BANCO COMERCIAL DE MACAU, S. A.

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2 BANCO COMERCIAL DE MACAU, S. A. DIRECTORS REPORT AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2007

3 CONTENTS Note Page Note Page Directors report 3 3 Critical accounting estimates and assumptions 34 Independent auditors report 5 4 Net interest income 35 Income statement 6 5 Net fee and commission income 35 Balance sheet 7 6 Dividend income 36 Statement of changes in equity 8 7 Net trading income 36 Cash flow statement 9 8 Other operating income 36 1 General information 10 9 Operating expenses 36 2 Summary of significant accounting policies Provisions for bad and doubtful debts Basis of preparation Income tax expense Transition to MFRS Cash and balances with banks Foreign currency translation- Functional 13 AMCM treasury bills 38 and presentation currency Interest income and expense Placement with and loans and advances to banks Fee and commission income and expense Loans and advances to customers Dividend income Reconciliation of allowance accounts for losses on loans and advances to customers Treasury bills Derivative financial instruments Financial assets Available-for-sale investments Impairment of financial assets Held-to-maturity investments Financial liabilities Other investments Derivative financial instruments Intangible assets Repossessed assets Premises and other fixed assets Premises and other fixed assets Other assets Intangible assets Balances and deposits from other banks Employee benefits Deposits from customers Provisions Certificates of deposit issued Deferred income tax Other liabilities Leases Deferred income tax Cash and cash equivalents Contingent liabilities and commitments Financial guarantee contracts Share capital Loan commitments Reserves Approval of financial statements

4 BANCO COMERCIAL DE MACAU, S. A. DIRECTORS REPORT FOR THE YEAR ENDED 31 DECEMBER 2007 The directors of Banco Comercial de Macau, S. A. ( the Bank or BCM ) submit their report together with the audited financial statements for the year ended 31 December Principal activities BCM is a limited liability company by shares incorporated and domiciled in the Macau Special Administrative Region ('MSAR' or Macau ), where it engages in general banking business by providing retail, commercial and private banking, and other related financial services to its customers. Other particulars of the Bank are set out in note 1 to the financial statements. Results and appropriations The results of the Bank for the year ended 31 December 2007 are set out in the income statement on page 6. The following appropriations of 2007 net profit will be proposed by the Directors for approval by the Shareholders at the forthcoming Annual General Meeting: Macau Patacas (MOP) Retained earnings at 31 December 2006 after appropriations (restated) 261,144,144 Net profit for the year ended 31 December ,909,192 Retained earnings at 31 December ,053,336 Transfer to legal reserve (10%) (6,690,919) Retained earnings at 31 December 2007 after appropriations 321,362,417 The Directors do not recommend the payment of any dividend. Shareholders equity Movements in shareholders equity of the Bank during the year are set out in the statement of changes in equity on page 8. Fixed assets Details of the movements in fixed assets of the Bank are shown in note 22 to the financial statements. Directors The Directors during the year and up to the date of this report are: David Shou-Yeh Wong (Chairman) Hon-Hing Wong (Derek Wong) Gary Pak-Ling Wang Harold Tsu-Hing Wong Lung-Man Chiu (John Chiu) (Chief Executive Officer) Leonel Leonardo Guerreiro da Costa (Retired on 29 March 2007) Kenneth Chan Sou Chao António Candeias Castilho Modesto (Appointed on 29 March 2007)

5 BANCO COMERCIAL DE MACAU, S. A. DIRECTORS REPORT FOR THE YEAR ENDED 31 DECEMBER 2007 (continued) There being no provision in the Bank s articles of association for retirement by rotation, all the remaining Directors continue in office. Directors interests in contracts None of the directors had a beneficial interest in any contract of significance to the business of the Bank to which the Bank, any of its holding companies, or fellow subsidiaries, was a party during the year. Directors interests in equity or debentures At no time during the year was the Bank, any of its holding companies or fellow subsidiaries a party of any arrangement to enable the Bank s directors to acquire benefits by means of the acquisition of shares or debentures of the Bank. Management contracts No contracts concerning the management and administration of the whole or any substantial part of the business of the Bank were entered into or existed during the year except for an agreement ('Computer and Administrative Services Agreement') with indefinite duration concerning the provision of services by Dah Sing Bank, Limited ('DSB'), the parent company, to the Bank, which was signed between the two entities on 1 November 2006, the commencement date. The Bank shall pay to DSB, for services rendered to the Bank, per DSB's periodic billing. DSB and the Bank shall review the fees annually at the end of each year. Under the terms of the Computer and Administrative Services Agreement, either party can terminate it by giving to the other no less than 9 months written notice or giving notice in writing to the other party if the other party commits any material breach of any terms of the agreement and shall have failed to remedy the breach within 30 days after the receipt of the request in writing. Auditors The financial statements have been audited by Lowe Bingham & Matthews - PricewaterhouseCoopers who retire and, being eligible, offer themselves for reappointment. On behalf of the Board (Signed on the original) Lung-Man Chiu (John Chiu) Chief Executive Officer (Signed on the original) Gary Pak-Ling Wang Director Macau, 27 February

6 INDEPENDENT AUDITORS REPORT TO THE SHAREHOLDERS OF BANCO COMERCIAL DE MACAU, S. A. (Incorporated in Macau with limited liability by shares) We have audited the accompanying financial statements of Banco Comercial de Macau, S. A. ( the Bank or BCM ) set out on pages 6 to 45, which comprise the balance sheet as at 31 December 2007, and the income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and explanatory notes. Directors responsibility for the financial statements The Directors are responsible for the preparation and the true and fair presentation of the financial statements in accordance with Financial Reporting Standards issued by the Government of the Macau Special Administrative Region. These responsibilities include designing, implementing and maintaining appropriate internal control relevant to the preparation and the true and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; making appropriate estimates that are reasonable in the circumstances; and keeping proper and accurate accounting records. Auditors responsibility Our responsibility is to express an opinion on these financial statements based on our audit and to report our opinion solely to you as a body, in accordance with our agreed terms of engagement and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. We conducted the audit in accordance with Auditing Standards and Technical Standards on Auditing issued by the Government of the Macau Special Administrative Region. Those standards require that the auditor comply with relevant ethical requirements and plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free from material misstatement. An audit includes performing appropriate audit procedures to obtain audit evidence supporting the amounts and disclosures in the financial statements. The procedures are selected according to the auditors professional judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and true and fair presentation of the financial statements in order to design audit procedures that are appropriated in the circumstances, but not for expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Audit opinion In our opinion the financial statements give a true and fair view, in all material respects, of the financial position of Banco Comercial de Macau, S. A. as at 31 December 2007 and of its operating results and its cash flows for the year then ended in accordance with Financial Reporting Standards issued by the Government of the Macau Special Administrative Region. (Signed on the original) Kenneth Patrick Chung Registered Auditor Lowe Bingham & Matthews - PricewaterhouseCoopers Macau, 27 February

7 FINANCIAL STATEMENTS INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER Note Restated Interest income 558, ,179 Interest expense (318,344) (277,068) Net interest income 4 240, ,111 Fee and commission income 29,522 28,420 Fee and commission expense (2,084) (1,393) Net fee and commission income 5 27,438 27,027 Dividend income 6 1, Net trading income 7 18,080 14,280 Net gain on available-for-sale investments Other operating income 8 17,008 9,570 Operating income 304, ,791 Operating expenses 9 (141,528) (128,400) Operating profit before bad debt provisions 163, ,391 Bad and doubtful debt expense 10 (8,591) (9,377) Impairment of available-for-sale investment securities 18 (81,265) - Recoveries of loans and interest previously written off 2,897 3,134 Profit before income tax 76, ,148 Income tax expense 11 (9,562) (16,472) Profit for the year 66, ,676 Attributable to: Equity holders of the Bank 66, ,676 The notes on pages 10 to 45 are an integral part of these financial statements

8 FINANCIAL STATEMENTS (continued) BALANCE SHEET AT 31 DECEMBER Note Restated Assets Cash and balances with banks , ,955 AMCM treasury bills 13 1,237,120 1,320,961 Placements with and loans and advances to banks 14 2,457,292 3,044,492 Loans and advances to customers 15 5,439,950 4,592,464 Investment securities - Available-for-sale , ,936 Investment securities - Held-to-maturity , ,743 Other investments 20 11,482 11,571 Intangible assets 21 6,027 8,102 Premises and other fixed assets 22 82,988 76,603 Deferred income tax assets 28 13, Other assets 23 31,634 36,127 Total assets 10,422,918 9,710,990 Liabilities Balances and deposits from banks ,496 4,851 Deposits from customers 25 9,217,481 8,492,870 Certificates of deposit issued , ,659 Other liabilities 27 65,028 46,227 Current income tax liabilities 19,886 16,511 Provisions Total liabilities 9,706,526 9,030,878 Equity Share capital , ,000 Share premium 50,000 50,000 Legal reserve , ,566 AFS reserve (30,890) (261) Retained earnings 328, ,807 Total equity 716, ,112 Total liabilities and equity 10,422,918 9,710,990 Approved and authorized for issue by the Board of Directors on 27 February 2008 (Signed on the original) (Signed on the original) (Signed on the original) David Shou-Yeh Wong Hon-Hing Wong (Derek Wong) Gary Pak-Ling Wang (Chairman) (Signed on the original) (Signed on the original) (Signed on the original) Harold Tsu-Hing Wong Lung-Man Chiu (John Chiu) Kenneth Chan Sou Chao (Chief Executive Officer) (Signed on the original) António Candeias Castilho Modesto The notes on pages 10 to 45 are an integral part of these financial statements

9 FINANCIAL STATEMENTS (continued) STATEMENT OF CHANGES IN EQUITY Share Capital (Note 30) Share premium Legal reserve (Note 31) Available-for-sale revaluation reserve Retained earnings Total equity Balance as 1 January ,000 50, , , ,697 Available-for-sale investments revaluation (297) - (297) AFS revaluation deferred tax impact Transfer to legal reserve - - 8,974 - (8,974) - Net profit for the year (restated) , ,676 Balance as 31 December 2006 (restated) 225,000 50, ,566 (261) 272, ,112 Available-for-sale investments revaluation (34,805) - (34,805) AFS revaluation deferred tax impact ,176-4,176 Transfer to legal reserve ,663 - (11,663) - Net profit for the year ,909 66,909 Balance at 31 December 2007 before appropriations 225,000 50, ,229 (30,890) 328, ,392 The notes on pages 10 to 45 are an integral part of these financial statements

10 FINANCIAL STATEMENTS (continued) CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER Cash flows from operating activities Interest income received 550, ,465 Interest expense paid (307,628) (267,604) Dividends received 1, Net fee and commission income received 28,605 25,617 Net trading income received 15,029 14,118 Recoveries of loans and interest previously written-off 2,897 3,134 Other operating income received 11,349 9,569 Other operating expenses paid (44,735) (42,483) Personnel expenses paid (81,028) (73,189) Income tax paid (15,939) (10,782) Cash flows from operating activities before changes in operating assets and operating liabilities 159, ,648 Changes in operating assets and operating liabilities Net increase in AMCM treasury bills with original maturity of more than 3 months (190,966) (211,739) Net (increase)/decrease in placements with and advances to banks with original maturity of more than 3 months 214,047 (944,236) Net increase in loans and advances to customers (850,402) (679,767) Net (increase)/decrease in other operating assets 4,260 (14,530) Net increase/(decrease) in balances and deposits from banks 151,395 (3,189) Net increase in deposits from customers and certificates of deposit issued 491,439 1,005,959 Net increase in other liabilities 14,409 7,586 Net cash flows from operating assets and operating liabilities (165,818) (839,916) Cash flows from investing activities Purchase of intangible assets (1,501) (4,646) Purchase of premises and other fixed assets (14,380) (3,193) Proceeds from sales of premises and other fixed assets Purchase of available-for-sale investments (659,541) (104,077) Proceeds from sales or redemptions of available-for-sale investments 55,704 - Purchase of held-to-maturity investments - (44,213) Proceeds from redemptions of held-to-maturity investments 137, ,929 Purchase of other investments (9) (2,578) Proceeds from sales of other investments 98 57,054 Net cash flows from investing activities (481,876) 15,300 Net cash flow from financing activities - - Net decrease in cash and cash equivalents (488,091) (682,968) Cash and cash equivalents at the beginning of the year 2,791,141 3,474,109 Cash and cash equivalents at the end of the year 2,303,050 2,791,141 Cash and cash equivalents comprise: Cash and balances with banks and AMCM 275, ,362 Items in course of collection from other banks 151,729 39,593 Placements with and deposits in AMCM (treasury bills) and other banks with original maturity up to 3 months 1,875,977 2,523,186 Total cash and cash equivalents at 31 December 2,303,050 2,791,141 The notes on pages 10 to 45 are an integral part of these financial statements

11 BANCO COMERCIAL DE MACAU, S. A. 1 General information Banco Comercial de Macau, S. A. ( the Bank or BCM ) principally provides retail, commercial and private banking services in Macau. The Bank is a limited liability company by shares and is incorporated and domiciled in Macau. The address of its registered office is at Avenida da Praia Grande No. 572, Macau. In its retail banking activities, the Bank handles individual customers deposits and provides consumer and housing loans, overdrafts, credit cards, insurance products and other banking services such as remittances. In its commercial and private banking activities, the Bank handles deposit and current accounts as well as property business, project and trade finance loans, banking guarantees and letters of credit for corporate, institutional and high net worth customers. The Bank also provides investment products and stock trading services to various segments of its clientele. The immediate and ultimate holding companies are Dah Sing Bank, Limited ( DSB ) and Dah Sing Financial Holdings Limited ( DSFH ) respectively, both of which are incorporated and domiciled in Hong Kong. DSFH is listed in Hong Kong. The financial regulatory authority is the Monetary Authority of Macau ('AMCM'). These financial statements are presented in thousands of Macau Patacas ( MOP ), unless otherwise stated. These financial statements have been approved for issue by the Board of Directors on 27 February Summary of significant accounting policies The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all years presented, unless otherwise stated. 2.1 Basis of preparation The financial statements of the Bank have been prepared in accordance Section 3 of Chapter 1 of the Macau Commercial Code and Financial Reporting Standards issued by the Government of Macau Special Administrative Region under Administrative Regulation No. 25/2005 on 9 December 2005 ( MFRS ). The MFRS, which has become effective from 1 January 2007, has fully adopted certain financial reporting standards ( IAS or IFRS ) issued by the International Accounting Standards Board ( IASB ) prevailing at the time when the above Administrative Regulation was issued. In summary, the MFRS comprises the following specific framework and standards published by IASB in March 2004: Framework of the Preparation and Presentation of Financial Statements IFRS 1: First-time Adoption of IFRS IAS 1: Presentation of Financial Statements IAS 2 : Inventories IAS 7: Cash Flow Statement IAS 8: Accounting Policies, Changes in Accounting Estimates, and Errors

12 2.1 Basis of preparation (continued) IAS 10: IAS 11: IAS 12: IAS 16: IAS 17: IAS 18: IAS 21: IAS 23: IAS 36: IAS 37: IAS 38: Events After the Balance Sheet Date Construction Contracts Income Taxes Property, Plant and Equipment Leases Revenue The effects of Changes in Foreign Exchange rates Borrowing costs Impairment of Assets Provisions, Contingent Liabilities and Contingent Assets Intangible assets In previous years, financial statements of the Bank were prepared in accordance with Section 3 of the Macau Commercial Code and accounting policies, which the directors considered appropriate. Accounting practices previously adopted by the Bank differ in certain aspects from MFRS. When preparing the Bank s 2007 financial statements, management has modified some of the Bank s accounting policies in order to comply with MFRS. Accordingly, the comparative figures in these financial statements have been restated to reflect these changes. Reconciliations and descriptions of the effect of adoption of MFRS and changes of the Bank s accounting policies on the Bank s equity, balance sheet and income statement are provided in note 2.2. These financial statements have been prepared under the historical cost convention, except that available for sale investment securities are carried at market value. The preparation of financial statements in conformity with MFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Bank s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in note Transition to MFRS Basis of transition to MFRS The Bank s financial statements for the year ended 31 December 2007 are the first set of annual financial statements that comply with MFRS. These financial statements have been prepared as described in Note 2.1. The Bank has applied IFRS 1 in preparing these financial statements. The Bank s transition date is 1 January The Bank prepared its opening MFRS balance sheet at that date. The reporting date of these financial statements is 31 December The Bank s MFRS adoption date is 1 January The Bank has not elected to apply any exemptions from following retrospective applications. The Bank has applied the mandatory exception that estimates under MFRS at 1 January 2006 should be consistent with estimates made for the same date under previous accounting policies, unless there is evidence that those estimates were in error

13 2.2 Transition to MFRS (continued) Reconciliations between current accounting policies (including MFRS and changes in accounting policy) and previous accounting policies The following reconciliations provide a quantification of the effect of the transition to MFRS on: - Equity at 1 January 2006 and 31 December 2006 [Note 2.2.2(a)]; - Balance sheet as at 1 January 2006 [Note (b)]; - Balance sheet as at and 31 December 2006 [Note 2.2.2(c)]; - Income statement for the year ended 31 December 2006 [Note 2.2.2(d)] (a) Equity as at 1 January 2006 and 31 December 2006 Note 31 December 2006 Note 1 January 2006 Total equity under previous accounting polices 679, ,856 (i) Capitalization and depreciation of subsequent costs that should be included in the carrying value of premises (ii) Recognition of a provision for liabilities under a defined benefit pension scheme (iii) Fee and commission income previously recognized up-front that is now amortized using the effective interest method (iv) Recognition of the existing pension plan residual account (v) Recognition of deferred income tax asset in relation to the revaluation of the available-for-sale portfolio (c) (g) (c) (l) (760) (b) (e) (b) (i) (839) (c) (c) (3,593) (c) (i) 4, (b) (f) 3, (c) (h) 36 - Total equity under MFRS 680, ,

14 2.2 Transition to MFRS (continued) Reconciliations between current accounting policies (including MFRS and changes in accounting policy) and previous accounting policies (continued) (b) Reconciliation of balance sheet at 1 January 2006 Balance sheet at 1 January 2006 Previous accounting policies Effects of changes Note Current accounting policies Assets Cash and balances with banks 262, ,514 AMCM treasury bills 1,206,500 (4,732) (a) 1,201,768 Placements with and loans and advances to banks 2,676,746 9,031 (b) 2,685,777 Loans and advances to customers 3,910,963 8,332 (c) 3,919,295 Investment securities - Available-for-sale Investment securities - Held-tomaturity 318,319 4,337 (d) 322,656 Other investments 66,047-66,047 Intangible assets 7,950-7,950 Premises and other fixed assets 81,290 (185) (e) 81,105 Deferred income tax assets Other assets 43,346 (20,003) (f) 23,343 Total assets 8,573,675 (3,220) 8,570,455 Liabilities Balances and deposits from banks 8,039 6 (g) 8,045 Deposits from customers 7,395,269 15,396 (g) 7,410,665 Certificates of deposit issued 535,152 1,284 (g) 536,436 Other liabilities 61,539 (23,586) (h) 37,953 Current income tax liabilities 10,820-10,820 Deferred income tax liabilities Provisions (i) 839 Total liabilities 8,010,819 (6,061) 8,004,758 Equity Share capital 225, ,000 Share premium 50,000-50,000 Legal reserve 123, ,592 Retained earnings 164,264 2,841 (j) 167,105 Total equity 562,856 2, ,697 Total liabilities and equity 8,573,675 (3,220) 8,570,

15 2.2 Transition to MFRS (continued) Reconciliations between current accounting policies (including MFRS and changes in accounting policy) and previous accounting policies (continued) (b) Reconciliation of balance sheet at 1 January 2006 (continued) (a) AMCM treasury bills Reclassification of unearned discounts from other liabilities (4,732) Previously, AMCM treasury bills, purchased at discount, were reported in the balance sheet at their nominal amount, which included principal invested, plus accrued interest or discounts, plus unearned interest or discounts. The adoption of the current accounting policy has resulted in the recognition of financial assets on an amortized cost basis. Accordingly, unearned discounts have been reclassified from other liabilities to AMCM treasury bills. (b) Placements with and loans and advances to banks Reclassification of accrued interest from other assets 9,031 The adoption of the current accounting policy has resulted in the recognition of financial assets on an amortized cost basis. Accordingly, accrued interest should be reported with the principal amount. In previous years, these items were reported in the balance sheet as other assets. (c) Loans and advances to customers (i) Reclassification of accrued interest from other assets 11,032 (ii) Reclassification of repossessed assets to other assets (2,700) 8,332 (i) The adoption of the current accounting policy has resulted in the recognition of financial assets on an amortized cost basis. Accordingly, accrued interest should be reported with the principal amount. In previous years, these items were reported in the balance sheet as other assets. (ii) In current year, a change in accounting policy has resulted in repossessed assets being reported under other assets. In previous years, these were reported in the balance sheet under loans and advances to customers and other accounts. (d) Investment securities Held to maturity Reclassification of accrued interest from other assets 4,337 The adoption of the current accounting policy has resulted in the recognition of financial assets on an amortized cost basis. Accordingly, accrued interest should be reported with the principal amount. In previous years, these items were reported in the balance sheet as other assets

16 2.2 Transition to MFRS (continued) Reconciliations between current accounting policies (including MFRS and changes in accounting policy) and previous accounting policies (continued) (b) Reconciliation of balance sheet at 1 January 2006 (continued) (e) Premises and other fixed assets (i) Capitalization of previously incurred expenses 422 (ii) Reclassification of items from premises and other fixed assets to other (607) assets (185) (i) The adoption of IAS 16 has resulted in the capitalization of costs, which were previously expensed in the income statement as incurred. However, as these are expected to be used in more than one future period, they are capitalized and will be depreciated over the asset s expected useful life. (ii) The adoption of IAS 16 has resulted in the reclassification of certain assets that do not meet the recognition criteria of IAS 16. (f) Other assets (i) Reclassification of accrued interest (24,400) (ii) Netting of interest accrued on IRS (2,168) (iii) Reclassification of repossessed assets 2,700 (iv) Recognition of pension plan residual account 3,258 (v) Reclassification of items from premises and other fixed assets to other 607 assets (20,003) (i) The adoption of the current accounting policy has resulted in the recognition of financial assets on an amortized cost basis. Accordingly, accrued interest should be reported with the respective principal amount. In previous years, these items were reported in the balance sheet as other assets. (ii) In previous years, interest accrued on interest rate swaps IRS was presented in gross terms in other assets and in other liabilities. Because interest of IRS is settled on net basis, interest receivable on IRS in other assets is netted against interest payable on IRS in other liabilities. (iii) In current year, a change in accounting policy has resulted in repossessed assets being reported under other assets. In previous years, these were reported in the balance sheet under loans and advances to customers and other accounts. (iv) In current year a change in accounting policy has resulted in the forfeited contributions to the Bank s defined contribution plan being used to offset their contributions to the plan. In previous years, forfeited contributions were not recognized. (v) The adoption of IAS 16 has resulted in the reclassification of certain assets that do not meet the recognition criteria of IAS

17 2.2 Transition to MFRS (continued) Reconciliations between current accounting policies (including MFRS and changes in accounting policy) and previous accounting policies (continued) (b) Reconciliation of balance sheet at 1 January 2006 (continued) (g) Reclassification of accrued interest from other liabilities Balances and deposits with Banks 6 Deposits from customers 15,396 Certificates of deposit issued 1,284 The adoption of the current accounting policy has resulted in the recognition of financial liabilities on an amortized cost basis. Accordingly, accrued interest should be reported with the principal amount. In previous years, these items were reported in the balance sheet as other liabilities. (h) Other liabilities (i) Reclassification of accrued interest to other liabilities (16,686) (ii) Reclassification of unearned discounts to AMCM treasury bills (4,732) (iii) Netting of interest accrued on IRS with other assets (2,168) (23,586) (i) The adoption of the current accounting policy has resulted in the recognition of financial assets on an amortized cost basis. Accordingly, accrued interest should be reported with the respective principal amount. In previous years, these items were reported in the balance sheet as other assets. (ii) Previously, AMCM treasury bills, purchased at discount, were reported in the balance sheet at their nominal amount, which included principal invested, plus accrued interest or discounts, plus unearned interest or discounts. The adoption of the current accounting policy has resulted in the recognition of financial assets on an amortized cost basis. Accordingly, unearned discounts have been reclassified from other liabilities to AMCM treasury bills. (iii) In previous years, interest accrued on interest rate swaps IRS was presented in gross terms in other assets and in other liabilities. Because interest of IRS is settled on net basis, interest receivable on IRS in other assets is netted against interest payable on IRS in other liabilities

18 2.2 Transition to MFRS (continued) Reconciliations between current accounting policies (including MFRS and changes in accounting policy) and previous accounting policies (continued) (b) Reconciliation of balance sheet at 1 January 2006 (continued) (i) Provisions Recognition of retirement benefit obligations 839 The adoption of IAS 37 has resulted in the recognition of provision for retirement benefit obligations. Previously, these were recognized in the income statement on a cash basis. (j) Equity (retained earnings) Cumulative effect of all of the above adjustments (a) to (i) 2,841 The cumulative effect of all of the above adjustments (a) to (i) has resulted in an increase in retained earnings at 1 January 2006 of MOP2,841,

19 2.2 Transition to MFRS (continued) Reconciliations between current accounting policies (including MFRS and changes in accounting policy) and previous accounting policies (continued) (c) Reconciliation of balance sheet at 31 December 2006 Balance sheet at 31 December 2006 Previous accounting policies Effects of changes Note Current accounting policies Assets Cash and balances with banks 267, ,955 AMCM treasury bills 1,327,000 (6,039) (a) 1,320,961 Placements with and loans and advances to banks 3,025,119 19,373 (b) 3,044,492 Loans and advances to customers 4,587,133 5,331 (c) 4,592,464 Investment securities - Available-for-sale 103, (d) 103,936 Investment securities - Held-tomaturity 245,603 3,140 (e) 248,743 Other investments 11,571-11,571 Intangible assets 8,857 (755) (f) 8,102 Premises and other fixed assets 76, (g) 76,603 Deferred income tax assets - 36 (h) 36 Other assets 66,570 (30,443) (i) 36,127 Total assets 9,719,671 (8,681) 9,710,990 Liabilities Balances and deposits from banks 4,850 1 (j) 4,851 Deposits from customers 8,468,331 24,539 (j) 8,492,870 Certificates of deposit issued 468,049 1,610 (j) 469,659 Other liabilities 82,742 (36,515) (k) 46,227 Current income tax liabilities 16,511-16,511 Deferred income tax liabilities Provisions (l) 760 Total liabilities 9,040,483 (9,605) 9,030,878 Equity Share capital 225, ,000 Share premium 50,000-50,000 Legal reserves 132, ,566 Retained earnings 271, (m) 272,546 Total equity 679, ,112 Total liabilities and equity 9,719,671 (8,681) 9,710,

20 2.2 Transition to MFRS (continued) Reconciliations between current accounting policies (including MFRS and changes in accounting policy) and previous accounting policies (continued) (c) Reconciliation of balance sheet at 31 December 2006 (continued) (a) AMCM treasury bills Reclassification of unearned discounts from other liabilities (6,039) Previously, AMCM treasury bills, purchased at discount, were reported in the balance sheet at their nominal amount, which included principal invested, plus accrued interest or discounts, plus unearned interest or discounts. The adoption of the current accounting policy has resulted in the recognition of financial assets on an amortized cost basis. Accordingly, unearned discounts have been reclassified from other liabilities to AMCM treasury bills. (b) Placements with and loans and advances to banks Reclassification of accrued interest from other assets 19,373 The adoption of the current accounting policy has resulted in the recognition of financial assets on an amortized cost basis. Accordingly, accrued interest should be reported with the principal amount. In previous years, these items were reported in the balance sheet as other assets. (c) Loans and advances to customers (i) Reclassification of accrued interest from other assets 10,680 (ii) Reclassification of accrued interest on car loans from other assets 3,131 (iii) Reclassification of fee and commission income from the income statement (3,593) (iv) Reclassification of repossessed assets to other assets (4,887) 5,331 (i) to (iii) The adoption of the current accounting policy has resulted in the recognition of financial assets on an amortized cost basis. Accordingly, accrued interest and other deferred income should be reported with the principal amount. Previously, these items were reported in the balance sheet as other assets or other liabilities. (iv) In current year, a change in accounting policy has resulted in repossessed assets being reported under other assets. Previously, these were reported in the balance sheet under loans and advances to customers and other accounts. (d) Investment securities Available-for-sale Reclassification of accrued interest from other assets 156 The adoption of the current accounting policy has resulted in the recognition of financial assets on an amortized cost basis. Accordingly, accrued interest should be reported with the principal amount. Previously, these items were reported in the balance sheet as other assets

21 2.2 Transition to MFRS (continued) Reconciliations between current accounting policies (including MFRS and changes in accounting policy) and previous accounting policies (continued) (c) Reconciliation of balance sheet at 31 December 2006 (continued) (e) Investment securities Held to maturity Reclassification of accrued interest from other assets 3,140 The adoption of the current accounting policy has resulted in the recognition of financial assets on an amortized cost basis. Accordingly, accrued interest should be reported with the principal amount. In previous years, these items were reported in the balance sheet as other assets. (f) Intangible assets Reclassification of projects under development belonging to premises and other fixed assets (755) Previously, projects under development, belonging either to intangibles or to premises and other fixed assets, were classified as intangibles. Projects under development belonging to premises and other fixed assets have been reclassified accordingly. (g) Premises and other fixed assets (i) Capitalization of previously incurred expenses 375 (ii) Reclassification of projects under development belonging to premises and other fixed assets 755 (iii) Reclassification of items from premises and other fixed assets to other assets (610) 520 (i) The adoption of IAS 16 has resulted in the capitalization of costs which were previously expensed in the income statement as incurred, being, however, expected to be used in more than one future period. These capitalized costs will be depreciated over the asset s expected useful life. (ii) Previously, projects under development, belonging either to intangibles or to premises and other fixed assets, were classified as intangibles. Projects under development belonging to premises and other fixed assets have been reclassified accordingly. (iii) The adoption of IAS 16 has resulted in the reclassification of certain assets that do not meet the recognition criteria of IAS

22 2.2 Transition to MFRS (continued) Reconciliations between current accounting policies (including MFRS and changes in accounting policy) and previous accounting policies (continued) (c) Reconciliation of balance sheet at 31 December 2006 (continued) (h) Deferred tax asset Recognition of deferred tax asset 36 The adoption of IAS 12 has resulted in the recognition of deferred income tax. Previously, deferred income tax was not recognized in the income statement. (i) Other assets (i) Reclassification of accrued interest to other financial assets (36,480) (ii) Reclassification of items from premises and other fixed assets to other assets 610 (iii) Netting of interest accrued on IRS with other assets (4,326) (iv) Reclassification of repossessed assets 4,887 (v) Recognition of the existing pension plan residual account 4,866 (30,443) (i) The adoption of the current accounting policy has resulted in the recognition of financial assets on an amortized cost basis. Accordingly, accrued interest should be reported with the respective principal amount. Previously, these items were reported in the balance sheet as other assets. (ii) The adoption of IAS 16 has resulted in the reclassification of certain assets that do not meet the recognition criteria of IAS 16. (iii) In previous years, interest accrued on interest rate swaps IRS was presented in gross terms in other assets and in other liabilities. Because interest of IRS is settled on net basis, interest receivable on IRS in other assets is netted against interest payable on IRS in other liabilities. (iv) In current year, a change in accounting policy has resulted in repossessed assets being reported under other assets. Previously, these were reported in the balance sheet under loans and advances to customers and other accounts. (v) In current year a change in accounting policy has resulted in the forfeited contributions to the Bank s defined contribution plan being used to offset its contributions to the plan. Previously, forfeited contributions were not recognized

23 2.2 Transition to MFRS (continued) Reconciliations between current accounting policies (including MFRS and changes in accounting policy) and previous accounting policies (continued) (c) Reconciliation of balance sheet at 31 December 2006 (continued) (j) Reclassification of accrued interest from other liabilities Balances and deposits with banks 1 Deposits from customers 24,539 Certificates of deposit issued 1,610 The adoption of the current accounting policy has resulted in the recognition of financial liabilities on an amortized cost basis. Accordingly, accrued interest should be reported with the principal amount. Previously, these items were reported in the balance sheet as other liabilities. (k) Other liabilities (i) Reclassification of accrued interest to other liabilities (26,150) (ii) Reclassification of unearned discounts to AMCM treasury bills (6,039) (iii) Netting of interest accrued on IRS with other assets (4,326) (36,515) (i) and (ii) The adoption of the current accounting policy has resulted in the recognition of financial assets and liabilities on an amortized cost basis. Accordingly, accrued and deferred interest and other income should be reported with the respective principal amount. Previously, these items were reported in the balance sheet as other liabilities. (ii) Previously, AMCM treasury bills, purchased at discount, were reported in the balance sheet at their nominal amount, which included principal invested, plus accrued interest or discounts, plus unearned interest or discounts. The adoption of the current accounting policy has resulted in the recognition of financial assets on an amortized cost basis. Accordingly, unearned discounts have been reclassified from other liabilities to AMCM treasury bills. (iii) In previous years, interest accrued on interest rate swaps IRS was presented in gross terms in other assets and in other liabilities. Because interest of IRS is settled on net basis, interest receivable on IRS in other assets is netted against interest payable on IRS in other liabilities

24 2.2 Transition to MFRS (continued) Reconciliations between current accounting policies (including MFRS and changes in accounting policy) and previous accounting policies (continued) (c) Reconciliation of balance sheet at 31 December 2006 (continued) (l) Provisions Recognition of retirement benefit obligations 760 The adoption of IAS 37 has resulted in the recognition of provision for retirement benefit obligations. Previously, these were recognized in the income statement on a cash basis. (m) Equity (retained earnings) Cumulative effect of all of the above adjustments (a) to (i) 924 The cumulative effect of all of the above adjustments (a) to (l) has resulted in an increase in retained earnings at 31 December 2006 of MOP924,

25 2.2 Transition to MFRS (continued) Reconciliations between current accounting policies (including MFRS and changes in accounting policy) and previous accounting policies (continued) (d) Reconciliation of the income statement for the year ended 31 December 2006 Income statement for the year ended 31 December 2006 Previous accounting policies Effects of changes Note Current accounting policies Interest income 512,294 (21,115) (a) 491,179 Interest expense (303,964) 26,896 (b) (277,068) Net interest income 208,330 5, ,111 Fee and commission income 37,794 (9,374) (c) 28,420 Fee and commission expense (1,393) - (1,393) Net fee and commission income 36,401 (9,374) 27,027 Dividend income Net trading income 14,280-14,280 Other operating income 9,570-9,570 Operating income 269,384 (3,593) 265,791 Operating expenses (130,040) 1,640 (d) (128,400) Operating profit before bad debt provisions 139,344 (1,953) 137,391 Bad and doubtful debt expense (9,377) - (9,377) Recoveries of loans and interest previously written off 3,134-3,134 Profit before income tax 133,101 (1,953) 131,148 Current income tax expense (16,472) - (16,472) Profit for the year 116,629 (1,953) 114,676 (a) Interest income (i) Amortization of up-front fees using the effective interest method 586 (ii) Reclassification of loan initiation and early repayment fee 5,195 (vi) Netting of interest on IRS (26,896) (21,115)

26 2.2 Transition to MFRS (continued) Reconciliations between current accounting policies (including MFRS and changes in accounting policy) and previous accounting policies (continued) (d) Reconciliation of the income statement for the year ended 31 December 2006 (continued) (a) Interest income (continued) (i) The adoption of IAS 18 has resulted in the recognition of interest income using the effective interest method. Accordingly, up-front fees have been amortized using the effective interest method. In prior years, these had been recognized in full on inception of the loan as fee and commission income in the income statement. (ii) Early repayment fees should be included under interest income as this payment is directly linked to the interest yield the Bank receives. In prior years, this was recognized in fee and commission income in the income statement. (iii) In previous years, interest on interest rate swaps IRS was presented in gross terms in interest income and interest expense. Because interest of IRS is settled on net basis, interest income is netted against interest expense. (b) Interest expense Netting of interest on IRS 26,896 In previous years, interest on interest rate swaps IRS was presented in gross terms in interest income and interest expense. Because interest of IRS is settled on net basis, interest income is netted against interest expense. (c) Fee and commission income (i) Amortization of up-front fees using the effective interest method (586) (ii) Deferment of up-front fees to be amortized using the effective interest method (3,593) (iii) Reclassification of loan initiation and early repayment fee (5,195) (9,374) (i) The adoption of IAS 18 has resulted in the recognition of interest income using the effective interest method. Accordingly, up-front fees have been amortized using the effective interest method and classified as interest income. In prior years, these had been recognized in full on inception of the loan and classified in fee and commission income in the income statement. (ii) Fee and commission income previously recognized up-front needs to be amortized using the effective interest method

27 2.2 Transition to MFRS (continued) Reconciliations between current accounting policies (including MFRS and changes in accounting policy) and previous accounting policies (continued) (d) Reconciliation of the income statement for the year ended 31 December 2006 (continued) (c) Fee and commission income (continued) (iii) Early repayment fees should be included under interest income as it is an integral part of the effective interest rate. In prior years, this was recognized as fee and commission income in the income statement. (d) Operating expenses (i) Recognition of the balance of the pension plan residual account 1,608 (ii) Depreciation of capitalized costs as a result of the adoption of IAS 16 (47) (iii) Reversal of payments under defined benefit scheme 79 1,640 (i) In current year a change in accounting policy has resulted in the forfeited contributions to the Bank s defined contribution plan being used to offset its contributions to the plan. Previously, forfeited contributions were not recognized. This is the compensation part allocated to (ii) The adoption of IAS 16 has resulted in the capitalization of costs which were previously expensed in the income statement as incurred, being, however, expected to be used in more than one future period. This the amortization for 2006 of the capitalized costs (iii) The adoption of IAS 37 has resulted in the recognition of provision for retirement benefit obligations in the opening balance sheet. Previously, these were recognized in the income statement on a cash basis. This adjustment reflects the reversal of payments that were recognized on a cash basis in

28 All amounts in thousands Macau Patacas (MOP) unless otherwise stated 2.3 Foreign currency translation Functional and presentation currency Items included in the financial statements of the Bank are measured using the Macau Pataca (MOP) as the functional currency Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement. Changes in the fair value of monetary securities denominated in foreign currency classified as available-for-sale are analyzed between translation differences resulting from changes in the amortized cost of the securities and other changes in the carrying amount of the securities. Translation differences related to changes in the amortized cost are recognized in the income statement, and other changes in the carrying amount are recognized in equity. 2.4 Interest income and expense Interest income and expense for all interest-bearing financial instruments are recognized within 'interest income' and 'interest expense' in the income statement using the effective interest method. The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability and allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period, to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate the Bank estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums and discounts. Interest income or expense arising from entering into interest rate swaps (IRS), recognized as offbalance sheet financial instruments, are also included in interest income or expense. Once a financial asset has been written down upon the recognition of a specific provision, interest is recognized on a cash basis in accordance with Notice 18/93 - AMCM