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GROUP CAPITAL Capital ratios

Financial review

GROUP CAPITAL Capital ratios

GROUP CAPITAL Capital ratios

At 31 December 2009, the Tier I capital ratio (basis own funds / risk-weighted assets) stood at 8.6% (8.8% at the end of 2008). Core capital1was situated at 7.8% of risk-weighted assets (8% at the end of 2008). The own funds requirements ratio was situated at 11%.

The behaviour of the Tier I capital ratio reflects a 2.3%

decrease in own funds, while risk-weighted assets were 0.5% lower despite the 10% increase in total assets, to the extent that the latter’s growth was mainly the result of the reinforcement of the portfolio of sovereign debt issued in euro by Euro zone countries, with the result that it does not consume capital.

Accounting shareholders’ equity

In 2009, shareholders’ equity in the accounts, including minority interests, posted a 17.4% increase (+341.2 M.€), and at 31 December amounted to 2 302.7 M.€.

The principal factors explaining the above trend are as follows:

With positive impact,

䊏consolidated net profit generated in the year of 265.1 M.€, of which 175 M.€ is attributable to Shareholders and 90 M.€ attributable to BFA’s minority interests;

䊏the 265.4 M.€ decline in unrealised losses in the portfolio of available-for-sale financial assets, net of deferred taxes, and recorded in the fair value reserve4 (from 433.6 M.€ in 2008 to 168.2 M.€5in 2009).

With negative impact,

䊏the payment of dividends relating to 2008: 59.8 M.€ paid to Banco BPI Shareholders and 57.6 M.€ corresponding to BFA dividends paid to Unitel;

䊏the currency revaluation of investments, with a negative impact on Shareholders’ equity and minority interests of 78.7 M.€ (impacts of -40.3 M.€ on equity attributable to Banco BPI shareholders and -38.4 M.€ to minority interests). That impact was the result almost exclusively of the revaluation of BFA’s shareholders’ equity by virtue of the Kwanza’s depreciation against the Dollar and the Euro which took place in the year.

1) Core capital corresponds to basis own funds, before deductions relating to equity interests in credit institutions and insurance undertakings, and excludes preference shares. It mainly refers to share capital, share premium account, reserves, retained earnings and minority interests, excluding preference shares.

2) Change in the fair value reserve (net of deferred taxes) as a result of the available-for-sale financial assets revaluation.

3) Includes the dividends on the preference shares issued by BPI Capital Finance (indexed to three-month EuriborG) and the early payment of this dividend.

4) Effective from October 2008, through Bank of Portugal Notice 6 / 2008, unrealised gains and losses on the portfolio of available-for-sale bonds, without signs of impairment, which are recorded directly in shareholders’ equity, in the fair value reserve, ceased to be included in Tier II and Tier I capital respectively. Therefore the decline in unrealised losses in the bonds portfolio that occurred in 2009 had no impact in own funds.

5) The unrealised losses in the available-for-sale financial assets, before deferred taxes, decreased by 322.5 M.€, from 540.9 M.€ in 2008 to 218.5 M.€ in 2009.

6) Preference shares are recorded in the caption “Minority interests”.

Shareholders’ equity and minority interests structure

Chart 66

Shareholders´ equity and minority

interests trend in 2009 Amounts in M.

Total

at year-beginning 1 1 498.1 463.4 1 961.5 2008 dividend payment 2 (59.8) (57.6) (117.3)

2009 net profit 3 175.0 90.0 265.1

Change in the fair value reserve, net

of taxes2 [= 5 + 6] 4 265.4 265.4

Of which:

Change in the fair value reserve

(pre-tax) 5 322.5 322.5

Change in deferred

taxes 6 (57.1) (57.1)

Foreign exchange

translation of subsidiaries 7 (40.3) (38.4) (78.7)

Other 8 8.6 (1.8)3 6.8

Shareholders´ equity and minority interests at

year-end [= Σ (1 to 4) + 7 + 8] 9 1 847.0 455.7 2 302.7 Table 29

p. 74 ÆÅ

Report | Financial review 77 Capital

Own funds

At the end of 2009, basis own funds totalled

2 245.3 M.€, down 52.1 M.€ (-2.3%) on the December 2008 figure.

Total own funds were 2 866.7 M.€, 96.9 M.€ (-3.3%) less than in 2008.

At the end of 2009, BPI did not use the facility afforded by the temporary widening of the corridor envisaged in Bank of Portugal’s Notice 11 / 20081, given that the accumulated negative actuarial and financial variances of the pension funds at that date were fully accommodated inside the accounting corridor contemplated by the IAS / IFRS.

1) Bank of Portugal Notice 11 / 2008 laid down a transitional regime for recognising in a phased manner over 4 years, part of the actuarial and financial variances of the pension funds which occurred in 2008. The transitional regime envisaged inNotice 11 / 2008 was already applied with respect to the reporting of financial information at 31 December 2008.

According to the Bank of Portugal’s rules, the negative actuarial variances of the pension funds, as regards that part which cannot be accommodated within the accounting “corridor”, are deducted from basis own funds. Notice 11 / 2008 widened the corridor considered for purposes of determining the amount of the actuarial losses to be deducted from own funds in 2008 by 383.1 M.€ in the case of BPI, by allowing adding to the accounting corridor the amount of the negative actuarial variances recorded in 2008 (544.3 M.€), after deducting the pension funds’ expected income in that year (161.2 M.€). This addition will be gradually reduced over the next 4 years until its extinction at 31 Dec. 2012: 100% (383.1 M.€) until 30 Dec. 2009; 75% (287.3 M.€) from 31 Dec. 2009 until 30 Dec. 2010; 50% (191.5 M.€) from 31 Dec. 2010 until 30 Dec. 2011; 25% (95.8 M.€) from 31 Dec. 2011 until 30 Dec.

2012; and 0% after 31 Dec. 2012.

2) In accordance with Bank of Portugal Notice 6 / 2008, unrealised gains and losses on the portfolio of available-for-sale bonds are not considered in the own funds calculation.

3) The amount of the loan provisions (specific and general), calculated according to the Bank of Portugal’s rules, which exceeds the value of the impairment allowances recognised in the consolidated accounts, is deducted from basis own funds. The part of this figure which corresponds to general provisions, is then added to complementary own funds.

4) The impacts of the transition to IAS / IFRS are recognised in own funds until 2014, including.

Own funds requirements ratios

Calculated according to the Bank of Portugal rules Amounts in M.

2009 2008

Shareholders' equity and minority interests 1 1 961.5 2 302.7

Dividends attributable to BPI Shareholders 2 (60.1) (70.2)

BFA dividends attributable to minority interests 3 - (50.3)

Exclusion of:

Fair value reserve in bonds available-for-sale portfolio (net of deferred taxes) not considered in own funds2 4 448.7 201.0 Positive fair value reserve in equities available-for-sale portfolio (45% of this amount in included in the Tier II) 5 (21.9) (22.5)

Revaluation reserves of fixed assets included in Tier II 6 (8.5) (8.5)

Adjustments to preference shares 7 32.1 10.1

Other adjustments 8 1.8 (5.8)

[= Σ 4 to 8] 9 452.1 174.2

Inclusion of:

Contributions to the pension funds still not disclosed as a cost 10 (0.6) (0.4)

Intangible fixed assets 11 (15.4) (9.7)

Loan provisions calculated in accordance with Bank of Portugal rules deducted of loan impairment recognised

in the consolidated income statement3 12 (79.3) (128.8)

Deduction of participating interests in credit institutions and insurance companies 13 (80.7) (68.2)

Deferred adjustments resulting from the transition to IAS / IFRS4 14 119.9 96.1

[= Σ 10 to 14] 15 (56.0) (111.0)

Basis own funds [= 1 + 2 + 3 + 9 + 15] 16 2 297.5 2 245.3

of which, core capital 17 2 082.7 2 040.8

of which, preference shares 18 295.5 272.8

of which, deduction of participating interests in credit institutions and insurance companies 19 (80.7) (68.2)

Complementary own funds 20 666.1 621.4

of which, complementary own funds before deductions 21 751.3 692.0

of which, deduction of participating interests in credit institutions and insurance companies 22 (80.7) (68.2)

of which, other deductions 23 (4.5) (2.4)

Total own funds [= 16 + 20] 24 2 963.6 2 866.7

Total own funds requirements 25 2 095.3 2 084.8

Risk-weighted assets [= 25 x 12.5] 26 26 191.7 26 059.9

Own funds requirements ratio [= 24 / 26] 27 11.3% 11.0%

Tier I [= 16 / 26] 28 8.8% 8.6%

Core Tier I (excluding preference shares) [= 17 / 26] 29 8.0% 7.8%

Preference shares as percentage of Tier I, before deductions of interests in credit institutions

and insurance companies [= 18 / (16 - 19)] 30 12.4% 11.8%

Table 30

Capital

Own funds requirements

Consolidated net total assets grew by 10.3% in 2009, without originating however an increase in capital requirements. Indeed, risk-weighted assets registered a drop of 0.5%.

Balance sheet expansion in 2009 was largely due to the increase in the portfolio of European public-debt securities in euro, which benefits from zero risk weightings.

On the other hand, own funds requirements stemming from the loan portfolio (whose growth was 2.7%) registered a 0.2% increase, which reflects the combined effect of a decrease in the loan portfolios in the corporate and small businesses segments, and the modest increase in the home-loans portfolio which consumes relatively less capital.

At 31 December 2009

1) BPI adopted in 2008 the standard method for calculating the requirements for covering credit risk as part of the adoption of the Basle II rules.

2) With the adoption of Basle II, own funds requirements began to be considered for cover of operational risk. BPI adopted the basic indicator method for purposes of determining the relevant amount.

Own funds requirements

Calculated according to Bank of Portugal rules Amounts in M.

Risk-weighted

Liquid assets 1 1 315.3 3.5% 45.7 1 690.8 3.0% 51.4

Loans to credit institutions 2 3 250.8 22.0% 714.4 1 799.0 22.0% 394.9

Loans to Customers 3 26 890.0 65.2% 17 529.4 27 604.8 63.6% 17 555.8

Bonds, equities portfolio and investments 4 3 710.1 58.8% 2 180.2 9 162.1 24.5% 2 248.7

Tangible fixed assets 5 331.2 100.0% 331.2 253.2 100.0% 253.2

Sundry assets 6 388.5 86.8% 337.4 398.4 79.5% 316.5

[= Σ 1 to 6] 7 35 885.9 58.9% 21 138.2 40 908.3 50.9% 20 820.5

Off-balance sheet items 8 2 422.3 2 410.3

Risk weighted assets

(credit risk)1 [= 7 + 8] 9 23 560.5 23 230.8

Own funds requirements

Credit risks [= 9 x 8%] 10 1 884.8 1 858.5

Securitisation operations 11 36.0 31.9

Market risks 12 17.0 28.2

Operational risk2 13 157.5 166.2

[= Σ 10 to 13] 14 2 095.3 2 084.8

Risk weighted assets [= 14 x 12.5] 15 26 191.7 26 059.9

Table 31

Report | Financial review 79 Capital

Pension fund

At 31 December 2009, the net assets of the staff pension funds totalled 2 463.8 M.€, which guaranteed the funding of 108% of the value of pension obligations.

Pension liabilities to Employees

At the end of 2009, BPI changed certain financial assumptions used in the calculation of liabilities, giving rise to a decrease in these of 84.1 M.€ (positive actuarial gain). The discount rate was cut from 5.5% to 5.25%, the salary growth rate reduced from 3.5% to 3.0% and the pensions’ growth rate trimmed from 2.25%

to 1.75%.

At 31 December 2009, pension liabilities amounted to 2 274.6 M.€ and covered a universe of 7 227 current Employees, 7 394 pensioners and 2 846 former Employees.

Returns

In 2009, the pension funds achieved an effective return of 14.7%, which is therefore well above the 5.5%

pension fund return assumption adopted for the period.

It is worth noting that up until the end of 2009, the fund’s effective return since its creation in 1992 was on average 9.8% per annum, and that in the last ten, seven, five and three years, the effective annual return was on average 7.2%, 8.5%, 7.4% and 4%, respectively.

Actuarial and financial variances

The actuarial and financial variances recorded in 2009 were a positive 295.2 M.€ and mainly resulted from:

䊏a positive variance of 194.9 M.€ between the pension funds’ income and the relevant financial assumption;

䊏a positive variance of 84.1 M.€ stemming from the change in the above-mentioned actuarial assumptions.

Selected indicators Amounts in M.

2009 2008

Total past service pension liabilities 1 2 298.2 2 274.6

Pension funds 2 2 269.41 2 463.8

Financing surplus [= 2 - 1] 3 (28.8) 189.2

Financing of pension liabilities [= 2 / 1] 4 98.7% 108.3%

Accounting corridor 5 229.9 246.4

Negative deviations recorded

in the corridor 6 (229.4) (207.0)

Available margin to accommodate

negative deviations 7 0.4 39.4

Positive (/ negative) deviations

outside the corridor 8 (272.4) 0.3

Pension funds return 9 (20.5%) 14.7%

Table 32

14%

Banco BPI pension funds’

assets

At 31 December 2009

7.2

14.7

8.5 7.4 9.8

Pension fund annual average return

Since signalled years until 2009

%

Chart 70 Real

estate 7%

41%

19%

Indexed-rate Fixed-rate

Other Portuguese

Chart 69 4.0

Bonds 55%

Equities 26%

14%

5%

Foreign

02 09

99 04

92 06

1) Including contributions made at the beginning of 2009.

Capital

At the end of December 2009, BPI had 207 M.€ of negative actuarial variances which were fully recorded within the 10% accounting corridor envisaged in the IAS (equivalent to 246.4 M.€), with the result that BPI still had an available margin of 39.4 M.€ for accommodating negative actuarial variations without giving rise to an impact on the income statement.

Accordingly, BPI did not need to resort to the facility of the transitional widening of the corridor provided for in Bank of Portugal Notice 11 / 2008 for accommodating negative variances falling outside the accounting corridor.

Liabilities for the Directors’ complementary pension plan At 31 December 2009, the liabilities for the

complementary pension plan for Directors totalled 27.7 M.€ and were 101%1covered by the pension fund.

1) Including a contribution of 1.3 M.€ to the pension fund made in January 2010.

2) Subsidiaries included in the geographical business segment designated Domestic activity.

Accounting corridor usage

Financing of pension liabilities

th.M.€ BoP Notice 11 / 2008 Chart 71

M.€

(291) 227

247 280 230 246

611

According to Bank of Portugal rules, the Group Employees’

pension funds fully guarantee the old-age and survivors’

retirement pensions of Employees and former Employees of the banks (Banco BPI and Banco Português de

Investimento) and of the subsidiaries which adhered to the Vertical Collective Employment Accord (BPI Gestão de Activos and Inter-Risco)2, excluding those Employees admitted with effect from 3 March 2009 who were not previously beneficiaries of a substitute regime of the social security scheme at another banking institution.

Employees recruited from 3 March 2009 onwards who were not in the service of another banking institution at which the social security scheme’s substitute regime was in force, are obligatorily covered by the social security scheme’s respective general regime in accordance with Decree-Law 54 / 2009 of 2 March. These Employees are also covered by a defined-contribution pension plan in addition to the pension-related benefits they will be entitled to under the Social Security scheme.

Investment policy

The Banco BPI pension fund’s investment policy is defined in the management contract and takes into consideration for each asset class the core objectives indicated below.

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