corporate Governance Report 317 LEGAL AND REGULATORY FRAMEWORK GOVERNING BFA’S ACTIVITY

1. Financial Institutions Act 2. Supervision The basic enactment for Financial Institutions (Law 1 / 99, As a bank subject to Angolan law1, BFA is subject to the revised by Law 13 / 05) regulates the process for the supervision of Banco Nacional de Angola which, according to establishment, exercise of activity, supervision and funding of its Organic Law2, has as its principal objectives the credit institutions and financial companies (namely, financial, preservation of the national currencies value and the stability micro-credit, leasing companies subject to the jurisdiction of the of the financial system. To this end, the BNA is vested with Angolan Central bank (Banco Nacional de Angola) or financial powers to regulate and supervise the banking system. holding, asset management, investment fund, real-estate management and investment companies, subject to the Subsidiarily, BFA as a full subsidiary of Banco BPI, is subject jurisdiction of the Securities Market Supervisory Body). in terms of Portuguese banking legislation3 and complementary regulations4, to supervision on a consolidated basis by the This law requires, amongst other aspects, that: Bank of Portugal.

᭿ the credit institutions with head office in Angola adopt the 3. Principal prudential precepts form of public limited companies; Adequacy of own funds

᭿ they have a share capital that is not less than the legal Notice 05 / 2003 approximates the rules relating to the minimum and which is represented by nominative shares; defence of the solvency of the institutions subject to the BNA’s supervision to international regulatory criteria: prescribes a ᭿ the transactions between residents of blocks of shares minimum ratio of 10% for the adequacy of own funds5 and representing more than 10% of the capital or any transaction defines the items comprising basis own funds, complementary involving non residents, are subject to the central bank’s own funds and negative elements of own funds. It stipulates authorisation (Banco Nacional de Angola, BNA); that the complementary own funds cannot be more than basis ᭿ the members of the management and supervisory bodies, as own funds and these cannot be less than the legal minimum well as agreements entered into between shareholders, are capital required for the constitution of institutions. subject to registration at the Banco Nacional de Angola;

᭿ the activity and the annual report and accounts are subject to Limits for the concentration of risks in one Customer or group external audit by a company recognised and established in Notice 05 / 1996 defines the concept of large risk – exposure Angola. of more than 10% of the credit institution’s own funds – and lays down that: Law no. 13 / 05 lays down as the supervisory entities for financial institutions Banco Nacional de Angola, the Insurance ᭿ the exposure limit for any one Customer cannot exceed 30% Supervision Institute (Instituto de Supervisão de Seguros) and of the Bank’s own funds;

the Securities Market Supervisory Body (Organismo de ᭿ the aggregate value of large risks cannot exceed three times Supervisão do Mercado de Valores Mobiliários). own funds.

The Act prescribes in a separate chapter rules of conduct on Limits to investments matters such as: professional confidentiality, cooperation with Notice 06 / 1996 provides that credit institutions: the supervisory entities of other States, conflicts of interest of members of governing bodies and the defence of competition. ᭿ cannot hold, directly or indirectly, an interest in the capital of a company the amount of which exceeds 15% of its own Similarly, the prudential and supervisory rules are described in funds; greater detail in a separate chapter, embracing in particular, ᭿ cannot hold an overall amount of qualified shareholdings (i.e. prudential relations and limits, supervisory procedures and the more than 10% of the respective capital or voting rights) in affirmation of sound and prudent management rules, as well as companies which exceed 60% of its own funds. the duty to supply information to the supervisory body.

1) Since June 2003. 2) Law no. 6 / 97 of 11 July. 3) Article 130 of Decree Law 298 / 92 of 31 December. 4) Namely Decree Law 36 / 92 of 28 March. 5) Relationship between own funds and risk-weighted assets.

318 Banco BPI | Annual Report 2006 Minimum limits of provisions Mandatory reserves Under notices 05 / 1999 and 09 / 1998, banks must Instruction 10 / 2003 and respective Directives fix a constitute provisions for general credit risks in the currency of coefficient of 15% for the basis of incidence (residents and the respective loan, by a minimum of 2% and a maximum of non-residents deposits, in local or foreign currency, with the 4% of the loan portfolio in foreign or local currency. exclusion of resources tied to currency operations) of which half can be kept in Central Bank Securities or Direct Public Pursuant to Instruction 09 / 1998, loan operations in arrears Debt securities, with a maturity of more than 63 days for 30 days after maturity, including the future instalments of registered in the Management System for Markets and Assets contractually envisaged instalments, must be transferred to a (GEMA). The reserves requirement is calculated on a weekly non-performing loan account, with the respective minimum basis on the arithmetic average of the balances of the provisions increasing in proportion to the length of time after penultimate week’s business days. due date. Control of liquidity Only the recomposition, extension or renovation of arrear loans As an indirect means of controlling the Angolan economy’s will allow the reclassification of such loans as normal loans: liquidity, Notice 05 / 2004 regulates the issue and trading in the reversal of provisions is only permitted when the Central Bank Securities (TBC), in dematerialised form sold on guarantees pledged are reinforced or when the accrued interest the primary market with remuneration defined by discount to and charges are paid in full. the face value, with short-term maturity and interest rate fixed by the BNA or defined in auction. In terms of Directive 17 / 1998, the operations referring to advances to depositors to cover any overdrawn current accounts Decrees 51 / 2003 and 52 / 2003 give origin to the Direct must be repaid in the maximum period of 30 days, except Public Debt securities (Treasury Bonds and Treasury Bills), those which must be classified to a non-performing loan which are dematerialised securities, issued on the basis of account and 100% provided for. purchase bids subscribed to by the institutions authorised by the BNA, according to previously-enunciated placing Maintenance Reserve for Own Funds conditions1. Directive 01 / 2003 confers to financial institutions the possibility of, according to their own criteria, creating a Internal control and external audit provision for the maintenance of own funds, covering the Instruction 01 / 1998 provides that the institutions forming amount of the capital, reserves (except fixed-asset revaluation part of the financial system must have a system of internal reserve) and positive retained earnings, based on the currency control adapted to the size, nature and risk of the activities variation which occurred. undertaken.

Limit of currency position This system must be: Notice 6 / 03 permits authorised banking institutions to conduct foreign exchange business, and to hold an open ᭿ supervised by an internal audit group reporting directly to the currency position up to 20% of regulatory own funds with Board of Directors;

reference to the previous month. The currency position limit ᭿ reviewed by an external auditor who will prepare a report on must be monitored daily and the amount of the currency the credibility of the financial statements presented relating position must be reported daily to the Banco Nacional de to the close of the financial year. Angola (central bank).

1) Regulated under Instruction 06 / 2004.

BPI Group Corporate Governance Report 319 4. The Group’s functional organisation chart

Executive management, supervision and control Product units The composition and functions of the BPI Group’s management, The development of the banks’ commercial products and supervisory and control bodies are detailed in points 3.1. to services is segregated by specialised Divisions (product units), 3.11. of this report. part of which are – building finance, property financing, motor vehicle finance, personnel credit, cards, resources, asset BPI Group functions management, leasing and factoring – simultaneously serve the The BPI Group units grouped according to their functions are individuals, small businesses and corporate segments. The under the direct command of Banco BPI’s Executive Committee. product units are responsible for loan decisions and for the processing of operations, as well as managing the relationship Central structures with the specialised channels. These structures embrace the entire universe of shared services (of the back-office G kind) which act as direct support to the Channels Group’s other units by undertaking the development and BPI possesses a multi-channel distribution network, fully maintenance of its operational, physical and technological integrated, composed of 574 retail branches, homebanking infrastructure. services (BPI Net), telephone banking (BPI Directo), Automated Banking (ATMs), agents network, online brokerage (BPI online – Credit risks service provided by the Investment Bank), specialised branches The Executive Committee for Credit Risk is the body that takes and structures dedicated to the corporate and institutional the principal decisions concerning matters relating to the segment (41 corporate centres, one project finance centre and concession, monitoring and recovery of lending operations. At a six institutional Client centres). Outside Portugal, BPI is engaged more operational level, credit risk management is centralised at in commercial banking business in Angola and Mozambique, the Credit Risks Division which manages in an integrated fashion through two local-law banks – Banco de Fomento Angola (100% the five Customer segments. Namely: individuals, small held by the BPI Group) and BCI-Fomento (30% held by the BPI businesses, companies, institutional banking and project Group). It also has a number of branches and representative finance. The manner in which the various risks are managed at offices which essentially provide support to Portuguese emigrant the BPI Group is comprehensively dealt with in a separate communities. chapter in the Directors’ Report. Brand quality and training Market risks Quality, communication and brand management are managed The Executive Committee for Market Risks is the body that under the direction of the same member of Banco BPI’s makes the main decisions concerning the activities which entail Executive Committee. This arrangement has as its goal market risks for BPI. It is primarily responsible for formulating prioritising service quality, thereby entailing close coordination overall strategy and operating regulations, fixing the limits for between the quality, technical and behavioural programmes, as treasury exposures to be adhered by the Finance Division, and well as those covering brand communication and development. defining the parameters for the management of long-term This coordination also encompasses the training area, a crucial structural positions (interest rate or currency risks) and fixing the element for ensuring superior standards of service. global limits for value-at-risk (VaR).

Marketing The marketing function is carried out in a segregated manner according to the segmentation between Individuals and Small Businesses, on the one hand, and Companies on the other. In the case of Individuals and Small Businesses Marketing, this function is undertaken by two Divisions which report to the same executive head: Strategic Marketing – concentrated above on the management of the systems CRM (Customer Relationship Management) – and Operational Marketing – focusing on the coordination of the sales function. The Marketing Division – Companies handles all aspects relating to communication, information and the management of databases associated with commercial activity directed at corporate Customers.

320 Banco BPI | Annual Report 2006 THE BPI GROUP’S FUNCTIONAL ORGANISATION CHART

Shareholders’ General Meeting Remuneration Portuguese Committee Statutory Auditor Banco BPI’s Consultative Board of Directors bodies

Corporate Governance Nomination, Evaluation and Company Audit Committee Committee Remuneration Committee Secretary

Banco BPI's External Auditors Executive Committee

Executive Committee Executive Committee Executive Committee Executive Committee of for Investment Banking for market Risks for Credit Risks Banco de Fomento Angola

Central structures Group functions Information systems Accounting and Planning Organisation Legal Securities Financial Management Risk Analysis and Control Operations Auditing and inspection Procurement, outsourcing Human Resources and fixed assets Investor Relations Security Public Relations Financial and Economic Studies Domestic International activity activity Investment Private Domestic Asset Overseas Insurance Banking Equity Commercial Banking Management Commercial Banking

Banco Português Inter-risco Banco BPI BPI Gestão de Allianz Portugal Banco de Fomento de Investimento Activos Angola

Equities Individuals and Small Corporate Banking, Unit trust funds Non-life and life-risk Individuals Banking Corporate Finance management insurance Corporate Banking Businesses Banking Institutional Banking Private Banking and Project Finance Investment Banking BPI Suisse Credit risks BPI Pensões Cosec BCI – Fomento1 Individuals Mozambique Small businesses and companies Madrid Institutional Banking Pension funds Export credit Banco BPI Cayman Project Finance management insurance Contentious and recovery Branches of lending operations BPI Vida Madrid Marketing Paris Operational Marketing Corporate Marketing Insurance Strategic Marketing capitalisation Macau Product factories Representative Customer Resources offices Personal Loans Geneva Cards Hamburg Building finance Newark Real Estate Financing Caracas Motor Car Financing Johannesburg Loan products and services2 Channels Channels Channels BPI Online Traditional network Traditional branches Investment centres Corporate centres Investment Centres In-store branches Institutional centres Corporate Centres Project finance centre BFA Net Automatic banking Telephone banking BPI Net Empresas BPI Net Housing shops Other Real Estate channels Other motor car finance channels External promoters Protocols banking Emigration International

Business support Brand Communication and Management Quality Training 1) 30% shareholding. 2) Namely leasing, factoring and documentary credits.

BPI Group Corporate Governance Report 321 5. Risk management

5.1. RISK MANAGEMENT PRINCIPLES 5.2. DIVISION OF RESPONSIBILITIES IN RISK CONTROL AND Risk management at the BPI Group is based on the permanent MANAGEMENT identification and analysis of exposure to different risks – credit The policy, procedures and allocation of powers amongst the risk, country risk, market risks, liquidity risk, operating and legal Group’s various bodies and departments on matters relating to risks – and on the adoption of strategies aimed at maximising the control and management of the Group’s risks are described profitability within predefined (and duly supervised) limits. in detail in a separate chapter of the Directors’ Report and are Management is complemented a posteriori by analysis of incorporated into this document by reference. performance indicators.

Matrix of responsibilities for risk management and control Identification and analysis of exposure Strategy Limits and control Evaluation of performance Credit / DACR: ratings and scorings CECA and CERC: overall strategy CECA, CERC, DRC, DACR, DIG, CECA counterparty risk (Probabilities of Default), and loss and approval of substantial DTA and risk areas of the CERM, CERC given default for all loan segments operations Credit Departments: limits DP, DACR DACR and DIG: external rating DRC and Credit Divisions: CECA, CAUD, CERC, DACR, identification to debt securities and to approval of operations Internal and external Auditors, All the Divisions credit to financial institutions Bank of Portugal: control DRC: companies ratings; Expert system for small businesses DRCCP and risk areas of DFI, DCA / DCP, DFA: Expert System DACR: exposure to derivatives DACR: overall analysis of exposure to credit risk

Country risk DIG: analysis of individual country CECA and CERM: overall strategy risk recourse to external ratings and DIG, DF, DA, DTA: operations analyses DACR: analysis of overall exposure Market risk DACR: analysis of risk by books / CECA and CERM: overall strategy CECA, CERM, DACR, DF, DA instruments and global risks – interest DF, DA and DTA: operations and DTA: limits rates, currencies, equities and CECA, CAUD, CERM, DACR, commodities Internal and external Auditors, Liquidity risk DF, DA and DTA: individual risk CECA and CERM: overall strategy Bank of Portugal: control analysis of liquidity, by instrument DACR: analysis of overall liquidity risk

Operating risks DACR: analysis of overall exposure CECA: overall organisation CECA, CERM, DORG, DACR: DORG and all the Divisions: DORG: regulations regulation and limits identification of critical points CECA, CAUD, DORG, DACR, Internal and external Auditors, Bank of Portugal: control

Legal risks DJ CECA, CAUD, DJ, Internal and external Auditors, Bank of Portugal: control

CECA – Comissão Executiva do Conselho de Administração (Board of Directors Executive Committee) CAUD – Comissão de Auditoria (Audit Committee) CERC – Comissão Executiva de Riscos de Crédito (Credit Risk Executive Committee) CERM – Comissão Executiva de Riscos de Mercado (Market Risk Executive Committee) DA – Departamento de Acções (Equity Department) DACR – Direcção de Análise e Controlo de Riscos (Risk Analysis and Control Division) DF – Direcção Financeira (Financial Division) DIG – Direcção Internacional do Grupo (the Group’s International Division) DJ – Direcção Jurídica (Legal Division) DORG – Direcção da Organização (Organisation Division) DP – Direcção de Planeamento (Planning Division) DRC – Direcção de Riscos de Crédito (Credit Risk Division) DTA – Direcção de Trading e Arbitragem (Trading and Arbitrage Division)

322 Banco BPI | Annual Report 2006 6. External auditors

The External Auditor is elected by the General Meeting following their professional activity – in BPI Group companies, capable of a proposal by the Audit Committee. leading a reasonable and informed third party to conclude that such interests could compromise the auditor’s independence. Deloitte & Associados, SROC, S.A. (Deloitte), a member firm of the international network Deloitte Touche Tohmatsu, is the BPI On the other side, the auditors’ professional statutes provide that Group’s external auditors / Portuguese Statutory Auditor and was anyone who has served in the last three years as a member of a elected in the General of Meeting of 20 of April of 2006. The company’s administrative or management bodies, cannot partner in charge of the audit of Banco BPI’s consolidated exercise the function of auditor of the same company. In the financial statements is Maria Augusta Cardador Francisco. same manner, the auditor who in the last three years has acted as the statutory auditor of companies or entities, is barred from 6.1. INDEPENDENCE exercising functions as a member of such companies’ or entities’ BPI recognises and subscribes to the concerns manifested, administrative or management bodies. amongst others, by the CMVM (Securities Market Commission), by the European Commission and by IOSCO – International BPI has adopted the principle of not entering into employment Organization of Securities Commissions, amongst other entities, contract s with any partner of the audit firm which has provided regarding the safeguarding of auditors’ independence vis-à-vis audit services to any BPI Group companies before at least two the audit Client. BPI believes that this independence is essential years have elapsed since the cessation of the provision of such for ensuring the public’s trust in the reliability of their reports services. and in the credibility of the financial information published. It should also be underlined that the Companies Code provides BPI is of the opinion that its auditors are independent within the that the Audit Committee is responsible for proposing the context of the regulatory and professional requirements appointment of the External Auditor / Portuguese Statutory applicable and that their objectivity is not compromised. BPI has Auditor. As referred to in a separate chapter, the Audit incorporated into its governance practices and policies several Committee must obligatorily be composed solely of members of mechanisms which safeguard the independence of the auditors. Banco BPI’s Board without executive functions.

Namely, the company which audits the BPI Group’s accounts, as Finally, the Companies Code prescribes that the External Auditor / well as the persons in charge of the relevant audit work, has to Portuguese Statutory Auditor must be elected by the General the best of BPI’s knowledge, no interest – effective or imminent Meeting, which reinforces his / her independence vis-à-vis the – financial, commercial, employment, family or of any other Company’s management team. nature – other than those which result from the normal course of

BPI Group Corporate Governance Report 323 DELOITTE’S POLICIES AND PROCEDURES Deloitte & Associados, SROC S.A. (Deloitte), an audit firm procedures designed to ensure that its world-wide network registered with the CMVM and appointed by BPI, has, according provides quality services and complies with all the applicable to information supplied by it to BPI, implemented policies and independence and ethical rules.

QUALITY, INDEPENDENCE AND ETHICS The functioning of the quality control system, independence In addition: and ethics is assured, in the first place, by the appointment at ᭿ all the services or Clients prior to their acceptance by global and national levels of partners with vast experience in Deloitte are assessed for the risks involved. According to the auditing (Reputation and Risk Leaders), without grading given to those risks, actions are identified and responsibilities for day-to-day management. Their function in control mechanisms implemented aimed at their monitoring;

the respective jurisdiction entails being at the forefront of all ᭿ all the services provided to Clients are subject to the quality the matters relating to quality, reputation and independence at review by other Deloitte partners who are independent in the Deloitte organisation. Their main duties include: relation to the team which provided in the first place services to the Client; ᭿ the definition of policies, the issue and disclosure of rules ᭿ the quality levels are further reinforced by centres of governing standards and quality procedures, independence excellence for technical matters and for specialisation rules, ethics and professional conduct; located in various parts of the world, which the responsible ᭿ follow-up of changes in the regulation of the various services partners can have access to in order to guarantee that in offered by Deloitte; each country the technical quality of the services provided is ᭿ the implementation and maintenance of mechanisms and safeguarded;

processes aimed at quality, independence and ethics, with ᭿ as a global organisation, Deloitte is the object of internal particular focus on the controls over the mechanisms for quality control undertaken by partners from other Deloitte identifying conflicts, approval and consultation (between the member firms at least once every three years. The different service lines and between the different countries or implementation plan for the recommendations arising from jurisdictions); their reviews is monitored regularly;

᭿ the management and updating of the global list of Deloitte’s ᭿ in Portugal, Deloitte is subject to the external quality control Public Interest Clients (“International Restricted Entities List”); undertaken by the Ordem dos Revisores Oficiais de Contas ᭿ the analysis of the information produced by the software (Portuguese Institute of Statutory Auditors). Deloitte & GIMS – Global Independence Monitoring System (which Associados, SROC S.A. is registered with the PCAOB (Public encompasses Clients, persons and services provided); Company Accounting Oversight Board) and, consequently, is

᭿ the control of the annual independence confirmation process subject to its supervision. and the conduct of test programmes and periodic inspections; Independence and ethics

᭿ the application of disciplinary procedures in the case of any Independence and ethics policies and practices are based on breach of the rules laid down for independence and ethics. those issued by IFAC (International Federation of Accountants) and are complemented by national or other more stringent rules, namely, those issued by the SEC (U. S. Securities and Exchange Quality Commission), those envisaged in the Sarbanes-Oxley Act, and Deloitte’s quality-control policies embrace, amongst others, the the European Commission’s recommendation of 16 May 2002 following aspects: on auditors’ independence. The disclosure of the independence and ethics control system is assured by means of strict standards ᭿ standards relating to the recruitment of professional staffs; which are periodically updated and made available to all persons ᭿ programming of Employees’ professional careers; working for the Deloitte firm via Intranet. Internal training ᭿ definition and development of the specific competencies of courses are held periodically dealing with independence and the teams allocated to each Client or department. ethics, attendance of which is compulsory.

324 Banco BPI | Annual Report 2006 6.2. LIABILITY 6.3. REMUNERATION In terms of the law1, auditors2 are jointly and severally liable for The remuneration paid to Deloitte and its network3 for services the “damages caused to the issuers or to third parties for any rendered to BPI Group companies in 2006 amounted to 1.8 shortcomings in their reports or opinions”. M.€. This figure is broken down in the table below according to the nature of the work performed and the company to whom the services were provided:

Figures in thousands of euros Banco BPI Banco de Banco Português BPI Gestão de Others1 Total Type of service Fomento Angola de Investimento Activos Statutory audit 590 57 115 84 197 1 043 Other attest services 262 45 43 25 19 393 Of which services relating to: Review of the financial information disclosed in the EMTN Programme 20 Review of the financial information disclosed in the debt securitisation operations 72 Business Plan contained in the Board of Directors’ Report on the acceptability and conditions of the takeover bid announced by BCP 98 Opinions on the adequacy of the internal control systems and the economic provisions 203 Tax consulting 179 - 130 - - 309 Other services 89 - - - - 89 Of which, services relating to: IAS 69.5 Information systems 19.5 Total 1 120 101 288 109 216 1 834 1) By order of importance (decreasing) according to the amount paid: BPI Vida, Sofinac, BPI Pensões, BPI Suisse, Banco BPI Cayman, Inter Risco, BPI – Locação de Equipamentos, BPI Rent, Douro-SGPS, Eurolocação and BPI Madeira.

Deloitte and its network did not provide any service to the BPI Group in areas such as financial information technology, internal audit, valuations, legal defence, recruitment, amongst others, which are capable of generating situations of conflict of interest and impairment to the quality of the audit and statutory audit work.

All the services provided by Deloitte, including the respective remuneration terms, are independently of their nature the object of prior review and approval by the Audit Committee, thus constituting an additional mechanism safeguarding the independence of the External Auditor.

1) Article 10 of the Securities Code. 2) In terms of article 10 of the Securities Code, the term “auditors” includes “the Portuguese statutory auditors and other persons who have signed the report or the opinion” (paragraph 1a) and “the firms of Portuguese statutory auditors and other audit companies, provided that the documents audited have been signed by one of their members / partners” (paragraph 1b). 3) BPI’s “Network” of auditors include Deloitte and Deloitte & Associados, SROC, S.A., and is in accordance with the definition of “Network” laid down by the European Commission in its Recommendation C (2002) 1873, of 16 May 2002.

BPI Group Corporate Governance Report 325 7. Remuneration

7.1. REMUNERATION POLICY 7.1.1. Principles 7.1.2. Principal components BPI’s remuneration policy is founded on five pillars. The remuneration attributed to BPI Group Directors and Employees includes a fixed and a variable component, with the latter increasing with each one’s level of responsibility and is set Performance according to each one’s merit. The remuneration packages of BPI’s Executive Directors and Employees are directly associated with the performance levels The annual attribution of variable remuneration to the Group’s attained: senior staff with the highest responsibility results from the individual assessment made by Banco BPI’s Executive ᭿ by the Bank; Committee. ᭿ by the business or business-support unit to which the person concerned is associated; In 2001 the BPI Group instituted the Variable Remuneration in 1 ᭿ by their individual merit. Shares Programme(Portuguese initials RVA) which consists of the granting of part of the variable remuneration in the form of shares and options to buy BPI shares: The RVA Scheme The criteria used in ascertaining the performance level and encompasses the members of Banco BPI’s Executive Committee, relative weight of each one of the aforementioned areas vary the Board of Directors of Banco Português de Investimento and according to the functions and degree of responsibility of the those Employees whose variable remuneration is 2500 euro or person concerned. more. The weight of the RVA Scheme on variable remuneration rises with the level of responsibility, oscillating between a Competitiveness minimum of 10% and a maximum of 50%. BPI seeks to offer its Directors and Employees remuneration packages which are competitive taking into account market In point 8 – Programa de Remuneração Variável em Acções practice for a given area of specialisation, degree of (RVA) – detailed information is provided about this important responsibility and geographical area. With this policy, BPI aims instrument for strengthening the alignment of Employees’ and to attract and retain the most efficient and lucrative people who Directors’ interests with those of the Shareholders. display the most potential for the organisation.

Employees of the individuals and small businesses commercial Strategy network also benefit from the Incentive and Motivation System The remuneration which is attributed to a specific employee is (SIM – Sistema de Incentivo e Motivação), which constitutes a also influenced by BPI’s specific needs and priorities at any component of variable remuneration which is awarded according given moment, as well as by the importance and singularity of to the commercial performance. This component’s specific the person’s contribution to the organisation. conditions are revised quarterly.

Equity 7.1.3. Profit sharing BPI remuneration practices are founded on uniform, consistent, Banco BPI has a policy of not remunerating its directors2 in the fair and balanced criteria. form of a share in the net profit. Nonetheless, article 28 of Banco BPI’s Statutes provides that the members of the Executive Alignment with the Shareholders Committee can earn variable remuneration corresponding to a All the Directors, Managers and a group of Employees have a ceiling and in global terms of 5% of annual consolidated net portion of their remuneration which is anchored to the profit. The full amount of directors’ compensation is recorded in performance of Banco BPI shares on the stock exchange. the caption personnel costs.

1) In relation to 2006, the full amount of variable remuneration was paid in cash. 2) As well as the Employees.

326 Banco BPI | Annual Report 2006 7.2. REMUNERATION OF MEMBERS OF BANCO BPI’S GOVERNING BODIES 7.2.1. Rules of attribution and competent bodies The Remuneration Committee is the governing body responsible The following table details the manner of remunerating the for the amount of the annual remuneration to be paid to the governing bodies, attribution rules and competent deciding members of Banco BPI’s governing bodies. bodies.

Remuneration structure of Banco BPI’s governing bodies Remuneration Rules Fixed Variable Deciding body Fixed Variable Cash Normal Attendance allowances RVA Scheme The amount of annual fixed GM defines every three years the maximum percentage General remuneration is defined every of annual consolidated net profit which, not exceeding Meeting, Chairman three years by the General 5% each year, can be allocated to variable Remuneration and Deputy-  –   Meeting, Art. 28(2) and (3), remuneration. Committee, -Chairman in the deliberation which The Remuneration Committee decides each year within based on the Members precedes the election of the the limits set by the GM, and based on the opinion of the of the Remuneration Committee. recommendations of the Nominations, Evaluation and Nomination, Executive In subsequent years, the Remuneration Committee. The variable remuneration to Evaluation and Committee fixed remuneration is be granted to each member of the Executive Committee Remuneration (CECA) Committee. adjusted according to the Variable remuneration is determined each year on the Other increase stipulated by the 1  –   basis of individual and collective performance. members ACTV – Vertical Collective Employment Agreement, for Weight of the RVA scheme on variable remuneration is level 18. 50% for the Chairman and Deputy-Chairman and 40% for the other members of the Executive Committee.

Amount of remuneration General Meeting

Board of Directors (fixed) is fixed at the start of the 3-year mandate. In subsequent years, the Chairman of the Board  – – fixed remuneration is – of Directors adjusted according to the increase stipulated by the ACTV – Vertical Collective Employment Agreement, for level 18. Amount of remuneration Non-executive Directors  – – (fixed) is fixed at the start of – the 3-year mandate.

Audit Committee –  – – –

Nomination, Evaluation and –  – ––– Remuneration Committee

Committees Corporate Governance  ––– Board of Directors' – – Committee Is not remunerated. Remuneration Committee –– – ––

The fees are fixed annually. Audit Committee Portuguese Statutory Auditor  –– –

1) Evaluation criterias take into consideration an adequate balance between merit, individual performance and contribution to the Executive Committee efficiency.

7.2.2. Exclusivity It is the BPI Group’s policy that the persons forming part of Banco BPI’s Executive Committee can only exercise corporate functions at other companies as BPI representatives. The remuneration attributed to them for occupying these positions is included in the overall remuneration set by the Remuneration Committee. These Directors are barred from exercising any other remunerated functions.

BPI Group Corporate Governance Report 327 7.2.3. Remuneration earned in 2006 In 2006, the total remuneration paid to Banco BPI’s Executive The variable component amounted to 4.3 M.€, corresponding to Committee was 6.1 M.€, which corresponds to an increase of 71% of the total remuneration (68% in 2005). In 2005, the 13.2% relative to 2005. variable remuneration as a percentage of net profit was situated at 1.4% (1.5% in 2005).

Remuneration of members of Banco BPI’s Board of Directors1 Amounts expressed in thousands of euro 2005 2006

Fixed2, 3 Variable4 Total Fixed2, 3 Variable Total

Cash RVA Total Cash RVA Total

Executives5 1 701 2 050 1 625 3 675 5 376 1 786 4 300 - 4 300 6 086 Non-executive 9516 ---9516 1 142 - - - 1 142 Total 2 652 2 050 1 625 3 675 6 327 2 929 4 300 - 4 300 7 229 1) Remuneration earned for executive functions exercised, not only at Banco BPI, but at all the companies with which Banco BPI maintains a controlling or Group relationship, in conformity with the amendments made to the Annex to the CMVM’s Regulation no. 7 / 2001 by CMVM Regulation no. 11 / 2003. 2) Fixed remuneration includes length of service increases and bonuses. 3) The fixed remuneration of the Board of Directors’ members who are members of the Audit and Internal Control Committee up until 20 April 2006 and of the Audit Committee effective from that date, include the attendance allowances for those governing bodies in the overall amounts of 88 thousand euro and 148 thousand euro, respectively in 2005 and 2006. 4) Includes in 2005, the remuneration earned for the exercise of the corporate office in representation of BPI at a non-controlled company, in the amount of 61 thousand euro. 5) The Executive Directors’ combined share in profits cannot exceed annually 5% of net profit (article 25 of the Statutes). 6) Includes 47 thousand euro in fixed remuneration relating to 2005, but only available in 2006. In the 2005 Annual Report, the amount presented as the fixed remuneration of the non-executive Directors (903 thousand euro) did not include this amount.

The full amount of the variable remuneration relating to 2006 7.2.4. Weight of remuneration on net profit was paid in cash. The total amount of remuneration (fixed and variable) of the members of the Board of Directors represented in 2006 2.3% In 2005, roughly 56% of variable remuneration was paid in of Banco BPI’s consolidated net profit for that year (2.5% in cash, 2.1 M.€, while the remaining 1.6 M.€ was paid through 2005). the granting of BPI shares and options to buy BPI shares (in identical proportions) under the RVA Scheme in force at the Weight of the remuneration of members of Banco BPI’s Board of Group. The 2005 RVA Scheme resulted in the granting to the Directors in net profit Executive Directors of 183 thousand Banco BPI shares and % 1806 thousand options to buy Banco BPI shares. 3.4 3.6 3.2 3.1 3.1 3.0 The remuneration of the non-executive members of the Board of 2.8 € 2.6 2.5 Directors totalled 1.1 M. , in 2006, and includes the payment 2.3 2.1 attendance allowances for meetings of the Audit and Internal 2.0 2.0 1.9 1.8 1.8 Control Committee up until 30 June (four meetings), and of the 1.5 1.4 Audit Committee as from July 2006 (four meetings). The Shareholders’ General Meeting held on 20 April 2006, deliberated to increase from 12 to 14, the number of non-executive Directors. 01 02 03 04 05 06

Total remuneration, as a % of consolidated net profit, of all Board of Directors including fixed and variable remunerations of Executive Committee members. Total remuneration, as a % of consolidated net profit, of the Board of Directors' Executive Committee. Variable remuneration, as a % of consolidated net profit, of the Board of Directors' Executive Committee.

328 Banco BPI | Annual Report 2006 7.3. REMUNERATION OF MEMBERS OF BANCO PORTUGUÊS DE INVESTIMENTO’S BOARD OF DIRECTORS The remuneration of members of Banco Português de It is the BPI Group’s policy that the persons forming part of Investimento’s Board of Directors is fixed by the Remuneration Banco Português de Investimento’s Board of Directors, with Committee, based on a proposal by the Chairman Banco BPI’s executive functions at BPI Group, can only exercise corporate Executive Committee and on the opinion of the Chairman of functions at other companies as BPI representatives or in the Banco BPI’s Board of Directors. The variable remuneration interest of BPI. The remuneration attributed to them for amount takes into account the Bank’s and each director’s occupying these positions is included in the overall remuneration individual performances. set by the Remuneration Committee. These Directors are barred from exercising any other remunerated functions.

Remuneration of Banco Português de Investimento’s Board of Directors members1 Amounts expressed in thousands of euro 2005 2006

Fixed Variable Total Fixed Variable Total

Cash RVA Total Cash RVA Total Remuneration 1 045 1 040 560 1 600 2 645 1 123 1 880 - 1 880 3 003 1) Remuneration earned by members of Banco Português de Investimento’s Board of Directors, who are not members simultaneously of Banco BPI’s Board of Directors Executive Committee, for functions exercised not only at Banco Português de Investimento, but at all the companies with which Banco BPI has a controlling of group relationship.

7.4. PENSION PLANS FOR DIRECTORS OF THE BANKS The pension plan for Directors of the BPI Group’s banks are Current Retired Total embodied in two regulations: one which applies to the Directors Number of persons 16 4 20 of Banco BPI’s Executive Committee, to the former Directors of Obligations (th.€) 17 424 4 507 21 931 the Executive Committee of the ex-BPI SGPS and to the former members of the elected Management Board of Banco Português de Investimento who, after nine years of service, still remain in As regards the Executive Committee in office, at 31 December management functions at any bank controlled by it; and the other 2006 the situation was as follows: which applies to the Directors of Banco Português de Number of persons 7 Investimento. Average period of service 10.2 Obligations (th.€) 7 339 As regards benefits, the regulations prescribe the payment of retirement (old age or infirmity) and survivors’ pensions, calculated In December 2006, the liabilities for retirement and survivors’ in accordance with the fixed monthly salary earned in the month pensions to the Directors of the BPI Group’s Banks were before the retirement date and the number of years of service. As transferred to an open-end pension fund (Fundo de Pensões BPI a rule, the maximum benefit (100%) is attained with 16 years of Valorização). service1 as Director and with more than 60 years of age. The fund assets allocated to the Directors of the BPI Group’s The pensions paid by the Social Security or by other BPI Group Banks amounted to 21 941 th.€ at 31 December 2006, covering pension plans are deducted from the pensions payable under the the full amount of the respective obligations for past services. Directors’ plan.

For purposes of calculating the obligations allocated to the Directors’ pension plan, account is also taken of the application of the regulations for the Directors of the Banco Fonsecas & Burney (incorporated in Banco BPI) and for the Directors of Banco Português de Investimento. The universe of Directors covered, which includes the Chairman of Banco BPI Board of Directors, at 31 December 2006, was as follows:

1) Or, in the case of Banco Português de Investimento Directors, with the exercise of management functions at the BPI Group for at least 20 years, at least 10 of which as Directors.

BPI Group Corporate Governance Report 329 7.5. LOANS TO MEMBERS OF BANCO BPI’S BOARD OF 7.6. INSURANCE OF BANCO BPI’S DIRECTORS DIRECTORS The Chairman of the Board of Directors and Executive Directors In general terms, the granting of loans to the members of the of Banco BPI in current service benefit from a range of Executive Committee of Banco BPI’s Board of Directors is insurance policies which cover life, illness and accident risks. regulated in article 85 of the General Regime of Credit

Institutions and Financial Companies (Regime Geral das Amounts expressed in thousands of euro Instituições de Crédito e Sociedades Financeiras). This Policy Risk covered Capital insured enactment provides that “credit institutions cannot grant loans in Group life assurance Illness 424 whatever form or mode, including the provision of guarantees, Accident (involuntary and whether directly or indirectly, to the members of the cause) 848 management or supervisory bodies, not to companies or other Traffic accident 1 272 collective entities controlled by them directly or indirectly”, Personal accident insurance Accident 127 unless such loans can be classified as “operations of a social Work accident insurance Dead or professional disability Pension1 nature or with a social objective or arising from personnel policy”. Health insurance2 Illness or accident 253 1) To himself / herself (or surviving spouse) and to children (if dependents). In this regard and in terms of established policy, the members of 2) Covers the respective family. the Executive Committee of Banco BPI’s Board of Directors benefit 3) Annual. from the subsidised home loan regime in force at the Banks for all their Employees. Hence, at 31 December 2006, the overall The costs borne by the BPI Group with respect to the above balance on mortgage loans granted to members of the Executive policies totalled 45.3 thousand euro in 2006. Committee of the Board of Directors for the purpose of acquiring their own homes amounted to 2.8 M.€ (2.9 M.€ in 2005). In addition, the BPI Group bears the cost of 7.6 thousand euro for contribution to the SAMS relating to three Executive The terms and conditions – risk evaluation, interest rates, Directors of Banco BPI who benefit from this medical aid guarantees furnished, term, etc – under which loans are granted scheme. to the members of the Executive Committee of Banco BPI’s Board of Directors are identical to those applied to the Group’s other Employees.

The executive directors, as well as Employees, also benefit from a credit line for the exercise of options and the retention of the shares obtained in portfolio, as described in greater detail under point relating to this scheme (point 8.2.5, on page 341).

330 Banco BPI | Annual Report 2006 7.7. INDEMNITIES AND EARLY TERMINATION OF CONTRACTS 7.8. OTHER BENEFITS / COMPENSATION 7.7.1. Early termination of contracts The BPI Group’s Directors and Employees do not benefit from BPI has a policy in cases where this is a dismissal or an early other forms of remuneration other than those referred to in this termination of a contract with an executive director, to grant to chapter or which are derived from the normal application of the such person the amount of fixed remuneration to which he / she ACTV (Collective Employment Agreement for the Banking Sector) is entitled had he / she remained in office till the date of any or from labour law. contract renewal. The compensation for the variable remuneration component is attributed on the same terms, based on the last amount awarded.

No compensation was paid nor is any due in 2006 to any former executive directors relating to the cessation of their functions during the year.

7.7.2. Change in control of the company The BPI Group’s Directors and Senior Employees do not benefit from any indemnity clause of an extraordinary nature, in terms of which they are entitled to be compensated in the event of a change occurring in the control of the company.

BPI Group Corporate Governance Report 331 8. Share Incentive Scheme

8.1. CONCEPT, BENEFICIARIES AND OBJECTIVES 8.1.1. Concept The BPI Group has a variable remuneration programme in shares ᭿ Encourages individual merit, given that since it is a variable (Portuguese initials – RVA) which entails the awarding of a component of remuneration, the amount thereof grows in step portion of the variable remuneration in the form of Banco BPI with the individual’s performance and merit. shares and share options. This programme has been in force at ᭿ Aligns the interests of the Directors and Employees with those the Group since the beginning of the 2001 financial year. of the Shareholders, given that the income is intrinsically tied to the performance of the BPI share on the stock exchange, 8.1.2. Beneficiaries while the importance of this incentive relative to the total The programme encompasses Banco BPI’s Executive Committee remuneration rises commensurately with the level of and Banco Português de Investimento’s Board of Directors, and responsibility. This stimulus is intensified by the existence of all Employees whose annual variable remuneration is equal to or the option to buy BPI shares, thereby permitting the leveraging exceeds 2 500 euros. of the gains from the future appreciation of the shares, while a negative trend in the share price results in a nil value of the 8.1.3. Objectives options. The RVA constitutes an important management instrument for ᭿ Boosts fidelity and retains talents – given that the RVA the Group’s human resources and strengthens the alignment of incentive is made available to the beneficiary in phases, from Directors’ and Employees’ interests with the ultimate goal of the the award date to the end of the third year thereafter, and Group and its Shareholders – the creation of value: under the condition that the beneficiary maintains a connection with the Group. This effect is all the more important the higher the individual’s responsibility and merit and constitutes an important means for the positive selection of human resources.

TOTAL REMUNERATION

Fixed remuneration Variable remuneration

% of variable % of variable remuneration Composition of variable remuneration remuneration in cash in shares and options Chairman and Deputy-Chairman of the Executive Committee 50% 50% Other Directors of the Executive Committee 60% 40% Other members of the Investment Bank Board of Directors 65% 35% Managerial staff 85% to 70% 15% to 30% Other Employees 90% 10%

Variable remuneration RVA (€) in cash (€)

Composition of RVA (subject to RVA beneficiaries choice) % of RVA in shares % of RVA in options 100% 0% 75% 25% 50% 50%

Variable remuneration Variable remuneration in shares (€) in options (€)

332 Banco BPI | Annual Report 2006 Main characteristics of the RVA Scheme Type Attribution of Banco BPI shares and share options Dilution The execution of the share incentive scheme does not contemplate the issue of capital. Settlement (attribution of shares and The attribution of shares and the exercise of options is effected by recourse to the treasury stock portfolio exercise of options) constituted for this purpose. Frequency Regular annual attribution programme. Period to which it refers The RVA remuneration is a component of variable remuneration, which is calculated based on the assessment of the performance for the year to which the award refers and therefore represents remuneration for services rendered. Accounting treatment of the attribution cost The value of the RVA incentive granted is recorded as personnel costs, considering for this purpose the market value of the shares (average quoted price in the last ten stock exchange sessions prior to the grant) and the fair valueG of the options. The attribution cost is deferred on a straight-line basis from the beginning of the year to which the attribution refers and the date it becomes available to Employees (in the case of the Share Scheme: 25% on the grant date and the balance at the end of each one of the three ensuing years; in the case of the Options Scheme, at the beginning of the exercise period). Accounting treatment of the cover cost BPI provides its own cover for the options using for this purpose portfolios of own shares. The gains and losses (in-house) realised on the treasury stock portfolio to cover the options plan are recorded directly in shareholders’ equity, thereby not affecting net profit for the year. On the options exercise date, the gains or losses corresponding to the difference between the exercise price and the average acquisition cost of own shares is recognised in shareholders’ equity. Annual limit of the RVA scheme Number of shares attributed and shares underlying the options attributed: ≤ 2% share capital. Cumulative limit of the RVA scheme Number of shares underlying the options in existence at any given moment, exercisable or not: ≤ 5% share capital. Value of the shares attributed Average of the market share price for the last 10 sessions before the attribution date. Value of the options attributed At-the-money, with the exercise price corresponding to the average of the market share price for the last 10 sessions before the attribution date. Availability of the shares 25% immediately and the remainder at the end of each of the following 3 years. Exercise of the options In the period falling between the 90th1 day and the end of the 5th year after the award date. Possibility of repricing the options No. Transferability of the options Not tradable. No. of existing options as a % of capital2 1.4%. 1) For the options granted under the 2005 and following RVA. For the options granted under the RVA 2001 to RVA 2004 programmes, the exercise period began a year after the award date and ended at the end of the fifth year from the award date. 2) Position at the end of 2006.

BPI Group Corporate Governance Report 333 SHARE INCENTIVE SCHEME Determination of value Attribution conditions Shares scheme Share scheme The value of the shares for attribution purposes corresponds to As a general rule, shares are transmitted immediately to the the weighted average of the share price at the last 10 stock beneficiary. However, their free disposal takes place in a exchange sessions before the attribution date phased manner – 25% are released immediately on attribution, while the remaining 75% are placed at the beneficiary’s Options scheme disposal at the end of the first, second and third year after the In the case of options their fair value is used, with the attribution date, and providing that the beneficiary continues attribution value of the shares being the exercise price. to be employed by the Group on those dates under pain of the transfer of the other shares still not released being cancelled. Determination of the quantity of shares and purchase options to attribute The number of shares and options to be attributed results from Share scheme – attribution, transfer and free disposal the quotient between the variable remuneration portion to be Attribution Transfer Free disposal1 attributed in the form of the RVA incentive scheme and the Attribution date 100% 100% 25% value laid down for the attribution of the shares and purchase 1 year later - - 25% options. 2 years later - - 25% 3 years later - - 25% In the RVA 2001 and RVA 2002 programmes, the weight of 1) The consolidation of the transfer of the shares which are released occurs on the share and options components on the amount of the RVA the dates they become freely disposable. incentives was mandatorily identical (50% / 50%), whereas in Option scheme the RVA 2003 programme the Directors and Employees were The options to purchase Banco BPI shares are transmitted to given the option to select the relative weight of each one of the the beneficiary’s title on the attribution date. The options are components from amongst the following combinations: not tradable. The exercise period G as relates to the options attributed under the 2005 RVA scheme now begins between ᭿ 50% shares / 50% options (2001 and 2002 regime);

th the 90 day from the date they are awarded – providing that ᭿ 75% shares / 25% options; until such date the employment relationship has not been ᭿ 100% shares / 0% options. terminated, in which case the transfer is cancelled – and the end of the fifth year from the award date. Limits to the scale of the programme The total number of shares and the shares underlying the Option scheme – attribution, transfer and free disposal options awarded in each year cannot exceed 2% of share Attribution Transfer Free disposal capital, and the number of shares underlying the various series Attribution date 100% 100% - of existing options (whether they are exercisable or not) cannot 90 days later1 -- Start of exercise exceed 5% of share capital, in accordance with the rules of the period RVA incentive programme in force. 2 years later -- 3 years later Right to dividends, right of preference in capital increases and 4 years later voting rights at General Meetings 5 years later -- End of exercise period Banco BPI shares transferred to the ownership of a Director or Employee, either by the direct attribution of shares under the 1) For the options granted under the 2005 and following RVA. For the options granted under the 2001 to 2004 RVA programmes, the exercise period began RVA scheme or through the exercise of the options attributed, a year after the award date and ended at the end of the fifth year after the are identical in nature to other Banco BPI shares and confer, award date. in these terms, the same rights, namely, as to dividends, preference in capital increases and voting at General Meetings.

334 Banco BPI | Annual Report 2006 In the case of options, the number held and the exercise price Trading in treasury stock are adjusted in the case of capital increases through the For purposes of share attribution, covering the option plan and incorporation of reserves or by subscription reserved G for the exercise of options, BPI has constituted treasury stock shareholders, in such a way that the position of the option (own shares) portfolios earmarked exclusively for this purpose. holder remains substantially the same as that existing before The execution of the RVA scheme does not contemplate the the occurrence of the fact. recourse to share capital issues, although the RVA Regulations do not expressly exclude this alternative. The execution of the RVA programme does not provide for the repricing of options. Approval, regulation, directives and responsibilities for the execution and modification of the RVA scheme Prohibition periods for the exercise of options and trading The general lines of the RVA scheme were approved by the shares General Board1 on 10 December 1998. At the Shareholders’ Share trading General Meeting of 21 April 1999, the Chairman of the Board Trading in shares attributed under the RVA scheme and those of Directors presented to the Shareholders a proposal resulting from the exercise of options are subject to the authorising the acquisition and sale of treasury stock by the provisions embodied in the codes of conduct in force at the company for the purpose of making the execution of the Group relating to the trading of Banco BPI shares by Directors incentive scheme viable. This motion was carried with 99.99% and Employees. of the votes in favour, and has been endorsed in following years.

Exercise of options The general provisions of the RVA Programme, as well as the Options can be exercised at any moment during the exercise duties of the bodies to execute and modify it, are laid down in period. However, the sale of shares resulting from the exercise a specific regulation. The RVA regulations were approved by of options and, therefore, the realisation of the gain afforded the General Board on 25 February 1999, while the following under the option scheme, is subject to the prohibition periods alterations were introduced on 3 March 2004 and 20 October laid down in the codes of conduct relating to the trading of 2005: Banco BPI shares by Directors and Employees. ᭿ adjustments to the RVA methodology with the object of Credit line for the exercise of options and maintenance of including ahead of time the rules stemming from the shares on hand introduction of the IAS;

At the start of 2004, an RVA Credit Line was created which is ᭿ change to the options exercise period which, in relation to now available to the Bank’s Employees and Executive Directors the 2005 and following RVA programmes, is now between who wish to exercise the RVA options and retain in portfolio the the ninetieth day and the end of the fifth year from the award shares thus acquired. date.

As regards the use of the credit line by members of the RVA scheme’s executive bodies Executive Committee, the Audit Board1 and the Bank of The Board of Directors delegated the annual execution of the Portugal have given their approval, at the same time as the RVA scheme to the Executive Committee. The concrete aspects Remuneration Committee was informed. of the RVA scheme’s execution are regulated in a number of directives approved by the Board of Directors, which are An amount – with a minimum limit of 2 500 euros and up to binding on the Executive Committee’s actions. Under the share 75% of the market value of shares to be acquired as a incentive and options scheme (RVA) regulations, the Board of consequence of the exercise of the respective options – is Directors’ Executive Committee is responsible for the awarding made available under this credit line, up to a maximum of of shares and share options to all the Group’s Employees and 100% of the amount required for the exercise of the options. to the Directors of BPI Group subsidiaries, excluding Banco Português de Investimento. In this domain, the following are The maximum loan term is 4 years, although an Employee can the Executive Committee’s principal duties: make partial repayments of principal or repay the debt in full before maturity date without incurring any penalties. The outstanding principal bears interest at the 12-month Euribor rate plus 0.75 percentage points.

1) Management body in the BPI Groups’ governance model prior to the alterations approved by the General Meeting of 20 April 2006.

BPI Group Corporate Governance Report 335 ᭿ fixing the maximum number of shares and options to be In the same way, any technical adjustments to the exercise awarded each year, as well as the criteria (of which the merit price of quantity of options held by members of the assessment of each employee always forms part) and the Executive Committee and by the Directors of Banco conditions underlying the distribution of these benefits Português de Investimento cannot be effected under more amongst the Group's Employees; favourable conditions than those applied to the Employees.

᭿ the adoption, at each attribution, of a model for valuing options which permits a more reasonable and realistic Accounting treatment calculation of their fair value; Attribution BPI records the remuneration attributed under the RVA ᭿ interpreting the RVA regulations and covering any loopholes; scheme in the caption personnel costs. The cost is ᭿ making occasional changes to the RVA's contractual deferred from the start of the year to which the award provisions, such as for example, bringing forward the option refers to the moment the benefits are made available to maturity dates or dispensing with the verification of the Employees. suspensive conditions or renouncing the attribution under condition subsequent. Even before the transition to IAS / IFRS, BPI used the fair value of the shares and options on the attribution date for The exercise of the above functions by the Executive recording the cost of the RVA scheme award. In valuing the Committee is monitored by the Audit Committee, as well as by shares their market value is used (average of the 10 stock the Board of Directors. exchange session prior to attribution), whilst in the case of options, given the non existence of a market value for RVA Management of the Variable Remuneration in Shares programme options and for similar traded options, BPI resorts to a Regulations RVA Regulations valuation model which conforms to the generally-accepted valuation principles for financial instruments and which RVA Directives incorporates all the relevant information available.

Executive Executive Committee It should be pointed out, moreover, that for purposes of the bodies Remuneration of Banco BPI Committee granting of shares and the exercise of the options awarded, Board of Directors BPI resorts to the acquisition of own shares, while no For the attribution to: For the attribution to: provision is made for the issue of new shares. ᭿ Employees with ᭿ The Executive variable remuneration Committee of In the notes to the consolidated financial statements, – ≥ 2 500 euro Banco BPI “2.9. Share-based payment (Remuneração Variável em ᭿ Directors of Group Board of Directors subsidiaries ᭿ Directors of Banco Acções – RVA) (IFRS 2)” and “5.48. Share-based variable Português de remuneration program” – the accounting treatment of the Investimento Supervision RVA programme, the valuation of the incentives awarded Banco BPI and the accounting impact are described. Board of Directors

RVA scheme cover Audit Committee The BPI Group executes its own cover operations for the RVA share and option scheme.

The Remuneration Committee is responsible for the As regards cover for the options plan, BPI has treasury awarding of shares and share options to the members of stock portfolios allocated to each one of the live options the Executive Committee of Banco BPI’s Board of Directors series in order to guarantee a number of shares and to the Directors of Banco Português de Investimento, corresponding to the product of the options delta by the undertaking the same functions as those attributed to the number of existing options. The gains and losses on the Executive Committee for purposes of attributing the RVA portfolio of own shares held to cover the options plan are scheme to Employees, based on the opinion of the recorded directly in shareholders’ equity, and therefore do Nominations, Evaluation and Remuneration Committee. In not affect net profit for the year. The gains or losses terms of the RVA scheme’s regulations, the Remuneration corresponding to the difference between the exercise price Committee cannot adopt more favourable award conditions and the average acquisition cost of the own shares are than those applied by the Executive Committee in the recorded in shareholders’ equity on the date the options attribution of the RVA scheme to Employees. are exercised.

336 Banco BPI | Annual Report 2006 8.2. EXECUTION OF SHARE INCENTIVE SCHEME 8.2.1. Extension of the RVA Scheme Since the entry into force of the RVA Scheme in 2001, the As concerns 2006, there were no RVA awards so that the full number of Executive Directors of the Banks, Managers and other amount of variable remuneration (including the corresponding Employees of the BPI Group covered by the RVA Scheme value of the RVA incentive) was paid in cash. represented on average 36% of the Group’s workforce in Portugal.

% of RVA in the No. of persons covered variable remuneration RVA 2001 RVA 2002 RVA 2003 RVA 2004 RVA 2005 Executive Committee of Banco BPI1 Chairman and Deputy-Chairman of the Executive Committee of Banco BPI1 50% 22222 Other Directors of the Executive Committee of Banco BPI1 40% 55565 Other Directors of Banco Português de Investimento2 35% 87777 Managerial staff and other Employees Managerial staff Central Managers 30% 45 38 39 42 42 Coordinating Managers 25% 61 59 58 51 58 Managers 20% 73 77 81 84 86 Assistant Managers and Sub-managers 15% 319 307 303 287 314 Subtotal: Managerial staff - 498 481 481 464 500 Other Employees 10% 1 565 1 660 1 673 1 806 2 150 Total - 2 078 2 155 2 168 2 285 2 664 1) The Executive Directors of BPI SGPS in 2001, and up to 20 December 2002. 2) Other Directors of Banco BPI and Banco Português de Investimento in 2001, and up to 20 December 2002.

8.2.2. Total value The accumulated value of variable remuneration in the form of In the accumulated total, the RVA Scheme entailed the granting RVA incentives since they began to be awarded amounts to of 5.3 million options, which correspond to 0.7% of Banco BPI’s 28.6 M.€. In the last RVA award relating to 2005, the value of share capital, and the granting of 30.5 million options, of which the RVA incentive corresponded to 21% of the total amount of the underlying number of shares represents 4.0% of Banco BPI’s the variable remuneration granted to the universe of Directors capital. and Employees covered by the RVA scheme.

BPI Group Corporate Governance Report 337 Share attribution RVA 2001 Share attribution scheme RVA 2002 RVA 2003 RVA 2004 RVA 2005 Original Adjusted1 Manner of attribution Under condition subsequent Under condition Under condition Under condition Under condition and under condition precedent subsequent subsequent subsequent subsequent Attribution date 21 March 02 22 February 03 23 February 04 28 February 05 23 February 06 Attribution price 2.67 euro 2.54 euro2 2.14 euro 3.13 euro 3.10 euro 4.44 euro No. of shares attributed3 Banco BPI Executive Committee4 215 875 218 996 265 307 220 930 307 585 183 001 Banco Português de Investimento's Board of Directors5 86 888 89 452 96 501 72 409 106 414 63 067 Managerial staff and other Group Employees 635 217 679 497 810 721 730 208 823 832 658 272 Total 937 980 987 945 1 172 529 1 023 547 1 237 831 904 340 1) Figures adjusted for dividends and the 2002 capital increase. 2) Attribution price of the RVA-2001 adjusted for the capital increase realised in May 2002. 3) The number of shares initially attributed under the RVA 2001 was adjusted by the payment of dividends and by the share capital increase realised by BPI SGPS (now Banco BPI) in May 2002. The adjustments entailed the attribution of an additional 37 211 shares (against the payment of 1.75€ per share) to Directors, managerial staff and Employees as an adjustment for the capital increase realised and 12 754 shares as adjustment for the distribution of dividends in respect of the 2001 financial year. In this last point, it is important to note that only the Director or Employees who opted for the attribution under precedent condition – in terms of which the shares in a captive situation remain in legal terms the Bank’s property – were the object of the aforementioned adjustment. Those members who opted for the attribution under subsequent condition received a dividend relating to all the shares – captive and available – in cash. 4) BPI SGPS’s Executive Directors in 2001 and up until 20 December 2002. 5) Other Directors of Banco BPI and Banco Português de Investimento in 2001 and up until 20 December 2002.

Attribution of share purchase options RVA 2001 Share purchase options attribution scheme RVA 2002 RVA 2003 RVA 2004 RVA 2005 Original Adjusted1 Attribution date 21 Mar. 02 22 Feb. 03 23 Feb. 04 28 Feb. 05 23 February 06 Exercise period 21 Mar. 03 to 21 Mar. 07 22 Feb. 04 23 Feb. 05 28 Feb. 06 23 May 06 to 22 Feb. 08 to 23 Feb. 09 to 28 Feb. 10 to 23 Feb. 11 No. of shares that may be acquired for each option held 1 1 1 1 1 1 Exercise price 2.67 euro 2.54 euro 2.14 euro 3.13 euro 3.10 euro 4.44 euro Value of each option 0.65 euro 0.62 euro 0.33 euro 0.45 euro 0.31 euro 0.45 euro No. of options granted Banco BPI Executive Committee2 859 725 904 216 1 720 457 1 310 003 1 624 195 1 805 558 Banco Português de Investimento’s Board of Directors3 346 818 364 767 625 761 503 614 584 278 622 225 Managerial staff and other Group Employees 2 607 040 2 741 681 5 251 558 3 236 802 4 790 338 4 408 981 Total 3 813 583 4 010 664 7 597 776 5 050 419 6 998 811 6 836 764

1) As a consequence of BPI SGPS’s share capital increase (now Banco BPI) realised in May 2002, the exercise price of the options resulting from the RVA-2001 was adjusted from 2.67 € to 2.54 € and the number of options attributed under the RVA-2001 programme increased by 5%. 2) BPI SGPS’ Executive Directors in 2001 and up until 20 December 2002. 3) Other Directors of Banco BPI and Banco Português de Investimento in 2001 and up until 20 December 2002.

338 Banco BPI | Annual Report 2006 8.2.3. Record of the share purchase options scheme In 2006, 9.1 million options were exercised, which million RVA options, all exercisable. The exercise period for the corresponded in terms of the number of underlying shares, to RVA 2001 options terminates on 21 March 2007. 1.2% of Banco BPI’s capital. At 31 December, there were 10.5

Record of the programme for the attribution of share purchase options – 2001, 2002, 2003, 2004 and 2005 Banco BPI’s Banco Português de Managers and Total Executive Investimento’s Board other Employees Committee1 of Directors2 RVA 2001 (number of options) Granted in March 20023, 4 904 216 364 767 2 741 681 4 010 664 exercised in 2002 0 0 0 0 extinguished in 2002 0 0 25 124 25 124 RVA 2001 options do existing at 31 Dec. 02 904 216 364 767 2 716 557 3 985 540 exercised in 2003 0 0 78 634 78 634 extinguished in 2003 0 0 12 580 12 580 RVA 2001 options do existing at 31 Dec. 03 904 216 364 767 2 625 343 3 894 326 exercised in 2004 590 038 163 072 1 605 627 2 358 737 extinguished in 2004 0 0 59 066 59 066 RVA 2001 options do existing at 31 Dec. 04 314 178 201 695 960 650 1 476 523 exercised in 2005 231 031 84 280 532 347 847 658 extinguished in 2005 0 0 13 418 13 418 RVA 2001 options do existing at 31 Dec. 05 83 147 117 415 414 885 615 447 exercised in 2006 0 72 274 264 441 336 715 extinguished in 2006 0 0 8 885 8 885 RVA 2001 options do existing at 31 Dec. 06 83 147 45 141 141 559 269 847 RVA 2001 exercisable options at 31 Dec. 06 83 147 45 141 141 559 269 847 RVA 2002 (number of options) Granted in February 20034 1 720 457 625 761 5 251 558 7 597 776 exercised in 2003 0 0 11 210 11 210 extinguished in 2003 0 0 25 008 25 008 RVA 2002 options do existing at 31 Dec. 03 1 720 457 625 761 5 215 340 7 561 558 exercised in 2004 1 491 365 106 061 2 808 544 4 405 970 extinguished in 2004 0 0 6 255 6 255 RVA 2002 options do existing at 31 Dec. 04 229 092 519 700 2 400 541 3 149 333 exercised in 2005 171 469 180 304 1 111 640 1 463 413 extinguished in 2005 0 0 9 321 9 321 RVA 2002 options do existing at 31 Dec. 05 57 623 339 396 1 279 580 1 676 599 exercised in 2006 0 169 698 837 619 1 007 317 extinguished in 2006 0 0 13 121 13 121 RVA 2002 options do existing at 31 Dec. 06 57 623 169 698 428 840 656 161 RVA 2002 exercisable options at 31 Dec. 06 57 623 169 698 428 840 656 161 RVA 2003 (number of options) Granted in February 20044 1 310 003 503 614 3 236 802 5 050 419 exercised in 2004 0 0 0 0 extinguished in 2004 0 0 37 990 37 990 RVA 2003 options do existing at 31 Dec. 04 1 310 003 503 614 3 198 812 5 012 429 exercised in 2005 288 890 81 667 1 034 400 1 404 957 extinguished in 2005 0 0 6 751 6 751 RVA 2003 options do existing at 31 Dec. 05 1 021 113 421 947 2 157 661 3 600 721 exercised in 2006 681 112 204 168 1 391 535 2 276 815 extinguished in 2006 0 0 1 582 1 582 RVA 2003 options do existing at 31 Dec. 06 340 001 217 779 764 544 1 322 324 RVA 2003 exercisable options at 31 Dec. 06 340 001 217 779 764 544 1 322 324 1) BPI SGPS Executive Directors in 2001 and up until 20 December 2002 (date on which BPI SGPS was transformed into Banco BPI). 2) Other Directors of Banco BPI and Banco Português de Investimento in 2001 and up until 20 December 2002. 3) Number of options granted adjusted for BPI SGPS’s (now Banco BPI) share capital increase realised in May 2002. 4) In terms of the RVA regulations, the number of shares which are object of the options granted in the year cannot exceed 2% of Banco BPI’s share capital at the date of the attribution of the aforementioned incentives. Simultaneously, the total number of shares which are object of the options in force (matured or not) cannot exceed at any point in time 5% of Banco BPI’s share capital.

BPI Group Corporate Governance Report 339 Record of the programme for the attribution of share purchase options – 2001, 2002, 2003, 2004 and 2005 (continuation) Banco BPI’s Banco Português de Managers and Total Executive Investimento’s Board other Employees Committee1 of Directors2 RVA 2004 (number of options) Granted in February 20054 1 624 195 584 278 4 790 338 6 998 811 exercised in 2005 0 0 484 484 extinguished in 2005 0 0 25 816 25 816 RVA 2004 options do existing at 31 Dec. 05 1 624 195 584 278 4 764 038 6 972 511 exercised in 2006 1 046 775 107 259 3 064 103 4 218 137 extinguished in 2006 0 0 18 005 18 005 RVA 2004 options do existing at 31 Dec. 06 577 420 477 019 1 681 930 2 736 369 RVA 2004 exercisable options at 31 Dec. 06 577 420 477 019 1 681 930 2 736 369 RVA 2005 (number of options) Granted in February 20064 1 805 558 622 225 4 408 981 6 836 764 exercised in 2006 0 0 1 270 079 1 270 079 extinguished in 2006 0 0 6 336 6 336 RVA 2005 options do existing at 31 Dec. 06 1 805 558 622 225 3 132 566 5 560 349 RVA 2005 exercisable options at 31 Dec. 06 1 805 558 622 225 3 132 566 5 560 349 1) BPI SGPS Executive Directors in 2001 and up until 20 December 2002 (date on which BPI SGPS was transformed into Banco BPI). 2) Other Directors of Banco BPI and Banco Português de Investimento in 2001 and up until 20 December 2002. 3) Number of options granted adjusted for BPI SGPS’s (now Banco BPI) share capital increase realised in May 2002. 4) In terms of the RVA regulations, the number of shares which are object of the options granted in the year cannot exceed 2% of Banco BPI’s share capital at the date of the attribution of the aforementioned incentives. Simultaneously, the total number of shares which are object of the options in force (matured or not) cannot exceed at any point in time 5% of Banco BPI’s share capital.

Current situation of the programme for the attribution of options to purchase shares – 2001, 2002, 2003, 2004 and 2005 Banco BPI’s Banco Português de Managers and Programme for the attribution of share Total Executive Investimento’s Board other Employees purchase options Committee1 of Directors2 Total RVA scheme Number of options Options do existing at 31 Dec. 06 2 863 749 1 531 862 6 149 439 10 545 050 options not exercisable until 31 Dec. 07 0 0 0 0 options exercisable until 31 Dec. 07 2 863 749 1 531 862 6 149 439 10 545 050 Number of shares needed for the exercise of Options granted but not yet exercisable at the beginning of 2006 0 0 0 0 at the end of 20063 0000 Exercisable options at the beginning of 2007 2 863 749 1 531 862 6 149 439 10 545 050 at the end of 20073 2 780 602 1 486 721 6 007 880 10 275 203 1) BPI SGPS Executive Directors in 2001 and up until 20 December 2002 (date on which BPI SGPS was transformed into Banco BPI). 2) Other directors of Banco BPI and Banco Português de Investimento in 2001 and up until 20 December 2002. 3) Assuming that, with the exception of the RVA 2001 options, the exercise period of which ends on 21 March 2007, no other options are exercised or extinguished during 2007.

340 Banco BPI | Annual Report 2006 8.2.4. Shares awarded under condition subsequent and not yet Shares awarded under condition subsequent and not yet freely freely disposable disposable At the end of 2006, there were 1 516 195 shares under condition At 31 December 2006 subsequent and not yet freely disposable. Of these, 767 603 31 Dec. 2006 shares will become freely disposable in 2007; 526 135 in 2008; RVA 2002 72 and 222 457 in 2009. RVA 2003 241 384 RVA 2004 607 368 RVA 2005 667 371 Total 1 516 195

8.2.5. Credit line for exercise of options and retention of shares in portfolio In 2006, 26.5% of the options were exercised with recourse to At the end of 2006, the balance of credit was 12.5 M.€. the credit line with the object of keeping the shares thus acquired in portfolio.

Credit line for the exercise of options and retention of shares in portfolio Amounts expressed in thousands of euro Banco BPI’s Banco Português Managers and other Total Executive de Investimento’s Employees Committee1 Board of Directors2 Balance at 31 December 2004 3 954 227 762 4 943 Balance at 31 December 2005 4 712 407 555 5 674 Balance at 31 December 2006 9 948 1 225 1 282 12 455 1) Including the outstanding balance of the Board of Directors’ Chairman relating to the loan for the exercise of the options granted when he was an Executive Director. 2) Directors who are not simultaneously members of Banco BPI’s Executive Committee.

Credit advanced to the Executive Committee of Banco BPI1 for the exercise of options and retention of shares in portfolio At 31 December 2006 At 12 March 2007 No. of Of which: Market value3 Balance of No. of Of which: Market value5 Balance of No. of shares held shares of the credit for shares held shares of the credit for options pledged as shares held acquisition of pledged as shares held acquisition of held security2 (th. €) shares4 security2 (th. €) shares4 ( th. €) ( th. €) Artur Santos Silva1 1 670 552 737 223 9 873 1 940 1 670 552 737 223 11 193 1 939.6 0 Fernando Ulrich 1 839 433 1 529 107 10 871 4 266 2 325 545 2 015 219 15 581 6 424.0 0 António Domingues 402 550 310 000 2 379 707 1 370 741 1 278 191 9 184 4 217.2 0 José Pena do Amaral 74 935 443 74 935 – 502 177 178 Maria Celeste Hagatong 587 306 407 906 3 471 943 587 306 407 906 3 935 942.9 233 334 Manuel Ferreira da Silva 193 019 80 000 1 141 171 299 000 80 000 2.003 171.2 536 797 António Farinha Morais 571 823 470 818 3 379 1 282 571 823 470 818 3 831 1 282.2 177 178 Pedro Barreto 307 309 206 452 1 816 640 307 309 206 452 2 059 640.0 177 178 5 646 927 3 741 506 33 373 9 948 7 207 211 5 195 809 48 288 15 671.1 1 301 665 1) Includes the outstanding balance of the Board of Directors’ Chairman relating to the credit advanced for the exercise of the options granted when he was an Executive Director. 2) Shares which constitute security for the finance obtained for the purpose of keeping those shares in portfolio, which resulted from the exercise of the options granted under the RVA scheme. 3) At the closing price of BPI shares at the session of 29 December 2006: 5.91 €. 4) Outstanding balance on the finance obtained to keep the shares resulting from the exercise of the RVA options in portfolio. 5) At the closing price of BPI shares at the session of 12 March 2007: 6.70 €.

BPI Group Corporate Governance Report 341 8.3. EXECUTION IN 2006 As a rule, the granting of RVA incentives in relation to each BPI’s Board of Directors decided not to execute the RVA scheme financial year takes place in the first quarter of the following in respect of 2006, so that the full amount of the variable year. Hence, the execution of the 2006 RVA would occur in the remuneration for that year will be paid in cash. first quarter of 2007. Except for the situation referred to in the above paragraph, the To the extent that it does not provide for the issue of shares, the RVA scheme remains in force as regards all its past and future RVA entails: effects, including all those stemming from the grants relating to 2001, 2002, 2003, 2004 e 2005. It is the intention of the ᭿ the acquisition by the Bank on a market registered at the Board of Directors and its Executive Committee to resume the CMVM of own shares earmarked for the awarding of the execution of the RVA scheme in the 2007 financial year. component in shares;

᭿ the constitution of a portfolio of own shares, allocated to cover the obligations arising from the granting of the options.

In view of the fact that:

᭿ BPI was on the actual date for the RVA awards, subject to a takeover bid, preliminarily launched on 13 March 2006;

᭿ the Bank did not know, nor could it predict, the date on which the outcome of the said bid might occur, and that such date could occur well beyond the normal award period;

᭿ the takeover bid had already led to the Board of Directors deciding not to present to the General Meeting held on 20 April 2006 the usual annual request to renew the authorisation to acquire own shares, with the result that the Bank did not have at the actual time the necessary authorisation for that purpose.

342 Banco BPI | Annual Report 2006 8.4. RETURN RVA 2001, RVA 2002, RVA 2003, RVA 2004 and RVA 2005 The effective value of the incentives attributed under the RVA Scheme, the value of the incentive at 12 March 2007 (date of Scheme is dependent upon the behaviour of the Banco BPI approval of the present report by the Board of Directors) share price on the stock exchange. corresponds, in relative to the attribution value, to an annual average capital growth of 37.2% for the RVA 2001 and 71.2% On the basis of the market value of the shares, plus the for the RVA 2002 and 71.5% for the RVA 2003 and 160.9% for dividends received and the intrinsic value of the options the RVA 2004 and 213.0% for the RVA 2005. attributed to the Directors and Employees covered by the RVA

Annual average return Exit on 12 of March 20071 ROI for Banco ROI for market Share scheme Option scheme Total RVA BPI Shareholder (PSI Geral)3 RVA of 2001 attribution date: 21 Mar. 02 24.7% 46.6% 37.2% 24.7% 13.0% RVA of 2002 attribution date: 22 Feb. 03 36.3% 91.2% 71.2% 36.3% 24.0% RVA of 20032 attribution date: 23 Feb. 04 31.5% 97.2% 71.5% 31.5% 19.9% RVA of 20042 attribution date: 28 Feb. 05 50.1% 234.1% 160.9% 50.1% 25.1% RVA of 20052 attribution date: 23 Feb. 06 51.8% 367.4% 213.0% 51.8% 26.6% Average of RVA 2001, 2002, 2003, 2004 and 2005 32.2% 84.7% 65.2% 32.2% 19.4% Note: it is assumed that during the period the RVA beneficiary subscribed for the maximum quantity of shares to which he was entitled in the 2002 capital increase, and did not sell shares or exercise options. On 12 March 2007, the share portfolio was valued using the closing price, while in relation to the options portfolio, their intrinsic value was taken into account, that is, the difference between the closing price on 12 March and the exercise price of the options. 1) Date of approval of the report by the Board of Directors (Banco BPI share’s closing price of 6.7 euro). 2) Considering a composition of the 2003 RVA, RVA 2004 and 2005 RVA of 50% shares and 50% purchase options. 3) Average return based on partial investments of equal amounts on each one of the attribution dates and disinvestment on 12 of March of 2007.

The BPI share price1 Market share price and stock exchange appreciation which equates the value of RVA incentive to the attribution value BPI share price on attribution date1 Break-even2 Share price appreciation (in euro) (in euro) to reach break-even

RVA of 2001 Shares scheme 2.54 2.543 0.0% Options scheme 2.54 3.164 +24.4% RVA 2001 Programme 2.54 3.04 +19.7% RVA of 2002 Shares scheme 2.14 2.143 0.0% Options scheme 2.14 2.474 +15.4% RVA 2002 Programme 2.14 2.43 +13.6% RVA of 2003 Shares scheme 3.13 3.133 0.0% Options scheme 3.13 3.584 +14.4% RVA 2003 Programme5 3.13 3.52 +12.5% RVA of 2004 Shares scheme 3.10 3.103 0.0% Options scheme 3.10 3.414 +10.0% RVA 2004 Programme5 3.10 3.38 +9.0% RVA of 2005 Shares scheme 4.44 4.44 0.0% Options scheme 4.44 4.894 10.1% RVA 2005 Programme5 4.44 4.85 9.2% Note: overall value of the 2001 and 2002 RVA incentives was attributed in equal parts in the form of BPI shares and BPI share purchase options. 1) Attribution price of BPI shares under the RVA Programme (average market price in the last 10 stock exchange sessions). 2) Market price of the BPI shares which equates the value of the RVA incentive to the attribution value. 3) Attribution value of the shares. In the case of the share scheme, the dividends relating to 2001, 2002, 2003 and 2004 and received by the beneficiaries of RVA programmes, were not taken into account. Had this been done, the break-even would have been reached at a price of 2.06 euro for the RVA 2001 share scheme, at a price of 1.75 euro for the RVA 2002 share scheme, at a price of 2.82 euro for the RVA 2003 share scheme, at a price of 2.88 euro for the RVA 2004 share scheme and at a price of 4.32 euro for the RVA 2005 share scheme. 4) Exercise price plus attribution value of the options. 5) A grant of 50% in shares and a 50% in options was assumed for the RVA 2003, RVA 2004 and RVA 2005 attribution.

BPI Group Corporate Governance Report 343 9. Shareholder control and transferability of shares

9.1. SHAREHOLDER CONTROL Banco BPI has not adopted any defensive clause impeding the The CMVM, in response to requests submitted by Itaúsa Portugal free transferability of the shares and the unrestricted review by Investimentos, SGPS and by RAS International BV III, decided shareholders of the performance of Board members. In on 8 November 2006, to consider that the abovementioned Pre- particular, there are no financial or shareholder mechanisms emption Contract was implicitly designed “to avoid the sale of which have as their object frustrating hostile takeover bids, shares to entities which do not have the acquiescence of the commonly known in English terminology as “poison pills” G of subscribers to the agreement”. According to the CMVM, this “anti-takeover provisions” G. intention, coupled with the fact that certain parties to the pre- emption contract had reinforced their shareholdings “after BCP’s The BPI Group has no convertible bond issues or shares with preliminary announcement of the takeover bid”, created warrants G or other special rights in circulation. “conditions for the frustration of initiatives aimed at the constitution of change of control, namely, takeover bids”, in At 31 December 2006, the share capital held by the members other words, it created conditions to frustrate the takeover bid of the Board of Directors, their representatives, key shareholders launched by BCP for BPI. who have nominated members to the Board of Directors and members of the Audit Board stood at 60% (49.7% in 2005). On 13 November, the Shareholders subscribing to the pre- emption agreement revoked it by mutual accord. At the request Banco BPI's statutes stipulate that the votes cast by a single of the contracting parties and within the scope of powers vested shareholder, in his own name or as the representative of another in him in the contract, the Chairman of the Board of Directors or others, which exceed 17.5% of the company's total votes, informed the CMVM and the market about this fact through the representing the share capital, shall not be counted. Any change announcement made on 14 November, in which he declared: to this statutory provision requires the approval of 75% of the votes cast in General Meeting. “… The parties (the subscribing shareholders) are of the opinion that the pre-emption contract does not fall within any of the 9.2. SHAREHOLDER AGREEMENTS RELATING TO THE categories of agreement referred to in article 20(1)(h) of the EXERCISE OF COMPANY RIGHTS OR TO THE Securities Code nor, in terms of paragraph 4 of the same article, TRANSFERABILITY OF SHARES can the said contract be presumed to constitute an instrument There are no shareholder agreements of the type referred to in for the concerted exercise of influence over BPI. They also article 19 of the Securities Code relating to the exercise of consider (…) that, even accepting the fact that, in terms of company rights, or to the transferability of Banco BPI shares; in article 20(4) of the Securities Code, the Pre-emption Contract is particular, there is no voting or defence agreement for warding deemed to be covered by the presumption, then such off takeover bids. presumption must be considered to be rebutted before the CMVM;…” Up till 13 November 2006, a pre-emption contract between certain of BPI’s principal shareholders was in force. This The parties therefore affirm in the announcement their absolute agreement stipulated that if any one of the contracting parties disagreement with the CMVM’s decision. intended to transfer for value all or part of the shares covered by the agreement, such party was obliged to give preference on the The agreement now revoked was entered into in 1993, having disposal to the other contracting parties upon the same terms been successively renewed for periods of three years. The last and conditions. renewal occurred on 30 July 2005.

Decree-Law 219 / 2006 was published on 2 November 2006 which transposed Directive 2004 / 25 / CE (commonly known as the takeover bids Directive).

344 Banco BPI | Annual Report 2006 10. Exercise of voting rights and shareholder representation

10.1. ENCOURAGEMENT OF THE EXERCISE OF VOTING 10.2. ATTRIBUTION OF VOTING RIGHT RIGHTS A shareholder can vote provided he owns at least 5003 Banco Banco BPI actively encourages the exercise of the right to vote, BPI shares on the 5th day prior to the date set for the General either directly – in person or by correspondence (postal or Meeting. The registration of ownership must be proved to Banco electronic) – or by proxy. BPI by 6 p.m. of the third working day prior to the date set for the meeting. Every 500 shares correspond to one vote. Under this policy, BPI has implemented a series of measures designed to reduce shareholder absenteeism at General 10.3. PROCEDURES RELATING TO PROXY REPRESENTATION Meetings, amongst which the following: At its own initiative BPI pursues a policy of sending to shareholders the full content of proposed matters to be included ᭿ acceptance of vote by correspondence, both postal and in the order of business, as well as proxy forms, accompanied by electronic, and the placing at Shareholders’ disposal of ballot a self-addressed postage-paid envelope. papers; Proxy representations must be communicated by letter addressed ᭿ ample disclosure of the convening of General Meetings (by to the Chairman of the General Meeting Board, with the postal or electronic mail and by the Internet), the topics to be signature duly certified by a notary, lawyer or legal clerk or discussed thereat and the different ways of exercising the right certified by the company. This letter must be received at Banco to vote; BPI’s head office by 6 p.m. on the fifth day prior to the date set for the General Meeting. ᭿ clear and detailed description in the meeting notice and preparatory documents1 for the General Meeting which are sent 10.4. PROCEDURES RELATING TO POSTAL VOTING to Shareholders2, the procedures to be adopted for those BPI sends annexed to the notice convening the General Meeting, opting for postal or proxy voting (regime enshrined in the ballot papers addressed to the Chairman of the General Meeting statutes). Board, by means of which the shareholder can express in a clear form his vote. Each ballot paper, available in Portuguese and It should also be pointed out that Banco BPI’s Board of English, must be signed and this signature duly certified (by a Directors, in a positive response to the CMVM’s most recent notary, lawyer or legal clerk). Ballot papers must be received at recommendations, approved at the 20 April 2004 General Banco BPI’s head office by 6 p.m. on the third working day prior Meeting an amendment to article 12 of the company’s Statutes to the date set for the General Meeting. whereby the prior period for the deposit and blocking of shares for purposes of taking part in the General Meeting was shortened Postal votes count towards the constitution of the General from 15 to 5 business days. Meeting quorum and are interpreted in the light of the matters appearing in the meeting notice, and do not express any voting The proposals to be submitted for consideration and deliberation intention as concerns new matters. at the General Meeting, as well as any other preparatory information, are placed up to 15 days prior to the date set for the meeting, at the disposal of shareholders at Banco BPI’s head office (Rua Tenente Valadim, 284, Oporto) and on the site www.ir.bpi.pt. The sending of any of the above-mentioned material, including copies of ballot (voting) papers for the exercise of postal voting, may also be requested via a publicly-disclosed e-mail address.

1) Also available at the Internet at the website www.ir.bpi.pt. 2) To the shareholders with the right to at least 10 votes. 3) After the General Meeting of 20 April 2006, where a reduction from 1 000 to 500 in the number of shares giving right to participate in the GM was approved.

BPI Group Corporate Governance Report 345 The postal votes are opened by the Chairman of the General 10.5. PROCEDURES RELATING TO ELECTRONIC MEANS Meeting Committee, who is responsible for checking their BPI offers its Shareholders the possibility of casting votes by authenticity, conformity with the rules and the non-existence of means of electronic mail with respect to the motions included in duplicate votes taking into account the presence of the the notice convening the General Meeting. respective Shareholders at the General Meeting. The procedures required for voting by electronic mail are in part Votes by correspondence are only considered after the votes cast similar to those required for postal voting: BPI sends beforehand in person on each one of the motions have been counted. The to its Shareholders, as an annex to the General Meeting Chairman of the General Meeting informs those present of the preparatory documents, a draft – available in Portuguese and number and results of the votes received by correspondence. English – that allows them to opt for the system of electronic voting. This draft can also be obtained from the website The manner in which the scrutiny of votes cast by www.ir.bpi.pt or upon request to the Investor Relations Division. correspondence at the General Meeting is conducted is set out The draft must be signed and the signature must be in documents made available by BPI for the exercise of voting by authenticated by a notary, lawyer or legal clerk. correspondence, as well as being described in a separate section of the Investor Relations website devoted to this event. In the draft the Shareholder is asked, amongst other details, to provide a password and indicate his email address. This The Company Secretary is charged with ensuring the document must be received at the Bank’s head office together confidentiality of the votes received by correspondence until the with the respective declaration of share deposit and blockage. day of the General Meeting. On that date, this responsibility is BPI sends an email to the Shareholder indicating his counter transferred to the Chairman of the General Meeting Committee password which, jointly with the initial password, will give him up to the moment of voting. access to an electronic ballot paper on a page at the site www.ir.bpi.pt. The Shareholder can exercise his voting right on The postal vote cast by a shareholder who is present or the until the 6 p.m. of the third business days before that set for represented at the General Meeting shall be ignored. the Meeting.

Although voting by correspondence by its very nature constitutes an alternative to shareholder representation, nothing prohibits that both forms be cumulative.

346 Banco BPI | Annual Report 2006 11. Exercise of corporate rights by BPI Group entities

The BPI Group's entities operating on the market as institutional In the prospectuses of the various funds managed by BPI Gestão investors – the Fund-Management Companies, the Pension-Fund de Activos a text which establishes the company’s “voting Management Company, the Investment Bank and the policy” is included. Namely: Development Capital Companies – are bound to the rules designed to ensure the diligent, efficient and critical use of the ᭿ “BPI Gestão de Activos only takes part in the General Meetings rights attaching to the negotiable securities of which they are the of the companies (whether based in Portugal or overseas) in holders or whose management has been entrusted to them, which it has equity holdings and where it considers that there namely as concerns information and voting rights. is interest in such participation;

The asset-management entities belonging to the BPI Group, ᭿ BPI Gestão de Activos does not have a predefined global policy besides the traditional investment criteria associated with the with respect to the exercise of voting rights in the companies risk / return relationship, also take into consideration in the in which it has equity holdings. At any moment, BPI Gestão de investment decision-making process, the following factors: Activos will evaluate the voting intention that best safeguards the interests of unit holders, taking into account the goals of ᭿ quality of the system of governance and supervision; seeking value and the financial soundness of the company in ᭿ transparency in the provision of information; which it participates; ᭿ good environmental practices. ᭿ in cases in which it opts to participate in General Meetings, On the other hand, BPI, on its own initiative, does not invest in the voting rights will exercised directly by BPI Gestão de companies operating in the pornography or arms industry. Activos or alternatively by a representative who is bound by the written instructions issued by BPI Gestão de Activos.” BPI GESTÃO DE ACTIVOS BPI Gestão de Activos exercised its voting rights during 2006 at BPI PENSÕES nine Shareholders General Meetings, contemplating the BPI Pensões exercised its voting rights at seven Shareholders respective orders of business, essentially, the approval of the General Meetings of local companies, having voted as a rule in accounts for the year and corresponding appropriation of results, favour of the motions presented. At these Shareholders General as well as (if applicable) the election of the governing bodies. Meetings, only the voting rights relating to the equity holdings owned by Banco BPI’s pension funds were exercised. All the Shareholders General Meetings attended by BPI Gestão de Activos refer to national-issuer companies (although the Insurance Institute of Portugal Standard 21 / 2002-R of 28 funds’ prospectuses foresee the possibility of participation at the November sets out that the strategy for the exercise of voting AGMs of foreign entities), with BPI Gestão de Activos rights in the issuing companies for the assets held by the communicating its voting intention, as well as the respective pension funds, must be contemplated in the Pension Fund justification, to the CMVM in terms of applicable legislation. BPI Management Contracts or in the Management Regulations in the Gestão de Activos voted as a rule in favour of the motions case of Open-end Pension Funds. presented.

BPI Group Corporate Governance Report 347 With a view to ensuring compliance with this requirement, BPI PRIVATE BANKING Pensões agreed in writing for each managed pension fund the Banco Português de Investimento, within the scope of the rules to be followed concerning the exercise of voting rights, the mandate awarded for the management of Private Banking Clients usual guidelines of which are as follows: portfolios, acts in conformity with the specific rules of a diligent manager and taking into account the principles and rules ᭿ BPI Pensões will exercise its voting rights at the General relating to the exercise of financial intermediation activity as Meetings of the companies in which the pension fund has envisaged in the Securities Market Code (CVM) and respective equity holdings, when it considers the exercise of such right is regulations, namely, the principle of safeguarding the legitimate advantageous; interest of Clients, and is subject to the supervision of the Securities Market Commission. ᭿ BPI Pensões does not have a predefined global policy with respect to the exercise of voting rights in the companies in which the pension fund has equity holdings. At any moment, it will evaluate the voting intention that best safeguards the interests of the associates, taking into account the goals of seeking value and the financial soundness of the company in which the pension funds participates;

᭿ in cases in which BPI Pensões opts to participate in General Meetings, the voting rights will be exercised directly by BPI Pensões or alternatively by a representative who is bound by the written instructions issued by BPI Pensões.

348 Banco BPI | Annual Report 2006 12. Code of ethics and professional conduct

12.1. COMMITMENT TO STRICT STANDARDS OF ETHICS AND 12.1.1. Head of Oversight and Control PROFESSIONAL CONDUCT CMVM Regulation 7 / 2005 came into effect on 1 January 2006. The professional activity of the members of governing bodies and The regulation provides that, with respect to the organisation and of Employees of the companies belonging to the BPI Group control of the activity of financial intermediaries, the internal control universe, is governed by the following principles: mechanisms must be reinforced through, in particular, the creation of the position of “Head of Oversight and Control”, whose holder is ᭿ respect for absolute independence as regards the interests subject to registration with the CMVM and obliged to prepare an between the Company and its Customers, between personal annual report on control. interests and those of the Company, and those of the Customers amongst themselves; Accordingly BPI appointed a Head of Oversight and Control for the entire BPI Group, which presupposes the involvement of all ᭿ professional competence; the areas where financial intermediation activities are conducted, as well as other bodies1 whose contribution enables the Head to ᭿ personal integrity. have at his disposal all the information needed to prepare the report to be sent annually to the CMVM. With the aim of safeguarding absolute respect for all the standards of an ethical and professional conduct nature at each The functions of the Head of Oversight and Control at the BPI of the BPI Group's companies, members of governing bodies, Group, which are exercised by the person in charge of the Control Employees, service providers and external consultants are and Compliance Area of the Securities Division, are the following: obliged to declare in writing that they have full knowledge of the norms appearing in the following documents. ᭿ to ensure compliance with standards applicable to the exercise of each one of the financial intermediation activities; ᭿ Codes of conduct of the respective associations, namely, the Associação Portuguesa de Bancos (APB) and the Associação ᭿ in cases of breaches, to adopt or propose the adoption of Portuguesa de Fundos de Investimento, Pensões e Patrimónios measures appropriate to the cessation of the non-compliance (APFIPP). and the prevention of the occurrence of similar situations;

᭿ BPI's own code of conduct. It contains, in certain instances, ᭿ to communicate the occurrence of breaches to the Board of even more restrictive rules than those embodied in directives Directors; issued by the associations to which the BPI Group companies belong and / or by the supervisory authorities. BPI’s code of ᭿ to control the realisation of securities operations for Employees’ conduct was approved for the first time in March 1994, since and governing bodies members’ own account, and to when it has been revised occasionally. The last revision was communicate to the Board of Directors any contravention of the carried out on 9 March 2006. provisions of the BPI Group’s Code of Conduct, and in the case of the Banks of the “Conduct Standards in Securities Broking” Breach of the duties envisaged in the aforesaid codes is (“Normas de Conduta na Intermediação em Valores Mobiliários”) punishable according to the gravity of the infringement, the and, in the case of BPI Gestão de Activos and Sofinac, of the degree of the perpetrator’s culpability and the consequences of respective Internal Regulations on standards of conduct; the act, through the application of a sanction which is graduated on a case-by-case basis, ranging from a verbal admonishment to ᭿ to immediately provide information to the Board of Directors dismissal with just cause. Disciplinary responsibility is about any signs of breach of duties that could lead to BPI or independent of responsibility of a civil, administrative offence its Employees committing a serious or very serious and criminal nature infringement;

᭿ to keep a record of breaches and the measures proposed and BPI Group’s codes of conduct in force are available for adopted; consultation or download at the website www.ir.bpi.pt or upon request to the Investor Relations Division (see contacts under ᭿ to prepare a report on the annual control to be sent to the CMVM. point 13.2 of this report).

To this end, the BPI Group’s Head of Oversight and Control The ethical and professional conduct regulations imposed upon exercises his functions in an independent manner, and may those who work for the BPI Group are intended to guarantee request and obtain information without requiring the consent of professional confidentiality, the defence of Customers' interests third parties, as well as report directly to the Board of Directors and the prohibited use of privileged information for personal gain. any information relating to his functions in this domain.

1) Namely the Audit and Inspection Division, the Legal Affairs Division, the Organisation Division, the Information Systems Division, the New Channels Division, the Equities Department, the Risk Analysis and Control Division and the Securities Division.

BPI Group Corporate Governance Report 349 12.2. EQUITY AND SAFEGUARDING AGAINST CONFLICT OF 12.3. VIOLATION OF PROFESSIONAL SECRECY AND INTERESTS CONFIDENTIALITY 12.2.1. Conflicts of interest between Directors or Employees and In contacts with Customers and the markets, members of the BPI governing bodies and Employees of BPI Group companies must The members of Banco BPI’s Board of Directors are bound to exercise the utmost discretion and practise professional secrecy communicate any interest, direct or indirect, that they, any regarding the services provided to their Customers and, member of their families or any entities to which they are furthermore, about facts or information relating to such professionally connected, may have in the Company in respect of Customers or third parties, knowledge of which stems from the which the possibility of the assumption of an equity interest, or exercise of the respective activities. This duty only ceases by way a loan or any service by BPI Group Companies or Banks, is being of the written authorisation of the person concerned or in the considered. In such circumstances, the Directors must inform cases expressly envisaged in the law. The duty of professional the nature and extent of such interest and, where this is secrecy continues even after the cessation of functions as substantial, they must refrain from taking part in the discussion member of the governing bodies or as Employee. and / or voting of any proposal that such operation may entail. In parallel, all the members of the governing bodies or Similarly, any conflicts of interest resulting from family Employees who, for purposes of their functions, become aware of relationships, personal assets or any other cause, of any information which has not yet been made public and which Employee on the one side, and those of BPI on the other, must could influence prices on any market, must keep such be promptly communicated to the person in charge of the information under the strictest confidentiality and abstain from respective Division. carrying out transactions involving the securities concerned until the public disclosure of such information. BPI Employees must also not accept any power of attorney or other form of mandate which involves the representation of third 12.4. STOCK BROKERAGE ACTIVITY parties, Customers or not, in negotiations and contacts with BPI. 12.4.1. Dealing for own account Exceptions to the rule set out in the preceding paragraph, There are strict rules governing everything that refers to the namely when they involve the representation of family members execution of operations involving securities dealing for one’s own or if justified by strong commercial grounds, must be requested account1. in writing by the Employee, indicating the type of representation and the extent of the powers conferred on him. An example of these rules is the policy that securities acquired by members of the BPI Group’s Governing Bodies and Employees Employees who have access to operate bank accounts through can only be sold at least 10 days after their purchase, thereby the internal IT systems of the Group’s Banks are prohibited from limiting the risk of improper involvement in operations of a processing movements on the accounts in which they appear as speculative nature. accountholders, authorised signatories or representatives. Compliance with the rules envisaged in the preceding paragraph 12.2.2. Conflicts of interest with Customers can only be waived by the decision of a Director or, when it As concerns the Customers of the BPI Group’s Banks and involves a member of a governing body, by deliberation of the Companies, every Customer is accorded equal treatment in all Board of Directors taken after submission of a written petition by situations where there is no motive of a legal and / or contractual the interested party2. To the present date, no member of a nature to proceed otherwise. This does not contradict the governing body has ever requested the Board of Directors to practice of differentiated conditions on the realisation of waive compliance with this rule. operations after having weighed the attendant risks, their profitability and / or the Customer’s return.

1) Operations are deemed to be carried out for one’s own account when such operations are effected (i) by the member of the Governing Bodies or the Employee, or on his behalf by an intermediate person; (ii) in the name of the minor children of the member of the Governing Bodies or of the Employee, (iii) by companies which are majority held and / or controlled by the member of the Governing Bodies or by the Employee. 2) The waiver shall only be granted when it does not jeopardise the values underlying the duties to defend the market and to prevent conflicts of interest which are envisaged in applicable legal, regulatory and deontological provisions, and where compliance with the rule whose waiver is being requested would seem, in view of the specific circumstances of the case, to be excessively onerous for the interested party.

350 Banco BPI | Annual Report 2006 It is important to underline in more general terms the obligation 12.4.3. Equity research activity imposed on all Directors of the Group and Employees to BPI adheres in essence to the recommendations of the CMVM communicate to Head of Supervision and Control within 24 relating to financial analysis reports. To this end, it has hours all the operations realised involving securities1, except in implemented a series of measures to ensure that: the case where the Group’s brokerage channels have been used (which in this case is regarded as communication of the ᭿ the information published is complete, accurate, current, clear, operation). Recourse to these channels is compulsory for objective and legitimate; Employees involved in stock brokerage activity. ᭿ the relationship with the public investor is founded on 12.4.2. Acting for the account of Customers principles of equity and transparency, with high standards of Employees of the BPI Group’s Banks which are involved in stock diligence and loyalty and oriented towards reducing to a broking activity are bound to the duties laid down in the code of minimum the risk of conflicts of interest. conduct of the Associação Portuguesa de Bancos (Portuguese Association of Banks) which provides that they must, in the Amongst the measures implemented with a view to effective execution of any operations entrusted to them, serve their compliance with the foregoing recommendations and principles, Customers with diligence, loyalty and discretion, namely: are the following:

2 ᭿ carrying out the transactions with speed and upon the best ᭿ the existence of Chinese walls between the research, equity conditions afforded by the market; sales and Corporate Finance areas;

3 ᭿ abstaining from carrying out and inciting their Customers to ᭿ the decoupling of the financial analyst’s remuneration from effect repeated operations of securities purchases and sales, the revenue generated by the transactions effected by BPI; when these operations are not justified and have as the only or main aim the charging of corresponding commissions or any ᭿ the maintenance of an up-to-date register of the transactions other objective that is contrary to the Customer’s interest; executed by the financial analysts4;

᭿ abstaining from attributing to themselves the same securities ᭿ the imposition on the financial analyst to refrain from trading, when they have Customers who have requested them at the on a date close to the conclusion and disclosure of the same or a higher price or, on the other hand, abstaining from research report, the securities issued by the company analysed; selling securities which they hold instead of identical stocks in respect of which they have received orders to sell by the ᭿ the identification in the reports of the valuation assumptions Customers at the same or lower price. and methods used;

In parallel, the Banks must inform their Customers of all the ᭿ the identification in general terms of the existence of economic material aspects that they require in order to form an informed relations or benefits which exist between the analyst, BPI and decision about the transaction they intend to enter into, alerting the company analysed, namely, the existence of shareholdings them, above all, to the nature of the inherent risks and the and, in operations on the primary market, the existence of financial consequences that their eventual realisation will imply. corporate finance relations;

With regard to the provision of portfolio management services, ᭿ the publication in the reports of a grid of recommendations vs. the banks and the investment fund management companies risk, and a history of the recommendations issued by BPI must ensure that their Customers are informed about the risk relating to the company concerned; level to which they will subjected, the degree of discretion granted to the broker and all the commissions and other ᭿ the publication in the reports of an alert to investors to the fact expenses they will be charged. that the recommendation, projections, assumptions and methods used by the analyst are capable of being changed where new circumstances warrant this;

᭿ the identification of the posts occupied by directors of the BPI Group in the companies analysed.

1) Excluding bonds issued by entities with sovereign or similar risk, unit trust (mutual) funds and to the transfers of securities to another account of the Employee. 2) The Anglo-Saxon term “Chinese walls” is used in the Investment Banking business to describe a set of procedures which are designed to guarantee the independence and autonomy between Employees who work in distinct areas with potential conflicts of interest. 3) The remuneration of analysts conforms to the same principles as those applied to other Employees and which are described in 7.1. 4) Financial analysts are obliged to use a BPI Group Bank in the realisation of securities operations.

BPI Group Corporate Governance Report 351 12.5. COMMUNICATION OF IRREGULARITIES BPI Employees must communicate to any of the Management or Thus and without prejudice to the investigations and control Oversight Bodies and, in particular, to the Audit Committee any initiatives which that Divisions considers it should carry out at its irregular practices which they detect or which they become own instigation, Employees of the Banks and other financial aware or have founded suspicions of, so as to prevent or impede companies which constitute the BPI Group have instructions to irregularities that may provoke damages (financial or to image) inform the Audit and Inspection Division about the operations for BPI. realised and / or to be realised which, due to their nature, amount or characteristics, may indicate the use of funds derived from The communication referred to in the preceding paragraph must illicit activities, in accordance with internal regulations in force at be effected in writing and must contain all the details and any moment at the Bank’s various financial entities. information that the Employee has and which he deems necessary for evaluating the irregularity. The Employee can also Banco BPI’s Audit and Inspection Division is charged with task of request confidential treatment as concerns the origin of the analysing any occurrences, following these up and taking the communication. necessary measures to prevent the BPI Group’s involvement in operations associated with money laundering and other The recipient of the above mentioned communication must obligations arising from the legislation in force dealing with the consider the situation described and decide upon the actions fight against organised and economic-financial crime. that are the most appropriate in each particular case. The Audit Committee is systematically informed of the evolution 12.6. COMBAT AGAINST MONEY LAUNDERING of occurrences and their consequences. According to prevailing legislation designed to impede the utilisation of financial entities in money laundering operations and In 2006, the Audit and Inspection Division carried out systematic in activities associated with economic-financial and organised control actions, which involved more in-depth analyses of the crime, the financial institutions and other financial companies records of 564 Customer accounts, 234 of which led to which constitute the BPI Group are endowed with internal control communication being made to the Republic’s Attorney General. and communication systems, as well as human and material resources, to provide their directors and Employees proper training The BPI Group provides training in the prevention of money for recognising operations which may be related to the aforesaid laundering to all Employees, both immediately after their crimes and the persons perpetrating criminal activities. admission and later during the course of the audits which it performs at the various Bodies of the organisational structure, in This legislation (national and community) is transposed in its this case of all those who form part of the respective workforce. essence into the internal regulations of the BPI Group’s financial In addition, it periodically organises classroom-type sessions institutions. dealing with this topic for all management and technical staff forming part of the commercial networks. At the BPI Group the abovementioned obligations are the responsibility of Banco BPI, SA.’s Audit and Inspection Division., where the Anti-Money Laundering Unit was created on 31 March 2004 solely for this purpose, and which changed its name on 3 January 2005 to the present “Money Laundering Prevention Unit”.

352 Banco BPI | Annual Report 2006 12.7. PREVENTION OF INSIDER TRADING Employees and Directors who, during the exercise of their Non-executive Directors are also subject to a period when they are functions, obtain information which has not been made public barred from trading in Banco BPI shares or other convertible and which could influence prices on any market, are bound by a securities or which confer rights thereto; however, in the case of the strict duty of secrecy, and must abstain from carrying out any first prohibition (due to the proximity to the release of earnings), transactions in the securities involved, until the public the restriction applies in the period falling between the 15th day disclosure of such information. before and the date of the public disclosure of the results.

Operations involving securities issued by Banco BPI Banco BPI and its Directors are also bound by strict In terms of Group BPI’s code of conduct, the members of communication duties imposed by law and by the CMVM’s Management or others with a professional category on a par with Regulations, such as the obligation to within a period of seven or above a Manager, as well as those Employees involved in the business days, the latter have to inform the former which must preparation of financial information or the issue of shares or then inform the CMVM, of any operations realised in Banco BPI securities convertible into shares, are prohibited from dealing in shares. Banco BPI shares, as well as in securities convertible into shares or those which confer such rights: In order to strengthen the measures aimed at averting situations of abuse arising from the possession of privileged information, th ᭿ in the period falling between the 15 day before the end of each BPI also pursues a policy of: quarter or each financial year, and the moment the corresponding results are disclosed, which considering BPI’s normal practice, ᭿ disclosing results on the same day the Board of Directors means the barring of trading in Banco BPI shares in approves them; approximately half the stock exchange sessions in the year; ᭿ waiting till the close of the stock exchange session before ᭿ in the period falling between the decision of BPI’s disclosing important facts; management to propose the issue of shares representing its share capital or of securities convertible into shares or those ᭿ informing the CMVM and placing on the Investor Relations site which confer such rights, and the respective public the presentations made at conference with Analysts and announcement. Investors.

BPI Group Corporate Governance Report 353 12.8. BUSINESS DEALINGS BETWEEN BPI AND MEMBERS 12.9. ACCOUNTING TRANSPARENCY OF THE BOARD OF DIRECTORS, THE AUDIT BOARD AND THE BPI adopts a policy of recording all the costs in the proper AUDIT COMMITTEE, THE HOLDERS OF QUALIFIED ledger accounts in accordance with their nature. BPI does not SHAREHOLDINGS OR COMPANIES BELONGING TO THE incur or record “confidential expenses”. GROUP There were no business dealings or operations in 2006 between 12.10. SOCIAL INVESTMENT Banco BPI on the one hand, and the members of its Board of The Bank has since its foundation supported projects of Directors, its Audit Board and the Audit Committee, the holders undisputed merit in the area of culture, education, research and of qualified shareholdings or Group companies, on the other, social solidarity, which involves partnerships with other private or which were materially relevant and cumulatively, which were public institutions. BPI’s social investment policy, as well as a carried out other than under market conditions (applicable to description of some of the most noteworthy projects BPI similar operations) or beyond the scope of the bank's normal supports or supported in the recent past, are outlined in a day-to-day business operations1. separate chapter of the Directors’ Report (pages 19 to 22).

However, it is important to disclose the following business relations existing between BPI and some of the holders of qualified shareholdings. Namely:

Allianz Group BPI is in partnership2 with the Allianz Group in the life assurance and life risk business, materialised in a 35% interest in Allianz Portugal3 and in an agreement for the distribution of insurance through its commercial network.

The Allianz Group owns a 8.8% shareholding in Banco BPI at 31 December 2006.

Arsopi BPI has a partnership with the Arsopi, evidenced by:

4 ᭿ a 26% shareholding in a holding company called Viacer;

5 ᭿ a direct and indirect shareholding (via Viacer) of 13.5% and 17.7%, respectively in the holding company called Petrocer (at the moment is deactivated).

Viacer’s most significant assets are a 56% shareholding in Unicer – one of the country’s biggest drinks manufacturers and distributors.

The Arsopi, its shareholders and their families owned a shareholding of 2.9% in Banco BPI at 31 December 2006.

1) Information disclosed in accordance with number I(7) of the “Scheme for Report on Corporate Governance” (CMVM Regulation 7 / 2001). 2) From which revenue is derived in the form of a share in the profits (from the shareholding) and commissions (for the selling of insurance at the bank’s network). 3) Consolidated participation in Banco BPI’s accounts using the equity method. 4) The Arsopi Group have a shareholding of 28%. 5) The Arsopi Group own a direct holding of 5.0% and an indirect holding – via Viacer – of 19.0%.

354 Banco BPI | Annual Report 2006 13. Communication with the market

13.1. PRINCIPLES GOVERNING THE DISCLOSURE OF FINANCIAL INFORMATION AND OTHER IMPORTANT FACTS

Principles underlying the disclosure of financial information and other important facts By supplying the market all relevant information that allows the formation of substantiated judgement about the evolution of activity Transparency and the results achieved, as well as the prospects for growth, earnings and existing risks.

In the maintenance of the criteria used in the provision of information and clarification of the motives underlying changes Consistency thereto, when they occur, so as to ensure the comparability of the information between the reporting periods.

Through the use of plain language, in the use of explanatory notes for complex issues and in the inclusion of a glossary and Simplicity formulary in the Annual Report.

In the adoption of a proactive, open and innovative stance in communication with the market. Availability

In the disclosure of all the information which is relevant and in the attribution to each piece of information a degree of Materiality visibility and detail commensurate with its importance.

Initiative In the adoption of communication of practices and the provision of information which, although not binding, are appreciated by the market.

13.2. INVESTOR RELATIONS DIVISION 13.2.1. Concept and responsibilities Banco BPI attaches special importance to the maintenance of a BPI has been disclosing information every quarter covering its frank and transparent relationship with financial analysts, activity and the consolidated results since the last quarter of investors, shareholders, authorities, mass media and other 1991. Since it was listed on the stock exchange in 1986, BPI market participants. adopts a policy of commissioning a full-scope external audit on the interim report and accounts, when the law merely requires a Stemming from this permanent concern, BPI set up in 1993 a limited review. structure exclusively dedicated to relations with investors and with the market. The Investor Relations Division (DRI), which In the sphere of advisory support given to the Executive reports directly to the Chairman of the Board of Directors and to Committee, we highlight the monitoring of Banco BPI’s share the Executive Committee of Banco BPI’s Board of Directors, has price in its multiple facets, as well as the backing given in the as its mission providing the market with accurate, regular, timely direct contact that the Executive Committee regularly has with and unbiased information concerning the BPI Group, with financial analysts and institutional investors (national and particular emphasis on information that could have a material foreign), covering both conferences and road shows and impact on the Banco BPI share price. individual (one-on-one) meetings.

The Investor Relations Division has as its principal functions As regards this aspect, an important event is the Annual guaranteeing, to the Authorities and to the market, compliance Conference for Investors and Analysts which the Executive with legal and regulatory reporting obligations to which Banco Committee has organised every year since 20011. BPI is bound responding to the information needs of investors, financial analysts and other interested parties, and lending BPI’s policy is to disclose to the market the information support to the Executive Committee in aspects relating to Banco presented at these gatherings, issuing a press release BPI's presence on the market as a listed entity. summarising the most relevant aspects and making available the presentations delivered during this event on the IR website. Within the scope of the abovementioned responsibilities, of particular importance is the disclosure of information classified as “relevant fact”, the furnishing of quarterly information concerning the Group's activity and results, and the preparation of the annual and interim reports and accounts.

1) Exceptionally, this event was not held in 2004.

BPI Group Corporate Governance Report 355 The Investor Relations Division contact details are frequent and 13.3. INTERNET SITE widely broadcast. All the information of a public nature 13.3.1. Investor Relations Website – www.ir.bpi.pt regarding the BPI Group can be requested from the Investor BPI has a website dedicated exclusively to the disclosure of Relations Office via the contact page at the website, by information of an institutional nature about the Group. This telephone, e-mail, fax or by letter. website is available at the address www.ir.bpi.pt, or for those persons who do not have access to the Internet, at the Internet Kiosks located at the majority of Banco BPI branches. INVESTOR RELATIONS CONTACTS Address: Rua Tenente Valadim, n.º 284 – 3.º Of the more than 500 pages of information (including files for 4100-476 Porto downloading) available on the website, the following merit Phone: +351 22 607 33 37 special mention: Fax: +351 22 600 47 38 E-mail: [email protected] ᭿ extensive financial information that is completely updated four Website: www.ir.bpi.pt times a year on the actual day results are released. This includes more than 30 tables for downloading in Excel and the web cast (in real time) of the quarterly result presentations;

13.2.2. Activity in 2006 ᭿ complete annual report and accounts available in HTML format In its capacity as a listed company, BPI undertook intensive and section on «Corporate Governance» containing more than communication activity with the market throughout 2006. 30 pages of information;

BPI participated in conferences and in a number of road shows ᭿ interactive simulator for calculating the total return (i.e. which involved some of the principal European financial markets assuming the reinvestment in dividends) on the investment in – Lisbon, London, Madrid – and the USA – Boston. The Bank Banco BPI shares; held more than 120 one-on-one meetings with institutional investors. ᭿ section about «debt» containing summary files and supporting documentation relating to the main public issues of Within the ambit of earnings releases, BPI continued to stage subordinated and senior debt, credit securitisation and quarterly meetings in 2006 with analysts and investors to preference shares; discuss quarterly results. These meetings – which count with the presence of all the members of the Executive Committee of ᭿ information concerning the equity research analysts who Banco BPI’s Board of Directors – can be attended personally or regularly cover Banco BPI’s share, indicating the respective by conference call, as well as being disseminated simultaneously contacts and investment recommendations; and with free access by webcast via the Bank’s Investor Relations website. ᭿ individual pages for each member of the Executive Committee and for the Chairman of the Board of Directors, containing Meriting special mention was the organisation in Lisbon of the their respective profiles (CVs, photographs, functions, etc.); BPI’s 5th Annual Conference for Analysts and Investors in May – a forum for debate between BPI’s Executive Committee and the ᭿ section on «Charts and Prices» relating to the Banco BPI financial community to discuss important issues relating to the share, which includes a comparison with benchmarks G, the Bank’s business. identification of events (payment of dividends, capital increases, etc) and the possibility of downloading a history of During the year BPI maintained permanent contact with the the share price (adjusted and not adjusted). financial analysts who cover Banco BPI shares, through virtually daily research calls.

356 Banco BPI | Annual Report 2006 The website (available in Portuguese and English) is split into eight principal sections which cover – inter alia – the following subjects:

Investor Relations web site – contents and organisation

BPI Group Corporate Financial Shareholders Banco BPI Share Debt News and Sectorial Governance information Events information History Management and Indicators Value creation Indicators Issued debt Announcements Market structure control bodies Chairman Results Shareholder Charts and Rating News Key economic Risk management structure quotations indicators Executive Shareholder Reports and Calendar Management control accounts Return calculator Analysts’ coverage Loans and Conferences deposits Strategy Voting and Dividends Investment representation Presentations recommendations International Identity Capital Remuneration comparison Volatility Social investment Ethics and rules General Meetings Transaction Recognition Communication with the market channels Legal framework Weight in indexes Corporate governance rating

All the information of an institutional nature which is public and 13.3.2. Electronic mail material is as a general rule published on the website. For the The announcements of important facts and other most significant events, such as the Shareholders’ General announcements, besides being published on the Investor Meeting, the Annual Conference for Analysts and Investors the Relations site and on the CMVM’s information channel, are also payment of dividends and the quarterly disclosure of results, sent by electronic mail to the supervision authorities, the media, specific pages are also created for disclosing information and analysts, as well as to all the institutional investors or to those giving support for such events. individuals who expressly request these.

Users of the website also have the opportunity to register for and In 2006, in each process involving the disclosure of quarterly receive a daily email summarising the behaviour of Banco BPI results, the Investor Relations Division sent approximately 400 shares on the stock exchange, an alert service whenever the email messages. The Investor Relations Division has a policy of share attains a predetermined percentage and news or new not sending unsolicited email messages and carries out a contents published on the site. The subscribers to these periodic review of its contacts database with a view to “mailing lists” can cancel their subscription at any moment by eliminating inactive addresses or recipients. simply following the links appearing at the bottom of each email for this purpose. Generally speaking, all the documents issued in paper form (including preparatory documents for the General Meetings) are The Investor Relations website complies fully with the CMVM’s available for dispatch in electronic format upon request. recommendations on the use of the Internet as a means of disseminating information of an institutional nature. 13.4. REPRESENTATIVE FOR RELATIONS WITH THE MARKET Mr. Rui Lélis – Director of Banco Português de Investimento – is In 2006 the IR website recorded a monthly average of 378 Banco BPI representative for Market Relations. thousand pages views and 17 thousand visits.

BPI Group Corporate Governance Report 357 14. Banco BPI shares

14.1. SHAREHOLDER RETURN 14.2. STOCK EXCHANGE PERFORMANCE AND Banco BPI shares registered a gain of 73.6% since the COMMUNICATIONS TO THE MARKET beginning of 2006 until 12 of March of 2007. If in addition to In 2006, the performance of Banco BPI shares was marked by the share’s stock market appreciation we include the income the takeover bid launched by BCP for BPI, which influenced the from the dividend paid, then the Banco BPI shares yielded a stock’s behaviour on the market effective from 13 March return on investment (ROI) of 61.4% to its Shareholders in onwards. 2006. The chart below presents the behaviour of Banco BPI shares and In the last 5 years, Banco BPI shares have outperformed the the communication to the market of important facts and other market average by an expressive margin. In this period, Banco announcements. BPI shares have posted an annual average appreciation of 175.0%, whilst the Portuguese stock market1 and the banking sector2 in Europe posted gains of 43% and 41%, respectively.

In the chapter entitled “Banco BPI Shares” (which is deemed to be incorporated in this text for reference) a detailed account is presented of the stock market behaviour of Banco BPI shares, which includes figures relating to earnings per share, dividends paid, stock prices, shareholders' returns, liquidity data and stock market capitalisation and market appreciation indicators for the last five years.

Banco BPI’s share performance Important facts

€ 73.6% 7.2

6.7 36 37 32 33 35

6.2 14 20 30 31 8 9 13 15 18 25 27 28 29 34 5 10 11 17 21 24 7 16 23 6 26 5.7 12 19 22

4 5.2

4.7 3

2 4.2 1

3.7 Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar. 2006 2007

Banco BPI communications to the market Third party’s communications

1) Considering PSI-20 index performance. 2) Considering Dow Jones Europe STOXX Bank index performance.

358 Banco BPI | Annual Report 2006 Communication of important facts to the market and trend in Banco BPI's share in the 10 sessions which preceded and that which followed the disclosure of information N.º Date Type Details over the 10 stock over the 10 stock exchange sessions exchange sessions before communication after communication Banco BPI PSI-20 Banco BPI PSI-20 2006 1 17 Jan. QS Banco BPI advises that Amorim Holding II, SGPS, S.A., holds 1.959% of its voting rights. 4.3% 1.6% 1.0% -1.3% 2 26 Jan. IP Announcement of Banco BPI’S consolidated results for 2005 and the proposed dividend relating to the same year, to be tabled at the Shareholders’ General Meeting1. 2.2% -1.3% 6.5% 5.1% 3 9 Mar. IP Board of Directors’ announcement relating to the motions to the deliberated at the Shareholders’ General Meeting on 20 April 2006. 0.7% 0.5% 26.7% 5.3% 4 13 Mar.2 TCP Announcement by Banco Comercial Português of a takeover bid for Banco BPI. 33.1% 4.1% -1.5% 3.0% 5 15 Mar. IP Board of Directors’ announcement relating to BCP’s takeover bid for Banco BPI underlines the hostile nature of the Bid. 26.7% 6.8% 3.0% 0.7% 6 17 Mar. OE Notice of the Shareholders’ General Meeting to be held on 20 April 2006. 25.0% 4.6% 3.2% 2.0% 7 21 Mar. QS Banco BPI advises that Norges Bank Investment Management holds 1.7161% of the voting rights in BPI. 27.6% 5.4% 1.7% 1.4% 8 28 Mar. QS Banco BPI advises that Polygon Global Opportunities Master Fund holds 2.44% of the voting rights in BPI. 1.7% -0.2% 0.0% 1.4% 9 31 Mar. TPC The application to register the Bid is lodged by the bidder with the CMVM and in the notification to the Competition Authority. 3.0% 1.9% -0.2% -0.1% 10 10 Apr. IP Report of the Board of Directors on the acceptability and conditions of the takeover bid for Banco BPI shares announced by BCP. -0.7% 1.9% 1.7% -0.4% 11 18 Apr. QS Banco BPI advises that Castlerigg Master Investments Ltd. holds 2.1% of its voting rights. 1.0% -0.4% 1.5% -1.9% 12 20 Apr. OC Results of the Shareholders’ General Meeting of 20 April 2006, amongst which the change to the limitation on voting rights from 12.5% to 17.5%. 0.9% -0.5% -0.8% -2.2% 13 21 Apr. OC Announcement concerning the distribution of voting rights relating to 20051. 1.6% -0.4% -0.5% -2.5% 14 26 Apr. IP Announcement of the disclosure of Banco BPI’s consolidated results for the 1st quarter of 20061. -0.3% -1.0% 0.2% -1.7% 15 3 May OE First stock exchange session in which BPI shares trade without the right to the dividend relating to 2005. -0.8% -2.5% -0.9% -4.4% 16 12 Jun. TPC BCP informs about the non-opposition decision of the Bank of Portugal. 0.9% 0.1% 0.3% -0.2% 17 22 Jun. QS Banco BPI informs that 6.42% of the voting rights in BPI are imputable to Banco Comercial Português. 1.4% -0.8% 1.2% 0.7% 18 30 Jun. IP Announcement concerning the alliterations to Banco BPI’s management and oversight model. 2.8% 1.9% -1.9% -1.0% 19 05 Jul. TPC BCP informs about the non-opposition of the Insurance Institute of Portugal. 0.9% 0.5% -2.6% -0.1% 20 06 Jul. QS Banco BPI advises that Polygon Global Opportunities Master Fund holds 2.44% of the voting rights in BPI. 1.5% 0.6% -2.9% -0.4% 21 07 Jul. QS Banco BPI advises that Caixa Holding, S.A.U. holds 18.679% of its share capital. 0.9% 1.0% -1.9% -0.5% 22 14 Jul. OE Commencement of the in-depth investigation phase by the Competition Authority. -2.0% -1.3% -1.2% 2.7% 23 27 Jul. IP Announcement of the disclosure of Banco BPI’s consolidated results for the 1st half of 20061. -0.5% 2.4% 0.5% 1.6% 24 24 Aug. QS Banco BPI advises that 20.034% of the voting rights in BPI are imputable to Caixa d’Estalvis i Pensions de Barcelona (“la Caixa”). 0.0% 1.1% 0.2% 0.4% 25 23 Oct. IP Announcement of the disclosure of Banco BPI’s consolidated results for the 3rd quarter of 20061. 0.7% 0.7% 0.8% 0.8% 26 23 Oct. IP Banco BPI announces plan for the opening of 80 branches in Portugal in 2007 and 30 new branches in Angola. 0.7% 0.7% 0.8% 0.8% 27 10 Nov. QS Banco BPI advises that 23.155% of the voting rights in BPI are imputable to Caixa d’Estalvis i Pensions de Barcelona (“la Caixa”). -0.5% 0.6% -0.2% 0.1% 28 14 Nov. IP Announcement by the Chairman of the Board of Directors regarding the revocation of the pre-emption contract between Banco BPI shareholders. -0.7% 0.8% 0.2% 0.0% 29 30 Nov. IP Publication of the text of the letter sent to the CMVM relating to the programme for branch openings. 0.0% 0.5% 0.8% 2.9% 30 13 Dec. IP Banco BPI informs that the Board of Directors deliberated to request the Chairman of the General Meeting Committee to convene two extraordinary general meetings. 1.0% 2.4% -0.2% 1.7% 31 15 Dec. OE Shareholders’ General Meeting convened for 19 January 2007. 1.3% 4.1% -2.0% 0.9% 1) In compliance with CMVM Regulation 7 / 2001. 2) The announcement was made during the session of 13 March 2006 during a period when trading in BPI shares was suspended. Legend: IF: Important fact; OC: Other communications; QS: Qualified shareholdings; OE: Other events.; TPC – Third-Party Communications Notes: A) Banco BPI adheres to a policy of disclosing sensitive information after the stock market has closed. Accordingly, any possible impact on the price of Banco BPI shares is only felt in the next session. B) The facts listed in the above table do not constitute an exhaustive summary of all the information published on the CMVM's extranet. However, in Banco BPI's opinion, it includes all the communications to the market that are capable of influencing the price of its shares.

BPI Group Corporate Governance Report 359 Communication of important facts to the market and trend in Banco BPI's share in the 10 sessions which preceded and that which followed the disclosure of information (continued) N.º Date Type Details over the 10 stock over the 10 stock exchange sessions exchange sessions before communication after communication Banco BPI PSI-20 Banco BPI PSI-20 2007 32 19 Jan. IP Shareholders’ General Meeting approves plan for the opening of branches and grants authority to the BD to decide on the disposal of the position in BCP held by Banco BPI and by BPI Vida. 4.7% 2.2% 0.8% 0.6% 33 25 Jan. IP Disclosure of BPI’s 2006 results: net profit of 308.8 M.€ exceeds the 291 M.€ projected in the Business Plan. 4.8% 0.2% 3.2% 2.3% 34 29 Jan. TPC BCP informs about the signing of contracts with Santander and the BCP Pension Fund for the purchase of 10.5% of BPI’s share capital, and about the undertaking relating to the process involving the possible sale of assets. 2.3% 0.3% 5.5% 2.2% 35 01 Feb. OC Announcement by BPI regarding the exposition made to the CMVM about the agreement announced between BCP and Banco Santander. -0.2% 0.6% 3.7% 2.6% 36 01 Mar. TPC Preliminary decision of the Competition Authority of non opposition to the operation, and which includes a number of undertakings given by BCP to the Competition Authority. -0.6% -3.5% -- 37 12 Mar. IP Banco BPI’s Board of Directors informs that it unanimously deliberated not to make a declaration regarding the content of the Competition Authority’s preliminary decision. 4.5% -1.1% -- 1) In compliance with CMVM Regulation 7 / 2001. 2) The announcement was made during the session of 13 March 2006 during a period when trading in BPI shares was suspended. Legend: IF: Important fact; OC: Other communications; QS: Qualified shareholdings; OE: Other events.; TPC – Third-Party Communications Notes: A) Banco BPI adheres to a policy of disclosing sensitive information after the stock market has closed. Accordingly, any possible impact on the price of Banco BPI shares is only felt in the next session. B) The facts listed in the above table do not constitute an exhaustive summary of all the information published on the CMVM's extranet. However, in Banco BPI's opinion, it includes all the communications to the market that are capable of influencing the price of its shares.

360 Banco BPI | Annual Report 2006 15. Dividend policy

In the revision of the Statutes, which was deliberated at the deliberation by the General Meeting a proposed long-term Shareholders’ General Meeting of 20 April 2006, a principle was dividend policy and the justification of any variances that may included that obliges the Board of Directors to submit for eventually occur in relation thereto.

THE BPI GROUP’S LONG-TERM DIVIDEND POLICY (proposal to submit to the Shareholders’ General Meeting to be held on 19 April 2007)

Whereas: The Board of Directors proposes the adoption of the following 1. Banco BPI’s Statutes (article 26(3)) stipulate that the long-term dividend policy: General Meeting deliberates on the long-term dividend policy proposed by the Board of Directors, and that this Distribution of an annual dividend, by way of a proposal to be body justifies any deviations that may arise in relation to the submitted by the Board of Directors to the General Meeting, said policy; which is tendentiously not less than 40% of the net profit reported in the consolidated accounts of the financial year to 2. the present General Meeting is the first ordinary meeting to which it refers, save where exceptional circumstances warrant, take place after that statutory principle was embodied in the in the Board of Directors’ considered judgement, the revision deliberated at the General Meeting of 20 April distribution of a lesser dividend to be submitted for the 2006; Shareholders’ deliberation.

3. Banco BPI pursues sound financial-base goals that translate Annex: Additional data into the maintenance of: Trend in key indicators over the last 5 years a) a ratio between its basis own funds and risk-weighted 2002 2003 2004 2005 2006 assets – indicator normally designated as Tier I – which Net profit (M.€) 140.1 163.8 192.7 250.8 308.8 tendentiously is situated higher than 7%; Dividend 60.8 68.4 76.0 91.2 121.6 Pay-out ratio 43.4% 41.7% 39.4% 36.4% 39.4% b) a percentage of preference shares that does not exceed Basic earnings per 20% of basis own funds, that is, a Core Tier I indicator share (EPS) 0.19 0.22 0.26 0.34 0.41 which tendentiously is situated higher than 5.5%; Δ% -2% 13% 18% 31% 23% Dividend per share 0.083 0.09 0.10 0.12 0.161 4. historically, Banco BPI’s dividend policy has translated into: Δ% yoy -2% 8% 11% 20% 33% Closing price 2.18 2.92 2.98 3.86 5.91 a) the distribution of an annual dividend which, when Δ% 1% 34% 2% 30% 53% measured with reference to the net profit reported in the Dividend Yield (share price consolidated accounts of the financial year to which such at beginning of the year) 3.9% 4.1% 3.4% 4.0% 4.1% dividend refers, corresponded to a payout of not less than Dividend Yield (share price at end of the year) 3.8% 3.1% 3.4% 3.1% 2.7% 31% for the last ten years taken as a whole, and of not Capital ratio 10.2% 9.9% 9.8% 11.5% 9.4% less than 36% in the last five years; Tier1 7.3% 6.7% 6.5% 7.3% 7.4% Core Tier I 5.9% 5.3% 5.1% 5.9% 5.9% b) the retention of an adequate share of net profit for 1) Dividend per share proposed by the Board of Directors in respect of the 2006 financing the Group’s growth needs; financial year.

c) an adequate dividend remuneration – measured by the Notes: The Group’s consolidated net profit constitutes the relevant basis which has been used by Banco BPI for the calculation of the dividend to be distributed. relationship between the dividend and the share price Meanwhile, the dividend constitutes the application of Banco BPI’s individual net (i.e. the dividend yield) – vis-à-vis the remuneration levels profit, with the result that if that net profit, after the required allocation to the Legal Reserve Fund and to the payment of the priority dividend on any preference (via dividend) prevailing at other listed banks. shares that the company may have issued, is inadequate for the payment of the proposed dividend, this will entail the distribution of free reserves to complement the distribution of the individual net profit. 5. Taking into account, in particular, that the above points 3,

4.b) and 4.c) remain perfectly current and valid for the The dividend per share is fixed in terms adjusted, namely, for capital increases (in G future. cash or through the incorporation of reserves) and for stock splits .

BPI Group Corporate Governance Report 361 Appendices

EXPERIENCE, PROFESSIONAL QUALIFICATION AND OTHER MANAGEMENT AND OVERSIGHT POSITIONS PERFORMED AT COMPANIES BY THE MEMBERS OF BANCO BPI, S.A.’S BOARD OF DIRECTORS

Artur Santos Silva (Chairman) Date of Birth 22 May 1941 Academic qualifications 1985: Stanford Executive Program, Stanford University 1963: Law graduate, Coimbra University Management and oversight Chairman of the Board of Directors of Banco Português de Investimento, S.A. positions held at other Member of the International Consultative Board of Banco Itaú Holding Financeira, S.A. companies or other entities Member of the National Council of the Securities Market Non-executive Director of Jerónimo Martins SGPS, S.A. Non-executive Director of SINDCOM – Sociedade de Investimento na Indústria e Comércio, SGPS, S.A. Non-executive Director of the Fundação Calouste Gulbenkian. Previous professional experience 1981-04: Executive Chairman of SPI / BPI 1997-04: Member of the Board of Directors of Associação Portuguesa de Bancos 1977-78: Deputy-Governor of the Bank of Portugal 1975-76: Secretary of State of the Treasury 1968-75: Manager at Banco Português do Atlântico 1963-67: Assistant lecturer at the Coimbra University Law Faculty in the chairs Public Finance and Political Economics

Carlos da Câmara Pestana (Deputy-Chairman) Date of Birth 27 July 1931 Academic qualifications 1955: Law graduate, Universidade Clássica de Lisboa Management and oversight In Brazil: positions held at other Director, Chairman of Audit Committee, Member of Nominations and Remuneration Committee and Member of companies or other entities International Consultive Board of Banco Itaú Holding Financeira, S.A. In Portugal: Deputy-Chairman of the Board of Directors of Banco Itaú Europa, S.A. Director of Itaúsa Portugal, SGPS, S.A. Member of the Management Board of IPI – Itaúsa Portugal Investimentos, SGPS, Lda. Member of the Management Board of Itaú Europa, SGPS, Lda. Member of Management Board of Itaúsa Europa – Investimentos, SGPS, Lda. Previous professional experience 1990-94: Chairman of the Management Board and Member of the Board of Directors of Banco Itaú, S.A. 1975-90: Member of Banco Itaú, S.A.’s Senior Management Board 1970-75: Member of the Board of Directors of Banco Português do Atlântico 1957-70: Member of the Senior Management Board of Banco Português do Atlântico 1989-92: Member of the Council for the Financial System (at the invitation of the Government of Portugal) 1972-75: Chairman of the National Guild of Banks and Banking Houses 1970-72: Deputy-Chairman of the National Guild of Banks and Banking Houses

Fernando Ulrich (Deputy-Chairman) Date of Birth 26 April 1952 Academic qualifications 1969-74: Attended Business Management Course of the Instituto Superior de Economia de Lisboa Management and oversight Deputy-Chairman of the Board of Directors of Banco Português de Investimento, S.A. positions held at other Chairman of the Board of Directors of Banco de Fomento Angola companies or other entities Chairman of the Board of Directors of BPI Gestão de Activos – Sociedade Gestora de Fundos de Investimento Mobiliário, S.A. Chairman of the Board of Directors of BPI Pensões – Sociedade Gestora de Fundos de Pensões, S.A. Chairman of the Board of Directors of BPI Vida – Companhia de Seguros de Vida, S.A. Chairman of the Board of Directors of BPI Madeira, SGPS, Unipessoal, S.A. Chairman of the Board of Directors of BPI Global Investment Fund Management Company, S.A. Director of BPI Capital Finance Limited Director of Banco BPI Cayman, Ltd. Director of Petrocer, SGPS, Lda. Non-executive Director of Semapa – Sociedade de Investimento e Gestão, SGPS, S.A. Member of the Board of Directors of Associação Portuguesa de Bancos Previous professional experience 1981-83: Chief of the Office of the Minister of Finance and Planning 1979-80: Officer at the Secretariat for External Economic Cooperation of the Ministry of Foreign Affairs (Relations with the EFTA, OECD and GATT) 1975-79: Member of the Portuguese Delegation at the OECD (Paris), responsible for economic and financial matters 1973-74: In charge of the financial markets section of the weekly “Expresso”

362 Banco BPI | Annual Report 2006 Ruy Octávio Matos de Carvalho (Deputy-Chairman) Date of Birth 26 March 1932 Academic qualifications 1973: Executive Program, Insead – Fontainebleau 1956: Finance graduate of the ISCEF – Instituto Superior de Ciências Económicas e Financeiras – Lisbon Management and oversight Deputy-Chairman of Yura International Holding, B.V. positions held at other Director of João Marques Pinto – Investimentos Imobiliários, S.A. companies or other entities Outher positions Member and Deputy-Chairman of the Insurance Committee of the OECD Honorary member of the Association de Genève Previous professional experience 1989-1990: Member of the General Board of BCI – Banco de Comércio e Indústria, S.A. 1982-97: Chairman of the Management Board of Portuguese Association of Insurers (Associação Portuguesa de Seguradores – APS) and Director of BCI, in representation of BPI 1979-82: Chairman of the Insurance Institute of Portugal 1976-79: Deputy-Chairman of the Insurance Institute of Portugal 1976: Member of the National Institute of Insurance Steering Committee 1977-04: Chairman of the Audit Committee of EFACEC 1958-77: Director of EFACEC – Empresa Fabril de Máquinas Eléctricas 1958-75: Director of Companhia de Seguros Garantia …-77: Deputy-Chairman of the Comité Européen des Assurances 1987-96: Chairman of the Insurance Commission of the Chambre de Commerce Internationale (CCI)

Alfredo Rezende de Almeida Date of Birth 22 May 1934 Academic qualifications 1959: Economics graduate, Economics Faculty of the Universidade do Porto Management and oversight Chairman of the Board of Directors of ARCOtêxteis, S.A. and ARCOfio – Fiação, S.A. positions held at other Partner-Director of Casa de Ardias – Sociedade Agrícola e Comercial, Lda. companies or other entities Other positions Director of ATP – Associação Têxtil e do Vestuário de Portugal Director of Associação Portuguesa de Exportadores Têxteis Previous professional experience 1998-…: Chairman of the Board of Directors of ARCOfio – Fiação, S.A. 1998-06: Deputy-Chairman of ARCOtinto – Tinturaria, S.A. 1995-06: Director of FÁBRICA DO ARCO – Recursos Energéticos, S.A. 1998-…: Chairman of the Board of Directors of ARCOtêxteis, S.A. 1989-90: Chairman of the General Board of BCI – Banco de Comércio e Indústria, S.A. 1985-88: Member of the General Board of BCI – Banco de Comércio e Indústria, S.A. 1986-91: Member of the General Board of Sociedade Portuguesa de Capital de Risco, S.A. 1959-63: Director of Sociedade Luso Americana de Confecções, SARL

António Domingues Date of Birth 30 December 1956 Academic qualifications 1979: Economics graduate of the Instituto Superior de Economia de Lisboa Management and oversight Deputy-Chairman of the Board of Directors of Banco de Fomento Angola positions held at other Member of the Board of Directors of BCI Fomento companies or other entities Member of the Board of Directors of Companhia de Seguros Allianz Portugal, S.A. Director of BCI – Banco Comercial e de Investimentos, SARL (Mozambique) Director of BPI Madeira, SGPS, Unipessoal, S.A. Director of Companhia de Seguros Allianz Portugal, S.A. Director of PT Multimédia, S.A Director of SIBS – Sociedade Interbancária de Serviços, S.A. Previous professional experience 1988-89: Assistant Director-General of the branch in France of Banco Português do Atlântico 1986-88: Technical advisor at the Foreign Department of the Bank of Portugal 1982-85: Director of the Foreign Department of the Instituto Emissor de Macau 1981: Economist at IAPMEI Until 1981: Economist at the Office of Studies and Planning of the Ministry of Industry and Energy

BPI Group Corporate Governance Report 363 António Farinha Morais Date of Birth 2 August 1951 Academic qualifications 1974: Finance graduate of the Instituto Superior de Economia da Universidade Técnica de Lisboa Management and oversight Director of Companhia de Seguros Allianz Portugal, S.A. positions held at other Chairman of the Board of Directors of Eurolocação – Comércio e Aluguer de Veículos e Equipamentos, S.A. companies or other entities Director of BPI Rent – Comércio e Aluguer de Bens, Lda. Director of BPI Madeira, SGPS, Unipessoal, S.A. Previous professional experience 1992-96: Director of Banco de Fomento e Exterior and Banco Borges & Irmão 1992: Director of Companhia de Seguros Aliança UAP 1989-91: Director of Banco Pinto & Sotto Mayor 1984-89: Director of SEFIS and Eurofinanceira, BFE Group investment companies 1981-89: Director of Financial and Capital Markets services of Banco de Fomento e Exterior 1978-81: Technical analyst of investment projects at Banco de Fomento e Exterior 1975-82: Lecturer at the Instituto Superior de Ciências do Trabalho e da Empresa and at the Instituto Superior de Contabilidade e Administração de Lisboa 1967-78: Head of finance and administration at the group of four companies

Armando Leite de Pinho Date of Birth 29 April 1934 Academic qualifications 1956: Diploma in Engineering, Instituto Superior de Engenharia do Porto Management and oversight Chairman of the Board of Directors of Arsopi – Indústrias Metalúrgicas Arlindo S. Pinho, S.A. positions held at other Chairman of the Board of Directors of Arsopi – Holding, SGPS, S.A. companies or other entities Chairman of the Board of Directors of Arsopi – Thermal, S.A. Chairman of the Board of Directors of A.P. Invest, SGPS, S.A. Chairman of the Board of Directors of ROE, SGPS, S.A. Chairman of the Board of Directors of Security, SGPS, S.A. Deputy-Chairman of the Board of Directors of Unicer – Bebidas de Portugal, SGPS, S.A. Director of Plurimodos – Sociedade Imobiliária, S.A. Director of Pluricasas – Sociedade Imobiliária, S.A. Director of Plurimodus Turismo, S.A. Director of Tecnocon – Tecnologia e Sistemas de Controle, Lda. Director of Equitrade – Equipamentos e Tecnologia Industrial, Lda. Director of Viacer – Sociedade Gestora de Participações Sociais, Lda. Director of Petrocer – SGPS, Lda. Director of IPA – Imobiliária Pinhos & Antunes, Lda. Previous professional experience 2000-…: Chairman of the Board of Directors of Arsopi, S.A. 1990-…: Chairman of the Board of Directors of Arsopi-Holding, S.A. 1990-…: Director of Unicer, S.A. 1989-…: Chairman of the Management Board of Arsopi- Thermal e da Tecnocon 1988-00: Managing Director of Arsopi, S.A. 1985-90: Member of the General Board of BCI – Banco de Comércio e Indústria, S.A. 1969-88: Manager of Arsopi, S.A. 1957-69: Manager and Technical and Production Director of Metalúrgica de Cambra

Carlos Moreira da Silva Date of Birth 12 September 1952 Academic qualifications 2006: Stanford Executive Programme, University of Stanford, USA 1982: PhD em Management Sciences, University of Warwick, UK 1978: MSc em Man. Sci. and OR, University of Warwick, UK 1975: Graduate in Mechanical Engineering from the University of Porto Management and oversight Chairman of the Board of Directors of BA Glass I – Serviços de Gestão e Investimentos, S.A. positions held at other Chairman of the Board of Directors of BA Vidro, S.A. companies or other entities Chairman of the Board of Directors of Barbosa & Almeida – SGPS, S.A. Chairman of the Board of Directors of BA Vidro II Marinha Grande – SGPS, S.A. Chairman of the Board of Directors of BA Vidrio, S.A. (Spain) Chairman of the Board of Directors of BA Vidrio, Distribución y Comercialización de Envases de Vidrio, S.A. (Spain) Chairman of the Board of Directors of Bar.Bar.Idade, SGPS, S.A. Chairman of the Board of Directors of Bar.Bar.Idade – Imobiliário e Serviços, S.A., da Bar.Bar.Idade II – Consultores de Gestão, S.A. Chairman of the Board of Directors of Cor.on.line – Comércio de Arte, S.A. Chairman of the Board of Directors of Fim do Dia, SGPS, S.A. Chairman of the Board of Directors of Sampletest II – Consultoria e Gestão de Laboratórios de Análises Clínicas, S.A. Chairman of the Board of Directors of companies of the Group GES-SIEMSA. Manager Artividro – Arte em Vidro, Lda. Member of the Board of Directors of Change SGPS, S.A. Sole Directors of MIDFIELD – Imobiliário e Serviços, S.A. Sole Directors of BAHOUSE – Imobiliária e Serviços, S.A. Previous professional experience 1998-…: Chairman of the Board of Directors of BA Vidro, S.A. 2005-…: Member of the Advisory Board of 3i Spain 2003-05: Chairman of Executive Committee of Sonae Indústria, SGPS 1988-98: Director of several companies from Grupo Sonae 1987-88: Director of EDP, Electricidade de Portugal 1982-87: Assistant Professor of the Engineering Faculty at the Universidade do Porto

364 Banco BPI | Annual Report 2006 Edgar Alves Ferreira Date of Birth 21 March 1945 Academic qualifications 1967: Forestry graduate of the Instituto Superior de Agronomia Post-graduate degree in Management from the Universidade Nova de Lisboa Management and oversight Director of HVF – SGPS, S.A. positions held at other Director of III – Investimentos Industriais e Imobiliários, S.A. companies or other entities Director of Corfi, S.A. Previous professional experience 1978-…: Production Manager at Cotesi …-2005: Director of Companies of the Violas Group 1989-05: Member of the Board of Directors of Unicer

Herbert Walter (representing RAS International, N.V.) Date of Birth 10 August 1953 Academic qualifications 1982: PhD in Political Sciences 1974-79: Kaufmann graduate in Business Administration, Ludwig-Maximilians University (Munich) Management and oversight Chairman of the Executive Committee of Dresdner Bank AG positions held at other Member of the Board of Directors of Allianz SE companies or other entities Member of Board of Directors of Banco Popular Espanhol Member of the Board of Directors of Deutsche Börse AG Member of the Board of Directors of E.ON Ruhrgas AG Member of the Board of Directors of Allianz Beratungs – und Vertriebs – AG (company of the Allianz Group) Previous professional experience 2003-…: Chairman of the Executive Committee of Dresdner Bank AG 2003-…: Member of the Executive Committee of Allianz SE 2002-03: Responsible for Customers (Companies and Individuals) and Member of the Executive Committee of the Deutsche Bank Group 1999-03: “Spokesman” of the Executive Committee of Dresdner Bank 24 AG

Isidro Fainé Casas Date of Birth 10 July 1942 Academic qualifications Graduate in “Senior Management”, IESE PhD in Economics Member of the “Real Academia de Ciências Económicas y Financieras” and the “Real Academia de Doctors” Holder of an ISMP in “Business Administration”, Harvard University Management and oversight Director-General of Caixa de Ahorros y Pensiones de Barcelona “la Caixa” positions held at other Chairman of Abertis Infraestructuras, S.A. companies or other entities Deputy-Chairman of Telefónica, S.A. Director of Caixa Holding, S.A. Director of Brisa Auto-Estradas de Portugal, S.A. Previous professional experience 1999-…: Director-General of Caixa de Ahorros y Pensiones de Barcelona “la Caixa” 1982-99: Subdirector-General of Caixa de Ahorros y Pensiones de Barcelona “la Caixa” 1978: General Manager of Banco Unión, S.A. 1974: Advisor and General Manager of Banca Jover 1973: Staff Manager of Banca Riva Y Garcia 1969: Director of Banco Asunción, Paraguay 1964: Investment Manager of Banco Atlântico

Jorge de Figueiredo Dias Date of Birth 30 September 1937 Academic qualifications 1959: Law graduate of the University of Coimbra 1970: PhD in Law (Legal Sciences) from the Law Faculty of the Universidade de Coimbra 1977: Chair Professor Management and oversight None positions held at other companies or other entities Other positions Member of the Management Council of the Fundação Luso-Americana para o Desenvolvimento Previous professional experience 1991-05: Deputy-Chairman SIC (Société Internationale de Criminologie) 1990-01: Chairman of FIPP (Fondation Internationale Pénale et Pénitentiaire) 1996-02: Vice-Chairman of SIDS (Société Internationale de Défense Sociale) 1996-00: Chairman of the General Meeting of the Caixa Geral de Depósitos 1991-96: Member of SIDS (Société Internationale de Défense Sociale) 1986-91: Member of SIC (Société Internationale de Criminologie) 1984-04: Member of the Management Council of the AIDP (Association Internationale de Droit Pénal) 1982-86: Member of the Council of State 1979-83: Member of the Constitutional Commission 1978-90: Member of FIPP (Fondation Internationale Pénale et Pénitentiaire)

BPI Group Corporate Governance Report 365 José Pena do Amaral Date of Birth 29 November 1955 Academic qualifications 1978: Economics graduate from Instituto Superior de Ciências do Trabalho e da Empresa Management and oversight Member of the Board of Directors Banco de Fomento Angola positions held at other Member of the Executive Committee of Banco de Fomento Angola companies or other entities Director of BPI Madeira, SGPS, Unipessoal, S.A. Previous professional experience 1986-96: Consultant at Casa Civil of the President of the Republic for European Affairs 1983-85: Head of the Office of the Minister of Finance and Planning; permanent member of the Portuguese Ministerial Delegation in the negotiations for Portugal’s accession to the European Community 1982-83: Member of the Office of the consultants Jalles & Vasconcelos Porto; correspondent of the Expresso, RTP and of Deutsche Welle in Brussels 1980-82: Head of the ANOP delegation in Brussels 1979-80: Editor of the Economic Supplement of the Diário de Notícias 1975-80: Professional journalist at the Diário de Notícias

Klaus Dührkop Date of Birth 9 February 1953 Academic qualifications Law graduate of the University of Hamburg Management and oversight Chairman of the Executive Committee of Mondial Assistance Group positions held at other Deputy-Chairman of Koc Allianz (Turkey) companies or other entities Previous professional experience 2006: Chairman of the Executive Committee of Mondial Assistance Group 1998-05: Executive Deputy-Chairman of the European Department of Allianz AG 1995-97: Head of the Department of Governmental Matters of Allianz AG, Brussels 1994: Head of the CEO Office of Allianz Versicherungs – AG 1991-93: Managing Director of Allianz Industrial, S.A. (Spain) 1987-91: Member of the Executive Committee of Allianz Ultramar (Brazil) 1985-86: Director of the Industrial Department of Allianz Versicherungs – AG, Hamburgo 1982-84: Insurance brokerage assistant

Manuel Ferreira da Silva Date of Birth 25 February 1957 Academic qualifications 1982: MBA, post-graduate course in Business Management from the Universidade Nova de Lisboa in collaboration with the Wharton School (University of Pennsylvania) 1980: Economics graduate from the Economics Faculty of the Universidade do Porto Management and oversight Chairman of the Executive Committee of the Board of Directors of Banco Português de Investimento positions held at other Chairman of the Board of Directores of Inter-Risco – Sociedade de Capital de Risco, S.A. companies or other entities Director of BPI Madeira, SGPS, Unipessoal, S.A. Previous professional experience 1980-89: Lecturer at the Economic Faculty of the Universidade do Porto 1981-83: Assistant Director of the Navy’s Centre of Operational Investigation

366 Banco BPI | Annual Report 2006 Marcelino Armenter Vidal (representing Caixa Holding, S.A. Sociedade Unipersonal) Date of Birth 2 June 1957 Academic qualifications 1974-1979: Business Sciences Course and Master of Company Administration and Management, ESADE Management and oversight Director-General of Caixa Holding, S.A. positions held at other Executive Director of Caja de Ahorros y Pensiones de Barcelona “La Caixa” companies or other entities Executive Chairman of Caixa Capital Desarrollo, S.C.R., S.A. Director of Servihabitat, S.A. Joint Director of Catalunya de Valores, S.G.P.S., Unipessoal, Lda. Director of E-la Caixa, S.A. Director of Caprabo, S.A representing Caixa Capital Desarrollo, S.C.R., S.A. Sole Director of Trade Caixa I, S.A. representing Caixa Holding, S.A.U. Previous professional experience 2005-…: Executive Director of Caja de Ahorros y Pensiones de Barcelona “la Caixa” 2001-…: Director-General of Caixa Holding, S.A. 1995-2001: Managing Director of Banco Herrero 1996-2000: Director of Hidroeléctrica del Cantábrico. 1985-1995: Manager of La Caixa’s Participating Interest’s Control Area

Maria Celeste Hagatong Date of Birth 2 July 1952 Academic qualifications 1974: Finance graduate of the Instituto Superior de Economia da Universidade Técnica de Lisboa Management and oversight Director of BPI Madeira, SGPS, Unipessoal, S.A. positions held at other Non-executive Director of Banco Português de Investimento, S.A. companies or other entities Non-executive Director of CVP – Sociedade de Gestão Hospitalar, S.A. Previous professional experience 1984-85: Member of the Board of Directors of Fonds de Rétablissement du Conseil de L'Europe 1978-85: Manager of Financial Services at the Directorate-General of the Treasury of the Ministry of Finance 1977: Administrative and Finance Director of the Republic’s Parliament 1976-77: Ministry of Finance – Directorate-General of the Treasury 1974-76: Lecturer at the Instituto Superior de Ciências do Trabalho e da Empresa 1974-76: Responsible for the Department of Local Finance of the Ministry for Internal Administration

Pedro Barreto Date of Birth 3 March 1966 Academic qualifications 2001: Stanford Executive Program 1989: Business Management graduate of the Universidade Católica Portuguesa Management and oversight Director of BPI Madeira, SGPS, Unipessoal, S.A. positions held at other companies or other entities Previous professional experience 1984-1988: IT Division of Soporcel – Sociedade Portuguesa de Celulose

BPI Group Corporate Governance Report 367 Roberto Egydio Setúbal Date of Birth 13 October 1954 Academic qualifications 1979: Master of Science – Enginneering Management, Stanford University 1977: Graduate in Production Engineering of the Polytechnical School of the Universidade de São Paulo (Brazil) Management and oversight In Brazil: positions held at other Deputy-Chairman of the Board of Directors, Director Chairman, Member of the Nomination and Remuneration Committee companies or other entities and Member of the International Consultative Board of Banco Itaú Holding Financeira, S.A. Director Chairman and Director General of Banco Itaú, S.A. Director Chairman and Director General of Itauinv Brasil Participações, Lda. Director Chairman and Director General of ITB Holding Brasil Participações, Lda. Director Executive Vice-Chairman of Itaúsa – Investimentos Itaú, S.A. Chairman of the Board of Directors and Director Chairman of Banco Fiat S.A. Chairman of the Board of Directors and Director Chairman of Companhia Itauleasing de Arrendamento Mercantil Chairman of the Board of Directors and Director Chairman of Itauseg Participações, S.A. Chairman of the Board of Directors of Banco Itaú BBA, S.A. Chairman of the Board of Directors of BFB Leasing S.A. – Arrendamento Mercantil Chairman of the Board of Directors of Investimentos Bemge, S.A. Chairman of the Board of Directors of Itaú Gestão de Activos, S.A. Chairman of the Board of Directors of Itaú XL Seguros Corporativos, S.A. Chairman of the Board of Directors of ItauBank Leasing, S.A. – Arrendamento Mercantil Member of the Board of the Instituto Itaú Cultural Director Chairman of Banco Banerj, S.A. Director Chairman of Banco Banestado, S.A. Director Chairman of Banco Beg, S.A. Director Chairman of Banco Itaucred Financiamentos S.A. Director Chairman of Companhia Itaú de Capitalização, Itaú Vida e Previdência, S.A. Director Chairman of Banco Itaucard, S.A. Director Chairman of Banco Itaú Cartões, S.A. Director Chairman of Itaú Seguros, S.A. Director Chairman of Banco ItaúBank, S.A. Director of Itaú BBA Participações, S.A. Director of Itaucorp S.A. Director of Fundação Itaú Social “Managing Director” of Três “B” Empreendimentos e Participações, S.A. In Portugal: Chairman of the Board of Directors of Banco Itaú Europa, S.A. Member of the Management Board of Itaúsa Europa – Investimentos, SGPS, Lda. Member of the Management Board of Itaúsa Portugal, SGPS, S.A. Member of the Management Board of Itaú Europa, SGPS, Lda. Member of the Management Board of IPI – Itaúsa Portugal Investimentos, SGPS, Lda. In Argentina: Director Chairman of Banco Itaú Buen Ayre, S.A. In the Cayman Islands: Director of Itaú Bank, Ltd. Director of BIE – Bank & Trust, Ltd. Director of Amethyst Holding, Ltd. Director of ITB Holding, Ltd. Director of Topaz Holding, Ltd. In Luxembourg: Director of Banco Itaú Europa Luxembourg, S.A. In the United States of America: Vice-Chairman of the Institute of International Finance Member of the International Advisory Committee of The Federal Reserve Bank of New York Member of the Board of the International Monetary Conference Member of the International Advisory Committee of the New York Stock Exchange, – NYSE Previous professional experience 2005-…: Member of the International Advisory Committee of the New York Stock Exchange, – NYSE 2003-…: Vice-Chairman of the Institute of International Finance – IIF 2002-…: Chairman of Banco Itaú Holding Financeira, S.A. 2002-…: Vice-Chairman of the Board of Banco Itaú Holding Financeira S.A. 2002-…: Member of the International Advisory Committee of the Federal Reserve Bank, NY 2000-…: Chairman of Fundação Itaú Social 1995-…: Member of International Monetary Conference – IMC 1994-…: Chairman of Banco Itaú, S.A. 1997-00: Chairman of the National Federation of Banks – FEBRABAN 1990-94: Executive Director-General of Banco Itaú, S.A. 1986-90: Executive Director of the Área Grande São Paulo do Banco Itaú, S.A. 1984-86: General Manager of Banco Itaú, S.A. 1986-86: Technical Manager of Banco Itaú, S.A. 1983-84: Advisor to Citibank (N.Y. – USA)

Tomaz Jervell Date of Birth 4 March 1944 Academic qualifications 1969: Higher School of Commerce, Oslo Management and oversight Chairman of the Management Board of Auto-Sueco, Lda. positions held at other Chairman of the Board of Directors of Norbase, SGPS, S.A. companies or other entities Chairman of the Board of Directors of Auto-Sueco (Angola), SARL Chairman of the Board of Directors of Auto-Sueco (Minho), S.A. Chairman of the Board of Directors of Soma, S.A. Chairman of the Board of Directors of Biosafe, S.A. Chairman of the Board of Directors of Vellar, SGPS, S.A.

368 Banco BPI | Annual Report 2006 EQUIVALENCE BETWEEN THE CMVM'S REGULATIONS AND RECOMMENDATIONS DEALING WITH CORPORATE GOVERNANCE AND THE BPI'S REPORT ON CORPORATE GOVERNANCE

Nature Details Chapter Regulation Recomendation

0. DECLARATION OF COMPLIANCE Detailed description of the CMVM's recommendations on corporate governance adopted and not adopted (explaining in the latter case the reasons for non adoption)  0. I. DISCLOSURE OF INFORMATION Organisation charts relating to the division of responsibilities between the various bodies and company departments in the business decision-making process  4. List of specific commissions created at the company with indication of their composition and functions  3.5., 3.7. and 3.8. Description of the system of risk control implemented at the company 3.5. and 5. Description of the issuer's share price behaviour  14.2. Description of the dividend distribution policy  15. Business dealings between the company on the one hand, and the members of its governing bodies, holders of qualified shareholdings or Group companies, on the other  12.8. Investor Support Office  13.2. Company site on the Internet 13.3. Identification of the market relations representative  13.4. Indication of the composition of the remuneration or equivalent committee, indicating which members are independent in relation to the members of the management body 3.9. Indication of the annual remuneration paid to the auditors and their network  6.3. Description of the means for safeguarding the auditor's independence  6.1. and 6.2. II. EXERCISE OF VOTING RIGHTS AND SHAREHOLDER REPRESENTATION Statutory rules on the exercise of voting rights, namely, voting by post and by proxy 10.3. and 10.4. Possibility of exercising voting rights be electronic means  10.5. Prior period required for the deposit or blockage of shares for participation at general meetings 10.2. Requirement of a period of time elapsing between the receipt of the voting paper by correspondence and the holding of the general meeting 10.4. Number of shares which correspond to one vote  10.2. III. CORPORATE RULES Existence of codes of conduct for the company's bodies or other internal regulations  3., 12. Description of the internal procedures for the control of risk in the company's activity  3.5. and 5. Measures capable of interfering in the success of takeover bids (limiting the exercise of voting rights, restrictions on the transferability of shares, shareholder agreements, etc)  9. IV. MANAGEMENT BODY Management body: distinction between executive and non-executive members and independent and non-independent members 3.3. Functions exercised by the members of the management body at other companies  Appendix Experience and professional qualifications of the members of the management body, number of 3.3 and Appendix and notes shares owned by them, date of the first appointment and date on which the term of office ends  to the financial statements Existence of an executive commission or other commissions with management responsibility, identifying the powers and responsibilities attributed to these committees and their composition  3.4. Delimitation of responsibilities between the Chairman of the management body and the Chairman of the executive committee  3.3. and 3.4. List of issues the executive committee is barred from dealing with  3.4. Information to the members of the management body relating to matters dealt with and decisions taken by the executive committee  3.3. Existence of internal control committees with responsibilities in the assessment of the company's structure and governance  3.5. and 3.7. List of disqualifications defined internally by the management body  3.3. Number of meetings of the management body during the year in question  3.3. Independence of the members of the remuneration committee in relation to the members of the management body  3.3. and 3.9. Motion submitted to the General Meeting relating to the approval of the share incentive and options scheme must contain all the details needed for a proper appraisal of the scheme  8.3. Description of the policy of reporting irregularities allegedly occurring within the company and the description of their principal elements 12.5 Remuneration Description of the remuneration policy, including in particular the means of aligning the interests of the Directors with those of the company  0., 7.1. and 8.1. Submission for consideration by the annual general meeting of shareholders of a statement on the remuneration policy for governing bodies  0. Disclosure of the annual remuneration of directors in individual terms  0. Company's policy relating to the compensation negotiated contractually or by way of mutual accord in the case of dismissals or other early cessation of contracts  3.3. and 7.7. Indication of the remuneration earned, distinguishing executive directors from non-executive directives, and the fixed part from the variable part  7.2. Identification of the principal parameters and grounds for any system of annual bonuses and or other non-monetary benefits  7. and 8. Granting of shares and or rights to acquire share options and or any share incentive scheme  8. Remuneration paid in the form of a share in profit and / or the payment of bonuses and the motives why such bonuses and or share in the profits were granted  8. Indemnities paid or due to former executive directors relating to the cessation of their functions during the year  7.7. Amounts paid for whatever reason by other companies with which there are controlling or group relationships  7.2. Estimate of the value of the non-monetary benefits considered to be remuneration not covered in the previous situations  7.8. Description of the principal characteristics of the complementary pension or early retirement regimes for directors  7.4. V. INSTITUTIONAL INVESTORS Institutional investors: diligent, efficient and critical use of the rights attaching to the securities of which they are the holders or whose management has been entrusted to them 11.

BPI Group Corporate Governance Report 369 PRINCIPAL REGULATORY SOURCES DEALING WITH CORPORATE GOVERNANCE IN PORTUGAL

Banco BPI, as a commercial company (of the PLC type), credit The table below identifies in summarised form and only from the institution and company quoted on the Euronext – Lisbon, is viewpoint of corporate governance and institutional subject to stringent regulation, supervision and inspection in the communication, the principal legal enactments of an external terms of a number of sources of law and conducted by various nature which regulate the Bank’s activity. regulatory entities.

Principal Scope of Main topics relating to corporate governance Most important provisions Links available on the Source enactments application Internet

Portuguese Public limited ᭿ Management and oversight structure Heading I: Chap. IV – Art. 53 www.dgrn.mj.pt/legislacao/s Companies companies (Plc) to 63; Chap. V – Art. 64; oc.pdf ᭿ Functioning and powers of the governing bodies Code Chap. VI – Art. 65 to 70-A; ᭿ Public liability of members of the management Chap. VII – Art. 71 to 84 and oversight bodies Heading IV: Chap. I – Art. ᭿ Shareholders’ rights and duties 278; Chap.II – Art. 288 to 291 and 294 to 297; Chap. V – ᭿ Non-voting preference shares Art. 373 to 389; Chap. VI – ᭿ Shareholders’ resolutions Art. 390 to 446-F; Chap. VII – Art. 447 to 450; Chap. VIII – ᭿ Disclosure requirements Art. 451 to 455 Heading VII: Art. 518 and 519

Portuguese Companies with ᭿ Information duties of public-listed companies and Heading I: Chap. II – Art. 4.º to 6.º www.cmvm.pt/NR/exeres/2 Securities capital open to disclosure means Chap. III – Art. 7.º to 10; FE66EA8-DFB8-4CA1- Code investment by the 85E4-87B8454BA2E8.htm ᭿ Communication duties of the holders of qualified Chap. IV – Art. 13 to 29; public holdings in publicly-listed companies Chap. V – Art. 30 to 36 (“Sociedades abertas”); ᭿ Quality of financial information Heading III: Chap. I to III – Art. 108 to 197 Other entities or ᭿ Scope of the work and responsibility of the persons auditors registered with the CMVM Heading IV: Chap. II – Art. LEGISLATIVE 244 to 251 connected to the ᭿ Concept of institutional investors securities market. Heading VII: Chap. II – Art. ᭿ Protection of non-institutional investors’ interests 358 to 368

Legal Collective ᭿ General duties of entities managing collective Heading II: Chap. I – Art. 33 www.cmvm.pt/NR/exeres/1 Regime of securities investment bodies Heading III: Chap. III – Art. 73 57B4E76-1B2C-47AA- Collective investment 87C9-C2959B0BA072.htm ᭿ Duty to inform the CMVM and the market of the and Art. 74 Investment undertakings justification of the exercise of the voting right Under- 1 attaching to the shares managed for the account takings of others

Legal European public ᭿ Concept, functioning structure of the “European All www.pgdlisboa.pt/pgdl/leis/l regime of companies public company (societas europaea)” ei_mostra_articulado.php?n European id=475&tabela=leis&ficha= public 1&pagina=1 companies2

CMVM Companies with ᭿ Imposition of the annual corporate governance All www.cmvm.pt/NR/exeres/A Regulations shares quoted on report and the respective model 97620FB-8DB4-47C3- no. 7 / a regulated BAAC-2BE59C7A105B.htm ᭿ Definition of the non-independent director 20013 market ᭿ Other information duties to the CMVM

᭿ Obligation to have a site on the Internet with essential information about the company

CMVM Auditors ᭿ Information subject to report or opinion prepared Art. 1.º to 6.º www.cmvm.pt/NR/exeres/0 Regulation registered with by the auditor registered with the CMVM Art. 11 CEE9490-EA96-4F28- no. the CMVM 9063-FD667876ABD1.htm ᭿ General duties of auditors 6 / 2000 ᭿ Content and requirements of auditors’ reports or

REGULATORY opinions

᭿ Register of auditors

᭿ Conflicts of interest

CMVM Companies with ᭿ Facts subject to information duties All www.cmvm.pt/NR/exeres/9 Regulation capital open to A4EDDB6-BAFF-41E9- ᭿ General disclosure means no. investment by the 8584-DEAE96EC3000.htm 4 / 20044 public ᭿ Disclosure deadlines

1) Decree-Law 252 / 2003, of 17 October. 2) Decree-Law 2 / 2005 of 4 January. 3) Changed by the regulations 11 / 2003, 10 / 2005 and 3 / 2006. 4) Changed by the regulations 10 / 2005, 3 / 2006 and 5 / 2006.

370 Banco BPI | Annual Report 2006 Principal Scope of Main topics relating to corporate governance Most important provisions Links available on the Source enactments application Internet

Recommen Companies with ᭿ Disclosure of information All www.cmvm.pt/NR/exeres/D dations of shares quoted on 6E8EF3B-7D3E-4C08- ᭿ Exercise of voting rights the CMVM a regulated A0DC-FE8BD01B05A9.htm on the market ᭿ Internal control system governance ᭿ Structure of the management body and of listed remuneration of its members companies ᭿ Duties of institutional investors

Recommen- Companies with ᭿ Rules for the exercise of voting rights by post, All www.cmvm.pt/NR/exeres/6 dations of capital open to including electronic voting 50F0A22-1E5B-45E0- the CMVM investment by the BD8E-47A1A0EFE06B.htm ᭿ Validation of the postal vote relating to public the exercise of postal voting at publicy- held companies RECOMENDATIONS

White Companies with ᭿ Mission, structure and independence of the Board All www.ecgi.org/codes/docum Paper on capital open to of Directors ents/libro_bianco_cgov_pt. Corporate investment by the pdf ᭿ Role of non-executive directors Governance public in Portugal ᭿ Specialised committees of the Board of Directors ᭿ Audit Board and Remuneration Committee

᭿ External and internal audit

᭿ General Meetings

᭿ Measures detrimental to the market functioning of company supervision

Statute of Portuguese ᭿ Scope of the work of the statutory auditors: duties Heading I: Chap. III – Art. 40 www.oroc.pt/fotos/editor2/e the Statutory Auditors and form of exercising their functions to 51 statutos_profissao.pdf Institute of registered with ᭿ Scope of the work of the statutory auditors: duties Heading II: Chap. I – Art. 52 Portuguese the respective and form of exercising their functions and 62 to 73; Chap. II – Art. Statutory Institute 75 to 78; Chap. III – Art. 82 Auditors5 and 92; Heading III: Chap. III – Art. 113 and 114 Heading IV: Chap. I – Art. 124

OTHERS Code of Portuguese ᭿ Fundamental principles Chap. I – Art. 1.º to 8.º www.oroc.pt/fotos/editor2/c Ethics and Statutory Auditors odigo_etica.pdf ᭿ Duties and responsibilities Chap. IV – Art. 11 Professional registered with Conduct of the respective ᭿ Independence Chap. V – Art. 13 Portuguese Institute ᭿ Professional confidentiality Statutory Auditors6

5) Decree-Law 487 / 99. 6) D.R.,III Series, 26.12.2001.

BPI Group Corporate Governance Report 371 PUBLICATIONS, COMMUNICATIONS AND INSTITUTIONAL EVENTS IN 2007

Important dates

Legal / regulatory timetable BPI 2007 calendar (expected dates)

Brochure 19 Apr. 07 Publication up to 30 days after the AGM4 Report and accounts: (CVM5 – art. 245; CMVM – Reg. no. 04/04) PDF 19 Apr. 07 2006 RAO1 – 19 Apr. 07

Brochure 19 Apr. 07 Publication up to 30 days after the AGM4 BPI Group Corporate (CMVM – Reg. no. 11/03) PDF 19 Apr. 07 Governance: 2006 RGO2 – 19 Apr. 07

Brochure Report and accounts: Publication up until 30 September 1st half 2007 (CVM5 – art. 246; CMVM – Reg. no. 04/04) 30 Aug. 07 PDF

1st and 3rd quarter: up to 60 days after the Announcement quarter end; (CMVM – Reg. no. 04/04) 24 Apr., 27 Jul., 25 Oct. 07 2nd quarter: up to 30 Sep. (CVM5 – art. 246; CMVM – Reg. no. 04/04) Disclosure of quarterly results Conference Call3 24/26 Apr. 07, – 27/30 Jul. 07, 25/26 Oct. 07 Webcast3 Presentation Publication up to 30 days before the SGM4 Notice 20 Mar. 07 (CSC6 – art. 377) Publication 15 or 30 days (depending Motions on the motion) before the SGM4 Between 20 Mar. and 5 Apr. 07 (CSC6 – art. 289 and 377)

SGM results – 19 Apr. 07 General Meetings

4 Motion 15 days before the SGM 4 Apr. 07 (CMVM – Reg. no. 04/04) Announcement 15 days before payment 19 Apr. 07 (CMVM – Reg. no. 04/04) 4 Dividends Payment Until 30 days after the AGM 4 May 2007 (Ex-dividend: 30 April) Events (CSC6 – art. 294) Annual conference for analysts and – To be defined investors Calendar of events Other institutional presentations – available on the IR site Material information Transmitted to the market on the day they become available (CVM5 – art. 248; CMVM – Reg. no. 04/04) Other communications Announcements At start of each half-year Permanent updating of the calendar Calendar of institutional events (CMVM – Reg. no. 11/03) of events for the current financial year

Of other companies As soon as BPI is informed of the occurrence of the change in the shareholder structure in BPI's capital (CVM5 – art. 17)

Of BPI in the capital Up to 3 days after transaction date Qualified of other companies (CVM5 – art. 16) shareholdings

Other reporting 1% of capital since Up to 3 days after the transaction date which originated the duty to communicate obligations the last announcement (CMVM – Reg. no. 04/04)

0.05% of capital in Immediately a single session (CMVM – Reg. no. 04/04) treasury stock Transactions in Transactions

Transactions in Banco BPI shares Up to 7 business days after the transaction (or appointment) realised by members of the (CMVM – Reg. no. 11/03) Board of Directors

Banco BPI share –

Permanent update Debt / Rating –

Institutional news [non-mandatory disclosure] – –

1) RAO – Annual Report Online. 2) RGO – Governance Report Online. 3) On the results presentations delivered by the Executive Committee of Banco BPI Board of Directors. 4) SGM – Shareholders General Meeting. 5) CVM – Código dos Valores Mobiliários (Securities Market Code). 6) CSC – Código das Sociedades Comerciais (Companies’ Code).

372 Banco BPI | Annual Report 2006 Investor Relations Division channels Website da CMVM Web site E-mail Telephone In person or postal mail www.cmvm.pt (www.ir.bpi.pt) [email protected] 22 607 33 37 Rua Tenente Valadim, 284, 4100-476 Porto Available for sending Available on request – (contacts page) Available on request Available on request or by registration on the mailing list Available – – – Available for sending Available on request – (contacts page) Available on request Available on request or by registration on the mailing list Available – – – Available for sending Available on request (contacts page) Available on request Available on request or by Available – registration on the mailing list

Available on request or by Available Available on request registration on the mailing list Available on request

Available on request Available – – (deferred) – Available by registration

SGM preparatory details: Page devoted to the event with: Information Specific address – available at the company's head office in motions, ballot papers, draft phone line about for support for the event: Rua Tenente Valadim, no. 284, 4100-476 Porto; – proxy letters, etc; available in the SGM: [email protected] Portuguese and English 22 607 33 33 – sent by post to all shareholders with more than 5 000 shares

– news about dividends Page devoted to distribution of – sent to subscribers to the dividends containing: amounts, mailing list of the IR site; key dates, tax information, Contacts available for clarification indicators, etc; available in – address available Portuguese and English for clarifications – Available (presentation and announcement) (announcement) Contacts available for clarification or remittance of information Available –

News sent to subscribers Available to the mailing list Contacts available for clarification or remittance of information (including history) of the IR site

Available Contacts available for clarification or remittance of information – (past and future events)

Available for the half-year and financial year end dates Contacts available for clarification or remittance of information Available

–

– – –

Historical prices, charts, return Alert for price changes and dispatch – – – calculator, etc. of a daily session summary

Information about the EMTN News about Debt sent to Telephone contact for Address for matters regarding Debt: [interest programme, preference shares subscribers to the mailing list matters regarding Debt: "Finance Division - Capital market, Debt; on debt and ratings reports of the IR site 21 310 11 80 Largo Jean Monnet, 1 - 1269-067 Lisbon" securities]

Available News sent to subscribers to the Contacts available for clarification – (including history) mailing list of the IR site

BPI Group Corporate Governance Report 373

Annexes Definitions, acronyms and abbreviations

DEFINITIONS

BPI Group entities – some definitions used

“BPI Group” / “BPI”, if the framework so permits: “Banco de Fomento, SARL” / “Banco de Fomento Angola” / “BFA” Angolan law bank, develops BPI Group banking business in Angola. The financial group with format defined on page 23, 174 and 175. “BCI Fomento”: “Banco BPI” / “Banco BPI, S.A.” / “the Bank”, “the Commercial Bank”, Mozambican law bank, in which BPI has an equity interest of 30%. The if the framework so permits: remaining 70% of the share capital are held by Caixa Geral de Depósitos and by a group of Mozambican investors. Head of the BPI Group and responsible for conducting the Commercial Banking business; listed on the stock exchange. “BPI SGPS” / “BPI – SGPS, S.A.”: The entity heading the BPI Group until 20 December 2002, responsible for the “Banco Português de Investimento” / “Banco Português de Investimento, S.A.” / holding and strategic command functions. At 21 December 2002, incorporated / “BPI” / “BPI-BI” or the “Investment Bank”, if the framework so permits: Banco BPI by merger, changed its object to "bank" and its name to Banco BPI.

The group's investment bank.

ACRONYMS

Entities

BIS Bank of International Settlements IAS International Accounting Standards BNA Banco Nacional de Angola (Angolan central bank) Ibex-35 Shares index (Spain) BoP Banco de Portugal (Portuguese Central bank) IFRS International Financial Reporting Standards CMVM Comissão do Mercado de Valores Mobiliários IPO Initial Public Offering (Securities Market Commission) IRC Corporate income tax CVM Central de Valores Mobiliários ISDA International Swaps and Derivatives Association (securities clearing house) M&A Mergers & Aquisitions EC European Commission Nasdaq Shares index (USA) ECB European Central Bank NCA Normas de Contabilidade Ajustadas Fed Federal Reserve System (Adjusted Accounting Standards) OECD Organisation for Economic Co-operation and NR Not rated Development OT Obrigações do Tesouro (Treasury Bonds) SIBS Sociedade Interbancária de Serviços (Interbank OTC Over-the-counter Service Society) PCSB Plano de Contas para o Sistema Bancário (Chart of Accounts for the Banking System) PPA Plano Poupança Acções (equities savings plan) Miscellaneous PPR Plano Poupança Reforma (retirement savings plan) ACTV Acordo Colectivo de Trabalho Vertical (Collective PPR/E Plano Poupança Reforma/Educação Employment Agreement for the Banking Sector) (retirement/education savings plan) BT Bilhetes do Tesouro (Treasury Bills) PSI Geral Shares index (Portugal) CA Conselho de Administração (Board of Directors) PSI-20 Shares index (Portugal) CAUD Comissão de Auditoria (Audit Committee) RVA Remuneração Variável em Acções (variable CECA Comissão Executiva do Conselho de Administração remuneration programme through the granting of (Board of Directors’ Executive Committee) shares and purchase options) CERC Comissão Executiva de Riscos de Crédito (Credit SARL Limited liability privately held company Risk Executive Committee) SGM Shareholders General Meeting CERM Comissão Executiva de Riscos de Mercado SGPS Sociedade Gestora de Participações Sociais (Market Risk Executive Committee) (investment holding company) CRM Customer Relationship Management SIME Sistema de Incentivos à Modernização DA Departamento de Acções (Equities Department) Empresarial (incentive scheme for business DACR Direcção de Análise e Controlo de Riscos (Risk modernisation) Analysis and Control Division) SME Small and Medium-sized Companies DF Direcção Financeira (Financial Division) SMS Short Message Service DIG Direcção Internacional do Grupo (The Group’s SROC Sociedade de Revisores Oficiais de Contas International Division) (Portuguese Statutory Auditing Firm) DJ Direcção Jurídica (Legal Division) S&P Standard & Poor’s DORG Direcção de Organização (Organisation Division) TBC Títulos do Banco Central de Angola DP Direcção de Planeamento (Planning Division) (Angolan Central Bank Securities) DRC Direcção de Riscos de Crédito (Credit Risk TWR Time weighted rate of return Division) USA United States of America DRI Direcção de Relações com Investidores (Investor Relations Division) DTA Direcção de Trading e Arbitragem Financial (Trading and Arbitrage Division) EMTN Euro Medium Term Note EPS Earnings per share FRIE Fundo de Reestruturação e Internacionalização NTA Net Total Assets Empresarial (fund for business restructuring and ROA Return on Assets internationalisation) ROE Return on Equity GDP Gross Domestic Product ROI Return on Investment GM General Meeting VaR Value at Risk

376 Banco BPI | Annual Report 2006 ABBREVIATIONS

Units Currencies Other € euro AKZ Angolan Kwanza E. Estimated 103 thousand EUR Euro e.g. exempli gratia (for example) 106 million JPY Japanese yen etc. et cetera b.p. basis points GBP Pound sterling (UK) Lda. limited th.€, th. euros thousands of euro USD United States dollar m2 square metre th.M.€ thousand million of euro no. number M.€, M. euros millions of euro neg. negative p.p. percentage points Months Net Internet US$ American dollar Jan. January P. Previsional Feb. February S.A. Public held company Mar. March v. vide Conventional signs Apr. April vs. versus . decimal point Jun. June y-o-y year-on-year % percentage Jul. July n.a. not available Aug. August nr irrelevant Sep. September -, nr irrelevant Oct. October < minor than Nov. November > greater than Dec. December Δ variation ≤ minor or equal than ≥ greater or equal than 0 nil or negligible 1 /2 one half 1 /4 one quarter

Annexes | 377 Glossary

American Depositary Receipts (ADR) – negotiable certificates of deposit, Day-trade – buying and selling of negotiable securities during the course issued by US banks, representing the shares held in custody of non-US- of the same stock market session so that at the end of the trading day, -based companies. These certificates entitle the holders thereof to the investor has no open position, nor has any change taken place in the dividends and capital gains. composition of his portfolio.

Anti-takeover provisions – statutory clauses designed to impede / obstruct Disability decreases – reduction in the calculated amount of pension the mounting of takeovers considered to be hostile. obligations for current employees’ past services resulting from the recourse to, in calculating these amounts, the probability of current employees Back-office – shared central services providing business support. ceasing to remain on the payroll due to disability, that is, before the normal retirement period. Pension obligations arising from disability are Benchmark – a widely-accepted market reference value used in the lower than those relating to normal retirement due to old age, given that valuation of securities (assets) and the assessment of an investment’s old-age and disability pensions are defined as a progressive percentage of performance. salary depending on the number of years service.

BIS ratio – an internationally-accepted capital adequacy ratio, Dividend yield – indicator which measures the return on a share based on corresponding to the relationship between total own funds and the total of the distribution of earnings by a company (payment of dividends). assets and off-balance sheet items, weighted according to their respective Corresponds to the dividend received as a percentage of the share price. risk (credit risk attached to the investment portfolio, market risks attached It should be noted that the shareholder's total return includes, in addition to the dealing portfolio). The minimum figure prescribed is 8%. to the dividends received, the appreciation in the share price.

Bond with cap or floor – variable-interest rate bonds with a coupon called Emerging markets – financial markets with strong growth potential and a cap (floor) which can be traded separately. The cap is an agreement in evolving rapidly to higher levels of maturity and development. These terms of which the issuer sets, in exchange for a premium (corresponding markets are essentially located in Asia and South America. to the implicit interest rate in the cap added to the bond issue’s interest rate), a maximum rate of interest for the issue. The floor is an agreement Equity method – methodology for recognising an equity holding in the in terms of which the issuer sets, in exchange for a premium consolidated accounts. It entails recording a percentage of the (corresponding to the implicit interest rate in the floor deducted from the shareholders' equity and net income corresponding to the percentage of bond issue’s interest rate), a minimum interest rate. the capital held, directly or indirectly, in that company's capital.

Callable bond – a bond which is redeemable at the issuer’s option under Euribor – the average of the interest rates supplied by a panel comprising predetermined conditions (time period for exercising the option, price, the European Union’s 57 largest banks. This benchmark rate is calculated etc.). The option attached to the bond cannot be traded separately from and published daily. the bond. The callable bond is commonly associated with a step-up which provides for an increase in the interest rate if the agreed-to early Exercise period – is the period during which the option can be exercised. redemption option is not exercised before a future date. After this period the option expires. The options that can be exercised at any time during a specified period are called “American options”. The Call option – an agreement between two parties in terms of which the options that can only be exercised at the expiration date are called buyer acquires, against payment of a monetary consideration (premium), “European options”. the right to buy from the seller at a specified future date (or up to a specified future date) the underlying security at an agreed price. See also The buyer of an option only benefits from the option exercise if the “Exercise price (strike)”, “Premium” and “Exercise period”. market price of the underlying security is higher than the option exercise price, in the case of a call option, or lower than the option exercise price, Capital rotation – the relationship between the number of shares traded in the case of a put option. In a tradable option, there is only advantage and the average number of shares listed on the stock exchange. in the option exercise, rather than trading it in the market, in expiration date (or near that date), because with its exercise there is no Cash flow – financial flow generated in a period. One of the most simple appropriation of the options time value but only of its intrinsic value. In indicators to calculate: it involves adding together net profit, depreciation non-tradable options, the reduction of the exposure can only be made and amortisation and provisions for the year (i.e. costs which do not entail through its exercise. the flow of funds). Exercise price (strike) of an option – is the agreed price for the underlying Cost-to-income – ratio used frequently to measure the level of efficiency security at which the option's buyer can buy it, in the case of a call in normal operating activity. Corresponds to operating costs as a option, or sell, in the case of a put option, through the option exercise at percentage of income from operating activity. a future date.

Country-risk – the probability of loss arising from exposure of assets and Factoring – debt-collection service provided by a financial institution to off-balance sheet items as a result of a default in the contracted financial companies supplying goods and/or services which cede their short-term obligations by a counterparty who is resident in a country which, owing trade receivables from corporate customers. This service may also be to its political and economic situation, is considered to bear an element associated with services involving cash advances and risk cover, of risk. depending on the type of contract.

Credit rating – classification attributed to an institution by a specialised Fair value – price at which an asset or service is transacted, assuming and independent entity (rating agency) with the object of assessing the that the buyer and the seller act rationally, they are at arm's length, and institution’s capacity to meet its short or long-term obligations. that they have reasonable knowledge of the relevant facts.

Datawarehouse – technological infrastructure for carrying out the Forward contract (currency) – an agreement between two parties in terms statistical analysis of vast quantities of historical data off-line (usually of which a rate of exchange is fixed for a specified future date and that relating to the Customer). Can indicate useful opportunities for cross amount of the currency concerned. selling. This specialised data base is conceived for the purpose of collating, organising and making available data for analysis. Forward rate agreements (FRA) – an agreement between two parties in terms of which the rate of interest is fixed for a specified future date, amount and maturity period.

378 Banco BPI | Annual Report 2006 Futures contract – a standard contract traded on a stock exchange in Payout – percentage of the annual profit which is distributed by a terms of which the two parties fix the price of an underlying asset for company to its shareholders in the form of dividends. a specified future date. Perpetual bonds – a debt security having no maturity date and which does Goodwill – for purposes of consolidating an equity holding, goodwill not confer upon the holder the right to repayment of the nominal value of corresponds to the difference between the cost of acquisition of such the debt. equity holding and the book value of the percentage interest in the consolidated company’s net assets (or shareholders’ equity). Theoretically, Placement syndicate – a group of financial entities which jointly organises it could be interpreted as being the company’s surplus (additional) value, and places an issue of negotiable securities. corresponding to the present value of expected future profits, that is, from a going concern perspective, relative to the book value of the company’s Poison pills – encompasses a number of strategies aimed at impeding assets less its liabilities (i.e. its net assets). (potential) hostile takeovers (acquisitions). These strategies generally give rise to a higher acquisition cost and a dilution effect. Hedging – the strategy adopted by a trader to minimise the potential risk of adverse changes in a given asset’s market price. A perfect hedging Premium of an option – its the fee through which the buyer acquires the operation eliminates any future capital loss or gain. option, and which tend to translate its economic value. The option value is made up of two components: Insider trading – is the terminology used to describe transactions in a company’s shares with the object of benefiting from access to privileged ᭿ the intrinsic value, which corresponds to the difference between the information about this company which has not yet been made public and market price of the underlying and the option exercise price. It's the which has a material impact on the formation of the share’s market price. value obtained with the option exercise Insider trading is an illegal activity. ᭿ the time value which corresponds to the present value of future gains, In-store banking – banking service based on a distribution network located taking into consideration that future losses are limited to the options in places with high volume of human traffic (shopping malls, premium. The option time value decreases with time elapsing, having a hypermarkets). nil value at the expiration date.

Investment grade – classification attributed to all those bond issuers For a tradable option, its premium results from the supply and demand whose credit rating is equal to or higher than BBB or Baa. forces in the market. In the calculation of premiums for non-tradable options it is used similar options traded in the market and / or Market-maker – the member of a stock exchange who undertakes the mathematical models that have in consideration variables like volatility of function of promoting liquidity by maintaining bid and asked prices for returns, current market price, exercise price and period, the level of specified securities at which these securities are bought and sold (under interest rates, etc. certain conditions). Private Equity – form of financing companies during the start-up of their Mismatch – Disparity between the maturity and interest-payment periods business, in a strong growth phase or undergoing restructuring, by means for interest-earning assets on the one hand, and deposits and other of a participating interest in their capital, as a general rule with a view to interest-bearing liabilities, on the other. One of the major concerns of a the subsequent dispersion of equity on the capital market. credit institution’s treasury management (usually interest-earning assets have longer maturity periods than interest-bearing liabilities) is reducing Project Finance – investment in which the debt service is financed by the the risk exposure associated with adverse changes in interest rates and project own cash flows; also used to define this type of financing. ensuring that there are adequate funds to meet the payment of liabilities as and when they fall due. Put option – an agreement between two parties in terms of which the buyer of the contract acquires, against payment of a monetary Non-voting preference share – a security representing a share in the consideration (premium), the right to sell to the seller of the put-option equity of the issuing company. It entitles the holder (i.e. the preference contract at a specified future date (or up to a specified future date) the shareholder) to receive a dividend (at a predetermined rate) and to underlying security at the price specified in the contract. See also share proportionately in the company's residual assets in the event of “Exercise price (strike)”, “Option value (premium)” and “Exercise period”. liquidation, in both cases in precedence to the holders of ordinary shares. Real time – non-existence of a time lag (which is perceptible by the user) Notional value (of a derivative) – the current price on the spot market of between the execution of a command by the user and the effective the asset underlying the derivative financial instrument. reaction by the application or access device used during the utilisation of a certain service. Ordinary share with voting rights – a security representing a share in the equity (i.e. net assets) of the issuing company. The principal rights Repricing gap – difference between the amount of interest-earning assets conferred on the holder (i.e. the shareholder) are the entitlement to and the amount of interest-bearing liabilities, for which the revision of the receive a dividend, to participate in and vote at Shareholders’ General corresponding interest rates occur in the same predefined time horizon. Meetings, and to share proportionately in the company's residual assets The breakdown of assets and liabilities per time horizon is based on the in the event of liquidation. residual time to the interest rate revision date or to maturity date. The purpose of this analysis is to assess the balance sheet sensibility to Own funds requirements ratio (solvency ratio) – (Bank of Portugal rules) – changes in market interest rates and the time lag of these changes in the relationship between total own funds and the total of assets and off- actual interest-earning assets and bearing liabilities rates and the balance sheet items, weighted according to their respective risk (credit corresponding impact in the income. risk attached to the investment portfolio, market risks attaching to the dealing portfolio). The minimum figure prescribed is 8%. It aims at Repurchase agreement – an agreement between the two parties to a ensuring that the institution has a minimum of own funds to cover the securities transaction, whereby the seller undertakes to repurchase the total potential losses stemming from assets and off-balance sheet securities at a specified price and date. The operation involves the resources, thereby guaranteeing the institution’s ability to satisfy all of its advancing of funds (usually for a short term) whereby the security serves liabilities. It is very similar to the BIS ratio in that it adopts the same as collateral, yielding an implicit rate of interest. It is an instrument principles and methodology, differing only in the treatment given to commonly used by central banks in interbank money market operations. certain components of own funds and in the calculation of certain assets and off-balance sheet risks.

Annexes | 379 Reserves incorporation – share capital increase (i.e. bonus or Subordinated bond (long-term debt) – a debt security, the redemption of capitalisation issue) effected by way of the transfer of undistributed which in the event of the issuer’s bankruptcy or liquidation, is dependent profits from reserves to subscribed capital. Since the issue of the new upon the prior repayment of all non-subordinated (i.e. senior) creditors (or shares to shareholders does not entail any payment on the part of at least certain types of creditors). shareholders, this operation has no effect on the company’s share capital or net worth. Subscription reserved for shareholders – share capital increase, either by incorporation of reserves or against a cash payment, reserved for Scoring (credit scoring) – methodology for assessing a Customer's capacity shareholders. In a subscription reserved for shareholders, the issue to service debt. Based on information gathered from the Customer and the price is normally set below the ruling market price. history of the business/Customer experience, the scoring system attributes a credit score to that debt, by means of the statistical treatment of Swap (currency / interest rate) – an agreement between two parties in information, in accordance with the calculated probability that the terms of which they exchange (swap) between them, for a specified Customer will repay the loan on the due date. amount and period of time, periodic payments of fixed rate for floating rate payments, in the case of interest rate swaps, or one currency for Securitisation of debts – operation in terms of which a company issues another currency, in the case of currency swaps. Usually one of the debt securities, the income and repayment of which are guaranteed counterparties is a financial institution acting as an intermediary. exclusively by a specified group of the company’s assets. In this way, a group of assets is used which serves solely as guarantee for the issue. Traditional warrant (shares) – negotiable contract that confers upon the This differs from what generally happens in a bond issue where good debt holder thereof the right to convert into shares of the issuing company servicing is globally dependent upon the company’s capacity to meet its under predetermined conditions (conversion period, conversion prices financial commitments. The underlying assets can be loan portfolios, etc.). Conversion normally implies an increase in the company’s share securities portfolios, real estate portfolios, amongst others. capital. The most common situation is the concurrent issue of bonds, thereby making the issue more attractive. For purposes of carrying out the operation, a company is formed, known as an SPV – Special Purpose Vehicle. The underlying assets are sold to Treasury bills – short-term public-debt bonds issued by the Treasury, with the SPV company which, in order to finance the acquisition of these a maturity period of less than one year. This instrument is issued at a assets, floats a securities issue using the assets acquired as security. discount and redeemed at its nominal value on maturity date.

Separate warrant (shares) – negotiable contract issued by financial Underwriting – an agreement between the issuer and the financial institutions that confers upon the holder thereof the right to purchase institutions responsible for selling (placing) the negotiable securities (call warrant) or the sell (put warrant) a financial assets, known as the object of the issue, in terms of which the underwriting financial underlying assets, under predetermined conditions (conversion period, institutions are committed to purchase, against payment, any unsold conversion prices etc.). The most common underlying assets are equities securities not subscribed for in the placement, thereby eliminating the and equity indices. risk of the operation being unsuccessful.

Spread (banking) – the difference, in basis points, between the interest Unitary margin (net interest margin) – difference, in percentage points, rate charged on bank loans (or other assets) and the lender cost of funds. between the assets interest rate remuneration (loans and investments) and Spread may also be calculated over a market interest rate (e.g. Euribor). the resources interest rate remuneration (deposits).

Spread (fixed income securities) – (1) difference between yields on Value at Risk (value at market risk) – corresponds to the maximum securities of the same quality but different maturities; (2) difference potential loss in the value of assets held resulting from an unfavourable between yields on securities with the same maturity but different quality. direction in markets and prices over a predetermined time span. The value-at-risk is calculated by way of models which are based on specific Start-up – new or very recent company which is normally involved in assumptions, namely, with regard to the distribution of probabilities of the modern/emerging business ventures, and which are almost always price variations, correlations between price variations and statistical financed by venture/development capital companies and by recourse to confidence level. the capital market. Volatility – a measure of the degree to which the market price of assets Stock split – increase in the number of shares by means of splitting the fluctuates, namely, from the viewpoint of extent and frequency. existing shares into smaller denominations with lower nominal value, without giving rise to any alteration to the amount of the share capital. (In Workflow – automation of processes, in total or in part, in which the principle) It has a neutral impact on the share's market value. circulation of information, documents and tasks between the various parties involved is managed by a set of rules and procedures. Stop-loss – definition of the price at which a financial asset must be sold (by reference to market prices) with the object of either limiting losses in Write-offs – accounting write-off of non-performing loans recorded as the event of an asset depreciating or protecting gains already made. assets, which have been provided for in full and in respect of which there is no prospect of recovery. The loan is written off directly against the Structured product (guaranteed capital / limited-risk) – variable-income debt respective provision account, with the result that this entry has no impact securities, the yield on which is indexed wholly or partially to the price of in the income statement. equities or to equity indices. Where the prices of assets which serve as the index benchmark become negative, the investor is guaranteed at maturity date the repayment of the total capital invested (guaranteed capital) or the limiting of any losses to a predetermined amount (limited risk).

380 Banco BPI | Annual Report 2006 Formulary

Total assets plus disintermediation: Cash flow after taxation:

Total assets (net)1 + Off-balance sheet Customer resources Net profit attributable to BPI Group Shareholders + Depreciation and amortisation + Loan provisions and impairments + Other impairments Business volume: and provisions

Loans to Customers (gross) + Guarantees + Total Customer resources Return on average total assets (ROA):

Total Customer resources: Net profit attributable to BPI Group shareholders x 100 Monthly average of total assets (net) Resources on the balance sheet + Off-balance sheet resources

Return on Shareholders’ equity (ROE): On-balance sheet Customer resources:

Net profit attributable to BPI Group Shareholders Deposits + Securities sold with repurchase agreements + Insurance x 100 capitalisation + Structured products (guaranteed-capital and limited-risk Monthly average of shareholders' equity, excluding bonds) + Other bonds and preference shares placed with Customers minority interests

Off-balance sheet Customer resources: Total loans in arrears, for more than 30/90 days, as % of Customer loans:

Unit trust funds + Retirements savings and equity savings plans + Loans to Customers and interest in arrears for longer + Pension funds than 30/90 days x 100 Assets under management2: Customer loans (gross)

Off-balance sheet Customer resources + Financial assets under Accumulated loan impairments in the balance sheet as % of Customer discretionary management and advisory services + Insurance capitalisation loans: + Structured products Accumulated loan impairments in the balance sheet x 100 Net operating income from banking: Customer loans (gross)

Net interest income + Technical results of insurance contracts + Loan impairments in the year as % of the loan portfolio: Commissions and other similar income (net) + Gains and losses in financial operations + Operating income and charges Loan impairments year n

Administrative overheads: Average balance of Customer - Average balance of loan portfolio (gross) year n loans in arrears year n Personnel costs + Outside supplies and services Loan impairments in the year, deducted of recoveries of loans in arrears Cost-to-income: written-off, as % of the loan portfolio:

Administrative overheads - costs with early retirements Loan impairments ano n - Recovery of loans in arrears previously written-off ano n Net operating income from banking Average balance of Customer - Average balance of

Administrative overheads plus depreciation and amortisation: loan portfolio (gross) year n loans in arrears year n

Personnel costs + Outside supplies and services + Depreciation and Increase in loans in arrears, adjusted by write-offs, as % of the loan amortisation portfolio:

Efficiency ratio: Balance of loans in arrears year n - Balance of loans in arrears year n-1 + Write-offs year n Administrative overheads + depreciation and amortisation Average balance of Customer - Average balance of - costs with early retirements loan portfolio (gross) year n loans in arrears year n Net operating income from banking Increase in loans in arrears, adjusted by write-offs and deducted of Net profit attributable to BPI Group Shareholders: recoveries of loans in arrears written-off, as % of the loan portfolio:

Profits before taxation – Corporate income tax + Equity accounted results Balance of loans in arrears year n - Balance of loans in arrears year n-1 + of subsidiaries - Minority Shareholders share of profit Write-offs year n - Recovery of loans in arrears previously written-off year n

Average balance of Customer - Average balance of

loan portfolio (gross) year n loans in arrears year n

1) Corrected for duplication of balances. 2) Adjusted for duplication of balances.

Annexes | 381 Pension liabilities cover: Price as a multiple of …

Pension funds Closing adjusted price at 31 December x 100 Pension liabilities with retired and past services Cash flow, net profit or Book value per share of current employees Dividend yield (%): Data per share: Dividend per share for the year (paid next year) Cash flow, net profit or dividend x 100 Closing adjusted price in the beginning of the year Weighted average number of shares Earnings yield (%): Book value

1 Net profit per share Final number of shares x 100 Closing adjusted price at 31 December Weighted average number of shares:

Weighted average number of shares ranking for dividends1

Total shareholder return:

Appreciation of the shares on the stock exchange + Appreciation of the dividends reinvested on shares

Profitability, efficiency, loan quality and financial strength, calculated in accordance with Bank of Portugal Instruction 16 / 2004:

Profitability: Loan quality:

Net profit + Minority interests + Taxes Non-performing loans4 Non-performing loans ratio = Average total assets (net) Total loan portfolio

Net operating income from banking2 Non-performing Specific provisions for Average total assets (net) loans5 - loans in arrears and Ratio of non- doubtful loans5 Net profit + Minority interests + Taxes -performing loans, = net of provisions Total loan portfolio - Specific provisions for Average shareholders' equity + Average minority interests loans in arrears and (in the balance sheet) doubtful loans5

Efficiency: Financial strength:

Personnel costs3 6 Net operating income from banking2 Ratio of total own Total own funds funds adequacy = Own funds requirements6 x 12.5 Personnel costs3 + Outside supplies and services + Amortisation and depreciation 6 2 Ratio of basis own Basis own funds Net operating income from banking funds adequacy = Own funds requirements6 x 12.5

1) Adjusted by the effects of Capital increases reserved for Shareholders. 2) In the calculation of profitability and efficiency indicators according to Bank of Portugal notice, the net operating income from banking is determined as follows: Net operating income from banking = Net interest income (narrow sense) + Unit linked gross margin + Income from securities (variable yield) + Commissions related to deferred cost (net) + Technical results of insurance contracts + Commissions and other similar income (net) + Gains and losses in financial operations + Operating income and charges + Equity-accounted results of subsidiaries. 3) Excluding costs with early retirements. 4) Non-performing loans = Loans in arrears for more than 90 days + doubtful loans, treated as loans in arrears for provisioning purposes. 5) Calculated in accordance with Bank of Portugal Notices 3 / 1995 and 8 / 2003. 6) Calculated in accordance with Bank of Portugal Notices 12 / 92, 1 / 93 and 7 / 96.

382 Banco BPI | Annual Report 2006 Methodological notes

CREATING SHAREHOLDER VALUE SHARE INDICATORS The most appropriate measure of shareholder value added is achieved by The "Earnings per share (EPS)" ratio is an extremely important figure conducting an analysis from the shareholder's own perspective. When an when evaluating a particular share investment. investor acquires shares he does so in the expectation that he will secure a capital gain that is higher than that which he would have achieved in an The principal reason for this is the fact that this indicator is, in turn, alternative investment with a similar degree of risk. the denominator of the relationship between the share price and the net income1 attributable to it, otherwise commonly termed P/E or PER ("Price Shareholder’s gain to Earnings Ratio"). The prospective P/E is probably the indicator most Shareholder's gain per share = Selling price - Cost price + Dividend often used by the market when assessing the appeal of a given investment in that it expresses the price at a specific moment and the estimated The shareholder's overall gain is the sum of the capital gain, which future profit flows of the company concerned. results from the share's appreciation on the stock exchange, and the appropriation of the company's earnings in the form of dividends received. In building the EPS indicator, the only matter that has to be resolved is the ascertainment of the number of shares to be used as the denominator Shareholder's rate of return – the weighted average number of shares with dividend rights in issue The rate of return calculation takes into consideration the investment time during the relevant period – in such a manner as to ensure comparability span in order to establish a relationship between the capital employed in of past EPS data. the acquisition of shares and the gain obtained, and permits an analysis to be made of the investment return by comparing this with alternative A number of events can signify that the number of shares has to investment opportunities. be adjusted; the most common are share-capital increases, be it an incorporation of reserves (a bonus/capitalisation issue) or a subscription In the rate of return calculation, given that the cash flows occur at reserved for shareholders (a rights issue). different time intervals, the internal rate of return (IRR) method is utilised. The rate of return is hence the average rate of the investment The fact that the issue price is below the ruling market price (a very period which equates the present value of the incoming flows resulting common procedure) means that the shareholder's right to subscribe from the sale of shares and the dividend paid to the present value of for new shares has an asset-related content that is detachable from the the capital invested. share and negotiable on the market. This constituent element is called the subscription right. CFj Σ = 0 In practical terms, a share issue reserved for shareholders can, and should (1 + Shareholder's annual average rate of return) (dj-d0) / 365 therefore, be subdivided into an incorporation of reserves (theoretical)2 followed by a share issue at the price which theoretically would be struck CFj – Cash flow at the moment j (incoming flows are registered as positive on the market after the capital increase. figure and outgoing flows as negative figure) dj – which corresponds to the moment j For purposes of determining the weighted average number of shares: d0 – date in relation to which cash flows are converted to present values and corresponds to the moment in which the first capital investment ᭿ when an incorporation of reserves takes place, whether theoretical is made (stemming from the above-mentioned subdivision) or real, this should Based on the assumption that all years have 365 days. be deemed to have occurred on the first day of the financial year;

The investment in any particular share produces different rates of return ᭿ the number of shares issued at "market price" in a subscription reserved depending on the moment chosen for making the investment and the for shareholders should be weighted on a time basis to reflect the period corresponding disinvestment. during which the proceeds from the capital increase contributed to the year's earnings. Matrix of spreads on a shareholder's nominal annual average return The yield matrix presents various annual average rates of return obtained When the shares issued in a year do not confer any dividend rights in by the BPI shareholder according to the investment time span. respect of that year – only the right to dividends in ensuing years – the appropriate procedure in such circumstances is, for all intents and The shareholder considered makes an initial investment in BPI SGPS purposes, to consider that the share-capital increase took place on the nominative shares with dividend rights. During the investment period first day of the following year, maintaining the basic method outlined he reinvests the dividends in new BPI SGPS shares in the day following above3. their receipt, and participates in all share capital increases and convertible-debt issues reserved for shareholders, subscribing for the Another adjustment to be made to the denominator involves deducting maximum quantity he is entitled to. from the weighted average number of issued shares the average number of own shares held during the year, considering that, in accordance with IAS/IFRS, own shares must be deducted from shareholders’ equity.

1) The net earnings figure used in EPS calculations is susceptible to various adjustments. In this report, the figure employed is always the BPI Group's net accounting profit without any adjustments. 2) A share-capital increase by way of the incorporation of reserves involves the mere book-entry transfer of amounts from one accounting component of shareholders' equity (net assets) to another, and does not entail any payment on the part of shareholders. 3) A different scenario is where the number of shares to be used is required for calculating the "book value per share" indicator as at 31 December of a financial year which precedes that in which the share-capital increase is realised. In this case, the two aggregates are static, with the result that the number to be used is the final number of shares in existence on that date, adjusted only by subsequent events.

Annexes | 383 General index

Page Page REPORT Disclosure of Banco BPI’s 2006 results 40 Index 3 Agreement between BCP and Banco Santander Totta 40 Leading business indicators 4 Decision of the Competition Authority 41 Growth, profitability, strength and value 5 Behaviour of BPI shares in 2006 42 Introduction 6 Background to operations 43 Strength and maturity 6 Global economy, Euro zone and Portugal economies 43 The response 6 Global and euro zone economies 43 Performance 7 Portuguese economy 45 The recognition 8 Markets 46 The shareholders’ support 8 Currency market 46 The identity of BPI 10 Money market 47 Governing bodies 11 Bond market 47 Shareholder value creation 12 Equities market 49 Return on investment (ROI) 12 Background to operations in Angola 50 Shareholders 13 Angolan economy 50 Historical milestones 14 Angolan financial system 51 Leadership, innovation and growth 14 Domestic Commercial Banking 53 BPI Governance 16 Individuals and small businesses banking 53 Guiding principles 16 Overview 53 Annual corporate governance report 16 Customer resources 54 Refinements to BPI’s governance practices and report 16 Time deposits 54 Recognition in 2006 17 Unit trust (mutual) funds 55 Value creation 17 Retirement savings plans 55 Corporate governance 17 Capitalisation insurance 56 Investor relations 18 Loans to Customers 57 Investor Relations Website 18 Mortgage loans 57 Social responsibility 19 Restructuring of the property-broking channel 58 Governance 19 BPI Imobiliário 58 Investor relations 19 Personal loans 59 Standards of conduct 19 Motor car finance 59 Quality 20 Commercial loans, guarantees and sureties, and leasing 59 Training 20 Credit cards 60 Sponsorship and solidarity 20 Debit cards 61 Social solidarity 20 Corporate banking, institutional banking and project finance 68 Education and research 21 Large corporations and companies 69 Culture 21 Project Finance 70 Financial structure and business 23 Institutional banking and state business sector 73 Domestic activity 23 Bancassurance 74 International activity 23 Asset Management 75 Distribution channels 24 Overview 75 The BPI Brand 26 Unit trust funds 76 Human resources 28 BPI Gestão de Activos activity in 2006 77 Banco BPI 29 Retirement Savings Plans 77 Banco Português de Investimento 30 Pension funds 78 Banco de Fomento Angola 30 Attracting new Clients 78 Technology 32 Pension fund returns 79 Information systems in Portugal 32 Participation in the seminar organised by APFIPP 79 Activity in 2006 33 Extension of the site www.bpipensoes.pt to employees Decision and business support 33 of company clients 79 Optimisation of processes 33 Application of Decree-Law no. 12 / 06 of 20 January 79 Infrastructure, control and security 33 Life capitalisation assurance 80 Information systems in Angola 34 Investment Banking 81 Activity in 2006 34 Overview 81 Evolution of the information systems 34 Corporate Finance 82 Highlights of the year 35 Equities 83 BCP's takeover bid for Banco BPI's capital 38 Secondary equities market 83 Bid 38 Primary equities market 83 Announcement by Banco BPI’s Board of Directors 38 Research and sales 83 Report of Banco BPI’s Board of Directors on the bid’s Trading 84 acceptability and conditions 38 Private Banking 85 Alteration to the limitation on Banco BPI’s voting rights BPI Suisse, S.A. 85 from 12.5% to 17.5% 40 Private Equity 86 Position of the regulatory authorities 40 Financial investments 87 Revocation of the pre-emption agreement between International banking activity 88 BPI’s shareholders 40 Banco de Fomento Angola 88 Extraordinary General Meeting of BPI approves plan to expand Commercial banking 88 branches and authorises the Board of Directors to decide on Deposits 88 the disposal of the position held in BCP 40 Loans 88 Overseas trade operations 89

384 Banco BPI | Annual Report 2006 Page Page Cards 89 Treasury shares 159 On-line banking 89 Other information 159 Distribution network 89 Rating 161 Investment banking 90 Final acknowledgements 163 Commercial Banking in Mozambique – BCI Fomento 91 Proposed appropriation of net profit 164 Deposits 91 Credit 91 CONSOLIDATED BALANCE SHEETS Distribution network 91 Consolidated balance sheets as of 31 December, 2006 and 2005 166 Financial review 92 Consolidated statements of income for the years Consolidated earnings 93 ended 31 December, 2006 and 2005 167 Consolidated balance sheet 96 Statements of changes in shareholders' equity for the years Domestic operations 98 ended 31 December, 2006 and 2005 168 Domestic operations income statement 99 Consolidated statements of cash flows for the years Revenue 101 ended 31 December, 2006 and 2005 170 Net interest income 101 Technical result of insurance contracts 103 Notes to the consolidated financial statements 173 Commissions 103 Notes to the consolidated financial statements as of Profits from financial operations 105 31 December 2006 and 2005 174 Administrative overheads, depreciation and amortisation 106 1. The financial group 174 Personnel costs 106 2. Basis of presentation and principal accounting policies 176 Outside supplies and services 107 A) Bases of presentation 176 Depreciation and amortisation 108 B) Principal accounting policies 176 Impairments and provisions 109 2.1. Consolidation of subsidiaries and recognition of Loan impairments 109 associated companies (IAS 27, IAS 28 and IFRS 3) 176 Other impairments and provisions 109 2.2. Financial assets and liabilities (IAS 32 and IAS 39) 177 Equity-accounted results of subsidiaries 110 2.3. Tangible assets (IAS 16) 182 Minority shareholders’ interests 110 2.4. Tangible assets available for sale 183 Domestic operations balance sheet 111 2.5. Intangible assets (IAS 38) 183 Loans and resources 114 2.6. Retirement and survivor pensions (IAS 19) 183 Loans to Customers 114 2.7. Long service premiums (IAS 19) 184 Resources taken 115 2.8. Treasury shares (IAS 32) 185 Portfolio of securities and participating interests 116 2.9. Share-based payments (Remuneração variável Pension obligations 117 em acções – RVA) (IFRS 2) 185 International operations 121 2.10. Technical provisions (IFRS 4) 186 Overview 121 2.11. Provisions for other risks and charges (IAS 37) 186 International operations income statement 124 2.12. Income taxes (IAS 12) 186 Revenue 126 2.13. Preference shares (IAS 32 and IAS 39) 187 Net interest income 126 2.14. Principal estimates and uncertainties regarding the Commissions 128 application of the accounting standards 187 Gains and losses from financial operations 128 3. Introduction of the international accounting standards 188 Administrative overheads, depreciation and amortisation 129 3.1. Impact on shareholders’ equity and results at Impairments and provisions 130 31 December, 2004 of the transition to IAS / IFRS 188 Results of equity-accounted subsidiaries 130 4. Segment reporting 194 International operations balance sheet 131 4.1. Geographical segments 194 Loans and resources 133 4.2. Business segments 202 Customer loans 133 5. Notes 207 Resources taken 133 5.1. Cash and deposits at central banks 207 Portfolio of securities 133 5.2. Loans and advances to credit institutions repayable Capital management 134 on demand 207 Shareholders’ equity 134 5.3. Financial assets held for trading and at fair value Own funds 135 through profit or loss 207 Own funds requirements 138 5.4. Derivatives 208 Ratio of own funds requirements 139 5.5. Financial assets available for sale 212 Risk management 143 5.6. Loans and advances to credit institutions 219 Organisation 143 5.7. Loans and advances to Customers 219 Credit risk 144 5.8. Other tangible assets 222 Management process 144 5.9. Intangible assets 224 Evaluation of credit risk exposure 145 5.10. Investments in associated companies and Default, provisioning and recovery levels 147 jointly controlled entities 224 Country risk 151 5.11. Tax assets 226 Market risks 152 5.12. Other assets 226 Liquidity risk 153 5.13. Resources of central banks 227 Operating risks 154 5.14. Financial liabilities held for trading 227 Legal risks 155 5.15. Resources of other credit institutions 228 Banco BPI shares 156 5.16. Resources of Customers and other debts 228 Liquidity 157 5.17. Debt securities 229 Market multiples 157 5.18. Financial liabilities relating to transferred assets 232

Annexes | 385 Page Page 5.19. Provisions and impairment losses 233 3.2.5. Information about GM results 282 5.20. Technical provisions 234 3.2.6. Results of the Shareholders’ Meetings held in the 5.21. Tax liabilities 235 last five years 5.22. Participating bonds 235 282 5.23. Subordinated debt 236 3.2.7. Shareholders’ General Meetings held in 2006 283 5.24. Other liabilities 237 3.2.8. Shareholders’ General Meetings held in 2007 284 5.25. Liability for pensions and other benefits 237 3.2.9. Annual General Meeting – 19 of April of 2007 288 5.26. Capital 240 3.3. Board of Directors 291 5.27. Share Premium account 241 3.3.1. Composition 291 5.28. Other equity instruments and treasury shares 241 3.3.2. Functions 292 5.29. Revaluation reserves 242 3.3.3. Chairman of the Board of Directors 292 5.30. Other reserves and retained earnings 242 3.3.4. Independence classification of members 5.31. Minority interest 243 of the Board of Directors 293 5.32. Off balance sheet items 244 3.3.5. Meetings of the Board of Directors 294 5.33. Financial margin (narrow sense) 244 3.3.6. Meetings order of business 294 5.34. Gross margin on unit links 245 3.3.7. Functioning of the meetings 294 5.35. Income from equity instruments 245 3.3.8. Participation at meetings 294 5.36. Net commission relating to amortised cost 245 3.3.9. Resolutions 294 5.37. Technical result of insurance contracts 245 3.3.10. Minutes 295 5.38. Net commission income 245 3.3.11. Information provided to the non-executive members 295 5.39. Net income on financial operations 245 3.3.12. Rules relative to election and dismissal 295 5.40. Net operating expenses 246 3.3.13. Induction of new Directors 295 5.41. Personnel costs 246 3.3.14. Liability and adherence to the codes of conduct 295 5.42. Administrative Costs 246 3.3.15. Exercise of the Board’s functions in 2006 and 5.43. Income tax 247 until 12 of March of 2007 296 5.44. Earnings of associated companies (equity method) 250 3.4. Executive Committee of the Board of Directors 298 5.45. Consolidated net income of the BPI Group 251 3.4.1. Composition 298 5.46. Personnel 251 Experience and professional qualifications of the 5.47. Fair value 252 members of Banco BPI’s Board of Directors 5.48. Share-based variable remuneration program Executive Committee 298 (Programa de remuneração variável em acções – RVA) 256 3.4.2. Chairman of the Board of Directors’ Model for valuing the equity instruments granted to the Executive Committee 299 employees and directors of the BPI Group 257 3.4.3. Functions 300 Shares 257 3.4.4. Executive Committee meetings 300 Options 258 3.4.5. Functioning rules 300 Accounting impact of the RVA program 260 3.4.6. Specialised Executive Committees 301 Shares 260 3.5. Audit committee 302 Options 261 3.5.1. Composition 302 5.49. Related parties 262 3.5.2. Functions 302 6. Note added for translation 269 3.5.3. Functioning of the Audit Committee 304 Legal certification of accounts and audit report 270 3.5.4. Support structures 304 Audit Committee’s report and opinion 272 3.5.5. Responsibility and adherence to the codes of conduct 304 3.5.6. Activity in 2006 304 BPI GROUP CORPORATE GOVERNANCE REPORT 3.5.7. Audit Committee’s Report relating to 2006 305 Index 274 3.6. Portuguese Statutory Auditor 310 Declaration of compliance 275 3.6.1. Portuguese Statutory Auditor 310 1. Introduction 276 3.6.2. Functions 310 Refinements to BPI’s corporate governance practices 3.6.3. Liability and adherence to the codes of and reporting 276 conduct (ROC) 310 Revocation of the Pre-emption Contract 276 3.7. Corporate Governance Committee 311 2. Guiding principles of the BPI Group’s corporate governance policy 277 3.7.1. Composition 311 3. Structure, division of duties and functioning of the BPI Group’s 3.7.2. Functions 311 principal management and control bodies 278 3.7.3. Functioning 312 3.1. Structure of the group’s governance and supervision 278 3.7.4. Activity in the year 312 Shareholders’ General Meeting 278 3.8. Nominations, Evaluation and Remuneration Committee 313 Board of Directors 278 3.8.1. Composition 313 Executive Committee of the Board of Directors 278 3.8.2. Functions 313 Audit Committee 278 3.8.3. Functioning 314 Portuguese Statutory Auditor 278 3.8.4. Activity in the year 314 Corporate Governance Committee 279 3.9. Remuneration Committee 315 Nominations, Evaluation and Remuneration Committee 279 3.9.1. Composition 315 Remuneration Committee 279 3.9.2. Functions 315 Company Secretary 279 3.9.3. Activity on the year 2006 315 3.2. Shareholders’ General Meeting 281 3.9.4. Responsibility and adherence to codes of conduct 316 3.2.1. Composition 281 3.10. Company Secretary 316 3.2.2. Functions 281 3.10.1. Company Secretary 316 3.2.3. Promotion of shareholder participation at SGM 282 3.10.2. Functions 316 3.2.4. Functioning rules 282 3.11. Banco Português de Investimento’s management 316

386 Banco BPI | Annual Report 2006 Page Page 3.12. Banco de Fomento Angola’s management 317 11. Exercise of corporate rights by BPI Group entities 347 Structure and functioning rules 317 BPI Gestão de Activos 347 4. The Group’s functional organisation chart 320 BPI Pensões 347 Executive management, supervision and control 320 Private Banking 348 BPI Group functions 320 12. Code of ethics and professional conduct 349 Central structures 320 12.1. Commitment to strict standards of ethics and Credit risks 320 professional conduct 349 Market risks 320 12.1.1. Head of Oversight and Control 349 Marketing 320 12.2. Equity and safeguarding against conflict of interests 350 Product units 320 12.2.1. Conflicts of interest between Directors or Channels 320 Employees and BPI 350 Brand quality and training 320 12.2.2.Conflicts of interest with Customers 350 The BPI Group’s functional organisation chart 321 12.3. Violation of professional secrecy and confidentiality 350 5. Risk management 322 12.4. Stock brokerage activity 350 5.1. Risk management principles 322 12.4.1. Dealing for own account 350 5.2. Division of responsibilities in risk control and management 322 12.4.2. Acting for the account of Customers 351 6. External auditors 323 12.4.3. Equity research activity 351 6.1. Independence 323 12.5. Communication of irregularities 352 Deloitte’s policies and procedures 324 12.6. Combat against money laundering 352 6.2. Liability 325 12.7. Prevention of insider trading 353 6.3. Remuneration 325 Operations involving securities issued by Banco BPI 353 7. Remuneration 326 12.8. Business dealings between bpi and members of the 7.1. Remuneration policy 326 Board of Directors, the Audit Board and the Audit 7.1.1. Principles 326 Committee, the holders of qualified shareholdings 7.1.2. Principal components 326 or companies belonging to the Group 354 7.1.3. Profit sharing 326 Grupo Allianz 354 7.2. Remuneration of members of Banco BPI’s Arsopi 354 Governing Bodies 327 12.9. Accounting transparency 354 7.2.1. Rules of attribution and competent bodies 327 12.10. Social investment 354 7.2.2. Exclusivity 327 13. Communication with the market 355 7.2.3. Remuneration earned in 2006 328 13.1. Principles governing the disclosure of financial information 7.2.4. Weight of remuneration on net profit 328 and other important facts 355 7.3. Remuneration of members of Banco Português 13.2. Investor Relations Division 355 de Investimento’s Board of Directors 329 13.2.1. Concept and responsibilities 355 7.4. Pension plans for Directors of the banks 329 13.2.2. Activity in 2006 356 7.5. Loans to members of Banco BPI’s Board of Directors 330 13.3. Internet site 356 7.6. Insurance of Banco BPI’s Directors 330 13.3.1. Investor Relations Website – www.ir.bpi.pt 356 7.7. Indemnities and early termination of contracts 331 13.3.2. Electronic mail 357 7.7.1. Early termination of contracts 331 13.4. Representative for relations with the market 357 7.7.2. Change in control of the company 331 14. Banco BPI shares 358 7.8. Other benefits / compensation 331 14.1. Shareholder return 358 8. Share Incentive Scheme 332 14.2. Stock exchange performance and communications 8.1. Concept, beneficiaries and objectives 332 to the market 358 8.1.1. Concept 332 15. Dividend policy 361 8.1.2. Beneficiaries 332 8.1.3. Objectives 332 Appendices 8.2. Execution of share incentive scheme 337 Experience, professional qualification and other management 8.2.1. Extension of the RVA Scheme 337 and oversight positions performed at companies by the 8.2.2. Total value 337 members of Banco BPI, S.A.’s Board of Directors 362 8.2.3. Record of the share purchase options scheme 339 Equivalence between the CMVM's regulations and 8.2.4. Shares awarded under condition subsequent and recommendations dealing with corporate governance and not yet freely disposable 341 the BPI's report on corporate governance 369 8.2.5. Credit line for exercise of options and retention Principal regulatory sources dealing with corporate governance of shares in portfolio 341 in Portugal 370 8.3. Execution in 2006 342 Publications, communications and institutional events in 2007 372 8.4. Return 343 RVA 2001, RVA 2002, RVA 2003, RVA 2004 and RVA 2005 343 ANNEXES 9. Shareholder control and transferability of shares 344 Definitions, acronyms and abbreviations 376 9.1. Shareholder control 344 Glossary 378 9.2. Shareholder agreements relating to the exercise Formulary 381 of company rights or to the transferability of shares 344 Methodological notes 383 10. Exercise of voting rights and shareholder representation 345 General index 384 10.1. Encouragement of the exercise of voting rights 345 Index of figures, tables, charts and “Boxes” 388 10.2. Attribution of voting right 345 Thematic index 390 10.3. Procedures relating to proxy representation 345 Miscellaneous information 391 10.4. Procedures relating to postal voting 345 10.5. Procedures relating to electronic means 346

Annexes | 387 Index of figures, tables, charts and “Boxes”

No. FIGURES Page No. TABLES (cont.) Page 01 Growth, profitability, strength and value (2002-2006) 5 45 Domestic operations principal indicators 98 02 Governing bodies 11 46 Domestic operations income statement 99 03 Historical milestones – Net total assets plus disintermediation 14 47 Net interest income 101 04 Main units of the BPI Group 23 48 Trend in interest income and expense 102 05 Distribution channels 24 49 Average interest rates on remunerated assets and liabilities 103 06 Applications overview – Principal components 32 50 Commissions and other similar income (net) 104 07 TAKEOVER BID – Chronology of the facts 38 51 Profits from financial operations 105 08 Rating classifications 161 52 Administrative overheads, depreciation and amortisation 106 53 Personnel costs 107 No. TABLES 54 Outside supplies and services 107 01 Leading business indicators 4 55 Depreciation and amortisation 108 02 Value creation for BPI shareholders (1997-2006) 12 56 Loan provisions and impairments 109 03 Shareholders owning more than 2% of Banco BPI’s capital 57 Equity-accounted results of subsidiaries 110 – At 31 December 2006 13 58 Domestic operations balance sheet 111 04 BPI Group Employees 28 59 Home-loans securitisation operation in 2006 – Douro RMBS 2 113 05 Banco BPI Employees – Selected indicators 29 60 Customer loan portfolio 114 06 Banco BPI Employees – Distribution by area of activity 29 61 Total Customer resources 115 07 Banco Português de Investimento Employees 62 Financial assets and investments in associated – Selected indicators 30 companies and jointly controlled entities 116 08 Banco de Fomento Angola Employees 63 Fair value reserve – shares portfolio available for sale – Selected indicators 30 – At 31 December 2006 116 09 Training – Activity in Portugal 31 64 Employees’ pension obligations cover 117 10 Efficiency, availability and performance in Portugal 65 Directors' complementary pension plan cover 117 – Selected indicators 32 66 Investment policy of Banco BPI’s pension fund 119 11 Efficiency, availability and performance of BFA information 67 International operations principal indicators 121 systems – Selected indicators 34 68 Euro exchange rates 123 12 Detailed forecasts for Portugal and the Euro zone 45 69 International operations income statement 124 13 Economic projections for Angola 50 70 Average balance sheet and factors influencing the trend 14 Individuals and Small Business Banking in net interest income from BFA 126 – Selected indicators 53 71 Net interest income quarterly evolution 127 15 Time deposits 54 72 Commissions and other similar income (net) 128 16 Individuals and Small Business Banking 73 Administrative overheads, depreciation and amortisation 129 – Customer resources 54 74 International operations balance sheet 131 17 Unit trust funds – Selected indicators 55 75 Customer loan portfolio 133 18 Individuals and Small Businesses Banking – Customer loans 57 76 Customer resources 133 19 Mortgage loans – Selected indicators 57 77 Shareholders' equity and minority interests 134 20 Mortgage loans contracted by distribution channel 58 78 Own funds – Calculated according to Bank of Portugal rules 137 21 BPI Imobiliário web site – Selected indicators 58 79 Own funds requirements – Calculated according to 22 Personal loans – Selected indicators 59 Bank of Portugal rules 138 23 Motor car finance – Selected indicators 59 80 Own funds requirements ratio – Calculated according 24 Commercial loans and leasing – Selected indicators 60 to Bank of Portugal rules 139 25 Credit cards – Selected indicators 60 81 Impact of the transition to IAS / IFRS 140 26 Debit cards – Selected indicators 61 82 Recognition of the impact of the transition to IAS / IFRS 27 Physical distribution network 62 on own funds 142 28 Investment centres – Selected indicators 62 83 Risk management – Selected indicators 143 29 Corporate Banking, Institutional Banking and Project Finance 84 Internal rating of companies – Breakdown of exposure – Selected indicators 68 by risk classes in 2006 145 30 Assets under management 75 85 Default probabilities of loans to individuals – In 2006 146 31 Unit trust funds under management 76 86 Bonds and fixed-interest securities’ investment portfolio 32 Life capitalisation assurance business written 80 – Breakdown of exposure by classes of risk (external rating) 146 33 Return vs. volatility 80 87 Current credit risk – Substitution value of derivatives 34 Investment Banking – Selected indicators 81 by type of counterparty 147 35 Private Banking – Selected indicators 85 88 Loans to Customers in arrears, provisions and impairments 148 36 BPI Private Banking Capitalisation Insurance 89 Credit loss and cost of risk 149 – Gross yields 85 90 Loans in arrears and impairments accumulated 37 Private Equity holdings – At 31 December 2006 86 in the balance sheet, by market segment 150 38 Financial investments – At 31 December 2006 87 91 Country risk exposure – At 31 December 2006 151 39 Banco de Fomento Angola – Selected indicators 88 92 Interest rate risk – Repricing gaps at 31 December 2006 152 40 BCI Fomento – Selected indicators 91 93 Foreign exchange rate risk – Structural position 41 Financial review – Consolidated principal indicators 92 at 31 December 2006 152 42 Consolidated income statement 93 94 Market risk in trading books 153 43 ROE by business areas in 2006 95 95 Liquidity risk – Gaps at 31 December 2006 153 44 Consolidated balance sheet 96 96 Liquidity risk – Sundry indicators 154

388 Banco BPI | Annual Report 2006 No. TABLES (cont.) Page No. CHARTS (cont.) Page 97 Banco BPI shares – Principal indicators 158 41 Pension funds under management 78 98 Treasury shares transactions in 2006 159 42 Pension funds long term returns 79 99 Banco BPI rating classifications 161 43 Life capitalisation assurance – New business per year 80 44 Life capitalisation assurance – Assets under management 80 No. CHARTS 45 Customer loans 88 01 Banco BPI shareholder average annual return 46 Customer deposits 88 – Until 31 December 2006 12 47 Contribution by business area to consolidated net profit in 2006 93 02 Banco BPI staff complement – Distribution by geographical and 48 Average capital allocated by business area in 2006 93 business area in 2006 28 49 Consolidated net profit 94 03 Banco BPI staff complement – Distribution by area of activity 29 50 Consolidated net assets and disintermediation 97 04 Banco BPI staff complement – Distribution by functional areas 29 51 Consolidated balance sheet structure in 2006 97 05 Banco Português de Investimento – Staff complement 30 52 Net profit from domestic activity in 2006 99 06 Banco Português de Investimento 53 Net profit from domestic activity 100 – Staff complement with university degree 30 54 Net interest income in 2006 101 07 Banco de Fomento Angola – Staff complement 30 55 Narrow net interest income 101 08 Banco de Fomento Angola – Staff complement 56 Commissions in 2006 104 with university degree 30 57 Administrative overheads, depreciation and amortisation 09 Trend in Banco BPI’s share price – Chronology of the facts – Five year trend 106 related with the takeover bid 42 58 Administrative overheads, depreciation and amortisation 10 GDP growth – Year-on-year rates of change 43 – As % of operating income from banking 106 11 Business climate indicator 44 59 Personnel costs in 2006 106 12 Euro exchange rates in 2006 46 60 Outside supplies and services in 2006 107 13 Six-month interest rates in 2006 47 61 Loan impairments as % of loan portfolio 14 Ten-year interest rates in 2006 48 – Five year trend 109 15 Corporate credit risk premiums – Euro-denominated issues 62 Loan impairments as % of loan portfolio – In 2006 109 (2002-2006) 48 63 Equity-accounted results of subsidiaries in 2006 110 16 PSI20 and IBEX 35 indexes’ evolution 49 64 Balance sheet structure in 2006 112 17 Inflation rate in Angola 50 65 Loan portfolio in 2006 – Breakdown by Customer segment 114 18 Real GDP growth in Angola 50 66 Total Customer resources in 2006 115 19 Angolan GDP breakdown by business sector 67 Portfolio of financial assets and participating interests in 2006 116 – At 31 December 2006 50 68 Pension funds assets and BPI Group Employees pension liabilities 119 20 Interest rates in the placement of Central Bank securities 69 Banco BPI pension funds' assets – Breakdown by asset class 120 issued in 2006 51 70 Banco BPI pension funds' assets 21 Kwanza / Dollar exchange rate (AKZ/USD) 52 – Breakdown by geographical area 120 22 Individuals and Small Businesses Banking 71 BPI Group Employees pension funds – Loans and guarantees 53 – Return vs. market performance 120 23 Individuals and Small Businesses Banking 72 Net profit from international activity – Five year trend 121 – Customer resources 53 73 Net profit from international activity 24 Individuals and Small Businesses Banking – As a % of consolidated net profit 121 – Customer resources in 2006 54 74 Net profit from international activity in 2006 124 25 Retirement / education savings plans (PPR/E) 75 Operating income from banking 126 – Portfolio evolution 55 76 Net interest income 126 26 Retirement / education savings plans (PPR/E) 77 Administrative overheads, depreciation and amortisation – Periodic subscription plans 55 – Five year trend 129 27 Individuals and Small Businesses Banking 78 Administrative overheads, depreciation and amortisation – Loans and guarantees to Customers in 2006 57 – As % of operating income from banking 129 28 Mortgage loans contracted by distribution channel 79 Coverage of loans in arrears by impairments 130 – In 2006 58 80 Balance sheet structure in 2006 132 29 BPI Imobiliário – Properties available on the web site 58 81 Customer loans 133 30 BPI Net and BPI Directo – Subscribers 63 82 Customer resources 133 31 BPI Net and BPI Directo – Transactions and consultations 63 83 Shareholders' equity and minority interests evolution in 2006 134 32 Ratings of Portuguese banks 66 84 Consolidated own funds requirements ratio – According 33 Ten best European banks (global ranking) 66 to Bank of Portugal rules 139 34 Corporate Banking, Institutional Banking and Project Finance 85 Bonds investment portfolio in 2006 – Loans and guarantees 68 – Breakdown of exposure by classes of risk (external rating) 146 35 Corporate Banking, Institutional Banking and Project Finance 86 Ratio of loans in arrears 147 – Customer resources 68 87 Cost of risk – As % of the average performing loan portfolio 149 36 Commissions – Intermediation of insurance products 74 88 Value at Risk (VaR) 152 37 Assets under management 75 89 Banco BPI shares’ evolution 156 38 Breakdown of assets under management – At 31 December 2006 75 90 Banco BPI shares’ evolution over the last five years 157 39 Unit trust funds under management 76 40 Breakdown of unit trust funds under management – At 31 December 2006 76

Annexes | 389 “BOXES” The identity of BPI 10 BPI Net empresas 72 Historical milestones – Leadership, innovation and growth 14 Office for Angola 72 Training 31 Communication with Customers 73 Highlights of 2006 35 Unit trust funds returns 77 Principal points in the Report of BPI’s Board of Directors Corporate Finance advisory assignments 82 concerning the bid’s acceptability and conditions 39 Recognition - Equities Business 84 Insurance – VitAll and MedicAll 61 Cooperation protocols 89 Physical distribution network – Individuals and Recognition – Banco de Fomento Angola 90 Small Businesses Banking 62 Medium and long-term financing 113 Investment centres 62 Pension obligations – regulatory framework 118 Network of external promoters 63 Consolidation of international operations 123 Homebanking services 63 Deduction from own funds of investments Telephonic attendance 64 in insurance sector companies 136 Sites on the internet / e-mail / sms 64 Transition to IAS / IFRS – impact on shareholders’ equity and own funds 140 Telemarketing 64 Banco BPI shares 157 Service quality 65 Authorisation for acquisition and sale of treasury shares 160 BPI branches considered the best in Europe 66 RVA relating to 2006 160 BPIgo 67 Rating reports 162 Public incentive systems / Cosec / Mutual guarantee 69 Final acknowledgements 163 Project finance operations 70 Proposed appropriation of net profit 164 Customer segmentation and commercial network 72

THEMATIC INDEX

Shareholders Corporate income tax 12, 13, 158 to 162, 284 to 294, 350 to 352, 360, 364, 365 102, 127, 188, 189, 192, 228, 237, 249 to 252

Preference shares Net profit 112, 137 to 139, 189, 245 95 to 97, 101, 102, 123 to 127, 160, 169, 198, 199, 202, 203, 206, 208, 253 Basle II 146 Takeover bid launched by BCP for the whole BPI's capital 6 to 9, 38 to 42, 288 to 291 Distribution network 24, 25, 40, 63 to 68, 74, 91, 93, 96, 108, 109, 131, 289 Financial investments 40, 88, 89, 107, 111, 118, 180, 214 to 220, 289 Loans to Customers 58 to 61, 70 to 75, 90, 93, 103 to 105, 116, 128, 129, 135, Share-based variable remuneration program (Programa de 140, 180, 181, 221 to 223 Remuneração Variável em Acções – RVA) 187, 191, 258 to 264, 338 to 349 Loans to Customers in arrears 58 to 61, 90, 111, 132, 149 to 152, 180, 221, 256, 328 Capital ratios 136 to 144, 170, 171, 242 to 245 Dividends 160, 166, 366 Recognition 17, 18, 26, 27, 35 to 37, 68, 79, 86 BPI Group financial and business structure 23, 54, 70, 76, 77, 83, 88, 89, 90, 96, 97, 176 to 179, 196 to Customer resources 208, 226, 252, 253, 326 and 327 55 to 57, 70, 77 to 82, 87, 90, 93, 103 to 105, 117, 128, 129, 135, 183, 184, 188, 230 to 233, 236 Pension funds and pension liabilities 107 to 109, 119 to 122, 137, 139, 185, 186, 190, 191, 228, Human resources 239 to 242 28 to 31, 67, 108, 109, 131, 253

IAS (International Accounting Standards) Loan securitisation 125, 142 to 144, 190 to 195 104, 115, 140, 181, 222, 234, 235

Customer loan’s impairments 58 to 61, 111, 132, 137 to 139, 149 to 152, 181 to 183, 221, 235, 236, 256, 328

390 Banco BPI | Annual Report 2006 Miscellaneous information

INVESTOR RELATIONS OFFICE BPI Group Investor Relations web site Rua Tenente Valadim, 284 www.ir.bpi.pt 4100-476 Porto Telephone: 22 607 33 37 Banco BPI web site (informative) Facsimile: 22 600 47 38 www.bpi.pt E-mail: [email protected] Banco Português de Investimento web site BUSINESS ADDRESS OF GOVERNING BODY www.bpiinvestimentos.pt MEMBERS Rua Tenente Valadim, 284 Banco de Fomento Angola web site 4100-476 Porto http://www.bfa.ao

Calendar1 of important facts to investors and analysts for 2007 Date Time Event

19 January 10:00 Shareholders' General Meeting - Sole point: Election of the Deputy-Chairman of the General Meeting

19 January 11:30 Shareholders' General Meeting - To deliberate over two proposals of the Board of Directors

25 January 16:45 (aprox.) 2006 consolidated results release

25 January 16:45 (aprox.) Press conference on 2006 activity and results

26 January 11:00 Conference-call with analysts and institutional investors regarding 2006 results

4 April - The project of the 2006 Annual Report and Accounts Is made available, to be approved by the SGM

19 April 11:00 Banco BPI's Shareholders General Meeting

20 April - Publication of the Banco BPI 2006 Annual Report2

24 April 16:45 (aprox.) First quarter 2007 earnings release

24 April 16:45 (aprox.) Media conference regarding 1st quarter 2007 results and activity

26 April 11:00 Conference Call for Analysts and Institucional Investors regarding 1Q07 results

30 April - First day the shares are traded on the stock exchange ex-dividend (ex-dividend date)

4 May3 - Payment of dividends

To be defined To be defined Banco BPI Annual Conference for Institucional Investors & Analysts

27 July 16:45 (aprox.) First half 2007 earnings release

27 July 16:45 (aprox.) Media conference regarding 1st half 2007 results

30 July 11:00 Analysts and Institucional Investors Conference Call regarding 1H07 results

Until 30 August - Publication date of Interim Report 2007

25 October 16:45 (aprox.) Third quarter 2007 earnings results

25 October 16:45 (aprox.) Media conference regarding 3Q07 results

26 October 11:00 Conference Call for Analysts and Institucional Investors regarding 3Q07 results

1) The forthcoming events dates are indicative and subject to change. 2) Assuming that the shareholders approve the Board of Directors' proposal relating to the 2006 Report and Accounts. 3) Date on which Banco BPI pays to the shareholders who have their shares deposited at a BPI group bank and to the other (remaining) financial brokers.

INFORMATION ON BANCO BPI SHARES At 31 December 2006, Banco BPI, S.A. share capital is Codes and tickers represented by 760 000 000 ordinary nominative shares with a ISIN and Euronext code: PTBPI0AM004 nominal value of EUR 1 each. Banco BPI shares are listed in the Reuters: BPI.LS Euronext Lisbon. Bloomberg: BPIN PL

Annexes | 391 BANCO BPI, S.A.

Public held company

Registered in Oporto C.R.C. and tax identification under the sole number 501 214 534

Headquarters: Rua Tenente Valadim, n.º 284, 4100-476 Porto, PORTUGAL

Share capital: EUR 760 000 000 This page was intentionally left blank.