Financial review
DIRECTORS’ COMPLEMENTARY PENSION PLAN The Directors forming part of Banco BPI’s Executive
Committee, as well as the other directors of Banco Português de Investimento, benefit from the
complementary retirement and survivors’ pension plan.
The liabilities associated with this plan are covered by a pension fund.
BenchmarkG Asset class
Equities 30% MSCI Europe
Fixed-rate bonds 25% EFFAS>1
Variable-rate bonds 20% 3-month Euribor
Hedge Funds 5% 3-month Euribor
Real estate 15% EFFAS>1
Liquidity 5% 3-month Euribor
Total 100%
Table 33
Report | Financial review 81 RESULTS OF DOMESTIC ACTIVITY
1) Excluding non-recurrent impacts in 2008. Negatives: (a) loss on the sale of Banco Comercial Português shares, (b) impairment losses recognised for the investment in that bank and (c) early-retirement costs; Positive: (d) gains realised on the sale of a 49.9% equity interest in BFA.
as reported /09Δ%08 Δ%08 adjusted /09 2008
as reported
2008 adjusted1
2009 as reported
Net interest income (narrow sense) 1 470.4 470.4 420.3 (10.6%) (10.6%)
Unit linked gross margin 2 6.5 6.5 3.3 (50.3%) (50.3%)
Income from securities (variable yield) 3 5.6 5.6 4.9 (12.0%) (12.0%)
Commissions related to deferred cost (net) 4 21.2 21.2 24.7 16.6% 16.6%
Net interest income [= Σ 1 to 4] 5 503.7 503.7 453.1 (10.0%) (10.0%)
Technical result from insurance contracts 6 (12.2) (12.2) 11.8 196.9% 196.9%
Commissions and other similar income (net) 7 255.8 256.0 262.5 2.6% 2.5%
Profits from financial operations 8 (20.2) 74.1a 92.7 559.8% 25.1%
Operating income and charges 9 191.5 14.9d 9.6 (95.0%) (35.5%)
Net operating revenue [= Σ 5 to 9] 10 918.6 836.5 829.7 (9.7%) (0.8%)
Personnel costs 11 (387.0) (349.3)c (356.7) (7.8%) 2.1%
Of which: early retirements costs 12 (37.7) (0.05) (99.9%)
Other administrative expenses 13 (196.0) (196.0) (181.3) (7.5%) (7.5%)
Depreciation of fixed assets 14 (40.5) (40.5) (39.5) (2.5%) (2.5%)
Operating costs [= 11 + 13 + 14] 15 (623.5) (585.8) (577.5) (7.4%) (1.4%)
Operating profit [= 10 + 15] 16 295.1 250.7 252.2 (14.5%) 0.6%
Recovery of loans written-off 17 25.7 25.7 18.2 (29.2%) (29.2%)
Loan provisions and impairments 18 (133.9) (133.9) (135.3) 1.1% 1.1%
Other impairments and provisions 19 (139.4) (18.8)b (34.6) (75.2%) 84.4%
Profits before taxes [= Σ 16 to 19] 20 47.5 123.8 100.5 111.4% (18.8%)
Corporate income tax 21 (24.6) (19.2) (18.9) (23.1%) (1.7%)
Equity-accounted results of subsidiaries 22 5.2 5.2 12.7 146.4% 146.4%
Income attributable to minority interest 23 (18.4) (18.4) (8.8) (51.9%) (51.9%)
Net profit [= Σ 20 to 23] 24 9.7 91.3 85.5 777.4% (6.4%)
Cash flow after taxation [= 24 - 14 - 18 - 19] 25 323.5 284.5 294.9 (8.9%) 3.7%
Domestic activity income statement Amounts in M.€
Table 34
Net profit
Net profit in 2009 from domestic activity was 85.5 M.€, which compares with the net profit reported in the previous year of 9.7 M.€ (91 M.€, excluding non-recurrent items).
Operating profit
Operating profit generated by domestic operations advanced 0.6% from 250.7 M.€ (excluding
non-recurrent items) to 252.2 M.€, given that the 0.8%
decrease in net operating revenue (-6.8 M.€) was offset by the 1.4% contraction in costs (-8.3 M.€). The decline in pre-tax profit of 23.3 M.€ (-18.8%) is explained by the 24.8 M.€ increase in impairments in the year.
Domestic activity net profit
M.€
07
05 09
179 242
85
06 278
08 911
Domestic activity operating profit
Chart 74 M.€
07
05 09
286 345
252
06 426
08 295
2511
10
Chart 73
The operating profit margin return on domestic operations in 2009 (operating profit as % of ATA) was 0.6%, while the return on assets (ROA = Profit / ATA) was 0.2% and the ROE was situated at 4.9%.
REVENUE
Net operating revenue generated by domestic banking operations fell by 9.7% relative to 2008, or by 0.8%
excluding the impact of non-recurring items1in 2008.
Net interest income
Net interest income posted a 10% decline in 2009 as a result of the 10.6% decrease in narrow net interest income (-50.1 M.€).
Narrow net interest income in 2009 depicts two distinct trend patterns:
䊏a negative trend on a monthly basis since the beginning of the year till July: the amount of net interest income shrank from 40 M.€ in December 2008 to 29 M.€ in July 2009;
䊏a gradual upturn till the end of the year.
The contraction in net interest income up till July was greatly influenced by the following factors:
䊏increase in the average cost of time deposits. The steep fall in liquidity and the higher funding cost on the interbank money market and the capital market in the last quarter of 2008 and in the first half of 2009, reflected itself in intensified competition for the capture of Customer resources that translated into an increase in the average costs of time deposits;
䊏contraction of the average margin on sight deposits as a result of the sharp drop in market interest rates5. 3-month Euribor declined from 5.3% at the start of October 2008 to 1.5% at the end of March 2009 and to 0.9% at the end of July.
Trend in net interest income (narrow sense)
2009 2008 2007
Loans and deposits spread Quarterly average interest rates
%
1) Excluding in 2008 the negative impacts of realised losses on the sale of BCP shares as well as impairment charges on this holding and early-retirement costs and the positive impact of gains realised on the sale of 49.9% of BFA capital.
2) Taking into consideration the net profit attributable to BPI Shareholders and to minority interests, excluding dividends paid to preference shares.
3) Excludes revaluation reserves.
4) Excludes preference shares.
5) The fall in market interest rates is virtually all reflected in a contraction of the average margin on sight deposits since these bear interest at close to zero rates, with the result that the possibility of adjusting their remuneration is negligible.
ATA = Average total assets.
Return on average shareholders' equity (ROE)
2009 2008
adjusted1 2008
Operating return (Operating profit as % ATA)
Net operating revenue
as % ATA 1 2.4% 2.2% 2.1%
Operating profit)] 4 x 0.16 x 0.49 x 0.40
Income tax impact (=Net profit /
profit before taxes) 5 x 0.20 x 0.74 x 0.85
Return on average
total assets (ROA)2 [= 3 x 4 x 5] 6 0.03% 0.2% 0.2%
ATA / average shareholders'
equity3and minority interests4 7 27.7 27.7 22.8
ROE3 [= 6 x 7] 8 0.7% 6.7% 4.9%
Table 35
Net interest income Amounts in M.€
Δ%
2009 2008
Net interest income
(narrow sense) 1 470.4 420.3 (10.6%)
Gross margin on unit links
products 2 6.5 3.3 (50.3%)
Income from securities
– dividends 3 5.6 4.9 (12.0%)
Commissions related to
deferred cost (net) 4 21.2 24.7 16.6%
Net interest income [= Σ 1 to 4] 5 503.7 453.1 (10.0%) Table 36
The recovery noted in net interest income from July onwards reflects:
䊏the expansion in the arbitrage portfolio made up of European public-debt securities financed with recourse to short-term funding1, so as to take advantage of the upward sloping yield curveG. This portfolio’s contribution to net interest income in the 2ndhalf of the year was 30.6 M.€ (and 5.3 M.€ on the 1sthalf);
䊏continuation of the loan spreads’ adjustment process2;
䊏the gradual improvement in the average interest margin on time deposits, with a positive (albeit slight) effect on net interest income;
䊏the virtual stabilisation of market interest rates
(3-month Euribor eased from 0.9% at the end of July to 0.7% at the end of December), which permitted alleviating the pressure for the narrowing of spreads on sight deposits.
Analysis of the trend in spreads and volumes The unit margin on average interest-earning assets declined from 1.47% in 2008 to 1.20% in 2009, which mainly reflects the increase in the average cost of time deposits and the contraction in the average spread on sight deposits, given the reasons pointed out before.
The spread between the average interest rate on
Customer loans and the average interest rate on Customer deposits shrank from 2% in 2008 to 1.11% in 2009, despite the fact that BPI continued to adjust credit spreads.
The volume effect generated by the 10% expansion in average interest-earning assets (+ 3 157 M.€) in 2009 did not permit compensating for the decrease in the above-mentioned unit margin.
The increase in interest-earning assets was primarily due to the reinforcement from midway through the year of the portfolio of European public-debt securities. For their part, the Customer loans and deposits portfolios grew in terms of average balances by 1.8% (+ 482 M.€) and 4.4% (+ 885 M.€), respectively.
Report | Financial review 83 Domestic activity
1) Given that the investment made resulted in an increase in assets eligible for ECB funding and therefore guarantees its own funding.
2) On the date of the renewal of operations in the corporate loan portfolio and for new operations in the majority of segments. A significant portion of the interest earned on the loan portfolio is indexed to market rates by way of a non-reviewable contractual spread during the life of the operation, as is the case with virtually the entire mortgage loan portfolio (which accounts for around 40% of the loan portfolio in domestic operations).
p. 32 ÆÅ
Commissions
Commissions and other net income increased by 2.6%
(+6.6 M.€) in 2009 as a result of the 13.7% rise (+24.1 M.€) in commercial banking commissions, which offset the decrease in commissions more directly related to the capital markets – chiefly asset-management commissions (-16.6 M.€).
Domestic activity
Commissions in 2009
Chart 77 Commercial
banking 76%
Investment banking 7%
Asset management 17%
11% 17%
Insurance
23%
6%
Loans and guarantees
14% 7%
22%
Cards Deposits Other
1) BPI Vida's remunerated assets and liabilities and corresponding interest income and expense were excluded from the table for the reason that the interest income and expense earned on capitalisation insurance is essentially recorded in the captions “Gross margin on unit links” and “Technical results of insurance contracts”.
2) Bonds and other fixed-income securities in the portfolio of dealing assets and in the portfolio of assets available for sale and placements with credit institutions.
3) Deposits, checks, orders payable and other Customer resources.
4) Amounts owed to central banks and to other credit institutions and financial liabilities held for trading, excluding derivatives, includes senior and subordinated debt securities and participating bonds.
Average interest rates on remunerated assets and liabilities Amounts in M.€
Average interest rate Interest
Average balance1
2009 Average
interest rate Interest
Average balance1
2008
Interest-earning assets Loans to Customers
Companies, institutionals and project finance 1 12 797.1 705.9 5.5% 12 844.7 393.4 3.1%
Mortgage loans 2 9 748.8 528.0 5.4% 10 285.0 303.1 2.9%
Other loans to individuals 3 1 245.3 89.9 7.2% 1 260.0 84.9 6.7%
Loans to small businesses 4 2 590.1 170.6 6.6% 2 520.7 99.7 4.0%
Other 5 810.8 49.0 6.0% 763.5 12.5 1.6%
[= Σ 1 to 5] 6 27 192.2 1 543.4 5.7% 27 673.9 893.6 3.2%
Other interest-earning assets2 7 4 786.7 232.6 4.9% 7 462.0 250.8 3.4%
[= 6 + 7] 8 31 978.9 1 776.0 5.6% 35 136.0 1 144.4 3.3%
Interest-bearing liabilities
Customer resources3 9 19 899.7 732.4 3.7% 20 784.7 440.3 2.1%
Financial liabilities associated
to transferred assets 10 2 559.9 117.0 4.6% 1 882.1 81.1 4.3%
Other interest-bearing liabilities4 11 9 989.2 482.9 4.8% 12 593.2 312.3 2.5%
[= Σ 9 to 11] 12 32 448.8 1 332.3 4.1% 35 259.9 833.7 2.4%
Subtotal [= 8 - 12] 13 443.6 1.45% 310.7 0.89%
Other income and costs 14 25.1 26.3
Trading derivatives 15 6.7 50.4
Hedging derivatives 16 (5.1) 32.9
Narrow net interest income [= Σ 13 to 16] 17 470.4 1.47% 420.3 1.20%
Intermediation margin
(= interest rate on loans – interest rate
on Customer resources) [= 6 - 9] 18 2.00% 1.11%
Net interest income as % ATA 19 1.24% 1.05%
Euribor 3 months (annual average) 20 4.6% 1.2%
Euribor 3 months (3 month moving average) 21 4.8% 1.6%
Table 37
The behaviour of commercial banking commissions benefited from the adjustments made to the schedule of service charges that BPI has made since the final quarter of 2008.
Commissions from asset management and investment banking which had been severely affected by the international financial crisis, evidence from the 2nd quarter of 2009 a positive trend, reflecting the increase in the value of managed assets and capital market operations. Despite the recovery noted, the aforesaid commissions were still 26.8% and 4.3% respectively lower than those earned in 2008.
Profits from financial operations
Profits from financial operations in 2009 were 92.7 M.€, which compares with the negative figure of 20.2 M.€ recorded last year.
The aforementioned increase of 112.9 M.€ in the profits from financial operations is strongly influenced by the accounting impact of the recording in 2008 of the 94.5 M.€ loss realised on the sale of the shareholding in BCP.
Report | Financial review 85 Domestic activity
As % of net operating revenue
07 09
06 08
05
Profits from financial operations 2005 to 2009
1) Excluding realised capital loss on the sale of BCP shares.
2) 2008 adjusted:
profits from financial operations – excludes capital loss on the sale of BCP shares;
net operating revenue – excludes that capital loss and the capital gain realised on the sale of a minority equity interest in BFA.
Commissions and other similar income (net) Amounts in M.€ Δ%
2009 2008
Commercial banking
Loans and guarantees 1 49.1 61.5 25.1%
Cards 2 55.2 57.8 4.8%
Intermediation of insurance
products 3 32.8 36.7 11.8%
Deposits and related services 4 24.7 28.4 15.0%
Banking services 5 11.5 12.1 5.5%
Other 6 1.9 2.7 43.9%
[= Σ 1 to 6] 7 175.1 199.2 13.7%
Asset management 8 61.8 45.2 (26.8%)
Investment Banking
Brokerage and placing 9 13.8 13.6 (1.1%)
Corporate finance 10 3.5 2.8 (21.7%)
Other 11 1.5 1.6 6.8%
[= Σ 9 to 11] 12 18.9 18.0 (4.3%)
Total [= 7 + 8 + 12] 13 255.8 262.5 2.6%
Table 38
Profits from financial operations Amounts in M.€ ΔM.€
2009 2008
Operations at fair value
Equities 1 10.1 8.3 (1.8)
Interest rate hedging 2 (1.5) 14.4 15.8
Structured products 3 (0.0) 15.5 15.5
Hedge funds 4 (12.6) 3.3 15.9
Currency 5 7.5 9.1 1.7
Other 6 (2.3) (0.0) 2.3
[= Σ 1 to 6] 7 1.1 50.5 49.4
Available for sale assets
Equities 8 (60.5) (1.6) 58.9
Bonds 9 (0.4) 47.4 47.8
Expected pension funds
return 13 161.2 123.4 (37.8)
Interest cost 14 (124.6) (127.3) (2.7)
[=13 + 14] 15 36.6 (3.9) (40.5)
Total [12 + 15] 16 (20.2) 92.7 112.9
Table 39
Domestic activity
Most of the components of profits from financial operations present a positive behaviour in 2009:
䊏gains on available-for-sale financial assets totalled 46.1 M.€, explained by the gains of 47.4 M.€ realised on the sale of bonds;
䊏the gains from operations at fair value were 50.5 M.€, and mainly resulted from:
䊏equity dealing gains of 8.3 M.€, associated with a long-short portfolio of equities with an allocated capital of 80 M.€;
䊏14.4 M.€ in gains on interest-rate hedging positions;
䊏gains of 15.5 M.€ on structured products derived from dealings on the secondary market in order to guarantee liquidity of the securities, the revaluation of positions and the early unwinding of hedging
operations;
䊏currency gains of 9.1 M.€ resulting from the currency margin on operations entered into by the commercial network with Customers.
䊏the financial income from pensions1was situated at 3.9 M.€2.
Other operating gains and losses
Other operating gains (net of losses) totalled 9.6 M.€ in 2009.
In the previous financial year, the caption “other operating gains”, with a value of 191.5 M.€ included 176.6 M.€ relating to the gain (before tax) realised on the sale of a 49.9% interest in BFA.