Caja Laboral Popular Coop. de Crédito and subsidiaries (Consolidated Group) Audit report, Consolidated annual accounts at 31 December 2017 and consolidated Directors’ Report for 2017 This version of our report is a free translation from the original, which was prepared in Spanish. All possible care has been taken to ensure that the translation is an accurate representation of the original. However, in all matters of interpretation of information, views or opinions, the original language version of our report takes precedence over this translation Independent auditor´s report on the consolidated annual accounts To the members of Caja Laboral Popular Coop. de Crédito: Report on the consolidated annual accounts Opinion We have audited the consolidated annual accounts of Caja Laboral Popular Coop. de Crédito (the Parent company) and its subsidiaries (the Group), which comprise the balance sheet as at December 31, 2017, and the profit and loss account, statement of recognized income and expenditure, statement of changes in total net assets, cash flow statement and related notes, all consolidated, for the year then ended. In our opinion, the accompanying consolidated annual accounts present fairly, in all material respects, the equity and financial position of the Group as at December 31, 2017, as well as its financial performance and cash flows, all consolidated, for the year then ended, in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS-EU) and other provisions of the financial reporting framework applicable in Spain. Basis for opinion We conducted our audit in accordance with legislation governing the audit practice in Spain. Our responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the consolidated annual accounts section of our report. We are independent of the Group in accordance with the ethical requirements, including those relating to independence, that are relevant to our audit of the consolidated annual accounts in Spain, in accordance with legislation governing the audit practice. In this regard, we have not rendered services other than those relating to the audit of the accounts, and situations or circumstances have not arisen that, in accordance with the provisions of the aforementioned legislation, have affected our necessary independence such that it has been compromised. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated annual accounts of the current period. These matters were addressed in the context of our audit of the consolidated annual accounts as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. PricewaterhouseCoopers Auditores, S.L., Pº de Colón, 2, 20002 San Sebastián, España Tel.: +34 943 283 977 / +34 902 021 111, Fax: +34 943 288 177, www.pwc.es 1 R. M. Madrid, hoja 87.250-1, folio 75, tomo 9.267, libro 8.054, sección 3ª Inscrita en el R.O.A.C. con el número S0242 - CIF: B-79 031290 Caja Laboral Popular Coop. de Crédito and its subsidiaries (Consolidated Group) Key audit matter How our audit addressed the key audit matter Impairment adjustments in the loan portfolio The identification of impaired credit exposures Our work regarding the estimate of loan portfolio and the calculation of impairment adjustments impairment focused on the analysis, assessment and in the loan portfolio are among the most verification of the general internal control complex and most important estimates made framework, as well as on the performance of detailed when preparing the accompanying tests regarding provisions estimated both on an consolidated financial statements. aggregate and individual basis. The Group recognizes provisions for the We have performed the following procedures to the impairment of its loan portfolio when there is internal control system, among other things: objective evidence of impairment as a result of one or more events occurring after initial • Understanding and reviewing the calculation recognition and when they have an impact on methods applied. the estimated cash flows from that portfolio, or the collateral specific to each operation. • Verifying the adequacy of the various policies and procedures approved by the Group’s The assessment of impairment due to credit governing bodies with respect to applicable risk is based on models with a high level of regulatory requirements. judgment when calculating the impairment losses, taking into consideration matters such • Verifying the main matters relating to the as: security environment for the information systems supporting the calculation of the • The classification of the different loan provisions. portfolios based on their credit risk profile. • Reviewing the regular risk assessment and monitoring alerts applied by the Group to • The identification and classification of identify risks that may be considered to be impaired assets, or those subject to special impaired or under special monitoring. monitoring. • Determining that the regular review of borrower • The use of assumptions with an effect on files within the process of monitoring their the provisions, as well as estimates accounting classification and the recognition of regarding the attainment of a certain level impairment, where applicable, is adequately of cash flows by borrowers, the performed. impairment of which is estimated on an individual basis in accordance with the We have also performed detailed tests consisting of: latest information available. • The selective verification of the databases used to • The fair value of the collateral associated calculate provisions, comparing the primary with the loans granted. determining attributes of the impairment provision against support documentation In this context, the Group uses models that (purpose of the transaction, classification of the take into consideration statistical data and loan, segmentation, default date). patterns covering the average performance of banking institutions in Spain and allows it to • A recalculation of the aggregate provisions for estimate the aggregate credit risk provisions credit risk. through the additional application of specific calculation methods to estimate them on an • An assessment of the suitability of the discounted individual basis. cash flow models used in the calculation of provisions based on individual analysis. 2 Caja Laboral Popular Coop. de Crédito and its subsidiaries (Consolidated Group) Key audit matter How our audit addressed the key audit matter The Group takes into account real and • A review of a sample of files to evaluate their personal guarantees considered to be effective adequate classification and recognition and, if when determining any impairment appropriate, the relevant impairment. adjustments to be applied to the loan portfolio. The described procedures resulted in our observation See notes 13.h), 26 and 63 of the Notes to the that the methods used to calculate the impairment of accompanying consolidated financial loan assets are adequate and any difference obtained statements. as a result of our procedures compared against the calculations made by Management remained within a reasonable range in the context of the amount included in the accompanying consolidated financial statements. Provisions for tax, legal and regulatory litigation The Group is involved in administrative, court We have analysed and documented our or other proceedings relating primarily to understanding of the process implemented by the legal, tax and regulatory matters as a result of Group to identify and assess litigation and the normal course of its business. proceedings in progress, as well as the Group’s process for recognizing provisions and we have Within this context there are also situations focused our procedures on matters such as: that, while not involved with court proceedings, require the recognition of • Understanding the policy for classifying claims provisions based on Management’s judgment and litigation and assigning provisions, where such as, those associated with the possible necessary. impact of refunding amounts received as a result of the hypothetical nullification by the • Analysing the main types of lawsuits, claims and courts of floor clauses and the application of litigation in progress. Royal Decree-Law 1/2017 on consumer protection measures regarding floor clauses • Obtaining confirmation letters from attorneys and amounts to compensate customers for the and advisers that work with the Group in order marketing of certain products. to compare their assessment of the expected outcome of claims or litigation, verify the Due to the complexity of these proceedings completeness of the information, the correct and the long period over which they take recognition of provisions and identify any place, they are generally particularly complex potential omissions of liabilities. and uncertain in terms of their possible outcome and/or definitive amount. As a result, • Analysing the reasonableness of the estimated the recognition of provisions for litigation is expected outcome of the most significant tax one of the areas that involves a high level of proceedings with the support of our internal estimation regarding the possible impact on experts. the accompanying consolidated financial statements. • Evaluating