Mr. Jorge Jardim Gonçalves, Chairman and CEO of BCP, commented on the Group’s results and activity for 2003:
“The past year represented a period of unique challenges in the history of Millennium bcp, with our activity influenced by the weak economic environment in both Europe and Portugal, highly volatile financial and currency markets, the outbreak of conflicts with global impact and the strongly competitive environment in which we operate. Capital markets could not fail to reflect such challenging developments, giving a clear sign of prudent expectations towards the Group, as they became aware of our renewed rigour in terms of our financial discipline and our strong resolve to continue to pursue a strategy focused in retail banking in Portugal and abroad.
In financial terms, the Group results in 2003 demonstrate the consolidation of its development. This is supported by stable net interest margins and the recovery of growth in non-interest income. This was particularly seen in commission income and recoveries of overdue loans, reflecting the fine tuning of internal procedures. The reduction of operating costs was also a key factor in the overall improvement. We would like to highlight the strengthening of our financial position, borne by the increase in own funds, the improvements registered in efficiency, in loan delinquency and loss experience as well as the build-up of provisions and reserves in our banking and insurance activities. Our quarterly results showed a positive and sustained trend.
In the Portuguese market, the year of 2003 will be associated with the launching of the single brand – Millennium bcp. We do not want to jump to early conclusions but we can indeed acknowledge a positive reaction, which we will seek to further develop through the expansion of our business across our extensive customer base. Internationally, with particular reference given to the sustained dynamics of our operation in Greece and to the consolidation of the activities in Poland, we must acknowledge that the results, in financial terms, do not yet meet our expectations. We are confident that the plans and initiatives to develop our operations, founded in the pursuit of commercial excellence, will contribute to attaining our goals. Our commitment to the success of these operations remains unchanged; it is even strengthened as the results of our efforts become progressively apparent. The public discussion of Corporate Governance issues, initiated by the Portuguese Stock Market Regulator, CMVM, was seen by BCP as a very useful process, aiming to lead, in a constructive manner, all listed companies to adopt generally recognised best practices in this domain. The Group participated actively in this discussion as it recognised that this initiative could contribute to a strengthened perception by the markets of the trust deserved by all participants. With the public discussion, the Group decided also to provoke an internal debate of these issues, aiming to improve on the regulator’s goals, setting standards of governance that exceed the minimum standards of compliance, a stance we deem as fundamental. As a result of this debate and after consideration of best practices in the industry, the Group has further developed its processes of internal control, its risk management and Client Claims by introducing the functions of Compliance Officer, Risk Officer and Clients’ Ombudsman. At the same time, nine specialised commissions were created, some new, and others through the reinforcement of the functions and skills already held. These were combined into three major areas: Corporate Governance, Control and Operational Activity.
A final word on the process of disposal of “Seguros e Pensões”. Recently the Group informed the market that the sale of insurance activities distributed through non-banking channel was interrupted by ourselves. At that time, it was our judgement that the conditions required to complete such a sale did not exist, in particular considering the value of assets involved and the very favourable developments in profitability achieved in 2003. We would like to stress that this disposal will only be carried out when the right strategic rationale and financial terms, in terms of value creation for the shareholder, are assured.”
SIGNIFICANT DEVELOPMENTS
The introduction of Millennium bcp, a single brand for the BCP Group, the promotion of a set of initiatives to boost commercial activity and the unification of all internet banking services in a single portal denominated “milleniumbcp.pt” were the most significant developments in the activity of BCP Group, being worth mentioning:
− Introduction of a single brand for the BCP Group, representing the conclusion of a cycle of integrated companies and the simplification of different brands into a single identity, “Millennium bcp”. The new brand represents the transformation of four autonomous brands to a more powerful combined entity, translates the vision of a stimulating future, greater ambition, has an intrinsic value and a symbolic charge which enlarges the dimension of the BCP brand, and enriches its external image. The “Millennium bcp” brand congregates a unifying meaning, projecting a set key values: universality, intemporality, greatness, reliability, credibility, effectiveness, quality, dynamism, modernity, innovation, boldness, ambition, future vision and success;
− Interruption of the negotiations to sell Seguros e Pensões’ Life and Life through non-banking channels business with a selected potential buyer. This decision was based on differences between the evaluations of the parties involved regarding the assets included in the sale and the favourable performance of Seguros e Pensões’ operational profitability;
− Individual customers registered with Millennium bcp’s internet banking portal reached 1 million at the beginning of November, thus achieving the goal for the end of 2003 almost two months early. This achievement coincided with the unification of all internet banking services of Millennium bcp for individuals and companies under a single portal named millenniumbcp.pt;
− Continuation of the cycle of “Encontros bcp” conferences promoted in Portugal’s leading towns. This initiative aims to promote meetings with regional clients to analyse the economic development of each region and its potential, and at the same time to present the Group’s service offering;
− Launch of a Euro 1 billion issue of Residential Mortgage Backed Securities through a Special Purpose Vehicle named Magellan Mortgages Nº2, Plc., backed by a mortgage loans portfolio;
− Launch of a Euro 400 million issue of subordinated bonds by BCP Finance Bank under the Euro Medium Term Notes programme of Millennium bcp. This transaction took advantage of favourable conditions in international markets for the issue of this type of subordinated debt instruments (lower tier II), stemming from historically low spreads; − Launch by Millennium bcp of a new concept of insurance, bundling in a single product a
combination of basic protection products for individuals. Named “Protecção Familiar” it integrates insurance for health, life and personal accident, granting customers and their families a complete and effective protection.
FINANCIAL REVIEW
The consolidated net income of Millennium bcp amounted to Euro 437.7 million in 2003. This figure is not directly comparable to the one for the previous year due to changes to the Group’s structure: BCP’s increased shareholding in Poland’s Bank Millennium to 50.0% of its share capital at the end of 2002 led to Millennium being fully consolidated from 1 January 2003 (this investment was equity accounted until that date); Spain’s Banco Sabadell ceased to be consolidated from 1 January 2003 and, following the realignment of BCP’s strategic alliance with Eureko, BCP also ceased to consolidate its holding in this company from the beginning of the second half of 2002, having acquired the whole share capital of Seguros e Pensões, with this investment being reflected in BCP’s consolidated financial statements from 31 March 2003.
As a result of these changes, the following analysis is based on the quarterly evolution of the consolidated financial statements. Millennium bcp’s net income amounted to Euro 122.4 million in the last quarter of 2003, compared to Euro 105.1 million in the previous quarter. Return on equity stood at 17.4%, with return on assets amounting to 0.7%.
Net interest income amounted to Euro 1,466.0 million in 2003, totalling Euro 367.7 million
from October to December 2003 (Euro 367.0 million in the previous quarter). This performance reflected increased activity and a focus on maintaining adequate interest spreads (the net interest margin was stable at 2.5%, the same level seen in the third quarter), despite continuing strong competition, decreasing market interest rates (during 2003, the European Central Bank decreased its base rate by an aggregate amount of 0.75%, with a similar reduction of the 3-month Euribor, which stood at 2.12% at year end) and the effect of credit securitisation amounting to Euro 1,264 million in 2003.
Average Balances
4th Quarter 2003 3rd Quarter 2003
(Euro million, except yields) Average
Balance Interest Yield % Average Balance Interest Yield %
Interest earning assets
Deposits in banks (1) 5,666 149 10.27 4,264 137 12.57
Securities 2,994 38 4.98 3,522 38 4.26
Loans and advances to customers 48,512 556 4.49 48,544 567 4.57
Total 57,172 743 5.08 56,330 742 5.16
Fixed assets 1,296 1,396
Other non interest earning assets 8,574 8,216
Total assets 67,042 65,942
Interest bearing liabilities
Amounts owed to credit instit. (1) 12,357 153 4.85 12,815 162 4.95 Amounts owed to customers 29,989 104 1.36 29,413 103 1.37 Debt securities 13,710 85 2.43 13,337 79 2.31 Subordinated debt 3,184 33 4.01 2,911 31 4.18
Total 59,240 375 2.48 58,476 375 2.51
Non interest bearing liabilities 3,530 3,360
Total liabilities 62,770 61,836
Shareholders’ equity and minority int. 4,272 4,106 Liabilities, sh. equity and minority int. 67,042 65,942
Net interest income 368 367
Net interest margin(2) 2.52 2.55
____________________________________
(1) Includes interest related off-balance sheet operations.
(2) Net interest income as a percentage of average interest earning assets.
Charges for provisions for loan losses totalled Euro 473.0 million in 2003. In 2003 the Bank pursued a provisioning policy aimed at keeping adequate coverage of past due loans. The reduction of quarterly charges (from Euro 164.9 million in the third quarter to Euro 96.5 million in the last quarter of 2003) was due to the combined effect of two factors: on one hand, significant recoveries of overdue loans in the last quarter released provisions, and on the other the impact of new regulation (Regulation 8/2003 from the Bank of Portugal) that changed the definition and the provisioning requirements of doubtful loans, has caused charges to increase in the third quarter.
Income from securities stood at Euro 128.3 million in 2003, of which Euro 21.8 million in the
third quarter and Euro 29.3 million from October to December 2003. The improvement to Seguros e Pensões’ profitability in the last three quarters of 2003 led the appropriation of its net income by Millennium bcp to increase.
Net commissions amounted to Euro 590.5 million in 2003. The benefits stemming from
efforts to properly price the Group’s services according to the value delivered and the capital employed were reflected in the performance of commissions, up to Euro 163.0 million in the last quarter of 2003 from Euro 148.6 million in the previous quarter. Higher fees and commissions from cards contributed to this performance, and reflected an increased usage by customers leading to an increase of the average amount per transaction.
Other net operating income amounted to Euro 396.7 million in 2003, of which Euro 118.7
million was booked in the last quarter of 2003. This compares to Euro 122.0 million in the third quarter, which includes a capital gain of Euro 46.7 million from property sales to the pension fund, taken as a financial management measure in line with Millennium bcp’s strategy of optimising capital allocation. Credit recoveries of written-off loans increased to Euro 74.4 million in the last quarter, up from Euro 51.1 million the previous quarter. This performance was mainly attributable to the continuous reengineering of processes targeting a greater effectiveness of the recovering effort.
Other Income 2003 Change (Euro million) 4th Quarter 3 rd Quarter 2 nd Quarter 1 st Quarter 4Q / 3Q 3Q / 2Q Net commissions 163.0 148.6 143.1 135.7 9.7% 3.9%
Net trading income 20.9 42.6 37.1 28.6 -51.0% 14.9% Other net operating income* 118.7 75.3 81.3 74.6 57.7% -7.4%
Other income / Total income* 44.0% 42.9% 41.6% 39.9%
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* Domestic activity. Excludes non-recurring transactions.
Operating costs (staff costs, other administrative costs and depreciation) amounted to Euro
1,668.5 million in 2003. Operating costs evolved from Euro 412.6 million in the third quarter to Euro 417.4 million the last quarter of 2003. The impact of the rationalisation measures being implemented by Millennium bcp as part of its operating efficiency programme started in 2002, was particularly visible in terms of activity in Portugal, and was reflected by an improvement to domestic cost-income ratio to 56.9% in the last quarter from 57.6% in the third quarter. The contract signed with IBM in the second quarter of 2003 for the outsourcing of part of the Group’s IT infrastructure is worth mentioning, as it already had a positive impact in the costs related to the management of the IT platform in 2003.
The costs relating to the Group’s activity abroad, which comprises projects in a launch phase or still with significant growth rates, implying investments in the opening of new branches, the recruitment of staff and the set-up of promotional campaigns, also influenced the evolution of the operating costs at the consolidated level.
Staff costs, which amounted to Euro 864.0 million in 2003, decreased from Euro 216.5 million
evolution of this item resulted from the continuous staff downsizing measures underway, mainly in Portugal.
Other administrative costs totalled Euro 601.4 million in 2003, evolving from Euro 144.7
million from July to September 2003 to Euro 155.8 million in the last quarter the year. The increase was mainly due to the evolution of other administrative costs relating to the activity of the Group outside Portugal. The evolution of this item relating to the activity of Millennium bcp in Portugal was slower, benefiting from the continuous rationalisation efforts under the above mentioned operating efficiency programme. The impact of these rationalization measures was particularly important in the evolution of the costs related to advertising, communications, travelling, maintenance, repairs and stationary.
Operating Costs 2003 Change (Euro million) 4th Quarter 3 rd Quarter 2 nd Quarter 1 st Quarter 4Q / 3Q 3Q / 2Q Staff costs 212.2 216.5 216.9 218.5 -2.0% -0.2%
Of which: domestic activity 170.0 171.3 170.1 166.2 -0.8% 0.7%
Other Administrative Expenses 155.8 144.7 151.0 149.9 7.7% -4.2%
Of which: domestic activity 103.0 101.4 104.7 103.1 1.5% -3.1%
Depreciation 49.4 51.4 51.3 50.9 -3.8% 0.3%
Of which: domestic activity 38.4 31.9 33.3 32.7 20.2% -4.1%
Operating Costs 417.4 412.6 419.2 419.3 1.2% -1.6%
Of which: domestic activity 311.4 304.6 308.1 302.0 2.2% -1.1%
Operating costs / Total income* 56.9% 57.6% 58.8% 60.7%
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Loans to customers stood at Euro 49,177 million at 31 December 2003, compared to Euro
49,548 million at the end of September. This decrease was due to the securitisation in October of Euro 1,000 million of mortgage loans originated in Millennium bcp and BII, which affected the evolution of the portfolio of mortgage loans from Euro 13,377 million in 30 September 2003 to Euro 13,443 million at year end. The strong performance of this activity, in which Millennium bcp maintained its domestic leadership in terms of new loans granted during the quarter, was paramount for the improvement of the risk profile of the loan portfolio. The decrease of loans to companies, from Euro 32,983 million at the end of the third quarter to Euro 32,658 million in 31 December 2003, reflects the strict assessment criteria, together with the goals set for the reduction of exposure to specific clients and sectors and the improvement of the profitability levels of capital allocated to this activity.
Loans to customers
2003 Change
(Euro million) 31 Dec. 30 Sep. 30 Jun. 31 Mar. Dec. 03 / Sep. 03 Sep. 03 / Jun. 03
Individuals Mortgage loans 13,443 13,377 12,573 11,981 0.5% 6.4% Consumer loans 3,765 3,915 4,049 4,137 -3.8% -3.3% 17,208 17,292 16,622 16,118 -0.5% 4.0% Companies Services 8,695 8,796 9,144 9,012 -1.1% -3.8% Commerce 4,805 4,787 4,950 5,176 0.4% -3.3% Other 19,158 19,400 18,443 18,605 -1.3% 5.2% 32,658 32,983 32,537 32,793 -1.0% 1.4% Specific provision (689) (727) (633) (626) -5.3% 15.0% Total 49,177 49,548 48,526 48,285 -0.7% 2.1% Securitised loans 2,725 1,754 1,853 1,943 55.3% -5.3%
Total loans under management 51,902 51,302 50,379 50,228 1.2% 1.8%
Credit quality continued to improve, comparing favourably to September 30 figures. Past
due loans decreased to Euro 919.5 million at the end of 2003 from Euro 961.3 million at 30 September 2003. This figure represents 1.8% of total loans (the same figure at the end of third quarter). Non performing loans, calculated according to the definition given by the Bank of Portugal in the Circular Letter 98/03 of 5 November, stood at 1.99% of total loans (1.54% for the domestic activity). Provision coverage of total past due loans reached 128.8% at the end of 2003, increasing from 126.3% at the end of September. Loans to individuals presented a coverage ratio of 174.6% and a ratio of past due loans to total loans of 1.3%, while loans to companies saw coverage of 113.5% and a ratio of past due loans to total loans of 2.1%. Past Due Loans and Provisions at 31 December 2003
(Euro million) Past due
loans Provisions forloan losses
Past due loans / Total loans Provision Coverage Individuals Mortgage loans 94.8 201.3 0.7% 212.3% Consumer loans 135,6 200.9 3.6% 148.2% 230.4 402.2 1.3% 174.6% Companies Services 72.6 164.8 0.8% 226.9% Commerce 138.4 128.8 2.9% 93.0% Construction 140.0 122.0 2.6% 87.1%
Other international activities 30.4 68.3 0.6% 224.9%
Other 307.7 298.3 3.4% 97.0%
689.1 782.2 2.1% 113.5%
Total past due loans 919.5 1.184.4 1.8% 128.8%
Of which:
Total customers’ funds amounted to Euro 51,375 million at the end of 2003, comparing
favourably to Euro 51,151 million at 30 September 2003. Balance sheet customers’ funds stood at Euro 35,985 million, up from Euro 35,753 million at the end of September 2003, due mainly to the performance of time deposits, which increased 1.7% in the last quarter and to demand deposits, which increased 0.8% in the same period. Regarding off-balance sheet customers’ funds, which attained Euro 15.390 million at the end of 2003 (Euro 15,398 million at the end of the previous quarter), the 3.6% growth of capitalisation insurance, to Euro 7,102 million at 31 December 2003, from Euro 6,854 million at the end of the third quarter of 2003, is worth mentioning.
Total Customers’ Funds
2003 Change
(Euro million) 31 Dec. 30 Sep. 30 Jun. 31 Mar. Dec. 03 / Sep. 03 Sep. 03 / Jun. 03
Balance sheet customers’ funds
Repayable on demand 12,669 12,571 11,918 12,854 0.8% 5.5% With agreed maturity date and CDs 17,963 17,659 17,130 17,360 1.7% 3.1% Securities 5,353 5,523 5,588 4,879 -3.1% -1.1%
35,985 35,753 34,636 35,093 0.6% 3.2%
Off-balance sheet customers’ funds
Assets under management 8,288 8,544 9,159 9,038 -3.0% -6.7% Capitalisation insurance 7,102 6,854 6,604 6,539 3.6% 3.8% 15,390 15,398 15,763 15,577 -0.1% -2.3% Total 51,375 51,151 50,399 50,670 0.4% 1.5%
Solvency maintained roughly the same levels seen at the end of the third quarter of 2003.
The consolidated solvency ratio stood at 10.9% at 31 December 2003, according to the rules of the Bank of Portugal, and at 11.8% according to BIS principles (Tier One of 7.1%). The impact of the pension fund in the capital ratios of the fourth quarter was negative due to the change in basic assumptions to adjust it to market conditions (criteria consistent with International Accounting Standards), leading to a Euro 147 million increase in actuarial differences. The higher profitability level of the pension fund, when compared to basic assumptions, was not enough to offset this effect.
Solvency (BIS)
2003 Change
(Euro million) 31 Dec. 30 Sep. 30 Jun. 31 Mar. Dec. 03/ Sep. 03 Sep. 03/ Jun. 03
Tier One Capital
“Core” 2,658 2,684 2,669 2,665 -1.0% 0.6% Preference Shares 1,158 1,167 1,169 1,193 -0.8% -0.2%
Total 3,816 3,851 3,838 3,858 -0.9% 0.4%
Tier Two Capital
Debt 3,065 2,914 2,960 3,043 5.2% -1.6%
Deductions (572) (585) (599) (569) -2.2% -2.2%
Total 2,493 2,329 2,361 2,474 7.1% -1.4%
Total Regulatory Capital 6,309 6,180 6,199 6,332 2.1% -0.3%
Risk Weighted Assets 53,630 53,879 53,632 53,038 -0.5% 0.5%
Solvency Ratio Tier I 7.1% 7.2% 7.2% 7.3% Tier II 4.7% 4.3% 4.4% 4.6% Total 11.8% 11.5% 11.6% 11.9%
SEGMENTAL REPORTING
BCP Group offers a wide range of banking activities and financial services in Portugal and abroad. This section presents and discusses the performance of the Group’s main business segments: retail banking in Portugal, private banking and asset management, commercial banking, corporate banking and investment banking, and activities in foreign markets.
Retail Banking in Portugal
Retail banking in Portugal is the Group’s main segment, both in terms of business volumes and contribution to results, and comprises the retail distribution networks in Portugal. The networks operate as distribution and marketing channels, responding to the specific financial needs of various market segments. The networks perform a critical role in the Group’s cross-selling strategy as they distribute financial products and services originating from most business segments of the Group.
Retail Banking in Portugal
2003 Change (Euro million) 4th Quarter 3 rd Quarter 2 nd Quarter 1 st Quarter 4Q / 3Q 3Q / 2Q Contribution (net) 42.5 32.2 26.4 38.0 32.2% 21.7% Allocated capital 725.5 697.2 687.1 680.8 4.1% 1.5% Return on allocated capital 23.2% 18.3% 15.4% 22.7%
Risk weighted assets 15,267 14,091 13,839 13,634 8.3% 1.8% Cost to income ratio 55.1% 58.6% 57.7% 56.5%
Loans to customers 17,704 17,148 16,589 16,175 3.2% 3.4% Total customers’ funds 28,145 27,812 27,419 27,417 1.2% 1.4%
The contribution by retail banking in Portugal to consolidated earnings reached Euro 139.1 million in 2003. On a quarterly basis, the contribution for the fourth quarter amounted to Euro 42.5 million, a positive development compared to the previous quarter (Euro 32.2 million). The increased contribution is evident in the increase of the return on allocated capital, from 18.3% in the third quarter to 23.2% in the fourth quarter of 2003.
The increase in the contribution to consolidated earnings is explained by higher net interest income, benefiting from loan growth, and commissions, mainly on cards. It also benefited from lower operating costs, that led the cost-income ratio to improve to 55.1% in the last quarter of 2003 from 58.6% in the previous quarter.
The loan growth in the Portuguese retail segment, up to Euro 17,704 million at the end of 2003 from Euro 17,148 million at 30 September, has been primarily driven by mortgage loans. The BCP Group maintained market leadership in the domestic mortgage market in terms of quarterly new production.
Private Banking and Asset Management
The wealth management activities of Millennium bcp are carried out by the Private Banking network, dedicated to private clients with significant financial assets, and by AF Investimentos, a subsidiary specialising in asset management and which is the holding company for the investment fund management subsidiaries and the personal asset management business.
Private Banking and Asset Management
2003 Change (Euro million) 4th Quarter 3 rd Quarter 2 nd Quarter 1 st Quarter 4Q / 3Q 3Q / 2Q Contribution (net) 11.2 14.3 11.6 12.1 -22.0% 24.3% Allocated capital 291.0 250.4 174.0 178.2 16.2% 43.9% Return on allocated capital 15.3% 22.8% 26.7% 27.4%
Risk weighted assets 5,282 4,975 3,388 3,582 6.2% 46.8% Cost to income ratio 51.8% 36.7% 38.3% 39.7%
Loans to customers 5,180 4,923 3,425 3,617 5.2% 43.7% Assets under management 12,794 11,863 12,110 12,246 7.9% -2.0%
The contribution to consolidated earnings of Private Banking and Asset Management reached Euro 49.2 million in 2003. The contribution for the fourth quarter reached Euro 11.2 million, compared to Euro 14.3 million in the previous quarter. The allocation of some companies’ international business to the Private Banking network in the third quarter of 2003, in accordance with the specialised competences and financial solutions of the new commercial model of Millennium bcp led to higher operating costs, causing the quarterly contribution of this segment to decrease.
Loans and assets under management increased from Euro 4,923 million to Euro 5,180 million and from Euro 11,863 million to Euro 12,794 million from the 30 September to the end of 2003, respectively.
Commercial Banking
The corporate retail network, dedicated to corporate clients with annual turnover between Euro 7.5 million and Euro 100 million, carries out the commercial banking business of Millennium bcp. Commercial Banking 2003 Change (Euro million) 4th Quarter 3 rd Quarter 2 nd Quarter 1 st Quarter 4Q / 3Q 3Q / 2Q Contribution (net) 23.2 21.8 16.0 14.7 6.7% 37.0% Allocated capital 451.1 438.3 433.4 425.6 2.9% 1.1% Return on allocated capital 20.4% 19.7% 14.7% 14.0%
Risk weighted assets 9,257 8,861 8,647 8,529 4.5% 2.5% Cost to income ratio 17.8% 18.9% 21.1% 23.2%
Loans to customers 7,600 7,300 7,102 6,978 4.1% 2.8% Total customers’ funds 1,291 1,237 1,168 1,175 4.4% 5.9%
The contribution to consolidated earnings from Commercial Banking reached Euro 75.7 million in 2003. The growth seen in the network contribution, which increased to Euro 23.2 million in the fourth quarter from Euro 21.8 million in the third quarter, is largely explained by the increase in both net interest income, resulting from overall volume growth, and non-interest income, that more than offset higher provision charges.
As a result, return on allocated capital increased to 20.4% from 19.7%. The improvement in efficiency, as seen in the improved cost-income ratio, down to 17.8% from 18.9% in the previous quarter, was another factor contributing to the improvement in profitability.
Loans to customers of the corporate retail network increased to Euro 7,600 million as at 31 December from Euro 7,300 million as at 30 September, 2003, whereas total customers’ funds increased to Euro 1,291 million from Euro 1,237 million in the same period.
Corporate and Investment Banking
The Bank has a significant activity in corporate and investment banking. This includes businesses with corporates and institutional customers with a turnover in excess of Euro 100 million, either performed directly through the BCP Corporate retail network and through BCP Investimento, BCP’s subsidiary specialised in investment banking.
Corporate and Investment Banking
2003 Change
(Euro million) Quarter 4th Quarter 3rd Quarter 2nd Quarter 1st 4Q / 3Q 3Q / 2Q
Contribution (net) 33.9 44.2 41.0 33.0 -23.3% 7.6%
Allocated capital 714.9 736.5 755.7 748.1 -2.9% -2.5% Return on allocated capital 18.8% 23.8% 21.8% 17.9%
Risk weighted assets 14,275 14,473 15,066 15,102 -1.4% -3.9% Cost to income ratio 31.3% 37.7% 38.6% 32.9%
Loans to customers 7,230 7,151 7,571 7,642 1.1% -5.5% Total customers’ funds 1,707 1,581 1,457 2,068 8.0% 8.5%
Increased net income and lower operating costs were more than offset by decreased other income and higher provision charges, leading this segment’s net contribution to decrease to Euro 33.9 million from Euro 44.2 million in the previous quarter. Accumulated net contribution totalled Euro 152.1 million in 2003.
The decrease in operating costs resulted in an improvement in cost-income ratio from 37.7% in the third quarter to 31.3% in the last three months of 2003. Both loans to customers and total customers’ funds increased from 30 September 2003, to Euro 7,230 million from Euro 7,151 million, and to Euro 1,707 million from Euro 1,581 million, respectively.
Activities in International Markets
The activity of Millennium bcp in international markets is carried out by banking subsidiaries located in markets with high growth potential or with historical Portuguese links. These include Bank Millennium (Poland), NovaBank (Greece), BankEuropa (Turkey), Banco Comercial de Macau (China), Banco Internacional de Moçambique (Mozambique), Banque BCP (France and Luxembourg) and bcpbank (USA and Canada).
Activities in International Markets
2003 Change (Euro million) 4th Quarter 3 rd Quarter 2 nd Quarter 1 st Quarter 4Q / 3Q 3Q / 2Q Contribution (net) 12.6 (11.0) (18.3) (4.7) -- -- Allocated capital 671.7 745.9 719.5 719.7 -9.9% 3.7% Return on allocated capital 7.5% -5.8% -10.2% -2.6%
Risk weighted assets 5,197 5,763 5,711 5,617 -9.8% 0.9% Cost to income ratio 76.6% 103.1% 108.6% 99.6%
Loans to customers 4,331 4,532 4,304 4,296 -4.4% 5.3% Total customers’ funds 8,387 8,825 9,316 8,503 -5.0% -5.3%
The activity of Millennium bcp in international markets returned a negative contribution of Euro 21.4 million in 2003. This amount reflects increased total income, notably non-interest income, the improvement to operational efficiency, resulting from lower operating costs and a non-recurring impact (booking of deferred tax credits) relating to the application of International Accounting Standards by NovaBank and BankEuropa. The impact of these items was more than offset by lower business volumes, higher provisioning and exchange rate devaluations.
ECONOMIC ENVIRONMENT
The international political and economic situation varied greatly throughout 2003. The first months were influenced by the uncertainty associated to the war in Iraq, by the volatility in financial markets and by the general economic stagnation. The rapid resolution of the military conflict in Iraq, the expansionary nature of macroeconomic policies in main industrialised countries and the high degree of correction of some excesses seen in the nineties contributed to the consolidation of economic recovery in the USA, the stabilisation of eurozone economic activity, higher than expected economic growth in Japan and to the improvement in conditions in emerging economies in the second half of 2003. However, the persistence of risks, such as the external and budget inbalances in the USA, may limit the strength and sustainability of worldwide economic expansion in the mid term.
The behaviour of most financial markets was very positive in 2003, benefiting from the dissipation of uncertainty upon the end of the war in Iraq, from the expansionary nature of monetary policy in main industrialised countries and from the international economic recovery. Short term interest rates in USA and in the euro area stood relatively stable after the cuts in reference interest rates in the first semester of 2003, while the long term yields showed an upward trend from the Summer onwards, reflecting the signs of acceleration of economic activity, the deterioration of the government budgetary inbalances and the rebalancing of investment portfolios towards riskier assets, which positively influenced the equity markets. In 2003, the Dow Jones index rose by 25.3%, while the Eurstoox50 increased 15.7%; in Portugal, after three consecutive years of falls, the PSI-20 index increased 15.8%. In Portugal, GDP decreased by around 1% in 2003, essentially due to the reduction of private consumption, strong contraction of investment and efforts towards public spending restraint, which were only partially offset by the positive contribution of net foreign demand. The process of endogenous adjustment to the unsustainable high growth rates of consumption and investment at the end of the nineties, stimulated by the fall of interest rates associated with the introduction of the euro, was for a key factor in these developments in the Portuguese economic conditions. In the second half of 2003, there were signs of an upturn in economic activity, and GDP posted less negative growth rates, benefiting from the favourable developments in the international environment, from the considerable degree of adjustment of spending by households and corporates already achieved, the expansionary monetary policy and slight improvement in confidence.
According to the information available, domestic credit (excluding the Public Administration and monetary financial institutions) grew by around 6.5%, yoy, in 2003, against 9.8% in 2002. Credit to corporates decelerated to 3% in November (7.5% in 2002), while loans granted to individuals decelerated to around 10% (+12% in 2002). The postponement of investment and durable goods consumption decisions, as well as the more restrictive credit granting policies pursued by banks have contributed to the slowdown of credit, albeit attenuated by the persistence of historically low interest rates, as well as by the widening of the maximum maturity limit of mortgage loans and the intensification of competition among credit institutions.
SHARE PRICE INDICATORS
2003
4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
Shares outstanding
end of period (thousands) 3,257,401 3,257,401 3,257,401 2,326,715 Shares outstanding
average (thousands) 3,257,401 3,257,401 3,226,719 2,326,715 Closing price (euros)
(end of period) 1.77 1.79 1.53 1.25
Book value per share*
(end of period) 0.88 0.84 0.78 0.76
Earnings per share (euros) 0.04 0.03 0.04 0.04 Return on equity (ROE) 17.4% 17.4% 18.2% 17.9% ________________
* Adjusted by the impact of the share capital increase.
The proposal for the appropriation of profits, to be presented to the General Meeting of Shareholders, includes the distribution of Euro 195.4 million as dividends, corresponding to a Euro 0.06 dividend per share.
CONTACTS
Corporate Communication and Institutional Relations Department
Paulo Fidalgo
Tel.: +351 21 321 1741 E-mail: comunicar@bcp.pt
Investor Relations Department
Miguel Magalhães Duarte Tel.: +351 21 321 1081 E-mail: investors@bcp.pt
“DISCLAIMER”
This document may include certain sections or statements, in particular relating to the Banco Comercial Português (“BCP”) Group, that are neither reported financial results nor other historical information. These statements, which may include, without limitation, targets, forecasts, projections, statements regarding the possible development or possible assumed future results of operations and any statement preceded by, followed by or that includes the words “believes”, “expects”, “aims”, “intends”, “may”, “expect”, “estimate”, “project”, “anticipate”, “should”, “intend”, “plan”, “probability”, “risk”, “Value-at-Risk” (“VaR”), “target”, “goal”, “objective”, “will”, “endeavour”, “outlook”, “optimistic”, “prospects” or similar expressions or negatives or combinations thereof are or may constitute forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995, regulations and case law, or other applicable laws and regulations. By their nature, forward-looking statements are inherently predictive, speculative and are subject to risk and uncertainty. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by forward-looking statements. These factors include, but are not limited to, changes in economic condition in individual countries in which the BCP Group conducts its business and internationally, fiscal or other policies adopted by various governments and regulatory authorities of Portugal and other jurisdictions, levels of competition from other banks and financial services companies as well as movements in securities markets, currency exchange rates and interest rates, monetary policies, inability to hedge certain risks economically; the adequacy of loss reserves; acquisitions or restructurings; technological changes; changes in consumer spending and saving habits, changes in financial position or credit worthiness of our customers, obligors and counterparties, and the success of the Group in managing the risk involved in the foregoing.
BCP does not undertake to update or to release publicly any revision to any forward-looking statements included in this document, whether to reflect events, circumstances or unanticipated events occurring after the date hereof, or otherwise.
