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1 Management Report 2 Financial Statements and Notes

1 Management Report

1.2 Profit and loss account

€777 million

Income before provisions and taxes

The main components of the Profit and loss account from 2016 to 2020 are shown in Table II.1.2.

Net profit for the year 2020 was €535 million.

Table II.1.2 • Main Profit and loss account items 2016-2020 | EUR millions

2016 2017 2018 2019 2020 Δ 2020/2019

Interest margin 845 1,010 1,065 998 802 (196)

Realised gains/losses arising from financial

operations 177 (264) 80 50 49 (1)

Unrealised losses on financial assets and positions (77) (260) (12) (5) (70) (66) Income from equity shares and participating interests 33 33 39 72 56 (16)

Net result of pooling of monetary income 71 127 73 119 143 24

Total administrative costs 183 208 206 205 196 (9)

Staff costs 122 136 138 139 132 (6)

Supplies and services from third parties 48 56 52 47 45 (2)

Other administrative costs 1 1 1 1 1

-Depreciation and amortisation for the year 13 15 15 18 18

-Banknote production costs 15 23 13 7 10 3

Other net profit/loss (1) (7) 89 85 4 (81)

Income before provisions and taxes 850 408 1,115 1,106 777 (328)

Transfer from/to risk provisions (200) 520 50 - -

-Income before taxes 650 928 1,165 1,106 777 (328)

Income tax (209) (271) (359) (347) (242) 105

Profit for the year 441 656 806 759 535 (223)

Income before provisions and taxes was €777 million, representing a €328 million decrease from 2019. This decrease results essentially from the absence of non-recurring factors, as seen in the past two years, and from the reduction in the interest margin, particularly with the contribution of accrued interest payable on Lending to credit institutions, due to the increase in the volume and the interest rate rebate for TLTRO III operations in the second half of the year.

This reduction in the interest margin was partly offset by the increase in the net result of pooling of monetary income mainly due to the effect of the rise in the remuneration of deposits of credit institutions in the rest of the Eurosystem. Unrealised losses on financial assets and positions show an increase, compared to 2019, due to the USD devaluation. Administrative costs were lower than in previous years (€196 million, €9 million less than in 2019), essentially stemming from a reduction in the amount of staff costs and the impact of the COVID-19 pandemic on the Bank’s operating expenses.

Banco de Portugal • Annual Report • Activities and Financial Statements 2020

Chart II.1.16 • Developments in the main profit/loss items | EUR millions

845 1,010 1,065 998 802

Net result of pooling of monetary income Transfer from/to risk provisions Profit for the year

Realised gains/losses arising from financial operations + unrealised losses on financial assets and positions Total administrative costs

Income tax

1.2.1 Interest margin

In 2020 the Interest margin continued to be the main component of the Banco de Portugal’s income statement, with an amount of €802 million. However, it represents a €196 million sharp drop against 2019 figures (-20%), most noticeable in the increase in the share of interest and other similar expenses (Chart II.1.17).

Interest on securities held for monetary policy purposes Interest on longer-term refinancing operations

Management Report

€882 million

Interest income from securities held for monetary policy purposes

Given its contribution to the Interest margin, a first analysis shows interest income from the portfolio of securities held for monetary policy purposes at a total of €882 million in 2020, i.e. declining by €18 million from 2019. This was largely due to the maturing of high-yield securities under the SMP, which absorbed the significant increase in the volume of PEPP and PSPP, in the components of lower-yield government securities.

-€175 million

Impact on the interest margin associated with TLTRO III

The reduction in the interest margin in 2020 is mainly justified by an increase in interest payable associated with longer-term refinancing operations (by €153 million), which essentially refer to TLTRO III operations (totalling €194 million of interest in 2020). Higher interest on these operations (€175 million) was due to the significant increase in their volume, combined with the interest rate rebate in the second half of 2020 decided by the ECB. Also, in the context of longer-term refinancing operations, interest payable on TLTRO II operations was in turn lower than in 2019, given the maturing of these operations (€29 million reduction).

-€39 million

Decrease in held-to-maturity securities portfolio yield

Other negative contributions to this margin include the decrease in the held-to-maturity securities portfolio yield (-€39 million) due to the decrease in their amount and average rate of return, and the reduction in interest associated with the foreign currency trading portfolio (-€11 million compared to 2019). These impacts were partly offset by results obtained in gold investments (€34 million in 2020, +€11 million compared to 2019) and the increase in interest receivable from General government current accounts held by the Banco de Portugal (+€12 million compared to 2019).

1.2.2 Net result of financial operations and unrealised losses

€49 million

Realised gains/losses arising from financial operations

In 2020 Realised gains/losses arising from financial operations showed a positive cumulative value of €49 million, almost identical to that of 2019 (Chart II.1.18). These realised gains/losses are associated with foreign exchange operations and other financial operations with assets in the Bank’s trading portfolio. Positive results were also achieved from the sale of securities held for monetary policy purposes (€6 million), which resulted from compliance with the limits set by the rules of the relevant programmes.

Banco de Portugal • Annual Report • Activities and Financial Statements 2020

Chart II.1.18 • Net result of financial operations and unrealised losses | EUR millions 177

-264

80 50 49

-77

-260

-12 -5

-70

2016 2018 2020

LossesProfit

Realised gains/losses arising from financial operations 2017

Unrealised losses on financial assets and positions 2019

€70 million

Unrealised losses on financial assets and positions

As regards Unrealised losses on financial assets and positions, the overall amount recognised in 2020 (€70 million) was mainly related to potential exchange rate losses (€69 million), mostly associated with the portfolio of assets denominated in USD, due to the devaluation of the price of this currency. In accordance with the Eurosystem’s harmonised accounting rules, unrealised losses are recognised as expenses as at 31 December, while unrealised gains are taken to the balance sheet under Revaluation accounts’ items.

1.2.3 Net result of pooling of monetary income

€143 million

Net result of pooling of monetary income method by the Eurosystem, for the year 2020

In 2020, the item Net result of pooling of monetary income included (i) the 2020 net result of pooling of monetary income method by the Eurosystem (€142.7 million), and (ii) the net effect of the reversal of the Eurosystem’s specific provision set up in 2018 for securities included in the corporate sector purchase programme (CSPP) (€0.6 million).

Net result of pooling of monetary income grew by €24 million from the previous year, essentially explained by: (i) the reduction in the weight of the Banco de Portugal’s contributions to total Eurosystem interest related to current accounts and liquidity-absorbing operations and (ii) the reduction in interest from the Banco de Portugal in the SMP portfolio, and increase in interest from the rest of the Eurosystem in the CSPP portfolio. This effect was partially offset by the reduction in the proportion of deductions by the Banco de Portugal as regards interest in lending operations vis-à-vis the rest of the Eurosystem.

Management Report The aforesaid net effect of the reversal of the specific Eurosystem provision for losses on

monetary policy operations resulted from the recognition of an effective loss of €1.6 million which, however, had an associated provision of €2.2 million set up in 2018, which was reversed in full in 2020. This realised loss refers to securities under the corporate sector purchase programme (CSPP), which, despite not being included in the Banco de Portugal’s portfolio, as the Bank is not an active participant in this programme, is risk-shared at Eurosystem level.

1.2.4 Income from equity shares and participating interests

In 2020 this item basically recognises the dividends received by the Banco de Portugal, in particular those distributed by the ECB, i.e. ordinary and interim dividends, the latter referring to the results of securities held for monetary policy purposes in the ECB’s balance sheet.

1.2.5 Total administrative costs

€196 million

Total administrative costs

In 2020 Total administrative costs amounted to €196 million (Chart II.1.19).

Chart II.1.19 • Administrative costs | EUR millions

13 1 15 1 15 1 18 1 18 1

48 56 52 47 45

133 136 138 139 132

119955 220088 220066 220055 119966

2016 2017 2018 2019 2020

Supplies and services from third parties Depreciation and amortisation for the year Staff costs, on a comparable basis(a)

Other administrative costs

Total administrative costs, on a comparable basis(a)

Note: (a) For 2016, the value above includes, for comparability purposes, costs with early retirements, which were until then recognised in own funds.

Banco de Portugal • Annual Report • Activities and Financial Statements 2020

Chart II.1.20 • Staff costs | EUR millions

83 83 83 82 81

24 25 26 27 28

26 27 29 29 24

113333 113366 113388 113399 113322

2016 2017 2018 2019 2020

Liabilities for the Pension Fund and other post-employment benefits(a)

Excluding those related to supervision Related to supervision

Staff costs, on a comparable basis(a)

Note: (a) For 2016, the value above includes, for comparability purposes, costs with early retirements, which were until then recognised in own funds.

-€6 million

Decrease in Staff costs

In 2020 Staff costs showed a €6 million decrease (-5%) from 2019 (Chart II.1.20), mainly related to the decrease in expenses associated with early retirements (-€6 million), included in the component related to Costs with pension fund liabilities and other post-employment benefits.

This reduction is mainly due to a lower number of employees under these circumstances in 2020.

The remuneration component reflects a slight decline compared to 2019, largely related to factors arising from the COVID-19 pandemic, namely the per diems, due to the absence of business travels for international representation purposes, and to cuts in overtime work and in sick pay and occupational accidents allowances. These impacts absorbed the effect of the 0.3% update of wage scales, in line with negotiations between the banks represented by the Portuguese Banking Association (APB) and banking sector trade unions. As at 31 December 2020 the number of staff members employed by the Banco de Portugal remained unchanged compared to 2019 (1,700 employees).

Chart II.1.21 • Supplies and services from third parties | EUR millions

39 40 41 41 40

5

12 6

4 3

4488

5566 5522

4477 4455

2016 2017 2018 2019 2020

Related to extraordinary factors

Related to factors exogenous to the Banks's management Excluding costs with extraordinary or exogenous factors Supplies and services from third parties

3 4 5 2 2

Management Report

-€2 million

Decrease in Supplies and services from third parties, 23% of total administrative costs

The item Supplies and services from third parties (accounting for around 23% of total administrative expenses) fell by €2 million (Chart II.1.21). This was especially due to (i) the decrease in expenses associated with extraordinary factors, mainly related to legal and financial advice provided as part of the resolution measure applied to the Banco Espírito Santo (-€1 million) and (ii) the impact of the COVID-19 pandemic on those expenses (for which a net saving of around €1.7 million is estimated) and, in the opposite direction, (iii) the increase in expenses with security (+€0.5 million).

The COVID-19 pandemic crisis resulted in a cut in expenses, estimated at €3.2 million, with particular emphasis on costs associated with electricity and water consumption, travel and accommodation, events and training. On the other hand, there were additional expenses in Information Systems and Technologies, under the scope of Business Continuity in the setting up of conditions for remote working, as well as in the purchase of personal protective equipment and material for the sanitisation of people and goods. This additional expenditure is estimated to have totalled around €1.5 million.

Lisbon, 2 March 2021

BOARD OF DIRECTORS