2017 | Annual Report HAITONG BANK, S.A. INDEX MANAGEMENT REPORT JOINT MESSAGE FROM THE CHAIRMAN AND THE CEO----------------------------------------------------------4 1. GOVERNANCE ----------------------------------------------------------------------------------------------------------------5 Corporate Bodies------------------------------------------------------------------------------------------------------------------5 Executive Committee-------------------------------------------------------------------------------------------------------------6 Executive Committee and Senior Managers Responsibilities ----------------------------------------------------------7 Branches and Main Subsidiaries ----------------------------------------------------------------------------------------------9 Organisational Chart------------------------------------------------------------------------------------------------------------ 10 2. EARNINGS DISTRIBUTION PROPOSAL ---------------------------------------------------------------------------- 11 3. DECLARATION OF CONFORMITY ------------------------------------------------------------------------------------ 12 4. GLOBAL STRATEGY AND MAIN DEVELOPMENTS ------------------------------------------------------------- 13 Global Strategy ------------------------------------------------------------------------------------------------------------------ 13 Corporate Events---------------------------------------------------------------------------------------------------------------- 14 Macroeconomic Environment ------------------------------------------------------------------------------------------------ 16 Financial Highlights ------------------------------------------------------------------------------------------------------------- 18 Financial Overview ------------------------------------------------------------------------------------------------------------- 19 Rating ------------------------------------------------------------------------------------------------------------------------------ 21 5. BUSINESS ACTIVITY ------------------------------------------------------------------------------------------------------ 22 Business Model ------------------------------------------------------------------------------------------------------------------ 22 5.1. INVESTMENT BANKING ---------------------------------------------------------------------------------------------- 23 Mergers & Acquisitions -------------------------------------------------------------------------------------------------- 23 Capital Markets ----------------------------------------------------------------------------------------------------------- 28 Structured Finance-------------------------------------------------------------------------------------------------------- 37 5.2. MARKETS ------------------------------------------------------------------------------------------------------------------ 40 Equities & Research ------------------------------------------------------------------------------------------------------ 40 Fixed Income, Currencies and Commodities (FICC) ------------------------------------------------------------- 42 5.3. ALTERNATIVE INVESTMENTS -------------------------------------------------------------------------------------- 43 Asset Management ------------------------------------------------------------------------------------------------------ 43 Private Equity--------------------------------------------------------------------------------------------------------------- 44 1 2017 Annual Report 6. TREASURY ------------------------------------------------------------------------------------------------------------------- 45 7. HUMAN RESOURCES ----------------------------------------------------------------------------------------------------- 47 8. RISK MANAGEMENT ------------------------------------------------------------------------------------------------------ 49 8.1. Credit Risk------------------------------------------------------------------------------------------------------------------- 52 8.2. Market Risk ----------------------------------------------------------------------------------------------------------------- 59 8.3. Operational Risk ----------------------------------------------------------------------------------------------------------- 61 8.4. Liquidity Risk---------------------------------------------------------------------------------------------------------------- 63 8.5. Capital Management------------------------------------------------------------------------------------------------------ 64 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES Consolidated Financial Statements---------------------------------------------------------------------------------------- 70 Notes to the Consolidated Financial Statements ----------------------------------------------------------------------- 75 x Report and Opinion of the Supervisory Board -------------------------------------------------------------- 181 x Statutory Auditor’s Report and Audit Report ---------------------------------------------------------------- 185 INDIVIDUAL FINANCIAL STATEMENTS AND NOTES Individual Financial Statements-------------------------------------------------------------------------------------------- 194 Notes to the Individual Financial Statements--------------------------------------------------------------------------- 199 x Report and Opinion of the Supervisory Board -------------------------------------------------------------- 279 x Statutory Auditor’s Report and Audit Report ---------------------------------------------------------------- 283 ANNEXES I - Shares and Bonds held by the Members of the Board of Directors and the Supervisory Bodies --- 292 II - Shareholders ------------------------------------------------------------------------------------------------------------- 293 III - Corporate Governance Structure and Practices ----------------------------------------------------------------- 294 IV - Non-Financial Information and Diversity --------------------------------------------------------------------------- 296 V - Bank of Portugal Reference Indicators----------------------------------------------------------------------------- 298 VI - Remuneration of the Board of Directors and Supervisory Board Members and Relevant Staff (Senior Managing Directors and Control Functions Staff) ---------------------------------- 300 2 HAITONG BANK, S.A. MANAGEMENT REPORT 3 2017 Annual Report JOINT MESSAGE FROM THE CHAIRMAN AND THE CEO This is our first joint message as Chairman and as CEO of Haitong Bank. Since starting in our new role, we have been committed to delivering on our main priorities: turning around the business; improving China-related deal flow; continuously strengthening our governance and further developing our human capital. The progress achieved so far makes us optimistic about the future of our organisation. Since our arrival in the fourth quarter of 2017, Haitong Bank has been consistently registering monthly operating profits. We have also received encouraging signs of the progress achieved so far, namely the upward revision of the Bank’s credit rating outlook from negative to stable by S&P. Although we are fully conscious of the great challenges ahead, these signs show us that we are on the right track. Haitong Bank is at a crucial point for its future development. After implementing an operating turnaround and strategic repositioning during 2017, Haitong Bank has a clear role inside Haitong Group as its Corporate and Investment Banking unit and offers a platform for Broad Asset Management. Over the last year, we have been actively engaged in reshaping the Bank’s strategy, adjusting the size of the organisation, the business culture and the cost base. The high restructuring costs and the impairments related to the deterioration of the legacy credit portfolio led the Bank to high losses that required additional capital support from our shareholder. All of the effort that took place in 2017 was with a view to having a sustainable business model going forward. The monthly running cost base has been reduced by one third. The legacy loan portfolio credit quality has improved with the stock of credit at risk falling by 42%. The product offering has been adapted to the new competitive approach. As China is growing in prominence as a global economic powerhouse, this raises tremendous opportunities for Haitong Bank. From a strategic perspective, the Bank is leveraging on the Sino-European and Sino-Latin American business flows, building from its established competitive presence in those markets. Haitong Bank has established itself as a true multinational bank headquartered in Lisbon. Our team has a unique combination of European, Asian and Latin American heritage. This cultural diversity brings clear competitive advantages in the way we identify opportunities, understand our clients and analyse the various risk exposures. This diversity is also reflected at a Board level. From a governance perspective, our new Board of Directors has been reinvigorated with the addition of several new members that will add further capabilities. We have been working closely with the Board of Directors and the Supervisory Board, which have contributed with useful ideas to continuously improve our governance and reinforce the culture of good conduct in the organisation. We firmly believe that we have the right people and the necessary tools to succeed. We are also proud to have a shareholder that gives us its