BANCO POPULAR PORTUGAL, S.A.

Transcription

1 SECOND SUPPLEMENT (dated 29 June 2011) to the BASE PROSPECTUS (dated 29 June 2010) BANCO POPULAR PORTUGAL, S.A. (incorporated with limited liability in Portugal) 1,500,000,000 COVERED BONDS PROGRAMME BASE PROSPECTUS This second Supplement dated 29 June 2011 (the Second Supplement ) to the Base Prospectus dated 29 June 2010 as supplemented on 16 December 2010 (the Base Prospectus ), constitutes a supplement to the Base Prospectus for the purposes of Article 135-C, and Article 142, ex vi Article 238, of the Portuguese Securities Code prepared in connection with the Covered Bonds Programme (the Programme ) established by Banco Popular Portugal, S.A. (the Issuer, fully identified in the Base Prospectus). Terms defined in the Base Prospectus have the same meaning when used in this Supplement. Each of the Issuer, the members of its Board of Directors, the members of its Supervisory Board (see Management and Statutory Bodies) and its Statutory Auditor (see Management and Statutory Bodies) hereby declares that, to the best of its knowledge (each having taken all reasonable care to ensure that such is the case) the information contained in this Second Supplement is in accordance with the facts and does not omit anything likely to affect the import of such information. This Second Supplement is supplemental to, and should be read in conjunction with, the Base Prospectus. To the extent that there is any inconsistency between any statement in this Second Supplement and any other statement in or incorporated by reference in the Base Prospectus, the statements in this Second Supplement will prevail. Save as disclosed in this Second Supplement, no other significant new factor, material mistake or inaccuracy relating to information included in the Base Prospectus has arisen or been noted, as the case may be, since the publication of the Base Prospectus.

2 I. GENERAL AMENDMENTS 1. This Supplement dated 29 June 2011 shall be referred to together with the supplement dated 16 December 2010, and references to, and the definition of, the Base Prospectus shall be amended accordingly. II. COVER PAGE 2. The last paragraph shall be amended as follows: The Base Prospectus was approved by CMVM on 24 June 2010 for the admission to trading of the Covered Bonds and is valid for a period of ten years as counted from such date. The Base Prospectus has been most recently supplemented on 29 June III. AMENDMENTS TO THE BASE PROSPECTUS: 1. Responsibility Statements In the section RESPONSIBILITY STATEMENTS of the Consolidated Base Prospectus annexed to the 2 nd Supplement to the Base Prospectus dated 29 June 2011 ( Consolidated Base Prospectus ), namely in the fifth paragraph, the wording for the years ended 31 December 2008 and 31 December 2009 shall be amended and replaced by the following wording: for the years ended 31 December 2009 and 31 December SUMMARY OF THE COVERED BONDS PROGRAMME (a) The section headed Ratings shall be amended as follows: Covered Bonds issued under the Programme are expected on issue to be rated at least by one of the Rating Agencies, which have applied to be registered with the European Securities and Markets Authority under Regulation (EC) no. 1060/2009, as amended or supplemented from time to time, of the European Parliament and of the Council of 16 September 2009 on credit rating agencies, as follows: Aa by Moody s, AA by Standard & Poor s and A+ by Fitch Ratings. The rating of Covered Bonds will not necessarily be the same as the rating applicable to the Issuer. A credit rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal at any time by the assigning rating organisation. A rating addresses the likelihood that the holders of Covered Bonds will receive timely payments of interest 2

3 and ultimate repayment of principal at the Maturity Date or the Extended Maturity Date, as applicable. (b) The section headed Listing and Admission to Trading shall be amended as follows: This base prospectus, the supplement thereto dated 16 December 2010 and the second supplement thereto dated 29 June 2011, have been approved by the CMVM and application was made to Euronext for the admission of Covered Bonds issued under the Programme to trading on Euronext Lisbon. Covered Bonds may, after notification by the CMVM to the supervision authority of the relevant Member State(s) of the European Union ( EU ) in accordance with Article 18 of the Prospectus Directive, be admitted to trading on the regulated market(s) of and/or be admitted to listing on stock exchange(s) of any other Member States of the EEA. Covered Bonds which are neither listed nor admitted to trading on any market may also be issued under the Programme. The relevant Final Terms will state whether or not the relevant Covered Bonds are to be listed and/or admitted to trading and, if so, on which stock exchange(s) and/or regulated market(s). 3. RISK FACTORS (I) (a) Issuer s Related Risk Factors Banking Markets Under the title RISK FACTORS of the Consolidated Base Prospectus, namely of the first subtitle Issuer s Related Risk Factors the last sentence of the first paragraph included in the subsection Banking Markets shall be amended and replaced by the following wording: ( ) The principal competitors of the Banco Popular Group in the Portuguese banking sector (ranking in terms of assets as of 31 December 2010) are Caixa Geral de Depósitos, the Millennium BCP Group, the BES Group, the Santander Totta Group, the BPI Group, the Montepio Group and BANIF Group. (b) Portuguese Economy Under the title RISK FACTORS of the Consolidated Base Prospectus, namely of the first subtitle Issuer s Related Risk Factors the subsection Portuguese Economy shall be replaced by the following wording: Portugal has become a diversified and increasingly service-based economy since joining the EU in Over the past 25 years, successive governments have privatized many state-controlled firms and liberalized key areas of the economy, including the financial and telecommunications sectors. The country qualified for the European Monetary Union (EMU) in 1998 and began circulating the euro on 1 January 2002 along with 11 other EU member countries. 3

4 The evolution of the Portuguese economy in this period has been highly irregular. From the late 80 s to the late 90 s the country experienced a period of prosperity, with a booming economic activity allowing an improvement in living standards towards the EU average levels. However, the situation has changed dramatically in the current decade, with the country entering a period of poor economic performance which caused an interruption in the real convergence process. The recent performance of the Portuguese economy has been strongly affected by the global economic recession. In 2009 with the objective to containing an unprecedented drop in the overall activity and to rescue the financial industry, monetary authorities and governments have responded in a decisive and mostly coordinated manner, adopting a series of monetary stimulus and expansionary fiscal policies. This response of the authorities contributed to a relevant decrease in volatility levels and to a positive economic performance in In Portugal, GDP rose 1,4%, supported by an impressive growth in exports and also relevant increases in consumption and government spending. This positive evolution more than compensated the sharp fall in investment registered in Not so bright was evolution of the budget deficit. The goal of 7.3 percent of gross domestic product was exceeded and the final figure was 9.1 percent. The number of unemployed in Portugal rose to 10.8 percent in December Public sector workers, around 670,000, account for about 13 percent of the employed workforce. Major industries in Portugal are automobiles, auto parts, textiles, shoes and tourism. Portugal's annual output of 157,000 tonnes of cork is just over half of the world's total. Agriculture employs some 11 per cent of the workforce, industry 28 percent, and services 61 percent, as of the third quarter of The 2011 budget included a 5 percent cut in civil servants' wages, a rise in value-added tax to a maximum 23 percent from 21 percent and cuts in tax benefits and government spending. The country's budget deficit for 2011 was projected at 10.5 billion euros. The IGCP debt agency in late December announced gross treasury bond issuance for 2011 of between billion euros, within market expectations and below 2010's 22 billion euros. In total, Lisbon had to repay 9.5 billion euros in bonds in However the measures included in the 2011 budget were not enough to prevent Portugal from being the third eurozone member (after Greece and Ireland) to request a bailout. In accordance with the terms of its 78 billion euros bailout agreement ( Program ), Portugal has until the end of 2013 to bring its budget deficit back below the mandated 3% eurozone limit. It seeks to impose fiscal discipline and further reduce its deficit over the next 3 years through structural reform measures, as agreed upon with the EU and IMF. As a result, GDP is expected to fall in 2011 and 2012 and economists forecast that unemployment will increase above 13% during this period. Despite the implementation of such measures and the commitment of the Portuguese Government in its implementation, there is no guarantee as to the degree of compliance with the targets set in 4

5 the Program or the impact that austerity measures may come to have in the Portuguese economy. The implementation of these measures may meet considerable resistance from unions and citizens, which may push the future government's ability to maintain the reform momentum. Moreover, any of the above measures, when implemented, may have a material and negative effect on the Portuguese economy, at least in the short term, which may significantly affect the Bank's business, its financial condition and operating results. During the period covered by the Program, tensions related to the Portuguese public finances or the negative effect of contagion from external events may continue to affect the liquidity and profitability of the financial system in Portugal, having particularly as a result: the reduction in market value of Portuguese public debt obligations; constraints on liquidity in the Portuguese banking system and persistent dependence on foreign financing, increasing competition in attracting deposits from customers and, consequently, their cost, limiting lending to customers, and deterioration the quality of the loan portfolio. Failure to comply with the objectives of the Program could raise the term of the assistance provided by the IMF and the European Union, which in turn could create the conditions for a default in respect of the Portuguese public debt. Moreover, the successful implementation of measures envisaged in the Program is not by itself sufficient to ensure the pursuit of the ultimate goals defined, and may worsen the macroeconomic conditions in Portugal and the effects of prolonged recession in time. In that case, the adjustment of the market and the likely deterioration in economic conditions could have a material adverse impact on the business of the Bank in its financial condition and operating results. Even allowing for the proper implementation of the Program, it is not possible to assure that the Portuguese economy will evolve into a stage of growth sufficient to alleviate the financial constraints of the country the further deterioration in global economic conditions, including the credit profile of other EU European countries credit quality of Portuguese and foreign banks and changes in the euro zone can extend the concerns about the ability of Portugal to meet its financing needs. Accordingly, the uncertainties resulting from the Portuguese financial-economic crisis and from the implementation of the Program, and the reaction from the market, have had and may continue to have a material adverse effect on the business of the Bank, its results and financial condition. Therefore, adverse changes affecting the Portuguese economy would likely have a significant adverse impact on its loan portfolio and, as a result, on the Issuer s financial condition, cash flows, results of operations and in turn affect the Issuer s ability to fulfil its obligations under the Covered Bonds, as well as the performance of the Banco Popular Group as a whole and its growth capacity in the banking segments in which it operates. 5

6 Risks arising from changes in credit quality and the recoverability of loans and amounts due from counterparties are inherent in a wide range of the Bank s businesses. Adverse changes in the credit quality of the Bank s borrowers and counterparties or a general deterioration in Portuguese economic conditions, or arising from systemic risks in the financial systems, could reduce the recoverability and value of the Bank s assets and require an increase in the Bank s level of provisions for credit losses. A downturn in the economy of Portugal, could also lead to an increase in defaults by the customers of the Banco Popular Group on the loans advanced to them and protracted economic declines could reduce the overall level of economic activity in the market, thereby reducing the ability of the Banco Popular Group to collect deposits and forcing it to satisfy its liquidity requirements by resorting to the more expensive capital markets as a result. (c) Regulation Under the title RISK FACTORS of the Consolidated Base Prospectus, namely of the first subtitle Issuer s Related Risk Factors the fifth and following paragraphs included in the subsection Regulation shall be fully replaced by the following wording: ( ) Portuguese banks, are currently required to maintain a solvency ratio of at least 8.0 per cent. and will be required to maintain a solvency ratio of at least 9.0 per cent. by 31 December 2011 and of 10.0 per cent. by 31 December The solvency ratio is defined as Tier I capital plus Tier II capital divided by risk-weighted assets. At 31 December 2010 the solvency ratio of Banco Popular Group complied with the applicable Bank of Portugal rules, being in the amount of 9.2 per cent. (for Tier I capital) and 0.03 per cent. (for Tier II capital). The capital adequacy requirements applicable to the Banco Popular Group limit its ability to advance loans to customers and may require it to issue additional equity capital or subordinated debt in the future, which are expensive sources of funds. As far as the required minimum level of own funds is concerned, the Bank of Portugal following to the negotiation of the financial assistance to Portugal by IMF, EU and the European Central Bank has issued Regulation no. 3/2011 through which has imposed that, no later than the end of 31 December 2011, credit institutions should have a minimum Tier I capital level of 9.0 per cent. and that until 31 December 2012 should have a minimum Tier I capital level of 10.0 per cent.. The Bank has under consideration a possible capital increase until 31 December 2011 to reinforce Tier I capital level to comply with the Bank of Portugal s Regulation no. 3/2011. Furthermore, in accordance with Law 63-A/2008 of 24 November referring to the reinforcement of financial stability of credit institutions, namely to capitalisation measures through public investment - the Portuguese Government may, by ministerial order, define the level of own funds of credit institutions in such a 6

7 capitalisation context; the Bank does not foresee that it will be necessary to recapitalise with the aid of the Portuguese government. In addition, the Bank of Portugal has established minimum provisioning requirements regarding current loans, non-performing loans, overdue loans, impairment for securities and equity holdings, sovereign risk and other contingencies. Therefore, any change in these requirements could have an adverse impact on the results of operations of the Banco Popular Group. (d) Ratings Under the title RISK FACTORS of the Consolidated Base Prospectus, namely of the first subtitle Issuer s Related Risk Factors the fourth paragraph included in the subsection Ratings shall be replaced by the following wording: Banco Popular Español current ratings are the following: Rating Agency Individual Financial Strength Short Term Long Term Fitch B/C F1 A Moody's C- P-1 A2 Standard & Poor's A-2 A- (e) The Issuer s liabilities to its customers exceed its liquid assets Under the title RISK FACTORS of the Consolidated Base Prospectus, namely of the first subtitle Issuer s Related Risk Factors the subsection The Issuer s liabilities to its customers exceed its liquid assets shall be replaced by the following wording: The Issuer s primary source of funds is its retail deposit base. In recent years, however, as interest rates stood at historically low levels, customers have started to channel their individual savings away from traditional bank products, such as deposits, and towards other instruments with higher expected returns. The Issuer s other funding sources include medium and long-term bond issues, and medium-term structured products. In addition, the Issuer has carried out a securitisation transaction. The Issuer also borrows money in the money markets and Banco Popular Español (or its affiliates) provide nearly all the required funding. This strongly mitigates the liquidity risk that 7

8 currently affects several Portuguese banks but raises concerns that those funding difficulties will eventually spread to the Spanish banking system, indirectly affecting the Issuer. While the Issuer complies in full with the Bank of Portugal s regulations in respect of liquidity, the Issuer s liabilities to its customers exceed the amount of its liquid assets. If the Issuer is unable to borrow sufficient funds to meet its obligations to its customers and other investors, the Issuer s financial condition and results of operations will be materially adversely affected. In the context of difficult macroeconomic conditions, the Bank has been able to manage its business activities in order to minimize the negative impacts of this economic environment, with a special focus on the funding activity. However, at December 2010, and on a consolidated basis, deposits stood at 3,558,284 while loans to costumers stood at 7,623,841. This corresponds to a slightly deterioration in commercial GAP comparing to the end of 2009, essentially explained by an investment in liquidity assets funded with operations of the Group. The liquidity gap as at 31 December 2009, on a consolidated basis, stood at -2,367,768, for up to a period of 1 year, and at 31 December 2010, on a consolidated basis, stood at -4,707,096, for up to a period of 1 year. (f) Under the title RISK FACTORS of the Consolidated Base Prospectus, namely of the first subtitle Issuer s Related Risk Factors it shall be inserted after the last paragraph included in the subsection The Issuer s liabilities to its customers exceed its liquid assets a new subsection entitled Main Risks and Uncertainties in 2011 with the following wording: Main Risks and Uncertainties in 2011 There are various risks and uncertainties, both at domestic and international levels, that may have impact on the business of the Banco Popular Group. We started the year with concerns in relation to the impact of continued deterioration of public accounts on loan spreads and the credit risk appraisal of sovereign issuers. The increase of spreads in Greece, Portugal, Spain and Ireland, had emphasised the need to control public expenditure, especially where the average age of the national populations was relatively high. These concerns led Portugal to be the third country to require financial assistance from the EU and IMF. On the other hand, we saw northern European economies, fuelled by Germany, posting strong GDP growth rates. As a whole, the Euro Area GDP rose 1.7 percent in 2010 and 2.5 percent in the first quarter of Prices also started an upward movement and as a result of inflation concerns we saw the first rate hike by the European Central Bank. 8

9 Accordingly, at national level, the macroeconomic situation reveals a weak growth and a potential divergence from situation of the eurozone area. This has various implications for the future activity of the Banco Popular Portugal. A slow economic growth maintains high levels of unemployment and therefore increases the risk of loan defaults. Further risk comes from monetary policies applicable to Portugal. Further increases of the refinancing rate could deteriorate the quality of Portuguese portfolios. In March 2011 Standard & Poor s downgraded the rating of the Republic of Portugal to BBB- and in May 2011 Moody s downgraded the rating of the Republic of Portugal to Baa1. The rating agencies concerns were justified by the lack of significant and credible measures to control the Portuguese deficit on behalf of the Government, when public debt kept growing and by the lack of consensus between the Government and the opposition on measures to be implemented for public finance consolidation in order to achieve the necessary convergence with countries with similar ratings. The rating agencies outlook on the Republic of Portugal will be highly dependent on the ability of the government to take the measures and meet the targets included in the bailout program, namely to reduce the public deficit to 3 per cent of the GDP by The rating of the Republic of Portugal further downgraded again in the future in the event of a continued deterioration in public finances resulting from poor economy activity or from the measures proposed by Government being perceived as insufficient. Accordingly, an adverse impact on the Republic of Portugal may result in negative side effects on Portuguese banks and companies in general and hence on their financial results. (g) Under the title RISK FACTORS of the Consolidated Base Prospectus, namely of the first subtitle Issuer s Related Risk Factors the following paragraphs shall be added after the last paragraph to the subsection Financial crisis impact in the Issuer s activity : ( ) The negative effects of the crisis continued to be felt in 2010, as can be observed by the reduction of the operating margin (-35.1%). In 2010, total return on investment diminished to 2.98%, less 94 basis points than in 2009, while the average cost of funding those assets lowered by 93 basis points to 1.50%, leading to a reduction of only 1 basis point in the net interest margin, which stood at 1.48%. Operating profitability reach 0.88% in 2010, down 50 basis points than in previous year.. This reduction was due mainly to the combined effect of decreases of 46 basis points from other operating income, including capital gains on sales of shareholdings in other companies, and 5 basis points, net commissions. In turn, the return on assets (ROA), ratio of net income to average net assets, stood at 0.16%, higher than the 0.04% the previous year. 9

10 As a corollary of the reduction of net income, the return on average common equity (ROE), defined as the relation between net income and average shareholders' equity, increase from 0.46% in 2009 to 2.33% at year end. (h) Under the title RISK FACTORS of the Consolidated Base Prospectus, namely of the first subtitle Issuer s Related Risk Factors the third, fourth and fifth paragraphs included in the subsection Credit Risk shall be replaced by the following wording: ( ) The behaviour of credit markets in recent years has been characterized by lower levels of growth, and this evolution was consistent through all the segments of loans to the non-financial private sector. However, Banco Popular has considered this situation as an opportunity to increase its market share. The growth rate of loans to non-financial companies has increased 9.5% in 2010, essentially explained by a increase in transport and services sectors, but the bank has decreased 18,7% at the construction sector. Loans to individuals also experienced an increase of 23,7% at the residential sector. The amount of overdue loans and interest reached 198,1 million euros in 31 December 2010, 38,4% less than in the previous year but still under the influence of the recessive economic environment. In 2010, overdue loans (defaults longer than 90 days) represented 2.06 per cent. of the total credit portfolio (3,93 per cent. in 2009) and the impairment for loan losses/+90 days non-performing loans ascending to 111 per cent. as at 31 December 2010 (77,1 per cent. as at 31 December 2009). In consolidated terms, customer loan impairment amounted to million euros at the end of 2010, a 9% decrease over 2009, while the Bank s total non-performing loans amounted to 198,1 million euros at 2010 year end, representing 2.54% of total loans. During 2010, the Bank sold more than 230 million euros (during 2009 this amount corresponded to more than 314 million euros) in overdue loans to Consulteam. The Issuer has no direct or indirect holding in Consulteam, such company being part of the Banco Popular Español Group. With these operations the Bank achieved positive results at the level of individual accounts and was able to improve its impairment ratios. These sale operations had no impact in the consolidated income statement. ( ) (i) Under the title RISK FACTORS of the Consolidated Base Prospectus, namely of the first subtitle Issuer s Related Risk Factors it shall be inserted after the last paragraph included in the subsection Market Risk the following wording: ( ) 10

11 The rating agencies Moody's and Fitch made the downgrade rating of long-term Portuguese Republic to "Baa1" (6 April 2011) and "A-" (24 March 2011) respectively. The rating agency Standard & Poor's made the downgrade of the rating of long term of the Portuguese Republic to "BBB-" (29 March 2011). All three agencies rating placed the rating outlook of the Portuguese Republic on negative outlook and have placed the rating under review. Expectations are that, if Portugal is subject to downgrade again, then the Bank may also be subject to a downgrade. A downgrade is likely to increase the cost of Portuguese public debt financing, which may result in increased taxes, reduced government spending, and hence a negative effect on economic conditions in Portugal. A downgrade is also likely to have a negative impact on the Bank's credit rating and cost of funding for certain securities guaranteed by the Portuguese Republic, and may also result in the withdrawal of deposits from the Bank. The Bank also has invested in public debt obligations issued by the Portuguese Republic. The increase of spreads of the Portuguese debt due to a downgrade event, developments in Portuguese public finances or for any other reason may have a negative impact on the Bank s activity and results. At December 31, 2010, the Bank s investments in public debt amounted to a total 566,127, euros (market value). A downgrade or series of rating downgrades in the Portuguese public debt may have a negative impact on extent that the Bank may use these bonds as collateral. A downgrade of the Portuguese Republic will have an impact not only on the eligibility of Portuguese government bonds, but also indirectly in other securities. Thus, a downgrade or series of rating downgrades in Portugal may have a systemic effect in the Portuguese banking sector, may have negative effects on the Portuguese economy and the ability of the Bank to proceed with the sale of these securities or make it more difficult and / or more expensive for the Bank access to private sources of capital and financing. (II) (a) Covered Bonds Related Risk Factors Under the title RISK FACTORS of the Consolidated Base Prospectus, namely of the second subtitle Covered Bonds Related Risk Factors, the fourth paragraph under the heading Other factors that may affect an Issuer s ability to fulfill its obligations under the Covered Bonds shall be replaced with the following wording: Mortgage lending represented around 17 per cent. of the credit portfolio in Significant changes in the economic conditions occurring in that sector due to economic or political conditions beyond the Issuer s control may lead to an increase in non-performing loans and to a decrease in the loan portfolio of the Banco Popular Group. This may also adversely affect the normal course of the Issuer s business and the Issuer s ability to fulfil its obligations under the Covered Bonds. 11

12 (b) Under the title RISK FACTORS of the Consolidated Base Prospectus, namely of the second subtitle Covered Bonds Related Risk Factors, the third paragraph under the heading Other Risks shall be replaced with the following wording: ( ) Income or gains from Covered Bonds may fluctuate in accordance with market conditions and taxation arrangements, and may probably fluctuate taking into consideration the agreed tax changes that shall be implemented until 2013 as a consequence of the bailout agreement entered into by the Portuguese Government with the EU and IMF. ( ). 4. DOCUMENTS INCORPORATED BY REFERENCE The section DOCUMENTS INCORPORATED BY REFERENCE of the Consolidated Base Prospectus shall be amended replacing items (a) and (b) with the following wording: DOCUMENTS INCORPORATED BY REFERENCE The following documents shall be deemed to be incorporated in, and to form part of, this Base Prospectus: (a) the audited consolidated financial statements of the Issuer in respect of the financial year ended 31 December 2009, together with the auditors reports prepared in connection therewith (available at and at including the information set out at the following pages in particular: Consolidated financial statements (prepared in accordance with IFRS) for the year ended 31 December 2009 Pages 57 to 60 (out of 173) Consolidated Statement of Income Page 58 (out of 173) Consolidated Balance Sheet Page 57 (out of 173) Consolidated statement of cash flow Page 60 (out of 173) Statement of changes in consolidated shareholder s equity Page 59 (out of 173) Notes to the financial statements Page 65 to 135 (out of 173) Legal Certification of Accounts and Auditors Report Page 142 to 143 (out of 173) Any other information not listed above but contained in such document is incorporated by reference for information purposes only; 12

13 (b) the audited consolidated financial statements of the Issuer in respect of the financial year ended 31 December 2010, together with the auditors reports prepared in connection therewith (available at and at including the information set out at the following pages in particular: Consolidated financial statements (prepared in accordance with IFRS) for the year ended 31 December 2010 Pages 48 to 51 (out of 174) Consolidated Statement of Income Page 49 (out of 174) Consolidated Balance Sheet Page 48 (out of 174) Consolidated statement of cash flow Page 51 (out of 174) Statement of changes in consolidated shareholder s equity Page 50 (out of 174) Notes to the financial statements Page 58 to 126 (out of 174) Legal Certification of Accounts and Auditors Report Page 127 to 128 (out of 174) Any other information not listed above but contained in such document is incorporated by reference for information purposes only. ( ) 5. FINAL TERMS FOR COVERED BONDS Under the title FINAL TERMS FOR COVERED BONDS of the Consolidated Base Prospectus, namely under paragraph two Ratings of subtitle Part B Other Information, the wording [Fitch Ratings: [AA]] shall be replaced with [Fitch Ratings: [A+]]. 6. TERMS AND CONDITIONS OF THE COVERED BONDS The Condition (Issuer Covenants) shall be added as follows: (I) Liquidity Reserve: If the Issuer is no longer rated at least A (for the long term rating) and F1 (for the short term rating) by Fitch ( Minimum Rating ), the Issuer will, within 30 (thirty) calendar days of the downgrade, contract a liquidity reserve with another bank having a Minimum Rating in the amount corresponding to 3 months of interest payments in respect of the Covered Bonds, which will be monthly adjusted in accordance with the interest payments that are from time to time payable. 13

14 7. DESCRIPTION OF THE ISSUER The section DESCRIPTION OF THE ISSUER of the Consolidated Base Prospectus shall be replaced with the following wording: DESCRIPTION OF THE ISSUER Introduction Banco Popular Portugal, S.A. (the Issuer or the Bank ) is a limited liability company (sociedade anónima) and was founded on 2 July 1991, following the authorization given by Decree order No. 155/91, of 26 April, issued by the Ministry for Finances, and is duly incorporated under the laws of Portugal as a credit institution whose activities are governed, inter alia, by the Portuguese Credit Institutions General Regime (Decree-law 298/92, of 31 December, as amended from time to time), the Portuguese Securities Code (Decree-law 486/99, of 13 November, as amended from time to time) and the Portuguese Companies Code (Decree-law 262/86, of 2 September, as amended from time to time). The Bank is registered with the Commercial Registry Office under its taxpayer number , with a share capital of 376,000,000 euros. The Head Office is located in Lisbon, Portugal, at 51 Rua Ramalho Ortigão, Lisbon Portugal (with telephone number ). The Bank adopted its current name in September 2005, having changed it from its previous name BNC - Banco Nacional de Crédito, SA. the Bank is a member of the Deposit Guarantee Fund. Integrated in a financial group owned by Banco Popular Español, the Bank undertakes general banking operations and other financial operations, such as investment funds, real estate and insurance business. The Bank has a nationwide branch network and it also operates through its electronic channels. The statement in this section relating to the Issuer s market positions is based on calculations made by the Issuer using data it has produced and/or data obtained from other entities and which is contained in or referred to in the Annual Report of the Issuer for 2010 (available at Information from third parties Where information has been sourced from a third party the Issuer confirms that, as far as the Issuer is aware, it has accurately reproduced such information. The Issuer accepts responsibility to the extent that no facts have been omitted which would render the reproduced information inaccurate or misleading. The Issuer calculates its market share data using official sources of information namely the Central Bank or otherwise (as applicable). Where no official sources exist, the Issuer relies on its own estimates. History As a result of the legal framework that formerly regulated the Portuguese banking system and the limitations that existed at the time regarding the authorization to found new banking institutions, BNC 14

15 Banco Nacional de Crédito Imobiliário, S.A., was founded in July 1991 as an investment bank 1 targeted at financing the construction, acquisition and improvement, conservation or renovation works performed on housing and service properties, including their intrinsic infrastructures, as well as the acquisition of land for those same ends. The approval of the new Banking Law the General Regime for Banking and Financial Institutions on 31 December 1992, which established the universal banking model, and the subsequent change in the Bank s statutes that were adapted to the new legal framework have allowed BNC to widen the scope of its activity into that of a universal bank, which has had evident reflexes on the growth obtained year after year. The foundations of BNC Gerfundos, Sociedade Gestora de Fundos de Investimento Mobiliário, S.A., in 1992, of BNC Predifundos, Sociedade Gestora de Fundos de Investimento Imobiliário, S.A., in 1993 these two now merged into a single society named Popular Gestão de Activos, Sociedade Gestora de Fundos de Investimento and of BNC Corretora, in 1998 now extinct since the brokerage business has been integrated in the Bank have allowed for the expansion of the activity of the Bank to investment fund management and brokerage with the aim of increasing the range of financial products and services it has to offer. The creation of Eurovida BNC CGU, SA, in 1999 in a partnership with CGNU (Aviva) has allowed for the significant development of the bancassurance activity with the sale of life insurance products through the Bank s distribution network. This company has been wholly-owned by the Banco Popular Group since Recently Popular Seguros was created for the placement of non-life insurance. In 2003, via Public Offer of Exchange, Banco Popular Español acquired 100% of the share capital of the Bank. Balance sheet and activity At the end of December 2010, the Bank s consolidated net assets amounted to EUR 10,300 million, corresponding to an increase of 16.6 per cent in comparison with December 2009, mainly as a result of a favourable variation in the loan portfolio and in the securities trading portfolio. The Bank has now more than 342 thousand customers, which represents an annual increase of 5% in individuals and 7% in corporations. The Bank s equity reached 625 million euros, total assets managed were next to 11,019 million euros, consolidated profit for the year reached 15,114 thousand euros and the return on equity was close to 2.33 per cent. In 2010, the Bank s credit volume surged to EUR 7,799 million, corresponding to an increase of 21.2 per cent when compared with the previous year. Customer funds also rose to EUR 3,558 million, evidencing an increase of 1.0 per cent. Total on-balance and off-balance sheet customer funds increased 0.1 per cent compared with the end of 2009, reaching EUR 4,277 million. On-balance sheet funds (deposits and securities placed with customers) amounted to EUR 3,773 million, i.e. 4.6 per cent more than the previous year. 1 At the time the Bank was founded, the law in force only allowed for the creation of two types of banks, commercial and investment banks. The activity of investment banks was more focused on granting medium and long term loans and commercial banks focused on short-term loans. 15

16 Special emphasis should be given to credit to individuals, which kept rising during 2010, including a 27.7 per cent increase in mortgage credit to more than 350 million euros. Also loans to companies, based on the innovative PME Power new strategy focused on strengthening our position in the SME segment, presented a robust increase of 5%. The growth of other areas in 2010 should also be highlighted, namely factoring (that grew approximately 10%), credit cards (16%), point-of-sale terminals (32%), operating leasing (100%), commercial paper (155%) and derivatives for hedging purposes, mostly interest rate swaps (4.170%). Off-balance sheet funds decreased by 4.1 per cent. in comparison with the end of 2009, amounting to EUR 719 million. The mutual funds segment has not yet fully recovered from the 2008 financial markets crisis, which resulted in negative net subscriptions and portfolio devaluations while investors sought refuge in less risky products, particularly time deposits. However total assets under management grew by 15% in Net income for the year 2010 stood at EUR 15.1 million, more EUR 11.7 million than in This has been mainly justified by the Bank s loan impairment better performance. The following table presents a summary of the key financial figures: 16

17 Banco Popular Portugal in numbers (consolidated values) 2010 % Change Business volume Total assets under management On-Balance sheet total assets Own founds (a) 627 (13) Customer funds: On balance sheet Off balance sheet 719 (4.1) Credit granted Contingent risks Solvency Solvency ratio (BP) (%) Tier Risk management Total risks Overdue credit 198 (38.4) Credit more than 90 days overdue 161 (36.6) Overdue credit ratio (%) Credit impairment 177 (9.4) Profit/loss Financial margin Banking income (18.5) Operating margin 81.8 (35.2) Earnings before taxes Net profit/loss Profitability & efficiency Average net assets Average own resources ROA (%) ROE (%) Operating efficiency (Cost to income) (%) (without depreciation) (%) Data per share Final number of shares (million) 376 0, Average number of shares (million) 376 0, Book value per share ( ) 1,668 (13) 1,918 1,915 2,795 2,476 Earnings per share ( ) 0, ,009 0,115 0,326 0,318 Other data Number of employees Number of branches Employees per branch 5, ,5 5,5 5,7 5,9 Number of automatic teller machines (ATM) (a) After the application of the profit/loss of each fiscal year 17

18 Solvency and Shareholders Equity On 31 December 2008, the Bank increased its share capital by 200 million euros to 376 million euros. This corresponded to the issue of 200 million new shares with a nominal value of 1 euro each that were totally bought by Banco Popular Español, who owns 100% of the Bank s equity. The following table presents the composition of the Bank s regulatory capital and the ratios for the periods as at 31 st December of 2010 and During these two periods, both the individual entities that comprise the group and the group itself were able to meet all the capital requirements to comply with the law. Individual Consolidated Tier 1 capital Share capital General banking reserves Statutory reserve Profit for the year Minority interests Minus :intangible assets Positive adjustments first consolidaton Eligible revaluation differences Contributions to pension funds not recorded as costs Reversal of excessive provisions vs. Impairment Deferred tax from assets not accepted Dedutions to insurance shareholdings Dedutions pursuant to regulation 120/ Tier 1 Total capital Tier 2 capital Unrealized gains in available for sale investments Reserves from revaluation of tangible assets Deductions to insurance shareholdings Tier 2 capital total Eligible own funds Risk weighted assets Own funds requirement ratio (1) Tier I Tier II (1) Calculated according to the regulations issued by the Bank of Portugal, apart from the profit for the year itself which was also included in these calculations. Current Activities The Bank operates as a universal bank, offering a wide range of banking and financial products and services such as factoring, renting, leasing, cards (debit and credit), insurance (life and non-life), pension funds, real estate, investment funds and securities, investment funds management, investment management and private banking from its 232 branches throughout Portugal, as well as its remote channels, aiming to satisfy the financial needs of all its customers. 18

19 The Bank is the ninth largest Portuguese banking institution in terms of total assets, and the eighth in terms of total equity. The Bank s main business is banking intermediation through deposit-taking, mainly from individuals and companies, and the provision of loans and credit facilities with a special focus on Small and Medium Enterprises (SME) and individuals. The Bank s Head Office is in Lisbon and it has a network of 232 branches throughout the country. The Bank s staff reached 1,343 employees as at 31 st December Set out below is the structure of the Banco Popular Group, showing the Bank and its subsidiaries. On 31 st March 2010, the Bank sold to Banco Popular Español shares representing 51.28% of the share capital of Popular Factoring obtaining a capital gain of 5.1 million euros on an individual basis and 2.6 million euros on a consolidated basis. At 28 th December 2010, the Bank sold to Banco Popular Español shares representing 100% of the share capital of Popular Gestão de Activos S.A., obtaining a capital gain of million euros on an individual basis and million euros on consolidated basis. Nevertheless the activity of the Bank is still developed with the support of these financial companies that now belong to Grupo Banco Popular, allowing our customers to access a full range of banking products and services. Currently, the Bank continues to hold a 15.93% stake in Eurovida S.A. and fully owns PopularGest - Property Management S.A. a special purpose company that allows the development of its operational activity. Financial Information Summary Set out below is a summary of the audited consolidated income statements and the audited consolidated balance sheets (showing net figures) of the Bank for the years ended 31 st December 2010 and 31 st 19

20 December This financial information was prepared in conformity with the International Accounting Standards/International Financial Reporting Standards (IAS/IFRS) as adopted by the European Union and incorporated into Portuguese legislation by the Bank of Portugal. BANCO POPULAR PORTUGAL, SA Consolidated Income Stament IAS/IFRS as at 31 December 2010 Notes Year Consolidation perimeter IAS/IFRS ( Thousand) Previous year Consolidation perimeter IAS/IFRS Interest and similar income Interest and similar Charges Net interest income Return on equity instruments Fee and commission income Fee and commission expense Net assets and liabilities at fair value through profit or loss Net gains from available for sale financial assets Exchange differences (net) Gains/losses from the sale of other assets Net premiums form reinsurance contracts Net claims and benefits incurred on insurence contracts Variation in net reinsurance technical provisions Profit/loss from operating activities Operating Profits Personnel expenses General administrative expenses Depreciation and amortisation 27/ Net provisions for write-backs and write-offs Credit impairment net of reversals and recoveries Other financial assets impairment net reversals and recoveries 0 81 Other assets impairment net reversals and recoveries Share of profit of associates and joint ventures Profit before tax and minority interests Income tax Current Deferred Profit after tax and minority interests Minority interests Consolidated profit for the year Earnings per share ( Euros) 0,04 0,01 20

21 BANCO POPULAR PORTUGAL, SA Consolidated Balance sheet IAS/IFRS as at 31 December 2010 ( thousand) Assets Notes Cash and balances at central banks Cash-like assets in other credit institutions Investments in credit institutions Credit to customers (-) Impairment Financial assets 21/22/ Investments held to maturity Real estate investement Others tangible assets Intangible assets Investement in associated companies Assets for taxes Other Assets Total Assets Liabilities Resources of other central banks Financial liabilities available for sell Resources of other credit institutions Customers ressourses Liabilities represented by securities Cover derivatives Provisions Taxes payable Subordinated liabilities Other liabilities Total Liabilities Share Capital Share Capital Issue premiums Own shares 0-3 Revaluation reserves Other reserves & carried over profits/losses Consolidated profit of the fiscal year Minority interests Total Share Capital Total Liabilities + Equity

22 BANCO POPULAR PORTUGAL, SA Consolidated cash flow statements for years ended 31 December 2010 and 2009 ( Thousand) Operating activities Interest and commissions received Interest and commissions paid Recovery of loans and interest in arrears Payments to suppliers and employees Contributions to the pension fund Operating results beforeadjustments to operating funs (increases) / decreases in operating assets Loans and advances to credit institutions Deposits with central bank Loans and advances to customers Financial assets Others operational assets (increases) / decreases in operating liabilities Deposits from credit institutions Deposits from customers Financial liabilities Others operational liabilities Net cash flow from operating activities before income tax Tax paid on profit Net cash flow from operating activities Investment activities Dividends received Sales of shares in subsidiaries Financial assets Proceeds from sale of non-current available for sale Acquisition of fixed assets Sales of non-current assets held for sale Purchase of fixed assets Sales of fixed assets 0 30 Net cash flow from investment activities Financing activities Issuance of debt securities Interest and depreciation from debt obligations Net cash flow from financing activities Effects of exchange rate on cash and cash equivalents Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year

23 Changes in Consolidates Equity Capital Shares Premium Reserves Other Reserves Retained Earnings Net Profit/Loss for the year (Thousands euros) Minority Interests Total Equity Opening balance as at 1 January, Transferred to retained earnings Transferred to statutory reserve Transferred to other reserves Adjustments for changes in criteria (IFRS) Changes in available for sale investments, net of tax Own assets at fair value Consolidated net profit Minority interest Balance as at 31 de Dezembro, Transferred to retained earnings Transferred to statutory reserve Transferred to other reserves Adjustments for changes in criteria (IFRS) Changes in available for sale investments, net of tax Own assets at fair value Capital increases Closing balance as at 31 December, CHIEF ACCOUNTANT THE BOARD OF DIRECTORS Overview of the Financial Performance of Banco Popular Portugal, S.A. In 2010, the Portuguese economy posted a real GDP growth of around 1.3% but continued to show some signs of weakness. The dynamism of exports, the better performance of domestic demand and the restrictive measures that the government adopted to reduce the public deficit were not sufficient to convey confidence to the markets. In this context, the pressure on the Portuguese economy was intense, notably through speculation that the country would not be able to refinance its large public debt. Anticipating these difficulties, the ECB launched a plan for the acquisition of sovereign debt of some countries, including Portugal, in addition to the constant injection of liquidity into the market as a way of supporting some banks that were suffering a significant reduction in their credit lines from the other financial institutions. At mid-year, were also released the results of the stress- tests to 91 European banks, confirming that the European banking system was well-capitalized. However, this active stance from the ECB was not sufficient to cease the implanted liquidity crisis. As a result, major Portuguese banks tried to fill this gap with other sources of funding, namely retail and wholesale customer deposits and started a deleveraging process through the introduction of strong restrictions on lending. Business strategy Subject to the adverse environment experienced in 2010, the bank pursued its growth strategy very focused on growing its customer base and decreasing the commercial gap. The expertise and financial strength that comes from belonging to one of the largest financial Iberian groups allowed Banco Popular Portugal to reaffirm its strategy, clearly expressing its mission to be the 23

24 best Bank for Small and Medium Enterprises (SME). During the year, the Bank launched a new strategy in communication for SMEs designated PME Power as a response to a perceived rising concern from companies in having a bank committed to continue supporting their activities, their development and their growth. Bottom line, a Bank that would allow this important sector of the Portuguese economy to accelerate, expand and move forward, reaching its maximum capacity. Total Assets At the end of 2010, the consolidated net assets of the Bank amounted to 10,300 million euros, 1,464 million euros more than in In terms of average balances, the global amount ascended to 9,278 million euros, 1.9% higher than the amount recorded on the previous year. The Bank additionally managed other customer funds applied in off-balance sheet investments such as mutual funds, savings and retirement instruments, whose amount was close to 719 million euros at year end, showing a 4.1% decrease when compared with the previous year (Consolidated values) Assets Total off-balance sheet assets Total on-balance sheet assets Consequently, the total assets managed by the Bank reached an amount of 11,019 million euros at the end of 2010, which represents a 15% increase over the previous year. 24

25 On Balance Sheet Funds On-balance sheet funds, mainly represented by deposits, totalled 3,558 million euros, corresponding to an increase of 1% over the previous year. The annual average balances of customer funds increased by 18.3%, standing at 3,793 million euros. Despite the small increase in customer deposits, there was an important change in its structure in favour of retail deposits, which posted a growth of 13.4% vis-à-vis deposits of large companies and institutions. Retail deposits, a more stable source of funding, now represent 67.5% of the total, while in the previous year accounted for only 59.3%. The increase of 2.3% in time deposits and the decrease of 1.4% in demand deposits resulted in a slight reduction of the relative weight of the later, which stood at 17% by the end of (Consolidated values) 25