WorldReginfo - 92da3163-c39e-4f97-8fe2-782c928145c8 MANAGEMENT REPORT AND ACCOUNTS - 1º HALF 2014
CONTENTS
01. SOCIAL AND ENVIRONMENTAL RESPONSIBILITY 4
02. DISTRIBUTION NETWORKS 7
Points of sales 7
Diagram of Holdings 8
03. HUMAN RESOURCES 9 04. ECONOMIC BACKGROUND 14 05. BANIF MANAGEMENT REPORT 17 BUSINESS ACTIVITY IN THE FIRST HALF OF 2014 17 RECAPITALISATION PLAN – KEY POINTS 20 RESTRUCTURING PLAN 21 DOMESTIC COMMERCIAL BANKING 22 Personal Banking 22 Business Banking 24 Corporate Banking 26 International Area 27 Commercial Networks 28 Telephone and Electronic Banking 35 Payment Products and Means of Payment 37 Recovery of Overdue Loans and Loans in Litigation 40 INTERNATIONAL COMMERCIAL BANKING 41 Banif Bank (Malta) 41 Banif Brasil 42 Banco Caboverdiano de Negócios 44 SPECIALISED CREDIT 46 INVESTMENT BANKING AND ASSET MANAGEMENT 51 REAL ESTATE MANAGEMENT 59 INSURANCE 62 FINANCIAL MANAGEMENT 66 RISK MANAGEMENT 67 06. ANALYSIS OF THE CONSOLIDATED ACCOUNTS 109 07. OUTLOOK 115 08. RATING 117 09. FINANCIAL STATEMENTS 119 1. Consolidated Financial Statement 119 1.1. Consolidated Balance Sheet 119 1.2. Consolidated Income Statement 120 1.3. Consolidated Statement of Comprehensive Income 121
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1.4. Consolidated Statement of Changes in Equity 122 1.5. Consolidated Cash Flows Statement 123 1.6. Annex to the Consolidated Financial Statements at 30 June 2014 Banif and Subsidiaries 124 10. OTHER INFORMATION 205 1. Governance and Statutory Structures 208 2. Portfolio of Own Shares 209 3. Holders of Qualified Shareholdings 209 4. Securities issued by Banif – Banco Internacional do Funchal, SA and companies in the Banif Financial Group held by members of the corporate structures 211 5. FSF and EBA Recommendations on information transparency and assets valuation 215 6. Mandatory Statements 219
Report on a limited audit of the half-year information carried out by the auditor registered at the CMVM.
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01. SOCIAL AND ENVIRONMENTAL RESPONSIBILITY
The Banif Financial Group continues to actively engage in initiatives designed to bring environmental and social issues into the very heart of the group's business enterprises and its relationship with society.
As usual, we have both internally and externally published our 7th Sustainability Report, for 2013. This report adopts the new version (4.0) of the Guidelines for the Preparation of Sustainability Reports issued by the international organisation Global Reporting Initiative (GRI). The report is special because the cover and separator page photographs were taken by the group employees who won the sustainability report photography competition that we organised in partnership with Club Banif. A number of copies of this report were distributed at the general shareholders' meeting held on 30 May, 2014.
Over the year, we continued our efforts to improve internal awareness and communication on sustainability issues. We also worked on our stakeholder relationships through a number of forums, including the Business Council for Sustainable Development – BCSD, Portugal.
Banif believes that by investing in entrepreneurship we are taking a strategic step towards creating value. This is why the issue is a key part of our positioning in society in general and with the Portuguese business sector. This strategic investment:
- Materialises an important part of our corporate sustainability and responsibility policy, by helping the Portuguese economy to develop; - Adds value to "innovation" and creates new opportunities, both inside and outside Banif; - Brings us closer to micro-businesses and SMEs.
One important milestone in this investment was the restoration of our building in Rua Rodrigo da Fonseca and the subsequent loaning of this to the Startups Factory, to provide a home for one of the largest entrepreneurship centres in Europe: Startup Campus powered by Banif.
This 3000 m² space was inaugurated on 5 May, 2014 by the Minister of the Economy, António Pires de Lima, at an event attended by over 300 people. Since then, a number of events promoting entrepreneurship have been held in the factory, with the support and/or participation of Banif.
In the Autonomous Region of Madeira (RAM), our investment in entrepreneurship has been strengthened through the ongoing project "rs4e" - road show for entrepreneurship, organised by
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CEIM - The Madeira Business and Innovation Centre and by our participation in the "Entrepreneur Fair" organised by AJEM - the Association of Young Madeira Business People.
The sustainability area also coordinated the volunteer programme, VAMOS Educar (LET'S Educate). This initiative was developed in partnership with our human resources department and the collaboration of the Junior Achievement Association. This business volunteer programme is an integral part of the Banif Financial Group's sustainability policy. Through education, volunteering and entrepreneurship, it aims to bring us closer and give us an active role in the communities of which we are part.
In 2013/2014, we implemented the "Braço Direito (Right Arm)" programme through which students could shadow a group staff member during a day's work. There was also the "A Empresa (The Company)" programme, which allowed 16 to 20-year old students to learn how to set up a mini- business and develop their entrepreneurial skills.
This year, the "A Empresa" program was run for the first time in the Autonomous Regions of Madeira and the Azores, with the support of a team of Banif volunteers and the teachers. At the end of the programme, two teams were selected – one from Madeira and one from the Azores – to come to Lisbon to battle it out in the national competition. They faced the 22 "companies" from the mainland who had been selected from the more than 3800 students who took part.
VAMOS Educar was promoted through the VAMOS micro-site and the group's normal internal communication channels. This brought in 34 volunteers from Banif, BBI and Banif Mais.
Banif's support for education took the form of the academic prizes handed out to students from a number of RAM schools with whom Banif has cooperation protocols. The group also sponsored the regional maths competition, Agente X, which attracted over 2,000 participants along the school year. In the RAA, we strengthened our long-standing partnership with the University of the Azores by instituting an excellence award for the best MBA student from this leading Azorean institution.
At the beginning of the year, we confirmed our support for culture by renewing the cooperation protocols with the two main performance venues in S. Miguel, Azores: Coliseu Micaelense and Teatro Micaelense.
In the social arena, we signed a new protocol with the Regional Government of the Azores as part of its Extraordinary Support Programme for Housing Loans. This programme is designed to help workers affected by delayed salary payments to meet their commitments. It is with initiatives like this that the bank has consolidated its social responsibility work in the region.
In a similar vein, the bank also lent its support to the Benefit Gala organised by the Ponta Delgada city council, in the RAA. The headline act at the gala was the international fado singer, Kátia Guerreiro, who has her roots in the Azores. The takings from the concert went to social institutions
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in the municipality. Additionally, we signed a protocol with Associação Seniores de São Miguel, through which we provided a building to house a support/documentation centre for the network of palliative care volunteers on the island of S. Miguel.
We encouraged young people to take part in sport, through a number of initiatives at RAM schools, in partnership with Clube Sport Marítimo and Clube Desportivo Nacional. We also sponsored the regional junior football league, known as Liga Infantil NOS Banif, in partnership with NOS Madeira. In the RAA, we renewed our support for the Pauleta Foundation and our sponsorship of the II International Football Tournament "Pauleta Azores Soccer Cup U13", the World Copa Foot 21 and the International Aerobic Gymnastics Open.
On the environmental side, the sustainability area continued its work on climate responsibility by participating in the Carbon Disclosure Project's international survey. Recognising the interest that the issue of climate change has for financial markets, Banif had already signed up to the Carbon Disclosure Project as a signatory investor. One year on and Banif has taken yet another step along this path, together with 530 other international investors, representing US$ 57 billion in assets, by signing up to the Water Program.
Water and climate change are intrinsically intertwined and both can significantly affect the growth of companies and economies. Water is an issue of prime importance in Portugal, given the water shortages that the country suffers at certain times of the year. By signing up to this initiative, Banif is supporting the drive by the investors behind the Water Program to get listed companies around the globe that operate in water intensive industries to take its water survey.
We also signed up to the "Planet Hour 2014" initiative, which will involve all group companies, including those in Brazil and Malta.
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02. DISTRIBUTION NETWORKS
Points of Sales
Mainland Madeira Azores Abroad Total
BANIF Comercial 203 35 40 154 432
1. BANIF 185 34 38 6 263
- Branches 171 31 35 0 237 - Business centres 11 1 2 0 14 - BANIF Privado 2 1 1 0 4 - Call Center 1 0 0 0 1 - Home Loans Shops 0 1 0 0 1 - Representatives offices/other 0 0 0 6 6
2.BANIF MAIS, SGPS 16 1 2 10 29
- Branches 15 1 2 4 22 - Other 1 0 0 6 7
3. BANIF-Banco Internacional do Funchal (Brasil) 0 0 0 3 3
- Branches 0 0 0 2 2 - Other 0 0 0 1 1
4. BANIF International Bank 0 0 0 1 1
5. BANIF BANK (Malta) 0 0 0 12 12
6. Banco Caboverdiano de Negócios 0 0 0 17 17
7. Banca Pueyo (Espanha) (*) 0 0 0 104 104
8. Other 2 0 0 1 3
BANIF Investimento 6 0 0 4 10
1. BANIF Banco de Investimento 2 0 0 0 2
2. Other 4 0 0 4 8
Insurance 28 3 17 0 48
1. Açoreana Seguros(*) 28 3 17 0 48
- Branches 28 1 17 0 46 - Other 0 2 0 0 2
TOTAL 237 38 57 158 490
(*) Not fully consolidated
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03. HUMAN RESOURCES
For the human resources department, the focus for the first half of 2014 was the rationalisation of the company's staffing levels. Although this main task required a significant level of commitment, the Human Resources Department (DRH) was also fully active in a number of other strategic initiatives for the organisation. These included training, the integration of human resource management models and staff communication support systems as well as the strengthening of the work being done in the area of health and safety at work.
Indicators As regards the reorganisation of staffing levels, one of the main initiatives in the first half of the year was the implementation of the company's voluntary redundancy programme (RMA Programme). This voluntary programme, based on pre-set criteria, was launched as a way of advancing the restructuring programme currently ongoing at Banif. Amongst other measures, the programme will also assist the bringing forward of the closure of a number of branches.
Thus, at 30 June 2014, the number of FTE (full time equivalents) at Banif was 2138, 181 FTE less than at 31 December, 2013.
There was also a significant rationalisation of staffing levels at the Banif Financial Group. Currently, the Banif Financial Group has a staff of 2980 FTE, which compares with the 3196 employees we had in December 2013. This represents a reduction of 216 FTE (6.8%).
New Staff Portal The new staff portal was launched this year. This application, accessible from the Banif intranet, is a qualitative leap and a clear evolution of our human resource management processes. We can now interact with our staff in a much more fluid manner.
The application has simplified and streamlined procedures, including the recording of working hours, absences, the booking or changing of leave periods and the recording of cashier work. Staff can access their own personnel files through the portal and check their salary slips, income tax returns and various documents of an informative nature.
This new application has been designed to be dynamic and evolutionary. As it grows, we will be adding new modules so that the staff portal can offer even more processes and functions.
Work – Life Balance The human resources department has taken a number of initiatives to encourage greater involvement with the organisation. These include the celebration of significant dates with our staff.
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Our aim is that these initiatives should also help maintain a healthy work-life balance, which is why we put so much effort into celebrating the World Day of the Child. This initiative, mainly aimed at the children of Banif Financial Group staff, took place simultaneously at the group's six central buildings. Children were given the opportunity to visit their parents' workplaces. Engaging scientific experiments also helped ensure the educational value of the event, which was followed by a tea party.
The DRH also publicised all the protocols that offer benefits to staff and their families, in terms of leisure activities, free time activities for children and other products and services that may be of interest to employees.
Training and Development In 2014, the human resources department implemented and oversaw the training plan for Banif Financial Group companies, namely: Banif SA, Banif – Banco de Investimento, Banif Açor Pensões, Banif – Gestão de Activos, Banif Mais, Banif Rent and Banif Imobiliária. In the first half of 2014, a total of 197 training courses were run, equivalent to 9 training hours per employee.
The following were the main training projects undertaken over the six-month period: the development and implementation of eLearning contents, internal face-to-face training programmes such as Banif@st Pay and Foreign Trade, the Learning Talks initiative, on-the-job in training at the Development Branches and the Development Academy training and development programme.
As part of our continuing investment in the development of internal eLearning contents, the first six months of the year saw courses on the new staff portal, a new loan workflow and the extraordinary loan protection regime. Other courses are at the development stage. These include complaint management, operating risk and FATCA – the Foreign Accounts Tax Compliance Act, all of which are to be implemented in the second half of the year.
The external trade training course was continued in 2014, with 20 individual sessions are attended by over 200 staff for a total of around 1500 training hours. More than 100 employees participated in sessions on the Banif@st Pay system, to total over 200 training hours. Both of these training courses will be continued in the second half of the year.
The e-learning talks initiative is designed to provide informal training spaces, new experiences and the sharing of knowledge about a whole range of subjects of interest to staff. In the first half of 2014, a total of six learning talks were held in Lisbon, Porto and Ponta Delgada. Employees from across the group attended these discussion or workshop sessions that focused on such themes as financial literacy, health and sport.
The objective of the Development Branch project is to set up branch schools that can offer on-the- job training to staff who are taking on new duties at the bank. In the first half of 2014, nine sessions, or 150 training hours, were delivered at the Mercado, João Tavira and Aveiro branches.
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The Development Academy is a strategic project designed to make the most of the human resources we have at the Banif Financial Group. It aims to develop, motivate and retain staff in line with our talent management model. We are planning to set up an internal business school along the lines of the corporate university concept. This will employ best possible practice as applied to the training and development of human resources.
In March, the launch event for this training and development programme was held. It was attended by 114 employees from companies across the group, including directors, first-line managers and other staff with coordination responsibilities. In June, we held our first themed seminars for about 100 employees, focusing on the subject of developing leadership in line with the organisation's strategy. In total, this involved over 870 training hours. Throughout 2014 we will be developing other initiatives under the development plans drawn up by the Development Academy.
Performance and Incentives Management Model The current performance and incentives management model was designed to provide a more objective performance assessment that matched the results achieved over the year. At the start of 2014, approval was given to change the cycle of setting and assessing objectives for non- commercial functions. These will now operate on a half-yearly cycle. The six-monthly assessments and the evaluation of skills feed into the annual performance assessment.
A set of training sessions for 167 line managers was held, with the aim of ensuring that participants have the knowledge they need to implement the performance assessment process for the staff they manage and can also present the central services incentives model.
Career Management The Internship Development Programme, launched in 2013, was continued in the first half of 2014, with the taking on of 21 new interns by the various companies in the Banif Financial Group. The first batch of interns were kept on for another six months, meaning that the group is currently hosting a total of 40 professional internships.
Another highlight of the first half of 2014 was the approval at Banif – Banco de Investimento (BBI) and subsidiaries and at Banif Mais of a new functions and careers model. Like the Banif model, these have reduced the number of internal functions and made the model more streamlined and agile.
Safety In the first half of 2014, the DRH area responsible for safety, which covered safety at work and safety of persons and property, was enlarged to include health in the workplace. This led to the approval of six main intervention strategies: the prevention of professional risk, fire safety in buildings, training in health and safety in the workplace, health care and the safety of people and property.
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For the first time, we ran the Banif [HEALTH] initiative, which took the form of a prevention day involving all the staff in the Group.
This initiative took place in six of the group’s central buildings, on the mainland, in the Azores and on Madeira. The day involved health check-ups, a healthy recipe competition and an informative talk. More than 300 staff took part from across the Banif Financial Group. The feedback was highly positive for this event and many participants suggested holding the event again. They want even more ideas for adopting a healthy lifestyle, with the aim of transforming these into a better quality of life, higher productivity and improved well-being.
In terms of preparation for emergency situations, the self-protection measures in place at three business units and the prevention plan for the central buildings in the Av. 24 de Julho were updated and submitted to the National Civil Protection Authority for approval. The operational emergency structure was strengthened with the appointment of assistant safety delegates. The contingency plan, which covers all Banif Financial Group central buildings, was also updated. A specific contingency plan was drawn up for the business units, as was a logistics and installations plan.
In the area of professional risk prevention, new risk assessments were carried out at the business units. As part of ongoing improvements, a new checklist of physical safety conditions was included in these plans. This list will help us to better assess any exposure to external violence or aggression. An innovative critical incident management programme was approved, with the aim of reducing the impact of serious and extremely serious traumatic events capable of psychologically and physically affecting Banif staff.
Work continued on in integrating the security systems at both central buildings and the business units, by centralising all the alarms at Banif's internal control centre. This will ensure the operational readiness of security systems through offsite control, testing and periodic audits designed to monitor the status and operation of the installed system and detect any breakdowns. We also drew up and set in motion a plan for implementing the new legal requirements regarding private security contractors. These requirements stipulate mandatory security measures and set deadline schedules.
Assets The human resources department's assets area took on a number of wide-ranging responsibilities, particularly as regards engineering and projects, maintenance and construction management, licensing and the management of the property and other assets belonging to the Banif Financial Group.
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In the first half of 2014, a break room was built at the João Tavira building and a leisure area set up at the Startup Campus powered by Banif. The break room was built at the João Tavira building because there was an obvious need to accommodate the growing number of staff bringing their lunches to work. The space was designed to provide a pleasant place to eat lunch and socialise. As part of our partnership with the Startups Factory, which operates out of the Rua Rodrigo da Fonseca building in Lisbon, we set up a networking lounge. This will serve as a support facility for the conferences and workshops floor of Europe's largest entrepreneurship centre.
A number of initiatives were undertaken in relation to the licensing processes and also the management of property and other Banif Financial Group assets. In order to ensure the best use and preservation of Banif's extensive collection of art, the works in the collection were evaluated and a photographic record made. For the first time, a selection of the information gathered through this operation was collated into a published catalogue.
We participated in the Lean Six Sigma project, with the aim of analysing our maintenance management process and the management of our strategy for improving services to better ensure client satisfaction. Our priority was to reduce maintenance costs. This work allowed us to assess the current status of a specific maintenance area and provided important management data for a more aware management of the same, whilst also leaving room for new strategies.
In terms of the management and optimisation of material goods, we reused much of the existing equipment when installing the centralised alarm system in the business units. The same approach was taken with the renewal of ATM machines, and the resulting improved availability rate meant we were able to maintain or increase their profitability. The bank has also invested continuously in improving the energy performance of its premises, using centralised technical management systems in buildings and branches and replacing inefficient equipment.
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04. ECONOMIC BACKGROUND
The global economy performed below expectations in the first half of 2014. It was much affected by the downturn in some of the world's main economies, particularly during the first quarter of the year. According to the IMF, the global economy grew by 2.75% in annual terms during the first quarter of 2014, well below the 3.75% seen in the last three months of 2013.
This negative behaviour was clearly felt in the U.S. economy, which was impacted by a number of highly adverse weather related events that contributed to the fall in domestic demand. This economy also suffered from an abrupt fall in exports, following on the heels of the strong performance turned in by this item in the final quarter of 2013. There was also a significant correction of stock levels, to counter the stockpiling that had taken place in the second half of the previous year. These are temporary factors and a significant recovery was already being seen in the second quarter. However, this recovery should only partially offset the fall. The IMF has reduced its 2014 growth estimate for the U.S. economy by 1.1 pp, to 1.7%.
China was another economy that produced a disappointing performance in the first quarter. Here, the efforts made by the authorities to contain the rapid growth in credit triggered a larger than expected slowdown in domestic demand and a correction in the residential construction business. In response to this, the authorities made use of limited targeted measures to drive growth in the second half of the year. These include a tax cut for SME, increased public investment in infrastructures and cuts in the legal reserve rates required of banks. These measures should be enough to see growth of 7.4% for the year as a whole.
In Russia, economic activity slowed significantly in the first quarter, due to a rise in geopolitical tensions that affected domestic demand, particularly as regards investment. For the emerging economies as a whole, the first half of the year was equally disappointing, with growth rates falling behind targets because of weaker external demand from the USA and China. In a number of countries there was also lower internal demand and feeble investment growth.
In Europe, the various economies grew at very different rates during the first half of 2014. The first quarter figures show 0.2% growth in the euro zone and 0.3% in the UE28. On the positive side, there was growth in Germany and the United Kingdom (0.8%), Spain (0.4%) and Belgium (0.4%). However, there were negative performances from Holland (-1.4%), Finland (-0.7%) and Portugal (-0.6%). The various economies that make up the euro zone performed very differently from each other and were negatively impacted by the deleveraging process of both public and private enterprises, by the persistent financial fragmentation, despite the advances made in terms of banking union, and by the high levels of unemployment in many of these economies.
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In Portugal, economic activity in the first half of the year was marked by the 0.6% fall seen in the first quarter, which broke a sequence of three consecutive quarters of economic growth. In year- on-year terms, GDP grew by 1.3%, somewhat slower than the 1.5% growth achieved in the previous quarter. This change can be largely attributed to the downturn in exports of goods and services, but also increased imports of goods and services. Domestic demand made a significant contribution to the overall figures, rising from 0.5 pp in the fourth quarter of 2013 to 2.8 pp in the first quarter of 2014, largely as a result of investment behaviour. The qualitative data for the second quarter show a general improvement in confidence levels, visible across all components, with the exception of industrial confidence, which remained unchanged.
Unemployment figures in the first quarter continued the downward trend seen since the same quarter of 2013. The unemployment rate stood at 15.1%, which is 0.2 pp lower than in the previous quarter and 2.4 pp less than a year before. A 12-month average IHPC inflation rate continue to drop, to around 0.0% in June. In year-on-year terms, prices actually fell, finishing at -0.2% by the end of June.
The first half of the year in Portugal was also notable for the end of the economic and financial assistance programme that Portugal had been following for the previous three years. The country had decided to leave the programme and return to market financing without any official assistance from any of the EU's safeguard mechanisms.
Over the same period, there was also a resurgence of geopolitical risks in various parts of the world. These could potentially impact on the price of energy commodities, particularly oil and gas, but also threaten to destabilise geographical areas that were already highly unstable, such as the Middle East. The conflict between Russia and the Ukraine, initially over the Crimean Peninsula and then later because of separatist areas in Eastern Ukraine, was a key event marking this period. The international response to this conflict was to impose economic sanctions on Russia. The civil war in Syria continued and spread into Iraq, where a caliphate was set up by ISIL.
In terms of monetary policy, the highly expansionist monetary policies of the main central banks continued to provide high levels of liquidity along the six months, despite the fact that there were signs of differing dynamics on both sides of the Atlantic. In the USA, the FED maintained the trajectory that it had been on since December of 2013, with a gradual removal of monetary stimuli. It did this by reducing its rate of market asset purchases by 10 billion dollars at each meeting. This process is scheduled to come to an end in October 2014. At the same time, the FED decided, in March, to remove the quantitative reference thresholds for determining the future direction of monetary policy, namely an unemployment rate of 6.5% and an inflation rate of up to 0.5 pp above 2%. From October onwards, the focus will be on setting an exit strategy and the process of raising interest rates, which is expected to happen in mid-2015.
In the euro zone, the ECB strengthened its indication that it intended to keep interest rates low for the foreseeable future, as a way of differentiating the policy shift in the USA from the situation in
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the euro zone. In fact, with growth slower than expected and extremely low inflation rates, plus the ongoing fragmentation of the financial markets and the continuing fall in available credit, the ECB, at its 6 June meeting, decided on a set of measures that were designed to increase liquidity levels. These included cutting key interest rates (the Repo Rate came down to 0.15%, the marginal interest rate to 0.4% and the rate for deposits went negative (-0.1%). The bank increased the supply of liquidity through targeted refinancing operations with longer terms (ORPA). The ECB also stated that, if necessary, it would make use of non-conventional instruments to deal effectively with the risks of overly low inflation. The central bank also announced that the meetings dealing with monetary policy would now take place every six weeks and that it intended to publish the minutes of the discussions on such monetary policy.
In the financial markets, there was a sharp upswing in values across almost all asset classes, as investors benefited from the liquidity flow provided by the expansionist monetary policies implemented in most economic blocs. Euribor rates fell across all maturities, closing the half year at 0.207%, 0.303% and 0.488% for the 3, 6 and 12-month maturities, respectively. Long-term interest rates in the advanced economies continued to fall, as did volatility indicators, the spreads in emerging economies and those in peripheral euro zone countries. Stock markets rose significantly, closing out the six months, in many cases, at near-historic highs. In the euro zone, the Euro Stoxx 50 index rose 4.24%, the FTSE MIB index 12.4%, the IBEX 35 went up 10.8% and the PSI 20 index 6.3%. In the USA, the S&P 500 index was 6.1% higher, while the NASDAQ Composite rose 5.5%. As regards the main commodities, oil prices increased by 7.5%, mainly as a result of the geopolitical tensions. This also had an impact on the price of gold, which rose 9.5% over the six- month period. Agricultural commodities, as measured by the S&P Agriculture Index, fell by -0.53% over the half year.
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05. BANIF MANAGEMENT REPORT
BUSINESS ACTIVITY IN THE FIRST HALF OF 2014
The first half of 2014 was marked by the implementation of a number of important measures that the bank had set as priority objectives and which related to meeting its commitments under the recapitalisation plan.
In April, we repurchased the second tranche of the contingent convertible subordinated debt instruments (CoCos). In less than a year and a half after the Portuguese State subscribed to these bonds, Banif has already repurchased around 70% of these instruments: 150 million euros in August 2013 and 125 million euros in April 2014. We plan to repurchase the final tranche, of 125 million euros, before the end of the year. The implementation of these measures has made an important contribution to our interest income, thanks to the consequent reduction in finance costs, which, in aggregate terms, totalled approximately 40.1 million euros in 2013 and 2014.
In May, the bank successfully completed compliance with its commitments under the recapitalisation plan, as regards the increase in its capital. This was achieved through a public offering of subscription in the amount of 138.5 million euros. As in June of the previous year, when the first public offering of subscription of shares under the recapitalisation plan (in the amount of 100 million euros) took place, the demand for Banif shares significantly exceeded expectations. In this case, the offer was oversubscribed by 140%.
In operational terms, the bank's main priority was the adjustment of its business model so as to ensure greater profitability and efficiency, in a persistently adverse macroeconomic climate, which continues to have a significant effect on the banking business.
To this end, the bank decided to accelerate the ongoing transformation process by bringing forward the cost reduction measures planned for 2015. Thus, we announced:
i. An acceleration of our branch closure programme in Portugal: of the 60 due to close by the end of 2014, 40 were closed in the first half of the year.
ii. A concomitant workforce reduction programme, involving up to 300 Banif, SA staff (domestic business). We have made this possible by streamlining our pre-retirement, retirement and voluntary redundancy programmes. These efforts will have a positive impact on the second half of the year.
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iii. A strategic IT and application maintenance partnership with IBM. This agreement is expected to yield significant cost savings of up to 15 million euros, over a 10-year period.
In terms of commercial repositioning, the bank has intensified its investment in specific business segments (micro and SME). As part of this initiative, we have instigated the Banif commercial leads programme, which will deploy 500 million euros of lending to SME in the industrial and agro-food sectors. We have also widened our network of dedicated managers for these business segments (micro and SME). We have also continued with our segmentation of private clients around the V+ concept, a segment we set up with a specific value offer for more affluent clients.
Additionally, Banif has successfully implemented a strategy focused on i) bringing down funding costs, which we have targeted at our offer of standardised savings products, as opposed to term deposits with negotiated rates and ii) providing closer support to high-value private clients, through an expansion of our Affluent Managers network, and to our clients who are emigrants. In the first half of 2014, this strategy allowed us to maintain the trend of reversing the downward trajectory in deposits. Deposits grew by 3.3%, compared to December 2013.
The process of disposing of the controlling interests in Banif - Banco Internacional do Funchal (Brazil), SA, Banif Bank (Malta), PLC and Banco Caboverdiano de Negócios (BCN) is currently ongoing. From now on, these business units will be carried as discontinued units.
Net losses for the first half of 2014 were 97.7 million euros. This was an improvement over the net losses incurred over the same period of the previous year (196.0 million euros). This can be attributed to a rise in banking income (which went up 69.0% year-on-year, to 216.1 million euros) and the less unfavourable performance of the discontinued units (-41.0 million euros in the first half of 2014, compared with -78.3 million euros in the first half of 2013, thanks to better results from the Brazilian operation following the ongoing restructuring process). The figures were somewhat penalised by an increase in staff costs resulting from the staff reduction programme (8.7 million euros) and the minor increase in net provisions and impairments (3.4% year-on-year, to 146.2 million euros).
Structural costs in the first half of 2014 totalled 114.7 million euros. This figure reflects the rationalisation and optimisation measures taken to reshape the bank's organisational structure, in the light of the current business context and the ongoing restructuring process. Excluding the costs (9.1 million euros in the first half of 2014, against 0.4 million euros in the first half of 2013) associated with the voluntary redundancy programme, which began in March, operating costs fell 7.7% compared to the first half of 2013.
Liquidity operations included the securitisation (Atlantes SME3) of SME loan portfolios in the amount of 438 million euros; the bond issue under the Banif Covered Bonds Programme, in the nominal amount of 100 million euros; the secondary market sale of 537 million euros worth of senior tranches of our own portfolio of securitisations and the collateralised medium-term funding
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operation in the amount of 150 million euros. The growth in customer resources and loans to customers over the first six months of the year led to a narrowing of the commercial gap by some 440 million euros. As a whole, these factors helped sustain the ongoing reduction in the use of central bank resources, by some 950 million euros, between December 2013 and June 2014. This followed on from the 700 million-euro reduction achieved in the fourth quarter of 2013.
As at 30 June 2014, the Common Equity Tier 1 ratio, calculated in accordance with the CRD IV/CRR rules applicable in 2014 (phasing in) stood at 10.0%, which is above the minimum levels required by the regulatory authorities.
The changes seen in the price of Banif shares on the regulated Euronext Lisbon stock exchange, where it is part of the main market index, the PSI20, reflects the listing of the shares that resulted from the various capital increase operations that have been carried out over the last 12 months. In total, these sum 450 million euros. In these operations, shares were sold at a unit price of 0.01 euros per share.
The operations were sanctioned by the decision taken at the general meeting held on 25 June, 2013, which authorised capital increase operations of up to 450 million euros, as written into the recapitalisation plan agreed between the bank and the Portuguese State on 16 January 2013. These operations were:
- June 2013: 100 million euros placed privately and reserved for major shareholders; - July 2013: 100 million euros in a public share offering. - August 2013: 40.7 million euros through a private placement with strategic investors; - October 2013: 70.8 million euros through a public offer of securities for Banif shares swap. - May 2014: 138.5 million euros in a public share offering.
Changes in the Banif, SA share price and volumes transacted on the stock exchange
0.1 2,500,000,000 0.09 0.08 2,000,000,000 0.07 0.06 1,500,000,000 0.05 0.04 1,000,000,000 0.03 0.02 500,000,000 0.01 0 -
Series1Daily volume Series2Share price
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In terms of market behaviour, Banif shares appreciated in value significantly over the first quarter of the year. There was also an increase in transacted volumes that resulted from a major reduction in Portugal's country risk and a general improvement in stock market sentiment. These gains were later reversed in mid-April, following the announcement of the public offering for sale of 138.5 million euros worth of non-preference shares to shareholders, has decided upon at the AGM of 25 June 2013. Nevertheless, this operation was successfully structured with priority placement with shareholders.
RECAPITALISATION PLAN – KEY POINTS
The bank’s recapitalisation plan, approved in January 2013 by the Ministry of Finance, is designed to ensure compliance with the regulatory capital requirements applicable to the sector. It will strengthen Banif’s capital base and dilute the state’s holding, thus rebalancing the shareholder structure in terms of state and private investors. Banif’s management team is fully committed to implementing all and any necessary measures to ensure the success of the recapitalisation plan agreed with the authorities. The plan is split into two phases of public and private investment.
The 1st phase of the recapitalisation plan was completed in January 2013, with the Portuguese state subscribing to (i) a 700 million euro increase in capital, achieved through the issue of (non- listed) special shares, and (ii) contingent convertible (CoCo) subordinated debt instruments in the amount of 400 million euros. 150 million euros worth of these were bought back in August 2013 and a further 125 million euros worth were bought back in April 2014.
The 2nd phase of the recapitalisation plan took the form of a capital increase of up to 450 million euros, aimed at private investors. This was successfully executed in a number of individual operations: - June 2013: 100 million euros through a private placement to key shareholders. This was taken up by Açoreana Seguros (a subsidiary of Rentipar Seguros SGPS) and Auto- Industrial SGPS, who subscribed with 75 million euros and 25 million euros, respectively.
- July 2013: 100 million euros in a public share offering. Demand for these Banif shares outstripped the offer by 61.8%.
- August 2013: 40.7 million euros through a private placement to a group of mainly Portuguese investors. The board of directors sees the entry of this group into the Banif shareholder base as being of strategic interest to the bank; - October 2013: 70.8 million euros through a public offer of securities for Banif shares swap. - May 2014: 138.5 million euros in a public share offering. Demand for these Banif shares outstripped the offer by 40%.
Once these operations had been completed, and at 30 June 2014, the total amount of capital that private investors had subscribed to and paid up during the second phase of Banif’s recapitalisation
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came to 450 million euros. Banif’s share capital stood at 1,720,700,000 euros, represented by 115,640,000,000 shares with no par value. As a result of these operations, the Portuguese State now holds 60.53% of Banif's capital stock. This corresponds to an identical percentage of voting rights as regards the issues specified in no. 8 of article 4 of Law no. 63-A/2008 of 24 November and 49.37% of the voting rights in respect of other matters.
RESTRUCTURING PLAN
The bank’s use of the Recapitalisation Fund, approved at the end of 2012 by the Ministry of Finance, led to a series of negotiations with the General Directorate for Competition (“DGComp”), the European Commission body responsible for analysing member state support for banks. These negotiations resulted in the drawing up of a restructuring plan. Taking into account the key guideline features of the recapitalisation plan (deleveraging, operational restructuring and simplification of corporate structures), the restructuring plan has helped channel the bank’s focus onto the more profitable business segments, in the geographical areas that make the most sense for the group. It has also brought in a greater streamlining of our operational platform and a specific management model for the assets that are to be divested.
Given the reality within which the bank operates and the objectives stipulated by DGComp, complying with the restructuring plan will mean transforming Banif. We have planned a broad range of initiatives to ensure that this transformation is a successful one. These initiatives will be implemented during the restructuring process and applied throughout and across the whole group,
In order to ensure an adequate response to these requirements, we set up the Programme Management Office (PMO) in July 2013.
Throughout 2013 and the first half of 2014, the results are some of these initiatives have already become clear, particularly as regards the following:
- a new management structure, with fewer directors - a successfully completed capital increase programme (450 million euros) - a new commercial strategy that has been set up, approved and implemented; - acceleration of the points of sale closure programme, beyond the initial objectives in the restructuring plan; - redundancy agreements with staff that have helped accelerate the rationalisation of staff numbers, beyond the initial objectives in the restructuring plan; - the design and implementation of improvements to the bank's IT structures.
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Besides these initiatives, with their clearly visible results, various other more complex transformation initiatives were launched. Although these initiatives required considerably more groundwork, implementation will continue in the second half of 2014.
DOMESTIC COMMERCIAL BANKING Personal Banking
In the first half of 2014, the personal banking business involves the following segments - mass market, affluent, private and residents abroad.
Mass-market Segment The main business activities carried out by the mass market area were as follows:
The consumer credit business, in the form of personal loans, in the first half of 2014 was marked by the adjustments made to product pricing and by the launch of pre-approved and revolving personal loan product campaigns aimed at current clients.
Compared to the end of the previous year, in terms of both balance and contract numbers, the personal loan portfolio fell by 8.5% at the end of the first half of 2014. The portfolio of approximately 153 million euros contained 30,222 active loan contracts.
As regards resources, and following the restructuring of the deposits offer, the following actions were implemented: - New funding and resource retention campaigns, particularly those aimed at the younger segment; - Restructuring of the liability product offer; - Reshaping of the pricing structures for term deposits, savings accounts and sight deposit accounts; - Ongoing monitoring of deposit and savings interest rates;
The portfolio fell by 3.5% in terms of the number of contracts, but the balance rose by 4.2%.
As regards payment means, we worked to increase our penetration rate through specific campaigns and initiatives designed to publicise our card offer.
The more important of these were: - SATA Miles Programme (campaign): A new credit card offer with an associated air miles programme, in partnership with SATA; - New credit card customers (campaign): Placement of credit cards with a points offer under the Card Loyalty Programme;
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- Card Loyalty Programme: Marketing of the points program with the aim of increasing the number of signed up customers and also the use of eligible cards; - Card activation initiative: DRD led promotion for the activation of cards placed by the business units.
As part of the management of the card portfolio, we reviewed our pricing structure and other commercial conditions during the period.
Affluent Segment In the affluent segment, known commercially as Banif V+, the following initiatives were implemented during the first half of 2014: - Launch of the Commercial Initiatives Programme, which is being phased in throughout 2014; - Closure of the client acquisition and loyalty campaign, the Christmas V+ Campaign, with the aim of encouraging resource inflow and the direct deposit of income; - Ongoing and regular publicising of the exclusive advantages and of the commercial initiatives offered by our partners, specifically the Grupo Auto Industrial; - One-off adjustment of the value proposal "Soluções V+", with changes being made to the exemption conditions; - Creation of the value proposal for Banif shareholders; - Implementation of a reassessment and renaming process involving the Affluent Managers. The aim of this was to be able to better match the quality of the Banif sales force to the needs of affluent clients; - Coordination with the DRH in a study on the enlargement of the Affluent Managers network; - Preparation of a new value proposal for affluent clients.
Residents Abroad Segment Given the importance of emigrants and non-residents to Banif, the following segment initiatives were implemented: - Monitoring of business growth by external unit; - Implementation of specific campaigns for funding and attracting new segment clients, namely: · RE 6+6 campaign; · RE Azores campaign – Tradition Deposit; · RE Summer in Portugal 2014 campaign. - Actioning of the following commercial leads: · Monthly leads for term deposits about to mature, to encourage resource retention; · Lead for the hosting of direct debits in segment client accounts. - Preparation of a monthly segment report; - Promotion of the offer and stimulation of the segment through contracted publications aimed at this market, with a focus on the products and client importance;
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- Work with the commercial networks on issues associated with the resident abroad segment (campaigns, updating of databases, etc).
Business Banking
SME, Small Businesses and Corporate The Commercial Leads Programme is still active and in continuous development, supported by the data mining work being done by the GME year (Business Marketing Office). The programme has been specifically shaped to fit the bank's strategic fund-raising and loan objectives.
The programme also covers the prospecting of potential clients, data analysis, allocation of contacts to the various business units, communication with the commercial networks, performance control and periodic reporting up the chain.
In the first half of the year, and as a way of implementing Banif's investment in support of Portuguese companies, a credit facility was set up under the name "Export Support Line". The facility has 300 million euros available and falls under the purview of the Linhas de Crédito Força PME (SME Strength Credit Lines).
In collaboration with the Communication and Image Department (DCI) we renewed the image and contents for the SME and business segments. This involved creating new communication materials that covered the product and service offer for the two segments.
In partnership with the International Business Department (DNI), the GME sponsored the 2014 SISAB, a 3-day fair for the food and drink sector that is particularly focused on export. In addition to the DMK and DNI, staff from the various commercial departments was also present at the event, with the aim of establishing potential business contacts for the bank. Following the event, a specific the lead was set up and is now in full development.
The GME also organised the bank’s presence at the 1st AgroIN forum, an event that is specifically aimed at business people and managers in the agro-business sector. As with SISAB, staff from the various commercial networks took advantage of the event to network. Later, a business lead was set up and distributed.
The office was also present at Expofranchise, the largest franchising business platform in the country. This fair covers a wide range of business activities (food, fashion and perfumery, financial advice, real estate, health, rental management and market studies, amongst many others). In addition to the normal commercial prospecting that takes place at such events, the Marketing Director also offered a talk on the theme "Bank renewal of investment in entrepreneurship: the case of Banif".
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The GME, in partnership with the DNI, also sponsored Moldplas Tecna 2014. This 4-day event brings together the various players in the moulds and plastics sub-sector. At this international conference, offer has a chance to meet demand and forge a range of mutually beneficial business deals. We also set up a specific lead based on this event.
As regards commercial protocols, we signed a collaboration protocol with Cefamol (National Association for the Moulds Industry). This protocol offers members of the association price reductions on some of the conditions pertaining to specific bank products and services. We also signed a commercial protocol with a large distribution chain (“Pingo Doce”) that offers benefits to its suppliers.
Together with the DNI, the GME implemented 18 training sessions across the country in May. These addressed trade finance, foreign operations, institutional protocols and mutual guarantees. These sessions, which were able to count on these special participation of the SGM (Norgarante, Lisgarante and Garval), were attended by 208 trainees. Two training sessions were run for 9 participants in partnership with the DGR.
In partnership with the government of the Portuguese Republic, and under the established institutional protocols, Banif continued to offer its banking credit lines for businesses. These help companies with their investments, with balancing their cash flow, and with restructuring existing loans. Productivity in the Institutional Protocols area remains high, thanks to: - The setting up of procedures and circuits for implementing subscribed protocols. There are currently more than 50 such institutional protocols; - Institutional relations between managing entities and the bank's various departments; - Provision of permanent support to the departments involved in handling institutional protocols, in the form of developing the procedures leading up to the application of the obligations; - Preparation of monitoring maps for the commercial, technical and execution performance of the institutional protocols.
Cross–Selling The first half of 2014 was marked by a sharp upswing in almost all cross-selling indicators. Sales by group companies increased significantly, when compared to the same period of the previous year.
The real estate investment funds registered strong year-on-year recoveries, rising 72% in terms of volume under management, on the basis of first subscription values. The number of savers investing in this product also rose, by 1,612 (+30%), compared to the previous year.
Accumulated specialised credit production at June 2014 was 54% higher than it had been at the same point in 2013. Accumulated sales for the year amounted to 11 million euros.
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In the insurance area, the inflow into retirement plans was practically identical to that of the same period in the previous year. Accumulated production came to 5.6 million euros. The financial insurance portfolio showed growth of 2% in the first six months of the year, with 56.6 million euros coming in by the close of the first half of 2014.
The other financial insurance product marketed by Banif's commercial networks, Maxi Performance, brought in 12 million euros of accumulated production for the year, as of June 2014. This is almost double the production rate seen in the first half of 2013. In terms of volume under management, the Maxi Performance portfolio was 48% up on the 2013 close, at 32 million euros.
Key sub-areas of the non-financial insurance business were accidents and illness insurance and non-assigned life insurance. As of June 2014, these two types of insurance brought in accumulated production of 1.2 million euros and 1 million euros each. This represents year-on-year growth of 9% and 30%, respectively.
These currently favourable results are due to the work put in by the commercial network, aided by the launch of initiatives that promote the sale of these products. Together these have proved decisive in meeting our targets.
One example of these initiatives is the Non-Assigned Life Insurance Campaign, which resulted in 4,710 new policies, worth a total of 234 thousand euros. A second example is the And Health Insurance Campaign and the resulting placement of 1491 new policies, worth a total of 112 thousand euros. In both cases, there have been direct positive consequences on the first half balances for these two types of insurance.
As part of Banif's 2014 capital increase programme, the bank's commercial networks implemented a share placement campaign, which generated 196 million euros worth of purchase orders for the 138.5 million euros worth of shares available.
Corporate Banking
The Corporate Banking Directorate was set up with the aim of providing specialised support to clients in the corporate segment (companies with an individual or group annual turnover of 50 million euros or more) and also institutional clients. These clients are served by two offices, one in Lisbon and the other in Porto.
In the first half of 2014, we continued to focus on the strategy of making the most of the bank’s existing portfolio of clients in this segment, by working to increase our share of wallet. Considerable effort was also put into acquiring new clients with good risk levels and strong business potential.
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Thus, the strategy followed over the first half of 2014 allowed us to continue to increase our loan portfolio (including our commercial paper programmes), as compared with the end of 2013. Direct credit products, principally commercial paper programmes and bonds, continue to be the mostly dynamically developed credit instruments, thanks to our close cooperation with our investment bank partners.
The funds raised from the segments looked after by this directorate rose sharply in the first half of 2014, compared to 2013. This resulted in a significant improvement of the credit to funds ratio and also of our net interest income.
(thousand euros) Item 1H2014 2013 Variation Resources 312,338 263,258 19% Cretid to clients 275,103 149,383 84% Source: SIG and DMC (for to heading of PPC included in the Total Credit to Clients)
International Area
In the first half of 2014, we focused our international area work on strengthening our positioning in the foreign trade and non-resident businesses.
The Banif Financial Group has a significant foreign presence, through banks, branches, representatives and incorporated companies. The aim of this network is to allow us to support the internationalisation of our client companies, to build close relations with expatriate Portuguese communities and to access markets where there are business opportunities and a high growth potential.
Banif has set up offices / incorporated companies in the USA, Canada, Venezuela and South Africa to support the Portuguese communities living in these countries. These offices and companies play a key role in representing the bank and in identifying and facilitating opportunities for the group and our clients.
Banif has made the most of the synergies provided by our international presence to increase the work we do in the area of foreign trade. We have helped to develop the working relationship between Portuguese companies and companies in the markets where we have a presence. We favour companies owned by Portuguese nationals or their descendants, as we see this as a clear way of boosting Portuguese exports.
In ensuring that our clients have access to a complete foreign trade service, Banif also offers additional support instruments to Portuguese companies exporting to higher risk markets. These
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instruments make use of trade finance programmes offered by multilateral development institutions (BERD, IFC, ADB and IADB) and other risk coverage instruments.
Given the improvements seen in the current economic climate, we have increased and diversified our funded and unfunded lines with our banking partners, which has allowed us to support our Portuguese business clients with both their commercial and investment needs. We aim to play an expanded role as these clients internationalise their businesses, focusing particularly on those small and mid-sized companies who are the main driving force behind the Portuguese economy.
In parallel, and over the first half of the year, Banif has negotiated a range of partnerships with local banks in markets targeted for business expansion by our Portuguese client companies. These partnerships form a solid basis from which we can effectively support such internationalisation.
In addition to trade finance, the bank has also focused on supporting our clients as they expand into foreign markets in which Banif has a physical presence. The International Business Directorate, working out of our head office, coordinates the on-the-ground support we offer these clients through our local structures.
In terms of correspondent banking, we have maintained relationships with our main partners in Europe and the USA and have developed new relationships in the Middle East, Africa and Latin America. We have also sought to offer clearing services to small and mid-sized banks in markets in which we are active, particularly in Latin America. We work as their euro-paying bank in Europe and also offer ancillary complementary services, such as remittance discounting and check clearing.
Despite the macroeconomic environment in which the bank has had to work, the “Banif” brand has become significantly better known and more widely acknowledged in the international markets.
Commercial Networks
a) The Azores
In overall terms, the balance of our business activity in the Azores in the first half of the year was positive across the main business items. The network turned in a good performance in terms of funding, lending, the control of the default ratio and its client portfolio. Thus, the downward trend seen in previous reporting periods was reversed.
Over the half year, there was a 2.7% increase in the portfolio (from 69,666 active clients in December 2013 to 71,555 active clients in June 2014). In effect, portfolio client numbers were largely restored to where they had been in the same period of the previous year (71,704).
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In terms of lending, there was satisfactory net growth in the portfolio compared to the start of the year (+3.2%). This can be mainly accounted for by lending to the regional government, under a partnership that the bank has maintained and strengthened over the years.
Despite the adverse economic climate, it proved possible to restrict the loan default rate to 5% and control the growth in the overdue loans portfolio. This latter closed out the half-year and 72 million euros (1 million euros higher than in December 2013), a figure that is very close to that of the same period in the previous year (72.5 million euros).
Over this first half, there was an increase in balance sheet resources of some 18.6 million euros (+2.4%), to give a total of 778.3 million euros. Despite this important growth, the portfolio was still not able to fully recover its year-on-year position (820.5 million euros), recording a fall of 5.2%. However, the first half of this year was notable for the conclusion of the recapitalisation process, implemented through a public offering of subscription. The success of this operation led to the transfer of balance sheet resources to the off-balance account, to the extent that this item recorded year-on-year growth of 3% (rising from 189.8 million euros to around 195.1 million euros).
As part of the restructuring plan, we closed two business units in the Azores: the S. Pedro branch, on Terceira Island, and the business centre in Faial. Despite this, our geographical coverage of the Azores remains comprehensive, through our 35 branches, 2 business centres and 1 private centre. Part of this reorganisation was the transfer of the Azores Private Centre to the 10th floor of Banif's central building in Ponta Delgada. The centre was, thus, relocated to a spacious modern facility that is better suited to this strategic client segment. Finally, and as a way of cutting costs and optimising space, at the beginning of the year all the staff in this building was brought together on a single floor, in an open space arrangement.
In parallel with the countrywide initiatives, the Azores Commercial Department (DCA) implemented a number of local campaigns over the first half of the year. Two of these were aimed at marketing the Azores Institutional TOP Protocol, a salary-based protocol designed for employees of institutions with their head offices in the region and offering unique account conditions. One significant part of our funding and account and client loyalty drive was the RE Azores Campaign - Tradition Deposit. This campaign was closely tied to a specific festival of great importance and tradition in the Azores - Lord Holy Christ of the Miracles. A commemorative medal was struck and the campaign was naturally aimed at our emigrants living in the United States and Canada.
(thousand euros) Item Jun-14 Jun-13 Variation Resources 778 821 -5.2% Credit to Clients 1,438 1,475 -2.5%
Active Customer Base 71,555 71,704 -0.2%
Note: on- balance sheet resources and credit granted
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b) Madeira
The downturn seen in both the regional and national economy over recent years and the associated climate of political and social instability were somewhat attenuated over the first half of 2014. This altered context was a major driver of the business activity exercised by Banif – Banco Internacional do Funchal, SA in the Autonomous Region of Madeira.
On the other hand, and following on from the political developments of 2012 and 2013, the economic and financial adjustment plan signed by the Regional Government of Madeira continues to influence the slow recovery of the local economy. This set of factors has naturally had repercussions right across regional businesses and, consequently, for the bank's commercial performance, given Banif's penetration and significant market share in the region.
Taking these limitations into account, the Madeira Commercial Department (DCM) prepared its strategic plan in conformity with the general guidelines set out by the bank for 2014. The plan is based on the growth targets for the items that are of key interest to the bank: resources and commissions, credit, overdue credit and cost control.
Within the strategic guideline areas, there was growth in the "Client Resources" item, which stood at 2,052.8 million euros. The portfolio shrinkage was caused by a drop in the deposit and balances of a number of public institutions, whose accounts now come under the management of the IGCP - the Institute for the Management of Treasury and Public Lending. The transfer of these accounts began in 2012, following the imposition of the economic and financial adjustment plan. Moreover, this growth has been accompanied by a reduction in funding costs that has contributed to increasing the DCM's overall profitability.
Another relevant factor has been the slight recovery in the emigration markets. This has come after a long period of volatility that particularly affected the country's financial bailout situation and the instability in the foreign exchange markets.
The Madeira Commercial Department has continued to invest in maintaining and strengthening its competitive position in the Venezuelan and South African markets, which we see as being crucial countries for this department's business development plans. This investment has been activated through commercial visits that have covered wide geographical areas whilst also focusing on clearly defined targets.
As regards the active loans portfolio, we are living through a period in which there is still some difficulty in accessing loans and also continuing lower levels of demand for the same. As a result, this item still continues to trend downwards. Between June 2013 and June 2014, it fell by 20.6%, to stand at 1,290.8 million euros. This form can be largely explained by the conversion of a medium to long term loan held by the Regional Government of Madeira into a bond loan.
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Despite the hard work of the department in the active accounts area, there has also been a 10.5% year-on-year decrease in account holder numbers, to 90,241. This can be directly linked to an internal reclassification of these accounts and the growing unemployment rate in the RAM.
Banif was present for two of the most iconic business events held in the region. The first of these was the Madeira Entrepreneur Day and the second the "100 biggest and best companies". We were official sponsors of this latter event.
We also renewed our sponsorship of the Annual Tourism Conference. This event is known for its high quality debating and it plays a key role in defining the strategic guidelines for the tourism sector in the region.
(thousand euros) Item Jun-14 Jun-13 Variation Resources 2,053 2,041 0.6% Total Credit 1,025 1,291 -20.6%
Active Customer Base* 90,241 100,798 -10.5% ** Changed vis-à-vis the Value reported in the 1st half of 2013 due to reallocation of active customer base
c) North
The North Commercial Department (DCN) consists of 3 networks (North Private Client Network (RPN), North Corporate Network (REN) and North Private Client Centre CPN)). These networks oversee and foster the work of the retail, small and medium-sized company and affluent client segments.
Over the current year, the DCN has focused on bringing in new funds, fund loyalty, lending, particularly to the business, micro-business and entrepreneur segment, and cross-selling with other group companies, particularly as regards insurance and specialised credit. Recovery of overdue credit was another major business concern pursued during the year.
North Private Client Network:
RPN closed out the first half of the year with 87 business units, of which 85 were standard branches and 2 associate branches (smaller dependencies of standard branches that market the same products and provide the same services as the other branches).
Over the first half of the year, 19 branches were closed under the programme to resize the network to match our current business reality. This was achieved without any loss of business or quality of customer service.
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In this reporting period, we continued the process of segmenting our clients and bringing them into portfolios, particularly as regards the affluent sub-segment. This offer is known internally as V+ and is aimed at individual clients with average incomes. These clients are assigned an account manager and are presented with a specific value proposition. Currently, the RPN has 59 branches staffed by 63 V+ managers, to ensure we can deliver a proper service to this segment.
The number of business managers in the 44 RPN branches has been brought up to 47. This enables us to provide the effective and specialised service that our business and micro-business clients have come to expect.
North Corporate Network:
REN comprises the six corporate centres that are responsible for driving our corporate business in the northern part of the country.
In this reporting period, this structure worked closely with companies in the region, setting up lending operations to support the company’s operational cycles and exports as well as their investment needs, particularly through loan protocol schemes.
North Private Client Centre:
CPN works through eight private client managers who manage the assets of wealthy private clients who will benefit from personal oversight. The managers identify opportunities according to each client’s profile and needs.
In year-on-year terms, the North Commercial Department saw a fall in balance sheet resources of 19 million euros (-0.9%), despite the strong growth seen in the first half of the year. This resulted in a total figure for these resources of 2,132 million euros. Off-balance sheet resources increased by 24 million euros (+7.6%)
The total value of the lending portfolio came to 1,573 million euros, which was 218 million euros less than in the previous year (-12.2%). Total commissions in the first half of 2014 amounted to 15 million euros.
The North Commercial Department closed out the first half of 2014 with a portfolio of around 159,000 active clients and a product to client ratio of 3.69.
(thousand euros) Item Jun-14 Jun-13 variation Resources 2,476 2,470 0.2% Total Credit 1,573 1,791 -12.2%
Active Customer Base 158,586 153,734 3.2%
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d) South
The South Commercial Department has invested heavily in bringing in new high-value clients and increasing the involvement of clients that we already have in our portfolio. There has been a particular focus on clients from the small business and SME segments, in the case of companies, and the affluent and private segments, in the case of personal clients.
South Private Client Network (RPS) The 84-branch South Private Client Network (RPS) prioritised raising and retaining funds, whilst also focusing on improving margins and diversifying the portfolio. We continued to concentrate on products for small savers and programmed savings, as well as cross-selling to other group companies (a key strategy for increasing commissions).
The bank continues to invest strongly in the affluent segment, that is, clients with mid-level income. We have 38 V+ managers in the RPS, 14 of who were appointed this year, without increasing overall staff numbers.
We have also put much effort into the small business segment. This segment is aimed at company and ENI clients with turnovers of 2 million euros or under. The RPS affluent segment i\s currently staffed by 42 V+ managers. Nine of these managers were appointed during the year, but overall staff numbers were maintained.
Lending remains tightly controlled and is based on selective policies and narrow risk criteria. The recovery and settlement of overdue loans remains a strategic priority and we make every effort to start negotiating early with clients who show warning signs. We do this in collaboration with the department’s loans monitoring office, which works with all the DCS networks.
During the first half of 2014, 18 branches were closed, in keeping with the plan to resize our network and preserve profitability and client service quality.
South Corporate Network The South Corporate Network (RES) comprises five corporate centres hosting 13 client service teams. The network’s strategy is based on controlling the quality of the lending portfolio, improving the ratio between lending and funding volumes and increasing portfolio profitability.
The recession that the country has been experiencing over recent years, the increase in unemployment and the frequent closure of companies have all generated a significant volume of overdue credit. We have worked hard to contain this by working closely with clients showing warning signs, negotiating with these solutions for resolving any non-compliance and seeking to strengthen guarantees wherever possible.
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South Private Client Centre The South Private Client Centre (CPS) has a staff of 5 private client managers who work out of offices in Lisbon and Faro.
This business area is aimed at high-income private clients, who receive a personalised service and access to a wide range of products and services relating to savings, investment funds, capital debt/brokerage markets and retirement solutions, in addition to our new trading platform, Banif Trader.
This segment has also concentrated heavily on cross-selling within the group, in the areas of (financial and non-financial) insurance, specialised lending (leasing, renting) and asset management (investment funds, pension funds, property management).
Overall, and in comparison to the first half of the previous year, DCS balance sheet funds fell by 17 million euros, to give a portfolio value of 1,945 million euros at the end of the first half of the year. This decrease can be attributed to a loss of deposits that occurred over the second half of 2013. This was provoked by a fall in the rates offered, as these sought parity with Banco de Portugal rates. Another factor was the transfer of the portfolio of bank staff accounts to the Direct Network Department (DRD) at the end of 2013. In 2014, the situation has been somewhat reversed and there has been some recovery in the balance sheet resources portfolio.
Similarly, the total loans portfolio (including commercial paper programmes) fell by 391 million euros, to 2,586 million euros at the end of the first half. The main reason behind this was the reduced exposure to high-risk clients, the thinning out of the mortgage and personal loans portfolios and the settlement of commercial paper programmes. A number of clients were also transferred to the Corporate Banking Department and the bank staff accounts portfolio was also transferred, to the Director Network Department.
Total commissions in the first half amounted to 13.2 million euros.
The South Commercial Department (DCS) closed out the first half of the year with 123,431 active clients in its portfolio.
The bank's capital increase operation was once again a great success. The South Commercial Department played an important role in contributing to this.
(thousand euros) Item Jun-14 Jun-13 Variation On-balance sheet resources 1,945 1,962 -0.9% Total Credit 2,586 2,977 -13.1%
Active Customer Base 123,431 121,734 1.4%
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Factoring Office Although the factoring and supplier payment management area is part of the DCS, it operates across all of the bank's commercial departments.
In the first half of 2014, this business area saw a significant increase in invoicing uptake. The year- on-year changes at the end of June in invoicing uptake and loans granted were +81% and -40%, or 169 million euros and 91 million euros, respectively.
Commissions grew by 29% over the same period of the previous year, reaching 0.7 million euros. Net interest income came to 1.8 million euros, a drop of 53%. Thus, banking revenue in this reporting period slipped 43% to 2.6 million euros.
In the first half of 2014, there were no significant structural changes in the client loan portfolio, when compared to the first half of 2013. The construction sector continued to predominate (80%).
e) Telephone and Electronic Banking
Linha Banif (Banif Line) took around 34,000 calls, a fall of about 12%, when compared to the first half of 2013. Outbound calls, made as part of commercial promotion and product placement campaigns, amounted to 220,000 contacts. This is roughly the same as in the same period of 2013. Around 308,000 calls were made in support of loan recovery operations, a year-on-year increase of 6%.
1 Half 2014 Banif Line 1 Half 2013
1 Half 2014 Outbound 1 Half 2013
1 Half 2014 Recovery 1 Half 2013
0 100000 200000 300000 400000
The key aspects of the telephone banking operation were:
Inbound:
- The level of service (the number of calls answered in the first 30 seconds) was 97%. - We maintained the same call lines for specific segments: Linha Banif Real Estate, Linha Banif Malta and Linha Banif International, through which we deploy international Freephone numbers to six different countries; - Client satisfaction regarding the Linha Banif achieved an NPS (Net Promoter Score) of 77.11%;
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Outbound:
- Ongoing commercial campaign for card activation and funding; - Assessment of client satisfaction levels and positioning through a total of 2,450 questionnaires;
Loan Recovery:
- there was an overall improvement in recovery rates (the ratio between the total number of settled loans and the total number of loans entered/worked on):
78% Others 62%
86% Credit Contract 79%
86% Real State Leasing 87%
26% Cards 26%
53% Overdrafts 63%
Bills of exch. And 87% 84% Promissory notes 90% Guaranteed 82%
87% CGT 80%
90% Personal Credit 85%
91% Mortgage Loans 85% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
¢ 1 Half 2013 ¢ 1 Half 2014
Electronic Banking
With the reorientation and geographical repositioning of the commercial network, the Banif@st service is an increasingly important channel for establishing an immediate and direct relationship with our clients. The bank has maintained its investment in this service over the first half of 2014, with the launch of new functions and the boosting of security levels.
We also continue to invest in products that are only available through home banking, including “Poupe Hoje” (Save Today) and “Super Depósito Banif@st”. This has increased the importance of this service as a means of funding. By the end of June, term deposits of some 193 million euros had been made via Banif@st. This compares with the 178 million euros that came in during the same period in 2013.
In terms of frequency of use of the service, 30% of clients regularly use the service, slightly above the 29% achieved in the first six months of 2013. This increase in frequent use, plus the new functions, resulted in a year-on-year increase of 6% in the number of operations.
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Payment Products and Means of Payment
Means of Payment
During the first half of 2014, our means of payment business focused on optimising the functions and processes designed to improve the quality of the service provided to the client.
The main business activities carried out during the first half of 2014 were:
I - Cards:
The card portfolio now incorporates new client segments, primarily through the placement of cards in the RAM that are to be used by local authorities and schools. The standard prepaid card now has the CVV2 on the back, as an alternative to the use of credit cards, thus lessening the risk of fraud.
In terms of technical projects, Banif signed up to the MB Way and Instantaneous Transfers platform deployed by the SIBS FPS, which is currently in development. Banif it is also working on joining 3D Secure.
The loyalty programme that we started in September 2012 is still in place. During the first half of 2014, a number of initiatives took place to publicise this programme to clients. Two SATA air miles campaigns took place during the period. The first of these related to signing up for SATA Imagine cards and the second was aimed at clients with SATA Imagine cards with trading on the Banif Trader platform. We also began a credit limit adjustment campaign that will come to a conclusion in the second half of 2014.
Improvements were made in the plastic stock management processes and in the circuit for sending cards to card account clients.
Over the reporting period, there was a +0.03% rise in the card portfolio as a whole, compared to December 2013. Given the economic situation, there was a slightly upwards trend in non- performing loans. Loans used rose by 8.1%.
(euros) Jun-14 Dec-13 Variation Credit Credit Credit Number Number Number Portfolio Portfolio Portfolio Credit Cards 79,564 53,420,168 79,566 49,411,918 0.00% 8.1% Debit Cards 315,240 N/A 315,105 N/A 0.04% N/A
Total Cards 394,804 53,420,168 394,671 49,411,918 0.03% 8.1%
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Automatic Payment Terminals and ATMs
The Automatic Payment Terminals (TPA) channel continued to prove to be a key means of funding and building client loyalty to the bank. For this reason, we launched a number of new client marketing initiatives in the first half of 2014. One campaign focused on the TPA Mais (TPA Plus) and ran from May to June, through the commercial network.
At the end of the first half of 2014, the overall number of TPAs in the bank’s portfolio fell to 6,141 units, compared to the 6,353 units supported during the first half of 2013.
We continued to reduce the number of ATMs. By the end of the first half of 2014 Banif had a total of 465 units, compared to the 498 units for the same period of 2013.
During the first half, Banif continued to focus its efforts on improving the profitability of its existing units and optimising its operating processes. All off-premises ATMs were assigned to the cash-management service provided by SIBS FPS.
III - Operating Account
By the end of the first half, the card portfolio had total revenues of 9.67 million euros. This was a 5.21% over the same period of 2013. Profits from our ATMs came to 1.18 million euros, a year-on- year decrease of 13.7%. Over the same period, income from automatic payment terminals rose by 2.7% (0.36 million euros) or 9.5 thousand euros.
Personal Loans In the first half of 2014, personal loans production reached 2,168 contracts worth a total of 12.5 million euros. This represents year-on-year growth of 3.0%.
In this segment, demand remained moderate and our focus remained on lending to existing clients with a positive experience of this type of loan, whilst also applying prudent risk criteria at all times.
New production was insufficient to compensate for the natural erosion of the portfolio. As a consequence, at the end of the first half of 2014 the personal loans portfolio stood at 152.7 million euros (30,071 contracts). This is equivalent to a year-on-year fall of 12.2% and a drop of 8.2% over December 2013.
Property loans Banif's Property loans portfolio stood at 2,883 million euros at the end of June 2014. This is 6.6% less than in June 2013 and down 2.2% on December 2013. The average portfolio spread (1.3%) rose slightly above that of June 2013 (1.24%).
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Production for the first half of 2014 came to 31.0 million euros, 20.9% higher than in the same period of 2013. The average production spread (3.67%) was slightly above that of the same period of the year before (2.95%).
Demand for this type of credit continues to be lacklustre, with around half of the production coming from the support given to the divestment of property owned by the bank and the financing of property whose construction was financed by Banif through construction incentive loans.
Specialised Credit – Lending to Businesses As part of our management of products for clients in the small business segment, we set out a new commercial strategy that allowed for the micro-segmentation of these clients and the association of this with a new value proposition.
In the first half of the year, we launched a new product, the Conta Empreendedor (Entrepreneur Account), aimed at businesses with lower levels of invoicing.
We maintained our offer of products in the Conta Gestão de Tesouraria (CGT - Treasury Management Account) line, with some small adjustments as regards the target clients. At the end of the first half of 2014, the Conta Gestão de Tesouraria (CGT) portfolio as a whole stood at 154.0 million euros. This is equivalent to a year-on-year fall of 23.5% and a drop of 9.8% over December 2013.
Deposits and Savings Products In pursuing our strategic funding objectives, the bank continued to promote our sight deposits and savings products solutions, designed for different age segments and socioeconomic profiles. In line with market changes, new deposits attracted lower interest rates.
In June 2014, the term deposits and savings portfolio stood at 4,867 million euros, which is equivalent to year-on-year growth of 5.2% and a rise of 4.6% over December 2013. The average rate in the portfolio dropped from 3.03% in June 2013 to 2.66% in June 2014.
There was a net gain of 16,552 sight deposit accounts. This is 1.4% up on June 2013.
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Recovery of Overdue Loans and those in Legal Proceedings
During the first half of the year, the Loans Recovery Department (DRC) managed to recover a total of 150.8 million euros by closely shadowing non-performing clients.
This performance is all the more impressive because it is based on policies that give priority, wherever feasible, to recovery in the form of collection or the restructuring of loans with improved guarantees.
We made significant changes to our credit recovery oversight model, with the aim of adjusting policies and procedures to the new cycle witnessed in 2013, characterised by a trend of stabilisation/decrease in the total amount of credit at risk. These changes included:
- The strengthening of the procedures for monitoring commercial network clients with a credit exposure and showing signs of overdue or at-risk credit. The DRC played a key role in this process; - A review of the DRC organisational model that strengthened the degree of specialisation in managing clients in central recovery, as a function of the segment, level of exposure process phase and type of product; - The setting up within the DRC of a specialist unit for monitoring network clients with overdue or at-risk loans. This unit works to ensure an active participation in setting and implementing the strategy used to manage clients with a significant credit exposure; - The introduction of systematic process for monitoring clients restructured by the DRC and had evolved to the commercial areas. The aim here was to encourage greater effectiveness and efficiency in controlling and handling any re-entry into default; - The centralisation of the responsibility for coordinating the individual analysis of credit risk impairment in the DRC. A review was also carried out of the approach and support tools used in this process; - The redefinition of the analysis and decision competences for loans that are being monitored or are in central recovery. This brings these competences in line with the changes made to the DRC's scope of action and organisational model.
The new credit recovery oversight model is in full operation. Over the next few months, the DRC will bring some additional measures online, with the aim of ensuring the optimisation and consolidation of the model.
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INTERNATIONAL COMMERCIAL BANKING
Banif Bank (Malta)
Changes to the company During the first half of 2014, the economic climate and the market in general were marked by low interest rates, a fall in loan spreads and increased levels of deposits. This latter was mainly driven by short-term deposits from the business segment. During the reporting period, the government of Malta intensified its efforts to bring down funding costs for small and mid-sized companies (SME). It hoped, in this way, to stimulate consumption and economic growth. In year-on-year terms, the Maltese economy began to show encouraging signs of economic improvement. Business activity increased, particularly as a result of the strong performances from the tourism, IT and gaming sectors. Another key factor was the start-up of a series of large infrastructure projects and initiatives that, in some cases, made use of EU funds.
Financial Performance At the end of June 2014, the bank's total asset base stood at 633.2 million euros, which is an 11.1% improvement over the 569.9 million euros recorded at the end of June 2013. The main asset item continues to be client loans, which came to 377.8 million euros. The next largest item was applications in credit institutions, worth a total of 200.1 million euros. The investment portfolio totalled 27.4 million euros. Our investment in properties, installations, equipment and intangible assets, net of depreciations and amortisations, came to 9.2 million euros at the end of June 2014. Other assets totalled 18.7 million euros, of which 5.0 million corresponded to deferred tax assets, which the bank is recognising as unused tax losses.
Deposits increased by about 10.9%, growing from 517.6 million euros at the end of June 2013 to 574.3 million euros at the end of June 2014. Lending increased by 14.6%, rising from 329.5 million euros at the end of June 2013 to 377.8 million euros at the end of June 2014. As a result, the loan to deposit ratio continue to fall, hitting 65.8% at the end of June 2014. Asset quality remained at a good level, with non-performing loans representing 5.75% of all credit, as opposed to the 5.35% it represented in June 2013.
The first six months saw the ECB cut interest rates again, which had the effect of increasing the pressure on loan spreads. Nevertheless, the bank managed to increase revenues, generating a total operating income of 6.650 million euros, a year-on-year increase of 16.3%.
Net interest income rose to 4.504 million euros (the same period in 2013: 3.958 million euros), mostly as a result of the increase in loans and deposits.
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Net commissions came to 1.066 million euros (compared to 0.810 million euros, in June 2013). This increase was largely driven by higher rates generated by the processing of loans and related legal services, payments, cards and other banking services.
There was also an increase in income from financial operations, which amounted to 1.081 million euros for the reporting period (June 2013: 0.953 million euros). The increase in revenue was entirely explained by the valuation of the bonds portfolio at the market value.
In total, operating income covered 123.5% of operating costs (same period of 2013: 107.4%).
Total operating costs, including depreciations and amortisations, rose slightly, by around 1.2%, from 5.323 million euros in the first half of 2013 to 5.387 million euros in the first half of 2014. This increase can be largely accounted for by the opening of three bank branches.
Net provisions and impairments increased by 53.0%, from 0.506 million euros in the first six months of 2013, to 0.774 million euros in the first half of 2014.
Profit before taxes for the reporting period was 0.490 million euros (same period of 2013: loss of 0.109 million euros).
(thousand euros) Jun/14 Jun/13 variation Net Asset 633,242 569,919 11.1% Gross loan book 377,761 329,511 14.6% Loans to customers 574,266 517,565 11.0% Equity 22,168 20,557 7.8% Net Interest Income 1.7% 2.3% -25.1% Operating income 6,650 5,720 16.3% Cost to Income 81.0% 93.1% -13.0% Non performing Credit / Total Credit 5.8% 5.4% 7.5% Net Results before tax 490 -109 - ROA 0.02% -0.04% 0.06pp ROE 4.42% -1.06% 5.48pp
Points of sale 12 10 2 Number of employees 185 168 17
Banif Brasil
The key highlight for Banif Brasil in the first half of 2014 was a return to profits, following the reorganisation and restructuring process that the new management had been implementing at the bank since September 2012.
Consolidated net profits at 30 June, 2014 were R$ 5.2 million. This can be attributed to: i) settlement of loan operations in the bank's portfolio, through payments in cash and/or the assignment of
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property in lieu of payment. This had a positive reversal impact on previously recognised provisions, as did the recovery of amounts pertaining to operations that had been written off; ii) the sale of property assets that generated capital gains of over R$ 16.5 million; iii) an R$ 7.1 million fall in administrative and staff costs, compared to June 2013, and iv) a year-on-year reduction in loan recovery costs of R$ 0.6 million.
This performance reflects the adjustments made to the prudent and conservative management approach taken by the current management team, particularly as regards the recognition of relevant provisions in June 2013. It also reveals the first indications of the effects of the organisational restructuring that has been implemented at Banif (Brasil) since September 2012. It supports the prospect of more value for the shareholder, with ongoing trading, collection and the strengthening of guarantees to increase the intrinsic value of the bank's loans portfolio.
Net consolidated assets fell between June 2013 and June 2014 from R$ 1,406 million to R$ 1,142 million. Credit operations on the balance sheet fell from R$ 1,119 million to R$ 698 million and client deposits from R$ 871 million to R$ 709. This was in line with the objective of deleveraging the balance sheet, with a positive knock on effect on the loans because it ratio, which, at 30 June, 2014, stood at 98%, compared to the figure of 128% at the same time the year before.
At the end of the first half of 2014, equity stood at R$ 204.4 million and the Basel Index for Banif's consolidated holding in Brazil at 30 June 2014 was 15.54%. This is above the minimum level required by the Central Bank of Brazil (11%) and is 1.38 pp better than it was in June 2013.
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Main consolidated indicators (thousand reais)
Jun/14 Jun/13 Variation
Net Asset 1,142,227 1,406,993 -19% Net Loans 349,706 584,736 -40% Resources of clients 708,971 871,413 -19% Equity 204,399 244,537 -16% Banking revenue 31,631 -329,666 Operating Cash Flow 26,444 -12,987 Net profit 5,240 -346.855 Basel index 15.54% 14.16% 1.38 pp
Points of sale 5 6 -1 Number of employees 127 201 -74
Main consolidated indicators (thousand euros)
Jun/14 Jun/13 Variation
Net Asset 379,012 486,866 -22% Net Loans 116,039 202,338 -43% Resources of clients 235,249 301,537 -22% Equity 67,823 84,618 -20% Banking revenue 10,496 -123,549 Operating Cash Flow 8,775 -4,867 Net profit 1,739 -129,991 Basel index 15.54% 14.16% 1.38 pp
Points of sale 5 6 -1 Number of employees 127 201 -74 Note: in June 30, 2014: 1 euro is equivalent to R $ 3,0137 (source BACEN)
Banco Caboverdiano de Negócios
In the first half of 2014, the Cape Verdean economy took a downward turn, largely as a result of external influences, particularly from the Eurozone. Of particular and striking note, given the high level of integration with the Eurozone, was the contagious effect of this region's banking and sovereign debt crises on Cape Verde, through the reduction of direct foreign investment and public and development aid. On a more positive note, however, the tourism sector showed growth in the period and there was some structural resilience in emigrant remittances. Given this, Cape Verde's economic growth slowed, with GDP growing around 0.5% in real terms and unemployment remaining high (at about 16%).
In this adverse macroeconomic context, the Cape Verde Central Bank began a process of softening the restrictions on lending to the economy. However, the high levels of non-performing credit in the sector and also the reduced demand for credit from clients with an acceptable profile meant that
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lending to the economy only grew by around 1%. Also of note in this context, was the general improvement in the liquidity positions of the banks, with a consequent reduction in the loan-to- deposit ratio to figures in the region of 80%.
At BCN, this period was marked by a slight decrease in the resource base (a year-on-year drop of about 2.2%). This is largely explained by the fact that in June 2013, a large real estate project, Dunas Beach Resort, had received funds from the bank syndicate to finance a development of the same name on Sal Island. Lending remained at moderate levels, growing 1.7% year-on-year. As a result, the commercial loan-to-deposit ratio stood at 85% in June 2014, about 3.2 percentage points lower than in the same period of the previous year. This was due to the reduction in the level of resources. There was also a degradation in the quality of the credit portfolio, with a consequent rise in the non-performing credit ratio (in the terms of the BCV notice on the matter). This ratio rose from 5.8% in June 2013 to 8.6% in June 2014. This is explained by an increase in overdue1 maturities rather than an increase in actual operations. We should note, however, that BCN has a credit quality indicators that a significantly higher than the market average, which stood at 11.5% in June 20132.
As regards the profit and loss statement, net interest income fell by around 23.8%. This is accounted for by a drop in interest earned (-7.7%, attributable to the increase in overdue loans, particularly those less than 90 days overdue). In a similar manner, complementary income also decreased (-3.3%), despite the positive performance turned in by income from capital instruments (+116%) and services and commissions income (+ 10.7%). The overall figure was heavily influenced by the fall of about 60.7% in other operating income. Given the weaker performance of both net interest income and complementary income, banking income fell by about 16.9%. BCN continued its sustained reduction of operating costs (-4.2%), particularly as regards staff costs (-9.5%). This resulted from the implementation of a policy of optimising the bank's cost base in both central services and the branch network. Amortisations rose slightly, by about 3.4%, following the bank's decision in December 2013 to reassess the useful lifetime of assets, even where these had been fully amortised, at 31 December 2012 or in previous years. This was because these assets were still perfectly operational and were expected to continue to generate economic benefits for the bank. In terms of operational efficiency, the cost-to-income ratio rose by 8.32 percentage points, to stand at 62.8% in June 2014.
In summary, net profits for the first half of 2014 fell by 23.7%, when compared to the same period of the previous year. This is explained by the negative performance of the net interest income and complementary income items and is in spite of the satisfactory performance of operating costs and the positive contribution made by loan impairments.
As regards the institution's soundness in the first half of 2014, the solvency ratio stood at 14.1%, as opposed to the 13.5% of the first half of 2013.
1 As a result of the number of days overdue and the total period of the operation, these operations were carried as loans falling due in the total amount of non-performing loans. 2 Data not yet available for December 2013 and June 2014.
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(Thousand euros) Item Jun-14 Jun-13 Variation Net Asset 118,950 121,475 -2.1% Gross loans 84,314 82,927 1.7% Loans to customers 98,785 100,998 -2.2% Equity 14,246 12,601 13.1% Net Interest Income 1,597 2,096 -23.8% Operanting income 2,628 3,162 -16.9% Operating cash flow 1,226 1,680 -27.0% Net profit 824 1,080 -23.7% ROA 1.38% 2.02% -0.6 pp ROE 14.87% 19.48% -4.6 pp Loans in default/Total Credit 9.20% 6.19% 3.0 pp Impairment/Loans in default 55.50% 94.60% -39.1 pp Cost to income 62.80% 54.50% 8.3 pp
Points of sale 17 18 -1 Numeber of employees 109 116 -7 Solvancy ratio 14.10% 13.50% 0.6 pp Note: This table was determined according to local accounting regulations NOTE: exchange rate at 30 June 2014: 1 euro = 110.265 CVE
SPECIALISED CREDIT
Banif Mais SGPS, SA Banif Mais SGPS, S.A. is the Banif Mais subgroup holding that includes Banco Banif Mais S.A. and Margem – Mediação de Seguros, in Portugal, and the bank's branches abroad: Slovakia, Poland and Spain, and also the subsidiary in Hungary, Banif Plus Bank Zrt. As in previous years, the company's business activity in the first half of 2014 consisted exclusively of managing its financial holdings involved in the provision of specialised credit and the cross-selling of associated products, particularly the loans portfolio-related insurance brokerage operated by the Margem subsidiary.
In terms of the main indicators, the consolidated financial statements for the first half of 2014 for the Banif Mais subgroup showed net assets of 624.4 million euros and equity of 325.3 million euros.
Net consolidated profits for the Banif Mais subgroup in the half came to 12.3 million euros, a year- on-year rise of 37.1%. Portugal was the main contributor, in geographical market terms, to the net consolidated profit, bringing in 12 million euros. This was followed by Hungary with 1.21 million euros and then Poland with 0.09 million euros. On the negative side, the Spanish subsidiary made a loss of 0.8 million euros and Slovakia a loss of 0.12 million euros.
During the semester, Banif Mais carried out a major sale of loans to an important European operator in the business of acquiring overdue loans portfolios. The portfolio that was sold is composed of Banif Mais loans in Portugal that have already been written off from assets (non-
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recoverable loans already derecognised on the balance sheet) and loans from the subsidiary in Spain. These latter relate to contracts in litigation and loans written off from assets (non- recoverable loans already derecognised on the balance sheet). With this operation, the Banif Mais subgroup made a credit disposal profit, net of impairments, of 2.6 million euros.
In this operation almost the entire Spanish portfolio held on the balance sheet (worth more than 40 million euros) was sold. This portfolio had the highest impairment cover, which explains the reduction in the portfolio hedge ratio for credit as a whole at Banif Mais SGPS from 26.6% to 23.7%. In a similar fashion, the hedge ratio for impaired credit at Banif Mais S.A., which includes the subsidiaries, amongst them the Spanish one, fell from 27.6% to 24.5%.
Main Indicators for Banif Mais SGPS (consolidated basis)
(base IAS) (thousand euros) Item Jun-14 Jun-13 Variation Net asset 624,353 634,604 -1.6% Total credit 665,396 755,802 -12.0% Equity 325,247 307,525 5.8% Overall production 82,305 66,086 24.5% Net Interest Income 19,518 20,452 -4.6% Operating Income 24,897 19,511 27.6% Cash Flow 18,304 12,313 48.7% Net Profit 12,332 8,993 37.1% Personnal costs/ banking revenue 16.4% 19.9% -3.5 pp Cost to income 30.9% 39.2% -8.3 pp Banking revenue / average net asset 2.0% 1.5% 0.5 pp ROE 1.6% 1.5% 0.1 pp ROA 1.0% 0.7% 0.3 pp Pre-taxes income/average net assets 1.3% 0.9% 0.4 pp Pre-taxes income/average equity 2.1% 2.1% 0.0 pp Credit Impairment on-balance sheet / total credit 23.7% 26.6% -2.9 pp Solvency ratio 55.6% 36.7% 18.9 pp
Points of sale 31 34 -3 Number of employees 351 357 -6
Banif SGPS, SA Business in Portugal Core business activity at Banif Mais S. A. in Portugal for the first half of the year was marked by a slight recovery in the sale of the used passenger vehicles period of some 5.1%. There was also growth in the amounts financed. These two factors came together in a 9.2% year-on-year rise.
The strategy set out in 2013 was continued in the first half of the year, with a strong investment in commercially aggressive agreements with key partners. We also implemented forceful campaigns
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directed at our commercial partners in the same business area. As a result of this commercial strategy, and according to ASFAC (Association of Financial Companies for Credit Acquisitions) figures, Banif Mais, S.A., managed to become the 2nd largest source of finance for transport for most of the first half of the year (3rd place in 2013). This result was largely attained thanks to the 19% growth in our core business, giving us a 19.0% share of the used market. This ensured we took 2nd place in the ranking, with a bigger gap over our 3rd place competition. In the motorcycle finance market, Banif Mais, SA managed to maintain its leading position, with a market share of 48.1%, which reflected a 7% growth in new production.
The Automobile Market According to ACAP (The Portuguese Automobile Trade Association), the first half of 2014 saw a continuation of the trend experienced in the second half of the previous year. Sales of new passenger vehicles continued to improve, to 87,719 vehicles sold, a year-on-year rise of 60%. The same behaviour was seen in the heavy goods vehicles market, where the increase was 45.1% and 1,339 HGVs were sold.
Production and Portfolio With this market context, and given the strategy outlined above, Banco Banif Mais S.A. in Portugal signed 9,089 contracts, with a total worth of 75 million euros, in the first half of 2014. This is 35% higher than the amount financed in the same period of the previous year.
During this reporting period, the bank continued to apply strict analysis criteria and gave priority to the profitability factor. A new admission scoring system was also implemented. Nevertheless, in its core segment, the bank returned to a trajectory of net growth during the first half of the year. New production more than compensated for portfolio amortisations. In addition to the strong commercial strategy through the traditional partnership channel (via car showrooms), there was also increased production through the banking channel (via Banif S.A. branches). In this latter case there was an increase in both the number of contracts and the amount of financing, when compared to the previous year and as planned.
In Portugal, the loans portfolio net of impairment fell by about 6% in year-on-year terms, to 449 million euros at the end of June 2014. This can be mainly explained by the strengthening of impairment and by the progressive reduction of the portfolio which was integrated when the former Banif Go was merged into Banif Mais (basically equipment leasing to companies and, thus, outside Banif Mais' core business), thanks to the amortisations and the efforts put into credit recovery.
International Business In Slovakia, 17,311 units were sold in the new passenger vehicle and light goods vehicle market, a year-on-year rise of 16%, in the first three months of the year (the most recent data available at the time of writing this report). As regards vehicle financing (new and used), total financings for
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the first quarter of 2014 came to 14,363 units, 5.5% more than in the same period of the previous year.
The performance of Banif Mais' Slovakian subsidiary, which recorded a net loss in the first semester of 2014 (compared to a profit of 153 thousand euros a year before) is largely explained by a strengthening of credit portfolio impairment.
In Poland, the main macroeconomic indicators were positive as regards the impact on automobile financing. GDP grew by 3.4% year-on-year, was consumption rose slightly more modestly by 1.2%. In the automobile sector, 175,487 passenger vehicles were registered during the first half of the year. This is 19.3% more than in the same period a year earlier. The number of cars sold to individuals rose 8.1%, although this only represented 40% of all sales. The sale of vehicles for business purposes, on the other hand, went up by 28.2%, in reaction to the expected changes to the VAT regulations.
As regards used vehicles, Banif Mais' main business, we make reference here to the used car import figures, as there is no other information available for the Polish market. In the first five months of the year (most recent available information) 317,560 used vehicles were imported, 11% more than in the same period of the previous year.
In this context, the Banif Mais subsidiary in Poland saw its business activity accelerate during the first half of the year. The number of vehicles financed rose by 1.54%, or 16.7% in terms of the monetary value of the loans.
During the first half of the year, and as planned, the operational side of the Spanish subsidiary's business activity migrated to the head office. This was done to optimise resources and synergies, given that there had been no new production in this market since 2008 and the bank was merely managing the existing portfolio, with a particular emphasis on recovering loans in arrears. As part of the strategy, the bank sold almost all of that part of the portfolio that was in litigation. As a result, at the end of the first half, the loans portfolio that remained on the balance sheet was residual (around 1.6 million euros).
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Main Indicators at Banco Banif Mais S.A. (including subsidiaries in Poland, Slovakia and Spain)
(base IAS) (thousand euros) Item Jun-14 Jun-13 Variation Net asset 637,414 658,326 -3.2% Total credit 613,448 690,996 -11.2% Equity 268,605 251,623 6.7% Overall production 76,824 60,818 26.3% Net Interest Income 16,094 15,357 4.8% Operating Income 19,739 17,025 15.9% Cash Flow 13,727 11,062 24.1% Net Profit 8,695 9,090 -4.3% Personnal costs/ banking revenue 17.2% 19.2% -2.0 pp Cost to income 32.5% 37.4% -4.9 pp Banking revenue / average net asset 1.5% 1.2% 0.3 pp ROE 1.7% 1.8% -0.1 pp ROA 0.7% 0.7% 0.0 pp Pre-taxes income/average net assets 0.9% 0.8% 0.1 pp Pre-taxes income/average equity 2.3% 2.3% 0.0 pp Credit Impairment on-balance sheet / total credit 24.5% 27.6% -3.1 pp Solvency ratio 47.7% 42.4% 5.3 pp
Points of sale 22 22 0 Number of employees 254 253 1
Banif Plus Bank, ZRT In Hungary, 40,014 new vehicles were sold in the first half of 2014. 32,992 light passenger vehicles were sold, as were 7,022 light goods vehicles, representing, for these segments, year-on-year rises of 21.4% and 50.8%, respectively.
233,952 used vehicles were traded up 2 May 2014 (most recent data available), which is 12.5% higher than in the same period of the previous year. 63,756 used vehicles were sold through commercial outlets, which is where the bank's distribution network is centred, in the same period. This is equivalent to a year-on-year increase of 6.8%.
As regards financed transactions of used cars in the first quarter of the year (most recent data available), there was a 7% fall in terms of the number of contracts signed, to 6,027 units. The number of finance contracts for new vehicles went up by 46% (4,220 units in 2014 as against 2,893 units in 2013).
The Banif Mais, S.A. subsidiary in Hungary turned in a strong performance in the first half of 2014. 1,972 contracts, worth 5.3 million euros, were signed. Compared to the same period of the year before, this represents a 31% rise in contract numbers and a 47% rise in credit worth. Despite the
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reduction in the loans portfolio, due to the amortisations which more than offset new production, net profits rose by around 3% to 1.2 million euros.
Main Indicators at Banif Plus Bank Zrt.
(base IAS/IFRS) (thousand euros) Item Jun-14 Jun-13 Variation Net asset 47,718 68,416 -30.3% Total credit 46,065 57,617 -20.0% Equity 21,799 24,206 -9.9% Overall production 5,482 5,268 4.1% Net Interest Income 3,094 3,238 -4.4% Operating Income 3,130 2,856 9.6% Cash Flow 1,870 1,619 15.5% Net Profit 1,215 1,177 3.2% Personnal costs/ banking revenue 22.1% 21.4% 0.7 pp Cost to income 41.1% 44.7% -3.6 pp Banking revenue / average net asset 11.8% 7.8% 4.0 pp ROE 10.5% 9.0% 1.5 pp ROA 4.6% 3.2% 1.4 pp Pre-taxes income/average net assets 2.8% 2.0% 0.8 pp Pre-taxes income/average equity 6.4% 5.6% 0.8 pp Credit Impairment on-balance sheet / total credit 18.1% 17.7% 0.4 pp Solvency ratio 46.1% 32.5% 13.6 pp
Points of sale 8 8 0 Number of employees 66 70 -4
INVESTMENT BANKING AND ASSET MANAGEMENT
INVESTMENT BANKING
Banif – Banco de Investimento, SA
Banif – Banco de Investimento, SA (BBI) and holdings are responsible for the investment banking and asset management activities of the Banif Financial Group. They are increasingly positioning themselves as service providers, with less use of the balance sheet, lower capital requirements, greater emphasis on commissions and with light and flexible cost structures.
Despite the macroeconomic context still being somewhat negative, there were some encouraging signs for these business areas. The reduction in market interest rates meant that more companies were going to capital markets for their financing, particularly in the form of commercial paper and
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bonds. There was also consistent growth in the asset management, brokerage and private equity businesses, amongst others.
BBI has been progressively reducing the size of its balance sheet and, over the half, continued the cost-cutting process that it has been implementing in recent years. The bank has now managed to reach a position in which its consolidated income (net interest income, net commissions and revenue from financial operations) are clearly higher than its operating costs. The greater part of this income comes from commissions, that is, quality income that is relatively recurrent and anchored in business activities that have lower capital requirements. This growth did not mean that the generally adverse economic context had not resulted in the carrying of significant impairments on the assets held during the period.
In the consolidated BBI accounts (including the investment banking and asset management businesses), income from services and commissions for the period came to approximately 8.3 million euros, a fall of 1% compared to the same period in 2013. At the same time, operating costs (staff costs, other administrative costs and amortisations) fell by around 21%, compared to the first half of the previous year, to about 5.7 million euros. Consolidated banking income came to approximately 4.6 million euros in the period.
In individual terms, BBI produced banking income of 361,300 euros in the period and the year-on- year percentage change (for both commissions and costs) was similar for those mentioned above for the consolidated situation.
BBI's net loss of 17,493 and 4,960 million euros, in consolidated and individual terms, respectively, was negatively affected by the amount of impairment and provisions recorded. These mostly related to non-core activities or assets. The devaluation of the holding in Finpro had both a direct and indirect impact via the Banif Capital Infrastructure Fund and the setting up of additional impairments in the Real Estate Finance portfolio.
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(thousand euros) Indivudual Accounts BBI Jun-14 Jun-13 Variation Net Asset 580,589.1 720,982.4 -19.47% Equity 33,229.1 78,645.2 -57.75% Commissions 3,400.6 3,107.9 9.42% Operating income 361.3 9,658.6 -96.26% Operating coast 3,752.6 4,573.1 -17.94% Provisions and Impairments -17,951.8 -5,664.3 - Net Profit -17,492.7 -1,248.6 -
(thousand euros) Pro-Forma Consolidated Accounts BBI* Jun-14 Jun-13 variation Net Asset 591,624.0 719,906.6 -17.82% Equity 58,742.8 91,894.6 -36.08% Commissions 8,277.1 8,360.1 -0.99% Operating income 4,591.6 14,956.1 -69.30% Operating coast 5,675.8 7,171.1 -20.85% Provisions and Impairments -3,659.7 -5,394.9 -32.16% Net Profit -4,959.8 974.7 - * entities included in the consolidation: BBI, BGA, BAP, BCAP, BIAM and GAMMA
1. Corporate Finance
The Corporate Finance Department participated in a number of projects/transactions during the period, including: - Financial advisor to Ambuibérica (ProA Capital holding) in the acquisition of MedSalva (largest scheduled and urgent patient transport company in Brazil); - Financial advisor to Banif, SEPI and the Cape Verde Red Cross for the sale of BCN – Banco Caboverdiano de Negócios; - Financial advisor to Empresa de Electricidade da Madeira for the appraisal of ENEREEM – Energias Renováveis; - Financial advisor to Empresa de Electricidade da Madeira for the appraisal of CLCM – Companhia Logística de Combustíveis da Madeira; - Financial adviser to private shareholders in the appraisal of Jornal Destak operations in Portugal and Brazil;
Real Estate Finance In this area, BBI focuses its business activity on managing specially constructed credit designed for the real estate market. During the half year, the Banif Financial Group's strategic guidelines were applied to this area, which resulted in a further reduction in lending to clients.
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Thus, the bank has centred its business activity on the management and optimisation of its existing credit portfolio, with a particular emphasis on the restructuring and monitoring of deteriorating loans.
2. Capital Markets
In the reporting period, the Banco de Investimento was involved in the structuring and placement of nine transactions in the primary market. In total, these were worth around 133.6 million euros.
In terms of operations involving entities outside the Banif Financial Group, we make special mention of the organization and leadership of seven commercial paper issue programmes for Portuguese companies, in the overall amount of 56 million euros.
We also provided financial assistance, as financial intermediary, in the share capital increase operation undertaken by Banif – Banco Internacional do Funchal, S.A. This took the form of a public offering of subscription of 13,850,477,957 shares, worth 138,504,779.57 euros. Additionally, the Banif Financial Group collaborated in the funding plan. This work involved the organisation of two senior note issues for Banif – Banco Internacional do Funchal, S.A., in the amounts of 45 million USD and 44.4 million USD.
3. Sales & Trading
Following the growth seen in the financial markets in the last few months of 2013, the year began (for most financial assets) with trading volumes that were above 2013 averages. These shadowed the upward trend seen in shareholder and debt markets in peripheral Europe.
As an intermediary in the shares segment, BBI saw a significant increase in trading volumes, particularly in the Portuguese market. Over this period, there was an increase in the number of new accounts and in the number of active accounts.
In the sovereign debt and corporate segment, BBI's work involved the management of a trading portfolio. Business activity rose sharply during the half, thanks to a narrowing of the spreads applicable to Portuguese public debt and also a greater interest shown by International Investors in the Portuguese market.
The online trading platform – Banif Trader, which came online in May 2013, has shown overall growth. It has proved that its solutions are competitive and it has also helped bring in new clients who are interested in investing online in financial products.
The distribution table placed significant volumes of issues, particularly commercial paper, with institutional clients.
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4. Securitisation
A new securitisation operation involving Banif loans to small and medium-sized companies (SME) was carried out during the reporting period.
As part of this transaction, Gamma – Sociedade de Titularização de Créditos, S.A. issued bonds in a total amount of 924.7 million euros. The senior tranche (class A) of this issue, in the amount of 437.5 million euros, was given an (A-) rating by Standard & Poor’s and DBRS. The class A bonds were fully placed on the market with institutional investors.
5. Private Clients
The Private Clients area met its objective of building the revenue stream, increasing the proportion of off-balance sheet assets and reducing that of liability products.
In an environment in which there has been a gradual reduction in risk aversion, across all client segments, and taking advantage of the dynamism in the debt and share markets, the area's business activities focused on bringing in new off-balance sheet assets, such as shares, bonds and investment funds. This also drove an increase in commissions. Additionally, the area followed the strategy of reducing its lending stock, with the aim of deleveraging the bank's balance sheet.
The area's work remained focused on funding and consolidation/new business from the current client base. The intention was to drive up client loyalty and increase commissions.
ASSET MANAGEMENT
Banco de Investimento manages the assets of individual and institutional clients, Banif Gestão de Activos – Sociedade Gestora de Fundos de Investimento Mobiliário, SA manages real estate and securities investment funds, and Banif Açor Pensões – Sociedade Gestora de Fundos de Pensões, SA manages pension funds.
With interest rates at an all-time low in the Eurozone, there was a higher demand for investment products in the market during this half. This allowed for competitive returns and benefited the funds sector, in general, and its more conservative classes, in particular.
The amount in securities and alternative funds under management by the various investment arms rose 9% in June, when compared with December 2013 (to 13,498.9 million euros). The amount under management in the real estate investment funds and the special real estate investment funds fell by 1.9% in the reporting period (to 12,864.9 million euros).
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Banif Gestão de Ativos' strategic position is based on:
- the consolidation of the offer of securities investment funds and the repositioning of the portfolio of real estate funds, given the current market conditions; - more dynamic marketing through the Banif network, based on the Banif Financial Group's strategic objectives. This aims to increase client loyalty and satisfaction through the marketing of a diversified value proposition that is suitable for any type of client risk; - strengthening the base of institutional clients outside the Banif Financial Group by promoting our investment funds. This group includes financial institutions, foundations and family offices, amongst others.
At 30 June, assets under management stood at 1,256 million euros, which is 15.9% less than the amount managed at the end of the first half of 2013. This is largely due to the winding-up of Infra Invest – Fundo Especial de Investimento Aberto (Special Open Investment Fund) and the clients who voted against the continuation of the Fundo de Gestão Passiva – Fundo de Investimento Alternativo em Valores Mobiliários Fechado (Liabilities Management Fund - Closed Alternative Securities Investment Fund) also exercised their rights to redeem their participation units in this fund. a) Banif Gestão de Activos (Securities Investment Funds and Special Investment Funds)
For the second consecutive year, Banif Gestão de Activos won World Finance magazine’s “Best Investment Management Company, 2014, Portugal” award.
This award, for being the Best Investment Management Company in Portugal, reflects the high confidence that the market has in the results and the quality of the work done by the managing company.
World Finance is one of the most respected magazines in the financial world and its annual awards recognise companies of excellence across a number of business areas, specifically those that work in asset management.
In the securities investment funds segment, Banif – Banco Internacional do Funchal, SA, responsible for placing the investment funds managed by Banif Gestão de Activos, launched a 4-month sales campaign in March.
The general meeting of the participants in the Art Invest - Fundo de Investimento Alternativo Fechado (Closed Alternative Investment Fund), held on 28 January, decided to extend the duration of the fund until 30 June, 2015.
During the half year, the Fundo de Investimento para o Cinema e Audiovisual (FICA) (Investment Fund for Cinema and Audiovisual Activities) undertook the work required for the disinvestment of the various holdings. This work should be concluded in the coming months.
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As regards real estate funds, the general meeting of the participants in the CITATION – Fundo de Investimento Imobiliário Fechado (Closed Real Estate Investment Fund), held in March, decided to extend the fund for 2 further years.
In April, BANIF IMOGEST – Fundo de Investimento Imobiliário Fechado (Closed Real Estate Investment Fund) was extended for an additional 3 years at the general meeting of participants.
Also in April, the general meeting of the participants in the BANIF PROPERTY – Fundo Especial de Investimento Imobiliário Fechado (Closed Real Estate Investment Fund) decided on: - the reduction of the fund's capital to 73,859,247.40 euros; - altering the duration of the fund from 2 to 10 years; - modifying the policy of income distribution from total to partial.
Banif Gestão de Activos' market share fell slightly, to 4.91%, in June (compared with 5.98% at 30 June, 2013).
( Thousand euros) Jun-14 Jun-13 Variation Net assets 15,275.8 11,806.4 29.39% Equity 10,287.1 9,470.2 8.63% Net Profit 1,043.4 1,184.0 -11.88%
b) Banif Açor Pensões (Pensions Funds)
In the first half of the year, the company's work focused primarily on such specific activity sectors as information technologies. Meetings were held and proposals made for the setting up of pension funds at 15 new companies. One of the main objectives in the first half was to provide commercial training and some impetus to the Banif Business Centres. This got underway at the end of the first quarter.
All the pension funds under management earned positive returns in the first half of the year. Of special note were the performances of the jointly marketed open pension funds, which achieved interesting returns, when compared with the other open market funds. This is based on information published by the Portuguese Association of Investment Funds (APFIPP). Almost all such funds ended up in the top six in the association's ranking of thirty pension funds.
Asset volume under management grew from 272 million euros in June 2013 to 298 million euros at the end of this half. This increase of 9.5% is essentially the result of the returns achieved by the funds' investment portfolios.
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(thousand euros) Jun-14 Jun-13 Variation Net assets 6,293.2 5,606.7 12.20% Equity 5,834.9 4,901.0 19.10% Net Profit 256.6 180.0 42.60%
c) BBI (Asset Management)
Over this half year, the bank was much involved in the group's Affluent and Private project, which aims to set and implement the new Banif Financial Group strategy for these client segments.
The total value under management, and the provision of investment advisory services increased by about 2.5% to a total amount of some 1,216 million euros, over the half.
Private Equity
Banif Capital – Sociedade de Capital de Risco, SA is the main vehicle through which Banif - Banco de Investimento, SA. exercises its private equity business.
In the first half of the year, Banif Capital focused on the structuring and management of a new investment fund, Banif Portugal Crescimento FCR (Banif Portugal Growth FCR). The investment strategy for this fund is to invest in medium-sized companies and medium-cap corporates in Portugal, particularly those in the primary and secondary sectors and where such businesses show growth and value potential. This fund made its first investment, of 5 million euros, in April.
At the same time, Banif Capital continued to manage three other funds : i) Fundo Capven FCR, directed at the small and medium-sized business segment , ii) Banif Capital Infrastructure Fund FCR, focused on the infrastructure sector, and iii) Banif Global Private Equity Fund FCR, a fund of risk capital funds.
In June, the Fundo Capven VCR was wound up, following the completion of the disinvestment process.
The capital invested in the Banif Global Private Equity Fund - FCR was reduced by 2.85 million euros, with the release of excess fund liquidity resulting from the ongoing disinvestment process.
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REAL ESTATE MANAGEMENT
Market Developments
The following aspects affected the real estate market in the first half of 2014:
- There were some signs of improved liquidity in both the residential and commercial real estate markets in Portugal, as a result of the country's improving economic situation.
- Most domestic business continued to be concentrated in the residential market, with the banks setting up specific lines of credit for the purposes. There was some increased demand in the commercial segment, mostly driven by new businesses (shops) and expansion investments (warehouses, logistics, etc);
- International investors entered the domestic real estate market in some strength over the period, often as a complement to their business activities in Spain. Many of these carried out due diligence work in the first half of the year and contracts are expected to follow over the next six months;
- The residential rental market continued to develop in the first half of 2014, on the back of the new rent law and the setting up of special residential rent funds.
- The recovery of the real estate market in the USA, particularly in Florida, has allowed the group to sell some of its real estate assets in this market.
- A contract has been drawn up for the disposal of a high-value real estate asset in Brazil (SPE Gávea), which will have a positive impact on P&L. Disposal of a second high-value asset (Shopping Capital) is planned for the second half of the year.
Banif Imobiliária
Banif Imobiliária, in its role of providing oversight for the group’s real estate activity, launched a series of initiatives designed to optimise the management and profitability of the group’s real estate management business, namely:
1. A number real estate sale campaigns were launched as a way of boosting domestic sales. Various promotional resources were employed, including media and online campaigns. 2. We improved our commercial incentives scheme for real estate sales through the different distribution channels in the group, scaling commissions and according to the value of the sale. 3. We helped the residential rental market expand through our residential rental funds.
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4. We signed two new tourist resort operating contracts as part of our drive to boost income from real estate assets in the Algarve. 5. We began the redevelopment of the real estate management tool (SGI – Real Estate Management System), with improvements to the rental, condominium, assessment and management information modules. 6. We worked on our online selling of assets, in the form of the real estate website and the links this has with other real estate sites, as a way of broadening our base of potential buyers. 7. We increased our asset marketing network, by signing agreements with both domestic and international intermediaries. 8. As stipulated in the deleveraging plan, we launched a public offer of sale for the FII Banif Property fund, with the aim of disposing of the participation units currently held by Banif Group entities.
Exposure to Real Estate During the first half of 2014, a total of 490 new properties, worth approximately 62.9 million euros, entered the Banif Financial Group's consolidation perimeter. 479 of these properties were in Portugal and 11 were abroad (Brazil and Cape Verde). These properties were worth 46.0 million euros and 16.9 million euros, respectively. Most of this exposure arises from dations in lieu of overdue loans.
The following property transactions were carried out (sales and rentals within the group's consolidation perimeter) during the first half of 2014:
(thousand euros) Amount Domestic Sales 32.777.5 Internacional Sales 15.506.9 Total Sales 48,284.40 Rentals 26,104.10 Total Business in 2014 74.388.5 Note: Includes Conveyances + CPCV for 2014
2014 earnings for Banif Imobiliária
(thousand euros)
Jun-14 Jun-13 Variation Net assets 596,090 599,943 -0.6% Equity 73,456 87,178 -15.7% Net Profit -13,653 -59,511 -
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BI's total asset base stood at 596 million euros at the end of the first half of 2014, a fall of 0.6% compared to the same period in 2013. This fall can be largely attributed to the devaluation of the FII held in the BI asset portfolio.
BI did not acquire any new property in the first six months of 2014. It sold 201 million euros worth of residential property on the market. These transactions resulted in a capital loss of 60 million euros.
Total revenue for the first half of 2014 was 5,683 thousand euros. Most of this came from rents (3,610 thousand euros), financial application income (210 thousand euros), services provided (360 thousand euros) or gains on adjustments made to fair value (1,448 thousand euros). Total operating costs came to 7,166 thousand euros. The main contributors to these were third-party and staff costs (895 thousand euros) and, more significantly, the losses associated with reductions in fair values (5,957 thousand euros).
Interest in the amount of 10,421 thousand euros was paid on the finance contracted as shareholder loans, which totalled 510.75 million euros at the end of the half.
The net result for the first half of 2014 was -13,653 thousand euros. Essentially, this can be explained by two joint effects: i) the abovementioned borrowing costs; (ii) the net effect of the results for the FII held in the fair value portfolio, amounting to -4,509 thousand euros, which compares with the amount of -8,280 thousand euros for the same period of the previous year.
During 2014, a number of initiatives were implemented in various domains, all with the aim of recovering value and renting out the more valuable properties on our books. We contacted the competent entities and interested parties and there are currently negotiations taking place regarding some of the high-end properties.
Additionally, we intensified our promotional work, with the aim of boosting property sales and rentals. This effort included designing new brochures for distribution through the high-end property sales channels, publicity campaigns promoting our Property Portal and bargain-price property promotions.
Forecast for 2014 and beyond
The Banif Group has an ambitious deleveraging plan for both domestic and foreign real estate assets. These objectives are a key feature of the group’s Funding and Capital Plan for 2014 to 2017.
The second half of 2014 will be given over to putting the plan into action, particularly as regards the objective for total direct sales in the domestic market of 154 million euros and international sales of 60 million euros, for which we intend to focus on our American and Brazilian assets.
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As in the first half of 2013, we will continue to develop our network of international contacts, with the aim of finding international investors interested in investing in Portuguese real estate assets. The contacts that we made in the first half of the year resulted in a firm proposal for the acquisition of a portfolio of 240 million euros worth of commercial assets. This offer is at the due diligence stage and there is a strong likelihood the investor will proceed with the deal in the second half of the year.
Portugal's economic outlook has improved, as can be clearly seen from the growth in GDP and the perception of country risk. However, we do not expect any significant rise in family income in the short term, which means that domestic consumption will continue to be weak.
INSURANCE
Insurer Sector
Figures from APS - the Portuguese Association of Insurance show that premium volumes grew by 18.4% in the first half of 2014, in terms of the production of purely financial life insurance investment contracts.
In terms of investment contracts, the life business enjoyed a production growth of 28.1% up to June 2014. The 32.0% increase in financial products, including pension savings plans, made a strong contribution to the overall figure.
The non-life business, which was somewhat held back by the adverse macroeconomic climate, saw production fall by 1.0%. Automobile (-2.7%) and IODC (-1.2%) insurance were significant contributors to this downturn.
Açoreana Seguros, SA
Main Activities
Açoreana has maintained its competitive positioning as a company of significant size, one that is well positioned in the Portuguese insurance market and is focused on the quality of the service provision.
The 2014-2016 three-year plan was drawn up on the basis of Açoreana's vision for 2016.
The strategy designed to ensure this vision becomes reality is based on 3 factors that will come together to make Açoreana a more solid and more competitive company. They will also endow the company with the legitimacy it needs to lead the revolution it proposes:
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- Costs and effective cost management are critical to the defence of price and profitability competitiveness, as our competitors are much larger and can benefit from economies of scale. - Service is the key factor that Açoreana has chosen to help differentiate us from the other players. We want to be known for the speed of our service, to both our clients and our partners. - Innovation is the leverage that will allow the company to keep ahead of the competition, in a consistent and sustained way. To us, innovation means excellent service, cost efficiency and an ability to progressively build additional competitive advantages.
In line with the strategy approved for the 2014-2016 three-year period, Açoreana will be strengthening its presence and intervention in the insurance market, based on the twin factors of agent centeredness and innovation. This will help the company become the largest operator of private Portuguese capital in the non-life segment. The main focus for the 2014-2016 three-year period will be:
- Increased Share with Sustainable Profitability: A broad range of commercial objectives have been set for the 2014-2016 three-year period. These should ensure we return to previous levels of profitability. There may be some initial stagnation in our market share, while we put in place the mechanisms required for a sustained recovery in market share towards the end of the three-year period.
- Optimised Management of the Cost Base: One of Açoreana's priorities is to significantly improve the contribution of the technical account to operating results. Thus, and following on from the progress made in recent years, namely the development of an ongoing portfolio monitoring model, Açoreana will be in a better position to identify structural risk imbalances in good time. This will allow us to prepare mitigation plans that we can use to clearly identify undesirable risks or deals that have negative margins, the incorrectly tariffed segmentation and repricing of deals, the retention of better clients and the prevention and fight against insurance fraud.
- Service Culture: At Açoreana, we are constantly working on identifying improvement and optimisation opportunities for our operational support models. We want to increase the efficiency and effectiveness of the structure so that both our agents and clients continue to benefit from our service-focused orientation. To this end, we have brought online our Commitment2 project and fully integrated the PCR, SIGA and PRISMA platforms.
- Innovation: In 2013, Açoreana launched an innovation programme with three main objectives: i) to leverage organisational mobilisation and motivation; ii) to benefit from our internal creativity and capacity to innovate, as a way of improving organisational
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performance and competitiveness, and iii) to be rightfully recognised by the market as an innovative insurer.
- Organisational Structure and Company Culture: Açoreana should be an industry leader and be able to attract, develop and retain the best staff and partners. Our objective is to become one of the "best companies to work for".
- We want to encourage and develop a positive attitude, and capacity, to innovation that permeates the whole organisation.
Business Development and Main Indicators
First half turnover in 2014 at Açoreana was 186,230 thousand euros. 48,737 thousand euros of this came from the life segment and 137,493 thousand euros from the non-life segment.
In the non-life segment, total premiums at Açoreana at the end of June 2014 were 1.5% down on the previous year, although we managed to maintain our non-life market share at 6.9%.
In the main sub-segments of accidents at work and car insurance, our market share in the car insurance sub-segment increased, despite the fall in premiums, to 8.4% at the end of the first half of 2014, making us one of the larger players in the market. The company is also now the third largest provider of accidents at work insurance in the Portuguese market, with a share of 10.5%.
The personal accidents, health and transport segments also performed well, turning in year-on- year growth of 17.1%, 8.0% and 6.3%, respectively. This performance was well above that of the market as a whole (+2.9% for personal accidents, +2.6% for health and -9.2% for transport).
Life business grew by 6.0% year-on-year. Main contributors to this were Vida Poupança (Life Savings), which rose 17.7%, and Vida Financeiro (Life Finance), which went up by 41.9%.
Our insurance products are distributed through a mediation network of around 3,600 agents, with active policies, and 77 brokers, Banif branches and 43 Açoreana branches and 6 outlets.
The key factors that affected business for the insurance sector in the first half of 2014 were the unfavourable macroeconomic climate, marked by a steep decline in domestic demand and an increase in unemployment.
Given this situation, Açoreana turned in a net loss for the first half of 2014 of around 3.7 million euros. This was something of a fall compared to the same period in the previous year, when the company made profits of 2.8 million euros.
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Net assets stood at 1,192,986 thousand euros and equity reached 188.364 thousand euros, which is 19.2% higher than it had been for the same period in the previous year.
The solvency margin in June 2014 was 282%, which leaves Açoreana in a very comfortable position in the insurance market and also underscores the company’s financial soundness and capabilities.
Large Economic and Financial Groupings
(thousand euros) Jun14/13 Jun- 2014 Jun - 2013 Value % Turnover 186,230 185,525 705 0.4% Life 48,737 45,989 2,748 6.0% non-life 137,493 139,536 -2,043 -1.5% Net assets 1,192,986 1,180,920 12,066 1.0% Equity 188,364 158,083 30,281 19.2% Investments 1,101,818 1,076,691 25,127 2.3% Solvency margin 282.4% 235.7% 46.7 p.p. Operating cash-flow -3,453 5,248 -8,701 - Net results -3,675 2,823 -6,498 -
Merger by incorporation of Rentipar Seguros with Açoreana Seguros
The merger of Rentipar Seguros and Açoreana Seguros, already approved by the two boards of directors, will take the form of a merger by incorporation. The full Rentipar Seguros asset base will be transferred to Açoreana and the owners of shares in Rentipar will be issued with new shares in Açoreana Seguros. These shares will be issued as part of the capital increase operation implemented for the purposes of the merger.
In accounting terms, the process of integrating the assets of Rentipar Seguros into Açoreana Seguros will imply, in a first stage, an increase in the share capital of the latter company to 243.07 million euros (the share capital of the incorporating company, 107.50 million euros, plus that of the incorporated company, 135.57 million euros). This capital will be represented by 48,614,000 shares with a nominal value of 5.00 euros each.
Following the merger, Açoreana will hold 21,500,000 of its own shares. These will be amortised, with a consequent reduction in Açoreana's share capital in the corresponding amount of 107.50 million euros.
Thus, once the merger has been completed, Açoreana's share capital will stand at 135.57 million euros, represented by 27,114,000 shares with a nominal value of 5.00 each. These shares will be distributed to the current Rentipar Seguros shareholders, in a proportion of 1:1 for the shares held by these Rentipar Seguros shareholders at this initial stage.
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The tax neutrality facility provided for in the Corporate Income Tax Code (articles 73 and subsequent) will be implemented in this merger.
The merger has already been analysed by the Portuguese Institute of Insurance, which issued an opinion at the beginning of July stating that it had no objection to the operation. The merger will be fully complete once it has been duly registered at the commercial registry office.
The necessary diligences for such registration are currently underway and should be completed during the third quarter of 2014. In accordance with the approved plan, the merger will be backdated to the beginning of 2014 for accounting purposes.
FINANCIAL MANAGEMENT
In the first half of 2014, the Banif Financial Group increased the robustness of its financial structure, in a continuation of the trend seen throughout 2013. The financial management of the group over the period was designed to ensure two main objectives: (i) to ensure there was sufficient surplus cash flow to service the expected out flows for the year; (ii) to diversify our sources of funding, reducing our reliance on the ECB and extending the average maturity of our funding portfolio.
The key events of the first six months of the year were as follows: - Issue of new securitisations – (i) placement on the primary market of 438 million euros of Atlantes SME3 (securitisation of SME loan portfolios), with a positive impact on liquidity of approximately 140 million euros; (ii) retention in our own portfolio of a new issue under the Banif covered bonds programme and the subsequent transfer of this as collateral to the ECB. This resulted in an increase of around 80 million euros in value of the free assets in this pool; - Sale of existing securitisations - the bank placed around 537 million euros of the outstanding amount of the senior tranches of two mortgage loan securitisations (RMBS) on the secondary market. These securitisations had been held in the group's own portfolio (in the collateral pool held at the ECB). These operations resulted in an increase in liquidity of 100 million euros and provided funding with an average term of over 10 years; - Monetisation of other assets - the group structured a collateralised funding operation at 2 years using illiquid assets (junior tranches of securitisations). This generated a cash flow of approximately 150 million euros.
Additionally, the growth in the consolidated commercial gap (client resources minus gross loans to clients) in the first half of the year resulted in a contribution of 402 million euros to the group's cash flow position. This increased from 625 million euros at the end of 2013 to 1,159 million euros at 30 June 2014.
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The above factors have ensured a continuing downward trend in the use of central bank resources. In fact, following the fall of 700 million euros (in the 4th quarter of 2013) and of 600 million euros (in the 1st quarter of 2014), there was a further decrease of 350 million euros between March and June 2014. Free assets in the ECB pool increased by 420 million euros in the first half of the year.
Issue maturities for the next few years are shown in the table below (by holder and issue type):
TOTAL 2014 2015 2016 2017 >2017 Institutional Investors 1,370 8 300 244 0 818 Private Clients 625 190 56 153 92 134 Eurosystem (Debt guaranteed by the state) 741 741 TOTAL 2,736 939 356 397 92 952 Million euros
TOTAL 2014 2015 2016 2017 >2017 Collaterised Debt (Securitisations) 1,318 0 283 239 0 796 Senior Debt 472 190 57 140 85 0 Subordinated Debt 205 8 16 18 7 156 Debt guaranteed by the state (liquidy) 741 741 TOTAL 2,736 939 356 397 92 952 Million euros
As can be seen, the non-collateralised debt placed with institutional investors has only residual value. When these issues mature, they are not expected to have any relevant negative impact. The bank’s past experience shows that funds belonging to group clients that are invested in issues tend to remain with the bank following maturity.
The loss of liquidity arising from the repayment of the debt guaranteed by the state in 2014 will be offset by a reduction in the asset pool offered to the ECB as collateral. Given their hybrid nature, the remaining 125 million euros in core tier 1 capital instruments held by the state (CoCos) are not listed in the tables above. The repayment of this facility is expected to take place in the last quarter of 2014.
RISK MANAGEMENT
1. Organisational model Risk management at the Banif Financial Group is based on identifying, mediating, mitigating and monitoring the main risks of the business to which the group is exposed and, consequently, being able to more efficiently calculate the distribution of our capital resources.
Risk control and management is increasingly becoming one of the main factors in ensuring business sustainability, despite the adverse macroeconomic situation in general and that of the sector in particular. The group’s management is increasingly focused on balancing risk and return, as well as reducing potential adverse effects that may influence the group's financial performance.
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The group’s risk management function is supervised according to strategies and policies defined by the board of directors. These are then implemented by the executive committee through Banif SA’s Global Risk Department (DGR) and by the respective risk management bodies of its subsidiaries.
The DGR is a shared service corporate entity that reports directly to the executive committee, through the director with the appropriate function. It is constituted according to the requirements of the various Banco de Portugal guidelines, specifically Notice no. 5/2008.
The governance model for risk management involves cross-entity control across the group, with the board of directors bearing ultimate responsibility for setting risk control and management policies.
Each group entity has its own corporate structure for risk management, scaled according to business activity, the associated risks and their degree of materiality.
The Risk and Audit Committee, comprising non-executive directors and members of the supervisory board, acts as a multidisciplinary discussion forum, with significant competences and representation at first-line management level. It analyses, oversees and makes recommendations to the group’s decision-making bodies and is responsible for supervising financial and other risks. The committee receives regular reports on risk monitoring, planning and the main business results. With the recent changes to the group's management and supervisory model, there are now two specialised committees in place, the Audit Committee and the Risk Committee. The latter has taken over the responsibilities for the control and oversight of business risk that were formerly the purview of the Risk and Audit Committee.
Another key organisational body is the Assets and Liabilities Committee (ALCO). This group advisory body meets monthly and plays a critical role in the management of a range of risks: liquidity risk, market risk and interest rate risk. ALCO is a consultative body. It coordinates the work of the various business units and proposes measures to the Banif board of directors. The committee makes recommendations on the strategic management of the main components of the consolidated balance sheet and management of the group’s structural risk.
The group encourages periodic reviews of risk management policies and procedures in order to reflect changes in regulations, markets, products and best practices. The board of directors is responsible for setting risk policies and has the support of the Global Risk Department in carrying out risk assessments and monitoring. The department monitors the most significant risks – credit risk, market risk, liquidity risk, operating risk, business/strategy risk and real estate risk – and, whenever necessary, proposes new policies and corrective measures to ensure that risks are prevented and mitigated.
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2. Allocation of capital The group uses the following methods to determine the value of risk-weighted assets, for the purposes of calculating regulatory requirements for Pillar I own funds: - The standard method for credit risk - The basic indicator method for operational risk - The standard method for credit risk
Notwithstanding the use of these methods, the group has been promoting programmes that optimise its risk-weighted assets (RWA), by obtaining better levels of eligible collateralisation for its assets, and, also, the selective assessment of capital consumption for credit operations, by means of a simulation tool available throughout the Banif's commercial networks.
The group also relies on an economic assessment of its risks and of its available financial resources. This assessment is used in the “Internal Capital Adequacy Assessment Process” (ICAAP), implemented as per Banco de Portugal Notice no. 15/2007 and no. 32/2010, as part of Basel II Pillar II.
To this end, the group makes use of an internal model, the Risk Taking Capacity model, for assessing its available financial resources. This model assesses the ability of existing economic capital levels and financial resources to meet current and future risks. The existing model takes into account the main risks to which the group is exposed. The more significant of these, due to their materiality, are credit risk and property risk.
The risk taking capacity model is based on the building up of a picture of each element that could be a source of internal equity. Elements are also categorised as a function of equity cover and ordered hierarchically by levels of safety. This ordering makes it easier to interpret and implement the strategy in terms of its capital adequacy policy and assumed risk profile, in line with the group’s ongoing restructuring plan.
3. Main activities The adverse macroeconomic climate, characterised by the weakened economic and financial capacities of both companies and individuals, impacted visibly on the quality of the group’s assets and, consequently, on its capital ratios. From a risk management perspective, this meant that the main focus for the most recent quarters had to be the implementation of measures designed to strengthen control and regulatory mechanisms:
- Information management: the group continued its initiatives to improve the database used for risk management information purposes, with the aim of making it increasingly comprehensive and reliable. To this end, we ran a Datawarehouse project for the construction of a new data repository designed to support a more robust, scalable and regular database that could then be used by management bodies to monitor, control and report in a more efficient and timely manner. This structural project will help ensure the
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success of a number of other initiatives based on the group’s information systems that are due to be implemented in the coming months.
- We also consolidated the work carried out in previous years, updating the key performance indicators (KPIs) and the periodic analyses for internal and external reporting purposes. This will allow management bodies and other stakeholders a broader and more effective overview of risk management.
- Preparation of the internal capital adequacy assessment report (ICAAP) and the market discipline report for Pillar II and Pillar III of Basel II, respectively, as well as the concentration risk report.
- Participation in regular Funding and Capital Plan (FCP) exercises, as part of the PAEF, as regards impairment forecasts, RWA and pensions funds, in both the base and adverse scenarios.
- Development of the structural project to review the internal models currently used to assign risk ratings, whether for admission or behavioural. Our aim is to adopt the most advanced methods possible for calculating capital requirements.
4. Risk Management at the Banif Financial Group
Credit Risk Credit risk is the likelihood of negative impacts on results or equity that arise from the inability of a counterparty to meet its financial commitments to the bank, including possible restrictions on the transfer of payments from abroad.
Our credit risk management profile is conservative in nature and is based on a set of policies and guidelines that apply throughout the whole lifecycle of a loan. They are determined as a function of current business strategies and the social and economic climate and are adjusted and reviewed regularly and whenever necessary.
Credit is granted according to the regularly reviewed regulations and standards that govern this business activity and that clearly establish the delegation of competences, both in value and in profitability, according to the implicit risk of clients, segments and operations.
In addition to the standards, credit is granted, in most segments, on the basis of on an evaluation and classification of client risk. This is calculated using scoring and rating models and by assessing the collateral coverage rate for the operations in question. For more significant exposures, the use of capital and the impact that these explosions may have on the pre-set aggregated exposure limits are analysed on a case by case basis.
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On the other hand, the main group entities make use of systems that allow them to identify and classify, at different levels, any clients showing signs of deterioration in their creditworthiness.
The group applies a number of metrics and internal indicators to help our monitoring of risk concentration indices, particularly as regards economic groups, business sectors, geographical regions, the materiality of the more important exposures and non-performance, amongst other aspects.
The Banif Group has established and implemented a number of policies and procedures designed to address the issue of loan concentration risk. The principles underpinning these policies and procedures apply to both the individual entities within the Banif Group and to the group as a whole:
- Definition of the various types of loan concentration risk; - Regular monitoring of concentration risk in its various forms; - Use of quantitative indicators to monitor across various dimensions.
The indicators are defined according to each loan concentration risk type and bring together comparisons of information originating from within the loan portfolio (such as relative weightings) with comparisons of information from other sources (such as the coverage rates for own funds).
- Complementary use of qualitative information for monitoring loan concentration risk; - Setting of internal management limits across a range of dimensions, bearing in mind the specific characteristics and materiality of each loan portfolio; - Inclusion of monitoring indicators and complementary information in the periodic risk management report submitted to the group’s management bodies; - Incorporation of diversification guidelines in lending processes (by exclusion on non-core sector) and in the objectives set out for the commercial and business departments (by geographical region).
We have adopted the following definitions pertaining to loan concentration risk:
Larger counterparties – significant exposure to an individual counterparty or group of counterparties that are economically or legally related (also known as “single-name concentration risk” or “great risks”). As such, these borrowers may present a simultaneous deterioration in their creditworthiness.
Business sector – significant exposure to a group of entities that, although not legally related to each other, work in the same economic sector and, as such, are exposed to the same business cycles and so may present a simultaneous, or cascading, deterioration in their creditworthiness
Geographical – significant exposure to a group of entities that, although not legally related to each other, work or are based in the same geographical area and, as such, are exposed to common factors that may trigger a simultaneous deterioration in their ability to repay their loans.
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Collateral type – significant exposure, albeit indirect, as a result of the risk mitigation mechanisms employed, to the same type of credit protection or loan guarantor. This may lead to a deterioration in the effective level of coverage provided by the underlying operations.
In addition to the indicators listed above, we also make use of quantitative indicators for monitoring purposes and for periodic assessment.
Credit Risk Management In view of the economic situation in Portugal and the Eurozone, and the funding restrictions that have affected business activities in recent years, the group has been managing its business in line with more prudent criteria and more conservative lending policies.
The portfolio profile is monitored and regularly evaluated according to the limits specified for the following dimensions, as mentioned above:
Measurement of credit risk The group has risk-rating models for a significant part of its loans portfolio. These models apply distinct methodologies to each segment and/or product based on our experience of client defaults, by combining a broad range of socio-demographic, economic, financial and transaction variables.
The risk systems can be subdivided into the following categories:
Internal Models
Small and medium Rating Model Large Corporate2 companies1
Application Scoring Housing Credit Consumer Credit Credit Car Small Business Credit cards Model
Behavioral Scoring Housing Credit Consumer Credit Credit Car Small Business Model
1 Average tree annual turnover of more than 500 thousand euros and less 50 million euros
2 Average tree annual turnover less than 50 million euros
The admission scoring models are used to assign each loan application a probability of default (PD). The models are also used to classify an operation, in terms of exposure to risk, until it is one year old.
The behavioural scoring models are used to measure the risk on retail lending operations over their lifetime, through an analysis of the irregular, or other, behaviour of operations that are over a year old as well as of the borrower.
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The rating model used for the business segment assigns each client a risk classification as a function of the probability of default, thereby measuring the risk of default by the counterparty. It does this by combining financial information with qualitative data, in particular variables pertaining to relationship and commercial involvement. At the same time, the risk ratings attributed by external rating agencies are also consulted, whenever applicable.
Monitoring of credit risk Credit risk is monitored through oversight and control of the development of credit risk exposure in the group’s portfolio and by the implementation of mitigation measures designed to preserve both the quality of loans and the set risk limits. This is realised through the regular drawing up of credit quality indicators, the automatic production of alerts and the carrying out of actions appropriate to the levels of such alerts. This approach makes it possible to predict necessary recovery measures and preventively manage non-performance.
It is important to manage these risk events by assigning responsibilities for managing warning signs, assigning competences to the staff responsible for providing and updating information and, lastly, by defining the steps to be taken according to the predictive classification of the signs. Credit risk is monitored by regularly preparing credit quality indicators and quality indicators for the corresponding segmented portfolios. In this way, the effectiveness of the policies in place is assessed and corrective measures may be applied.
Mitigation of credit risk The value and nature of collateral – or security for loans – together with the necessary degree of coverage depends on the assessment of the risk involved in lending. First, the Group evaluates the counterparty’s repayment capacity and probability of default. Collateral is taken to be a secondary means of payment and, thus, is not necessarily the main aspect of the assessment criteria, notwithstanding its relevance in the consumption of regulated capital, where eligible.
The group has internal procedures for the acceptance of certain types of collateral with specific assessment criteria.
Credit impairment Credit risk materialises, in the last resort, in the impairment losses carried by the bank. These are the best estimates of losses at the given reference date and may, or may not, become actual losses.
A loan is considered to be impaired if one or more events occur that imply that the recoverable value will be lower than the book value. If there is objective evidence of an event causing an impairment loss, the amount of such loss should be calculated as being the difference between the balance sheet value and the present value of the estimated future cash flows (excluding losses caused by events that have not yet occurred), discounted at the original contract interest rate.
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The balance sheet value to be taken into account shall include all the balance sheet amounts recorded for the loan in question, namely, outstanding principal, principal overdue, interest accrued and interest overdue. Estimated future cash flows included in the calculation referred to contractual loan amounts, adjusted for any amounts that the bank feels it will not recover and for the time period over which it is foreseeable that such cash flows will occur. The recovery time period for cash flows is a highly significant variable in calculating impairment. This is because, even in those cases in which the bank expects to receive contractual cash flows in full, albeit outside a contractual term, an impairment loss should be recognised.
The calculation of impairment across the Group makes use of models which are governed by risk policies that are common to the various entities. It also takes into account the most recent recommendations of the regulatory authority, specifically Banco de Portugal circular letter no. 02/2014/DSP (hereinafter referred to as the circular letter). In 2014, Banif Mais, the group unit that concentrates on specialised financing, namely car loans and personal loans, began the process of revising the models used in estimating impairment. This revision took into account the risk-related principles and concepts used by the group (notwithstanding the specificities of the business and the bank itself, in individual terms) and good market practices. This work was also designed to ensure compliance with the requirements stipulated in the abovementioned circular letter.
The calculation model for impairment losses ensures that a suitable level of impairment is measured; one that is commensurate with a prudent approach. It takes into account not only the objective indicators of client default, but also a further set of indicators designed to forecast future losses.
The best estimate of the recoverable values is based on reasonable assumption and is supported by observable and documented data, at the impairment measurement date, pertaining to the client's ability to make payments or to the need to resort to enforcement or foreclosed assets, in the form of collateral.
Individual Analysis The model is based on a structure that covers both individual and collective analysis. Limits are defined above which a case-by-case calculation of impairment is mandatory for those clients with significant exposures. For other clients, impairment is calculated using a PD and LGD model. The division of the portfolio in terms of individual and collective analysis of impairment is summarised in the following table:
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Portfolio with no signs Portfolio with signs of Impairment of Impairment Portfolio inDefault
Portfolio Portfolio Portfolio Homogeneous Homogeneous Homogeneous
Clients with Clients with Clients with Exposure less Exposure less Exposure less than 2,500,000 euros than 250,000 euros than 250,000 euros Collective Analysis
Portfolio Portfolio Portfolio Significant Significant Significant
Clients with Clients with Clients with Exposure higher than or Exposure higher than or Exposure higher than or
Individual Analysis Individual equal to 2,500,000 euros equal to 250,000 euros equal to 250,000 euros
Individual analysis is mandatory for clients classified as being in default or those showing signs of impairment. The client and the respective collateral are monitored closely, to ensure that the impairment is properly covered. Those clients who show no signs of impairment but whose total exposure is equal to, or greater than, 2.5 million euros are monitored economically and financially. This monitoring may later translate into selection for a more detailed individual analysis.
The level of individual impairment stipulated as requiring a one-off analysis is calculated prudently. This approach takes into account the contract, the client's economic and financial situation and the collateral given in guarantee. Haircuts are applied to this collateral as a function of its nature and liquidity. The present cash flows are updated, at the contracted rate, on the basis of the estimate of future recoverability that results from applying these factors.
In the case of an individual analysis, and as a way of incorporating the experience gained through the various across-the-board inspections carried out by the regulator, the Banif Group has adopted the qualitative impairment table contained in the Banco de Portugal's circular letter for the applicable situations (namely, the lack of sufficient information to calculate whether or not the cash flows released by the business are sufficient to service the debt), for the non-hedged part.
The assessment of a contract's collateral is one of the determining aspects in calculating impairment through individual analysis. The Group has adopted, as standard, the tables and minimum criteria contained in the circular letter. The services of expert valuers, with market recognition, are retained for the purposes.
Nevertheless, Banif Group makes use of the general criterion applicable to real estate valuation. This should be reviewed by an expert valuer whenever the available information indicates that there may have been a substantial reduction in the value of the property or that its value may have materially diminished in relation to general market prices. The change in the property's value is checked using statistical methods or recognised indices.
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The minimum frequency of checking a property's value is as follows:
I. One year, for properties received as repayment for personal borrowing and as sureties on commercial properties; II. Three years, for sureties on residential property.
Such checking should be more frequent when market conditions change significantly.
The minimum frequency for valuation by an expert valuer is as follows:
Three years for: - Property received as repayment of personal borrowing; - Loans that exceed 5% of an institution's own funds or 500 thousand euros, in the case of residential mortgages, or 1 million euros, in the case of commercial property mortgages.
Collective Analysis Clients whose exposure falls below the significance limits for the portfolio are subject to a collective analysis. This involves assigning their operations to homogeneous segments in terms of default and recovery rates. The main segmentation criteria in the model are:
- Client type - Product type - Type of associated collateral - Business sector
The segments related to loans granted for the acquisition of homes, construction or commercial real estate (CRE) (according to the list of CAE in the circular letter) have their own segments, given the specificity of the loans in question and the current economic situation of these business sectors.
The group has a cross-default policy that defines all of a client's exposures as being in default when at least one of the following conditions is a met:
- At least one operation has been in default for more than 90 days; - The client has entered bankruptcy proceedings; - At least one operation has been restructured and where the original operation and/or operations for this were in default on the restructuring date.
For the purposes of cross-default contamination, the following materiality criteria are applied, on the basis of fixed amounts that depend on client type: 100 euros for individual clients; 2,500 euros in the case of individual name businesses; 5,000 euros for businesses.
A client is taken as showing signs of impairment if at least one of the following conditions is met:
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I. Loans 30 to 90 days (inclusive) in arrears at the bank. II. Arrears at the bank of 30 days or less, where the client is on the list of risk users and/or has had cheques returned without good reason. III. Arrears at the bank of 30 days or less and where the client is in default in the CRC. IV. Loans in arrears for more than 90 days at the CRC. V. Having operations identified as being restructured and where the original operation and/or operations for this were not in default on the restructuring date.
According to the risk management policy, restructured loans are defined as all operations for which there is a formal agreement between the group entities and the client for the renegotiation of the terms and conditions of payment of one or more loans that are in actual or potential default.
This agreement may take the form of changes to the contractual conditions of existing loan operations (extension of the term, grace periods, capitalisation of interest, revision of interest rates, etc.) or through the contracting of new loan facilities for the (partial or total) settlement of the existing debt.
The group has set out guideline principles for the management of these loans:
- Loans proposals should unequivocally identify whether the operation is a restructuring and, when this is the case, the reason for this. - The restructuring of the operations should take into account the appropriateness of the conditions to the nature of the client and its ability to generate funds. Extra prudence should be applied to the analysis of such operations. - It is policy that the restructuring of loans should be accompanied by strengthened collateral and/or payment of any interest owing. - As a rule, new loans should not be issued to clients who were originally lenders in operations that were restructured because of financial difficulties. This rule should apply for at least one year from the date of restructuring. This recommendation allows the bank to monitor the risk profile of such clients and their behaviour in the banking system. Should the client default, or new loan restructurings become necessary, this safety period should remain effective for one year after such events.
Restructured loans are flagged in the information systems and are used in validation tests of the databases. According to internal regulations, clients with restructured operations are in a state of high alert.
The PD applicable to a client in a normal situation is composed of a Probability of Indication (PI), a and Conditional Probability of Default (PDC) and a Direct Probability of Default (PDD), calculated using the following formula:
PD = PI x PDC + PDD
A PDC will be applied directly to any client who has an impairment indicator resulting from a collectively analysed impairment deterioration.
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The model calculates the loss after default on the basis of LGD Vintage. This LGD varies as a function of the default maturity of the operation. The estimate of the loss is made using the effective recovery history for the operations in the segment and the time that has passed since the default occurred. For operations that are not in default, the applicable LGD corresponds to the first default period given by the full recovery history for the segment in question.
The resulting period, adopted by the bank, is three months. This coincides with the period used to rule that a client is in default and is also sufficiently short that it can be reacted to, thus capping the effective risk to the bank's portfolio.
3 months 3 months
Loans without Signs Loans with Signs Loans without Signs Loans in Default
0 t 0 t Probability of showing signs Probability of Direct Default
3 months
Loans with Signs Loans in Default
0 t Probability of Conditional Default
Reversal and Write-Offs Given the prevailing regulatory framework, namely circular letter 15/09/DSBDR, the definition of a suitable policy and criteria for write-offs is of prime importance. This is because of the potential effect on the calculation of loans portfolio quality ratios and, indirectly, on the communication, transparency and disclosure of information.
Thus, and in accordance with the sector internal standards, the determination that a loan is uncollectible and should be written off will only occur if all of the following are true:
I. The institution has demanded the repayment of the loan in its entirety (that is, all of the credit exposure, including principal and interest, regarding the contract or client is deemed to be in arrears and has been classified under IAS 15 - Loans and interest in arrears); II. Appropriate efforts have been made to collect on the loan; III. The probability of recovering the loan, over a time period for which such probability can be reasonably estimated, is low, thus leading to the recognition of a total loss.
As policy, the group only writes off loans on a case-by-case basis and where these criteria have been met. A loan can only be written off from assets if full provision has been made (as per BdP Note 3/95) and where the total amount is covered by impairment. If such full impairment has not been assigned, it will be necessary to increase this until it is the same as the amount that is to be
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written off against assets or forgiven (in which case it counts as a loss in the profit and loss account).
The group also stipulates that individual impairment of a client can only be the object of reversal if such reversal is related to an event that occurred after the initial recognition of the loss. This could be, for example, an improvement in the quality of the client's rating, reinforced guarantees or amortisation, or payment of the debt. In the case of collective analysis, reversal will be triggered by the application of the model. It may arise from an improvement in the portfolio risk parameters or from a reduction in exposure, amongst other factors.
Market Risk Market risk is taken to be the likelihood of the occurrence of negative impacts on results or on capital, due to unfavourable movements in the market price of instruments in the trading portfolio caused by fluctuations in interest rates, exchange rates, listed share prices or commodity prices. Market risk derives, above all, from short-term positions in debt and equity securities, foreign exchange, commodities and derivatives.
Management of Market Risk Market risk in the Banif Financial Group essentially arises from exposure on securities in the trading portfolio held by the various subsidiaries. As a rule, the derivatives employed are designed to hedge positions, mainly in operations undertaken on behalf of clients, through symmetrical operations with other parties which cancel out the market risk and the risk of the portfolio itself and that of the group’s securitisation vehicles. These are not taken into account for the purposes of calculating the Value-at-Risk. This means, in view of the business in which it operates, that the main market risks to which the Banif Group is subject are those resulting from variations in the interest rates, exchange rates and market prices underpinning the securities.
Market risk is managed separately by the various subsidiaries, due to their specific characteristics and competitive advantages, including proximity and local knowledge of the markets in which they operate. This is especially true of the institutions operating in Brazil (particularly the investment banking unit and the commercial banking unit in this country), Banif - Banco de Investimento, SA, in Portugal and Banif Bank (Malta) in Malta. In 2013, the group began to oversee this risk across all group members. To do this, we made use of a Value-at-Risk (VaR) model, applied to all holdings, as the main indicator of market risk and estimated the potential losses under adverse market conditions.
Interest Rate Risk Interest rate risk is defined as the likelihood of financial losses arising from adverse movements in interest rates. In this case, interest rate risk to the banking portfolio is assessed in the medium/long term. This makes it possible to assess the group’s exposure to this risk and to infer its capacity to absorb adverse variations in the rates to which it is exposed.
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Interest rate risk is calculated through the categorisation of all the asset, liability and off-balance sheet items in the banking portfolio that are sensitive to oscillations in interest rates, according to interest rate reset scales.
Interest rate risk is systematically monitored as a function of the repricing periods for assets and liabilities. The reason for analysing sensitivity to interest rates is to assess the group’s exposure to this type of risk and to infer its capacity to absorb adverse variations in the rates to which it is exposed.
Exchange Rate Risk Exchange rate risk represents the fluctuations in value that financial positions expressed in foreign currency may suffer as a result of changes in exchange rates.
Management of Exchange Rate Risk The group monitors its exposure to exchange rate risk through day-to-day control of the overall exposure of its open positions in different currencies. It adopts global hedging strategies to assure that these positions are kept within limits defined by management. The group’s exposure to the exchange rate risk is essentially based on the share capital of its financial holdings outside the Eurozone and, therefore, subject to such volatility. These holdings manage such risk in conformity with executive committee guidelines.
Liquidity Risk Liquidity risk, which is managed centrally within the group, is defined as the likelihood of the occurrence of negative impacts arising from the institution's inability, particularly in the short term, to honour its financial obligations in a timely manner.
Management of Liquidity Risk The monitoring of current and structural liquidity, required as a function of the value and timing of commitments and portfolio funds, takes the form of identifying liquidity gaps, for which exposure limits are set.
Although the domestic and international economic situation is not yet fully favourable, as regards liquidity management, both the liquidity gap and the cumulative gap have stayed within acceptable limits for the periods analysed.
At the end of 2013, the group's liquidity position stood at 625 million euros, a rise of over 100% along the year. In the first half of 2014, and following a number of operations, this position increased by 534 million euros, to total 1,159 million euros at 30 June.
The transactions in question (issue of new securitisations, the sale of existing securitisations all and the monetisation of other assets) were carried out to meet to key objectives: (i) to ensure there was sufficient surplus cash flow to service the expected outgoings for the year; (ii) to
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diversify our sources of funding, reducing our reliance on the ECB and extending the average maturity of our funding portfolio.
Analysis of the Liquidity Risk The assessment of the group’s liquidity risk is based on the calculation and analysis of regulatory indicators defined by the regulatory authorities, as well as other internal metrics which have set exposure limits.
A regular calculation is made of changes to the group’s liquidity position and all the factors that might have contributed to such changes are identified. This control is backed up by the carrying out of stress tests in order to arrive at a detailed description of the group’s risk profile and ensure that all of its obligations can be met in the context of a worsening market climate.
The internal liquidity management policy places great emphasis on the constant monitoring and revision of exposure limits, in order to reflect market conditions at any given moment in the best possible way. As part of current liquidity management, and under the group’s short term financing plan, quantitative and qualitative analyses of liquidity have been carried out on a regular basis. These are designed to identify any shortcomings and inform decisions on the corrective measures required to re-establish minimum liquidity reserves, whenever necessary.
In complying with Banco de Portugal rules of prudence, the group is obliged to maintain a proper balance between the financial flows involving balance sheet items. This is to make sure that there are sufficient liquid funds available for the group to be able to comply, under reasonable conditions, with its financial obligations as they fall due.
Sovereign Risk The group’s exposures at 30 June 2014 are disclosed in note 40 – “Special conditions applying to the sovereign risk of Portugal, Greece, Ireland, Spain, Italy and Cyprus” in the Banif Financial Group annexe (consolidated view).
Operating Risk Operating risk is “the risk of losses resulting from the insufficiency or shortcomings of procedures, staff or internal systems, or from external events, including legal risks” (Decree Law no. 104/2007).
Any event that constitutes the materialisation of an operating risk that implies a negative impact, or reduction, for results or for the institution's asset situation, and where this event occurred as a consequence of any operating risk event, it is carried as an actual or potential operating loss for the institution.
These losses may arise from operating risk hotspots such as internal or external fraud, improper practices involving clients, products or businesses, damage to material assets, system failures, incorrect management or execution of processes and lack of suitable human resources, amongst others.
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Management of Operating Risk Aware of the importance of the effective monitoring and control of operating risk, the Banif Financial Group decided to implement systematic control mechanisms in the areas that present operating risk. The main objectives of the management models developed to this end include a detailed understanding of operating risk hotspots and mitigation measures to deal with these, plus an awareness of the nature and magnitude of operating loss events.
In order to meet the proposed objectives, Operating Risk Managers (OR managers) were appointed for the various group areas. The staff members assigned to this function are periodically reassessed to ensure their suitability. The profile of the OR managers requires that these persons have an excellent command of all the issues in their intervention area, particularly as regards their knowledge of the business processes. They should have the ability to suggest mitigation measures and are also responsible for recording and monitoring all the events that could potentially lead to financial loss, in a specific application for operating risk management.
The group identifies and assesses operating risks in all business areas, classifying such risks according to the risk types defined by the Basel Committee.
In this way, the group aims to meet its objective of monitoring and measuring the operating risk in its business. Detailed records are kept of all occurrences affecting the various processes and intervention areas, which will translate into an effective and dynamic assessment of the current internal control systems.
Business continuity management system During the first half of 2014, Banif completed its Business Continuity Management System (SGCN), in conformity with the prudence recommendations issued by the regulatory authorities and in line with international best practice, namely ISO 22301.
The implementation of the SGCN will contribute to improving the group's resilience in disaster scenarios. It will be used to implement recovery policies and procedures for business functions and information technologies, thus safeguarding both the financial information and the level of client service.
For the second half of the year, we are planning to carry out activation tests on the Business Continuity Plan (PCN), in conjunction with the contingency plan, the communication plan and the disaster recovery plan. In this way, we will assess our recovery strategy and identify opportunities for improvement.
Real Estate Risks Over the last four years, we have implemented a policy through which the group values, on an annual basis, all the real estate that falls within its consolidated balance sheet perimeter. This practice covers all assets, whether these are domestic or whether they are held abroad, irrespective of the structure that holds them (directly by the banks’ balance sheets or as consolidated through real estate investment funds).
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These valuations are carried out by a group of valuers certified by the regulators, in accordance with the established concentration rules.
The flows of real estate assets are monitored daily. This applies to inflows (foreclosed/adjudications), outflows (disposals) and the respective impacts on the Banif Group's consolidated operating account. This monitoring is carried out by Banif Imobiliária, the group company that is responsible for managing and overseeing real estate assets.
The group's management is informed of the impacts of these flows on a daily basis. Periodic reports are also sent to the Banco de Portugal.
The regulatory time limits governing the keeping of real estate on credit institutions balance sheets are as follows:
- Property acquired as counterpart to the repayment of own loans may be held by credit institutions for up to two years. This may be extended for a further year if so authorised by Banco de Portugal, in accordance with the provisions of article 114 of the General Schedule for Credit Institutions and Financial Companies and in conjunction with Banco de Portugal Instruction no. 120/96, as altered by Instruction no. 14/2014. - After three years, and in accordance with the provisions of number one of Banco de Portugal Instruction no. 120/96, of 16 August, 1996, the property may remain on the balance sheets of credit institutions.
The Banif Financial Group has the following guidelines policies for property held within its consolidation perimeter:
- All property held within the consolidation perimeter, with the exception of property at the service of the group, is disposable and shall be marketed through the various real estate sales channels used by the group (internal channels, such as the group's commercial networks, and external domestic and international channels, such as real estate agents and/or brokers). - If there is no demand for a given property, this property will be placed on the rental market or tourism operator market, in the case of tourism developments, using the same channels as specified above. - It is of ongoing concern to the group that property retains its value, as this is a factor that helps the sale or rental of the same. Thus, the Banif Group's guideline policy on this matter is that the property should be kept in a proper state of conservation and, wherever justified, improvement work on the same may be carried out. - Each real estate asset is subject to specific analysis. This is based on conservation state, location, type and an independent valuation. As a result of this, a minimum disposal price and/or minimum rental yield is set. The minimum rental yield for commercial property is currently 6% and for residential property it is 5%.
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- The setting of the minimum price and rental yield is based on a criterion of defending asset value. The base rule for setting the sale price is that this should be the greater of the net book value of the property and the last valuation value.
Other Risks To reinforce and improve risk management, Banif incorporates the monitoring of other types of risk in its management practices. Although these are not of the same magnitude as the more "traditional" types of risk, following them allows a fuller and more inclusive appreciation of the institution’s risk profile. In this way, various indicators that keep track of "strategic risk" and “business risk” are incorporated into the group’s existing information reporting structures for risk management.
Quantitative analysis of the Banif Financial Group In line with the objective of redefining Banif’s geographic presence, which is one of the key points in our restructuring plan, we are in the process of disposing of Banif’s controlling holdings in Banif - Banco Internacional do Funchal (Brasil), SA, Banif – Banco de Investimento (Brasil), SA, Banif Bank (Malta), PLC and Banco Caboverdiano de Negócios (BCN). We expect to complete these disposals during the remainder of 2014. These business units will be reported as discontinued operational units and will continue to be consolidated in the financial statements, using the full consolidation method, at 30 June 2014. As a result, this section does not include the loan amounts pertaining to the abovementioned group members.
Analysis of the credit risk
Exposure to credit risk by accounting item
At 30 June 2014, the group’s total assets had the following credit risk exposure:
(thousand euros) Jun 14 Dec 13 Gross Net** Gross Net** Exposure Exposure Exposure Exposure Deposits with banks 191,360 191,360 186,777 186,777 Applications in credit institutions 230,323 228,639 117,520 117,487 Other financial assets at fair value through profit or loss 1,099 1,099 83 83 Financial assets available for sale 1,668,104 1,668,104 1,429,877 1,429,877 Credit to Clients 8,916,042 3,143,553 9,129,242 3,281,352 Investments held until maturity 8,139 8,139 12,081 12,081 Other assets 236,623 178,396 249,467 197,180 Subtotal 11,251,690 5,419,290 11,125,047 5,224,837 Contingent Liabilities 4,449,964 4,449,964 6,513,257 6,513,257 Assumed commitments 129,822 129,822 191,346 191,346 Subtotal 4,579,786 4,579,786 6,704,603 6,704,603 Total 15,831,476 9,999,076 17,829,650 11,929,440
* Gross Exposure: Refers to the gross balance sheet value ** Net Exposure: Gross exposure less impairment and the effect of mitigation considered to be an actual reducer of credit risk. Guarantees/securities and other low-value collateral is not included.
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Maximum exposure corresponds to the worst risk exposure scenario for the group, bearing in mind that this does not take into account collateral or other mitigations associated with the assets. The figures reflect the financial positions disclosed in the consolidated financial statements.
In terms of net exposure, mitigating effects are highly significant in the case of personal loans, reflecting a lower exposure to credit risk of approximately 65%.
Exposure to client credit risk, by sectors and mitigating factors
Jun/14 Mitigation effect 3 Residential Other Maximum exposure 1 Net exposure 2 Financials Guarantees Mortgages Mortgages Services 1,199,092 792,739 17,141 35,544 95,921 257,747 Construction 640,310 364,068 12,149 27,823 34,607 201,663 Property activities 518,559 189,903 9,516 0 15,740 303,400 Industry 462,259 339,405 12,056 170 16,426 94,202 Retail sales 353,233 179,427 9,218 565 54,936 109,087 Public sector 344,331 185,914 230 156,745 0 1,442 Financial institutions and insuran161,822 82,303 56,424 0 4,748 18,347 Others 396,683 257,064 15,075 22,647 32,325 69,572 Private 3,662,955 752,730 32,536 41 2,718,138 159,510 Total 7,739,244 3,143,553 164,345 243,535 2,972,841 1,214,970
1 - Maximum exposure: Refers to the net balance sheet value 2 - Net exposure: maximum less the effect of mitigation considered to be an actual reducer of credit risk. Guarantees/securities and other low- value collateral is not included. 3 - Effect of mitigation: Value of collateral associated with an operation. Limited to the value of this collateral, priority is given to more liquid collateral (financial, insurance, residential mortgages and other mortgages).
Dez/13 Mitigation effect 3 Residential Other Maximum exposure 1 Net exposure 2 Financials Guarantees Mortgages Mortgages Services 1,335,315 905,934 20,737 35,611 123,632 249,399 Construction 720,701 424,158 17,586 49,710 45,215 184,032 Property activities 552,892 203,397 14,971 0 16,676 317,848 Industry 489,465 342,690 23,892 384 22,776 99,723 Retail sales 386,077 189,519 7,958 405 73,063 115,133 Public sector 265,430 137,712 218 125,837 183 1,480 Financial institutions and insuran162,495 85,874 51,322 0 7,361 17,938 Others 390,567 226,121 13,897 24,454 47,625 78,470 Private 3,666,084 765,945 21,034 19 2,809,096 69,990 Total 7,969,025 3,281,352 171,614 236,420 3,145,627 1,134,013
1 - Maximum exposure: Refers to the net balance sheet value 2 - Net exposure: maximum less the effect of mitigation considered to be an actual reducer of credit risk. Guarantees/securities and other low- value collateral is not included. 3 - Effect of mitigation: Value of collateral associated with an operation. Limited to the value of this collateral, priority is given to more liquid collateral (financial, insurance, residential mortgages and other mortgages).
65% of the hedging in the loans portfolio by collateral type pertains to residential mortgage collateral, 26% to other mortgages, 5% to guarantees issued by institutional entities, and 4% to financial guarantees.
Commitments and guarantees The group makes use of a range of commitments and contingent liabilities that are designed to allow us to meet our clients’ needs. Although these obligations are not recognised in the balance
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sheet, the commitments represent a credit risk and the group consequently regards them as an integral part of this risk.
The figures for maximum exposure to commitments and guarantees accepted by the group, at 30 June 2014, are disclosed in note 24.
Geographical structure of the loans portfolio and securities With regard to the exposure to credit risk in the various markets, as a function of counterparty location, the financial asset concentration risk, at 30 June 2014 and at 31 December 2013, was distributed as follows:
Jun-14 (thousand euros) North Latin Rest of the Europe Total America America world Financial assets held for trading1 19,585 - (0) - 19,585 Other financial assets at value through profit or loss 38,775 1,099 2,727 - 42,600 Financial assets available for sale 2,024,201 - 0 - 2,024,201 Credit to clients 7,513,424 80,721 89,314 55,785 7,739,244 Investments held until maturity 8,139 - - - 8,139 Total 9,604,123 81,819 92,041 55,785 9,833,769
Weight of each geographical area 98% 1% 1% <1%
1 Derivatives are not included Note: The analysis excludes amounts related to discontinued units.
These figures indicate that lending to clients carries a significant concentration risk in all markets: Europe (78%), North America (99%), Latin America (97%) and Rest of the World (100%).
It should also be noted that the financial assets held for trading are of particular importance in the European market, where they represent 21% of the assets managed in this market. This is the result of the purchase of public debt securities under the recapitalisation plan implemented in 2013.
Geographical structure of the loans portfolio The geographical exposure to credit risk at 30 June 2014 and 31 December 2013 is detailed in the table below. The European market was responsible for the vast majority of this risk, with a share of 97% in June 2014, the same percentage as at December 2013.
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(thousand euros) Jun-14 Dec-13 Maximum Net1 Maximum Net1 Exposure Exposure Exposure Exposure Mainland 4,662,034 60% 2,061,798 66% 4,700,265 59% 2,133,648 65% Autonomous Regions 2,396,329 31% 873,882 28% 2,512,408 32% 871,954 27% European Union 436,529 6% 133,134 4% 503,042 6% 184,483 6% Rest of Europe 18,532 <1% 461 <1% 17,150 <1% 510 <1% North America 80,721 1% 11,694 <1% 96,576 1% 20,952 1% Latin America 89,314 1% 47,575 2% 84,155 1% 50,135 2% Rest of the world 55,785 1% 15,009 <1% 55,429 1% 19,670 1% Total 7,739,244 3,143,553 7,969,025 3,281,352
** Net Exposure: maximum less the effect of mitigation considered to be an actual reducer of credit risk. Guarantees/securities and other low-value collateral is not included. Note: The analysis excludes amounts related to discontinued units.
The other markets are of reduced significance in this respect, accounting for just 3%. As at December 2013, the figures given here reflect the geographical reorganisation of the group’s presence, which resulted from the accounting changes applied to group entities. The planned disposal of controlling interests is scheduled to take place in 2014.
Loans portfolio structure by sector At 30 June 2014 and 31 December 2013, client loans were distributed across business sectors in the following way:
(thousand euros) Jun-14 Dec-13 Maximum Net2 Maximum Net2 Exposure Exposure Exposure Exposure Services¹ 1,199,092 15% 792,739 25% 1,335,314 17% 905,934 28% Construction 640,310 8% 364,068 12% 720,701 9% 424,158 13% Property activities 518,559 7% 189,903 6% 552,892 7% 203,397 6% Industry 462,259 6% 339,405 11% 489,465 6% 342,690 10% Retail sales 353,233 5% 179,427 6% 386,077 5% 189,519 6% Public sector 344,331 4% 185,914 6% 265,430 3% 137,712 4% Financial institutions and insurance com 161,822 2% 82,303 3% 162,495 2% 85,874 3% Others 396,683 5% 257,064 8% 390,567 5% 226,121 7% Private 3,662,955 47% 752,730 24% 3,666,084 46% 765,945 23% Total 7,739,244 3,143,553 7,969,025 3,281,352
1 The services segment includes other business services.
2 Net exposure: maximum less the effect of mitigation considered to be an actual reducer of credit risk. Guarantees/securities and other low-value collateral is not included. Note: The analysis excludes amounts related to discontinued units.
At 30 June 2014, the services segment accounted for 15% (17% in December 2013) of the total maximum exposure, followed by the construction segment at 8% (9% in December 2013) and then real estate activities at 7%, the same as in December 2013.
In sector terms, the credit risk exposure (including direct credit and bank guarantees issued) of our top 20 clients and/or economic groups stood, at 30 June 2014, at 1,155 million euros (gross).
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The credit distribution of our largest clients by sector is represented in the diagram below.
June 2014
OTHERS 4%
FINANCIAL SERVICES INSTITUIONS 24% 17%
TOP 20
PUBLIC SECTOR 19%
CONSTRUCTION 16%
REAL ESTATE ACTIVITIES 19%
Loans portfolio structure by geography and by sector At 30 June 2014, the group’s market exposure by business sector was as follows:
June 2014
Public Financial Retail sales Sector EUROPE Institutions and LATIN AMERICA 5% 5% Insurance Industry Industry Companies 0% 6% 2% Private Clients 42% Activities Real State Private Clients Activities Real 6% 42% State 47%
Constrution 8% Others 10% Services* Constrution Others Services* 16% 5% 5% 1%
NORTH AMERICA REST OF THE WORLD Industry Private Clients 0% Retail sales Activities Real 36% 0% State Activities 36% Real State Private 25% Clients 32%
Services* Services* 0% Constrution Others Constrution 8% 17% 11% 26% Others 9%
Structure of the loans portfolio by currency
The main exposure to foreign currency credit risk in the lending portfolio is to the US dollar (USD), as the following table below shows.
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(thousand euros)
Jun-14 Dec-13 EUR 7,515,335 7,739,214 BRL 127 62 USD 137,859 140,664 CVE - - CHF 11,281 15,693 GBP 39,818 38,615 HUF 27,416 27,458 PLN 7,326 7,222 JPY 77 88 Others 2 9 Total 7,739,244 7,969,025
Average amount by exposure intervals At 30 June 2014 and 31 December 2013, the average exposure of the loans portfolio, by operation value interval, was as follows:
Jun-14 (thousand euros)
Range value for No. of Clients Credit Average exposure Weighting operation ] 0M - 0.5M ] 273,333 4,949,145 18 63.9% ] 0.5M - 2.5M ] 704 880,861 1,251 11.4% ] 2.5M - 5M ] 127 493,143 3,883 6.4% ] 5M - 10M ] 56 436,159 7,789 5.6% > 10M 57 979,936 17,192 12.7% Total 274,277 7,739,244
Dec-13 (thousand euros) Range value for No. of Clients Credit Average exposure Weighting operation ] 0M - 0.5M ] 285,558 5,087,011 18 63.8% ] 0.5M - 2.5M ] 775 947,431 1,222 11.9% ] 2.5M - 5M ] 123 487,180 3,961 6.1% ] 5M - 10M ] 71 542,050 7,635 6.8% > 10M 55 905,353 16,461 11.4% Total 286,582 7,969,025
Quality of the loans and other financial assets
Loans Made In addition to the still enfeebled economy (1st quarter GDP was down on the last quarter of 2013) of the first half of the year, the changes in the indicators presented above were also influenced by the reduction in the loans portfolio, which is a consequence of the ongoing deleveraging process.
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Also related to credit quality, the indicators for the period were as follows:
Jun-14 Dec-13 Credit to Clients, of which: 8,916,042 9,129,242 Overdue credit and interest2 1,193,482 1,177,059
Credit impairment (1,176,798) (1,160,217)
Indicators (%)
Credit impairment / Credit to Clients 13.2% 12.7% Credit with impairment/Total credit1;3 17.0% 16.2% Net credit with impairment/Net total credit1;3 3.4% 3.4% Credit at risk/Total Credit1 22.7% 22.2% Net credit at risk/Net Total Credit1 10.1% 10.3% Restructured Loans/Credit to clients(Gross)4 15.0% 13.8% Restructured credit not included in Credit at risk /Credit to Clients(Gross)4 11.9% 11.0%
1 Ratios from Banco de Portugal Instruction no. 22/2011. 2 Loans and interest overdue > 90 days
3 Values from the financial statements.
4 Banco de Portugal defined ratios (Instruction No. 32/2013).
These indicators show that the quality of the loans portfolio fell in the last six months, a fact that can be attributed to the worsening domestic and international economies. This adverse climate led to an increase in impairment losses.
The overdue loans and interest item, at 30 June 2014, includes 90,904 thousand euros of loans written off in the assets items of the individual group member accounts. This compares with the figure of 53,939 thousand euros carried in the individual accounts of group companies at 31 December 2013.
Assessment of Impairment At 30 June 2014, the value of collective and individual impairment losses, including off-balance sheet losses, stood at 545,322 thousand euros (2013 – 578,381 thousand euros) and 631,476 thousand euros (2013 – 581,836 thousand euros), respectively. Loans that are in default or show signs of an impairment that is materially significant are analysed individually. All other loans are subject to impairment through the application of collective models based on PD and LGD parameters.
The amounts referred to above do not include (either collective or individually) impairment losses for discontinued operational units (192,510 thousand euros).
At 30 June 2014 and 31 December 2013, individually analysed loans totalled 1.803 thousand million euros (not including the discontinued operational units) and 1.868 thousand million euros, respectively. The individually analysed loans for discontinued units (Banif Brasil, BBI Brasil, BCN and Banif Bank (Malta) totalled 254 thousand euros (2013 - 269 thousand euros).
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At the end of the reporting periods in question, the relative proportion, for the group, of total estimated group credit losses and off-balance sheet credit-related liabilities that can be attributed to individual losses is as follows:
ACCORDING TO FINANCIAL STATMENTSa) INCLUDE THE DISCONTINUED OPERATIONS UNITS
100% 100%
90% 90%
80% 80% 50% 54% 70% 70% 57%
60% 60%
50% 50%
40% 40%
30% 30% 50% 46% 20% 20% 43%
10% 10%
0% 0% Dez -13 Jun -14 Jun-14 Collective Losses Individual Losses Perdas Colectivas Perdas Individuais
Notes: a) The amount related to Banif – Banco Internacional do Funchal (Brasil), SA, Banif - Banco de Investimento (Brasil), Banif Bank (Malta), PLC e Banco Caboverdiano de Negócios (BCN) were not considered, due to the fact that business units were classified as discontinues operations units.
Total lending and the estimated losses per segment, for the reporting periods in question, are as follows:
Credit to Clients Credit impairment
Jun-14 49% 34% 8% 9% Jun-14 55% 19% 5% 21%
Dec-13 49% 33% 9% 9% Dec-13 61% 4% 23% 12%
Companies Personal Clients Property Personal Clients Consumer Personal Clients Other
Over the last six months, there have been no significant changes in the loans portfolio. The "companies" segment has the highest weighting in the group's portfolio. As regards the distribution of losses by impairment, there was a slight fall in the "companies" segment, whereas the "personal real estate" and "other personal" recorded significant increases. The "personal consumption" segment fell sharply.
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Credit impairment for the periods in question was as follows:
Changes to impairment (with details regarding the effect of the transfer of the discontinued operational units to “Non-current assets held for sale”):
(thousand euros)
Personal Clients Personal Clients Personal Clients Companies Total Consumer Property Others Balance 2013 805,078 286,987 52,560 170,579 1,315,203
Transfer from discontinued units to (97,641) (22,678) (1,360) (33,307) (154,986) non-current assets held for sale
Reinforcements 108,088 15,483 16,290 117,087 256,947 Uses and Settlements (62,358) (42,524) (1,157) (378) (106,417) Reversals and recoveries (102,157) (11,959) (9,322) (10,511) (133,949) balance Jun-14 651,010 225,307 57,010 243,470 1,176,798
Changes to Impairment (including the discontinued operational units):
(thousand euros) Personal Clients Personal Clients Personal Clients Companies Total Consumer Property Others Balance 2013 805,078 286,987 52,560 170,579 1,315,203 Reinforcements 143,093 15,441 16,563 117,133 292,230 Uses and Settlements (52,485) (40,852) (1,095) 2,257 (92,174) Reversals and recoveries (108,504) (15,558) (9,367) (12,521) (145,951) Balance Jun-14 787,181 246,018 58,662 277,447 1,369,308
Personal Clients Personal Clients Personal Clients Companies Total Consumer Property Others Balance 2012 692,400 259,144 66,303 79,918 1,097,764 Reinforcements 521,393 76,397 33,370 114,943 746,104 Uses and Settlements (148,491) (12,778) (8,351) (543) (170,163) Reversals and recoveries (260,224) (35,777) (38,762) (23,739) (358,502) Balance 2013 805,078 286,987 52,560 170,579 1,315,203
Given the stipulations of Banco de Portugal circular 02/2014/DSPDR, we have included the following tables with detailed information on the quality of the Banif Group credit portfolio and the respective impairment.
To contextualise the situation, we note that Banif, SA is the main group entity and is responsible for around 80% of the consolidated gross credit portfolio. It is followed by Banif Mais SGPS (which includes the branches and the Hungarian subsidiary) which is responsible for 7% of the portfolio. The other entities are of little significance in this respect.
The tables do not include some types of credit because, given their nature, there is no associated impairment. This is the case, for example, of reverse repos with non-banking entities.
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Details of the exposures and related impairment (by main status):
Exposure June 2014 Impairment June 2014 Total Performing Of which of which Overdue and of which Total Performing Overdue and Segment exposure Loans cured restructured doubtful loans restructured Impairment Loans doubtful loans Corporate 435,906 331,654 n/a 11,852 104,252 64,121 54,158 10,180 43,978 Construction and CRE 1,332,316 788,757 n/a 263,090 543,559 156,826 318,099 71,558 246,541 Housing 2,682,093 2,411,409 n/a 102,290 270,685 48,916 39,667 2,416 37,251 Consumer 923,260 549,637 n/a 20,519 373,623 53,716 244,673 4,410 240,263 Other Companies 2,586,841 1,896,489 n/a 225,996 690,351 210,446 417,282 120,287 296,996 Other Personal Clients 735,271 528,026 n/a 77,877 207,245 48,870 102,918 4,278 98,640
Total 8,695,688 6,505,972 n/a 701,624 2,189,716 582,896 1,176,798 213,128 963,669
n/a = not available
Details of the exposures and related impairment (disaggregated by buckets):
Of the Total exposure at June 2014 Of the Total impairment at June 2014 Performing Loans Overdue and doubtful loans Performing Loans Overdue and doubtful loans Days late Exposure June Not showing Days late <=90 Days late >90 Impairment Days late Days late Days late >90 Segment Showing signs Sub-total between 30 - 2014 signs days days June 2014 <=30 days <=90 days days 90
Corporate 435,906 243,008 88,646 331,654 36,286 67,966 54,158 8,109 2,071 10,810 33,169 Construction and CRE 1,332,316 594,252 194,504 788,757 99,163 444,397 318,099 70,899 659 25,699 220,842 Housing 2,682,093 2,243,072 168,337 2,411,409 39,856 230,829 39,667 2,000 416 2,669 34,583 Consumer 923,260 534,310 15,327 549,637 32,362 341,261 244,673 4,255 155 5,463 234,800 Other Companies 2,586,841 1,511,878 384,611 1,896,489 163,280 527,071 417,282 114,894 5,392 25,976 271,020 Other Personal Clients 735,271 453,632 74,394 528,026 22,577 184,669 102,918 3,282 996 5,397 93,243 Total 8,695,688 5,580,152 925,820 6,505,972 393,524 1,796,192 1,176,798 203,440 9,689 76,013 887,656
Details of the loans portfolio by segment and by production year:
Corporate Construction and CRE Housing Consumer Other Companies Other Personal Clients Number of Impairment Number of Impairment Number of Impairment Number of Impairment Number of Impairment Number of Impairment Year of production Amount Amount Amount Amount Amount Amount operations constituted operations constituted operations constituted operations constituted operations constituted operations constituted
2004 and before 128 54,916 6,793 5,054 218,920 104,281 18,958 680,534 10,889 12,889 56,307 37,754 15,509 588,847 189,421 42,025 86,703 35,783 2005 12 5,657 1,375 320 18,885 3,520 4,079 212,416 4,827 4,455 22,689 14,976 1,041 59,733 5,452 2,126 18,219 1,568 2006 12 3,815 12 533 50,493 10,904 4,843 273,147 4,551 8,715 41,826 27,561 1,352 75,832 7,938 2,361 38,143 2,325 2007 29 26,598 2,483 823 160,690 38,754 6,565 380,679 6,389 19,323 81,139 47,186 1,995 167,022 15,437 3,189 90,720 6,427 2008 28 11,070 674 1,194 147,897 25,442 6,164 370,474 5,979 20,736 89,559 43,221 2,858 163,476 27,545 4,664 119,889 12,212 2009 34 55,725 6,667 1,347 128,546 29,221 3,714 227,635 2,685 12,652 59,114 23,059 3,850 214,361 52,410 11,306 97,363 11,101 2010 48 95,766 11,199 1,830 78,592 13,827 3,932 265,241 2,250 21,287 103,717 20,540 7,098 219,402 26,712 23,040 93,902 7,555 2011 27 10,605 2,541 1,204 71,800 20,555 1,982 133,873 1,331 19,956 96,272 14,128 4,365 171,512 25,188 10,122 60,821 13,119 2012 30 53,623 5,080 1,069 170,338 33,385 481 32,924 130 17,700 95,513 6,160 4,461 229,026 26,838 18,050 40,128 5,417 2013 87 65,049 13,259 2,503 204,207 32,057 1,024 76,141 469 27,421 171,720 7,677 7,928 398,576 27,633 21,053 64,937 5,995 2014 290 53,082 4,076 1,368 81,946 6,152 360 29,031 167 14,938 105,404 2,412 7,547 299,053 12,709 5,137 24,447 1,417 Total 725 435,906 54,158 17,245 1,332,316 318,099 52,102 2,682,093 39,667 180,072 923,260 244,673 58,004 2,586,841 417,282 143,073 735,271 102,918
Details of the gross credit exposure and impairment assessed individually and collectively, by sector:
Corporate Constrution and CRE Housing Consumer Other Companies Others Private Clients June2014 Evaluation Exposure Impairment Exposure Impairment Exposure Impairment Exposure Impairment Exposure Impairment Exposure Impairment Individual 138,565 52,027 744,519 259,796 54,766 13,087 30,819 17,987 675,535 263,567 98,613 27,639 Collective 297,342 2,131 587,797 58,303 2,627,327 26,580 892,441 226,686 1,911,306 153,715 636,658 75,279 Total 435,906 54,158 1,332,316 318,099 2,682,093 39,667 923,260 244,673 2,586,841 417,282 735,271 102,918
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Details of the gross credit exposure and impairment assessed individually and collectively, by business sector:
Manufacturing Accommodation and Construction Commerce Real Estate Activities Technical Activ. Public Administration Others June 2014 Industries Catering Evaluation Exposure Impairment Exposure Impairment Exposure Impairment Exposure Impairment Exposure Impairment Exposure Impairment Exposure Impairment Exposure Impairment Individual 367,224 143,382 199,842 79,419 386,798 124,247 130,067 51,235 77,984 16,919 38,996 13,441 0 0 360,207 162,159 Collective 392,341 43,960 464,593 79,490 208,210 7,180 380,893 44,263 131,444 10,452 118,265 5,460 257,302 5 1,407,163 167,844 Total 759,564 187,343 664,435 158,909 595,009 131,427 510,960 95,499 209,428 27,371 157,261 18,901 257,302 5 1,767,370 330,003
Details of the gross credit exposure and impairment assessed individually and collectively, by geography:
Portugal United Kingdom Luxembourg Ireland Venezuela United States of America Cape Verde Brazil (Others) June 2014 Evaluation Exposure Impairment Exposure Impairment Exposure Impairment Exposure Impairment Exposure Impairment Exposure Impairment Exposure Impairment Exposure Impairment Exposure Impairment Individual 1,508,575 534,354 16,804 3,287 119,000 59,535 8,436 2,154 10,561 825 30,585 11,516 6,694 767 30,154 15,128 12,008 6,538 Collective 6,384,767 516,226 225,526 4,425 2,528 18 54,261 5,302 26,532 129 55,145 1,428 15,814 243 37,629 457 150,669 14,466 Total 7,893,342 1,050,580 242,330 7,712 121,528 59,553 62,697 7,457 37,094 954 85,730 12,944 22,508 1,010 67,783 15,585 162,676 21,004
Details of the restructured portfolio by restructuring measure applied:
2014 Performing Loans Overdue and doubtful loans Total
Number of Impairment Number of Impairment Number of Impairment Restructuring Measure Amount Amount Amount operations constituted operations constituted operations constituted
Extension of deadline 4,939 206,298 17,108 3,821 97,820 39,919 8,760 304,118 57,027 Grace period 177 49,692 5,938 320 106,352 25,433 497 156,044 31,371 Reduction of interest rate 0 0 0 0 0 0 0 0 0 Capitalisation of interest 0 0 0 0 0 0 0 0 0 Write-down of interest and capital 0 0 0 0 0 0 0 0 0 Others (1) 4,141 445,634 45,106 10,748 378,724 98,088 14,889 824,358 143,195
Total 9,257 701,624 68,153 14,889 582,896 163,440 24,146 1,284,519 231,593
(1) Includes restructured loans for which the restructuring measure ID is pending IT processing
Movements in and out of the restructured credit portfolio:
Initial balance of the restructured portfolio (gross of impairment) 1,027,629 Restructured loans in the period 351,704 Accrued interest on the restructured portfolio 924 Settlement of restructured loans (partial or total) (103,846) Loans reclassified from "restructured" to "normal" (442) Others 8,549
Closing balance of the restructured portfolio (gross of impairment) 1,284,519
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Details of the fair value of the collateral underlying the credit portfolio in the corporate, construction and commercial real estate (CRE) and housing segments:
Construction and CRE Housing Real Estate Other Real Collateral* Real Estate Other Real Collateral*
Fair value Number Amount Number Amount Number Amount Number Amount
< 0.5 M € 39 8,663 23 2,915 2,039 258,002 462 23,958 >= 0.5 M € and < 1 M € 10 7,146 5 3,639 165 118,307 18 11,727 >= 1 M € and < 5 M € 19 46,650 9 18,578 177 334,295 12 27,217 >= 5 M € and < 10 M € 6 42,434 5 31,852 18 131,103 4 28,308 >= 10 M € and < 20 M € 7 107,278 0 0 8 95,764 2 25,380 >= 20 M € and < 50 M € 3 83,410 0 0 2 45,432 1 22,000 >= 50 M € 2 352,518 0 0 0 0 0 0
Total 86 648,100 42 56,984 2,409 982,904 499 138,590
* Example: shares, bonds, deposits, material goods LTV ratio for the corporate, construction and CRE and housing segments:
Jun-14 Performing Overdue and Segment / Ratio Number Impairment Loans doubtful loans Corporate Without associated collateral n/a 266,403 18,828 13,991 < 60% 14 1,128 6,283 4,922 >= 60% and < 80% 3 0 518 518 >= 80% and < 100% 0 0 0 0 >= 100% 19 1,494 12,105 8,097 Construction and CRE 0 0 0 Without associated collateral n/a 325,046 199,728 154,628 < 60% 1,048 110,541 100,294 41,668 >= 60% and < 80% 435 46,774 83,426 19,014 >= 80% and < 100% 474 187,376 74,450 45,246 >= 100% 452 109,899 134,164 63,042 Housing 0 0 0 Without associated collateral n/a 12,555 24,831 3,812 < 60% 24,476 1,435,314 173,893 26,308 >= 60% and < 80% 9,858 738,591 33,708 4,364 >= 80% and < 100% 2,280 203,790 30,547 4,165 >= 100% 273 21,379 7,902 1,094 Total 39,332 3,460,290 900,677 390,870
Details of the fair value and of the net book value of the real estate received in kind, by asset type and by age:
Jun-14 Fair value Asset Number Book value of asset Land Urban 701 125,714 109,964 Rural 40 8,952 4,496 Buildings in development Commerce 8 2,834 2,789 Housing 131 37,636 35,050 Others 29 10,089 5,403 Buildings constructed Commerce 795 206,714 176,529 Housing 1,274 230,959 202,786 Others 0 0 0 Others 439 13,412 11,897
Total 3,417 636,310 548,913
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Details of the collateral paid in kind by time lapsed:
>= 2.5 years >= 1 year and Time lapsed since foreclosed/execution < 1 year and 5 years T otal < 2.5 years < 5 years a d 5 yea s a d 5 yea s a d 5 yea s Land Urban 13,315 48,532 34,992 13,125 109,964 Rural 0 2,187 1,405 904 4,496 Buildings in development 0 Commerce 250 2,538 1 0 2,789 Housing 17,169 12,282 1,254 4,345 35,050 Others 2,333 1,023 2,047 0 5,403 Buildings constructed 0 Commerce 42,261 90,605 31,612 12,050 176,529 Housing 85,731 83,066 30,620 3,369 202,786 Others 0 0 0 0 0 Others 3,666 5,120 2,336 776 11,897 Total 164,724 245,353 104,266 34,569 548,913
Distribution of the loans portfolio by degrees of internal risk:
Low DR Medium DR High DR
Segment 1 2 and < 5 3years and < 5 4years and < 5 5years and < 5 6years and < 5 7years and < 5 8years and < 5 9years and < 5n/a years Corporate 6,425 751 17,696 60,308 80,871 60,642 73,182 28,594 30,561 76,876 Construction and CRE 237 18,241 28,561 82,392 116,348 62,367 101,175 187,935 388,997 346,061 Housing 0 593 2,310 1,423 1,953 837 624 1,090 2,436 2,670,827 Consumer 0 0 74 81 172 69 0 21 3 922,839 Other Companies 16,497 25,705 87,326 166,673 229,287 194,877 265,891 235,792 348,820 1,015,972 Other Personal Clients 0 286 4,557 830 786 990 1,522 1,015 4,298 720,989 Total 23,160 45,576 140,524 311,706 429,418 319,783 442,394 454,447 775,116 5,753,563
The following tables detail the disaggregated risk parameters by homogenised segments for the main entities, in terms of their contribution to the consolidated loans portfolio: Banif S.A. and Banif Mais SGPS. As regards the collective analysis models, we should mention that all the entities in the Banif Group, with the exception of Banif Mais, used the Banif, SA risk parameters applied to the segments in which they operate. They did this in lieu of making their own estimates, bearing in mind the reduced statistical relevance of the various portfolios and their respective weighting in the consolidated portfolio.
As has already been mentioned, Banif Mais is in the process of updating its impairment model to make it a better fit to the methodology used by the parent company and also the requirements stipulated in the circular letter, particularly as these relate to the estimation of specific risk parameters, namely PD – Probability of Default, LGD – Loss Given Default, PI – Probability of Indication. Thus, we present the final impairment losses for Banif Mais by internal risk rating (from A - best to L - worst. CNC are contracts in litigation).
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Information on the risk parameters associated with the model for impairment by segment:
Banif SA
Segment PI PDD PDC PD LGD (1) 01- State and other Public Entities 1.77% 0.08% 1.13% 0.10% 0.00% 02- Residential Mortgages 1.90% 0.17% 11.79% 0.40% 6.91% 03- Consumer Credit 2.63% 0.33% 11.20% 0.63% 57.41% 04- Property Leasing 5.19% 0.99% 19.85% 2.01% 6.77% 05- Clients with contracts to promote Construction 11.75% 3.09% 25.48% 6.08% 9.13% 06- Other Constr. Sect. Clients Prom Prop - With Guarantee 6.65% 1.07% 21.64% 2.51% 10.09% 07- Other Constr. Sect. Clients Prom Prop - Without Guarante 5.31% 1.00% 23.23% 2.23% 35.45% 08 - Other Personal Clients - With Guarantee 3.82% 0.41% 16.16% 1.03% 7.44% 09 - Other Personal Clients - Without Guarantee 2.67% 0.33% 15.73% 0.75% 52.94% 10 - Other Companies - With Guarantee 4.46% 0.72% 19.55% 1.59% 9.92% 11 - Other Companies - Without Guarantee 4.46% 0.75% 17.75% 1.54% 54.83% 12 - ENIs - With Guarantee 4.23% 0.53% 18.59% 1.32% 9.32% 13 - ENIs - Without Guarantee 3.68% 0.54% 20.10% 1.28% 63.55%
(1) Corresponding to the LGD applicable to performing loans. A Vintage LGD is applied to loans in default
PORTUGAL HUNGARY Personal Personal SPAIN SLOVAKIA POLAND RISK PARAMETERS Auto BGO Auto Loans Loans A 2.6% 3.0% 2.2% 1.7% 3.1% 3.2% 2.6% 2.7% B 4.8% 6.0% 4.5% 3.4% 6.1% 6.0% 6.7% 5.0% C 8.2% 9.4% 7.1% 4.9% 9.7% 10.2% 10.2% 8.4% D 11.7% 12.6% 9.5% 7.5% 12.9% 14.6% 14.6% 12.1% E 15.4% 16.4% 12.3% 9.7% 16.8% 19.2% 17.9% 15.9% F 18.1% 18.8% 14.2% 12.7% 19.3% 22.6% 22.1% 18.8% G 21.1% 22.0% 16.6% 14.3% 22.6% 26.2% 26.1% 21.8% H 24.6% 26.6% 20.1% 16.5% 27.4% 30.6% 30.7% 25.4% I 27.1% 31.5% 23.8% 18.6% 32.4% 33.7% 35.3% 28.0% J 31.1% 34.6% 26.1% 20.5% 35.6% 38.7% 38.2% 32.1% K 36.9% 39.4% 29.7% 24.0% 40.5% 46.0% 45.2% 38.2% L 45.6% 54.3% 40.9% 32.1% 55.8% 56.9% 64.1% 47.2% CNC 67.0% 70.8% 53.4% 44.2% 72.8% 83.5% 82.9% 69.3%
Overdue loans and interest At 30 June 2014 and 31 December 2013, overdue loans and interest by segment was as follows:
Jun-14 (thousand euros)
3 - 6 Months 6 - 12 Months 1 - 3 Years > 3 Years Total Companies 43,525 100,722 299,986 322,407 766,640 Personal Clients Consumer 1,639 4,788 37,945 151,765 196,138 Personal Clients Property 6,012 7,383 30,340 37,103 80,838 Personal Clients Other 3,862 4,555 66,931 74,519 149,866 Total1 55,038 117,447 435,203 585,794 1,193,482 1 The amount reported for loans and interest overdue is not net of impairments.
Dec-13 (thousand euros)
3 - 6 Months 6 - 12 Months 1 - 3 Years > 3 Years Total Companies 50,344 108,448 285,190 285,332 729,313 Personal Clients Consumer 1,848 5,744 47,308 186,104 241,005 Personal Clients Property 1,993 6,667 26,010 34,116 68,785 Personal Clients Other 3,031 30,945 42,391 61,589 137,956 Total1 57,216 151,803 400,899 567,141 1,177,059
1 The amount reported for loans and interest overdue is not net of impairments.
There was a slight increase in the amount of overdue loans and interest (16,423 thousand euros).
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Recovery of Overdue Loans and those in Litigation The loans recovery oversight model has been significantly altered, with a view to adjusting it to the new cycle started in 2013. This cycle is characterised by a trend towards stabilisation/decrease in the total amount of credit at risk and growth in accordance with the recommendations of the Special Assessment Programme – Management of Distressed Loans, implemented by Banco de Portugal in 2013. Amongst the measures taken, were the following:
- The strengthening of the procedures for monitoring commercial network clients with a credit exposure and showing signs of overdue or at-risk credit. The DRC played a key role in this process; - A review of the DRC organisational model that brought in a greater degree of specialisation in managing clients, as a function of the segment, level of exposure process phase and type of product; - The implementation in the DRC of a specialised unit exclusively focused on monitoring clients under network management with overdue loans or those giving warning signs; - The redefinition of the analysis and decision competences for client loans that are being monitored or are in central recovery. This ensures these competences are in line with the changes made to the DRC's scope of action and organisational model.
Restructured loans The group regularly monitors its loans portfolio for preventive detection of potential client defaults. When applicable and suitable, loans are restructured and new conditions are negotiated that are better matched to the client’s financial capabilities and their capacity to generate funds or income.
In compliance with Banco de Portugal regulations (Instructions 18/2012 and 32/2013, which replace the previous instructions), credit operations subject to restructuring are identified and labelled as such in our information systems. This process covers credit operations whose initial conditions have been reformulated, in the same operation or by contracting a new loan, following a deterioration of the client’s creditworthiness and/or if they show evidence of being in financial difficulty. Restructured operations are classified according to their nature and, additionally, according to the reasons for the restructuring. Banif makes use of monitoring indicators to follow changes in loans classified in this way.
The adverse macroeconomic climate in the first half of 2014, and the resulting severe economic slowdown, lower private consumption, higher unemployment and consequent faster deterioration of company and private client credit risk all had a major impact on the volume of loans restructured because of client-side financial difficulties. The restructured exposure is detailed in the following table:
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(thousand euros)
Jun-14 Dec-13 Gross Restructured Gross Restructured Exposure* Exposure** Exposure* Exposure** Residents 8,534,787 1,240,603 15% 8,593,630 1,290,018 15% Housing 2,892,648 122,601 4% 2,921,044 100,473 3% Consumer and others 1,263,871 192,953 15% 1,336,617 187,893 14% Companies 3,919,908 842,500 21% 3,976,740 895,630 23% Public administration 348,775 54,137 16% 261,859 76,057 29% Others 109,585 28,412 26% 97,370 29,966 31% Non-residents 381,256 72,673 19% 535,612 41,650 8% Total 8,916,042 1,313,276 15% 9,129,242 1,331,668 15%
* Gross Exposure : as per gross loans to clients on the balance sheet.
* Restructured Exposure: credit operations whose initial conditions were reformulated as a result of a deterioration in client creditworthiness.
Impairments on restructured loans came to 323 thousand euros.
The group continued to work to perfect the information flow on the changes made to loan operations, particularly as regards restructuring.
Analysis of the Market Risk At 30 June 2014, the market value of the securities held for trading across the group stood at 83 million Euros (79.3 million euros at the end of 2013).
In consolidated terms, 33% of the group's trading portfolio is represented by Banif – Banco de Investimento (Brasil), SA. The next largest share is that of Banif Bank (Malta), at 30%, followed by Banif Banco de Investimento, SA, in Portugal, including holdings, with a share of 23% and, finally, Banif Banco Internacional do Funchal (Brasil), SA with 14%. When compared to 2013, the portfolio shares of Banif Bank (Malta) and of Banif Banco Internacional do Funchal (Brasil), SA. both went up.
Jun-14 Dec-13 BBI (Portugal) BBI (Portugal) 23% 30%
Banif Bank (Malta) Banif Bank 30% (Malta) Banif (Brazil) Banif (Brazil) 20% 14% 22%
BBI (Brazil) BBI (Brazil) 33% 28%
The following tables show the calculation of Value-at-Risk (VaR) for the Banif Financial Group trading securities portfolios. VaR was calculated using two different methods: the parametric model, with a 10-day horizon and a confidence interval of 99%, and the historic model, with a 10-day horizon and a confidence interval of 99%. 504 observations were made.
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The method based on parametric approximation is designed for forward-looking risk management, as it uses historic observations to create a basis for estimating future asset/portfolio volatility/risk.
In the historic model, the choice of 504 observations meant that the adverse conditions seen in the financial markets over the last 2 years were incorporated in the results. Calculation of the risk figures, individually (for positions held by each entity) or on a consolidated basis, takes into account the impact of the level of portfolio diversification for each of the entities.
The discontinued units, BBI (Brasil), Banif (Brasil) and Banif Bank (Malta), were included in the market risk analysis. Excluding the discontinued units, the only entity in the group to hold a trading portfolio is BBI (Portugal) and its subsidiaries. The parametric model gives a VaR of 4.8% at 30 June 2014, which compares with 3.5% in December 2013. Under the historic model, the VaR at 30 June, 2014 was 4.1%, which compares with the 5.0% of December 2013.
The Portuguese public debt securities portfolio, resulting from the application of the amounts received under the recapitalisation plan, corresponds to more than 80% of the portfolio of financial assets available for sale and stood at 1.6 thousand million euros at 30 June 2014. Given the relevance of this, it is important to mention that this portfolio had a VaR of 36.8 million euros (65.2 million euros at 31 December, 2013), calculated using the historic model for a 10-day horizon and a confidence interval of 99%, based on a period of 504 observations.
We should note, however, that in the case of the trading portfolio there is some market risk, which means that changes in the market price of the securities directly affects the bank's results. However, in the case of the assets that are in the portfolio of assets available for sale, the impact of changes in the price is felt at the level of the bank's equity (via our reserves).
The following table details the VaR for the consolidated trading portfolio at 30 June 2014, including discontinued units:
Discontinued Entities
Parametric model BBI Banif Banif Bank Consolidated (Portugal) BBI (Brazil) (Brazil) (Malta) VaR Portfolio VaR (%) 4.8% 0.2% 3.3% 4.8% 2.1% Portfolio VaR (euros) 939 44 384 1,189 1,730 Market Risk (common factors) 816 44 130 1,158 1,682 Shares 23 0 0 0 23 Bonds 651 44 111 1,158 1,598 Yield curve 653 1 111 1,134 1,550 Spread 102 0 13 153 239 Indexed to inflation 2 43 0 0 45 Emerging Markets 257 0 48 0 257 Correlation - common factors -115 0 -29 0 0 Specific Risk 217 2 71 267 386 Foreign Exchange Risk 355 0 382 0 355 Diversification Effect -449 -2 -199 -237 -693 (thousand euros)
a a a Co so da ed Historical Model (Portugal) BBI (Brazil) (Brazil) (Malta) VaR Portfolio VaR (%) 4.1% 1.8% 3.2% 2.5% 2.2% Portfolio VaR (euros) 802 483 368 620 1,853 (thousand euros)
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At 31 December 2013:
Banif Parametric model BBI BBI Banif Bank Consolidated (Portugal) (Brazil) (Brazil) (Malta) VaR Portfolio VaR (%) 3.5% 1.2% 2.0% 2.9% 1.8% Portfolio VaR (euros) 531 256 347 477 1,298 Shares 4 5 Bonds 189 255 39 344 826 Indexed to inflation 2 253 255 Emerging Markets 318 53 438 Correlation - common factors -144 -30 0 -279 Specific Risk 71 21 62 331 401 Foreign Exchange Risk 483 919 Diversification Effect -391 -20 222 -198 -1,012 (thousand euros)
Banif Historical Model BBI BBI Banif Bank Consolidated (Portugal) (Brazil) (Brazil) (Malta) VaR Portfolio VaR (%) 5.0% 2.8% 2.4% 1.6% 2.2% Portfolio VaR (euros) 1,199 583 418 267 1,526 (thousand euros)
Thus, at 30 June 2014, total aggregate VaR for the trading portfolios held by the various members of the Banif Financial Group came to about 1.7 million euros, according to the parametric model, or approximately 2.1% of the market value of this portfolio on a consolidated basis (1.3 million euros, or 1.8%, in 2013). According to the historic model, the figure is 1.9 million euros, or 2.2% of the portfolio’s market value on a consolidated basis (1.5 million euros, 2.2%, in 2013). The effect of diversification between the various entities was taken into account. The ratio of VaR to the Group’s consolidated own funds remains low, at less than 0.2%, under both methodologies.
6.0% Banif Bank BBI (Portugal) 5.0% (Malta)
4.0% Banif (Brazil)
3.0% risk % - at - 2.0% Value 1.0% BBI (Brazil)
0.0% 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 -1.0% Market value of portfolio (€)
Taking the percentage VaR of each entity’s portfolio at 30 June 2014, BBI (Portugal) is the largest contributor to the group’s overall VaR.
The analysis results provided by the two methods show the expected increase in market risk for Banif Bank (Malta) and BBI (Brasil), if their current portfolios were maintained and the same assumptions are used in the modelling.
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Parametric Historical Model Model
BBI (Brazil) Banif (Brazil) Banif Bank (Malta)
In the first half of 2014, approximately 78% of the Group’s portfolio comprised fixed-rate bonds (down from 83% at 31 December 2013), most of which are for public debt (42% Brazilian, 14% Maltese and 18% Portuguese). This explains the contribution of the “income curve” risk to total VaR, compared to the credit risk (“spread”).
Change in VaR by Risk Factor
120%
100%
80%
60%
40%
20%
0% Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14
Global Risk (common factors) Specific Risk Currency Risk
Overall Risk by sub-factor
120%
100%
80%
60%
40%
20%
0% Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14
Global Risk (common factors) Bonds Yield curve Spread
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Note: these graphs only reflect the major risk factors and do not incorporate the diversification effect, which, depending on the degree of correlation between the assets in the portfolio, results in a lesser/greater overall level of risk.
Analysis of the Interest Rate Risk This analysis is based on a positive or negative 200 basis point parallel shock to the income curve and the consequent impact on the group’s liquidity and the net interest income for the year, using the assumptions provided in Banco de Portugal Instruction 19/2005. However, the group also assesses the impact on its internal indicators of other magnitudes of shock.
Sensitivity analysis – impact of a positive change of 200 basis points on the interest rate curve for relevant currencies:
(thousand euros)
Jun-14 2013 Assets Liabilities Off-balance sheet Gap Impact on net worth TOTAL TOTAL (+) (-) (+) (-) (+/-) Up to 1 m 878,543 2,459,165 433,621 456,401 -1,603,402 1,283 1,888 1 - 3 m 3,125,145 1,621,373 1,644,724 1,742,660 1,405,836 -4,499 -7,947 3 - 6 m 2,243,400 1,677,514 910 0 566,796 -4,081 -12,573 6 - 12 m 354,693 2,643,491 85 0 -2,288,714 32,729 12,366 1 - 5 Y 1,597,966 810,507 3,206 0 790,665 -56,116 46,602 > 5 Y 562,888 39,699 4,114 0 527,304 -79,808 -4,536 Total 8,762,635 9,251,749 2,086,660 2,199,061 -601,514 -110,492 35,801 in % of Own Funds -11.6% 3.5%
Jun-14 2013 Impact on net interest income, at Assets Liabilities Off-balance sheet Gap TOTAL TOTAL 12 months (+) (-) (+) (-) (+/-) Up to 1 m 878,543 2,459,165 433,621 456,401 -1,603,402 -30,848 -45,393 1 - 3 m 3,125,145 1,621,373 1,644,724 1,742,660 1,405,836 20,970 39,143 3 - 6 m 2,243,400 1,677,514 910 0 566,796 3,823 17,672 6 - 12 m 354,693 2,643,491 85 0 -2,288,714 -14,583 -5,031 Total 6,601,781 8,401,543 2,079,341 2,199,061 -1,919,483 -20,637 6,391 in % of interest income -16.1% 5.1%
Own Funds 953,914 1,016,310 Net Interest Income 128,163 125,074
The results of the sensitivity analysis carried out on balance sheet and off-balance sheet assets in the banking portfolio indicate that a rise in market rates would have a negative impact on both the net situation and on short term net interest income.
Net Worth Net Interest Income 60,000 50,000 40,000 40,000 30,000 20,000 20,000 0 10,000 Até 1 m 1 - 3 m 3 - 6 m 6 - 12 m 1 - 5 Y > 5 Y -20,000 0 Até 1 m 1 - 3 m 3 - 6 m 6 - 12 m -40,000 -10,000 -20,000 -60,000 -30,000 -80,000 -40,000 -100,000 -50,000
Jun-14 Dec-13 Jun-14 Dec-13
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The concentration of interest rate risk in the 1 to 5-year and over 5-year time periods comes from the exposure to Portuguese public debt, penalised by the fact that these are long-term assets held at fixed rates. In counterpart, liabilities are concentrated in the up to 12-month periods. The aggregation of these factors results in a total negative impact in the long term.
The discontinued units have no material impact on either net worth or net interest income and introduce no changes to the final structure. In terms of overall impact, and if all entities are taken into account, the net worth impact would change to a negative 108 million euros (a change of -2.0 million euros) and the net interest income to a negative 20.6 million euros (a change of -5.4 million euros).
Analysis of the exchange rate risk At 30 June, 2014, the net open position in foreign currency was focused on American dollars (USD), as shown in the following table:
(thousand euros) Jun-14 Dec-13 Position Position Currency Long Short Net Net Czech koruna 9 5 4 53 Danish krone 20 0 20 102 Norwegian krone 14 42 -28 7 Swedish krona 200 0 200 31 Australian dollar 59 22 36 -404 Canadian dollar 330 274 56 -64 Hong Kong dollar 90 0 90 0 United States dollar 8,554 35,804 -27,250 -39,712 Hungarian forint 18 0 18 17 Swiss franc 69,364 69,393 -29 295 Japanese yen 114 103 11 -126 Pound sterling 744 471 273 0 Others 139 55 84 80 Brazilian real 1,518 9,052 -7,534 -6,252 Polish zloty 1,090 6 1,084 70 Total 82,263 115,230 -32,966 -45,926
Analysis of the liquidity risk The tables below summarise the maturity profile of the cash flows for the group’s assets and liabilities at 30 June 2014 and 31 December 2013 (not including future interest payments), respectively:
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(thousand euros)
Residual Deadlines Jun-14 UP TO 1 MONTH 1-3 MONTHS 3-6 MONTHS 6-12 MONTHS 1-5 YEARS >5 YEARS TOTAL
LIABILITIES 2,767,477 1,874,257 1,804,881 2,676,098 1,505,659 1,889,772 12,518,144
Funds from central banks and other IC's 1,376,529 89,382 80,040 922,396 175,332 0 2,643,680 Client funds and other loans 909,496 1,545,677 1,471,313 1,622,226 343,096 621,844 6,513,652 Financial liabilities held for trading 952 1,003 177 223 0 28,804 31,159 Financial liabilities at fair value through profit or loss 0 0 0 0 0 12,471 12,471 Debts represented by securities 14,048 92,438 153,214 78,015 327,239 1,145,194 1,810,148 Instruments representing capital 0 0 0 130,158 0 0 130,158 Subordinated liabilities 0 0 0 0 132,852 24,311 157,163 Other liabilities 467,403 146,759 100,314 53,461 516,089 98,271 1,382,297 Provisions 0 0 0 0 11,052 152 11,204 Capital and reserves 0 0 0 0 0 1,001,936 1,001,936 TOTAL 2,768,429 1,875,259 1,805,058 2,806,479 1,505,659 2,932,983 13,693,868
ASSETS
Credit to IC´s 214,606 145,973 0 0 0 59,420 419,999 Credit to Clients 396,405 343,857 498,673 522,819 2,723,299 3,254,191 7,739,245 Financial assets 72,244 133 1,254 276,011 1,138,412 629,191 2,117,244 Investments and tangible and intangible assets 790 1,056 1,774 1,642 534 405,155 410,951 Other assets 363,403 64,181 139,898 251,718 1,089,360 1,097,869 3,006,429 TOTAL 1,047,448 555,200 641,599 1,052,189 4,951,605 5,445,827 13,693,868
(thousand euros)
Residual Deadlines Dec-13 UP TO 1 MONTH 1-3 MONTHS 3-6 MONTHS 6-12 MONTHS 1-5 YEARS >5 YEARS TOTAL
LIABILITIES 3,355,887 1,702,320 1,462,563 2,029,936 2,518,777 1,654,436 12,723,920
Funds from central banks and other IC's 2,090,553 86,800 3,749 0 1,245,151 0 3,426,254 Client funds and other loans 905,303 1,465,030 1,311,233 1,628,637 389,445 603,632 6,303,280 Financial liabilities held for trading 2,321 1,997 1,496 0 1,079 21,893 28,785 Financial liabilities at fair value through profit or loss 0 0 0 0 0 12,393 12,393 Debts represented by securities 502 22,333 27,289 243,770 385,171 579,005 1,258,070 Instruments representing capital 0 125,000 0 125,058 10,000 0 260,058 Subordinated liabilities 0 0 0 0 74,439 79,879 154,318 Other liabilities 358,037 1,161 118,795 32,471 400,160 356,772 1,267,397 Provisions 5 0 0 0 13,333 27 13,365 Capital and reserves 0 0 0 0 0 879,572 879,572
TOTAL 3,356,722 1,702,320 1,462,563 2,029,936 2,518,777 2,533,174 13,603,492
ASSETS
Credit to IC´s 107,405 64,634 0 0 0 132,225 304,264 Credit to Clients 447,083 426,111 479,315 553,569 2,677,299 3,385,648 7,969,024 Financial assets 28,443 40,298 23,835 72,485 587,847 1,154,985 1,907,893 Investments and tangible and intangible assets 625 2,361 1,910 4,675 2,527 382,297 394,395 Other assets 407,268 80,552 113,566 207,603 912,851 1,306,076 3,027,915
TOTAL 990,823 613,956 618,626 838,332 4,180,524 6,361,231 13,603,492
Analysis of the gaps in the maturities profile for future cash flows also possible makes it to determine concentrations of risk at the various maturities:
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(thousand euros) Jun-14 %GAP ACCUMULATED % ACCUMULATED GAP /TOTAL GAP GAP/TOTAL ASSETS ASSETS UP TO 1 MONTH (1,720,981) (1,720,981) -12.6% -12.6% 1-3 Months (1,320,059) (3,041,040) -9.6% -22.2% 3-6 Months (1,163,458) (4,204,499) -8.5% -30.7% 6-12 Months (1,754,290) (5,958,789) -12.8% -43.5% 1-5 Years 3,445,946 (2,512,843) 25.2% -18.4% > 5 Years 2,512,843 - 18.4% -
(thousand euros) Dec-13 %GAP ACCUMULATED % ACCUMULATED GAP /TOTAL GAP GAP/TOTAL ASSETS ASSETS UP TO 1 MONTH (2,365,899) (2,365,899) -17.4% -17.4% 1-3 Months (1,088,364) (3,454,262) -8.0% -25.4% 3-6 Months (843,937) (4,298,199) -6.2% -31.6% 6-12 Months (1,191,605) (5,489,804) -8.8% -40.4% 1-5 Years 1,661,747 (3,828,057) 12.2% -28.1% > 5 Years 3,828,057 - 28.1% -
GAP/Total Assets (%) 40.0%
30.0%
20.0%
10.0%
0.0%
-10.0%
-20.0%
a) considering discontinued operations units b) excluding discontinued operations units
GAP/Accumulated Total Assets (%) 10.0%
0.0%
-10.0%
-20.0%
-30.0%
-40.0%
-50.0%
a) considering discontinued operations units b) excluding discontinued operations units
In relation to the above tables, we note that a significant proportion (61%) of the negative value in the one-month liquidity gap results from the maturing of funding acquired from the ECB. We foresee no difficulty in successively renewing this, as has already occurred in the past.
The execution of the funding plan for 2014 will ensure a stable level of liquidity, despite the expected disbursements. Some measures have already been taken during the first half of the year and others will be implemented before the end of the year.
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The growth in client deposits has led to an improved loan-to-deposit ratio for the half year. We are not expecting any worsening of the commercial gap before the end of the year. That is, client resources that are not renewed should be compensated for by the non-renewal of loans to clients that become due in the same period. In any case, the bank expects that by far the larger part of client resources that fall due in the coming months will be renewed.
Derivatives at fair value The table below lists the derivatives carried at fair value, broken down by maturity gaps, and based on the remaining period (to the contractual date) at 30 June 2014 and 31 December 2013, respectively. The amounts shown correspond to the updated contracted cash flows, although these flows might take place before the maturity date.
(thousand euros)
Jun-14 Up to 1m 1-3m 3-12m 1-5 Y >5Y Total FX Swaps 279 -893 1,078 0 0 463 Currencies -789 -1 0 0 0 -790 Interest Rate Swaps 0 0 17 0 -6,694 -6,677 Credit Default Swaps 0 0 0 0 0 0 Foreign currency forward transactions 0 0 0 0 0 0 Total -510 -895 1,094 0 -6,694 -7,004
Dec-13 Up to 1m 1-3m 3-12m 1-5 Y >5Y Total FX Swaps -2,226 -1,959 -1,496 0 0 -5,680 Currencies 1,751 134 2 0 0 1,887 Interest Rate Swaps 0 0 0 -692 -3,303 -3,996 Credit Default Swaps 0 0 0 0 0 0 Foreign currency forward transactions 0 0 0 0 0 0 Total -474 -1,825 -1,494 -692 -3,303 -7,789
The discontinued units are of low materiality in terms of exposure to the portfolio of financial derivative instruments held for trading, as the figure below shows:
2,000 1,000 0 -1,000 Até 1m 1-3m 3-12m 1-5 Y >5Y -2,000 -3,000 -4,000 -5,000 -6,000 -7,000 -8,000
a) Considering discontinued operations units b) Excluding discontinued operations units
Analysis of the sovereign risk The group’s exposures at 30 June 2014 are disclosed in note 40 “Special conditions applying to the sovereign risk of Portugal, Greece, Ireland, Spain, Italy and Cyprus” in the Banif Group annexe (consolidated view).
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Analysis of the operating risk There are certain occurrences in banks’ everyday business activities that may lead to losses because of the operating risk (OR) to which they are exposed.
The bank has a process for loading and checking OR events that depends on information flowing in from a number of sources.
OR managers augment this information by also recording events. Points that need dealing with are then added to these events, in such a way as to trigger mitigation measures. The aim is to strengthen and disseminate our operating risk culture so that the collaboration that already exists may be continued and improved by all staff working for the group.
Risk-weighted assets At 30 June, 2014, risk-weighted assets stood at 9.5 thousand million euros. 90% of the total came from credit and counterpart risk, 9% from operating risk and 1% from market risk.
The changes in the risk-weighted assets essentially reflect the deleveraging of the credit portfolio and the strengthening of the amount set aside for impairments.
(Million Euros) Evolution of RWAs
10,000
9,000
8,000
7,000 Mar-14 Jun-14
RWAs Market Risk RWAs Operating Risk RWAs Credit Risk
Note: Credit RWAs also included the values for the “Other Assets” segment (i.e. accounting items not relating to loans or securities, such as “Fixed”, “Cash”, etc.)
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06. ANALYSIS OF THE CONSOLIDATED ACCOUNTS
Results In the first half of 2014, operating income rose by 69.0%, year-on-year, to 216.1 million euros. A number of factors contributed to this, including:
- The 29.1% rise in net interest income, to 66.1 million euros, reflecting the ongoing adjustments we are making to our business model. The strategy underpinning this process involves repositioning Banif commercially, by offering higher value products to the corporate segment and following a policy of cutting funding costs by being more selective in our capture of customer resources. This positive growth in net interest income occurred in an economic environment that was strongly influenced by the credit volume effect, in the context of the deleveraging of the non-financial sectors of the economy, the fact that reference interest rates remained at low levels and the costs of the CoCo's.
- The full redemption of the CoCos, with the repurchase of the final tranche of 125 million euros, expected to take place before the end of this year, will contribute to reducing financing costs and so improve net interest income.
- The 9.7% decrease in commissions (net), to 33.4 million euros. This reflects the negative impact of the changes introduced by the new Banco de Portugal rules, with effect from the second half of 2013 onwards. It also reflects the decreases in our commercial and investment banking operations.
- The 81.7 million euro gains on financial operations, mostly attributable to the capital gains on the disposal of fixed-income Portuguese public debt securities (90.7 million euros in the first half of 2014).
- Other operating results stood at 34.2 million euros. This can be largely accounted for by the 41.5 million euros earned on the disposal of our overdue loans portfolio (write-off portfolio) and the 17.1 million euros attributable to the devaluation and disposal of real estate assets.
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Operating Income: Structure
4.0% 15.8%
26.2%
37.8%
28.9%
0.9% 15.4% 0.3%
40.0% 30.6%
Jun/13 Jun/14 Net interest income Dividend income Net fees and commissions Gains and losses in financial operations Other operating income
Operating costs in the first half of 2014 totalled 114.7 million euros. This figure reflects the rationalisation and optimisation measures taken to reshape the bank's organisational structure, in the light of the current business context and the ongoing restructuring process. Excluding the costs (9.1 million euros in the first half of 2014, against 0.4 million euros in the first half of 2013) associated with the voluntary redundancy programme, which began in March, operating costs fell 7.7% compared to the first half of 2013.
The payroll for the half year was 67.9 million euros. Excluding the impact of non-recurring costs arising from the staff reduction programme, staff costs fell 4.1% year-on-year. The voluntary redundancy programme and the expansion of Banif's ongoing restructuring process, particularly as regards the accelerated closure of branches, both had a positive impact on this figure. Given the streamlining of the already agreed pre-retirement, retirement and voluntary redundancy processes, which will begin to produce cost effects in the second half of 2014, and the ongoing closure of branches and the reorganisation of central services, Banif SA (domestic business) will likely close out 2014 with a total workforce of 2,000, or 14.4% fewer than the 2,328 staff it employed in the December of last year.
General administrative costs totalled 36.4 million euros in the first half of 2014, a drop of 8.3% year- on-year. This is despite the considerable costs incurred by the current recapitalisation and restructuring processes. This fall can be attributed to the rationalisation and optimisation strategy being applied to operating procedures and also to the renegotiation of contracts and the resizing of the distribution network, at both the domestic and international level. Among other items, it is worth highlighting the significant savings achieved in communication, maintenance and repair and consultants and external auditors. Related to this is the important strategic IT and application maintenance partnership with IBM, set up on an outsourcing basis and for a period of 10 years. This will result in a significant increase in efficiency and, at the same time, generate considerable operational savings, of up to 15 million euros.
Banif has decided to bring forward a number of measures that are part of the ongoing process of reshaping our business model. These measures include accelerating the programmes for resizing
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the workforce and closing bank branches in Portugal. This will allow us to achieve major cost reductions in 2015 and beyond.
Amortisations totalled 10.4 million euros for the first half of 2014, 22.1% less than the same period of the previous year. This partly reflects the downsizing of the bank’s structure and the rationalisation of our investment policy to provide a better fit to the reshaped business model.
Net provisions and impairments for the first half of 2014 came to 146.2 million euros, against the 141,4 million euros recorded for the first half of 2013, a year-on-year rise of 3.4%. This figure reflects an increase in net provisions for credit impairment in the amount of 121.5 million euros at the end of the first half of 2014. This is largely explained by a rise in impairments in our domestic business, particularly at Banif, SA, where net provisions were 117.9 million euros. This amount includes an impairment accruing from the across-the-board BdP instruction regarding the net exposure to GES entities.
The discontinued operational units made losses of 41.0 million euros in the first half of 2014, against a 78.3 million euro loss in the first half of 2013. As regards the discontinued operational units, we note the following:
- Banif Malta consolidated its operation in the first half of 2014, with a slight but sustained rise in its asset base (+63.3 million euros). It also made a profit (0.3 million euros), partly attributable to a reduction in general administrative costs (-6% year-on-year) and despite a small rise in staffing costs (+3% year-on-year).
- At the Banif Brasil bank, the results reflect the positive contribution made by the ongoing restructuring process, particularly as regards the impact of the associated cost reduction initiatives. These include the operational integration of the commercial and investment banking units; the downsizing of the distribution network (from 19 branches in December 2012 to two in June 2014); the staff reduction programme (from 233 employees in December 2012 to 126 in June 2014, with the payroll falling 23% year-on-year) and the lower general administrative costs. We also took the prudent step of increasing impairment by 33 million euros.
- Throughout the first half of 2014, Banco Caboverdiano de Negócios worked to implement its programme to increase operational efficiency. This resulted in significant cost savings, mainly on the staff side (-9.5% year-on-year), but also with a small but helpful contribution from general administrative costs (-15 year-on-year). Net income for the first half amounted to 0.8 million euros.
Net income for the first half of 2014, at -97.7 million euros compares favourably with the figure for the same period in the previous year (-196.0 million euros). This encouraging trend is attributable to improved banking income and the less negative performance of the discontinued operational units. It would have been even more marked, if it had not been for the increase in costs related to the staff reduction program (8.7 million euros).
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Balance Sheet Net assets stood at 13,693.9 million euros as at 30 June 2014, slightly higher (+0.7%) than at the end of 2013.
Gross lending came to 8,916.0 million euros as at 30 June 2014, down around 2.3% on December 2013. This fall reflects the bank's work to deleverage its positions in non-strategic sectors plus a somewhat weaker demand for credit in a recessionary context that has affected the Portuguese economy in particular.
It is important to note, however, that our ongoing repositioning strategy has allowed us to focus more closely on the corporate sector, particularly as regards micro and small to medium businesses. One of the main drivers of this commitment is our new commercial Leads programme, which has resulted in 500 million euros of loans to SMEs in the industrial and agri-food sectors. Overall, lending to businesses rose 2.7% in the first half of 2014, compared to December 2013. In order to sustain and increase the momentum of our strategy of working ever more closely with SMEs, we have set in train an expansion of our network of dedicated Micro and SME business managers. We will continue to refocus our efforts on commercial and financial lending to such customers, offering them current account facilities and registered loans.
Gross Lending to Customers (millions of euros)
Jun/14 Dez/13 D
Corporate 3,718 3,620 2.7% Individuals 3,928 4,064 -3.3%
Mortgage Loans 2,819 2,885 -2.3% Consumer Loans 525 522 0.6% Other Loans 584 657 -11.1%
Others 1,271 1,445 -12.0%
Total 8,917 9,129 -2.3%
Discontinued units 814 788 3.3%
Total 9,731 9,917 -1.9% The Others item includes loans more than 30 days overdue. The rise in lending by the discontinued units is attributable to the Malta unit.
In the first half of 2014, the growing trend of reversing the downward trajectory in deposits was maintained. Deposits grew by 3.3%, compared to December 2013, (excluding the impact of discontinued units). Our strategy has been to focus proactively on high-worth private customers, through our Affluent Manager network, and to work closely with expatriate communities. Taken together, these steps should see us meeting our 2014 growth targets for this item.
Banif has continued to successfully follow a funding cost reduction strategy that has focused the offer on standardised savings products rather than term deposits with negotiated rates. “Off-balance sheet” resources totalled 1,902 million euros at 30 June 2014.
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Total Customer Resources (millions of euros)
Jun-14 Dec-13 D
Total on-Balance sheet customer resources T 7,038 6,847 2.8% Dposits D 6,514 6,303 3.3% Other Liabilities O 524 544 -3.7%
Total off-balance sheet customer resources T 1,902 1,993 -4.6%
Total 8,940 8,840 1.1%
Discontinued units 913 962 -5.1%
Total 9,853 9,802 0.5%
Loan-to-Deposit Ratio
131.2% 128.4% 131.8% 126.4% 121.8% 118.8%
1T13 2T13 3T13 4T13 (*) 1T14 (*) 2T14 (*)
(*) Since 4Q2013, this has excluded the discontinued units.
As at 30 June 2014, the ratio of transformation of deposits into loans (net loans/deposits) stood at 118.8%. This significant improvement over December 2013 (126.4%) can be put down to positive growth in customer deposits.
Equity, before non-controlling interests, increased by 15.0%, compared to December 2013, to stand at 931.2 million euros at the end of June 2014. This is largely attributable to the 138.5 million euro increase in capital, an increase in revaluation reserves in the amount of 80.0 million euros and net income of -97.7 million euros for the period.
Liquidity Management In the first half of 2014, Banif increased the robustness of its financial structure, in a continuation of the trend seen throughout 2013. The broad lines of the Banif funding plan for 2014 were defined with two main objectives in mind: (i) to ensure there was sufficient surplus cash flow to service the expected outgoings for the year; (ii) to diversify our sources of funding, reducing our reliance on the ECB and extending the average maturity of our funding portfolio.
In the first half of 2014, and as planned, 438 million euros were placed through a securitisation operation involving SME loan portfolios (Atlantes SME3). We also placed an issue under the Banif Covered Bonds Programme, in a nominal amount of 100 million euros. On the secondary market, we
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sold 537 million euros worth of senior tranches of our own securitisations. We also carried out a medium-term collateralised funding operation worth some 150 million euros. Lastly, and as already mentioned, the growth in customer resources and loans to customers over the first six months of the year led to a narrowing of the commercial gap by some 440 million euros (excluding the effect of the discontinued units).
These factors have favoured a continuing downward trend in the use of central bank resources. Following a reduction of approximately 700 million euros in this facility, in the fourth quarter of 2013, we managed a further decrease of some 950 million euros between December 2013 and June 2014. At the same time, we increased the value of the free assets in our ECB pool by more than 80%, to 925 million euros at the end of the first half.
Thus, as can be seen from the charts below, Banif has significantly changed its resource structure over the first six months of 2014.
Total resources: 31 December 2013 30 June 2014
7% 5% 5% 7% 7% 8% 47% 11% Deposits & equivalents 49% 15% Central banks 23% Own debt funds 16% Discontinued units Equity Other resources
Solvency As at 30 June 2014, the Common Equity Tier 1 ratio, calculated in accordance with the CRD IV/CRR rules applicable in 2014 (phasing in) stood at 10.0%, which is above the minimum levels required by the regulatory authorities.
CRD IV/CRR Phasing in (2014)
Dec-13 Jun-14
Common Equity Tier 1 1,081.7 951.9 RWAs 9,923.7 9,539.8 Common Equity Tier 1 ratio 10.9% 10.0%
Unit: (millions of euros)
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07. OUTLOOK
The board of director’s main concern is to create value for our shareholders. As such, and with the aim of repositioning the group in the domestic financial landscape and enhancing our ability to generate capital organically, we identified a number of key areas in which we needed to take action. These included deleveraging the balance sheet, commercial repositioning, operational efficiency and corporate streamlining.
These strategic guidelines have sustained not only the recapitalisation plan, approved by the Portuguese State, but also our restructuring plan, which has been the subject of detailed discussions between the Ministry of Finance and the Directorate General of Competition at the European Commission. It still needs to be submitted for final approval by the college of commissioners at the European Commission. Once negotiations have been completed, the restructuring plan should: (i) show the group’s self-reliability in the mid to long term and its ability to operate without state support; (ii) demonstrate the group’s current and future contribution, and that of its shareholders (excluding the Portuguese state), to our recapitalisation and restructuring efforts; and (iii) include measures designed to prevent any distortion of competition in the sector that may result from the fact that the group has received funding from the Portuguese state.
Thus, the group should maintain and operate a sustainable, profitable and highly efficient retail banking business that concentrates on the group’s core segments, providing services (i) to the islands (the Autonomous Region of Madeira and the Autonomous Region of the Azores), (ii) to emigrant Portuguese communities, and (iii) to micro-companies, SMEs and private/high-income clients on the mainland.
The group is also committed to an operational turnaround that is focused on improving our capacity to generate capital organically, based on critical measures aimed at cost containment, loan recovery, real estate management and increased productivity. The group’s operational platform will be streamlined and re-centred on retaining and attracting private/high-income client funds on the mainland and also in all the other segments in the autonomous regions. We also want to develop our work with the micro-company and SME segment. More specifically, the geographical distribution of our branch network will be adjusted and re-centred to make it operationally more profitable and more usefully supportive of the group’s work with our target segments. The group’s overall objective, with this plan, is to ensure that our main productivity indicators converge with best market practices, thus ensuring that our cost/income ratios are compatible with an attractive return on equity. Additionally, and as a way of dealing with the high levels of non-performing loans, we have overhauled and strengthened our risk management and loan recovery structures.
The deleveraging process that is currently in progress addresses various classes of assets and business units, particularly in the international arena. Its main objective is to optimise our balance sheet structure by reducing the proportion of low-return assets and, at the same time, minimising the production of impairment. The disinvestment in our subsidiaries in Brazil, Cape Verde and Malta
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is a part of this plan, as can be seen from our decision to include these as non-current assets held for sale in our 2013 accounts.
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08. RATING
Ratings Banif – Banco Internacional do Funchal, SA has been rated by two agencies (Fitch Ratings and Moody’s) since 2003.
On 31 December 2012, the Ministry of Finance approved Banif’s recapitalisation plan. At the end of January 2013, the European Commission gave temporary authorisation, under EU rules on state aid, for a recapitalisation in the amount of 1.1 billion euros, to be provided by Portugal to Banif as part of the country’s financial stability programme.
Fitch Ratings On 9 January 2013, and as a result of the approval of Banif’s recapitalisation plan, Fitch downgraded Banif’s viability rating (VR) from “C” to “F”. This downgrading of the VR is a technical procedure common to all cases of state-backed recapitalisations. On the same day, Fitch announced that the following ratings would remain unchanged: Long-term "BB", Short-term "B", Support Rating "3" and the Support Floor Rating or SRF "BB".
On 19 December 2013, the agency raised the viability rating from “F” to “CCC”, following the results of the measures implemented in regard of the bank’s solvency ratios. Fitch announced that the other ratings would remain the same.
Moody´s On 15 April, Moody’s completed its review of the ratings of the Portuguese banks that had received state aid for the purposes of recapitalising under the PAEF, as from December 2012. On this same day, Banif, SA’s long-term rating was downgraded from “B2” to “Caa1”, with “negative” outlook. The BFSR was changed from E(Caa2) to E(Ca).
Despite Moody’s recognising that state aid may help Banif’s solvency, it also pointed out that the worsening of the operating environment could call into question the bank’s achievement of the deleveraging objectives built into its restructuring plan.
Long Short BF SR Outlook VR** Run Run (BCA)* MOODY'S Caa1 NP Negative E(ca) - 15 Apr 15, 2013 FITCH RATINGS BB B Negative - CCC Dec 19, 2013
* - BFSR (Bank Financial Strength Rating) BCA (Baseline Credit Assessment)
** - VR - Viability Rating
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Rating of issues The conclusion of the financial assistance plan to Portugal, in June 2014, associated with the asset eligibility criteria for the ECB pool led the group to request the cancelling of the rating of two of its issues guaranteed by the state: 200 million euros, maturing on 19 July, 2014 (Moody's and S&P) and 500 million euros due to mature on 22 December, 2014 (Moody's). The ratings in question were withdrawn on 25 (Moody's) and 30 June (Standard & Poor's), respectively.
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09. FINANCIAL STATEMENTS
1 - Consolidated Financial Statements
1.1 - Consolidated Balance Sheet
BANIF AND SUBSIDIARIES
Consolidated Balance Sheet
AT JUNE 30, 2014 AND DECEMBER 31, 2013
(Thousand Euros)
30/06/2014 31/12/2013
Impairment and Notes Gross value Net value Net Value Depreciation
Cash and balances at central banks 5 221,630 - 221,630 152,343 Balances at other credit institutions 6 191,360 - 191,360 186,777 Trading securities 7 42,305 - 42,305 40,086 Other Financial assets at fair value through profit or loss 8 42,600 - 42,600 73,686 Financial assets available for sale 9,37 2,092,057 (67,856) 2,024,201 1,782,041 Due from banks 10,37 230,323 (1,684) 228,639 117,487 Loans and advance to customers 11,37 8,916,042 (1,176,798) 7,739,244 7,969,025 Investment securities held to maturity 12 8,139 - 8,139 12,081 Non-current assets held for sale 13,37 1,603,437 (48,091) 1,555,346 1,606,951 Investment property 14 809,911 - 809,911 827,576 Other tangible assets 15 412,176 (178,188) 233,988 247,689 Intangible assets 16 81,140 (66,611) 14,529 17,076 Investments in associates and affiliates excluded from consolidated acc. 17 162,433 - 162,433 129,630 Current tax assets 3,078 - 3,078 3,417 Deferred tax assets 38 238,069 - 238,069 240,447 Receivables - direct insurance and reinsurance - - - - Other assets 18,37 245,823 (67,427) 178,396 197,180
Total Assets 15,300,523 (1,606,655) 13,693,868 13,603,492
Deposits from central banks 19 - - 2,119,891 3,077,603 Trading Liabilities 7 - - 31,159 28,785 Financial liabilities at fair value through profit or loss 20 - - 12,471 12,393 Deposits from other banks 21 - - 523,788 348,651 Due to customers 22 - - 6,513,652 6,303,280 Debt securities in issue 23 - - 1,810,148 1,258,070 Non-current liabilities available for sale 13 - - 1,017,596 994,338 Provisions 24 - - 11,204 13,365 Current tax liabilities - - 8,399 5,366 Deferred tax liabilities 38 - - 62,279 48,369 Securities representing equity 25 - - 130,158 260,058 Other subordinated liabilities 26 - - 157,163 154,318 Other liabilities 27 - - 294,024 219,323
Total Liabilities - - 12,691,932 12,723,919
Issued capital 28 - - 1,720,700 1,582,195 Share premium 28 - - 199,765 199,765 Treasury shares 28 - - (5) (6) Revaluation reserves 28 - - 62,126 (18,774) Other reserves and retained earnings 28 - - (953,638) (483,031) Profit for the period 28 - - (97,707) (470,273) Non-controlling interests 29 - - 70,695 69,697 Total Equity - - 1,001,936 879,573
Total Liabilities + Equity - - 13,693,868 13,603,492
The Accountant The Board of Directors
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1.2 - Consolidated Income Statement
Six months ended June 30 Three months ended June 30
30/06/2013 30/06/2013 Notes 30/06/2014 30/06/2013 30/06/2014 30/06/2013 Restated Restated
Interest and similar income 30 224,873 252,707 304,944 108,762 126,121 151,230 Interest and similar expense 30 (158,814) (201,550) (236,928) (75,976) (95,894) (112,779) Net Interest Income 30 66,059 51,157 68,016 32,786 30,227 38,451
Dividend Income 755 1,136 1,206 129 1,053 1,123 Fees and commission income 31 43,584 48,176 50,183 22,469 24,137 25,164 Fees and commission expenses 31 (10,204) (11,209) (11,685) (5,149) (5,704) (5,973) Income from assets and liabilities valued at fair value through profit or loss 32 (8,276) (2,888) 2,557 (4,263) (2,253) 6,991 Income from available-for-sale financial assets 32 90,643 36,108 36,170 50,126 32,273 32,336 Foreign exchange income 32 (673) 226 (8,827) (489) (881) (11,913) Income from disposal of other assets 33 35,742 - - 36,989 - - Net reinsurance premiums ------Net cost of reinsurance claims ------Variation in net underwriting provisions for reinsurance ------Other operating income 34 (1,576) 5,106 5,964 (2,498) 499 978 Net Operating Income 216,054 127,812 143,584 130,100 79,351 87,157
Personnel expenses 35 (67,922) (61,763) (73,724) (32,561) (30,485) (36,507) Overheads 36 (36,424) (39,728) (52,356) (19,656) (22,596) (28,986) Depreciation and Amortisation 15.16 (10,384) (13,321) (14,376) (5,042) (6,471) (6,996) Provisions net of write-offs 24 640 (3,807) (5,497) 981 (2,967) (4,569) Loan impairment net of reversals and recoveries 37 (121,509) (120,744) (198,941) (88,834) (125,353) (125,249) Impairment of other financial assets net of reversals and recoveries 37 (17,092) (5,509) (5,509) (8,481) (1,170) (1,170) Impairment of other assets net of reversals and recoveries 37 (8,194) (11,313) (12,114) (1,689) (7,259) (8,060) Negative consolidation differences ------Income from associates and joint ventures (equity method) 17 (5,907) 1,086 1,086 (5,866) 1,103 1,103 Profit/loss before tax and non-controlling interests (50,738) (127,287) (217,847) (31,048) (115,847) (123,277)
Income Tax (4,796) 8,810 21,051 (595) 8,363 (3,433) Current (9,467) (4,745) (5,191) (6,402) (2,575) (2,894) Deferred 38 4,671 13,555 26,242 5,807 10,938 (539) Profit/loss after tax and before non-controlling interests (55,534) (118,477) (196,796) (31,643) (107,484) (126,710) Profit/loss on discontinued operations 13 (40,999) (78,319) - (25,499) (19,226) -
Non-controlling interests 29 (1,174) 781 781 (845) (138) (138) Consolidated Profit for the Period (97,707) (196,015) (196,015) (57,987) (126,848) (126,848)
Earnings per share (expressed as EUR per share) 42 (0.001) (0.001) (0.002) Diluted earnings per share (expressed as EUR per share) 42 (0.000) (0.001) (0.002)
The Accountant The Board of Directors
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1.3 - Consolidated Statement of Comprehensive Income
BANIF AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
AS AT JUNE 30, 2014 AND 2013
(Thousand Euros)
30/06/2013 Notes 30/06/2014 30/06/2013 Restated
Profit/loss after tax and before non-controlling interests (55,534) (118,477) (196,796)
Other comprehensive income
Items that may be reclassified to profit or loss:
Financial assets available for sale Gains / (losses) in fair value 28 81,173 (45,939) (45,939) Tax gains / (losses) in fair value 28 (22,525) 12,900 12,900 Gains / (losses) on assets of entities consolidated by the equity method 28 18,505 3,673 3,673 Tax gains / (losses) on assets of entities consolidated by the equity method 28 (4,512) (2,255) (2,255)
Items that will not be reclassified to profit or loss:
Foreign exchange variations 28 7,351 9,945 9,945
Gains on property revaluations 28 (4) (2,664) (2,664) Tax gains on property revaluations 28 - 187 187
Actuarial gains / (losses) - - - Actuarial tax gains / (losses) - - -
Of hedge instruments used in cash flow hedging 28 - 41 41 Tax on hedge instruments used in cash flow hedging - - -
Total other comprehensive income net of tax, before non-controlling interests 24,454 (142,589) (220,908) (40,999) (78,319) - Non-controlling interests 29 (1,174) 781 781
Total other comprehensive income net of tax (17,719) (220,127) (220,127)
The Accountant The Board of Directors
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1.4 - Consolidated Statement of Changes in Equity
BANIF AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
AT JUNE 30, 2014 AND 2013
(Thousand Euros)
Non-control- Issued Other equity Share Revaluation Retained Other Result for Notes Own Share ling interests Total Capital instruments Premium reserves Earnings Reserves the year
Balances at 31-12-2013 28 1,582,195 - (6) 199,765 (18,774) (339,696) (143,335) (470,273) 69,697 879,573 Application of net profit/loss from the previous year Transfer to reserves 28 - - - - - (470,273) - 470,273 - - Acquisition/disposal of own shares 28 - - 1 ------1 Increase in capital 28 138,505 ------138,505 Comprehensive Income - - - - 79,988 - - (97,707) - (17,719) Operations in non-controlling interests 29 ------998 998 Other changes in equity 28 - - - - 912 - (334) - - 578
Balances at 30-06-2014 1,720,700 - (5) 199,765 62,126 (809,969) (143,669) (97,707) 70,695 1,001,936
Balances at 31-12-2012 28 570,000 95,900 (124) 104,565 (2,141) 247,235 (147,135) (576,353) 84,209 376,156 Restatement in accordance with IAS 8 - - - - - (2,735) - (7,843) - (10,578) Application of net profit/loss from the previous year Transfer to reserves - - - - - (576,353) - 576,353 - - Acquisition/disposal of own shares 28 - - 71 ------71 Increase in capital 28 800,000 - - - - - (1,261) - - 798,739 Comprehensive Income 28 - - - - (24,112) - - (196,015) - (220,127) Operations in non-controlling interests 29 ------(6,022) (6,022) Other changes in equity 28 ------626 - - 626
Balances at 30-06-2013 1,370,000 95,900 (53) 104,565 (26,253) (331,853) (147,770) (203,858) 78,187 938,865
The Accountant The Board of Directors
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1.5 - Consolidated Statement of Cash Flows
BANIF AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOW
AT JUNE 2014 AND 2013
(Thousand Euros)
OPERATING ACTIVITIES
30/06/2014 30/06/2013
Operating Results:
Net profit/loss for the year (97,707) (196,015) Profit/loss on discontinued operations 40,999 - Value adjustments related to loan and advance to customers 121,509 198,941 Other losses through impairment 25,286 17,623 Provisions for the year (640) 5,497 Amortisations and depreciation for the year 10,384 14,376 Income tax for year 4,796 (21,051) non-controling interests 1,174 (781) Derivatives (net) (785) (7,669) Profit/loss from non-consolidated companies 5,907 (1,086) Recognised dividends (755) (1,206) Interest paid on subordinated liabilities 5,892 7,097 Interest paid on Securities representing equity 9,505 16,577 Unrealised gains on investment properties 10,762 3,311
136,327 35,614
Changes to operating assets and liabilities:
(Increase)/Decrease in financial assets held for trading 4,272 4,525 (Increase)/Decrease in financial assets at fair value through profit or loss 31,086 (421) (Increase)/Decrease in Financial assets available for sale (199,982) (1,074,664) (Increase)/Decrease in due from banks (114,454) 185,518 (Increase)/Decrease in investments held to maturity 3,942 11,667 (Increase)/Decrease in loans to customers 216,340 430,258 (Increase)/Decrease in non-current assets held for sale (26,451) (72,337) (Increase)/Decrease in assets with repurchase agreements - 6,693 (Increase)/Decrease in other assets (129,851) (150,598) Increase/(Decrease) in deposits from central banks (957,712) 776,335 Increase/(Decrease) in financial liabilities held for trading (3,332) (2,709) Increase/(Decrease) in other financial liabilities at fair value through profit or loss 78 573 Increase/(Decrease) in deposits from other credit institutions 175,137 (359,846) Increase/(Decrease) in due to customers 210,372 (597,267) Increase/(Decrease) in debt securities in issue 552,078 (308,276) Increase/(Decrease) in other liabilities 86,591 72,594
(151,886) (1,077,955)
Operating Cash Flow (15,559) (1,042,341)
INVESTING ACTIVITIES
Investment in subsidiaries and associates Disposal of investments insubsidiaries associates and joint venture Acquisition of tangible assets (1,691) (4,047) Disposal of tangible assets 1,775 1,545 Acquisition of intangible assets (778) (782) Acquisition of investment properties (2,763) (3,870) Disposal of investment properties 14,765 13,144 Dividends received 755 1,206
Investment cash flow 12,063 7,196
FINANCING ACTIVITIES
Increase in share capital 138,505 800,000 Buy back of own shares 1 71 Issue of subordinated liabilities (200) (3,092) Interest paid on subordinated liabilities (5,892) (7,097) Issue of non-subordinated bonds - 20,000 Redemption of non-subordinated bonds - (20,000) Equity instruments (125,000) 400,000 Interest paid of Equity instruments (9,505) (16,577)
Financing cash flow (2,091) 1,173,305
Net cash flow from operating activities of discontinued operations 81,645 Net cash flow from discontinued operations of investment activity (2,188)
73,870 138,160 VARIATION IN CASH AND CASH EQUIVALENTS
Cash and cash equivalents at the beginning of the reporting period 339,120 394,198 Cash and cash equivalents at the end of the reporting period 412,990 532,358 73,870 138,160
Balance sheet value of cash and cash equivalent items, at June 30 Cash on hand 40,102 45,130 Sight deposits at central banks 181,528 215,243 Sight deposits at other credit institutions 120,588 174,487 Cheques for collection 11,626 12,758 Others 59,146 84,740 412,990 532,358
Cash and cash equivalents not available for use by the entity - -
The Accountant The Board of Directors
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1.6 - Annex to the Consolidated Financial Statements at 30 June 2014 Banif and Subsidiaries
(Amounts in thousands of euros, except where indicated otherwise)
1. GENERAL INFORMATION
The Banif Financial Group (the Group) is composed of companies with specialised expertise in the banking and insurance sectors. These are supported by a number of other companies that operate in various areas of the financial sector.
Banif – Banco Internacional do Funchal (Banif) is a public limited company that has its registered office at Rua João de Tavira, 30, 9004-509 Funchal, Portugal. Its business purpose is to provide banking services and it is entitled to carry out all accessory, connected or similar operations permitted by law and compatible with this purpose.
The Portuguese State holds 60.53% of Banif's capital stock. This corresponds to an identical percentage of voting rights as regards the issues specified in no. 8 of article 4 of Law no. 63-A/2008 of 24 November and 49.37% of the voting rights in respect of other matters. This holding was acquired as part of the recapitalisation operation concluded on 25 January, 2013.
Banif shares are listed on the Euronext Lisbon stock exchange.
On 28 July, 2014, the Banif board of directors reviewed, approved and authorised the financial statements at 30 June, 2014. On 19 August, 2014, it did the same thing for the Management Report for the first half of 2014.
2. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
2.1 Basis of Presentation
The Group's Consolidated Financial statements, presented here, relate to the half year reporting period ending 30 June, 2014. They were prepared in accordance with the IAS 34 – Interim Financial Report.
The interim consolidated financial statements do not include all the information and disclosures presented in the annual consolidated financial statements. Thus, these statement should be read at the same time as the consolidated financial statements for the year ending 31 December 2013.
The consolidated financial statements for the Banif Financial Group were prepared in accordance with the International Financial Reporting Standards (IFRS), as adopted by the European Union, at 30
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June 2014, and as established under EC Regulation No. 1606/02 of the European Parliament and Council of 19 July 2002.
Amounts in the consolidated financial statements are expressed in thousands of euros, rounded to the nearest thousand. They were prepared on the basis of historical cost, except for those financial assets and liabilities carried at fair value, namely assets and liabilities held for trading (including derivatives), assets and liabilities at fair value through profit or loss, financial assets available for sale, property registered as tangible assets and investment properties. The main accounting policies used by the Group are detailed below.
2.2 Comparative Information
In general terms, the figures presented here are comparable, in all significant respects, with those for the previous year, with the exception of the following changes:
- Discontinued units
The Group restated comparative information from 2013, from the profit and loss statement and the comprehensive income statement, where related to the classification of the following entities as discontinued units: Banco Banif Brasil, ZACF, Banif Banco de Investimento (Brasil), SA, Beta Securitizadora, Banif Gestão de Activos (Brasil), FIP Banif Real Estate, Banif Bank (Malta) and Banco Caboverdiano de Negócios.
These changes had an impact on the following items on the balance sheet and income statement at 30/06/2014:
Banif Banco Banco FIP Banif Banif Banco 30/06/2013 30/06/2013 de Beta BGA Banif ZACF Real Bank Caboverdiano Net Value Net value Investimento Securitizadora Brasil Brasil Estate (Malta) Negocios Restated (Brasil) SA
Interest and similar income 304,944 (34,571) (6) (3,780) (67) - (1) (10,183) (3,630) 252,707 Interest and similar expense (236,928) 18,685 - 4,682 3,342 - - 7,261 1,408 (201,550) Net Interest Income 68,016 (15,886) (6) 903 3,274 - (1) (2,922) (2,222) 51,157 Dividend Income 1,206 ------(16) (54) 1,136 Fees and commission income 50,183 (253) - (375) (12) - - (609) (758) 48,176 Fees and commission expenses (11,685) 74 - 34 4 - - 245 120 (11,209) Income from assets and liabilities valued at fair value through profit or loss 2,557 (6,820) - 1,065 - - 294 (3) 19 (2,888) Income from available-for-sale financial assets 36,170 ------(62) - 36,108 Foreign exchange income (8,827) 9,591 - - - - - (505) (32) 226 Other operating income 5,964 1,746 1 490 (3,339) (12) (13) 304 (35) 5,106 Net Operating Income 143,584 (11,548) (5) 2,117 (73) (12) 280 (3,568) (2,963) 127,812 Personnel expenses (73,723) 6,170 - 2,332 - 30 - 2,656 773 (61,763) Overheads (52,355) 8,153 2 1,456 67 30 90 2,120 709 (39,728) Depreciation and Amortisation (14,376) 336 - 145 - 1 - 332 240 (13,321) Provisions net of write-offs (5,497) 1,696 - (0) (10) - - - 4 (3,807) Loan impairment net of reversals and recoveries (198,941) 74,221 - 4,345 167 - - 367 (902) (120,744) Impairment of other financial assets net of reversals and recoveries (5,509) ------(5,509) Impairment of other assets net of reversals and recoveries (12,114) ------801 (11,313) Negative consolidation differences ------0 Income from associates and joint ventures (equity method) 1,086 ------Profit/loss before tax and non-controlling interests (217,846) 79,029 (4) 10,394 150 49 371 1,907 (1,338) (127,287) Current 21,050 (11,433) - (1,191) 34 - - (14) 364 8,810 Deferred (5,191) - - - 83 - - - 364 (4,744) Income Tax 26,242 (11,433) - (1,191) (48) - - (14) - 13,555 Profit/loss after tax and before non-controlling interests (196,796) 67,595 (4) 9,203 185 49 371 1,893 (973) (118,477) Profit/loss on discontinued operations - (67,595) 4 (9,203) (185) (49) (371) (1,893) 973 (78,319)
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2.3 Impact of the adoption of standards and interpretations that came into effect on 1 January 2014
Standards
· IAS 32 (change) ‘Offsetting of financial assets and liabilities’. This alteration is part of IASB's “asset and liability offsetting”, which clarifies the expression “has a legally enforceable right to set off the amounts” and clarifies that some systems for settlement at gross amounts (clearing houses) may be equivalent to offsetting at net amounts. Adopting this change had no impact on the Group's financial statements.
· IAS 36 (change) ‘Disclosures of recoverable amounts for non-financial assets’. This change deals with the disclosure of information on the recoverable value of impaired assets, when the impairment has been measured using the fair value less sales costs method. Adopting this change had no impact on the Group's financial statements.
· IAS 39 (change) ‘Novation of derivatives and continuity of hedge accounting’. The change to IAS 39 allows an entity to continue carrying a hedge, when the counterpart to a derivative that has been designated a hedge instrument, is changed to a clearing house, or equivalent, as a consequence of the application of some law or regulation. Adopting this change had no impact on the Group's financial statements.
· Changes to IFRS 10, IFRS 12 and IAS 27 –’Investment entities’. The change defines an investment entity and introduces an exception to the application of consolidation under IFRS 10, for entities that qualify as investment entities and whose investments in subsidiaries should be measured at fair value through results for the period, by reference to IAS 39. IFRS 12 requires specific disclosure. This change is not applicable to the Group as it does not qualify as an investment entity.
· IFRS 10 (new) ‘Consolidated financial statements’ IFRS 10 replaces all procedures and guidelines pertaining to control and consolidation included in IAS 27 and SIC 12. It changes the definition of control and the criteria applied for determining control. The basic principle that the consolidated entity presents the parent company and its subsidiaries as a single entity remains unchanged. Adopting this standard had no material impact on the Group's financial statements.
· IFRS 11 (new) ‘Joint arrangements’. IFRS 11 focuses on the rights and obligations associated with joint arrangements rather than on the legal form. Joint arrangements may be joint operations (rights over assets and obligations) or joint ventures (rights over the net assets by application of the equity method). Proportional consolidation of joint ventures is no longer allowed. Adopting this standard had no impact on the Group's financial statements.
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· IFRS 12 (new) ‘Disclosure of interests in other entities’. This standard establishes the disclosure requirements for all types of interests in other entities, including subsidiaries, joint arrangements, associates and structured entities. It is designed to allow the assessment of the nature, risk and financial impacts associated with the entity’s interests. Adopting this standard had an impact at the level of additional disclosures, as presented in Notes 3 and 17.
· Changes to IFRS 10, IFRS 11 and IAS 12 ‘Transition regime’. This change clarifies that, when reporting differs from the guidelines given in IAS 27/SIC 12, following the adoption of IFRS 10, then the comparison figures only need to be adjusted for the immediately preceding reporting period. The calculated differences are recognised at the beginning of the comparison period, in equity. The change introduced in IFRS 11 is that there is now an obligation to test the financial investment that results from the discontinuation of proportional consolidation for impairment. Specific disclosure requirements are established in IFRS 12. The change to this standard had no impact on the Group's financial statements.
· IAS 27 (revised 2011) ‘Separate financial statements’. IAS 27 was revised after IFRS 10 was issued. It contains the accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates when an entity prepares separate financial statements. The revision to this standard had no impact on the Group's financial statements.
· IAS 28 (revised 2011) ‘Investments in associates and joint enterprises’. IAS 28 was revised after IFRS 11 was issued. It sets out the accounting methods used for investments in associates and joint ventures, establishing the requirements for the application of the equity method. The revision to this standard had no impact on the Group's financial statements.
2.4 New standards, changes to existing standards and interpretations that have already been published and which the Group must apply, for annual reporting periods that begin on or after 1 July 2014, and which the Group has not already adopted:
Standards
· IAS 19 (change) ‘Defined benefit plans – Employee contributions’ (applicable to reporting periods beginning on or after 1 July 2014). This change is still subject to approval by the European Union. The change to IAS 19 applies to employee or third party contributions to defined benefits plans. It aims to simplify the accounting procedures for these, when the contributions are independent of the number of years of service. This change is not expected to have an impact on the Group's financial statements.
· IAS 16 and IAS 38 (change) 'Permissible methods for calculating amortisations and depreciations' (applicable to reporting periods beginning on or after 1 January 2016). This
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change is still subject to approval by the European Union. This change clarifies that the use of methods for calculating depreciations/amortisations of assets that are based on revenue earned is not, as a rule, considered suitable for measuring the pattern of consumption of the economic benefits associated with the asset. This change is not expected to have an impact on the Group's financial statements.
· IAS 16 and IAS 41 (change) 'Agriculture: plants that produce consumable biological assets' (applicable to reporting periods beginning on or after 1 January 2016). This change is still subject to approval by the European Union. This change defines the concept of a plant that produces consumable biological assets and removes this type of asset from the application scope of IAS 41 - Agriculture and places it under IAS 16 - Tangible assets, with a consequent impact on measurement. However, the biological assets produced by these plants remain under the scope of IAS 41 - Agriculture This change is not expected to have an impact on the Group's financial statements.
· IFRS 11 (change), 'Reporting of the acquisition of an interest in a joint operation' (applicable to reporting periods beginning on or after 1 January 2016). This change is still subject to approval by the European Union. This change introduces guidelines for the reporting of the acquisition of an interest in a joint operation that constitutes a business, as defined in IFRS 3 - business combinations. This change is not expected to have an impact on the Group's financial statements.
· Improvements to the 2010-2012 standards (to be applied, in general, in reporting periods beginning on or after 1 July 2014). These improvements are still subject to approval by the European Union. This improvement cycle affects the following standards: IFRS 2, IFRS 3, IFRS 8, IFRS 13, IAS 16, IAS 24 and IAS 38. The Group will apply the improvements to the 2010-2012 cycle, as and when they come into effect.
IFRS 2, 'Share-based payment' (to be applied in reporting periods beginning on or after 1 July 2014). This improvement is still subject to approval by the European Union. The improvement to IFRS 2 changes the definitions of ‘vesting conditions’ and ‘market condition’ were amended and the definitions of ‘performance condition’ and ‘service condition’ were added, as two different types of "vesting condition", for the valuation of acquired rights to shares or share options.
IFRS 3, 'Business combinations' (to be applied in reporting periods beginning on or after 1 July 2014). This improvement is still subject to approval by the European Union. This improvement clarifies that an obligation to pay a contingent consideration is classified according to IAS 32, as a liability or as an equity instrument, where it meets the definition of a financial instrument. Contingent considerations classified as liabilities shall be measured at fair value through profit or loss.
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IFRS 8, 'Operating segments' (to be applied in reporting periods beginning on or after 1 July 2014). This improvement is still subject to approval by the European Union. This improvement changes IFRS 8, which now requires the disclosure of the judgements made by management in aggregating operating segments. It also requires the reconciliation of the assets by segment and the entity's total assets, where this information is reported.
IFRS 13, 'Fair value: measurement and disclosure ' (to be applied in reporting periods beginning on or after 1 July 2014). This improvement is still subject to approval by the European Union. The improvement to IFRS 13 clarifies that the standard does not preclude the possibility of measuring current account receivables and payables on the basis of invoiced amounts, when the discount effect is not material.
IAS 16, ‘tangible fixed assets’ and IAS 38 ‘Intangible assets’ (to be applied in reporting periods beginning on or after 1 July 2014). This improvement is still subject to approval by the European Union. The improvement to IAS 16 and IAS 38 clarifies the treatment of gross carrying amounts and accumulated depreciations/amortisations. Two possible methods are identified, for when an entity adopts the revaluation model in the following measurement of tangible fixed and/or intangible assets. This clarification is significant when the lifetimes or the depreciation/amortisation methods are revised during the revaluation period.
IFRS 24, 'Related party disclosures' (to be applied in reporting periods beginning on or after 1 July 2014). This improvement is still subject to approval by the European Union. This improvement to IAS 24 changes the definition of a related party. This is now taken to include entities that provide management services to the reporting entity or to the parent of the reporting entity.
· Improvements to the 2011-2013 standards (to be applied, in general, in reporting periods beginning on or after 1 July 2014). These improvements are still subject to approval by the European Union. This improvement cycle affects the following standards: IFRS 1, IFRS 3, IFRS 13, and IAS 40. The Group will apply the improvements to the standards in the 2010-2012 cycle in the reporting period in which they take effect, except in the case of IFRS 1, as the Group already applies the IFRS.
IFRS 1, 'First-time adoption of the IFRS' (to be applied in reporting periods beginning on or after 1 July 2014). This improvement is still subject to approval by the European Union. The improvement to IFRS 1 clarifies that a first-time adopter may use the previous version or the new version of a standard, although not mandatorily applicable, is available for early application.
IFRS 3, 'Business combinations' (to be applied in reporting periods beginning on or after 1 July 2014). This improvement is still subject to approval by the European Union. The
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improvement to IFRS 3 clarifies that the standard is not applicable to the accounting of any joint arrangement under IFRS 11, in the financial statements of the joint arrangement.
IFRS 13, 'Fair value: measurement and disclosure ' (to be applied in reporting periods beginning on or after 1 July 2014). This improvement is still subject to approval by the European Union. This improvement clarifies that the exception to the measuring of a portfolio on a net basis is applicable to all the contract types (including non-financial contracts) that fall under the scope of IAS 39.
IFRS 40, 'Investment properties' (to be applied in reporting periods beginning on or after 1 July 2014). This improvement clarifies that IAS 40 and IFRS 3 are not mutually exclusive. IFRS 3 needs to be applied whenever an investment property is acquired, for the purposes of determining whether or not the acquisition corresponds to a business combination.
· IFRS 9 (new), 'Financial instruments - classification and measurement' (to be applied in reporting periods beginning on or after 01 January 2018). This standard is still subject to approval by the European Union. IFRS 9 is the first part of the new IFRS standard for financial instruments. This standard provides for two categories of measurement: amortised cost and fair value. All equity instruments are measured at fair value. Financial instruments are measured at amortised cost when the entity holds these as a means of receiving contractual cash flows and where these cash flows correspond to capital/nominal value and interest. In other cases, the financial instruments are measured at fair value through profit or loss. The Group will apply IFRS 9 in the reporting period in which it takes effect.
· IFRS 9 (new), 'Financial instruments - hedge accounting' (to be applied in reporting periods beginning on or after 01 January 2018). This change is still subject to approval by the European Union. This change corresponds to the third phase of IFRS 9, and reflects a substantial revision of the hedge accounting rules in IAS 39. It eliminates the quantitative assessment of the effectiveness of hedges and allows a larger number of items to be eligible as hedged items. Moreover, the deferral of certain impacts of hedge instruments in the comprehensive income statement is now permitted. This change is designed to bring hedge accounting in line with risk management practices. The Group will apply IFRS 9 in the reporting period in which it takes effect.
· IFRS 14 (new), 'Tariff deviations' (to be applied in reporting periods beginning on or after 01 January 2016). This standard is still subject to approval by the European Union. This standard allows first-time adopters of IFRS to continue to recognise regulatory assets and liabilities in accordance with the policy followed under the previous standard. However, in order to allow comparability with those entities that have adopted IFRS and do not recognise regulatory assets/liabilities, these amounts should be disclosed separately in the financial statements. The Group will apply IFRS 14 in the reporting period in which it takes effect.
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· IFRS 15 (new), 'Revenue from contracts with clients ' (to be applied in reporting periods beginning on or after 01 January 2017). This standard is still subject to approval by the European Union. This new standard is only applicable to contracts for the delivery of products or service provision. It requires the entity to recognise the revenue when the contractual obligation to deliver assets or provide services is satisfied, and for the amount that reflects the counterpart to which the entity is entitled. Such recognition should use the "5-step methodology". The Group will apply IFRS 15 in the reporting period in which it takes effect.
Interpretations
· IFRIC 21 (new), 'State taxes' (to be applied in reporting periods beginning on or after 17 June 2014). IFRIC 21 is an interpretation of IAS 37 and relates to the recognition of liabilities. It clarifies that the past event that results in an obligation to pay tax (apart from corporate tax – IRC) should correspond to the activity described in the relevant legislation that obliges the payment. This change is not expected to have an impact on the Group's financial statements.
2.5 Use of estimates in preparing the financial statements
The preparation of the financial statements in accordance with the IFRS requires the Group to make judgements and estimates that affect the accounting policies, the value of assets and liabilities, income and costs and the contingent liabilities disclosed. In making these estimates, the Group’s management used its judgement, together with the information available on the date the financial statements are prepared. Notwithstanding this, the future amounts actually realised may differ from the estimates made.
Those areas requiring major judgement calls or in which there is significant use of estimates and assumptions in preparing the consolidated financial statements are the following:
Going concern
The financial statements were prepared on a going concern basis, as the Group’s management believes that the Group has the means and capacity to continue business in the foreseeable future. In making this judgement, the Group’s management took into account the information it has on current conditions and also forecasts of future profitability, cash flow and capital. The management believes that the discontinued units should be sold without losses on their book value. Nevertheless, the realisable value of these assets and liabilities has not yet been defined and is dependent on the success of negotiations for their sale, which are currently ongoing.
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Fair value of financial instruments
Fair value is based on market prices, whenever possible. However, and when such prices are not available, it is determined using valuation techniques based on discounted future cash flows (marked to model ) that take into account market conditions, volatility, correlation and also time value, in conformity with the principles of IFRS 13 - Fair value.
Impairment of loans to clients
Periodically, the Group carries out a valuation of its loans portfolio in order to test for signs of impairment.
As part of this process, those clients with non-performing loans and whose outstanding debt represents a significant exposure for the Group, are analysed on an individual basis to determine if there is a need to register impairment losses. These estimates are based on assumptions regarding a number of factors that may change in the future, and so alter impairment amounts. Furthermore, a collective test is carried out for any impairment in all other loans, where these have not been subject to individual analysis. This test process involves assigning the loans to different credit segments, in which the loans share similar characteristics and levels of risk. Collective impairment losses are then estimated for the Groups. This calculation is made on the basis of historical loss behaviours for the same type of assets.
Individually analysed loans for which no impairment can be objectively determined are grouped according to their risk characteristics and assessed collectively for impairment.
Whenever a loan is considered uncollectible, and its impairment loss is estimated at 100% of the total loan value, it is cancelled in the accounts, through a counter-entry equivalent to the value of the loss. The loan is thus written off from assets.
If written-off loans are later recovered, the recovered amounts are credited to the profit and loss statement in “Loans impairment net of recoveries and reversals”.
Impairment of financial assets available for sale – equity instruments
The Group accepts that there is impairment in its financial assets available for sale when there is a significant or prolonged devaluation in the fair value of these, to below cost price or where there is expected to be an impact on the future cash flows from these assets.
Such a decision requires a degree of judgement. To this end, the Group collects all the information available from both the market and external sources. Given the volatility of the markets, the Group has decided that objective evidence of impairment will have been shown, that is that a significant or prolonged devaluation has occurred, whenever:
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ü the fair value of an equity instrument decreases by 30% or more, or ü the fair value decreases over a period of more than one year.
Impairment of financial assets available for sale is presented in Note 37.
Assessment of real estate assets
The valuation service is provided by outside independent service providers, registered with the CMVM. They have the appropriate qualifications, recognised competence and professional experience to perform their duties. The reports comply with the requirements laid down by the CMVM, Banco de Portugal and the Instituto de Seguros de Portugal, as well as criteria defined by the European Accounting Standardisation and the guidelines issued by international institutions, such as RICS and TEGoVA.
The assessment procedures require the compilation of a comprehensive dossier of information, whether based on updated documentation, an inspection of the property and its surrounding area, information from local authorities and other bodies, market analysis, transactions, the supply and demand situation or the development outlook. Baseline values for calculations, the application of methodologies and the comparison of these are all based on the processing of this information, which includes areas, usages and market prices.
The comparative market method is always used, either directly or as a basis for development cash flows, updated at the valuation date at rates that incorporate the risk of the projects. The replacement cost method is also used directly in the valuation of properties in continuous use and makes an essential contribution in these development scenarios. For properties in operation, actually leased or whose valuation depends on their potential earnings, capitalised earnings are updated by means of yields that reflect the market’s performance and main indicators.
All the reports are analysed and validated by the internal technical body.
The realisable value of these assets depends on the future trend of real estate market conditions.
Real estate assets are reported in non-current assets held for sale, investment properties and own- use property.
Deferred tax assets
Deferred tax assets are recognised for reportable tax losses, when it is estimated that there will be positive tax results in the future period established by law. To this end, judgements are made to determine the amount that may be recognised for deferred tax assets, based on the level of future tax results expected.
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Retirement benefits
The liabilities for retirement benefits and income from pension funds set up to cover these liabilities, are calculated using actuarial tables and assumptions regarding increases in pensions and the expected rate of return on pension fund assets. The most sensitive variables in these calculations are the liability update rate and the mortality tables.
In view of the long-term nature of pension plans, these estimates are subject to significant uncertainties.
Consolidation of special purpose entities (SPE)
The Group sets up special purpose entities (SPE) for the purposes of asset securitisation or debt issue operations.
The Group does not consolidate those SPE over which it does not exercise control. Given that it can be difficult to determine whether or not the Group does exercise control over an SPE, a judgement is made as to whether or not the Group is exposed to the risks and benefits arising of the SPE’s activities and whether or not it has any decision-making power in the SPE.
The decision to consolidate an SPE in the Group is based on a number of assumptions and estimates that are used in calculating residual gains or losses and in determining who will retain the majority of such gains and losses. Other assumptions and estimates might lead the Group to have a different consolidation perimeter.
The special purpose entities included in the consolidation are listed in Note 3.
Provisions
The nature of these liabilities is described in Note 24.
2.6 Principles of consolidation
The consolidated financial statements include the accounts of Banif and entities under its control (“subsidiaries”). Such entities include investment funds in which the Group is adjudged to exercise control. These are, thus, included in the consolidated financial statements.
Subsidiaries are all those entities (including structured entities) over which the Group exercises control. The Group exercises control over an entity when it is exposed to, or has rights over, the variable returns generated by the entity, as a result of its involvement with the entity and where it
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also has the ability to affect these variable returns through the influence that it exerts over the relevant aspects of the entity's business activities.
SPE subsidiaries are consolidated as from the date on which the Group acquires control. They are excluded from consolidation as from the date on which the Group relinquishes such control.
SPEs for which the Group is exposed to the majority of risks and benefits generated by their activities are also contained in the consolidated accounts. Essentially, these are the entities used by the Group in credit securitisation operations and in the issue of structured debt.
Whenever applicable, subsidiary’s accounts are adjusted to reflect the accounting policies used by the Group.
Balances and transactions between Group entities, resulting from intra-Group transactions, are eliminated in the course of the consolidation process. Non-realised losses are also eliminated, except where they relate to an impairment loss on the transferred asset.
The value corresponding to third party holdings in subsidiaries is entered under the “non-controlling interests” item, in equity. When less than 100% control is acquired and in applying the purchase method, the non-controlling interests may be measured at fair value or at the proportion of the fair value of the assets and liabilities that have been acquired. This option is selected for each transaction individually.
Subsequent disposals or acquisitions of holdings in non-controlling interests, where there is no change of control, do not result in the recognition of gains, losses or goodwill. The difference between the transaction value and the book value of the transacted holding is recognised in equity.
2.7 Business combinations and goodwill
The acquisition of subsidiaries is reported by the purchase method. The acquisition cost corresponds to the fair value, on the transaction date, of assets delivered, liabilities accepted and equity instruments issued, plus any costs directly attributable to the transaction. The identifiable assets, liabilities and contingent liabilities of the acquired entity are measured at their fair value at the acquisition date.
Goodwill corresponds to the difference between the acquisition cost and the proportion acquired by the Group of the fair value of the identified assets, liabilities and contingent liabilities.
Whenever the fair value exceeds the acquisition cost (negative goodwill), the difference is recognised in profit or loss. Costs directly attributable to the acquisition are recognised in the profit and loss account for the reporting period. When, on the date on which control is acquired, the Group already
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has a previously acquired holding, the fair value of this holding is included in the calculation of the goodwill, or negative goodwill.
When the acquisition cost exceeds the fair value of the assets, liabilities or contingent liabilities, the positive goodwill is reported under assets, and is not amortised. However, it is subject to annual impairment tests and any calculated impairment losses are reported.
For the purposes of the impairment test, any goodwill acquired is allocated to each of the cash generating units (CGU) that benefited from the combination. The goodwill allocated to each unit is subject to an annual impairment test or whenever there is an indication that impairment may exist.
The impairment to the goodwill is determined through calculation of the recoverable amount of each CGU or CGU Group that the goodwill relates to. When the recoverable amount for the CGU is less than the amount reported, impairment is recognised.
Impairment losses on goodwill cannot be reversed in future periods.
2.8 Investments in associates
Those organisations in which the Group has significant influence over operational and financial policies, but not control, and which are neither subsidiaries, joint ventures nor holdings owned through investment funds, venture capital funds or banks (seed capital), are classified as associates, on initial accounting, as financial instruments at fair value through profit or loss.
Significant influence exists whenever the Group directly or indirectly holds more than 20%, but less than 50%, of the voting rights and representation on the entity's managing structure.
Investments in associates are reported in the Group’s consolidated financial statements using the equity method, from the time that the Group first acquires significant influence to the time that it relinquishes it. The balance sheet value of investments in associates includes the related goodwill value determined on acquisition and is reported net of any impairment losses.
The investment is initially reported at acquisition cost, plus or minus the recognition of subsequent variations in the percentage holding of the associate's net worth. Any negative goodwill is immediately recognised in profit or loss. Any dividends distributed by the associate reduce the value of the investment made by the Group.
The value of the investment is subject to an annual impairment analysis.
As with the procedure for subsidiaries, the associate's accounts are adjusted, whenever applicable, to reflect the Group’s accounting policies.
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2.9 Joint ventures
Joint ventures are taken to be investments in entities in which the Group shares control with another party. This sharing is formalised in a contractual arrangement in which strategic, financial and operational business decision-making requires unanimous agreement between the parties sharing control.
The Group’s interests in joint ventures are recognised using the equity method.
There are no non-controlling interests in this consolidation method.
2.10 Transactions in foreign currency
Foreign currency transactions are reported using the indicative exchange rates for the functional currency on the transaction date of transaction.
Monetary assets and liabilities expressed in foreign currency are converted to euros at the closing exchange rate on the balance sheet date. Non-monetary items which are valued at fair value are converted on the basis of the prevailing exchange rate on the last valuation date. Non-monetary items which are kept at historical cost are reported at the original exchange rate.
Foreign currency exchange differences resulting from conversion are recognised as gains or losses for the period in the profit and loss statement, except for those resulting from non-monetary financial instruments classified as available for sale. These are counter-entered in a specific equity item, until the asset is disposed of.
Financial statements of subsidiaries and associates expressed in foreign currency At the balance sheet date, assets and liabilities in a functional currency other than the euro are converted at the closing exchange rate on the balance sheet date, whilst income and cost items are converted at the average exchange rate for the period. Differences that result from using the closing exchange rate and the average exchange rate are reported as a counter-entry, without tax effects, under a specific equity item, until the entities in question are disposed of.
The exchange rates used by the Group for the purposes of exchange rate conversion:
30/06/2014 31/12/2013 30/06/2013 Closing Average Closing Average Closing Average exchange exchange exchange exchange exchange exchange rate rate rate rate rate rate USD 1.3658 1.3703 1.3791 1.3281 1.3080 1.3134 BRL 3.0002 3.1499 3.2576 2.8687 2.8899 2.6683 PLN 4.1568 4.1755 4.1543 4.1975 4.3376 4.1772 CVE 110.265 110.265 110.265 110.265 110.265 110.265
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2.11 Cash and cash equivalents
For the purposes of the cash flow statement, cash and cash equivalents are balance sheet amounts, expressed in domestic and foreign currency that are entered as cash, sight deposits with central banks, sight deposits with other banks in Portugal and abroad, and cheques to be drawn on other banks. The initial maturities of these items cannot be greater than 3 months and it should be possible to liquidate them immediately without provoking significant fluctuations in their value.
2.12 Financial instruments
2.12.1 Initial recognition and measurement of financial instruments
The purchase and sale of financial assets in which the assets are delivered in accordance with deadlines, as set by regulations or market conventions, are recognised at the trade date, that is, at the date on which the commitment to purchase or sell is made. Derivative financial instruments are also recognised at the trade date.
The classification of financial instruments on the initial recognition date depends on their characteristics and on the reason for which they are acquired.
All financial instruments are initially measured at fair value, plus direct purchase or issuance costs, except for assets and liabilities measured at fair value through profit or loss. In this case, costs are recognised directly in profit or loss.
2.12.2 Subsequent measurement of financial instruments
Financial assets and liabilities held for trading Financial assets and liabilities held for trading are those assets that have been acquired for short- term resale, with the intention of profiting from price fluctuations or on the trader’s margin.
This class includes all derivative financial instruments that are not hedging derivatives.
After initial recognition, the gains and losses generated by subsequent measurement at fair value are recognised in the profit and loss statement for the year. For derivatives, positive fair values are reported under assets and, consequently, negative fair values are reported under liabilities.
Interest, dividends or costs are reported in the corresponding profit or loss accounts when the right to payment has been established.
Sales of overdraft securities are also taken to be financial liabilities held for trading. These operations are reported in the balance sheet at fair value, with subsequent variations in fair value reported in
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the profit and loss statement for the year under the item “Income from assets and liabilities measured at fair value through profit or loss”.
Financial assets and liabilities at fair value through profit or loss This category includes financial assets and liabilities classified by the Group on initial recognition as being at fair value through profit or loss, in accordance with the option provided for in IAS 39 - fair value option.
The Group initially recognises certain assets and liabilities at fair value, providing the conditions for such recognition are met, namely: ü the recognition eliminates or significantly reduces inconsistencies between the measurement of financial assets and liabilities and the recognition of the corresponding gains or losses (accounting mismatch); ü the financial assets and liabilities are part of a Group of assets or of liabilities, or of both, whose performance is assessed on a basis of fair value, in accordance with a duly documented investment and risk management strategy; or ü the financial instrument incorporates one or more embedded derivatives, except when the embedded derivatives do not significantly modify the contract cash flows, or when it is clear, with little or no analysis, that the embedded derivatives cannot be separated.
After initial recognition, the gains and losses generated by subsequent measurement at fair value of financial assets and liabilities are reported in the income statement for the fiscal year under the item “Income from assets and liabilities measured at fair value through profit or loss”.
The Group classifies all those securities whose management and performance assessment is based on fair value under financial assets at fair value through profit or loss. Debt instruments (both subordinated and non-subordinated) with one or more embedded derivatives are classified as financial liabilities.
Financial assets available for sale This item includes instruments which may be disposed of in response to, or in anticipation of, liquidity needs or changes in interest rates, exchange rates or market prices.
To date, this category includes fixed income securities, holdings regarded as strategic and equity instruments for which reliable valuations cannot be obtained.
Following initial accounting, they are subsequently measured at fair value or maintained at acquisition cost.
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Gains and losses are entered under the “Revaluation reserves” item until they are sold (or recognised as impairment losses), at which time the accumulated value is transferred to profit and loss for the year under the “Income from available-for-sale financial assets” item.
Interest on financial assets is calculated using the effective rate method and recognised in profit and loss under the “Interest and similar income” item. Dividends are recognised in the profit and loss account under “Earnings from equity instruments”, once the right to payment has been established.
For debt instruments issued in foreign currencies, foreign exchange differences are recognised profit or loss for the year under the “Profit or loss on foreign exchange revaluation” item.
At each profit and loss statement date, the Group tests for objective evidence of impairment of its financial assets available for sale. Such tests take into account market information and any information pertaining to the issuers.
Where there is objective evidence of an impairment of financial assets available for sale, such losses are recognised in the profit and loss account under the “Impairment of other financial assets net of reversals and recoveries” item.
Financial assets held to maturity This category includes those non-derivative financial assets, with fixed or determinable payments and fixed maturities, that the Group intends, and is able, to hold to maturity.
These assets are measured at amortised cost, using the effective interest rate method, and are subject to impairment tests. Calculation of this amortised cost takes into account the bonus or discount at the acquisition date and other charges directly imputable to the purchase as part of the effective interest rate. Amortisation is recognised in profit or loss under the “Interest and similar income” item.
Impairment losses are recognised in profit or loss under the “Impairment of other financial assets net of reversals and recoveries” item.
Assets with repurchase agreement The asset purchase price, plus the interest rate implicit in the resale price, is carried under this item. These amounts are recognised in accordance with the specialisation principle for the reporting period.
Investments at other credit institutions and loans to clients These items cover the Group’s investments at other credit institutions and the total value of all loans to clients and purchase operations with resale agreement.
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These assets correspond to financial assets with fixed or determinable payments, not listed on an active market, provided that they are not assets which have been acquired or generated for short- term disposal (held for trading) or assets which, when initially recognised, had been classified as financial assets at fair value through profit or loss.
Following initial recognition, the disbursement value, which includes all transaction-related costs, such as fees, where these do not take the form of service provision, these assets are measured at amortised cost, using the effective rate method, and subjected to impairment tests.
The amortised cost is calculated as part of the effective interest rate, taking into account earnings or costs directly imputable to the sourcing of the asset. Amortisation of these earnings or costs is recognised in profit or loss under the “Interest and similar income” item or the “Interest and similar costs” item. Impairment losses are recognised in profit or loss under the “Credit impairment net of reversals and recoveries” item.
If, at any time, the Group determines that a given loan, or set of loans, is irrecoverable, the loan, or set of loans, is written-off from assets.
This assessment is independent of the procedures for writing-off loan assets in the individual accounts of the subsidiaries, under the local rules applicable to those entities.
Deposits from other credit institutions, client deposits and other loans / Security-based liabilities and other subordinated liabilities The remaining financial liabilities, which essentially consist of funds from credit institutions, client deposits and debt issues not designated as financial liabilities at fair value through profit or loss and whose contractual terms include an obligation to deliver funds or financial assets to the holder, are initially recognised at the value of the consideration received net of directly associated transaction costs. They are subsequently valued at amortised cost, using the effective rate method. The amortisation is recognised in profit or loss under the “Interest and similar costs” item.
Fair value of financial assets and liabilities As stated above, the financial instruments reported as financial assets and liabilities held for trading, at fair value through profit or loss, or as financial assets available for sale are valued at fair value.
The fair value of a financial instrument corresponds to the amount for which a financial asset or liability may be sold or settled between independent and informed parties interested in pursuing the transaction under normal market conditions.
The Group determines the fair value of its financial assets and liabilities held for trading, at fair value through profit or loss, and available for sale in accordance with the following criteria:
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ü In the case of instruments traded on active markets, the fair value is determined on the basis of the closing price, the price of the last transaction undertaken or the value of the last-known bid. ü In the case of instruments not traded on active markets, the fair value is determined using valuation techniques which include the prices of recent transactions in equivalent instruments and other valuation methods normally used by the market (discounted cash flow, options valuation models, etc.).
Floating rate assets (e.g. shares), and the derivative instruments they underpin, for which it is not possible to obtain reliable valuations, are kept at acquisition cost, less any impairment losses.
2.12.3 Impairment of financial assets
Financial assets at amortised cost The Group regularly assesses whether or not there is objective evidence of impairment in financial assets reported at amortised cost. These assets include investments at credit institutions, instruments held to maturity, client loans and all receivables. Any identified impairment losses are entered with a counter-entry in the profit and loss account.
Whenever, in a subsequent reporting period, there is a fall in the value of the estimated impairment loss, the amount previously recognised is reversed by adjusting the account for impairment losses. The amount of the reversal is recognised directly in the profit and loss statement, in the same item.
A loan, or a portfolio of client loans, defined as a set of credits with similar risk characteristics, is impaired whenever: - there is objective evidence of impairment resulting from one or more events which occurred after initial recognition, and, - when this event (or events) has (have) an impact on the recoverable value of future cash flows from the loan or portfolio of client loans, and this impact can be realistically estimated.
Two analytical methods are used to determine impairment losses:
a) Individual analysis The existence of impairment losses in individual terms is assessed by means of a case-by-case analysis of the situation of customers whose total credit exposure is regarded as significant. For each client, the Group assesses, at each balance sheet date, the existence of any objective evidence of impairment. This assessment takes into account the following factors: - The client's economic and financial situation; - The client’s overall exposure and any existing default on loans within the Group or in the rest of the financial system; - Commercial information on the client;
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- Analysis of the business sector in which the client operates, where applicable. - The links between the client and the Group to which it belongs, where applicable, and, thus, analysis of the Group in terms of the same individual customer variables as above.
In determining impairment losses on an individual basis, the following factors are taken into account: - The economic and financial feasibility of the customer generating sufficient cash flow to be able to service the debt in the future; - The value of the associated real guarantees and the estimated recoverable amount and recovery period; - The client’s assets in situations of liquidation or bankruptcy and the existence of preferential creditors.
Loans analysed on an individual basis for which impairment has been determined as being below the portfolio IBNR, are Grouped according to their risk characteristics and assessed collectively for impairment.
Loans analysed on an individual basis for which an impairment loss has been determined are not included in this collective assessment.
Whenever an impairment loss is identified in individually assessed customer loans, the loss amount is determined by calculating the difference between the accounting value of that loan and the present value of its estimated future cash flows, discounted at the original interest rate for the contract. On the balance sheet, the loans to clients item is reduced by the use of an impairment losses account, with the amount recognised in the profit and loss statement under the “Impairment of loans net of recoveries and reversals” item. For loans with a variable interest rate, the discount rate used to determine any impairment loss is the effective annual rate written into the contract.
Calculation of the present value of estimated future cash flows from collateralised loans reflects the cash flows which may result from the recovery and disposal of the collateral, less the costs involved in any such recovery and sale.
b) Collective analysis
Loans assessed on a collective basis are grouped by segments based on similar characteristics and risks. Impairment losses for these loans are estimated on the basis of historical losses on similar risk portfolios, the economic situation and the influence of this on the level of historical losses. At regular intervals, the Group updates the historical parameters used to estimate losses through collective analysis.
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Whenever a loan is considered uncollectible, and its impairment loss is estimated at 100% of the total loan value, it is cancelled in the accounts, through a counter-entry equivalent to the value of the loss. The loan is thus written off from assets.
If written-off loans are later recovered, the recovered amounts are credited to the profit and loss statement in the same “Loans impairment net of recoveries and reversals” item referred to above.
Financial assets available for sale In addition to any of the abovementioned signs of impairment for financial assets reported at amortised cost, IAS 39 also provides for the following specific signs of impairment in equity instruments: ü Information on significant changes which have an adverse impact on the technological, market, economic or legal context in which the issuer operates, and where these suggest that the investment cost will not be fully recovered; ü A significant or prolonged decline in market value below cost price.
At each balance sheet date, the financial assets available for sale are analysed for any objective evidence of impairment, namely when there is a significant or prolonged decline in fair values, below cost price. Determining the degree of decline that may be considered “significant or prolonged” involves making certain judgements. The Group has determined that a decline in the fair value of an equity instrument of 30% or more (30% in 2013) or a decline for more than 1 year (1 year in 2013) may be considered significant or prolonged, respectively.
Whenever there is objective evidence of impairment, accumulated losses which have been recognised in reserves are transferred to costs for the year, in the form of impairment losses. These are reported under the “Impairment of other assets net of reversals and recoveries” item.
Impairment losses on equity instruments cannot be reversed. This means that any potential gains originating after the recognition of impairment losses are reported under the “Fair value reserve” item. If any additional losses are subsequently determined, impairment is still deemed to exist and these losses are reflected in the profit or loss for the reporting period.
The Group also carries out periodic analyses of impairment in financial assets recognised at cost, specifically unlisted equity instruments whose value cannot be reliably measured. The recoverable value corresponds to the best estimate of the future flows receivable from the asset, discounted at a rate which properly reflects the risk associated with holding the asset.
The value of the impairment loss is recognised directly in the profit and loss statement for the year. Impairment losses on these assets also cannot be reversed.
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2.12.4 Derivatives
As part of its normal business activity, the Group makes use of a number of derivative financial instruments to both satisfy its clients’ needs and to manage its own interest rate risk positions or other market risks. These instruments involve varying degrees of credit risk (maximum potential book loss due to default by counterparties on their respective contractual obligations) and market risk (maximum potential loss due to change in the value of a financial instrument as a result of interest rate, exchange rate or price variations).
The notional values of derivative transactions, reported as off-balance-sheet items, are used to calculate the flows to be exchanged under the contracted terms. For interest or exchange rate derivatives, the credit risk is measured by the replacement cost at current market prices for those contracts in which a position of potential gain is held (positive market value), in the event of the borrower defaulting.
Derivatives embedded in other financial instruments are separated from the host instrument, whenever their risks and characteristics are not closely related to those of the host contract. In such cases, valuation at fair value through profit or loss is not applied to the entire instrument.
The derivative instruments that the Group uses to manage its exposure to financial and market risks are carried as derivatives held for hedging, in accordance with IAS 39 criteria. Otherwise, derivatives are carried at their fair value as financial trading assets or liabilities, depending on whether their fair value is positive or negative.
Hedge accounting Derivative financial instruments used for hedging are classified as a hedge for accounting purposes as long as they meet all the following requirements: - at the transaction start date, the hedge ratio must be identified and formally documented. This must include the identification of the hedged item and the hedge instrument, and the assessment of the effectiveness of the hedge. - there must be a reasonable expectation that the hedge ratio will be highly effective, at both the transaction start date of and throughout the life of the operation. - the effectiveness of the hedge can be reliably measured at the hedge start date and throughout the lifetime of the operation. - for cash flow hedges, there must be a strong likelihood that the cash flows will occur.
At the balance sheet date, the Group tests the effectiveness of hedges, by comparing the change in the fair value of the hedge instrument, as attributable to the hedged risk, with the change in the fair value of the hedged derivative. This ratio of comparison should fall within a range of 80% to 125%.
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Fair Value Hedging In a fair value hedging operation, the balance sheet value of an asset or liability, determined on the basis of the appropriate accounting policy, is adjusted in order to reflect the change in its fair value that is attributable to the hedged risk. The variations in the fair value of derivatives held for hedging are recognised as profit or loss, as are changes in the fair value of the hedged assets or liabilities attributable to the hedged risk.
If the hedge relationship ceases to exist, because the ratio of the change in fair value for the derivatives and the hedged instruments no longer falls between 80% and 125%, the derivatives are reclassified to the trading portfolio and the revaluation amount of the hedged instruments is recognised as profit or loss for the remainder of the operational period.
At 30 June 2014, the Group has no fair value hedges.
Cash flow hedges In an operation designed to hedge exposure to a high probability variability of future cash flows, the effective part of the variations in the fair value of the hedging derivative is recognised in reserves, being transferred to the profit and loss statement in those periods in which the hedged item will affect profit or loss. The non-effective part of the hedge is reported as profit or loss.
When a hedge instrument expires or is sold, or when the hedge ceases to meet the requirements for hedge accounting, the variations in the fair value of the derivative accumulated in reserves are recognised in profit or loss, when the hedged transaction also affects profit or loss.
If it is foreseeable that the hedged transaction will not take place, the amounts still reported under equity are immediately recognised as profit or loss and the hedge instrument is transferred to the trading portfolio.
2.12.5 Derecognition of financial assets and liabilities
Financial assets A financial asset (or, when applicable, a part of a financial asset or part of a Group of financial assets) is derecognised when: ü The entitlement to receive cash flows from the asset expires; or ü The entitlement to receive cash flows has been transferred, or an obligation has been accepted to pay the receivable cash flows in full, with no material delay, to third parties in the context of a pass-through agreement, and ü The risks and benefits of the assets have been substantially transferred, or the risks and benefits have not been transferred or retained, but control over the asset has been transferred.
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If the rights to receive the cash flows have been transferred or when a pass-through agreement has been entered into, and where not all the risks and benefits of the asset have been substantially transferred or retained and control over the asset has not been transferred, the financial asset is recognised to the extent of continued involvement. This is measured at the lesser between the original value of the asset and the maximum value of the payment which could be claimed from the Group.
When continued involvement takes the form of a purchase option for the transferred asset, the extent of the continued involvement is the value of the asset which may be repurchased, except in the case of a sale option measurable at fair value. In this latter case, the value of the continued involvement is limited to the lower of the fair value of the asset and the option exercise price.
Financial liabilities A financial liability is derecognised when the underlying obligation expires or is cancelled.
When an existing financial liability is replaced by another with the same counterparty, but on substantially different terms from those initially established, or if the initial terms are substantially changed, such replacement or modification is dealt with as a derecognition of the original liability and the recognition of a new liability. If there are any differences in value, these are recognised in profit or loss for the fiscal year.
2.12.6 Reclassification between categories of financial instruments
In October 2008, the IASB issued a revised version of IAS 39 - Reclassification of financial instruments. Under certain circumstances, the revised version allows an entity to transfer financial instruments from the categories of financial assets held for trade and financial assets available for sale to the categories of other loans and receivables or to financial assets held to maturity, provided those financial assets meet the criteria for the category in question.
The Group made use of this reclassification for a set of financial assets, as from July and October 2008.
The reclassifications were carried at the fair value of the instruments at the reclassification date. This value then became the amortised cost in the new categories to which the financial assets were reclassified.
For a financial asset reclassified to the category of financial assets available for sale, the gains or losses on that asset, previously recognised in reserves, are amortised to profit or loss for the fiscal year, over the remainder of the financial asset’s lifespan, using the effective interest rate method. If impairment is detected in these assets, the amount that is still recognised in reserves is recognised in the profit and loss statement.
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The Group may reclassify assets held for trading, provided they are not derivatives, to the other loans and receivables category, if the assets meet the criteria for this class of assets.
However, if a financial asset is reclassified to a different category and the Group subsequently estimates that future cash flows from the asset will increase, as a result of a forecast of a better recovery for such cash receivables, the effect of that increase is recorded as an adjustment to the effective rate, as from the date on which the estimate was changed.
2.13 Non-current assets held for sale
Non-current assets are classified as held for sale whenever it is determined that their balance sheet value will be recovered through sale. This condition is met only when such a sale is highly likely and the asset is available for immediate sale in its current condition.
The sale should take place within a maximum period of one year following classification in this item. Any extension of the period during which the sale must be completed does not exclude an asset (or group of assets for sale) from being classified as held for sale if the delay is caused by events or circumstances outside the Group’s control and the commitment to sell the asset is maintained.
The Group enters property acquired through loan recovery under this item and also, in 2013, assets of discontinued units as mentioned in Note 13.
Property acquired through loan recovery is initially recorded at the value agreed in the settlement contract, this being the lower of the amount of outstanding debt or the assessed value of the asset at the dation date. These assets are periodically valued by independent surveyors. Such valuations will result in the recognition of impairment losses, whenever the value determined by the valuation, net of any costs incurred in selling the property, is lower than the current book value of the asset.
Assets related to discontinued units are recorded in accordance with the accounting policies applicable to each category of assets, as set out in IFRS 5.
2.14 Investment Property
Properties held by the Group are recognised as investment properties when these properties are held in order to offer a long-term return on capital and not for the purposes of a short-term sale. In the ordinary course of business, they are neither put up for sale nor used.
These investments are initially recognised at cost, including transaction costs, and are later revalued at fair value.
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An investment property’s fair value should reflect market conditions at the balance sheet date. Changes in fair value are recognised in the profit or loss for the year, under the “Other operating income” item. The revenues generated by these properties, through leasing, are carried under this item. Operating, maintenance and other costs are carried under the other operating costs item.
Investment properties are derecognised when disposed of, or when future economic benefits derived from the ownership are no longer expected.
At the time of sale, the difference between the net proceeds of the sale and the amount of the asset recorded is recognised in the profit and loss account.
Transfers from and to the “Investment properties” item may be made whenever there is a change in use. On transferring investment properties to property for the Group’s own use, the estimated cost, for accounting purposes, is the fair value at the date of the change of use. If an own-use property is classified as an investment property, the Group recognises this asset in accordance with the policy applicable to own-use properties, until the date on which it is transferred to investment properties.
2.15 Other tangible fixed assets
This item includes the Group’s own-use properties, used for its business, vehicles and other equipment.
Own-use properties are valued at fair value, as determined by independent appraisers, less any subsequent amortisation and impairment losses.
The Group’s own-use properties are also valued at sufficiently regular intervals that the accounting values do not differ significantly from their fair value at the balance sheet date, with revaluations at three year intervals being the norm.
Positive changes in fair value are credited to the “Revaluation reserves” item, included in equity, except, and to the extent, where such change constitutes a reversal of losses on the same asset recognised in profit or loss.
Negative changes in fair value are recognised in profit or loss, except, and to the extent, where they can be offset by positive revaluation reserves existing for the same asset.
Other property, plant and equipment are recorded at cost, less subsequent amortisation and impairment losses. Repair and maintenance costs and other expenses associated with use are recognised as costs when they occur.
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Tangible fixed assets are amortised on a straight-line basis, in accordance with their expected useful lifespan. This is as follows: Property [10-50] years Vehicles 4 years Other equipment [2 to 15] years
On the date of transition to the IFRS, the Group used the option permitted by the IFRS 1 of taking the “considered cost” of tangible assets to be the respective fair value or, in some cases, the balance sheet value resulting from legal revaluations carried out up to 1 January 2004, under Portuguese legislation.
The financial costs incurred through loans obtained for the construction of qualifying tangible assets are recognised as asset acquisition/construction costs.
The costs of dismantling or removing assets installed on property belonging to third parties are recognised as an initial part of those assets, when the amounts involved are significant and reliably measurable.
A tangible asset is derecognised when disposed of or when no further economic benefits are expected from its use or sale. On the date of derecognition, the gain or loss calculated by the difference between the net sale value and the net accounting value is recognised in the profit and loss statement under the “Other operating income” item.
2.16 Leasing
The Group classifies finance or operating leasing operations as a function of their substance rather than of their legal form, thus meeting the criteria set out in IAS 17 – Leases. Operations are classified as finance leases when the risks and benefits of owning an asset are transferred to the lessee. All other lease operations are classified as operating leases.
Operating leases ü As lessee The payments made by the Group under operating lease contracts are entered as costs for the periods to which they relate.
ü As lessor Operating leases assets are basically vehicles and are recorded in the balance sheet under the “Other tangible assets” item, at cost, less amortisation and impairment losses. Rental income from operating leases is recorded under income for the period to which it relates.
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Finance leasing ü As lessee Finance lease contracts are recognised at their start date as assets or liabilities, at the acquisition cost for the leased property, which is equivalent to the present value of lease payments due. Lease payments are made up of: - finance charges, recognised as profit or loss - financial amortisation of the capital, which is deducted in liabilities.
Finance charges are recognised as costs over the term of the lease, in order to obtain a constant interest rate until the liability matures.
Finance leasing assets are amortised over their useful lifespan. However, if there is no reasonable certainty that the Group will obtain ownership at the end of the contract, the asset is amortised for the lesser of its useful lifespan or the term of the finance leasing contract.
ü As lessor Finance lease assets are carried on the balance sheet as loans made, for an amount equal to the net investment of the leased asset. This amount is repaid through the capital amortisations in each contract’s finance plan. The interest included in lease payments is registered as interest income, at the effective rate in the contract.
2.17 Intangible assets
Intangible assets, which mainly consist of software, are recorded at acquisition cost, less accumulated amortisation and impairment losses. Amortisation is accounted for on a straight-line basis, over the estimated useful lifespan of the assets, currently between 3 and 6 years.
The amortisation period and method for intangible fixed assets are reviewed at the end of each year. Changes to the estimated useful lifespan or consumption pattern of any future economic benefits are treated as changes to estimates. Amortisations are recognised under the corresponding item in the profit and loss statement.
Intangible assets may include capitalised internal costs, particularly costs associated with in-house software development. For this purpose, costs are only capitalised from the point at which the conditions stipulated in IAS 38 are met, namely the requirements inherent to the development phase.
2.18 Income tax
Expenses or income recognised as subject to income tax correspond to the sum of the expense or income recognised with current tax and the expense or income recognised with deferred tax.
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Current tax is calculated on the basis of the prevailing tax rate.
The Group also reports as deferred tax liabilities or assets those sums relating to the recognition of taxes that are payable/recoverable in the future and which result from temporary taxable/deductible differences, particularly those related to provisions, employee benefits and assets available for sale.
Deferred tax assets and liabilities are calculated and assessed on an annual basis, using the taxation rates expected to be in force at the date of reversal of the temporary differences, which correspond to the rates approved or substantially approved at the balance sheet date. Deferred tax liabilities are always recognised. Deferred tax assets are only recorded to the extent that it is likely that there will be sufficient future taxable income to allow their use.
Income taxes are entered against the profit/loss for the year, except in situations where the events which gave rise to them were reflected in a specific equity item, namely, with regard to the valuation of financial assets available for sale and employee benefits. In this case, the fiscal effect associated with valuations is also entered against equity, without affecting the profit or loss for the year. Under current tax legislation, tax declarations are subject to review and correction by the tax authorities for 4 years from the reporting date.
2.19 Employee benefits
There are various pension plans within the Group, including some with defined benefits and others with defined contributions. These liabilities are normally financed through independent pension funds or payments to insurance companies.
Liabilities relating to employee benefit are recognised according to the rules set in IAS 19. Accordingly the policies reflected in the consolidated accounts at 30 June 2014 are as follows:
a) Banif – Banco Internacional do Funchal, SA
Pension and healthcare liabilities Employees of Banif – Banco Internacional do Funchal, S.A. (Banif) are covered by the General Social Security Scheme from the moment they join the company, with the exception of those employees absorbed following the merger by incorporation of Banco Banif e Comercial dos Açores, SA (BBCA), on 1 January 2009. These latter had been covered by the alternative social security scheme set up under the Collective Labour Agreement (ACT) for the banking sector and were only incorporated in the General Social Security Scheme as from 1 January 2011, as stipulated by Decree-Law 1-A/2011, of 3 January.
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Under this law, the General Social Security Scheme offers protection to working BBCA employees for maternity, paternity and adoption, and also old age. Banif remains responsible for social protection in the case of illness, disability, survival and death. The contribution rate is 26.6% (23.6% from the employer and 3% from employees). This arrangement replaces the Caixa de Abono de Família dos Empregados Bancários (CAFEB), which has been wound up. As a result of this change, the pension rights of current working BBCA employees are now covered by the terms of the General Social Security Scheme. These take into account the length of service from 1 January 2011 to retirement age, with Banif paying the difference required to make up the pension guaranteed under the ACT. According to the guidelines in a Notice issued by the National Council of Financial Supervisors, attached to Banco de Portugal Fax Message No. 11/11/DSPDR, of 26 January 2011, and given that the ACT plan remains unchanged and that there is no reduction of benefits from the beneficiary’s point of view, liabilities for past services remained unchanged at 31 December 2010.
On 31 December 2011, and as a result of Decree-Law 27/2011, of 31 December, BBCA retirees and pensioners, who had been incorporated in the alternative social security scheme set up under the ACT for the banking sector, were transferred to the social security system, for coverage of their retirement and survivor pensions. The credit institutions remained responsible, through their pension funds, for paying updates to pensions, for complementary retirement and survivor benefits for pensions taken over by social security, for contributions to medical and social care services (SAMS) on retirement and survivor pensions, for death allowances, for survivor pensions paid to children and the surviving spouse, provided they relate to the same employee, and for survivor pensions owed to relatives of current retirees, where this becomes attributable as of 1 January 2012 (deferred survivor pension).
Medical care for bank employees is provided by the Medical and Social Care Service (SAMS), an independent entity managed by the banking unions. SAMS provides beneficiaries with services and/or contributions to the costs of medical care, auxiliary diagnostic procedures, medicines, hospital admissions and surgical operations, in accordance with its own internal regulations.
In 2008, a Company-Level Agreement (AE) was signed with the banking unions. This agreement instigated major changes in relation to the career structure and social security provisions available to all employees, with the exception of those absorbed following the merger by incorporation of BBCA. These latter employees are not covered by the AE.
Following the entry into force of the AE, on 1 October 2008, the former Banif Fund was transformed into a mixed fund with three pension plans, designated Pension Plans I, II and III.
Up to 28 December 2012, the company’s responsibilities were financed through two independent pension funds: ž Banif Pensions Fund, which financed Pension Plans I, II and III ž BBCA Pensions Fund, which financed the BBCA Pension Plan.
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However, it was determined that there was no real reason to maintain two different pension funds, insofar as there is only one corporate entity involved, and regardless of whether two distinct populations can be differentiated in terms of their socio-professional situations, under either the ACT or the AE for the banking sector, which meant there was little reason for certain different, although customisable, retirement benefits. As a result, on 28 December 2012, the Banco Banif e Comercial dos Açores, SA Pension Fund was closed, in accordance with the legislation in force and with the authorisation of the Instituto de Seguros de Portugal (ISP), by incorporation with the Banif Pension Fund, with the corresponding transfer of all its assets and liabilities to the Banif Pension Fund.
The incorporation of the Banco Banif e Comercial dos Açores Pension Fund into the Banif Pension Fund required a change be made to Pension Plan I of this Fund, in order to accommodate the new population and the corresponding benefits, without any loss of rights, expectations and benefits for the participants and beneficiaries transferred.
Thus, Banif provides its employees with the following pension and healthcare benefits:
- Pension Plan I (defined benefit), under which it assumes responsibility for the following defined benefits for: - Subpopulation A, those in the former Plan I of the Banif Pension Plan for (i) paying disability, old age and surviving relative retirement pensions, in accordance with the AE and the corresponding pension plan, in complement of the benefits provided by the social security system and (ii) future payment to SAMS, an independent entity managed by the unions, of mandatory contributions for post- employment medical care, in the following terms: ž for employees eligible for the retirement pension, the company makes a contribution of 6.5% towards their pensions. ž for other employees associated with the defined contribution plans, this benefit is altered to a lump sum on retirement, equivalent to 6.50% of the constituted capital amount, on the basis of the initial contribution plus the value of future defined contributions. - Subpopulation B, those from the former Banco Banif e Comercial dos Açores, SA Pension Plan, closed to new members, for the payment of retirement, disability, old age and surviving relative pensions to employees of BBCA and pensioners on the date of the merger by incorporation, or to their families, in conformity with the ACT and Decree-Law No. 1-A/2011, of 3 January, and Decree-Law No. 127/2011, of 31 December. As a supplement to the benefits in the pensions plan, Banif has taken on responsibility for paying mandatory contributions to SAMS, at a contribution rate of 6.5%, and the death allowance, under the terms of the vertical ACTV; - Pension Plan II (defined contribution), under which the company assumes an obligation to make a monthly contribution equivalent to 4.5% of qualifying remuneration and to make
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an initial contribution on the date the plan was set up. This covers all employees who joined Banif before 1 January 2007 and who had not died, retired or left before the date on which the AE came into force. Excepted from this plan are the employees absorbed following the merger by incorporation with BBCA, as they are not covered by the AE. The initial contribution was assigned to their respective individual accounts. It was calculated according to (i) the estimated supplementary old age pensions, as assessed in the liability study carried out by the actuary responsible for the pension plan on 31 December 2006 and duly reported to the Portuguese Insurance Institute and Banco de Portugal, and (ii) the current value of future contributions;
- Pension Plan III (defined contribution), under which Banif assumes an obligation to make a monthly contribution equivalent to 1.5% of qualifying remuneration. It covers all employees who joined the company after 1 January 2007 and who had not died, retired or left before the date on which the AE came into force;
Pension Plans I, II and III are financed by the Banif Pension Fund, which is an independent fund.
The cost of these liabilities deriving from Plan I is determined annually by independent actuaries, using the projected unit credit method and appropriate actuarial assumptions. Liabilities are updated on the basis of a discount rate that reflects market interest rates on the bonds of high- quality companies, denominated in the currency in which the liabilities are payable and with maturities similar to the dates when the pension responsibilities will have to be met.
In 2011, Banif decided to change its accounting practices as regards actuarial gains and losses. It stopped using the corridor method (IAS 19 § 92) and began to recognise actuarial gains and losses in equity on the comprehensive income statement (OCI - Other Comprehensive Income (IAS 19 § 93)).
In accordance with the method of immediately recognising actuarial gains and losses in comprehensive income: ž the liability or asset recognised on the balance sheet corresponds to the difference between the current value of pension responsibilities and the fair value of the assets in the pension funds; ž the gains and losses arising from the differences between the actuarial and financial assumptions used and the values actually seen as regards these liabilities and the income from the pensions fund are wholly recognised in equity, in a reserves through an actuarial gains and losses account. Increased liabilities arising from early retirement, which equate to the increase in liabilities caused by the employee retiring before reaching the age of 65, are recognised as costs in the reporting period.
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The costs of defined contribution plans are recognised as a cost in the corresponding reporting period.
The cost of past services is immediately recognised in the profit and loss account for the reporting period.
On the date of transition to IFRS, the Group chose the option permitted by IFRS 1 of not recalculating actuarial gains and losses deferred since the start of the plans (an option normally known as “reset”).
For the defined benefit plan, Banif assesses the recoverability of any surplus on the fund in relation to its retirement pension responsibilities, based on the expectation that necessary contributions will decrease in the future.
Other long-term benefits In addition to the benefits referred to above, Banif has other liabilities for employee benefits concerning the length of service bonus referred in the ACT, and medical care, under the SAMS, in regard of employees who terminated their employment contract with Banif by mutual agreement, under the restructuring process implemented in 2012, until their re-employment or retirement.
The liabilities for these benefits are also determined on the basis of actuarial valuations, in a way similar to that for pension liabilities. They are recognised under the “Other liabilities” item, against the profit and loss item.
b) Other Group entities
The companies Banif – Banco de Investimento, S.A., Banif Gestão de Activos – Sociedade Gestora de Fundos de Investimento Mobiliário, S.A., Banif Açor Pensões – Sociedade Gestora de Fundos de Pensões, S.A., Banif Capital – Sociedade de Capital de Risco, S.A., Banco Banif Mais, S.A., Margem – Mediação de Seguros, Lda and Banif Rent – Aluguer Gestão e Comércio de Veículos Automóveis, S.A. provide their employees with defined contribution pension plans, financed through independent pension funds.
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2.20 Provisions and contingent liabilities
The Group makes a provision whenever there is a present obligation (legal or constructive) resulting from past events, for which future disbursement of resources is likely and this disbursement can be reliably determined. The provision is the Group’s best estimate of the amounts that will have to be disbursed in order to settle the liability at the balance sheet date. If the time effect of the cost of money is significant, the provisions are discounted using a pre-tax interest rate that reflects the specific risk of the liability. In these cases, the increase in the provision due to the passage of time is recognised under financial costs.
Where future disbursement of resources is not likely, a contingent liability is recognised. Contingent liabilities are subject only to disclosure, unless the possibility of their being materialised is remote.
Provisions and contingent liabilities are presented in Note 24.
2.21 Dividends
Dividends are recognised as a liability and deducted from the equity item, when approved by shareholders. Dividends for the reporting period approved by the board of directors after the reference date of the financial statements are disclosed in the notes to the financial statements.
2.22 Recognition of income and costs
Income and costs are generally recognised according to the timing of the operations concerned, in accordance with the accrual principle. That is, they are carried as they are generated, irrespective of when they are collected or paid. Income is recognised to the extent that it is likely that the economic benefits associated with the transaction will flow to the Group and the amount of income can be reliably measured.
For financial instruments measured at amortised cost and for financial instruments classified as “Financial Assets available for sale”, interest is recognised using the effective rate method. This is the rate that exactly discounts the set of future cash receipts and payments expected until maturity, or until the next repricing date, for the currently recorded net amount of the financial asset or liability. Future cash flows are estimated when calculating the effective interest rate, taking into account the contractual terms and all other income or costs directly attributable to the contracts.
Dividends are recognised when the entitlement to receive payment is established.
2.23 Income and charges for services and commissions
The Group earns fees from its clients for providing a broad range of services. These include fees for the provision of ongoing services, for which clients are usually debited on a periodic basis, as well as commissions charged for carrying out a specific significant act.
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Fees charged for services provided during a given period are recognised over the duration of the service. Fees related to the performance of a significant act are recognised at the moment the act in question occurs.
The fees and charges associated with financial instruments are included at the effective interest rate of such instruments.
2.24 Financial guarantees
Financial guarantees are initially recognised as a liability, at their fair value. Subsequently, the liability is carried at the estimated amount of future expenditure required to settle the obligation, at the balance sheet date. Commissions obtained for providing financial guarantees are recognised in results under the “Income from services and fees” item, during the validity period of the commissions.
3. GROUP COMPANIES
At 30 June 2014 and 31 December 2013, the following Group companies were inside the consolidation perimeter:
30/06/2014 31/12/2013 30/06/2014
Registered % effective Non-controlling % effective Non-controlling Profit for the Company name Shareholder activity Total assets offices holding interests holding interests year
Banif Finance, Ltd. Cayman Islands Banif - Banco Internacional do Funchal, S.A. 100.00% 0.00% 100.00% 0.00% financial 69,818 (1,964)
Banif & Comercial Açores, Inc San José U.S.A Banif - Banco Internacional do Funchal, S.A. 100.00% 0.00% 100.00% 0.00% Representative office 495 1
Banif & Comercial Açores, Inc Fall River U.S.A Banif - Banco Internacional do Funchal, S.A. 100.00% 0.00% 100.00% 0.00% Representative office 1,500 -
Investaçor, SGPS, S.A. Portugal Banif - Banco Internacional do Funchal, S.A. 59.20% 40.80% 59.20% 40.80% Holding 16,937 (57)
Investaçor Hoteis S.A. Portugal Investaçor, SGPS, SA 59.20% 40.80% 59.20% 40.80% tourism 13,275 (297)
Açortur Investimentos Turísticos dos Açores, S.A. Portugal Investaçor, SGPS, SA 49.37% 50.63% 49.37% 50.63% tourism 8,311 (95)
Turotel, Turismo e Hoteis dos Açores, S.A. Portugal Investaçor, SGPS, SA 58.07% 41.93% 58.07% 41.93% tourism 3,928 (219)
Investimentos Turísticos e Similares e Apart-Hotel Pico Lda. Portugal Açortur Investimentos Turísticos dos Açores, S.A. 49.37% 50.63% 49.37% 50.63% tourism 1,588 (3)
Banif Rent - Aluguer Gestão e Comercio de Veículos Automóveis Portugal Banif - Banco Internacional do Funchal, S.A. 100.00% 0.00% 100.00% 0.00% Rent a car 13,513 (581)
Banif - Banco Internacional do Funchal, S.A. Banif - Banco Internacional do Funchal (Brasil), S.A. Brazil 99.85% 0.15% 99.85% 0.15% Bank 334,420 1,664 Banif International Holdings, Ltd
Banif - Banco de Investimento, S.A. Portugal Banif - Banco Internacional do Funchal, S.A. 100.00% 0.00% 100.00% 0.00% Investment Banking 580,621 (17,493)
Banif Gestão Activos - Soc. Gestora de Fundos de Investimento Mobiliario, S.A. Portugal Banif - Banco de Investimento, S.A. 100.00% 0.00% 100.00% 0.00% Asset Management 15,276 1,043
Banif - Banco Internacional do Funchal, S.A. Banif Açor Pensões - Soc. Gestora Fundos Pensões, S.A. Portugal 67.30% 32.70% 67.30% 32.70% Asset Management 6,293 257 Banif - Banco de Investimento, S.A.
Banif Capital - Soc. de Capital. de Risco S.A. Portugal Banif - Banco de Investimento, S.A. 100.00% 0.00% 100.00% 0.00% Asset Management 24,739 31
Gamma - Soc. Titularização de Créditos, S.A. Portugal Banif - Banco de Investimento, S.A. 100.00% 0.00% 100.00% 0.00% Asset Management 7,226 226
Banif International Asset Management Ltd. Portugal Banif - Banco de Investimento, S.A. 100.00% 0.00% 100.00% 0.00% Asset Management 1,381 120
Banif Multifund Ltd. Cayman Islands Banif International Asset Management Ltd. 100.00% 0.00% 100.00% 0.00% Asset Management 231 (10)
Banif - Banco Internacional do Funchal (Cayman) Ltd Cayman Islands Banif - Banco Internacional do Funchal, S.A. 100.00% 0.00% 100.00% 0.00% Other 8,765 (3,732)
Banif Internacional Holdings, Ltd Cayman Islands Banif - Banco Internacional do Funchal, S.A. 85.00% 15.00% 85.00% 15.00% Holding 13,017 (495)
Banif Financial Services, Inc Cayman Islands Banif Internacional Holdings Ltd 85.00% 15.00% 85.00% 15.00% financial 253 (5)
Banif Finance (USA) corp. U.S.A Banif Internacional Holdings Ltd 85.00% 15.00% 85.00% 15.00% financial 108,376 (1,419)
Banif Forfaiting Company, Ltd. Bahamas Banif Internacional Holdings Ltd 85.00% 15.00% 85.00% 15.00% financial 8,416 (4,110)
Banif Securities, Inc. U.S.A Banif Securities Holding, Ltd 100.00% 0.00% 100.00% 0.00% financial 1,637 (81)
Banif Securities Holding, Ltd Cayman Islands Banif - Banco Internacional do Funchal, S.A. 100.00% 0.00% 100.00% 0.00% Holding 20,918 (9,109)
Banif ( Brasil), Ltd. Brazil Banif - Banco Internacional do Funchal, S.A. 100.00% 0.00% 100.00% 0.00% real estate 39,935 (2,269)
Banif - Banco Internacional do Funchal, S.A. Banif International Bank, Ltd Bahamas 100.00% 0.00% 100.00% 0.00% Bank 336,785 (1,790) Banif Finance, Ltd.
Banif - Banco de Investimento (Brasil), SA Brazil Banif - Banco Internacional do Funchal (Brasil), S.A. 99.85% 0.15% 99.85% 0.15% Investment Banking 87,181 445
Banif US Real Estate Cayman Islands Banif - Banco de Investimento, S.A. 100.00% 0.00% 100.00% 0.00% Asset Management 9,316 (137)
Banif Gestão de Activos (Brasil), S.A. Brazil Banif - Banco de Investimento (Brasil), S.A. 99.85% 0.15% 99.85% 0.15% Asset Management 154 (10)
Banif - Imobiliária, S.A. Portugal Banif - Banco Internacional do Funchal, S.A. 100.00% 0.00% 100.00% 0.00% real estate 596,090 (13,653)
Sociedade Imobiliária Piedade, S.A. Portugal Banif - Imobiliária, S.A. 100.00% 0.00% 100.00% 0.00% real estate 1,913 (2)
Banif Bank (Malta) PLC Malta Banif - Banco Internacional do Funchal, S.A. 78.00% 22.00% 78.00% 22.00% Bank 638,516 326
Banco Caboverdiano de Negócios S.A. Cape Verde Banif - Banco Internacional do Funchal, S.A. 51.69% 48.31% 51.69% 48.31% Bank 118,940 824
Banif - Banco Internacional do Funchal, S.A. Banif Holding (Malta) PLC Malta 100.00% 0.00% 100.00% 0.00% Holding 15,111 (616) Banif - Banco Internacional do Funchal (Cayman)
Banif Mais, SGPS, SA Portugal Banif - Banco Internacional do Funchal, S.A. 85.92% 14.08% 85.92% 14.08% Holding 623,409 12,331
Banco Mais, SA Portugal Banif Mais, SGPS, SA 85.92% 14.08% 86.06% 13.94% Bank 590,008 15,132
Banif Plus Bank ZRT Hungary Banco Mais SA 85.92% 14.08% 86.06% 13.94% Bank 47,913 1,215
Margem Mediação de Seguros, Lda Portugal Banif Mais, SGPS, SA 85.92% 14.08% 85.92% 14.08% insurance 1,626 1,147
Banif Mais, SGPS, SA TCC Investments Luxembourg Luxembourg 85.92% 14.08% 86.05% 13.95% investments 13,475 4,405 Banco Mais, SA
Beta Securitizadora Brazil FIP Banif Real Estate 99.85% 0.15% 99.85% 0.15% real estate 48,012 257
Banif - Banco Internacional do Funchal (Brasil ) S.A. FIP Banif Real Estate Brazil 99.85% 0.00% 99.85% 0.00% Asset Management 6,551 (20) Banif - Banco de Investimento (Brasil) S.A.
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30/06/2014 31/12/2013 30/06/2014
Registered Non-controlling Non-controlling Total do Resultado do Company Name Shareholder % direct holding % direct holding Actividade Office interests interests Activo exercício
Art Invest Portugal Banif - Banco de Investimento, S.A. 88.92% 0.00% 62.58% 0.00% Asset Management 1,354 (28)
Banif Fortuny Portugal Banif - Banco de Investimento, S.A. 100.00% 0.00% 100.00% 0.00% Asset Management 8,138 (468)
Banif - Imobiliária, S.A. Imogest Portugal 80.78% 0.00% 80.48% 0.00% Asset Management 139,376 (1,629) Banif - Banco de Investimento, S.A.
Banif - Imobiliária, S.A. Banif Renda Habitação Portugal 100.00% 0.00% 100.00% 0.00% Asset Management 138,886 (2,059) Banif - Banco Internacional do Funchal, S.A.
Banif Gestão Imobiliária Portugal Banif - Imobiliária, S.A. 100.00% 0.00% 100.00% 0.00% Asset Management 23,445 (511)
Gestarquipark Portugal Imogest 80.78% 19.22% 80.48% 19.52% Asset Management 13,929 56
Banif Real Estate Polska Poland Imopredial 98.24% 1.76% 97.81% 2.19% Asset Management 5,583 145
Tiner Polska Poland Imopredial 93.33% 6.67% 92.92% 7.08% Asset Management 16,980 (9)
Banif - Imobiliária, S.A. Imopredial Portugal 98.24% 0.00% 97.81% 0.00% Asset Management 358,712 (4,785) Banif - Banco de Investimento, S.A. Banif - Imobiliária, S.A. Banif Property Portugal 94.76% 0.00% 94.76% 0.00% Asset Management 104,368 1,327 Banif - Banco Internacional do Funchal, S.A.
Achala Brazil Banif ( Brasil), Ltd. 100.00% 0.00% 100.00% 0.00% real estate 29,182 (91)
Komodo U.S.A Banif Securities Holding, Ltd 100.00% 0.00% 100.00% 0.00% Holding 7,767 (32)
Banif - Banco de Investimento, S.A. Worldvilas Portugal 100.00% 0.00% 100.00% 0.00% real estate 409 - Banif Capital - Soc. de Capital. de Risco S.A.
Turirent Portugal Banif - Banco de Investimento, S.A. 100.00% 0.00% 100.00% 0.00% Asset Management 7,959 (56)
Banif - Banco Internacional do Funchal, S.A. Wil Portugal 95.00% 5.00% 95.00% 5.00% real estate 31,046 (439) Banif Capital - Soc. de Capital. de Risco S.A Banif Finance (USA) corp. Santa Ester S.A. Brazil Banif International Bank, Ltd 94.66% 5.34% 94.66% 5.34% Holding 24,550 - Banif - Banco Internacional do Funchal (Brasil), S.A.
Pitchecia Participações Brazil Banif Real Estate Brasil 94.66% 5.34% 94.66% 5.34% real estate 6,227 -
Banif Real Estate Brasil Brazil Santa Ester S.A. 94.66% 5.34% 94.66% 5.34% Asset Management 26,932 -
Banif Portugal Crescimento Portugal Banif - Banco Internacional do Funchal, S.A. 100.00% 0.00% 100.00% 0.00% Asset Management 9,977 (65)
Numberone SGPS, Lda Portugal Banif - Banco Internacional do Funchal, S.A. 0.00% 0.00% 100.00% 0.00% Holding - - Banif - Banco Internacional do Funchal, S.A. Capven Portugal Banif Capital - Soc. de Capital. de Risco S.A 0.00% 0.00% 67.98% 0.00% Asset Management - - Banif - Banco de Investimento, S.A. ZACF - Participações Ltda Brazil Banif - Banco Internacional do Funchal (Brasil), S.A. 0.00% 0.00% 99.85% 0.15% real estate - -
The details of associates are disclosed in Note 17.
Although the Group has effective holdings of below 50%, it controls the subsidiaries.
At 30 June 2014 and 31 December 2013, the special purpose vehicles included in the consolidated accounts were as follows:
30/06/2014 31/12/2013 Company Name Nature % holding % holding
Atlantes Mortgage Nº1 plc Securitisation Vehicles 100.00% 100.00% Atlantes Mortgage Nº2 plc Securitisation Vehicles 100.00% 100.00% Atlantes Mortgage Nº3 plc Securitisation Vehicles 100.00% 100.00% Atlantes Mortgage Nº4 plc Securitisation Vehicles 100.00% 100.00% Atlantes Mortgage Nº5 plc Securitisation Vehicles 100.00% 100.00% Atlantes Mortgage Nº6 plc Securitisation Vehicles 100.00% 100.00% Atlantes Mortgage Nº7 plc Securitisation Vehicles 100.00% 100.00% Azor Mortgage Nº 1 Securitisation Vehicles 100.00% 100.00% Azor Mortgage Nº 2 Securitisation Vehicles 100.00% 100.00% Euro Invest Series 3A e 3B Structured Debt Issue 100.00% 100.00% Atlantes Finance Nº4 Securitisation Vehicles 100.00% 100.00% Atlantes Finance Nº5 Securitisation Vehicles 100.00% 100.00% Atlantes NPL 1 Securitisation Vehicles 100.00% 100.00% Atlantes Finance Nº6 Securitisation Vehicles 100.00% 100.00% Atlantes SME 2 Securitisation Vehicles 100.00% 100.00% Atlantes SME 3 Securitisation Vehicles 100.00% -
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4. REPORTING BY SEGMENT
The Banif Financial Group is organised into independent business areas: commercial banking and specialised lending, investment banking and other financial activities.
In this context and as required by IFRS 8, disclosures by the Group’s operating segments correspond to the form in which information is analysed by the Group’s management:
Commercial Banking – This comprises the holding of funds and deposits and specific credit products for individual, corporate and institutional customers. These products include housing loans, consumer credit, products for sole traders (ENI) and small businesses, factoring, short term credit facilities and import and export credits.
Investment Banking – This comprises business activities in the primary and secondary capital markets, in the Group's own name or on behalf of third parties, and includes transactions, corporate finance, and mergers and acquisitions.
Asset Management – This comprises the investment product offer and related management services for individual and corporate customers, as well as other financial services. This segment includes investment funds managed by Group entities in which the Group holds the majority of the investment units.
Others – This covers all operations that do not fall into one of the operational segments defined above. The larger Group entities operating in this segment are: Banif Imobiliária, hotel sector entities (Investaçor subgroup) and the insurance business (consolidated using the equity method – Note 17).
The reports used by management are based on accounting information produced under IAS/IFRS rules.
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4.1 - Business segments
30/06/2014
Investment Retail Banking Asset Management Holdings and others TOTAL Banking
Cash and balances at central banks 219,497 2,128 - 5 221,630 Balances at other credit institutions 171,201 18,943 1,148 68 191,360 Financial assets held for trading 3,847 38,458 - - 42,305 Other financial assets at fair value through profit or loss 26,290 14,994 1,316 - 42,600 Financial assets available for sale 1,990,482 33,715 - 4 2,024,201 Investments at credit institutions 228,379 260 - - 228,639 Loans to customers 7,442,375 295,706 1,163 - 7,739,244 Investments held to maturity 8,139 - - - 8,139 Assets with repurchase agreement - - - - - Hedging derivatives - - - - - Non-current assets held for sale 1,442,904 83,700 236 28,506 1,555,346 Investment property 109,348 - 603,070 97,493 809,911 Other tangible assets 41,294 599 121,666 70,429 233,988 Intangible assets 12,134 2,348 - 47 14,529 Investments in non-consolidated subsidiaries and associate companies 38,154 2,281 22,941 99,057 162,433 Current tax assets 2,427 214 12 425 3,078 Deferred tax assets 219,848 17,423 487 311 238,069 Underwriting provisions for reinsurance receivables - - - - - Other assets 130,619 12,490 13,537 21,750 178,396
Total Assets 12,086,938 523,259 765,576 318,095 13,693,868
Deposits from central banks 1,974,888 145,003 - - 2,119,891 Financial liabilities held for trading 12,977 18,182 - - 31,159 Other financial liabilities at fair value through profit or loss 12,471 - - - 12,471 Deposits from other credit institutions 459,671 37,161 24,444 2,512 523,788 Customer funds and other loans 6,368,834 143,853 - 965 6,513,652 Debt securities in issue 1,809,965 183 - - 1,810,148 Financial liabilities associated with transferred assets - - - - - Hedging derivatives - - - - - Non-current assets held for sale 988,828 28,744 24 - 1,017,596 Provisions 10,691 188 113 212 11,204 Underwriting provisions - - - - - Current tax liabilities 7,176 422 461 340 8,399 Deferred tax liabilities 52,787 3,805 89 5,598 62,279 Equity instruments 130,158 - - - 130,158 Other subordinated liabilities 155,709 1,454 - - 157,163 Other liabilities 268,015 4,577 14,216 7,216 294,024
Total Liabilities 12,252,170 383,572 39,347 16,843 12,691,932
31/12/2013
Investment Retail Banking Asset Management Holdings and others TOTAL Banking
Cash and balances at central banks 151,227 1,111 - 5 152,343 Balances at other credit institutions 170,580 14,803 1,315 79 186,777 Financial assets held for trading 2,127 37,959 - - 40,086 Other financial assets at fair value through profit or loss 30,611 18,145 24,930 - 73,686 Financial assets available for sale 1,744,964 37,077 - - 1,782,041 Investments at credit institutions 117,487 - - - 117,487 Loans to customers 7,667,578 300,289 1,152 6 7,969,025 Investments held to maturity 12,081 - - - 12,081 Assets with repurchase agreement - - - - - Hedging derivatives - - - - - Non-current assets held for sale 1,496,736 85,004 230 24,981 1,606,951 Investment property 117,344 - 612,079 98,153 827,576 Other tangible assets 45,296 655 124,155 77,583 247,689 Intangible assets 14,399 2,625 - 52 17,076 Investments in non-consolidated subsidiaries and associate companies 35,963 550 - 93,117 129,630 Current tax assets 2,057 318 369 673 3,417 Deferred tax assets 224,337 13,804 447 1,859 240,447 Underwriting provisions for reinsurance receivables - - - - - Other assets 137,843 16,559 18,746 24,032 197,180
Total Assets 11,970,630 528,899 783,423 320,540 13,603,492
Deposits from central banks 2,936,826 140,777 - - 3,077,603 Financial liabilities held for trading 12,068 16,717 - - 28,785 Other financial liabilities at fair value through profit or loss 12,393 - - - 12,393 Deposits from other credit institutions 256,177 61,406 28,887 2,181 348,651 Customer funds and other loans 6,156,478 145,781 - 1,021 6,303,280 Debt securities in issue 1,257,895 175 - - 1,258,070 Financial liabilities associated with transferred assets - - - - - Hedging derivatives - - - - - Non-current assets held for sale 949,670 44,642 26 - 994,338 Provisions 12,477 299 172 417 13,365 Underwriting provisions - - - - - Current tax liabilities 4,032 493 530 311 5,366 Deferred tax liabilities 42,538 113 87 5,631 48,369 Equity instruments 260,058 - - - 260,058 Other subordinated liabilities 152,864 1,454 - - 154,318 Other liabilities 192,818 3,806 14,504 8,195 219,323
Total Liabilities 12,246,294 415,663 44,206 17,756 12,723,919
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30/06/2014
Investment Retail Banking Asset Management Holdings and others TOTAL Banking
Interest margin: External customers 64,214 2,483 (623) (15) 66,059 Interest margin: Inter-Segment 15,196 (666) (1,922) (12,608) - Interest margin 79,410 1,817 (2,545) (12,623) 66,059
Income from equity instruments 225 530 - - 755 Fee and commission income - External Customers 39,045 3,205 1,334 - 43,584 Fee and commission income - Inter-Segment 3,452 1,140 2,653 - 7,245 Fee and commission income 42,497 4,346 3,988 - 50,831 Fee and commission expenses - External customers (9,205) (646) (336) (17) (10,204) Fee and commission expenses - Inter-Segment (724) (7) (3,963) (57) (4,751) Fee and commission expenses (9,928) (653) (4,299) (74) (14,954) Profit/loss from Assets and Liabilities valued at Fair Value through profit or loss (4,915) (2,952) (428) 19 (8,276) Profit/Loss from Financial Assets available for sale 90,761 (118) - - 90,643 Profit/Loss from Foreign Currency Revaluation (635) (52) (25) 39 (673) Other Operating Income 28,888 6,112 5,372 518 40,890 Banking Revenue 226,303 9,030 2,063 (12,121) 225,275
Staff Costs (62,961) (2,543) (985) (1,433) (67,922) Other administrative costs (39,195) (1,826) (2,889) (1,735) (45,645) Amortisations for the year (8,497) (359) (617) (911) (10,384) Provisions net of write-offs 471 110 59 - 640 Impairment of loans and advances net of reversals and recoveries (120,381) (1,123) (5) - (121,509) Impairment of other financial assets net of reversals and recoveries (15,043) (2,049) - - (17,092) Impairment of other assets net of reversals and recoveries (5,672) 33 (4,680) 2,125 (8,194) Negative Goodwill - - - - - Profit/loss from associates and joint ventures (Equity Method) 1,086 12 (201) (6,804) (5,907) Profit/loss before tax and non-controlling interests (23,889) 1,285 (7,255) (20,879) (50,738)
Taxes (2,625) (187) (423) (1,561) (4,796) Current (8,595) (411) (461) - (9,467) Deferred 5,970 224 38 (1,561) 4,671 Profit/loss after tax and before non-controlling interests (26,514) 1,098 (7,678) (22,440) (55,534) Profit/loss on discontinued operations (31,212) (9,787) - - (40,999) Non-controlling interests (1,992) (60) 496 382 (1,174) Profit/loss for the year (59,718) (8,749) (7,182) (22,058) (97,707)
30-06-2013 Restated
Investment Retail Banking Asset Management Holdings and others TOTAL Banking
Interest margin: External customers 47,143 5,147 (1,021) (112) 51,157 Interest margin: Inter-Segment 14,105 (604) (2,348) (11,153) - Interest margin 61,248 4,543 (3,369) (11,265) 51,157
Income from equity instruments 834 302 - - 1,136 Fee and commission income - External Customers 43,473 3,391 1,312 - 48,176 Fee and commission income - Inter-Segment 4,044 1,028 2,989 - 8,061 Fee and commission income 47,518 4,419 4,301 - 56,238 Fee and commission expenses - External customers (10,203) (614) (372) (20) (11,209) Fee and commission expenses - Inter-Segment (1,099) (5) (4,146) (68) (5,318) Fee and commission expenses (11,302) (619) (4,519) (89) (16,529) Profit/loss from Assets and Liabilities valued at Fair Value through profit or loss (599) (2,302) (168) 181 (2,888) Profit/Loss from Financial Assets available for sale 32,527 3,581 - - 36,108 Profit/Loss from Foreign Currency Revaluation 89 112 (7) 32 226 Other Operating Income (2,303) 2,936 8,406 3,628 12,667 Banking Revenue 128,012 12,972 4,644 (7,513) 138,115
Staff Costs (55,174) (3,028) (2,028) (1,533) (61,763) Other administrative costs (43,595) (1,945) (2,885) (1,606) (50,031) Amortisations for the year (10,906) (548) (868) (999) (13,321) Provisions net of write-offs (4,350) 543 - - (3,807) Impairment of loans and advances net of reversals and recoveries (115,343) (4,885) (31) (485) (120,744) Impairment of other financial assets net of reversals and recoveries (3,819) (1,690) - - (5,509) Impairment of other assets net of reversals and recoveries (11,210) 19 (646) 524 (11,313) Negative Goodwill - - - - - Profit/loss from associates and joint ventures (Equity Method) 724 23 - 339 1,086 Profit/loss before tax and non-controlling interests (115,661) 1,461 (1,814) (11,273) (127,287)
9,921 (187) (463) (461) 8,810 Current (3,456) (596) (327) (366) (4,745) Deferred 13,377 409 (136) (95) 13,555 Profit/loss after tax and before non-controlling interests (105,740) 1,274 (2,277) (11,734) (118,477) Profit/loss on discontinued operations (68,697) (9,622) - - (78,319) Non-controlling interests 193 (48) 184 452 781 Profit/loss for the year (174,244) (8,396) (2,093) (11,282) (196,015)
The “Other operating income” (including the “income from the disposal of other assets" and “other operating income” sub-items) and “Other administrative costs” items include inter-segmental balances in the amount of 6,724 thousand euros (7,561 thousand euros in the first half of 2013) and 9,221 thousand euros (10,303 thousand euros in the first half of 2013), respectively.
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5. CASH AND BALANCES AT CENTRAL BANKS
This item breaks down as follows:
Description 30/06/2014 31/12/2013
Cash on hand 40,102 45,291 Sight deposits at Central Banks 181,528 107,052 Interest on liquid assets - -
221,630 152,343
Sight deposits at central banks include an amount 181,528 thousand euros (54,726 thousand euros in 2013). The Group is, thus, in compliance with the legal requirements on minimum cash balances held at Banco de Portugal. In accordance with Banco de Portugal Notice no. 7/94, of 19 October, and Circular Letter No. 5/2011/DMR, of 20/12/2011, the coefficient to be applied is 1% of the eligible liabilities. These deposits have been interest bearing since 1 January 1999.
6. AMOUNTS DUE FROM OTHER CREDIT INSTITUTIONS
This item breaks down as follows:
Description 30/06/2014 31/12/2013
Cheques for collection In Portugal 11,626 12,615 Abroad - 2
Sight deposits In Portugal 6,710 4,544 Abroad 113,878 99,075
Other 59,146 70,541
191,360 186,777
Cheques for collection at credit institutions in Portugal, at 30 June 2014, were cleared through the clearing house in the first few business days of July 2014.
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7. FINANCIAL ASSETS AND LIABILITIES HELD FOR TRADING
Financial assets held for trading:
Description 30/06/2014 31/12/2013
Debt instruments Portuguese government bonds 1,423 1,307 From public foreign issuers 96 648 From other residents 1,961 1,639 From other non residents 11,085 15,540 14,565 19,134 Capital instruments Issued by residents 4,706 4,723 Issued by non residents 15 - 4,721 4,723 Other Issued by residents 299 - Issued by non residents - - 299 -
Derivatives held with positive fair value 22,720 16,229
TOTAL 42,305 40,086
Debt instruments amounting to 154 thousand euros and 95 thousand euros were in use as guarantees for repo operations and for irrevocable commitments with the Deposits Guarantee Fund, respectively. In 2013, debt instruments amounting to 1,667 thousand euros were in use as guarantees for refinancing operations at the ECB.
Financial liabilities held for trading:
Description 30/06/2014 31/12/2013
Derivative instruments with negative fair values 29,724 24,018 On overdraft sales 1,435 4,767
31,159 28,785
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Derivative financial instruments:
30/06/2014 31/12/2013 Description Notional Values Fair Value Fair Value Positive Negative Positive Negative
Exchange rate contracts Swap FX 508,443 1,802 1,339 92 5,772 Forwards 27,846 3 793 1,929 42
Interest rate contracts Interest Rate Swaps 4,442,387 20,915 27,592 14,208 18,204
4,978,676 22,720 29,724 16,229 24,018
The notional values have the following maturities:
Maturity of notional values > 3 months <= 6 > 6 months <= 1 > 1 year <= 5 <= 3 months > 5 years Total months year years
Exchange rate contracts Swap FX 316,274 192,169 - - - 508,443 Forwards 27,846 - - - - 27,846
Interest rate contracts Interest Rate Swaps - - 16,702 - 4,425,685 4,442,387
Total 344,120 192,169 16,702 - 4,425,685 4,978,676
8. OTHER FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS
This item breaks down as follows:
Description 30/06/2014 31/12/2013
Debt instruments Portuguese government bonds - 83 From public foreign issuers 1,099 - 1,099 83 Capital instruments Issued by residents 1,419 24,128 Issued by non residents 2,727 2,511 4,146 26,639 Other Issued by residents 31,932 42,703 Issued by non residents 5,423 4,261 37,355 46,964
TOTAL 42,600 73,686
In compliance with the accounting policy described in Note 2.8, the Group classifies in its “Other financial assets at fair value through profit or loss” securities portfolio those of its holdings in investment funds that are in excess of 20%, but where it does not have control, when held through investment funds, venture capital or bank capital, given the characteristics of these operations (seed capital).
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The 2013 amount of 81 thousand euros in treasury bonds corresponds to “Assets pledged as collateral” that are being used to back irrevocable commitments to the Deposit Guarantee Fund.
9. FINANCIAL ASSETS AVAILABLE FOR SALE
This item breaks down as follows:
Description 30/06/2014 31/12/2013
Debt instruments Portuguese government bonds 1,663,221 1,424,461 From public foreign issuers 472 1,093 impairment - (630) From other residents 2,306 2,222 From other non residents 2,105 2,101 1,668,104 1,429,247 Capital instruments Issued by residents 57,509 53,375 impairment (18,945) (8,945) Issued by non residents 133 137 38,697 44,567 Other Issued by residents 69,079 66,071 impairment (9,156) (6,776) Issued by non residents 297,232 283,967 impairment (39,755) (35,035) 317,400 308,227
TOTAL 2,024,201 1,782,041
Changes in impairment of financial assets available for sale, during the first half of 2014, are described in Note 37.
The amount of 13,263 thousand euros (13,836 thousand euros in 2013) in treasury bonds corresponds to “Assets pledged as collateral” that are being used to back irrevocable commitments to the Deposit Guarantee Fund and the Investor Compensation Scheme.
At 30 June 2014, debt securities with a value of 1,417,666 thousand euros (1,322,263 thousand euros in 2013) are being used as security for refinancing operations with the ECB, as described in Note 19.
Capital instruments in the amount of 2 thousand euros are being used to guarantee liabilities held at the Mutual Guarantee Company.
The main assumptions used in the valuation of unlisted equity instruments are: · Fund Units – list price based on the last NAV available for fund units acquired up to the date of that price; historical cost for investments made between the date of the last quoted price available and the date of the financial statements;
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· Securities received in lieu – carrying of 100% impairment on the balance sheet value if there are no prospects of recoverability. The prospects of recoverability are determined based on individual analyses conducted internally (Note 2.12)
10. INVESTMENTS AT CREDIT INSTITUTIONS
This item breaks down as follows:
Description 30/06/2014 31/12/2013
Interbank money market - - Purchase operations with resale agreement In Portugal - - Abroad - - Deposits In Portugal 22,218 21,801 Abroad 160,905 87,670 Loans In Portugal 10,601 505 Abroad 12,850 3,757 Very short-term investments In Portugal - - Abroad - 15 Other 23,749 3,772
Impairment (1,684) (33)
228,639 117,487
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11. LOANS TO CLIENTS
This item breaks down as follows:
Description 30/06/2014 31/12/2013
Corporate Loans Current accounts 319,303 731,644 Discount and other credit represented by bills 157,490 161,505 Loans 2,551,257 2,353,412 Overdrafts 16,693 42,877 Factoring 93,053 103,112 Finance Leases 168,865 176,569 Other 87,564 80,318 Private Loans Housing 2,821,322 2,889,509 Consumer 502,845 523,157 Other purposes Loans 469,636 490,290 Current accounts 61,403 91,958 Discount and other credit represented by bills 3,305 4,425 Finance leases 23,138 17,626 Overdrafts 24,034 22,645 Other 26,922 33,052
Other credit and securitised receivables 348,246 181,096
Loans and overdue interest 1,193,482 1,177,059
Income receivable 59,168 61,304 Costs with deferred income 32 69 Income from deferred income (11,716) (12,386)
Loans and advance to customers (Gross) 8,916,042 9,129,242
Impairment on loans (1,176,798) (1,160,217)
Loans and advance to customers (Net Value) 7,739,244 7,969,025
Of all loans to clients, the sum of 1,448,722 thousand euros was being used, in 2013, as security for refinancing operations with the ECB, as described in Note 19.
Of all loans to clients, the amount of 23,514 thousand euros (22,152 thousand euros in 2013) are being used as security for refinancing operations with the ECB, as described in Note 19.
The “Overdue loans and accrued interest” item includes repayment instalments more than 90 days overdue. Repayment instalments between 30 and 90 days overdue amount to 29,093 thousand euros (37,905 thousand euros in 2013).
Of net loans to clients, the amount of 170,544 thousand euros was loaned to non-resident Group entities.
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The age of overdue balances has the following breakdown:
Description 30/06/2014 31/12/2013
Corporate Loans 3 - 6 Months 11,514 6,872 6 Months - 1 year 16,725 43,355 1 - 3 years 135,216 115,709 > 3 years 263,387 281,810
Private Loans 3 - 6 Months 43,525 50,343 6 Months - 1 year 100,722 108,448 1 - 3 years 299,986 285,190 > 3 years 322,407 285,332
TOTAL 1,193,482 1,177,059
Loans that have been securitised have the following breakdown:
Description 30/06/2014 31/12/2013
Loans and interest
Private Loans Housing 2,205,221 2,301,302 Consumer 290,952 361,925 Other purposes 3,961 3,745
Corporate Loans 1,158,204 628,721
Loans and overdue interest
Private Loans Housing 46,910 44,250 Consumer 16,068 14,380 Other purposes 15,839 15,117
Corporate Loans 110,218 105,556
TOTAL 3,847,373 3,474,996
These securitised loans originate in Portugal, at Banif, SA and Banco Banif Mais.
The Group considers restructured loans to be those loans in relation to which there have been changes in contractual conditions, particularly in terms of extensions to the repayment terms, the introduction of grace periods or the capitalisation of interest, due to the financial difficulties of the borrower, regardless of whether or not there have been delays in the payment of capital and interest.
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12. INVESTMENTS HELD TO MATURITY
This item breaks down as follows:
Description 30/06/2014 31/12/2013
Debt instruments 8,139 12,081 Impairment - -
8,139 12,081
The portfolio of investment securities held to maturity had the following composition at 30 June 2014:
Nature and type Quantity Balance sheet value
Debt instruments
PT INT FIN 5% NOV19 3,900,000 4,076 CAIXABANK 4,125% NOV 14 2,500,000 2,581 GOLDMAN FLT MAI 2016 1,500,000 1,482
8,139 Securities with a value of 4,063 thousand euros (9,592 thousand euros in 2013) are being used as security for refinancing operations with the ECB, as described in Note 19.
13. NON-CURRENT ASSETS AND LIABILITIES HELD FOR SALE
This item has changed over the period as follows:
Description 30/06/2014 31/12/2013
Property and infrastructure 575,169 549,446 holdings 1,028,268 1,105,985 impairment (48,091) (48,480)
1,555,346 1,606,951
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Net balance at Net balance at Asset category 30-06-2014 31-12-2013
Property and infrastructure 527,078 500,966 Holdings: FIP Banif Real Estate Brasil 26,699 25,218 LDI - Desenvolvimento Imobiliário 74,088 67,898 Banco Banif Brasil 277,186 313,225 Banif Banco de Investimento (Brasil) 65,103 66,668 Beta Securitizadora 39,601 35,975 Banif Gestão Activos (Brasil) 119 103 FIP Banif Real Estate 118 127 Banif Bank (Malta) 433,846 475,097 Banco Caboverdiano Negócios 111,508 121,674
1,555,346 1,606,951
For the purposes of determining any impairment, valuations of non-current assets held for sale are carried out by independent specialists, in accordance with the criteria and methodologies generally accepted for the purpose. These include analyses that make use of the cost and market methods. Fair value is defined as the amount that could reasonably be expected of a transaction between an interested purchaser and vendor, with equity between the two, neither being obliged to sell or purchase and both being aware of all relevant factors on a given date.
Discontinued units
Details of the assets and liabilities of the discontinued units at 30 June 2014:
Banif Banco Banif FIP Banco Banif Banco de Beta Gestão Banif Banif ZACF Bank Caboverdiano Investimento Securitizadora Activos Real Brasil (Malta) Negocios (Brasil) SA (Brasil) Estate
Total Assets 277,186 - 65,103 39,601 119 118 433,846 111,508 Cash and balances at central banks 1,063 - - --- 8,302 2,674 Balances at other credit institutions 1,540 - 4 2 - 17 965 542 Trading securities 11,541 - 27,223 -- 101 25,491 - Other Financial assets at fair value through profit or loss ------185 Financial assets available for sale 2,252 - 10,474 --- 2,397 6,133 Due from banks 6,249 - 7,837 623 --- 16,250 Loans and advance to customers 122,701 - 3,188 38,272 -- 377,279 79,911 Investment securities held to maturity 10,578 ------140 Securities subject to repurchase agreements 6,192 ------Derivatives held for hedging ------Non-current assets held for sale 30,457 - 3,809 --- 137 2,407 Investment property ------Other tangible assets 1,195 - 452 - 1 - 8,229 2,079 Intangible assets -- 65 --- 1,010 50 Current tax assets 5,232 - 2,774 260 112 -- 193 Deferred tax assets 46,693 - - 428 -- 5,000 45 Receivables - direct insurance and reinsurance ------Other assets 31,491 - 9,277 16 5 - 5,036 898
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Banif Banco Banif FIP Banco Banif Banco de Beta Gestão Banif Banif ZACF Bank Caboverdiano Investimento Securitizadora Activos Real Brasil (Malta) Negocios (Brasil) SA (Brasil) Estate
Total Liabilities 250,969 - 28,744 40,007 6 18 594,176 103,675 Deposits from central banks ------6,001 - Trading Liabilities ------Financial liabilities at fair value through profit or loss ------Deposits from other banks 22,449 - - --- 313 3,482 Due to customers 2,924 - - --- 582,953 93,905 Debt securities in issue 205,138 - 27,957 39,219 --- - Financial liabilities linked to transferred assets ------Derivatives held for hedging ------Non-current liabilities available for sale ------Provisions 11,913 - 83 ---- 121 Underwriting provisions ------Current tax liabilities ------316 Deferred tax liabilities ------274 Securities representing equity ------Other subordinated liabilities ------Other liabilities 8,545 - 703 788 6 18 4,908 5,577
Results of the discontinued units at 30 June 2014:
Banif Banco Banif FIP Banco Banif Banco de Beta Gestão Banif Banif ZACF Bank Caboverdiano Investimento Securitizadora Activos Real Brasil (Malta) Negocios (Brasil) SA (Brasil) Estate
Interest and similar income 12,091 - 3,712 29 -- 9,708 3,323 Interest and similar expense (16,220) - (2,931) (2,992) -- (7,176) (1,692) Net Interest Income (4,129) - 781 (2,963) -- 2,532 1,631 Dividend Income ------117 Fees and commission income 94 - 64 10 -- 869 839 Fees and commission expenses (256) - (10) (3) - (2) (273) (128) Income from assets and liabilities valued at fair value through profit or los 4,066 - (281) - - 3 293 5 Income from available-for-sale financial assets ------(2) - Foreign exchange income (1,204) - - --- 445 32 Other operating income (6,081) (8) 390 2,997 8 - (251) 86 Net Operating Income (7,510) (8) 944 41 8 1 3,613 2,581 Personnel expenses (6,301) - (242) - (11) - (2,735) (700) Overheads (2,855) - (538) (30) (8) (21) (1,983) (702) Depreciation and Amortisation (241) - (76) --- (402) (249) Provisions net of write-offs (557) - (52) (1) --- 2 Loan impairment net of reversals and recoveries (20,886) - (1,352) (143) -- (774) (42) Impairment of other financial assets net of reversals and recoveries ------Impairment of other assets net of reversals and recoveries 5,253 ------(7) Negative consolidation differences ------Income from associates and joint ventures (equity method) ------Profit/loss before tax and non-controlling interests (33,097) (8) (1,317) (133) (12) (20) (2,281) 884 Current 3,918 - (8,440) (49) -- (163) (282) Deferred (85) - - (106) --- (282) Income Tax 4,003 - (8,440) 57 -- (163) - Profit/loss after tax and before non-controlling interests (29,179) (8) (9,756) (182) (12) (20) (2,445) 602
14. INVESTMENT PROPERTY
This item has changed over the period as follows:
June 2014
Entities Transfers Balance at within the Exchange Balance Asset category 31-12- consolidation Acquisitions Revaluations Disposals rate at 30- Other 2013 perimeter for Own-use held for differences 06-2014 assets the first time properties sale
Buildings and land 827,576 - 2,763 (10,762) (14,765) 2,826 - - 2,273 809,911
827,576 - 2,763 (10,762) (14,765) 2,826 - - 2,273 809,911
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2013
Entities Transfers Balance at within the Exchange Balance Asset category 31-12- consolidation Acquisitions Revaluations Disposals Assets rate at 31- Other 2012 perimeter for Own-use held for differences 12-2013 assets the first time properties sale
Buildings and land 924,357 - 13,177 (50,890) (63,866) 1,265 12,286 - (8,753) 827,576
924,357 - 13,177 (50,890) (63,866) 1,265 12,286 - (8,753) 827,576
Valuations of investment properties are carried out by independent specialists, in accordance with the criteria and methodologies generally accepted for the purpose. These include analyses that make use of the cost and market methods. Fair value is defined as the amount that could reasonably be expected of a transaction between an interested purchaser and vendor, with equity between the two, neither being obliged to sell or purchase and both being aware of all relevant factors on a given date, as described in Note 2.5. In the fair value hierarchy, these valuations correspond to level 2. That is, they are valuations based on observable market variables.
15. OTHER TANGIBLE ASSETS
As stated in Note 2.15, the Group’s own-use properties are recorded at the fair value, which is updated every three years. These properties were last re-valued at 31 December 2012.
Changes to this item over the period:
June 2014
Transfer to non current assets Net balance Increases Exchange Net balance held for sale Transfers Depreciation Impairment Write- Adjust- Asset category at Disposals rate at from for the year for the year Offs ments 31-12-2013 Revaluations differences 30-06-2014 discontinued Acquisitions units (net)
Property 191,985 - 134 - (2,548) (4,116) (11) - (218) (2) 15 185,239 Equipment 8,177 - 337 - 284 (1,480) (242) - (99) (5) (17) 6,955 Assets under operating leases 12,428 - - - (3,290) (1,316) - (1,775) - (3) - 6,044 Assets under finance leases ------Tangible assets under construction 33,058 - 1,215 - (453) ------33,820 Other tangible assets 2,041 - 5 - (17) (148) - - - - 49 1,930 247,689 - 1,691 - (6,024) (7,060) (253) (1,775) (317) (10) 47 233,988
2013
Entities within Net balance Increases Exchange Net balance the Transfers Depreciation Impairment Write- Adjust- Asset category at Disposals rate at consolidation Revaluations for the year for the year Offs ments 31-12-2012 Acquisitions differences 31-12-2013 perimeter for (net)
Property 227,669 (6,874) 545 - (9,460) (8,588) (10,456) - (1,380) 534 (5) 191,985 Equipment 14,986 (4,432) 1,612 - 472 (3,986) - (399) (62) - (13) 8,177 Assets under operating leases 27,377 (46) - - (5,586) (5,791) - (3,527) - - - 12,428 Assets under finance leases ------Tangible assets under construction 34,851 (567) 445 - (1,352) - - - - (320) - 33,058 Other tangible assets 2,142 (53) 453 - (175) (326) - - - -- 2,042
307,025 (11,972) 3,055 - (16,101) (18,691) (10,456) (3,926) (1,442) 214 (18) 247,689
The tangible assets under construction item mainly refers to the Imogest and Imopredial construction projects.
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Assets under operating leases refer to the Banif Rent business – service provision in the area of operational vehicle leasing and fleet management. The disposals during the first half of 2014 are the result of the deleveraging policy being implemented for the business.
16. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes to this item over the period:
June 2014
Transfer to non Exchange Net balance Net balance at current assets Amortisations Deductions Asset category Acquisitions Transfers Impairment rate at 31-12-2013 held for sale for the year (net) differences 30-06-2014 from
Goodwill - Other intangible assets 1,905 ------1,905 Intangible fixed assets under construction 1,473 - 729 (10) - - - - 2,192 Automatic data handling systems (software) 12,884 - 49 10 (3,032) - - (1) 9,910 Other intangible assets 814 - - - (292) - - - 522
17,076 - 778 - (3,324) - - (1) 14,529
2013
Transfer to non current assets Exchange Net balance Net balance at Amortisations Deductions Asset category held for sale Acquisitions Transfers Impairment rate at 31-12-2012 for the year (net) from differences 31-12-2013 discontinued
Goodwill - Other intangible assets 1,905 ------1,905 Intangible fixed assets under construction 9,289 - 1,057 6,387 - - (2,486) - 14,247 Automatic data handling systems (software) 14,474 (723) 604 (7,445) (6,800) - - (1) 110 Other intangible assets 596 (137) - 1,058 (639) - (64) - 814
26,264 (859) 1,661 - (7,439) - (2,550) (1) 17,076
The goodwill item relates to the following holding:
An initial study was carried out on Investaçor SGPS, SA. This justifies the goodwill recognised (at 2,218 thousand euros). This study was updated in 2013. An impairment of 313 thousand euros was recorded in 2010. This analysis used the discounted cash flows method, based on the prospective analysis of the company’s future activity and business dealings. This analysis focused on medium and long-term economic and financial forecasts (6 years), and the calculation of the respective projected financial flows. In this assessment, the following parameters were used:
- Inflation rate: 2.00% (2012: 2.00%). - Real yield: 3.93% (2012: 3.85%). - Risk rate: 3.11% (2012: 3.14%). - Discount rate: 9.31% (2012: 9.25%). - Additional risk rate (perpetuity): 1.00% (2012: 1.00%). - Capitalisation rate: 8.24% (2012: 8.18%).
Goodwill assessment was based on the going concern principle and used historical and accounting data from the entities being valued. The methods and key assumptions used in the valuations are those commonly accepted for company valuations and were applied in accordance with the international corporate valuation practices accepted by the Group’s management. No alterations
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were identified in the key assumptions that would justify quantifying the respective impacts, as required by paragraph 134 (f) of IAS 36.
17. INVESTMENTS IN ASSOCIATES
At 30 June 2014 and 31 December 2013, the investment in associate companies item had the following breakdown:
30/06/2014
Company Name Registered Offices Main business activity Holder of capital % of holding Value of holding Goodwill Total Equity Net Profit/Loss Net contribution
Avenida Barbosa du Rentipar Seguros, SGPS, SA Insurance Banif, SA 47.69% 96,018 - 201,318 (14,307) (6,823) Bocage, 85
Virgen de Guadalupe , 2 Banca Pueyo Villanuea de la Serena, Banking Banif, SA 33.32% 38,479 - 115,482 3,256 1,085 Badajoz
Parque de la Inmobiliaria Vegas Altas Constitución, 9 Real estate Banif, SA 33.33% 2,714 - 8,142 120 40 Villanueva de la Serena
Av. Barbosa do Bocage Espaço 10 Real estate Banif, SA 25.00% - - - (84) (21) 83-85, 1050-050 Lisboa
Rua Tierno Galvan, MCO2 Torre 3, 10.º Piso Investiment Management Banif - Banco de Investimento, SA 25.00% 562 - 2,249 50 12 Amoreiras, Lisboa
Pedidos Liz Portugal Investment Fund Imogest 40.24% - - 1 - -
Porto Novo Portugal Real estate Imogest / Banif - Banco de Investimento 35.72% 3,236 - 9,059 (563) (200)
Aplicação Urbana XIII Portugal Real estate Imopredial 49.12% 2,564 - 5,220 - -
GCC Portugal Real estate Imopredial 49.12% 2,741 - 5,580 - -
Aplicação Urbana XIV Portugal Real estate Imogest 49.12% 16,119 - 32,816 - - 162,433 - 379,867 (11,528) (5,907)
31/12/2013
% of Value of Total Net Net Company Name Registered Offices Main business activity Holder of capital Goodwill holding holding Equity Profit/Loss Contribution
Avenida Barbosa du Rentipar Seguros, SGPS, SA Insurance Banif, SA 47.69% 90,904 - 190,607 (1,250) (596) Bocage, 85
Virgen de Guadalupe , 2 Banca Pueyo Villanuea de la Serena, Banking Banif, SA 33.32% 35,502 - 106,548 4,492 1,497 Badajoz
Parque de la Inmobiliaria Vegas Altas Constitución, 9 Real estate Banif, SA 33.33% 2,674 - 8,022 128 42 Villanueva de la Serena
Av. Barbosa do Bocage Espaço 10 Real estate Banif, SA 25.00% - - (1,849) (678) (170) 83-85, 1050-050 Lisboa
Rua Tierno Galvan, MCO2 Torre 3, 10.º Piso Investiment Management Banif - Banco de Investimento, SA 25.00% 550 - 2,200 212 53 Amoreiras, Lisboa
Pedidos Liz Portugal Investment Fund Imogest 40.24% - - 1 - -
129,630 - 305,529 2,904 826
Changes to this item over the period are as follows:
Balance at 31-12-2013 129,630
Profit/Loss in associate companies (5,907) The fair value reserve of associates 13993 Application of IFRS 10 24,660 Others 57
Balance at 30-06-2014 162,433
Companies using the equity method report their data in accordance with Banif Financial Group accounting policies (Note 2). There were no problems with the harmonisation of such accounting policies.
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Under IFRS 10 (new), the Porto Novo, Aplicação Urbana XIII, Aplicação Urbana XIV and GCC investment funds are now included in the consolidation perimeter, by means of the equity method.
18. OTHER ASSETS
This item breaks down as follows:
Description 30/06/2014 31/12/2013
Gold 22 22 Other precious metals, coins and medals 497 498 Other liquid assets with residents 1 1 520 521
Bonuses receivable 8,680 9,152 8,680 9,152
Shareholder loans 42,957 42,925 Sundry debtors 57,794 63,215 Public administration sector 12,937 11,916 Other receivables 1,352 1,290 Pension Fund 1,070 390 Securities operations awaiting settlement 3,105 7,811 Insurance 734 549 Foreign currency position 957 5,310 Investments – security account 6,452 10,111 Other assets 109,265 105,950 236,623 249,467
Impairment losses (67,427) (61,960)
178,396 197,180
The "other assets" item includes operations in progress: TEIS, security disposal operations, advances on purchase and operators in litigation awaiting settlement.
19. FUNDS FROM CENTRAL BANKS
This item breaks down as follows:
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Description 30/06/2014 31/12/2013
Deposits from central banks 2,106,504 3,065,186 Interest on central bank deposits 13,388 12,826 Expenditure with deferred costs (1) (409)
2,119,891 3,077,603
“Deposits from Central Banks” correspond to refinancing operations with the European Central Bank (ECB) in the context of liquidity provision operations, guaranteed by pledge of eligible assets. These are indicated in Note 23, regarding the securities issued as part of securitisation operations, Note 12, on Loans to clients and Notes 7, 8, 9 and 12, on securities. The guarantees by pledge of eligible assets have a nominal value of 4,194,672 thousand euros. The Group has a nominal amount of 1,263,894 thousand euros of eligible assets available to pledge as guarantees for any future funding operations.
20. OTHER FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS
Financial liabilities at fair value through profit or loss refer to debt instruments issued by the Group that have one or more embedded derivatives that, under the amendment to IAS 39 – “Fair Value Option”, have been carried, on initial recognition, at fair value through profit or loss.
This item breaks down as follows, by issuer:
Description 30/06/2014 31/12/2013
Euro Invest Série 3a) 7,322 7,251 Euro Invest Série 3b) 6,100 6,042
Held by Banif Financial Group (951) (900)
12,471 12,393
At 30 June 2014, the nature of the liabilities issued by the Group was as follows:
Value in Fair Value derivative Fair value financial Balance Name Issue date Redemption date Interest rate Held by the Group circulation component liability component sheet value
Euro Invest S3a) 12/11/2003 perpetual 5% 7,322 - - (461) 6,861 Euro Invest S3b) 12/11/2003 perpetual 5% 5,200 900 - (490) 5,610
12,522 900 - (951) 12,471
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21. DEPOSITS FROM OTHER CREDIT INSTITUTIONS
This item breaks down as follows:
Description 30/06/2014 31/12/2013
From in-country credit institutions Deposits 47,966 20,219 Loans 131,427 154,778 Other 3,214 982 182,607 175,979
From foreign credit institutions Deposits 457 326 Loans 38,154 11,348 Sales operations with repurchase agreement 297,876 157,457 Other 3,430 2,848 339,917 171,979
Financial costs 1,264 693
523,788 348,651
22. CLIENT DEPOSITS AND OTHER LOANS
This item breaks down as follows:
Description 30/06/2014 31/12/2013
Deposits Sight 1,201,027 1,148,129 Term 4,068,734 3,966,632 Savings 62,332 62,282 Others 1,123,064 1,069,908 6,455,157 6,246,951
Other debits Loans 947 1,021 Others 57,548 55,308 58,495 56,329
6,513,652 6,303,280
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23. DEBT SECURITIES IN ISSUE
This item breaks down as follows, by issuer:
Description 30/06/2014 31/12/2013
Banif Finance - 94,881 Banif 1,498,408 1,321,484 Atlantes Mortgage N.º3 455,161 471,628 Atlantes Mortgage N.º2 249,808 259,149 Atlantes Mortgage N.º4 521,691 540,699 Atlantes Mortgage N.º5 473,053 495,873 Atlantes Mortgage N.º6 73,821 77,324 Atlantes Mortgage N.º7 371,880 387,529 Azor Mortgage N.º2 213,812 219,792 Atlantes Mortgage N.º1 128,474 137,234 Azor Mortgage N.º1 64,085 66,927 Atlantes Finance N.º4 106,604 132,019 Atlantes Finance N.º5 79,700 109,287 Atlantes Finance N.º6 189,268 235,200 Atlantes NPL N.º1 159,962 165,094 Atlantes SME N.2 482,990 631,948 Atlantes SME N.3 937,763 - Banco Banif Mais 25,000 25,000 Banif - Banco de Investimento 150,000 150,000
Debt reacquired (1,173,531) (1,073,206) Held by Banif Financial Group (3,136,186) (3,184,996)
1,871,763 1,262,866
Deposit certificates 25,190 26,558 Financial costs (86,805) (31,354)
1,810,148 1,258,070
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At 30 June 2014, the nature of the liabilities issued by the Group was as follows:
Balance Name Issue date Redemption date Interest rate Value in circulation Repurchased Held by the Group sheet value
Atlantes Mortgage Nº1 class A 13/02/2003 17/01/2036 Euribor 3M + 0,54% 75,574 - (13,185) 62,389
Atlantes Mortgage Nº1 class B 13/02/2003 17/01/2036 Euribor 3M + 1,3% 22,500 - - 22,500
Atlantes Mortgage Nº1 class C 13/02/2003 17/01/2036 Euribor 3M + 2,60% 12,500 - - 12,500
Atlantes Mortgage Nº1 class D 13/02/2003 17/01/2036 Euribor 3M + 4,75% 2,500 - - 2,500
Atlantes Mortgage Nº1 class E 13/02/2003 17/01/2036 - 15,400 - (15,400) -
Azor Mortgage Nº1 class A 25/11/2004 20/09/2047 Euribor 3M + 0,3% 26,085 - (5,586) 20,499
Azor Mortgage Nº1 class B 25/11/2004 20/09/2047 Euribor 3M + 0,76% 19,000 - - 19,000
Azor Mortgage Nº1 class C 25/11/2004 20/09/2047 Euribor 3M + 1,75% 9,000 - (2,000) 7,000
Azor Mortgage Nº1 class D 25/11/2004 20/09/2047 - 10,000 - (10,000) -
Atlantes Mortgage Nº2 class A 05/03/2008 19/09/2060 Euribor 3M + 0,33% 212,524 - - 212,524
Atlantes Mortgage Nº2 class B 05/03/2008 19/09/2060 Euribor 3M + 0,95% 14,766 - (14,766) -
Atlantes Mortgage Nº2 class C 05/03/2008 19/09/2060 Euribor 3M + 1,65% 6,019 - (6,019) -
Atlantes Mortgage Nº2 class D 05/03/2008 19/09/2060 - 16,499 - (16,499) -
Azor Mortgage Nº2 class A 24/07/2008 14/12/2065 Euribor 3M + 0,3% 163,684 - (163,684) -
Azor Mortgage Nº2 class B 24/07/2008 14/12/2065 Euribor 3M + 0,8% 43,080 - (43,080) -
Azor Mortgage Nº2 class C 24/07/2008 14/12/2065 - 7,048 - (7,048) -
Atlantes Mortgage Nº3 class A 30/10/2008 22/08/2061 Euribor 3M + 0,2% 360,097 - (360,097) -
Atlantes Mortgage Nº3 class B 30/10/2008 22/08/2061 Euribor 3M + 0,5% 37,118 - (37,118) -
Atlantes Mortgage Nº3 class C 30/10/2008 22/08/2061 - 57,946 - (57,946) -
Atlantes Mortgage Nº4 class A 16/02/2009 22/12/2064 Euribor 3M + 0,15% 411,487 - - 411,487
Atlantes Mortgage Nº4 class B 16/02/2009 22/12/2064 Euribor 3M + 0,3% 35,750 - (35,750) -
Atlantes Mortgage Nº4 class C 16/02/2009 22/12/2064 - 74,454 - (74,454) -
Atlantes Mortgage Nº5 class A 21/12/2009 23/11/2068 Euribor 3M + 0,15% 361,495 - (361,495) -
Atlantes Mortgage Nº5 class B 21/12/2009 23/11/2068 Euribor 3M + 0,3% 45,000 - (45,000) -
Atlantes Mortgage Nº5 class C 21/12/2009 23/11/2068 - 66,558 - (66,558) -
Atlantes Mortgage Nº6 class A 30/06/2010 23/10/2016 4,5% 51,821 - (51,821) -
Atlantes Mortgage Nº6 class B 30/06/2010 23/10/2016 - 22,000 - (22,000) -
Atlantes Mortgage Nº7 class A 19/11/2010 23/08/2066 Euribor 3M + 0,15% 268,313 - (268,313) -
Atlantes Mortgage Nº7 class B 19/11/2010 23/08/2066 Euribor 3M + 0,30% 39,700 - (39,700) -
Atlantes Mortgage Nº7 class C 19/11/2010 23/08/2066 - 63,867 - (63,867) -
Atlantes Finance N.º4 class A 20/12/2011 19/06/2032 Euribor 3M + 1,5% 39,490 - - 39,490
Atlantes Finance N.º4 class B 20/12/2011 19/06/2032 Euribor 3M + 2,25% 20,300 - (20,300) -
Atlantes Finance N.º4 class C 20/12/2011 19/06/2032 Euribor 3M + 3% 37,100 - (37,100) -
Atlantes Finance N.º4 class D 20/12/2011 19/06/2032 - 9,714 - (9,714) -
Atlantes Finance N.º5 class A 16/07/2012 16/12/2025 Euribor 3M + 2,75% 26,491 - - 26,491
Atlantes Finance N.º5 class B 16/07/2012 16/12/2025 Euribor 3M + 3% 39,600 - (39,600) -
Atlantes Finance N.º5 class C 16/07/2012 16/12/2025 - 6,779 - (6,779) -
Atlantes Finance N.º5 class S 16/07/2012 16/12/2025 - 6,830 - (6,830) -
Atlantes Finance N.º6 class A 16/12/2013 20/03/2033 Euribor 3M + 2,4% 131,832 - - 131,832
Atlantes Finance N.º6 class B 16/12/2013 20/03/2033 Euribor 3M + 3% 40,100 - (40,100) -
Atlantes Finance N.º6 class C 16/12/2013 20/03/2033 - 10,930 - (10,930) -
Atlantes Finance N.º6 class S 16/12/2013 20/03/2033 - 6,406 - (6,406) -
Atlantes NPL 1 class A 21/12/2012 15/12/2018 6.00% 114,857 - (114,857) -
Atlantes NPL 1 class B 21/12/2012 15/12/2018 - 45,105 - (45,105) -
Atlantes SME 2 class A 29/05/2013 26/05/2042 Euribor 3M + 2,00% 93,928 - - 93,928
Atlantes SME 2 class B 29/05/2013 26/05/2042 Euribor 3M + 2,00% 361,100 - (361,100) -
Atlantes SME 2 class C 29/05/2013 26/05/2042 - 11,680 - (11,680) -
Atlantes SME 2 class S 29/05/2013 26/05/2042 - 16,282 - (16,282) -
Atlantes SME 3 class A 04/02/2014 28/12/2043 Euribor 3M + 1,95% 309,746 - - 309,746
Atlantes SME 3 class B 04/02/2014 28/12/2043 Euribor 3M + 2,00% 112,500 - (112,500) -
Atlantes SME 3 class C 04/02/2014 28/12/2043 Euribor 3M + 8,00% 150,000 - (150,000) -
Atlantes SME 3 class D 04/02/2014 28/12/2043 - 179,117 - (179,117) -
Atlantes SME 3 class S 04/02/2014 28/12/2043 - 186,400 - (186,400) -
Banco Mais 2011-2014 (25M) 19/07/2011 19/07/2014 Euribor 3M +4,95% 25,000 (25,000) - - guaranteed by the Portuguese Banif Banco de Investimento 2011- 2014 (55M) guaranteed by the 19/07/2011 19/07/2014 Euribor 3M +4,95% 55,000 (55,000) - - Portuguese Republic Banif Banco de Investimento 2011- 2014 (95M) guaranteed by the 22/12/2011 22/12/2014 Euribor 3M +12% 95,000 (95,000) - - Portuguese Republic Banif Float 2014 29/07/2011 29/07/2014 Euribor 3M +1,6% 85,000 (85,000) - -
Banif Float 2014 21/10/2011 21/10/2014 Euribor 3M +1,6% 50,000 (50,000) - -
Banif 2011-2014 - Guarantee 19/07/2011 19/07/2014 Euribor 3M +4,95% 200,000 (200,000) - -
Banif 2011 500M Guarantee 22/12/2011 22/12/2014 Euribor 3M +12% 500,000 (500,000) - -
Ob CX Banif 2012-2015 Fungible 20/06/2012 31/05/2015 5.75% 63,000 (63,000) - -
Ob CX Banif 2012-2015 31/05/2012 31/05/2015 5.75% 46,900 (100) - 46,800
Ob CX Banif 2012-2015 USD 31/05/2012 31/05/2015 5.00% 9,152 - - 9,152
Banif 2012/2014 08/11/2012 08/11/2014 5.75% 93,947 (75) - 93,872
Banif 2012/2014 08/11/2012 08/11/2014 5.75% 27,679 - - 27,679
Banif 2013/2014 USD 20/03/2013 20/09/2014 4.50% 18,304 - - 18,304
Banif 2013/2014 20/03/2013 20/09/2014 4.50% 50,000 - - 50,000
Banif 2013/2016 EUR 30/07/2013 30/07/2016 7.50% 60,312 (356) - 59,956
Banif 2013/2016 USD 25/11/2013 25/11/2016 5.00% 36,609 - - 36,609
Banif 2013/2016 (80M) 23/12/2013 23/12/2016 5.00% 80,000 - - 80,000
Banif Sénior 4,75% 2014/2017 30/01/2014 30/07/2017 4.75% 45,000 - - 45,000
Banif Sénior 4,75% 2014/2017 USD 30/01/2014 30/07/2017 4.75% 32,505 - - 32,505
Banif Covered Bonds - Mortgage 2014 17/01/2014 17/01/2017 Euribor 3M +1,4% 100,000 (100,000) - -
6,181,480 (1,173,531) (3,136,186) 1,871,763
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The following issues were repaid during the first half of 2014:
- Banif Finance 2012-2014 EUR in the amount of 55,000 thousand euros - Banif Finance 2012-2014 USD in the amount of 39.518 thousand euros
Securitisation Operations
The Group securitised consumer credit and mortgage lending through the disposal of these assets to special purposes entities (vehicles) set up for the purpose.
The following securitisation operations were carried out:
Atlantes Mortgage No.1
In the Atlantes Mortgage No. 1 operation, carried out in February 2003, only Banif, SA mortgage contracts were transferred, in the amount of 500 million euros. Under the prevailing legislation, a loan securitisation fund, designated Atlantes Mortgage No. 1 Fund, was set up. This acquired the housing loan contracts from the transferor and issued participation units that were subscribed to by a company formed under Irish law: Atlantes Mortgage no. 1 Plc. To finance itself, Atlantes Mortgage No. 1 Plc issued bonds in a total amount of 500 million euros.
Azor Mortgage No.1
Loans with a total value of 281 million euros, from the former BBCA, were transferred to Azor Mortgages, which was carried out in November 2004. At Azor Mortgages, and under the prevailing legislation, the loans initially transferred were acquired by Sagres – Sociedade de Titularização de Créditos, which issued the Azor Notes bonds, subscribed to in their entirety by a company formed under Irish law: Azor Mortgages Plc. To finance itself, Azor Mortgages Plc issued bonds in a total amount of 281 million euros.
In December 2006, and in accordance with the objectives of Gamma STC, the company set up to handle securitisation for the Group, the Azor Notes were transferred to Gamma, along with the corresponding rights to receive the credit and payment due to Azor Mortgages plc vehicle, but which originally belonged to Sagres STC. This transfer had the agreement of the loan originator, the original securitisation company, the ratings agencies, the CMVM, investors and other entities involved in the operation, following an assessment indicating that Gamma was capable of managing the operation.
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Atlantes Mortgage No. 2
In the Atlantes Mortgage No. 2 operation, carried out in March 2008, only Banif, SA mortgage contracts were transferred, in the amount of 375 million euros. Under the prevailing legislation, a loan securitisation fund designated Atlantes Mortgage No. 2 Fund was set up and then administered by Gamma – Sociedade de Titularização de Créditos, SA. This acquired the housing loan contracts from the transferor and issued participation units subscribed to by Atlantes Mortgage No. 2 Plc. To finance itself, Atlantes Mortgage No. 2 Plc issued bonds in a total amount of 375 million euros.
Azor Mortgage No. 2
In July 2008, Azor Mortgages No. 2 was carried out. This was an issue of securitised bonds, collateralised by a mortgage loans portfolio originating with the former BBCA. Unlike previous emissions, which involved vehicles registered overseas, this issue was carried out directly by Gamma STC and did not involve any other vehicle outside Portugal.
In this issue, BBCA transferred a portfolio of 300 million euros to Gamma STC. This acquisition, together with the constitution of the necessary cash reserve, were financed by way of the securitised issue of Azor Mortgages No. 2 class A, B and C bonds, in a total nominal amount of 306.75 million euros.
Atlantes Mortgage No. 3
At the end of October 2008, another operation was carried out, in this case Atlantes Mortgage No. 3, with the issue of securitised bonds, involving a Banif, SA portfolio of mortgage loans.
Banif transferred a portfolio of mortgage loans with a value of 600 million euros to Gamma. This acquisition and the constitution of the necessary cash reserve were financed by way of the securitised issue of Atlantes Mortgage No. 3 class A, B and C bonds, with an aggregate nominal value of 623.7 million euros.
Atlantes Mortgage No. 4
In February 2009, the Atlantes Mortgage No. 4 operation was carried out. This involved Banif transferring a mortgage loans portfolio, worth 550 million euros, to Gamma. The operation was financed by way of the issue of Atlantes Mortgage No. 4 class A, B and C securitised bonds, with an aggregate nominal value of 567.2 million euros.
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Atlantes Mortgage No. 5
In December 2009, the Atlantes Mortgage No. 5 operation was carried out. This involved Banif transferring a mortgage loans portfolio, worth 500 million euros, to Gamma. The operation was financed by way of the issue of Atlantes Mortgage No. 5 class A, B and C securitised bonds, with an aggregate nominal value of 520.5 million euros.
Atlantes Mortgage No. 6
In June 2010, the Atlantes Mortgage No. 6 operation was carried out. This involved Banif transferring a mortgage loans portfolio, worth 91 million euros, to Gamma. The operation was financed by way of the issue of Atlantes Mortgage No. 6 class A, B and C securitised bonds, with an aggregate nominal value of 113 million euros.
Atlantes Mortgage No. 7
In November 2010, the Atlantes Mortgage No. 7 operation was carried out. This involved Banif transferring a mortgage loans portfolio, worth 397 million euros, to Gamma. The operation was financed by way of the issue of Atlantes Mortgage No. 7 class A, B and C securitised bonds, with an aggregate nominal value of 460.55 million euros.
Atlantes Finance No. 4
In December 2011, the Atlantes Finance No. 4 operation was carried out. This involved Banif and Banco Banif Mais each transferring a consumer loans portfolio, worth 110.2 million euros and 137.2 million euros, respectively, to Gamma. The operations were financed by way of the issue of Atlantes Finance No. 4 class A, B, C and D securitised bonds, with an aggregate nominal value of 260.0 million euros.
Atlantes Finance No. 5
In December 2012, the Atlantes Finance No. 5 operation was carried out. This involved Banif and Banco Banif Mais each transferring a consumer loans portfolio, worth 115.5 million euros and 82.4 million euros, respectively, to Gamma. The operations were financed by way of the issue of Atlantes Finance No. 5 class A, B, C and S securitised bonds, with an aggregate nominal value of 226.4 million euros.
Atlantes NPL No. 1
In December 2012, the Atlantes NPL No. 1 operation was carried out. This involved Banif and Banco Banif Mais transferring a portfolio of mortgage loans or loans with property as collateral, worth 168 million euros, to Gamma. The operation was financed by way of the issue
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of Atlantes NPL NO. 1 class A and B securitised bonds, with an aggregate nominal value of 213 million euros.
Atlantes SME No. 2
In November 2013, the Atlantes SME No. 2 operation was carried out. This involved Banif transferring a business loans portfolio, worth 802 million euros, to Gamma. The operation was financed by way of the issue of Atlantes SME No. 2 class A, B, C and S securitised bonds, with an aggregate nominal value of 834 million euros.
Atlantes Finance No. 6
In December 2013, the Atlantes Finance No. 6 operation was carried out. This involved Banif and Banco Banif Mais each transferring a consumer loans portfolio, worth 48.3 million euros and 168.7 million euros, respectively, to Gamma. The operations were financed by way of the issue of Atlantes Finance No. 6 class A, B, C and S securitised bonds, with an aggregate nominal value of 235.2 million euros.
Atlantes SME No. 3
In February 2014, the Atlantes SME No. 3 operation was carried out. This involved Banif transferring a business loans portfolio, worth 875 million euros, to Gamma. The operation was financed by way of the issue of Atlantes SME No. 2 class A, B, C, D and S securitised bonds, with an aggregate nominal value of 925 million euros.
The bonds issued through Atlantes Mortgage No. 1, Atlantes Mortgage No. 3, Atlantes Mortgage No. 5, Atlantes Mortgage No. 7, Azor Mortgage No. 1, Azor Mortgage No. 2 and Atlantes SME No. 3 are held by Group entities and are being used, in part, to guarantee refinancing operations at the ECB.
24. PROVISIONS AND CONTINGENT LIABILITIES
The changes in provisions for the period ending 30 June 2014 were as follows:
Balance at Uses and Reversals and Balance at Description Increases 31-12-2013 adjustments recoveries 30-06-2014
Provisions for guarantees and commitments 5,121 560 (749) (118) 4,814 Fiscal contingencies 2,500 - (26) (224) 2,250 Other provisions 5,744 630 (746) (1,488) 4,140
13,365 1,190 (1,521) (1,830) 11,204
Given the high degree of uncertainty as to when payment might be received in these contingent situations, no time-based discount was taken into consideration.
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A more detailed description of the bonds in question is given below:
Fiscal contingencies: there is a present obligation arising from past events, for which there is likely to be a future disbursement of funds for the purposes of paying tax on profits.
Provisions for guarantees and commitments: there is a present obligation arising from past events, for which there is likely to be a future disbursement of funds related to the provision of guarantees and commitments.
Other provisions: there is a present obligation arising from past events, for which there is likely to be a future disbursement of funds (legal proceedings against the Group and other banking risks), to wit: - Legal proceedings: provisions based on proceedings and an assessment of the likelihood of a negative outcome based on information from the lawyers. - Restructuring: when there is sufficient information to recognise and determine the type of costs involved.
Banif Plus Bank began an assessment of the impact of a new law approved by the Hungarian parliament in July (Act No. XXXVIII of 2014). Amongst other issues, this law addresses the bank's application of spreads to foreign currency purchases and sales that occur as part of its foreign currency lending to clients and the possibility that the bank may need to repay these amounts to the clients in question.
Operations not included on the balance sheet:
- The guarantees provided correspond to the following nominal amounts recognised in off-balance sheet accounts:
Description 30/06/2014 31/12/2013
Guarantees given (of which:) 370,090 385,519 Guarantees and sureties 353,416 372,194 Open documentary credit 16,674 13,325
- Contingencies and other commitments entered into with third parties, but not recognised in the financial statements, with reference to 30 June 2014 and 31 December 2013, have the following breakdown:
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Description 30/06/2014 31/12/2013
Other contingent liabilities (of which:) 4,449,964 6,513,257 Sureties and Compensations - - Assets given as guarantee 4,449,964 6,513,257 Commitments to third parties (of which:) 676,029 680,592 Irrevocable commitments 129,822 191,346 Revocable commitments 546,207 489,246
5,125,993 7,193,849
“Assets given as guarantee” refer to securities given in repos and treasury bonds that are being used to guarantee irrevocable commitments to the Deposit Guarantee Fund, the Investor Indemnification System, intra-day credit from Banco de Portugal and refinancing operations at the European Central Bank.
25. EQUITY INSTRUMENTS
The “Equity instruments” item corresponds to Core Tier 1 equity instruments subscribed to by the State (“Portuguese Republic”) on 25 January 2013, in the amount of 400 million euros. These instruments attracted an initial annual interest rate of 9.5%, which increases by 25 basis points in the first two years and 50 basis points in subsequent periods. The hybrid instrument was due to be repaid in three tranches, in June 2013 (150 million euros) and December 2013 (125 million euros), and December 2014 (125 million euros). If it is impossible to repay the entirety of the hybrid instrument, the tranche that was not repaid will be converted into special shares with voting rights.
On 29 August 2013, following authorisation from Banco de Portugal, in accordance with Point 7 of the terms and conditions of the Core Tier 1 equity instruments subscribed to by the Portuguese State, and as set out in the annex to Ministry of Finance Order No. 1527-B/2013, of 24 January, 150 million euros of these instruments were bought back.
On 11 April 2014, following authorisation from Banco de Portugal, in accordance with Point 7 of the terms and conditions of the Core Tier 1 equity instruments subscribed to by the Portuguese State, and as set out in the annex to Ministry of Finance Order No. 1527-B/2013, of 24 January, 125 million euros of these instruments were bought back.
The balance, at 30 June 2014, stood at 125 million euros worth of CoCos, plus the 5,158 thousand euros of interest these had earned.
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26. OTHER SUBORDINATED LIABILITIES
This item breaks down as follows, by issuer:
Description 30/06/2014 31/12/2013
Banif - Banco de Investimento 17,178 17,178 Banco Mais 6,000 6,000 Banif - Banco Internacional do Funchal 130,398 130,598 Banif Finance Ltd 64,449 64,449
Held by Banif Financial Group (40,037) (40,037)
177,988 178,188
Financial charges and deferred charges (20,825) (23,870)
157,163 154,318
At 30 June 2014, the nature of the liabilities issued by the Group was as follows:
Balance Redemption Value in Held by the Name Issue date Interest rate sheet date circulation Group value first 5 years: Euribor 6M + 0,875% Banif - Banco de Investimento 2006 - 2016 29/06/2006 29/06/2016 15,000 (15,000) - remaining years: Euribor 6M + 1,15%
Banif - Banco de Investimento 2007 - perpetual 05/05/2007 perpetual Euribor 3M + 1,35% 2,178 (726) 1,452
until 30/12/2010: Euribor 3M + 0,75% Banif - Banco Internacional do Funchal 2005 - 2015 30/12/2005 30/12/2015 16,190 - 16,190 remaining time: Euribor 3M + 1,25% until 22/12/2014: Euribor 3M + 1% Banif - Banco Internacional do Funchal 2006 - perpetual 22/06/2006 perpetual 2,769 (2,769) - remaining time: Euribor 3M + 2% until 22/12/2011: Euribor 3M + 0,75% Banif - Banco Internacional do Funchal 2006 - 2016 22/12/2006 22/12/2016 5,040 (5,040) - remaining time: Euribor 3M + 1,25% until 22/12/2016: Euribor 3M + 1,37% Banif - Banco Internacional do Funchal SFE 2007 22/12/2007 perpetual 3,080 (3,080) - remaining time: Euribor 3M + 2,37% 1º year: 6,25%; until 11º coupon: Euribor 6M + 1% Banif - Banco Internacional do Funchal 2008 - 2018 18/08/2008 18/08/2018 14,900 (507) 14,393 remaining time: Euribor 6M + 1,15% until 30/06/2014: 4,5% remaining Banif - Banco Internacional do Funchal 2009 - 2019 30/06/2009 31/12/2019 9,633 - 9,633 time: Euribor 6M + 2,75% until 09/01/2017: flat rate 6,875% Banif 2012 - 2019 09/01/2012 09/01/2019 52,940 - 52,940 remaining time: 7,875% - emission at 70% first 5 years: Euribor 6M + 1% BBCA 2006 - 2016 23/10/2006 23/10/2016 14,242 (1,488) 12,754 remaining years: Euribor 6M + 1,25% until 11º coupon: Euribor 6M + 1% BBCA 2007 - 2017 25/09/2007 25/09/2017 7,739 (613) 7,126 remaining years: Euribor 6M + 1,25% until 28/12/2017: Euribor 3M + 3,0362% BBCA 2008 - perpetual 30/06/2008 perpetual 3,865 (3,865) - remaining time: Euribor 3M + 4,0362%
Banif Go 2005 -2015 (Banif Mais) 30/06/2005 30/06/2015 Euribor 12M + 1,5% 6,000 (6,000) -
until 21º coupon: Euribor 3M + 0,80% Banif Finance 2004 - 2014 29/12/2004 29/12/2014 8,163 (500) 7,663 remaining time: Euribor 3M + 1,30% until 22 December 2016: Euribor 3M + 1,37% Banif Finance 2006 - perpetual 22/12/2006 perpetual 3,080 - 3,080 remaining time: Euribor 3M + 2,37% until 22 December 2011: Euribor 3M + 0,75% Banif Finance 2006 - 2016 22/12/2006 22/12/2016 5,040 - 5,040 remaining time: Euribor 3M + 1,25%.
Banif Finance 2009 - 2019 31/12/2009 31/12/2019 3%, Liability issued at 75% and 50% 48,166 (449) 47,717
218,025 (40,037) 177,988
The contracts for these subordinated liabilities include clauses for early repayment, in full or in part, at the issuer's discretion ("call option") and at par. This option may be exercised on any interest payment date, following prior authorisation from Banco de Portugal, or when these instruments no longer qualify as complementary own funds.
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27. OTHER LIABILITIES
This item breaks down as follows:
Description 30/06/2014 31/12/2013
Creditors and other funds 58,164 46,776 For staff costs 25,338 28,155 For general administrative costs 911 2,009 Other interest and similar charges - - Securities operations awaiting settlement 1,388 240 Guarantees given and other contingent liabilities - - Foreign currency position 1,035 5,510 Public administration sector 20,205 23,785 Investment Funds 30,573 33,556 Others 156,410 79,292
294,024 219,323
The “Investment Funds” item reflects units in investment funds that are included in the consolidation perimeter but are held by entities outside the Group. IAS 32 states that, although interest in these funds is residual, they constitute a Group obligation (through the investment fund) to liquidate these liabilities, if so required by the holders of the fund units (“puttable interest”).
28. EQUITY OPERATIONS
At 30 June 2014 and 31 December 2013, the equity item had the following breakdown:
Description 30/06/2014 31/12/2013
Issued capital 1,720,700 1,582,195 Share premium 199,765 199,765 Other equity instruments - - Own shares (5) (6) Revaluation reserves 62,126 (18,774) Legal Reserve 50,727 50,727 Other reserves and retained earnings (free) (1,004,365) (533,758) Profit/loss for the Year (97,707) (470,273) Interim dividends - - Non-controlling interests 70,695 69,697
1,001,936 879,573
The share capital consists of 115,640,000,000 fully paid up shares, with no nominal value.
On 4 June 2014, an increase in share capital in the amount of 138,504,779.57 euros was registered at the commercial registry office. This capital increase took the form of an inflow of new cash, following a public offering of subscription. As a result, the company's share capital rose to 1,720,700,000 euros, represented by 115,640,000,000 shares with no nominal value.
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The revaluation reserves (net of tax) break down as follows: - Assets available for sale 72.685 thousand euros (45 thousand euros in 2013). The change in this item (amounts net of tax) corresponds to: transfer to the profit and loss account of -1.094 thousand euros, an increase in fair value in the amount of 70,195 thousand euros and a transfer to impairment of 3,539 thousand euros. - Revaluation of Property for own use: 16,740 thousand euros (16,743 thousand euros in 2013) - Actuarial losses: -23,351 thousand euros (-24,263 thousand euros in 2013). In 2014, 912 thousand euros were reclassified from the "other reserves and retained earnings" item to the "revaluation reserves" item. - Reserves associated with exchange differences: -3,948 thousand euros (-11,299 thousand euros in 2013)
The analysis of the regulatory capital is presented in the analysis of the consolidated accounts.
29. NON-CONTROLLING INTERESTS
At 30 June 2014 and 31 December 2013, the non-controlling interests item had the following breakdown:
30-06-2013 30/06/2014 31/12/2013 30/06/2014 Entity Restated Balance sheet value Balance sheet value Profit/loss Profit/loss
Banif Mais SGPS 44,172 44,261 (1,665) (1,294) Banif Finance 13,986 13,987 - - Banco Caboverdiano de Negocios 6,882 6,579 (273) (406) Banif Bank (Malta) 4,877 4,778 (72) 21 Açortur - Investimentos Turísticos dos Açores 3,488 3,539 48 48 Investaçor Hoteis SA 2,620 2,780 121 93 Investaçor SGPS SA 2,385 2,326 23 37 Banif Açor Pensões 1,898 1,797 (74) (59) Tiner Polska 836 838 1 (1) Turotel - turismo e Hóteis dos Açores 230 363 92 82 Hotel Pico 434 435 1 1 Banif Financial Services Inc 23 25 1 3 Gestarquipark 11 (6) (11) (14) Beta Securitizadora 1 1 - - Wil (140) (117) 22 1 Banif Banco Internacional do Funchal (Brasil) 11 (1,630) 56 430 Banif International Holdings (2,468) (1,700) 74 191 Banif Forfaiting Company (2,787) (2,673) 258 128 Banif Finance (USA) (6,003) (5,864) 213 1,462 Banif Real Estate Polska 3 - (3) (4) Banif - Banco de Investimento (Brasil) 4 18 14 50 Santa Ester 71 (197) - - Pithecia 34 40 - - Banif Real Estate Brasil 127 117 - - Indigo - - - 12
70,695 69,697 (1,174) 781
As regards Banif Finance, the non-controlling interests item comprises: - The issue, on 22 December 2004, of Guaranteed Perpetual Preference Shares with a preference liquidation value per unit of 1,000 euros and a total value of 75 million euros. Preferential dividends are paid quarterly and in arrears to the holders of the preference
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shares, if so decided by the company’s board of directors. Banif Finance has a call option, permitting it to repay all or part of this issue, at its preferential liquidation value, at any dividend payment date as from the first repayment date (22 December 2014), plus: i) a sum corresponding to the preferential dividend accumulated and not paid in relation to the most recent preferential dividend period, declared or not, up to the date set for the repayment, and ii) any additional sums, provided prior authorisation is obtained from Banco de Portugal and the Issue Guarantor (Banif - Banco Internacional do Funchal), and provided the requirements of Cayman Islands Law are met. Repurchases in the amount of 72.2 million euros were made. - The issue, on 28 December 2007, of Guaranteed Perpetual Preference Shares with a preference liquidation value per unit of 1,000 euros and a total value of 25 million euros. Preferential dividends are paid quarterly and in arrears to the holders of the preference shares, if so decided by the company’s board of directors. Banif Finance has a call option, permitting it to repay all or part of this issue, at its preferential liquidation value, at any dividend payment date as from the first repayment date (28 December 2017). Exercise of this option is subject to prior authorisation from Banco de Portugal and compliance with Cayman Islands Law. Repurchases in the amount of 22.0 million euros were made. - The issue, on 29 December 2008, of Guaranteed Perpetual Preference Shares with a preference liquidation value per unit of 1,000 euros and a total value of 20 million euros. Preferential dividends are paid quarterly and in arrears to the holders of the preference shares, if so decided by the company’s board of directors. Banif Finance has a call option, permitting it to repay all or part of this issue, at its preferential liquidation value, at any dividend payment date as from the first repayment date (29 December 2018). Exercise of this option is subject to prior authorisation from Banco de Portugal and compliance with Cayman Islands Law. Repurchases of the full issue, in the amount of 20 million euros, were made in 2012. - The issue, on 29 December 2008, of Guaranteed Perpetual Preference Shares with a preference liquidation value per unit of 1,000 euros and a total value of 35 million US dollars. Preferential dividends are paid quarterly and in arrears to the holders of the preference shares, if so decided by the company’s board of directors. Banif Finance has a call option, permitting it to repay all or part of this issue, at its preferential liquidation value, at any dividend payment date as from the first repayment date (29 December 2018). Exercise of this option is subject to prior authorisation from Banco de Portugal and compliance with Cayman Islands Law. Repurchases of the full issue, in the amount of 35 million US dollars, were made in 2012. - The issue, on 31 December 2008, of Guaranteed Perpetual Preference Shares with a preference liquidation value per unit of 1,000 euros and a total value of 25 million euros. Preferential dividends are paid quarterly and in arrears to the holders of the preference shares, if so decided by the company’s board of directors. Banif Finance has a call option, permitting it to repay all or part of this issue, at its preferential liquidation value, at any dividend payment date as from the first repayment date (31 December 2018). Exercise of
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this option is subject to prior authorisation from Banco de Portugal and compliance with Cayman Islands Law. Repurchases of the full issue, in the amount of 25 million euros, were made in 2012. - The issue, on 30 June 2009, of Guaranteed Perpetual Preference Shares with a preference liquidation value per unit of 1,000 dollars and a total value of 15 million US dollars. Preferential dividends are paid annually and in arrears to the holders of the preference shares, if so decided by the company’s board of directors. Banif Finance has a call option, permitting it to repay all of this issue, at its preferential liquidation value, at any dividend payment date as from the first repayment date (30 June 2019). Exercise of this option is subject to prior authorisation from Banco de Portugal and compliance with Cayman Islands Law. Repurchases in the amount of 4.7 million euros were made. - The issue, on 30 June 2009, of Guaranteed Perpetual Preference Shares with a preference liquidation value per unit of 1,000 euros and a total value of 10 million euros. Preferential dividends are paid annually to the holders of the preference shares, if so decided by the company’s board of directors. Banif Finance has a call option, permitting it to repay all or part of this issue, at its preferential liquidation value, at any dividend payment date as from the first repayment date (30 June 2019). Exercise of this option is subject to prior authorisation from Banco de Portugal and compliance with Cayman Islands Law. Repurchases in the amount of 9.1 million euros were made.
30. INTEREST AND SIMILAR INCOME AND INTEREST AND SIMILAR COSTS
This item breaks down as follows:
30-06-2013 Description 30/06/2014 30/06/2013 Restated
Interest and similar income Interest on liquid assets 118 349 346 Interest on investments at CI 719 2,629 3,233 Interest on loans to customers 172,034 194,259 239,233 Interest on overdue loans 7,832 11,415 11,508 Interest and similar income on other assets 662 2,585 2,585 Interest on financial assets held for trading 9,743 10,129 14,844 Interest on other financial assets at fair value through profit 2 11 11 Interest on financial assets available for sale 26,425 26,598 27,955 Interest on assets with repurchase agreement 3,313 220 220 Interest on investments held to maturity 180 330 330 Fees received in association with amortised cost 3,845 4,182 4,679 224,873 252,707 304,944
Interest payable and similar expenses Interest on funds from central banks 2,853 9,980 10,039 Interest on funds at other CI 6,123 7,258 8,741 Interest on customer funds 79,437 101,205 109,601 Interest on loans 81 58 58 Interest liabilities on non-subordinated securities 35,198 34,403 53,676 Interest and similar charges on other financial liabilities 5,127 6,791 9,325 Interest on subordinated liabilities 15,397 23,640 23,674 Fees paid in association with amortised cost 5,988 5,148 5,148 Others 8,610 13,067 16,666 158,814 201,550 236,928
Strict net interest income 66,059 51,157 68,016
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31. INCOME AND CHARGES WITH RESPECT TO COMMISSIONS
This item breaks down as follows:
30-06-2013 Description 30/06/2014 30/06/2013 Restated
Income from commissions Guarantees given 4,086 5,269 5,384 Credit operations 886 488 800 Annuities 2,091 1,941 1,996 Card management 5,314 5,681 6,034 Transfer of securities 562 245 295 Collective investment arrangements in securities 1,633 1,731 1,731 Administration of securities 236 - 508 Collection of securities 1,872 2,021 2,185 Deposit and custody of securities 184 188 188 Other services provided 5,309 5,426 5,947 Other fees received 21,411 25,186 25,115 43,584 48,176 50,183
Cost of fees Guarantees received 4,873 5,178 5,189 For other services received 4,203 4,780 5,071 Other commissions paid 1,128 1,251 1,425 10,204 11,209 11,685
32. PROFIT/LOSS ON FINANCIAL OPERATIONS
This item breaks down as follows:
30-06-2013 Description 30/06/2014 30/06/2013 Restated
Gains on financial operations
Gains on other financial assets at fair value through profit and loss 2,190 827 833 Gains on financial assets held for trading 7,611 45,228 83,332 Gains on financial assets available for sale 90,924 36,192 36,255 Gains on exchange rate differences 36,425 75,524 76,094 137,150 157,771 196,514
Losses on financial operations
Losses on other financial assets at fair value through profit and loss 11,826 2,149 2,474 Losses on financial assets held for trading 6,251 46,794 79,134 Losses on financial assets available for sale 281 84 85 Losses on exchange rate differences 37,098 75,298 84,921 55,456 124,325 166,614
In the first half of 2014, the Group recognised 90.7 million euros (32.4 million euros in the first half of 2013) as gains on the disposal of fixed income Portuguese public debt securities.
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33. PROFIT/LOSS ON THE DISPOSAL OF OTHER ASSETS
This item breaks down as follows:
30/06/2013 Description 30/06/2014 30/06/2013 Restated
Other income Gains on the disposal of other non-financial assets 1,164 - - Gains on the disposal of subsidiaries 483 - - Non-current assets held for sale - - - Gains on investments held to maturity - - - Gains on disposal of customer loans 41,451 - - 43,098 - -
Other costs Losses on the disposal of other non-financial assets 6,534 - - Losses on disposal of customer loans 822 - - Losses on investments held to maturity - - - Losses on the disposal of subsidiaries - - - 7,356 - -
Disposal of other non-financial assets refers to the disposal of property assets.
The disposal of subsidiaries refers to the disposal of Espaço 10.
The gains on the disposal of loans to clients item refers to the disposal of a portfolio of overdue loans (Banco Banif Mais: nominal value of 43 million euros) and a portfolio of write-offs (Banif SA: nominal value 485 million euros and Banco Banif Mais: nominal value of 26 million euros)
34. OTHER OPERATING PROFITS/LOSSES
This item breaks down as follows:
30/06/2013 Description 30/06/2014 30/06/2013 Restated
Other income Provision of Services 5,316 5,277 5,283 Recovery of loans and interest 4,312 4,052 4,352 Reimbursement of costs 2,998 4,480 4,671 Income from operational leases 1,327 3,074 3,074 Investment property 1,060 921 922 Tangible Assets 284 2,090 2,726 Non-current assets held for sale - 623 623 Rents 10,763 11,826 11,826 Others 10,377 5,646 9,972 36,437 37,989 43,449
Other costs Subscriptions and donations 192 178 178 Contributions to DGF and CAM guarantee fund 1,494 2,743 4,114 Other taxes 5,769 5,808 6,887 Investment property 11,823 5,314 5,314 Tangible Assets 1,601 167 738 Non-current assets held for sale - 4,436 4,436 Others 17,134 14,237 15,818 38,013 32,883 37,485
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The "Other income" item includes income from the hotel business (Investaçor subgroup). The "Other costs" item includes recovery costs for overdue loans.
35. STAFF COSTS
This item breaks down as follows:
30-06-2013 Description 30/06/2014 30/06/2013 Restated
Remuneration of management and supervisory bodies 1,629 1,884 3,084 Remuneration of employees 42,047 44,450 52,123 43,676 46,334 55,207
Social securities costs: Costs relating to remuneration 12,019 11,907 13,924 Pension costs: - Defined contribution plan 1,473 1,530 1,530 Other social security costs 1,018 875 876 14,510 14,312 16,330
Other staff costs 9,736 1,117 2,187
67,922 61,763 73,724
In the first half of 2014, the Group recognised 9,110 thousand euros in this item (375 thousand euros in the first half of 2013). This relates to employment termination payments.
36. GENERAL ADMINISTRATIVE COSTS
This item breaks down as follows:
30-06-2013 Description 30/06/2014 30/06/2013 Restated
Specialised services 13,081 16,109 20,553 Communications 2,625 3,363 4,038 Publicity and publications 2,463 2,371 2,850 Travel, subsistence and representation 1,304 1,196 1,505 Maintenance and repair 3,080 4,151 4,309 Water, electricity and fuel 2,555 2,808 3,052 Rents and leases 3,639 2,990 4,354 Insurance 1,022 1,184 1,363 Transport 550 584 810 Consumables 182 232 368 Staff training 95 93 106 Others 5,828 4,647 9,048
36,424 39,728 52,356
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37. IMPAIRMENT OF LOANS AND OTHER ASSETS
The changes in the impairment of loans to clients item for the period ending 30 June 2014 were as follows:
Balance at Uses and Reversals and Balance at Description Increases 31-12-2013 adjustments recoveries 30-06-2014
Impairment on loans 1,160,217 256,947 (106,417) (133,949) 1,176,798 Due from banks 33 1,651 - - 1,684
1,160,250 258,598 -106,417 -133,949 1,178,482
In the first half of 2014, the Group recovered 3,140 thousand euros of uncollectible debt (2,725 thousand euros in the first half of 2013).
The changes in the impairment of the assets listed for the period ending 30 June 2014 were as follows:
Balance at Uses and Reversals and Balance at Description Increases 31-12-2013 adjustments recoveries 30-06-2014
Financial assets available for sale 51,386 17,100 (622) (8) 67,856 Non-current assets held for sale 48,480 3,445 (1,117) (2,717) 48,091 Other tangible assets 22,026 282 (95) (29) 22,184 Goodwill 314 - - - 314 Debtors and other investments 61,960 8,564 (1,746) (1,351) 67,427
184,166 29,391 (3,580) (4,105) 205,872
38. ASSETS AND LIABILITIES BY DEFERRED TAX
This item breaks down as follows:
Description 30/06/2014 31/12/2013
Deferred tax assets
Impairment on loans granted 90,628 76,166 Reportable tax losses 97,993 93,663 Valuations not accepted for tax purposes (20,129) 8,516 Employee benefits 15,623 15,600 Other (8,325) (1,867)
175,790 192,078
The movement of deferred tax is analysed as follows:
Balance at 1 January 2014 192,078 Recognized in results 4,671 Recognized in reserves (20,959)
Balance at 30 June 2014 175,790
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39. FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments at fair value
The following tables offer an analysis of the categories of financial instruments recognised at fair value in the financial statements and the valuation methods used, as at 30 June 2014 and 31 December 2013:
Valuation Methods Total Description Market or listed value Market analysis Others
30/06/2014 31/12/2013 30/06/2014 31/12/2013 30/06/2014 31/12/2013 30/06/2014 31/12/2013 Assets
Financial assets held for trading - note 7 14,204 19,170 22,720 16,229 5,381 4,687 42,305 40,086 Other financial assets at fair value through profit or loss - note 8 12,751 10,835 5,803 15,836 24,046 47,015 42,600 73,686 Financial assets available for sale - note 9 1,679,879 1,442,821 - - 344,322 339,220 2,024,201 1,782,041
Liabilities
Financial liabilities held for trading - note 7 - - 31,159 28,785 - - 31,159 28,785 Other financial liabilities at fair value through profit or loss - note 20 - - 12,471 12,393 - - 12,471 12,393
The analysis in the table above is based on the following assumptions:
- Market values (Level 1): financial instruments valued on the basis of active market prices were placed in this column; - Market analysis (Level 2): Financial instruments valued on the basis of observable market variables were placed in this column. This level includes units in equity investment funds valued according to their published NAV and bonds not listed on an active market; - Others (Level 3): Financial instruments valued on the basis of non-observable market variables were placed in this column. This level includes unlisted shares and units in real estate investment funds.
Non-listed equity instruments, recognised in financial assets available for sale at acquisition cost, because it has not been possible to reliably determine their value, have been recognised in the “Others” column.
The reconciliation of level 3 opening and closing balances is as follows:
Variation Total Transfers of Description 31/12/2013 Revaluatio Acquisitions Disposals Reclassifications Impairment 30/06/2014 (losses)/gains levels n Reserves Financial assets held for trading Debt instruments - - - 722 - - - - 722 Equity instruments 4,687 (28) ------4,659
Other financial assets at fair value through profit or loss 47,015 (723) - 471 - (22,717) - - 24,046
Financial assets available for sale Equity instruments 339,220 105 886 20,943 (1,556) - (15,276) - 344,322
The amounts of acquisitions in the table above essentially concern assets received in the context of lending.
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Fair value complies with the policies outlined in Note 2.12.2
In in-house models for the valuation of financial instruments for trading and at fair value through profit or loss, market interest rates are calculated on the basis of information published by Bloomberg. For maturities of up to one year they are indexed to the interbank money market rates. For longer maturities they are indexed to prices for interest rate swaps. The interest rate curve thus obtained is further adjusted against values of short-term interest rate futures. Interest rates for specific maturities are determined using interpolation methods. The same interest rate curves are also used for forecasting non-deterministic cash flows, such as reference rates.
40. BALANCES AND TRANSACTIONS WITH RELATED PARTIES
In the normal course of its financial business, the Group conducts transactions with related parties. These include loans and banking products, deposits, shareholder loans, guarantees and other banking operations and services.
The balance sheet balance of these transactions with related parties, and the related costs and income for the year, is as follows:
Family members close Description Key management staff to key management Associates Other entities staff 30/06/2014 31/12/2013 30/06/2014 31/12/2013 30/06/2014 31/12/2013 30/06/2014 31/12/2013
Loans and applications 330 780 527 528 89,125 83,941 149,330 159,435 Deposits 599 494 310 470 11,192 29,880 2,307 12,579 Shareholder loans - - - - 13,682 13,845 6,961 7,299 Loans obtained ------Guarantees given - - - - 1,963 1,761 11,026 11,699
30/06/2014 30/06/2013 30/06/2014 30/06/2013 30/06/2014 30/06/2013 30/06/2014 30/06/2013
Commissions and services provided 1 1 - - 560 513 143 273 Interest and similar charges 8 13 10 21 180 1,466 1,827 985 Interest and similar income 4 5 2 5 1,016 1,454 3,505 4,332
Transactions with related parties are analysed in accordance with the criteria applicable to similar third-party operations and are conducted under normal market conditions. These operations are subject to the approval of the board of directors.
The related parties for the Banif Financial Group are the following:
Key members of management: Luís Filipe Marques Amado Jorge Humberto Correia Tomé Maria Teresa Henriques da Silva Moura Roque Vítor Manuel Farinha Nunes Nuno José Roquette Teixeira
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João Paulo Pereira Marques de Almeida João José Gonçalves de Sousa António Carlos Custódio de Morais Varela Fernando Mário Teixeira de Almeida António Ernesto Neto da Silva Thomaz de Mello Paes de Vasconcellos Issuf Ahmad
Close family of key members of management Marta do Patrocínio Oliveira de Castro Amado Carlos António de Castro Amado Maria Carolina de Castro Amado Isabel Maria da Silva Pedro Gomes Carolina Pedro Gomes Tomé Lorenzo Roque Dal Fabbro Bianca Maria Roque Dal Fabbro Maria José Botelho de Vasconcellos e Melo de Morais Varela Matilde de Vasconcellos Morais Varela João de Vasconcellos Morais Varela Francisco de Vasconcellos Morais Varela Maria Luísa Pereira Silva Sousa João Nuno da Silva e Sousa Joana Filipa da Silva e Sousa Helena Veiga Martins de Almeida Catarina Martins Marques de Almeida Margarida Martins Marques de Almeida Sara Dolores Militão Silva de Cima Sobral Roquette Teixeira Maria Cima Sobral Roquette Teixeira José Maria Cima Sobral Roquette Teixeira Isabel Maria Cima Sobral Roquette Teixeira Ana Cristina dos Santos de Figueiredo e Sousa Nunes Sofia Farinha de Figueiredo e Sousa Nunes Tomás Farinha de Figueiredo e Sousa Nunes Francisco Farinha de Figueiredo e Sousa Nunes Maria Cláudia Gonçalves Teixeira de Almeida Patrícia Maria Gonçalves Teixeira de Almeida Maria Inês Gonçalves Teixeira de Almeida João Fernando Gonçalves Teixeira de Almeida Filipe Jorge de Figueiredo Neto da Silva Ana Isabel de Figueiredo Neto da Silva Inês Tria Neto da Silva
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Laura Fátima R. S. C. Paes Vasconcellos Tomás Remartinez Paes Vasconcellos Carolina Remartinez Paes Vasconcellos Sara Noorbibi Pinto Ahmad Sofia Pinto Ahmad Isaac André T. A. Ahmad
Associated Entities: Rentipar Seguros, S.G.P.S., S.A. Companhia de Seguros Açoreana, S.A. Banca Pueyo Inmobiliaria Vegas Altas, S.A. MCO2 - SGFIM, S.A Pedidos Liz, Lda
Other Entities Rentipar Financeira, SGPS, S.A. Vestiban – Gestão e Investimentos, S.A. Auto-Industrial – Investimentos e Participações, SGPS, S.A. Renticapital, Investimentos Financeiros, S.A. Rentipar Investimentos, SGPS, S.A. Rentipar Industria SGPS, S.A. Rentiglobo, SGPS, S.A. Empresa Madeirense de Tabacos SIET – Sociedade Imobiliária de Empreendimentos Turísticos Savoi, S.A. DISMADE – Distribuição de Madeira VITECAF – Fabrica Rações da Madeira, S.A. RAMA – Rações para Animais, S.A. SODIPRAVE – Soc. Dist. de Produtos Avícolas Avipérola Aviatlântico – Avicultura, S.A. SOIL, SGPS, S.A. Rentimundi – Investimentos Imobiliários, S.A. Mundiglobo – Habitação e Investimentos, S.A. Habiprede – Sociedade de Construções Genius – Mediação de Seguros, S.A. Rentimedis – Mediação de Seguros, S.A. MS MUNDI – Serviços Técnicos de Gestão e Consultoria, S.A. RENTICONTROL – Controlo e Gestão de Contabilidade, S.A. LDI – Desenvolvimento Imobiliário Group Staff Pension Fund
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FN Participações SGPS, SA
41. RESTRUCTURING PLAN
The Group's restructuring plan (the "Plan") has been the subject of detailed discussions between the Ministry of Finance and the Directorate General of Competition (DGCOM) at the European Commission. A revised version of the plan was submitted to the Ministry of Finance on 6 June 2104, for later submission to DGCOM. The plan still needs to be submitted for final approval by the college of commissioners at the European Commission. The bank's board of directors is confident that the plan will be approved.
The Plan will: (i) demonstrate the Group’s self-reliability and robustness in the mid to long term and its ability to operate without state support; (ii) demonstrate the Group’s current and future contribution, and that of its shareholders (excluding the Portuguese state), to our recapitalisation and restructuring efforts; and (iii) include measures designed to prevent any distortion of competition in the sector that may result from the fact that the Group has received funding from the Portuguese state.
Complying with the restructuring plan will mean transforming Banif. To this end, we have planned a broad range of initiatives, which will be implemented during the restructuring period and applied throughout and across the whole Group. The Programme Management Office was set up to oversee the smooth running of this implementation. Its mission is to ensure that the necessary changes are brought in as quickly as possible.
Throughout 2013 and the first half of 2014, the results of some of these initiatives have already become clear, particularly as regards the following: - A new management structure, with fewer directors - Capital increases realised (EUR 450M); - New commercial strategy drawn up, approved and implemented, focused on the Group’s core segments, providing services (i) to the islands (the Autonomous Region of Madeira an the Autonomous Region of the Azores), (ii) to emigrant Portuguese communities, and (iii) to micro-companies, SME and private/high-income clients on the mainland. - Acceleration of the points of sale closure programme, beyond the initial objectives in the restructuring plan; - Redundancy agreements with staff that have helped accelerate the rationalisation of staff numbers, beyond the initial objectives in the restructuring plan; - The design and implementation of improvements to the bank's IT structures.
Besides these initiatives, with their clearly visible results, various other more complex transformation initiatives were carried out. Although these initiatives required considerably more groundwork, implementation will continue in the second half of 2014.
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Given the prospective information that is currently available, regarding rates of return, cash flows and levels of capital, and with the plan serving as a base of action, the Group believes that the conditions are right for it to continue developing its priority initiatives. These are designed to achieve the objective of repositioning the Group in the national finance system and driving its organic capacity to generate capital, which will result in the building of value for the its shareholders. However, this plan is currently awaiting approval from the European Commission.
42. PROFIT/LOSS PER SHARE
Profit/loss per basic share
Description 30/06/2014 31/12/2013
Basic Profit/loss for the Year - continued operational units (56,421) (373,365) Weighted average number of ordinary shares issued 103,778,527,888 78,286,720,207
Earnings per share (expressed as EUR per share) (0.001) (0.005)
Description 30/06/2014 31/12/2013
Basic Profit/loss for the Year - discontinued operational units (41,286) (96,908) Weighted average number of ordinary shares issued 103,778,527,888 78,286,720,207
Earnings per share (expressed as EUR per share) (0.000) (0.001)
Profit/loss per diluted share
Description 30/06/2014 31/12/2013
Diluted Profit/loss for the Year - continued operational units (56,421) (373,365) Average number of shares: 123,253,666,010 110,503,459,933 Weighted average number of ordinary shares issued 103,778,527,888 78,286,720,207 MCS - 52,356,164 CoCos, issued on 25/01/2013 19,475,138,122 32,164,383,562
Diluted earnings per share (expressed as EUR per share) (0.000) (0.003)
Description 30/06/2014 31/12/2013
Diluted Profit/loss for the Year - discontinued operational units (41,286) (96,908) Average number of shares: 123,253,666,010 110,503,459,933 Weighted average number of ordinary shares issued 103,778,527,888 78,286,720,207 MCS - 52,356,164 CoCos, issued on 25/01/2013 19,475,138,122 32,164,383,562
Diluted earnings per share (expressed as EUR per share) (0.000) (0.001)
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43. SPECIAL CONDITIONS REGARDING SOVEREIGN RISK IN PORTUGAL, GREECE, IRELAND, SPAIN, ITALY AND CYPRUS
The onset of the sovereign debt crisis in a number of countries led the Eurozone countries, together with the International Monetary Fund, to instigate a set of support mechanisms. These were aimed at the drawing up and implementation of adjustment plans for Greece and then, later, for Ireland and Portugal.
In February 2012, the terms of the agreement on the involvement of the private sector in the restructuring of the Greek public debt were announced. This resulted in the exchange of securities held by Banif on 31 December 2011, recognised in assets available for sale, for new bonds issued by Greece.
Banif decided to accept the terms of the exchange, having recorded a loss of 558 thousand euros, and attributed nil value to the contingent securities. In 2011, and in accordance with ESMA recommendations, the Greek securities had been recognised at their fair value, and impairments of 941 thousand euros had been carried.
In December 2012 the Greek government launched a debt buy-back programme, with the support of the European Financial Stability Facility (EFSF). This process covered bonds maturing between 2023 and 2042, with the exception of the “Detachable GDP-Linked Securities”. The terms of exchange varied according to bond maturity, from a minimum of 30.2% to a maximum of 40.1% of the nominal value. In exchange, private creditors received 6-month EFSF bills.
Banif accepted the buy-back terms, recognising a gain of 101 thousand euros in 2012 and maintaining the impairment of the entirety of the nominal value of the “Detachable GDP-Linked Securities”, in the amount of value of 630 thousand euros (securities already disposed of by the Group).
An 85 billion euro assistance plan was put into place for Ireland in November 2010, and a similar plan, expected to provide support totalling 78 billion euros, was set up for Portugal in May 2011.
With the worsening in 2012 of the sovereign debt crisis and the crisis in the banking systems of some countries, Spain formally requested financing to support the recapitalisation of its banking system and, in March 2013, Cyprus accepted a financial aid plan. Italy also was affected by instability in the European sovereign debt markets, which generally diminished through 2013 and 2014.
Banif does not envisage any additional impairment losses arising from direct exposure to the risk of Ireland, Portugal, Spain, Cyprus or Italy.
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Group exposures:
Residual Maturity
Provisions / 1 year 2 years 3 years 5 years > 5 years Total (net) Reserve JV Impairment
Portugal Financial assets available for sale Central Government 70,007 10,426 181,014 668,859 732,915 1,663,221 - 68,844 Local and Regional Governments ------Banks - - 208 - - 208 - 6 Public Companies ------70,007 10,426 181,222 668,859 732,915 1,663,429 - 68,850
Investments held to maturity Central Government ------Local and Regional Governments ------Banks ------Public Companies ------
Loans Central Government ------Local and Regional Governments 88,575 86 14,494 1,115 228,132 332,402 - - Banks 22,681 - - - - 22,681 - - Public Companies 8,937 - - 21,247 60,093 90,277 - - 120,193 86 14,494 22,362 288,225 445,360 - -
190,200 10,512 195,716 691,221 1,021,140 2,108,789 - 68,850
Spain Financial assets available for sale Central Government ------Local and Regional Governments - - - 472 - 472 - 40 Banks - - - - 240 240 - 31 Public Companies ------472 240 712 - 71
Investments held to maturity Central Government ------Local and Regional Governments ------Banks 2,581 - - - - 2,581 - - Public Companies ------2,581 - - - - 2,581 - -
2,581 - - 472 240 3,293 - 71 192,781 10,512 195,716 691,693 1,021,380 2,112,082 - 68,921
Rentipar Seguros, an associate company, has the following exposures: - Portugal: 85,802 thousand euros - Italy: 81,317 thousand euros - Spain: 82,025 thousand euros - Greece: 5,015 thousand euros - Ireland: 8,878 thousand euros
44. EVENTS AFTER THE BALANCE SHEET DATE
At the date of approval of these financial statements by Banif’s board of directors, there have been no events subsequent to 30 June 2014, the reference date for the financial statements, which would require adjustments or modifications to the figures given for assets or liabilities, in the terms of IAS 10 - Events after the balance sheet date.
The process of negotiating the final restructuring plan, under the recapitalisation scheme, with the European Commission's Directorate General for Competition was ongoing throughout 2013 and 2014. The final version of this plan, which is still subject to approval, contains initiatives involving a repositioning of Banif in the Portuguese financial system.
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On 18 July 2014, the bank disclosed the results of the first period for the exercise of the facility to acquire shares from the Portuguese State, as per paragraph 9 of Decree no. 1527-B/2013, of 23 January. No shares in Banif were sold.
On 28 July 2014, the bank reported that the following members of its board of directors had submitted their resignations: Maria Teresa Henriques da Silva Moura Roque and Nuno José Roquette Teixeira.
Maria Teresa Henriques da Silva Moura Roque will continue in all the other positions she holds in Banif Group entities and will also head up the Group-wide coordination of the social responsibility and sustainability programme.
Nuno José Roquette Teixeira has decided to relinquish all the positions he holds in Banif Group entities.
Under the terms of article 404 of the Commercial Companies Code, these resignations will take effect as from the end of August 2014, unless, in the meantime, replacement board members are appointed or elected.
On 30 July 2014, Rentipar Seguros SGPS was merged by incorporation into Açoreana Seguros.
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10. OTHER INFORMATION
On 5 February 2014, Banif – Banco Internacional do Funchal, SA (Banif) informed the market that it had signed a non-binding memorandum of understanding with the government of Equatorial Guinea. This document prepares the ground for collaborative initiatives in the banking sector, in accordance with conditions to be agreed by the two parties. It is expected, as part of these initiatives, that an Equatorial Guinean company will acquire a qualifying holding in Banif's share capital.
On 31 March 2014, and following the submission of their resignations, Diogo António Rodrigues da Silveira and Rogério Pereira Rodrigues left the Banif posts to which they had been appointed by the Portuguese state, that is, as a non-executive member of the board of directors and a member of the audit board, respectively.
On 11 April 2014, Banif informed the market that, following the appropriate authorisation from Banco de Portugal, in accordance with point 7 of the terms and conditions of the Core Tier 1 equity instruments subscribed to by the Portuguese State, and as set out in the annex to Order No. 1527- B/2013, issued by HE the Minister of State and Finance on 23 January, it had bought back, on this same date, 125 million euros of the subordinated contingent conversion bonds (CoCos).
The meeting of Banif's board of directors held on 14 April 2014 approved an increase in the company's share capital of 1,582,195.43 euros, to give a total of 1,720,700,000.00 euros. This increase took the form of a new cash inflow generated by a public subscription with suppression of existing shareholders' preference rights. This also involved making changes to articles 5 and 6 of the company's articles of association.
Ministerial Order no. 5838/2014, issued by the Minister of State and Finances on 22 September, was published in the 05 May 2014 edition of the 2nd Series of the Official Gazette of the Republic (no. 85). This order addressed the appointment of a replacement for Rogério Pereira Rodrigues in the following terms: “with effect from 16 April 2014, Issuf Ahmad is appointed to the bank's supervisory board, in accordance with the terms of no. 2 of article 14 of Law no. 63-A/2008 and no. 10 of Order no. 1527-B/2013 and in full respect of all applicable legal procedures, including the provisions of articles 30 to 33 of the General Code for Credit Institutions and Finance Companies, approved through Decree-Law no. 298/92, of 31 December."
The general meeting of Banif shareholders, held on 30 May 2014, approved the 2013 accounts and management report for Banif, S.A., and also the board of director’s recommendation for the appropriation of profits for the year. The meeting also approved a statement from the remunerations committee on the remuneration policy for the company’s management and supervisory bodies.
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The same meeting also decided the following: i) - to appoint the audit firm, PricewaterhouseCoopers & Associados – Sociedade de Revisores Oficiais de Contas, Lda. (SROC no. 183), represented by José Manuel Henriques Bernardo (ROC n.º 903), for the purposes of carrying out the duties stipulated in article 446 of the Commercial Companies Code and no. 4 of article 27 of the company's articles of association, for the one-year reporting period of 2014; ii) - approve the reduction in the number of shares representing Banif's share capital through the conversion of each 10 (ten) shares into 1 (one) new share. This affected the ordinary shares listed for trading on the NYSE Euronext Lisbon exchange (ISIN PTBAF0AM0002) and the special shares held by the Portuguese State (ISIN PTBVF0AM0007). No. 1 of article 6 of the company's articles of association will be altered to reflect this consolidation, at a time to be decided on by the board of directors; iii) - approve a proposal from the board of directors for a change to the company's articles of association. This proposal concerns a new management and supervisory model for the company, composed of a board of directors, which incorporates an audit committee, and a statutory auditor. iv ) - elect the persons named below to the board of director's audit committee (in the terms and for the purposes of article 423-B and subsequent of the Commercial Companies Code), to carry out the duties assigned to this committee, as non-executive members of the board of directors, for the remainder of the 2012-2014 mandate. Appointees: a. Fernando Mário Teixeira de Almeida (chair); b. António Ernesto Neto da Silva; c. Thomaz de Mello Paes de Vasconcellos; Issuf Ahmad will also become a member of the board of directors and serve on the audit committee, in his own right and as a consequence of the terms of his appointment under the ministerial order of 16 April last.
The meeting held on 30 May 2014 also approved the plan from the board of directors to allow the company itself, or one of its subsidiaries, to acquire and sell own-debt securities. Such transactions would be dependent on opportunity criteria and decisions taken by the board of directors, in accordance with the conditions agreed at the general meeting. Any such authorised transactions would take place in the context of Banif’s state-investment recapitalisation plan and would respect any commitments that Banif had entered into as part of this process.
On 4 June 2014, and following the public offering for subscription, the increase of 138,504,779.57 euros in Banif's share capital, from 1,582,195.43 euros to 1,720,700,000.00 euros, was officially registered.
As a result of this operation, and because it continues to hold 70,000,000,000 shares of Banif capital stock (categorised as special, as per the terms of Law no. 63-A/2008, of 24 November), the Portuguese State now holds 60.53% of Banif's capital stock. This corresponds to an identical
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percentage of voting rights as regards the issues specified in no. 8 of article 4 of Law no. 63-A/2008 of 24 November and 49.37% of the voting rights in respect of other matters.
As a further consequence of the completion and registration of the increase in Banif's share capital to 1,720,700,000.00 euros, and notwithstanding the subscription to shares that took place as part of the increase, the shareholder Auto Industrial Investimentos e Participações SGPS SA saw its share of Banif capital stock fall to 1.8722%, equivalent to 2,165,000,000 shares and the same number of voting rights as regards the matters specified in no. 8 of article 4 of Law no. 63-A/2008, of 24 November. As a result, this shareholder was no longer deemed to have a significant holding, in the terms of paragraph b) of no. 2 of article 16 of the Securities Code.
At 30 June 2014, and following completion of all the capital increase operations mentioned above, Banif’s share capital stood at 1,720,700,000.00 euros, represented by 115,640,000,000 shares with no par value. Banif’s shareholder structure now included the following qualifying holdings (above 2%):
# Shares % Capital
Portuguese State 70,000,000,000 60.533%
Açoreana Seguros, SA 6,953,088,628 6.012%
HSR Estate (*) 7,298,748,811 6.312%
(*)The holding of the Horácio da Silva Roque estate includes the holding of Açoreana Seguros, SA, as this company is owned by the estate.
On 30 June 2014, Banif informed the market as to the first period for the exercise of the facility, extended to those holding shares on 25 January 2013, to purchase shares from the Portuguese State, in the terms of paragraph 9 of Order no. 1527-B/2013, of 23 January.
Although the following events took place after the end of the reporting period covered by this report, which ended on 30 June 2014, they are mentioned here for their relevance:
- On 18 July 2014, and subsequent to its announcement of 30 June 2014, regarding the facility extended to those holding shares on 25 January 2013, to purchase shares belonging to the Portuguese State, Banif informed the market that no such facility had been exercised. Consequently, none of the shares representing the company's capital and held by the Portuguese State were sold in this first exercise period (3 to 16 July 2014) regarding the purchase facility provided for in paragraph 9 of Order no. 1527-B/2013, of 23 January.
- On 28 July 2014, the bank informed the market that the following members of its board of directors had submitted their resignations: Maria Teresa Henriques da Silva Moura Roque and Nuno José Roquette Teixeira. The resignations of these members of the board of directors will take legal effect from the end of August 2014, unless replacement members are appointed or elected before that time.
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1. GOVERNANCE AND STATUTORY STRUCTURES
At 30 June 2014, the governance and statutory structures had the following compositions:
GENERAL MEETING COMMITTEE
Chair: Miguel José Luís de Sousa Secretary: Bruno Miguel dos Santos de Jesus
BOARD OF DIRECTORS
Chair: Luís Filipe Marques Amado (non-executive director)
Vice-Chairs: Maria Teresa Henriques da Silva Moura Roque (non-executive director)¹ Jorge Humberto Correia Tomé (executive director)
Members: Vítor Manuel Farinha Nunes (executive director) Nuno José Roquette Teixeira (executive director) ¹ João Paulo Pereira Marques de Almeida (executive director) João José Gonçalves de Sousa (executive director) António Carlos Custódio de Morais Varela (non-executive director)
Professor Fernando Mário Teixeira de Almeida (non-executive director) ²
António Ernesto Neto da Silva (non-executive director) ²
Thomaz de Mello Paes de Vasconcellos (non-executive director) ²
Issuf Ahmad (non-executive director) ²
THE BOARD OF DIRECTORS' AUDIT COMMITTEE
Chair: Professor Fernando Mário Teixeira de Almeida ²
Permanent Members: António Ernesto Neto da Silva ² Thomaz de Mello Paes de Vasconcellos ² Issuf Ahmad ²
¹ Submitted a resignation request in July 2014. Under the terms of no. 2 of article 404 of the Commercial Companies Code, this should take effect as from the end of August 2014 ² At the closing date of 30 June 2014, the process of special registration, at the Banco de Portugal, for the exercise of such duties had not been completed. This process will only be concluded at a later date and, consequently, these appointees will only take up their positions as non-executive members of the board of directors and the board of directors' audit committee as from 8 August 2014.
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STRATEGY COUNCIL
Chair: Maria Teresa Henriques da Silva Moura Roque Vice-Chair: Mário Raúl Leite Santos Members: Professor António Soares Pinto Barbosa Fernando José Inverno da Piedade Jorge Humberto Correia Tomé José Marques de Almeida José Paulo Baptista Fontes Mário Henrique de Almeida Santos David Paula Cristina Moura Roque
REMUNERATION COMMITTEE
Chair: António Gonçalves Monteiro Members: Filipe de Andrade e Silva Lowndes Marques António Carlos Custódio Morais Varela
COMPANY SECRETARY:
Permanent: Bruno Miguel dos Santos de Jesus Alternate: Ângela Maria Simões Cardoso Seabra Lourenço
2. PORTFOLIO OF OWN SHARES
At 30 June 2014, the total number of own shares, all held by Banif – Banco de Investimento SA., stood at 565,574.
3. HOLDERS OF QUALIFYING SHAREHOLDINGS
Under the terms of article 9, no. 1, paragraph c) of CMVM Regulation no. 5/2008, we list here the holders of qualifying shareholdings, at 30 June 2014, in accordance with article 20 of the Securities Code and in conformity with the information in the company's possession on the date on which this information was produced: i) – The Portuguese State was holder of 70,000,000,000 shares, equivalent to 60.533% of Banif's capital stock, and the same number of voting rights as regards the issues specified in no. 8 of article 4 of Law no. 63-A/2008, of 24 November, and 49.374% of the voting rights in respect of other matters.
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ii) - The Estate of Horácio da Silva Roque was holder of 7,298,748,811 shares (considering the aggregate of the direct and indirect holdings listed below, the voting rights for which are attributable to the estate under the terms of article 20 of the Securities Code, as indicated below), equivalent to 6.312% of Banif's capital stock and the same number of voting rights as regards the issues specified in no. 8 of article 4 of Law no. 63-A/2008, of 24 November, and 8.096% of the voting rights in respect of other matters:
a) – The Estate of Horácio da Silva Roque, holder of 808,888 shares, equivalent to 0.0006% of Banif's capital stock, and the same number of voting rights as regards the issues specified in no. 8 of article 4 of Law no. 63-A/2008, of 24 November, and 0.0008% of the voting rights in respect of other matters.
b) – Açoreana Seguros SA, holder of 6,953,088,628 shares, equivalent to 6.0127% of Banif's capital stock, and the same number of voting rights as regards the issues specified in no. 8 of article 4 of Law no. 63-A/2008, of 24 November, and 7.7127% of the voting rights in respect of other matters.
c) – Rentipar Financeira SGPS SA, holder of 307,063,133 shares, equivalent to 0.2655% of Banif's capital stock, and the same number of voting rights as regards the issues specified in no. 8 of article 4 of Law no. 63-A/2008, of 24 November, and 0.3406% of the voting rights in respect of other matters.
d) – Members of the corporate structures of Rentipar Financeira SGPS SA, holder of 10,043,062 shares, equivalent to 0.0086% of Banif's capital stock, and the same number of voting rights as regards the issues specified in no. 8 of article 4 of Law no. 63-A/2008, of 24 November, and 0.0111% of the voting rights in respect of other matters.
e) – Vestiban – Gestão e Investimentos SA, holder of 27,583,051 shares, equivalent to 0.0238% of Banif's capital stock, and the same number of voting rights as regards the issues specified in no. 8 of article 4 of Law no. 63-A/2008, of 24 November, and 0.0305% of the voting rights in respect of other matters.
f) – Renticapital – Investimentos Financeiros SA,, holder of 162,049 shares, equivalent to 0.0001% of Banif's capital stock, and the same number of voting rights as regards the issues specified in no. 8 of article 4 of Law no. 63-A/2008, of 24 November, and 0.0001% of the voting rights in respect of other matters.
The table below summarises the information regarding the holders of qualifying shareholdings, at 30 June 2014:
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% Voting % Voting Rights # Shares % Share Capital1 Rights2 should the state with all its shares
Portuguese State 70,000,000,000 60.533% 49.374% 60.533%
Estate of HSR (aggregated) 7,298,748,811 6.312% 8,096% 6.312%
Includes shares held by:
- Açoreana Seguros 6,953,088,628 6.013% 7,713% 6.013%
- Others 345,660,183 0.299% 0.383% 0.299%
No other holders of qualifying shareholding in Banif's capital stock are known, bearing in mind the provisions of paragraph b) of no. 2 of article 16 of the Securities Code.
4. SECURITIES ISSUED BY BANIF – BANCO INTERNACIONAL DO FUNCHAL, SA AND COMPANIES IN THE BANIF FINANCIAL GROUP HELD BY MEMBERS OF THE CORPORATE STRUCTURES
In conformity with the provisions of article 8, no. 1, paragraph a) of CMVM Regulation no. 5/2008, the number of securities (shares and bonds) issued by Banif – Banco Internacional do Funchal SA (Banif), and other companies with which this is related by means of control or by group membership, that were held, acquired, sold or transferred by members of the corporate structures, during the reporting period (1st half of 2014) were as follows:
GENERAL MEETING COMMITTEE
Miguel José Luís de Sousa
He personally helds 741 shares in Banif. He did not transact, either directly or through any related entities, any securities issued by Banif (including shares and/or financial instruments related to these) and/or any companies with which this is related by means of control or by group membership, during the period in question.
Bruno Miguel dos Santos de Jesus
He is not a holder, either directly or through any related entities, of any securities issued by Banif (including shares and/or financial instruments related to these) and/or any companies with which this is related by control or by group membership.
1 Voting rights in all matters falling under the purview of no. 8 of article 4 of Law no. 63-A/2008, of 24 November, as amended 2 Voting rights in all matters not falling under the purview of no. 8 of article 4 of Law no. 63-A/2008, of 24 November, as amended
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He did not transact, either directly or through any related entities, any securities issued by Banif (including shares and/or financial instruments related to these) and/or any companies with which this is related by means of control or by group membership, during the period in question.
BOARD OF DIRECTORS
Luís Filipe Marques Amado
He is not a holder, either directly or through any related entities, of any securities issued by Banif - SGPS, SA (including shares and/or financial instruments related to these) and/or any companies with which this is related by means of control or by group membership.
He did not transact, either directly or through any related entities, any securities issued by Banif (including shares and/or financial instruments related to these) and/or any companies with which this is related by means of control or by group membership, during the period in question.
Maria Teresa Henriques da Silva Moura Roque
She is one of the two heirs to the estate of Commendador Horácio da Silva Roque and, at 30 June 2014, she held 9,894,751 Banif shares and 52,500 Banif 7,5% 2013/2016 bonds, in her own name.
During the 1st half of 2014 she carried out the following transactions: No. shares Transaction Date Unit Value Final position 6,894,751 Acquisition 04/06/2014 0.01 9,894,751
She also carried out the following bond transactions: No. Bonds Transaction Name Date Unit Value Final position Banif 7,5% 7,000 Acquisition 103% 52,000 2013/2016 13/02/2014
Banif 7,5% 500 Acquisition 103% 52,500 2013/2016 18/02/2014
Jorge Humberto Correia Tomé
At 30 June 2014, he held 15,995,780 Banif shares, 7,152,169 of which he had subscribed to on 4 June 2014, following the public offering for subscription, at the price of 0.01 euros, of up to 13,850,447,957 ordinary Banif shares, held between 16 and 30 May 2014.
He also stated that, at 30 June 2014, he held 175,000 Banif SA 7,5% 2013/2016 bonds.
Additionally, he reported that, on 16 April 2014, he transferred to Banif the 4 preferential non- voting shares he had held in Banif – Banco Internacional do Funchal (Brasil), SA.
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As regards the persons and company described in paragraphs a) and b) of no. 4 of article 248-B of the Securities Code, he stated that none of these is a holder of, or transacted, Banif shares or bonds during the 1st half of this year.
Vítor Manuel Farinha Nunes
At 30 June 2014, FN Participações, SGPS, SA (FN), a company he controls, held 14,675,277 Banif shares, 2,354,760 of which had been subscribed to on 4/06/2014, following the public offering for subscription, at the price of 0.01 euros, of up to 13,850,447,957 ordinary Banif shares, held between 16 and 30 May 2014.
At 30 June 2014, FN held 250,000 Banif SA 7,5% 2013/2016 bonds.
As regards the persons and companies described in paragraphs a) and b) of no. 4 of article 248-B of the Securities Code, he stated that none of these is a holder of, or transacted, Banif shares or bonds during the 1st half of this year.
Nuno José Roquette Teixeira
At 30 June 2014, he held no shares in the company, having sold his entire holding of 1,545,114 Banif shares at the price of 0.0131 euros on 9 January 2014.
On 16 April 2014, the 4 preferential non-voting shares he had held in Banif – Banco Internacional do Funchal (Brasil), SA were transferred to Banif, SA.
As regards the persons and companies described in paragraphs a) and b) of no. 4 of article 248-B of the Securities Code, he stated that none of these is a holder of, or transacted, Banif shares or bonds.
João Paulo Pereira Marques de Almeida
At 30 June 2014, he held 1,378,419 Banif shares, 1,353,612 of which he had subscribed to on 4 June 2014, following the public offering for subscription, at the price of 0.01 euros, of up to 13,850,447,957 ordinary Banif shares, held between 16 and 30 May 2014.
As regards the persons and companies described in paragraphs a) and b) of no. 4 of article 248-B of the Securities Code, he stated that none of these is a holder of, or transacted, Banif shares or bonds.
João José Gonçalves de Sousa
During the 1st half of 2014 he carried out the following transaction:
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No. shares Transaction Name Date Unit Value Final position 1,236,090 Sale of Shares Banif Shares 08/01/2014 0.0124 0
At 30 June 2014, he did not hold any Banif shares.
António Carlos Custódio de Morais Varela
He did not carry out any direct or indirect transactions in the 1st half of 2014 that involved shares issued by Banif.
At 30 June 2014, he held 50 “Banif 08/18” subordinated treasury bonds and 25,000 “Banif Finance Perpetual 07” preferential shares.
THE BOARD OF DIRECTORS' AUDIT COMMITTEE
Professor Fernando Mário Teixeira de Almeida
In the first half of 20014, he did not carry out any transactions involving securities issued by Banif – Banco Internacional do Funchal, SA, or by any other company related to this by reason of control or group membership.
At 30 June 2014, he held 368,358 Banif – Banco Internacional do Funchal shares directly. He also held 368,358 shares in Banif – Banco Internacional do Funchal indirectly, through Quinta Sourinho – Agricultura e Turismo, Lda. (related entity).
António Ernesto Neto da Silva
He is not a holder, either directly or through any related entities, of any securities issued by Banif (including shares and/or financial instruments related to these) and/or any companies with which this is related by control or by group membership.
He did not transact, either directly or through any related entities, any securities issued by Banif (including shares and/or financial instruments related to these) and/or any companies with which this is related by means of control or by group membership, during the period in question.
Thomaz de Mello Paes de Vasconcellos
He is not a holder, either directly or through any related entities, of any securities issued by Banif (including shares and/or financial instruments related to these) and/or any companies with which this is related by control or by group membership.
He did not transact, either directly or through any related entities, any securities issued by Banif (including shares and/or financial instruments related to these) and/or any companies with which this is related by means of control or by group membership, during the period in question.
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Issuf Ahmad
He is not a holder, either directly or through any related entities, of any securities issued by Banif (including shares and/or financial instruments related to these) and/or any companies with which this is related by control or by group membership.
He did not transact, either directly or through any related entities, any securities issued by Banif (including shares and/or financial instruments related to these) and/or any companies with which this is related by means of control or by group membership, during the period in question.
5. FSF AND EBA RECOMMENDATIONS ON INFORMATION TRANSPARENCY AND ASSET VALUATION Business Model I. Business Model Description of business model (i.e. reasons for the See Management Report and development of activities/businesses and their Accounts respective contribution to the value creation - Chapter 05 BANIF process) and, if applicable, the changes made (e.g. MANAGEMENT REPORT 1. as a result of the period of turmoil); See annex to the consolidated DF's: - Note "4. REPORTING BY SEGMENT" Description of strategies and objectives (including See Management Report and strategies and objectives specifically related with Accounts securitisation operations and structured - Chapter 05 BANIF products); MANAGEMENT REPORT
See annex to the consolidated DF's: 2. - Note "23. DEBT SECURITIES IN ISSUE" - Note "20. OTHER FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS" - Note "11. LOANS TO CLIENTS" Description of the importance of the activities See Management Report and performed and their respective contribution to the Accounts business (including a quantitative approach); - Chapter 05 BANIF MANAGEMENT REPORT 3. See annex to the consolidated DF's: - Note "2. BASIS OF PRESENTATION AND ACCOUNTING POLICIES" Description of the type of activities performed, See Management Report and including a description of the instruments used, Accounts 4. their operation and the qualification criteria with - Chapter 05 BANIF which the products/investments must comply; MANAGEMENT REPORT
Description of the objective and extent of the See Management Report and institution's involvement (i.e. commitments and Accounts 5. obligations assumed) for each activity performed; - Chapter 05 BANIF MANAGEMENT REPORT
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II. Risks and Risk Management Description of the nature and extent of the risks See Management Report and incurred on activities performed and instruments Accounts used; - Chapter 05. BANIF 6. MANAGEMENT REPORT, "RISK MANAGEMENT" point
Description of risk management practices relevant to the activities (particularly including liquidity risk See the reference in the previous 7. in the present context), description of any point (II. 6.) fragilities/weaknesses identified and the corrective measures taken;
III. Impact of period of financial turmoil on results
Qualitative and quantitative description of the 8. results, particularly losses (when applicable) and See point III.9. in this annex the impact of write-downs on results; Breakdown of write-downs/losses by types of products and instruments affected by the period of turmoil, namely: commercial mortgage-backed 9. N.A. securities (CMBS), residential mortgage-backed securities (RMBS), collateralised debt obligations (CDO), asset-backed securities (ABS); Description of the reasons and factors responsible See Management Report and for the impact; Accounts - Chapter 05. BANIF 10. MANAGEMENT REPORT, "FINANCIAL MANAGEMENT" point and "RISK MANAGEMENT" point 1. Comparison of: i) impacts between (relevant) See annex to the consolidated DF's: periods and of ii) financial statements before and - Note "7. FINANCIAL ASSETS after the impact of the period of turmoil; HELD FOR TRADING" - Note "8. OTHER FINANCIAL 11. LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS" - Note "9. FINANCIAL ASSETS AVAILABLE FOR SALE" Breakdown of “write-downs” into realised and 12. See point III.9. in this annex unrealised amounts; Description of the influence of the financial turmoil See Management Report and on the entity’s share prices; Accounts - Chapter 05. BANIF 13. MANAGEMENT REPORT, "BUSINESS IN THE 1st HALF OF 2014" point Disclosure of maximum loss risk and description of See Management Report and how the institution’s situation could be affected by Accounts 14. the prolongation or worsening of the period of - Chapter 05. BANIF turmoil or market recovery; MANAGEMENT REPORT, "RISK MANAGEMENT" point Disclosure of the impact of changes to the spreads See annex to the consolidated DF's: associated with the institution’s own liabilities on - Note "39. FAIR VALUE OF 15. results, plus the methods used to determine this FINANCIAL INSTRUMENTS" impact;
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IV. Levels and types of exposures affected by the period of turmoil Nominal (or amortised cost) and fair value of "live” See annex to the consolidated DF's: exposures; - Note "42. SPECIAL CONDITIONS REGARDING SOVEREIGN RISK IN 16. PORTUGAL, GREECE, IRELAND, SPAIN, ITALY AND CYPRUS"
Information on credit risk mitigating factors (e.g. 17. credit default swaps) and respective effect on N.A. current exposures; Detailed disclosure of exposures, broken down by: - Level of seniority of exposures/tranches held; - Level of credit quality (e.g. ratings, vintages); - Geographic areas of origin; - Sector of activity; - Origin of exposures (issued, retained or acquired); 18. - Product characteristics: e.g. ratings, N.A. weight/proportion of associated sub-prime assets, discount rates, spreads, finance; - Characteristics of underlying assets: e.g. vintages, loan-to-value ratio, credit rights; weighted average lifespan of underlying asset, assumptions regarding the development of prepayment situations, expected losses. Movements occurring in exposures between 19. relevant reporting periods and reasons underlying N.A. such changes (sales, write-downs, purchases, etc.) Explanations of exposures (including “vehicles” and, in this case, the respective activities) which 20. have not been consolidated (or which have been N.A. recognised during the crisis) and associated reasons;
Exposure to monoline type insurance companies and quality of insured assets: - Nominal amount (or amortised cost) of insured exposures in addition to the amount of credit
protection acquired; 21. N.A. - Fair value of "live” exposures and the respective credit protection; - Value of write-downs and losses, distinguishing realised and unrealised amounts; - Breakdown of exposures by rating or counterparty. V. Accounting policies and valuation methods
Classification of transactions and structured See annex to the consolidated DF's: products for accounting purposes and the - Note "2.12 FINANCIAL respective processing in accounts. INSTRUMENTS", which contains a description of the 22. financial instruments and the accounting procedures applied to these.
Consolidation of Special Purpose Entities (SPEs) and See annex to the consolidated DF's: 23. other "vehicles" and the reconciliation of these - Note "2.5 Use of estimates in with the structured products affected by the preparing the financial
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period of turmoil. statements" - Note "3. GROUP COMPANIES" Detailed disclosure of the fair value of financial instruments: - Financial instruments at fair value; - Fair value ranking (breakdown of all exposures measured at fair value in the fair value ranking See annex to the consolidated DF's: and breakdown between liquid assets and - Note "2.12 FINANCIAL derivative instruments, plus disclosure of INSTRUMENTS"; 24. information on migration between ranking - Note "39. FAIR VALUE OF levels); FINANCIAL INSTRUMENTS" - Processing of “day 1 profits” (including quantitative information); - Use of fair value option (including conditions of use) and respective amounts (with an adequate breakdown); Description of the modelling techniques used to value financial instruments, including information on: - Modelling techniques and the instruments to which they are applied; See the reference in the previous - Valuation processes (including the assumptions 25. point and inputs upon which the models are based); (V. 24.) - Types of adjustment applied to reflect the modelling risk and other valuation uncertainties; - Sensitivity of fair value (namely changes to assumptions and key inputs); - Stress scenarios.
VI. Other relevant aspects of disclosure Description of the disclosure policies and principles See annex to the consolidated DF's: used in reporting disclosures and in financial - Note "2. BASIS OF 26. reporting. PRESENTATION AND ACCOUNTING POLICIES"
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6. MANDATORY DECLARATIONS
In the terms, and for the purposes, of paragraph c) of no. 1 of article 246 of the Securities Code, each of the members of the board of directors, signatories to this document and identified below, declares upon his/her own individual responsibility, that, to the best of his/her knowledge, the condensed financial statements have been prepared in conformity with the applicable accounting standards. They also declare that these statements provide a true and fair picture of Banif – Banco Internacional do Funchal, SA's assets and liabilities, its financial position and results, as well as of those of the companies included in its consolidation perimeter. They further declare that the management report accurately describes the changes in business activities and the key events that occurred during the reporting period in question and the impact of these on the financial statements. They confirm that the report also contains a description of the main risks and uncertainties likely to be faced in the next six months.
In the terms of no. 3 of article 8 of the Securities Code, they also declare that this half-yearly information has not been subject to audit or limited review.
Lisbon, 19 August 2014
THE BOARD OF DIRECTORS
Chair Luís Filipe Marques Amado
Vice-Chairs: Jorge Humberto Correia Tomé
Maria Teresa Henriques da Silva Moura Roque
Members: Vítor Manuel Farinha Nunes
Nuno José Roquette Teixeira
João Paulo Pereira Marques de Almeida
João José Gonçalves de Sousa
António Carlos Custódio de Morais Varela
Professor Fernando Mário Teixeira de Almeida António Ernesto Neto da Silva Thomaz de Mello Paes de Vasconcellos Issuf Ahmad
219 WorldReginfo - 92da3163-c39e-4f97-8fe2-782c928145c8 Limited Review Report Prepared by Auditor Registered with the Securities Market Commission (CMVM) on the Consolidated Half Year Information
(Free translation from the original in Portuguese)
Introduction
1 In accordance with the Portuguese Securities Market Code (CVM), we present our limited review report on the consolidated financial information for the six-month period ended 30 June 2014 of Banif – Banco Internacional do Funchal, S.A. (“Bank”) included in the consolidated Directors’ Report, consolidated balance sheet (which shows total assets of Euro 13.693.868 thousand and total shareholders’ equity of Euro 1.001.936 thousand, including non-controlling interests of Euro 70.695 thousand and a net loss of Euro 97.707 thousand), consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the period then ended, and the corresponding notes to the accounts.
2 The amounts in the consolidated financial statements, as well as those in the additional financial information, are derived from the respective accounting records.
Responsibilities
3 It is the responsibility of the Board of Directors: (a) to prepare consolidated financial information which present fairly, in all material respects, the financial position of the companies included in the consolidation, the consolidated results and the consolidated comprehensive income of their operations, the changes in consolidated equity and the consolidated cash flows; (b) to prepare historical financial information in accordance with International Accounting Standard 34 – Interim Financial Reporting as adopted by the European Union and which is complete, true, up-to-date, clear, objective and lawful as required by the CVM; (c) to adopt appropriate accounting policies and criteria; (d) to maintain appropriate systems of internal control; and (e) to disclose any significant matters which have influenced the activity, financial position or results.
4 Our responsibility is to verify the financial information included in the documents referred to above, namely as to whether it is complete, true, up-to-date, clear, objective and lawful, as required by the CVM, for the purpose of issuing an independent and professional report based on our work.
Scope
5 Our work was performed with the objective of obtaining moderate assurance about whether the financial information referred to above is free from material misstatement. Our work was performed in accordance with the Standards and Technical Recommendations issued by the Institute of Statutory Auditors, planned according to that objective, and consisted: (a) primarily, in enquiries and analytical procedures, to review: (i) the reliability of the assertions included in the financial information; (ii) the appropriateness and consistency of the accounting principles used, as applicable; (iii) the applicability, or not, of the going concern basis of accounting; (iv) the presentation of the financial information; (v) as to whether the consolidated financial information is complete, true, up- to-date, clear, objective and lawful; and (b) of substantive tests of unusual significant transactions and of those for which contradictory information has been obtained (if applicable).
PricewaterhouseCoopers & Associados - Sociedade de Revisores Oficiais de Contas, Lda. Sede: Palácio Sottomayor, Rua Sousa Martins, 1 - 3º, 1069-316 Lisboa, Portugal Tel +351 213 599 000, Fax +351 213 599 999, www.pwc.pt Matriculada na CRC sob o NUPC 506 628 752, Capital Social Euros 314.000 Inscrita na lista das Sociedades de Revisores Oficiais de Contas sob o nº 183 e na CMVM sob o nº 9077
PricewaterhouseCoopers & Associados - Sociedade de Revisores Oficiais de Contas, Lda. pertence à rede de entidades que são membros da PricewaterhouseCoopers International Limited, cada uma das quais é uma entidade legal autónoma e independente. WorldReginfo - 92da3163-c39e-4f97-8fe2-782c928145c8 6 Our work also covered the verification that the consolidated financial information included in the consolidated Directors’ Report is consistent with the remaining documents referred to above.
7 We believe that the work performed provides a reasonable basis for the issue of this limited review report on the half year information.
Conclusions
8 Based on the work, which was performed with the objective of obtaining a moderate level of assurance, nothing has come to our attention that leads us to conclude that the consolidated financial information for the six-month period ended 30 June 2014 of Banif – Banco Internacional do Funchal, S.A. contain material misstatements that affect its conformity with International Accounting Standard 34 – Interim Financial Reporting as adopted by the European Union and that it is not complete, true, up-to-date, clear, objective and lawful.
Report on other requirements
9 Based on the work performed, nothing has come to our attention that leads us to believe that the consolidated financial information included in the consolidated Directors’ Report is not consistent with the consolidated financial information for the period.
Emphasis
10 Without qualifying our conclusions expressed in paragraph 8 above, we draw attention to the fact that, as disclosed in Note 41 of the notes to the accounts, the Bank submitted on 6 June 2014, to the Ministry of Finance to be posteriorly presented to the European Commission’s Directorate-General for Competition, entity responsible for the review of the state aid cases, a revised version of the Restructuring Plan of Banif Financial Group (“Plan”). This Plan comprises a profound revision of its business model, which consubstantiates in a program focused on providing the Group with the sustainability and financial autonomy to continue its activity in the long term, without aid from the Portuguese State. Additionally, as disclosed in the referred note to the accounts, based on the mentioned Restructuring Plan and prospective information regarding profitability, cash flows and capital levels, the Board of Directors considers that the Bank has the means necessary to continue its activity in the foreseeable future, although at this date the referred Plan is pending approval from the European Commission, which restricts the decisions taken for its implementation.
26 August 2014
PricewaterhouseCoopers & Associados - Sociedade de Revisores Oficiais de Contas, Lda Registered in the Comissão do Mercado de Valores Mobiliários with no. 9077 represented by:
José Manuel Henriques Bernardo, R.O.C.
(This is a translation, not to be signed)
Limited Review Report Prepared by Auditor Registered Banif – Banco Internacional do Funchal, S.A. with the Securities Market Commission (CMVM) on the Consolidated Half Year Information PwC 2 of 2
30 June 2014 WorldReginfo - 92da3163-c39e-4f97-8fe2-782c928145c8 MANAGEMENT REPORT AND ACCOUNTS - 1º HALF 2014
Banif – Banco Internacional do Funchal, SA Limited Liability Company Registered Office: Rua de João Tavira, 30 – 9004-509 Funchal Share Capital: 1,720,700,000 euros Single Registration and Corporate Taxpayer Number 511 202 008 WorldReginfo - 92da3163-c39e-4f97-8fe2-782c928145c8