Banco BPI 2003 Report Index REPORT Leading business indicators 4 Introduction 6 Governing bodies 13 Historical milestones 14 The identity of BPI 16 Financial and business structure 17 The BPI Brand 18 Distribution channels 20 Corporate Governance at the BPI Group 22 Social investment 24 Highlights of 2003 26 Background to operations 28 Human resources 36 Technology 40 Operations 43 Commercial banking 44 Insurance 69 Asset Management 70 Investment banking 76 Private equity 81 Financial Review 84 Risk management 127 Rating 144 BPI Shares 146 Shareholders 149 Shareholders value creation 150 Final acknowledgements 151 Proposed appropriation of net profit 152 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES Consolidated financial statements 153 Notes to the consolidated financial statements 160 Legal certification of accounts and audit report 224 Auditor’s report 226 Report and opinion of the Audit Board 227 ANNEXES The BPI Group's Corporate Governance Report 229 Trading information 291 Leading business indicators (Consolidated figures in millions of euro, except where indicated otherwise) 1999 2000 2001 2002 2003 ∆% 02 / 03 Total assets 16 550.5 21 907.4 24 792.9 25 669.1 26 195.3 2.0% Total assets plus disintermediation 20 753.3 26 331.3 29 098.3 29 576.9 30 533.1 3.2% Shareholders’ equity 650.7 930.0 908.7 1 168.9 1 227.3 5.0% Loans to Customers (gross) and guarantees 12 023.4 16 542.8 18 768.9 19 738.0 20 690.1 4.8% Customer deposits 9 458.5 10 463.7 11 494.3 12 224.6 12 181.4 (0.4%) Total Customer resources 14 801.2 16 507.8 17 392.9 17 690.3 18 213.9 3.0% Assets under management 7 248.5 7 638.4 7 544.4 7 512.6 8 575.5 14.1% Operating cash flow 207.2 278.6 327.0 310.4 329.1 6.0% Net operating income 139.6 152.5 190.6 192.1 200.8 4.5% Net profit 124.8 152.4 133.3 140.1 163.8 17.0% Cash flow after taxation 192.3 278.5 269.6 258.4 292.2 13.1% Return on average total assets (ROA) 0.8% 0.8% 0.6% 0.6% 0.6% Return on Shareholders’ equity (ROE) 22.4% 21.8% 14.8% 13.5% 13.9% Cost-to-income1 65.0% 60.7% 58.1% 58.7% 57.5% Efficiency ratio2 79.6% 71.9% 68.3% 67.1% 66.7% Ratio of own funds requirements3 11.6% 9.8% 9.2% 10.2% 9.9% Tier I3 6.8% 6.7% 5.9% 7.3% 6.7% Loans in arrears for more than 90 days as % of Customer loans 1.4% 1.0% 0.9% 1.3% 1.2% Provisioning cover for arrear loans 157.3% 194.2% 210.0% 153.0% 148.4% Cover of pension obligations4 102.4% 101.6% 100.0% 100.1% 101.4% Data per share adjusted (euro)5 Cash flow after taxation 0.32 0.44 0.40 0.35 0.38 8.4% Net profit 0.21 0.24 0.20 0.19 0.22 12.1% Dividend 0.09 0.09 0.09 0.08 0.09 7.8% Book value 1.05 1.37 1.34 1.54 1.61 5.0% Weighted average no. of shares (in millions)5 603.8 626.3 679.0 728.3 760.0 4.4% Closing price (euro)5 3.86 3.18 2.15 2.18 2.92 33.9% Total Shareholder return 2.5% (16.0%) (30.4%) 3.0% 38.5% Stock market capitalisation at year end 2 390.0 2 156.4 1 459.1 1 656.8 2 219.2 33.9% Dividend yield 2.4% 2.4% 2.7% 3.9% 4.1% Retail branches6 (number) 592 592 584 564 573 1.6% Corporate and institutionals centres network7 54 63 63 61 54 (11.5%) BPI Group staff complement (number)8 8 239 8 359 8 106 7 576 7 025 (7.3%) 1) Administrative overheads (personnel costs and outside supplies and services) as % of operating income from banking. Table 1 2) Administrative overheads and depreciation as % of operating income from banking, excluding profits from financial operations. 3) Calculated in accordance with the Portuguese Central Bank's rules governing minimum own funds requirements (Notice 7 / 96). 4) Pension liabilities recognised in the balance sheet. 5) Adjusted for capital increase, re-denomination and re-nominalisation. 6) Includes traditional branches (483 in 2002 and in 2003), housing shops, in-store branches, investment centres and automatic shops. 7) Distribution network specialising in serving medium-sized companies (38 Corporate Centres), large companies (6 Corporate Centres), 4 Wholesale Centres, 1 Project Finance Centre and Institutionals (5 Centres). 8) Group staff complement in the domestic and international activities. Includes term Employees and temporary workers. 4 Banco BPI | Annual Report 2003 GROWTH, PROFITABILITY, STRENGTH AND VALUE Net total assets plus Bi.€ Bi.€ Loans and Customer disintermediation 35 20 resources 28 15 21 Net total assets1 Disintermediation2 10 14 Total Customer resources1 Loans to Customers 1) Corrected for duplication of 5 balances. 7 2) Off-balance sheet Customer 1) Corrected for duplication of resources. 0 0 balances. 9998 0102 03 9900 0102 03 Net profit M.€ € Net profit per share 180 0.28 135 0.21 90 0.14 45 0.07 0 0.00 9900 0102 03 9900 0102 03 Quality of loan portfolio % Bi.€ Own funds and own funds 6 2.0 requirements 4 1.5 Ratio of loans in arrears1 2 1.0 Loans in arrears1 net of provisions, as % of loans to Customers 0 0.5 1) Loans in arrears for more than Own funds 90 days. Own funds requirements -2 0 9900 0102 039900 01 02 03 Stock market capitalisation Bi.€ BPI Ratings 2.8 Issuer A+ Fitch Ratings Stable 23 Oct. 03* 2.1 A2 Moody’s 1.4 Positive 21 Nov. 03* 0.7 A- Standard & Poor’s Stable 10 Feb. 04* Long-term rating notations * last report 0 9900 0102 03 Figure 1 Report | Leading business indicators 5 Introduction Strength and consistency The 2003 financial year confirmed the adequacy of BPI’s strategy adjustment to the difficult economic landscape of the last three years, marked by a noteworthy deceleration in domestic demand and by the clear deterioration in the Portuguese economy’s risk pattern. In the year under review, the Bank’s net profit rose by 17% and was accompanied by an unequivocal reinforcement of its solid economic and financial base: non-performing loans descended to 1.2%, unrealised capital gains associated with the portfolio of participating interests exceed unrealised losses, net of provisions – the latter falling to less than half the corresponding figure in 2002 – at the same time as provisioning cover for pension obligations surpassed the 100% mark and the capital ratios remain at comfortable levels. If we add the recovery of net unrealised losses on the financial investments and the favourable development in the pension- -related actuarial variances to the net profit for the year, we can confirm that the Bank’s net asset situation improved by EUR 400 million during the past year. Profitability also improved, as borne out by the increase in the return on equity to 14% and the 12% climb in earnings per share. In parallel, the efficiency indicators continued their positive advance, thanks to the containment of administrative costs, depreciation and amortisation and to the competitive capacity which the Bank has evidenced in the principal segments of retail banking. BPI’s sound financial base and its consistent strategy were once again acknowledged by the leading international rating agencies (Standard & Poors, Fitch and Moody’s), which confirmed the previous classifications (A-, A+ and A2, respectively). Insofar as the outlook is concerned, the first two maintained their stable classification, while Moody’s upgraded its outlook to positive, which in this domain represent the best set of results managed by any Portuguese financial institution. The credibility of the Bank’s strategic direction was also confirmed by the market judging from the behaviour of its shares. In fact, Banco BPI shares, including the dividend paid, posted a return of around 40% in 2003, well above the PSI index which added 17.4% over the same period. Efficiency The improvement in BPI’s net profit in 2003 is explained by the convergence of three essential positive effects: ᭿ The organic simplification completed in 2002, which permitted the elimination of tax and operating inefficiencies, with important repercussions for cost reduction; ᭿ The good commercial performance, which was responsible for the 3.2% rise in operating income from banking which, in turn, reflects the very favourable trend in commissions (+6.3% in consolidated terms); 6 Banco BPI | Annual Report 2003 ᭿ Ongoing containment of administrative overheads, depreciation and amortisation, which rose by a mere 0.4% in consolidated terms, while in domestic activity this caption in fact declined 0.2%. These effects over-compensated for the impact of three negative factors: ᭿ The 2.7% contraction in consolidated net interest income, above all as a consequence of the 17.6% fall in narrow net interest income associated with international activity, bearing in mind that the decline was only 0.7% in terms of domestic operations. The negative contribution from international activity is explained by the euro’s appreciation against the dollar, which led to a 15% drop in Banco de Fomento Angola’s net interest income (recorded in euro). Notwithstanding this factor which is linked to the prevailing framework, a quarterly analysis of narrow net interest income shows a positive evolution during the course of 2003 Chairman of the Board of Directors on both the domestic and international fronts; Artur Santos Silva ᭿ The 19.4% increase in net amounts set aside for provisions, explained chiefly by the creation of non-obligatory provisions for other risks and contingencies in the amount of EUR 17.5 million, given that total provisions for loans to Customers actually fell by roughly 5%; ᭿ The negative balance on net extraordinary items, which increased from EUR 5.3 million to EUR 18.9 million, in particular as a consequence of the rise in pension costs stemming from the execution in the last few years of the early-retirements’ programme, in terms of which the total number of Group Employees has been cut by some 20% in the period from the end of 2000 to the close of 2003.